Fannie Mae 2009 Annual Report Download - page 155

Single-Family Portfolio Diversification and Monitoring
Our single-family mortgage credit book of business is diversified based on several factors that influence credit
quality. We monitor various loan attributes, in conjunction with housing market and economic conditions, to
ensure that our pricing and our eligibility and underwriting criteria accurately reflect the risk associated with
loans we acquire or guarantee. In some cases we may decide to significantly reduce our participation in riskier
loan product categories. We also review the payment performance of loans in order to help identify potential
problem loans early in the delinquency cycle to guide the development of our loss mitigation strategies.
The profile of our guaranty book of business is comprised of the following key loan attributes:
—LTV ratio. LTV ratio is a strong predictor of credit performance. The likelihood of default and the
gross severity of a loss in the event of default are typically lower as the LTV ratio decreases. This also
applies to the estimated mark-to-market LTV ratios, particularly those over 100%.
—Product type. Certain loan product types have features that may result in increased risk. Intermediate-
term, fixed-rate mortgages generally exhibit the lowest default rates, followed by long-term, fixed-rate
mortgages. ARMs and balloon/reset mortgages typically exhibit higher default rates than fixed-rate
mortgages, partly because the borrower’s future payments may rise, within limits, as interest rates
change. Negative-amortizing and interest-only loans also default more often than traditional fixed-rate
mortgage loans.
—Number of units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on
two-, three- or four-unit properties.
—Property type. Certain property types have a higher risk of default. For example, condominiums
generally are considered to have higher credit risk than single-family detached properties.
—Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary
residence tend to have lower credit risk than mortgages on investment properties.
—Credit score. Credit score is a measure often used by the financial services industry, including our
company, to assess borrower credit quality and the likelihood that a borrower will repay future
obligations as expected. A higher credit score typically indicates lower credit risk.
—Loan purpose. Loan purpose indicates how the borrower intends to use the funds from a mortgage
loan. Cash-out refinancings have a higher risk of default than either mortgage loans used for the
purchase of a property or other refinancings that restrict the amount of cash returned to the borrower.
—Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the
value of collateral underlying loans. Geographic diversification reduces mortgage credit risk.
—Loan age. We monitor year of origination and loan age, which is defined as the number of years since
origination. Statistically, the peak ages for default are currently from two to six years after origination.
However, we have seen higher early default rates for loans originated in 2006 and 2007, due to a higher
number of loans originated during these years with risk layering. Risk layering means permitting a loan
to have several features that compound risk, such as loans with reduced documentation and higher risk
loan product types.
Table 42 presents our conventional single-family business volumes and our conventional single-family
guaranty book of business for the periods indicated, based on certain key risk characteristics that we use to
evaluate the risk profile and credit quality of our single-family loans.
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