Fannie Mae 2009 Annual Report Download - page 154

consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans
(whether held in our portfolio or held by third parties). Desktop Underwriter
TM
, our proprietary automated
underwriting system which measures default risk by assessing the primary risk factors of a mortgage, is used
to evaluate the majority of the loans we purchase or securitize. As part of our regular evaluation of Desktop
Underwriter, we conduct periodic examinations of the underlying risk assessment models to improve Desktop
Underwriter’s ability to effectively analyze risk by recalibrating the models based on actual loan performance
and market assumptions. Subject to our prior approval, we also may purchase and securitize mortgage loans
that have been underwritten using other automated underwriting systems, as well as mortgage loans
underwritten to agreed-upon standards that differ from our standard underwriting and eligibility criteria.
Additionally, as the number of our delinquent and defaulted loans has increased, so has the corresponding
number of these loans reviewed for compliance with our requirements. We use the information obtained from
these loan quality reviews to provide more timely feedback to lenders on possible areas for correction in their
origination practices.
We initiated underwriting and eligibility changes that were announced or became effective in 2009 such as
establishing a minimum FICO credit score and a maximum debt-to-income cap, updating Desktop
Underwriter’s credit risk assessment model by implementing Desktop Underwriter 8.0, and we provided
updates to our property-related policies. All of the changes focused on strengthening the underwriting and
eligibility standards to promote and provide prudent and sustainable homeownership options to borrowers. The
result of many of these changes is reflected in the substantially improved risk profile of the single-family
acquisitions in 2009. For loans associated with our Refi Plus Initiatives, which are loans that are refinanced
back to us from our portfolio, some of these changes do not apply unless expressly stated otherwise.
Our charter requires that conventional single-family mortgage loans with LTV ratios above 80% at acquisition
that we purchase or that back Fannie Mae MBS generally be covered by one or more of the following:
(1) insurance or a guaranty by a qualified insurer; (2) a seller’s agreement to repurchase or replace any
mortgage loan in default (for such period and under such circumstances as we may require); or (3) retention
by the seller of at least a 10% participation interest in the mortgage loans. Under HARP, however, we allow
borrowers who have mortgage loans with current LTV ratios up to 125% to refinance their mortgages without
obtaining new mortgage insurance in excess of what was already in place. We have worked with FHFA to
provide us with the flexibility to implement this element of HARP.
Borrower-paid primary mortgage insurance is the most common type of credit enhancement in our single-
family mortgage credit book of business. Primary mortgage insurance transfers varying portions of the credit
risk associated with a mortgage loan to a third-party insurer. In order for us to receive a payment in settlement
of a claim under a primary mortgage insurance policy, the insured loan must be in default and the borrower’s
interest in the property that secured the loan must have been extinguished, generally in a foreclosure action.
Once title to the property has been transferred, we or a servicer on our behalf files a claim with the mortgage
insurer. The mortgage insurer then has a prescribed period of time within which to make a determination as to
whether the claim is payable or whether the coverage should be rescinded. The claims process for primary
mortgage insurance typically takes three to six months after title to the property has been transferred.
Mortgage insurers may also provide pool mortgage insurance, which is insurance that applies to a defined
group of loans. Pool mortgage insurance benefits typically are based on actual loss incurred and are subject to
an aggregate loss limit. The triggers for payment under a pool mortgage insurance policy are generally the
same as for primary mortgage insurance, except that we generally must have received a claim payment from
the primary mortgage insurer and the foreclosed property must have been sold to a third party so that we can
quantify the net loss with respect to the insured loan and determine the claim payable under the pool policy.
In addition, under some of our pool mortgage insurance policies, we are required to meet specified loss
deductibles before we can recover under the policy. We typically collect claims under pool mortgage insurance
three to six months after disposition of the property that secured the loan.
For additional discussion of our aggregate mortgage insurance coverage as of December 31, 2009 and 2008
and the increase in mortgage insurance rescissions, see “Risk Management—Institutional Counterparty Credit
Risk—Mortgage Insurers.”
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