Fannie Mae 2008 Annual Report Download - page 49

RISKS RELATING TO OUR BUSINESS
We may not be able to achieve or maintain a positive net worth, which would result in requests for
additional investment by Treasury.
Under the Regulatory Reform Act, FHFA must place us into receivership if the Director of FHFA makes a
written determination that we have a net worth deficit (which means that our assets are less than our
obligations) for a period of 60 days. Our ability to maintain a positive net worth has been adversely affected
by market conditions and volatility. At December 31, 2008, our total liabilities exceeded our total assets by
$15.2 billion, as reflected on our consolidated balance sheet. As a result, we will have to draw on Treasury’s
commitment under the senior preferred stock purchase agreement. We expect the market conditions that
contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, and therefore to
continue to adversely affect our net worth resulting in additional draws on Treasury’s commitment. Factors
that could adversely affect our net worth for future periods include factors that we can affect as well as factors
that we have no control over, such as: additional net losses; continued declines in home prices; increases in
our credit and interest rate risk profiles; adverse changes in interest rates or implied volatility; adverse changes
in option-adjusted spreads; impairments of private-label mortgage-related securities; counterparty downgrades;
downgrades of private-label mortgage-related securities; changes in GAAP; and actions taken by FHFA,
Treasury or Congress relating to our business, the mortgage industry or the financial services industry. In
addition, actions we take to help homeowners, such as increasing our purchases of loans out of MBS trusts
and modifying loans are likely to adversely affect our net worth in future periods.
We are subject to mortgage credit risk. We expect increases in borrower delinquencies and defaults on
mortgage loans that we own or that back our guaranteed Fannie Mae MBS to continue to materially and
adversely affect our business, results of operations, financial condition, liquidity and net worth.
We are exposed to mortgage credit risk relating to both the mortgage loans that we hold in our investment
portfolio and the mortgage loans that back our guaranteed Fannie Mae MBS because borrowers may fail to
make required payments of principal and interest on their mortgage loans, exposing us to the risk of credit
losses and credit-related expenses.
Conditions in the housing and financial markets worsened dramatically during 2008 and have continued to
worsen during the first quarter of 2009, contributing to a deterioration in the credit performance of our book
of business, including higher serious delinquency rates, default rates and average loan loss severities on the
mortgage loans we hold or that back our guaranteed Fannie Mae MBS, as well as a substantial increase in our
inventory of foreclosed properties. Increases in delinquencies, default rates and severities cause us to
experience higher credit-related expenses. In addition, deteriorating economic conditions have negatively
affected the credit performance of our book of business. These worsening credit performance trends have been
most notable in certain of our higher risk loan categories, states and vintages, although the recession has also
begun to affect the credit performance of our broader book of business. We present detailed information about
the risk characteristics of our conventional single-family mortgage credit book of business in “Part II—
Item 7—MD&A—Risk Management—Credit Risk Management—Mortgage Credit Risk Management” and we
present detailed information on our credit-related expenses, credit losses and results of operations for 2008 in
“Part II—Item 7—MD&A—Consolidated Results of Operations.”
We expect that these adverse credit performance trends will continue and may accelerate, particularly if we
continue to experience national and regional declines in home prices, a recessionary economic environment
and rising unemployment in the United States.
The credit losses we experience in future periods as a result of the housing and economic crisis are likely to
be larger, perhaps substantially larger, than our current combined loss reserves and will adversely affect our
business, results of operations, financial condition, liquidity and net worth.
Our combined loss reserves, as reflected on our consolidated balance sheet, do not reflect our estimate of the
future credit losses inherent in our existing guaranty book of business. Rather, pursuant to GAAP, they reflect
only the probable losses that we believe we have already incurred as of the balance sheet date. Accordingly,
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