Fannie Mae 2008 Annual Report Download - page 61

securities could materially adversely affect our business, results of operations, financial condition, liquidity
and net worth.
Market illiquidity also has increased the amount of management judgment required to value certain of our
securities. If we were to sell any of these securities, the price we ultimately realize will depend on the demand
and liquidity in the market at that time and may be materially lower than the value at which we carry these
securities on our balance sheet. Any of these factors could require us to take further write-downs in the value
of our investment portfolio and incur material impairment of assets, which would have an adverse effect on
our business, results of operations, financial condition, liquidity and net worth.
Our business with many of our institutional counterparties is critical and heavily concentrated. If one or
more of our institutional counterparties defaults on its obligations to us or becomes insolvent, we could
experience substantial losses and it could materially adversely affect our business, results of operations,
financial condition, liquidity and net worth.
We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual
obligations to us. That risk has escalated significantly as a result of the current financial market crisis. Our
primary exposures to institutional counterparty risk are with: mortgage servicers that service the loans we hold
in our mortgage portfolio or that back our Fannie Mae MBS; third-party providers of credit enhancement on
the mortgage assets that we hold in our mortgage portfolio or that back our Fannie Mae MBS, including
mortgage insurers, lenders with risk sharing arrangements, and financial guarantors; issuers of securities held
in our cash and other investments portfolio; and derivatives counterparties.
The challenging mortgage and credit market conditions have adversely affected, and will likely continue to
adversely affect, the liquidity and financial condition of our institutional counterparties. One or more of these
institutions may default in its obligations to us for a number of reasons, such as changes in financial condition
that affect their credit ratings, a reduction in liquidity, operational failures or insolvency. The financial
difficulties that a number of our institutional counterparties are currently experiencing may negatively affect
the ability of these counterparties to meet their obligations to us and the amount or quality of the products or
services they provide to us. A default by a counterparty with significant obligations to us could result in
significant financial losses to us and could materially adversely affect our ability to conduct our operations,
which would adversely affect our business, results of operations, financial condition, liquidity and net worth.
For example, we incurred significant losses during the third quarter of 2008 in connection with Lehman
Brothers’ entry into bankruptcy. For a description of these losses, refer to “Part II—Item 7—MD&A—Risk
Management—Credit Risk Management—Institutional Counterparty Credit Risk Management.”
In addition, we routinely execute a high volume of transactions with counterparties in the financial services
industry. Many of these transactions expose us to credit risk relating to the possibility of a default by our
counterparties. In addition, to the extent these transactions are secured, our credit risk may be exacerbated to
the extent that the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to
recover the full amount of the loan or derivative exposure due to it. We have exposure to these financial
institutions in the form of unsecured debt instruments, derivative transactions and equity investments. As a
result, we could incur losses relating to defaults under these instruments or relating to impairments to the
carrying value of our assets represented by these instruments. These losses could materially and adversely
affect our business, results of operations, financial condition, liquidity and net worth.
Moreover, many of our counterparties provide several types of services to us. Many of our lender customers or
their affiliates also act as mortgage servicers, custodial depository institutions and document custodians for us.
Accordingly, if one of these counterparties were to become insolvent or otherwise default on its obligations to
us, it could harm our business and financial results in a variety of ways. Refer to “Part II—Item 7—MD&A—
Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” for a
detailed description of the business concentration and risk posed by each type of counterparty.
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