Fannie Mae 2010 Annual Report Download - page 25

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charge-offs to remain commensurate with 2010 levels throughout 2011. All of these conditions as well as our
single-family serious delinquency rate may worsen if the unemployment rate increases on either a national or
regional basis. We expect our overall business volume in 2011 will be lower than in 2010 as a result of our
expectations that, in 2011 (1) residential mortgage debt outstanding will continue to decline, (2) total
originations will decline, and (3) the portion of originations represented by refinancings will decline.
Approximately 78% of our single-family business in 2010 consisted of refinancings.
Home Price Declines. We expect that home prices on a national basis will decline slightly, with greater
declines in some geographic areas than others, before stabilizing later in 2011, and that the peak-to-trough
home price decline on a national basis will range between 21% and 26%. These estimates are based on our
home price index, which is calculated differently from the S&P/Case-Shiller U.S. National Home Price Index
and therefore results in different percentages for comparable declines. These estimates also contain significant
inherent uncertainty in the current market environment regarding a variety of critical assumptions we make
when formulating these estimates, including the effect of actions the federal government has taken and may
take with respect to the national economic recovery; the management of the Federal Reserve’s MBS holdings;
and the impact of those actions on home prices, unemployment and the general economic and interest rate
environment. Because of these uncertainties, the actual home price decline we experience may differ
significantly from these estimates. We also expect significant regional variation in home price declines and
stabilization.
Our 21% to 26% peak-to-trough home price decline estimate corresponds to an approximate 32% to 40%
peak-to-trough decline using the S&P/Case-Shiller index method. Our estimates differ from the S&P/Case-
Shiller index in two principal ways: (1) our estimates weight expectations by number of properties, whereas
we believe the S&P/Case-Shiller index weights expectations based on property value, causing home price
declines on higher priced homes to have a greater effect on the overall result; and (2) our estimates attempt to
exclude sales of foreclosed homes because we believe that differing maintenance practices and the forced
nature of the sales make foreclosed home prices less representative of market values, whereas we believe the
S&P/Case-Shiller index includes foreclosed homes sales. The S&P/Case-Shiller comparison numbers are
calculated using our models and assumptions, but modified to account for weighting based on property value
and the impact of foreclosed property sales. In addition to these differences, our estimates are based on our
own internally available data combined with publicly available data, and are therefore based on data collected
nationwide, whereas the S&P/Case-Shiller index is based on publicly available data, which may be limited in
certain geographic areas of the country. Our comparative calculations to the S&P/Case-Shiller index provided
above are not modified to account for this data pool difference. We are working on enhancing our home price
estimates to identify and exclude a greater portion of foreclosed home sales. When we begin reporting these
enhanced home price estimates, we expect that some period to period comparisons of home prices may differ
from those determined using our current estimates.
Credit-Related Expenses and Credit Losses. We expect that our credit-related expenses will remain high in
2011 and that our credit losses will increase in 2011 as compared to 2010. We describe our credit loss outlook
above under “Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in
2009, and Credit Losses.
Uncertainty Regarding our Long-Term Financial Sustainability and Future Status. There is significant
uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that
we currently anticipate, such as home prices and unemployment, may cause our future credit-related expenses
and credit losses to vary significantly from our current expectations. Although Treasury’s funds under the
senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting
dividend payments are substantial. Given our expectations regarding future losses, which we describe above
under “Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in 2009,
and Credit Losses,” we do not expect to earn profits in excess of our annual dividend obligation to Treasury
for the indefinite future. As a result of these factors, there is significant uncertainty as to our long-term
financial sustainability.
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