Fannie Mae 2009 Annual Report Download - page 61

We depend on our ability to enter into derivatives transactions in order to manage the duration and
prepayment risk of our mortgage portfolio. If we lose access to our derivatives counterparties, it could
adversely affect our ability to manage these risks, which could have a material adverse effect on our business,
results of operations, financial condition, liquidity and net worth.
Deterioration in the credit quality of, or defaults by, one or more of our mortgage insurer counterparties
could result in nonpayment of claims under mortgage insurance policies, business disruption and increased
concentration risk.
We rely heavily on mortgage insurers to provide insurance against borrower defaults on conventional single-
family mortgage loans with LTV ratios over 80% at the time of acquisition. The current weakened financial
condition of our mortgage insurer counterparties creates a risk that these counterparties will fail to fulfill their
obligations to reimburse us for claims under insurance policies. Since January 1, 2009, the insurer financial
strength ratings of all of our major mortgage insurer counterparties have been downgraded to reflect their
weakened financial condition, in some cases more than once. One of our mortgage insurer counterparties
ceased issuing commitments for new mortgage insurance in 2008, and, under an order received from its
regulator, is now paying all valid claims 60% in cash and 40% by the creation of a deferred payment
obligation, which may be paid in the future.
A number of our mortgage insurers publicly disclosed that they might exceed the state-imposed risk-to-capital
limits under which they operate and they might not have access to sufficient capital to continue to write new
business in accordance with state regulatory requirements. Regulators in some states have been granted
statutory relief to temporarily waive or raise risk-to-capital limits. However, we can not be certain that a
regulator will grant such relief for a regulated entity. Some mortgage insurers have been exploring corporate
restructurings, intended to provide relief from risk-to-capital limits in certain states. A restructuring plan that
would involve contributing capital to a subsidiary would result in less liquidity available to its parent company
to pay claims on its existing book of business, and an increased risk that its parent company will not pay its
claims in full in the future.
In addition, many mortgage insurers have pursued and continue to explore capital raising options. If mortgage
insurers are not able to raise capital and exceed their risk-to-capital limits, they will likely be forced into run-
off or receivership unless they can secure a waiver from their state regulator. This would increase the risk that
they will fail to pay our claims under insurance policies, and could also cause the quality and speed of their
claims processing to deteriorate. If our assessment of one or more of our mortgage insurer counterparty’s
ability to fulfill its obligations to us worsens and our internal credit rating for the insurer is further
downgraded, it could result in a significant increase in our loss reserves and a significant increase in the fair
value of our guaranty obligations.
Many mortgage insurers have stopped insuring new mortgages with higher loan-to-value ratios or with lower
borrower credit scores or on select property types, which has contributed to the reduction in our business
volumes for high loan-to-value ratio loans. As our charter generally requires us to obtain credit enhancement
on conventional single-family mortgage loans with loan-to-value ratios over 80% at the time of purchase, an
inability to find suitable credit enhancement may inhibit our ability to pursue new business opportunities, meet
our housing goals and otherwise support the housing and mortgage markets. For example, where mortgage
insurance or other credit enhancement is not available, we may be hindered in our ability to refinance
borrowers whose loans we do not own or guarantee into more affordable loans. In addition, access to fewer
mortgage insurer counterparties will increase our concentration risk with the remaining mortgage insurers in
the industry.
The loss of business volume from any one of our key lender customers could adversely affect our business
and result in a decrease in our revenues.
Our ability to generate revenue from the purchase and securitization of mortgage loans depends on our ability
to acquire a steady flow of mortgage loans from the originators of those loans. We acquire most of our
mortgage loans through mortgage purchase volume commitments that are negotiated annually or semiannually
with lender customers and that establish a minimum level of mortgage volume that these customers will
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