Fannie Mae 2010 Annual Report Download - page 173

typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business
and receive representations and warranties from them as to the accuracy of the information. While we perform
various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility
criteria, we do not independently verify all reported information. The portion of our multifamily guaranty
book of business for which we have detailed loan level-information, excluding loans that have been defeased,
constituted 99% of our total multifamily guaranty book as of both December 31, 2010 and 2009. See “Risk
Factors” for a discussion of the risk due to our reliance on lender representations regarding the accuracy of the
characteristics of loans in our guaranty book of business.
Multifamily Acquisition Policy and Underwriting Standards
Our Multifamily business, in conjunction with our Enterprise Risk Management division, is responsible for
pricing and managing the credit risk on multifamily mortgage loans we purchase and on Fannie Mae MBS
backed by multifamily loans (whether held in our portfolio or held by third parties). Our primary multifamily
delivery channel is the DUS program, which is comprised of multiple lenders that span the spectrum from
large financial institutions to smaller independent multifamily lenders. Multifamily loans that we purchase or
that back Fannie Mae MBS are either underwritten by a Fannie Mae-approved lender or subject to our
underwriting review prior to closing depending on the product type and/or loan size. Loans delivered to us by
DUS lenders and their affiliates represented 84% of our multifamily guaranty book of business as of
December 31, 2010 compared with 81% as of December 31, 2009.
We use various types of credit enhancement arrangements for our multifamily loans, including lender
risk-sharing, lender repurchase agreements, pool insurance, subordinated participations in mortgage loans or
structured pools, cash and letter of credit collateral agreements, and cross-collateralization/cross-default
provisions. The most prevalent form of credit enhancement on multifamily loans is lender risk-sharing.
Lenders in the DUS program typically share in loan-level credit losses in one of two ways: (1) they bear
losses up to the first 5% of unpaid principal balance of the loan and share in remaining losses up to a
prescribed limit; or (2) they share up to one-third of the credit losses on an equal basis with us. Other lenders
typically share or absorb credit losses based on a negotiated percentage of the loan or the pool balance.
Multifamily Portfolio Diversification and Monitoring
Diversification within our multifamily mortgage credit book of business by geographic concentration,
term-to-maturity, interest rate structure, borrower concentration and credit enhancement arrangements is an
important factor that influences credit quality and performance and helps reduce our credit risk.
The weighted average original LTV ratio for our multifamily guaranty book of business was 67% as of each
of the three years ended December 31, 2010, 2009, and 2008. The percentage of our multifamily guaranty
book of business with an original LTV ratio greater than 80% was 5% as of each of the three years ended
December 31, 2010, 2009, and 2008. We present the current risk profile of our multifamily guaranty book of
business in “Note 7, Financial Guarantees and Master Servicing.”
We monitor the performance and risk concentrations of our multifamily loans and the underlying properties on
an ongoing basis throughout the life of the investment at the loan, property and portfolio level. We closely
track the physical condition of the property, the relevant local market and economic conditions that may signal
changing risk or return profiles and other risk factors. For example, we closely monitor the rental payment
trends and vacancy levels in local markets to identify loans that merit closer attention or loss mitigation
actions. We are managing our exposure to refinancing risk for multifamily loans maturing in the next several
years. We recently formed a team to proactively manage upcoming loan maturities and minimize losses on
maturing loans. This team assists lenders and borrowers with timely and appropriate refinancing of maturing
loans with the goal of reducing defaults and foreclosures related to loans maturing in the near term. For our
investments in multifamily loans, the primary asset management responsibilities are performed by our DUS
and other multifamily lenders. We periodically evaluate the performance of our third-party service providers
for compliance with our asset management criteria.
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