Fannie Mae 2009 Annual Report Download - page 172

have minimum standards and financial requirements for mortgage servicers. For example, we require servicers
to collect and retain a sufficient level of servicing fees to reasonably compensate a replacement servicer in the
event of a servicing contract breach. In addition, we perform periodic on-site and financial reviews of our
servicers and monitor their financial and portfolio performance as compared to peers and internal benchmarks.
We work with our largest servicers to establish performance goals and report performance against the goals,
and our servicing consultants work with servicers to improve servicing results and compliance with our
servicing guide.
Our business with our mortgage servicers is concentrated. Our ten largest single-family mortgage servicers,
including their affiliates, serviced 80% of our single-family mortgage credit book of business as of
December 31, 2009 compared with 81% as of December 31, 2008. Our largest mortgage servicer is Bank of
America Corporation, which, together with its affiliates, serviced approximately 27% of our single-family
mortgage credit book of business as of both December 31, 2009 and 2008. In addition, we had two other
mortgage servicers, Wells Fargo and JP Morgan Chase & Co., that, with their affiliates, each serviced over
10% of our single-family mortgage credit book of business as of December 31, 2009. Wells Fargo and PNC,
with their affiliates, each serviced over 10% of our multifamily mortgage credit book of business as of
December 31, 2009. Because we delegate the servicing of our mortgage loans to mortgage servicers and do
not have our own servicing function, the loss of business from a significant mortgage servicer counterparty
could pose significant risks to our ability to conduct our business effectively.
Due to the economic recession that began in December 2007 and the continuing weak economy, the financial
condition and performance of many of our mortgage servicers has deteriorated, with several experiencing
ratings downgrades and liquidity constraints, however, during 2009, our primary mortgage servicer
counterparties have generally continued to meet their obligations to us. The growth in the number of
delinquent loans on their books of business may negatively affect the ability of these counterparties to
continue to meet their obligations to us in the future. We are also relying on our mortgage servicers to play a
significant role in our homeownership assistance programs; the broad scope of some of these programs, as
well as the recent economic challenges in the market, may limit their capacity to support these programs.
Our mortgage servicers are obligated to repurchase loans or foreclosed properties, or reimburse us for losses if
the foreclosed property has been sold, if it is determined that the mortgage loan did not meet our underwriting
and eligibility requirements or if mortgage insurers rescind coverage. Beginning in 2008, there was a
substantial increase in the amount of repurchase and reimbursement requests that we made to our mortgage
servicers, of which a small amount remain outstanding. For 2009, we continued to see an increase in the
amount of repurchase and reimbursement requests. The amount of our outstanding repurchase and
reimbursement requests from 2009 is increasing primarily due to (1) increases in the number of our delinquent
and defaulted mortgage loans, which has resulted in a corresponding increase in the number of these mortgage
loans that we review for compliance with our requirements, and (2) significant increases in the number of
mortgage loans for which mortgage insurance coverage has been rescinded. We expect the amount of our
outstanding repurchase and reimbursement requests to remain high throughout 2010.
We continue to work with our mortgage servicers to fulfill these outstanding repurchase and reimbursement
requests; however, as the volume of servicer repurchases and reimbursements increases, the risk increases that
affected servicers will not be able to meet the terms of their repurchase and reimbursement obligations and we
may be unable to recover on all outstanding loan repurchase and reimbursement obligations resulting from
breaches of seller representations and warranties. If a significant servicer counterparty, or a number of servicer
counterparties, fails to fulfill its repurchase and reimbursement obligations to us, it could result in a substantial
increase in our credit losses and have a material adverse effect on our results of operations and financial
condition.
We likely would incur costs and potential increases in servicing fees and could also face operational risks if
we decide to replace a mortgage servicer due to its default, our assessment of its financial condition or for
other reasons. If a significant mortgage servicer counterparty fails, and its mortgage servicing obligations are
not transferred to a company with the ability and intent to fulfill all of these obligations, we could incur
penalties for late payment of taxes and insurance on the properties that secure the mortgage loans serviced by
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