Fannie Mae 2009 Annual Report Download - page 158

(7)
Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate have
maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their
maturities.
(8)
Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI,
VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of AZ, AR, CO, KS,
LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.
Credit Profile Summary
During 2008 and early 2009 we made changes in our pricing and eligibility standards that helped to improve
the risk profile of our new single-family business in 2009 and support sustainable homeownership. Compared
to our 2008 acquisitions, the composition of our 2009 acquisitions experienced a decline in the average
original LTV ratio, an increase in the average FICO credit score, and a shift in product mix to more fully
amortizing fixed-rate mortgage loans. The early performance of the single-family loans we acquired in 2009
appears stronger than that of loans acquired in any other year in the past decade. While this early performance
is strong, we cannot yet predict how these loans will ultimately perform. Moreover, we expect the ultimate
performance of these loans will be affected by macroeconomic trends, including unemployment, the economy,
and house prices. We expect that these loans may have relatively slow prepayment speeds, and therefore
remain in our book of business for a relatively long time, due to the historically low interest rates throughout
2009, which resulted in our 2009 acquisitions overall having an average interest rate of 4.9%. In addition to
changes in our pricing and eligibility standards, our 2009 acquisitions reflect changes in the eligibility
standards of mortgage insurers, which further reduced our acquisition of loans with higher LTV ratios. Also,
the Federal Housing Administration (“FHA”) has become the lower-cost option, or in some cases the only
option, for loans with higher LTV ratios, which further reduced our acquisition of these loans.
The credit profile of our 2009 acquisitions was further enhanced by a significant increase in our acquisition of
refinanced loans, which generally have a stronger credit profile as the act of refinancing indicates the
borrower’s ability and desire to maintain homeownership. Refinancings represented 80% of our 2009 business
volume compared with 59% in 2008. The drop in interest rates and our Refi Plus initiatives provided an
opportunity for many borrowers to refinance to obtain a lower payment. Historically, refinanced loans have
tended to perform better than loans used for initial home purchase. However, the loans acquired through our
Refi Plus initiatives, including loans acquired under HARP that permit LTV ratios up to 125%, tend to have
higher original LTV ratios and lower FICO credit scores and may not ultimately perform as strongly as
traditional refinanced loans have historically performed.
Whether our 2010 acquisitions exhibit the same credit profile as our 2009 acquisitions will depend on many
factors, including our future pricing and eligibility standards, our future objectives, mortgage insurer’s
eligibility standards, and future activity by our competitors, including FHA.
The prolonged and severe decline in home prices has contributed to an increase in the overall estimated
weighted average mark-to-market LTV ratio of our conventional single-family guaranty book of business to
75% as of December 31, 2009, from 70% as of December 31, 2008. The portion of our conventional single-
family guaranty book of business with an estimated mark-to-market LTV ratio greater than 100% increased to
14% as of December 31, 2009, from 12% as of December 31, 2008. If home prices continue to decline, more
loans will have mark-to-market LTV ratios greater than 100%, which increases the risk of delinquency and
default. We calculate our mark-to-market LTV ratios based on the unpaid principal balance of the loan as of
the date of each reported period divided by the estimated current value of the property underlying the loan,
which we determine using an internal valuation model that estimates periodic changes in home value.
Our exposure, as discussed below, to Alt-A and subprime loans included in our single-family guaranty book of
business does not include (1) our investments in private-label mortgage-related securities backed by Alt-A and
subprime loans or (2) resecuritizations, or wraps, of private-label mortgage-related securities backed by Alt-A
mortgage loans that we have guaranteed. We classified newly originated mortgage loans as Alt-A if the lender
that delivered the mortgage loan to us classified the loan as Alt-A based on documentation or other features.
We have classified mortgage loans as subprime if the mortgage loan was originated by a lender specializing in
subprime business or by subprime divisions of large lenders. As a result of our decision to discontinue the
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