Fannie Mae 2010 Annual Report Download - page 175

Multifamily loans with an original balance of less than $3 million nationwide or $5 million in high cost
markets, which we refer to as small balance loans, acquired through non-DUS lenders continue to exhibit
higher delinquencies than small balance loans acquired through DUS lenders. These small balance non-DUS
loans account for 21% of our multifamily serious delinquency rate while representing approximately 10% of
our multifamily guaranty book of business as of December 31, 2010. These small balance non-DUS loan
acquisitions were most common in 2007 and 2008 and have not been a significant portion of our total
multifamily acquisitions since 2008. Although our 2007 and early 2008 acquisitions were underwritten to our
then-current credit standards and required borrower cash equity, they were acquired near the peak of
multifamily housing values. During the second half of 2008, our underwriting standards were adjusted to
reflect the evolving market trends at that time. While these non-DUS small balance loans represent a higher
proportionate share of delinquencies, they generally are covered by loss sharing arrangements, which limits the
credit losses incurred.
In addition, Arizona, Florida, Georgia, and Ohio, have a disproportionate share of seriously delinquent loans
compared to their share of the multifamily guaranty book of business as a result of slow economic recovery in
certain areas of these states. These states accounted for 39% of multifamily serious delinquencies but only
10% of the multifamily guaranty book of business.
REO Management
Foreclosure and REO activity affect the level of credit losses. Table 50 compares our multifamily REO
balances for the periods indicated.
Table 50: Multfamily Foreclosed Properties
2010 2009 2008
As of December 31,
Multifamily foreclosed properties (number of properties):
Beginning of period inventory of multifamily foreclosed properties (REO). . . . . . . . . . . . . . . . . . 73 29 9
Total properties acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 105 33
Disposition of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83) (61) (13)
End of period inventory of multifamily foreclosed properties (REO) . . . . . . . . . . . . . . . . . . . . . . 222 73 29
Carrying value of multifamily foreclosed properties (dollars in millions) . . . . . . . . . . . . . . . . . . . $596 $265 $105
Our multifamily foreclosed property inventory increase reflects the continuing stress on our multifamily
guaranty book of business as weak economic conditions have caused new foreclosures to outpace dispositions.
Institutional Counterparty Credit Risk Management
We rely on our institutional counterparties to provide services and credit enhancements, including primary and
pool mortgage insurance coverage, risk sharing agreements with lenders and financial guaranty contracts that
are critical to our business. Institutional counterparty risk is the risk that these institutional counterparties may
fail to fulfill their contractual obligations to us, including seller/servicers who are obligated to repurchase
loans from us or reimburse us for losses in certain circumstances. Defaults by a counterparty with significant
obligations to us could result in significant financial losses to us.
Several of our institutional counterparties may now be subject to provisions of the Dodd-Frank Act, which was
signed into law in July 2010. However, we cannot predict its potential impact on our company or our industry
at this time. For additional discussion on key provisions and additional information about this legislation
please see “Legislation and GSE Reform—Financial Regulatory Reform Legislation: The Dodd-Frank Act”
and “Risk Factors” in this report.
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