Fannie Mae 2010 Annual Report Download - page 326

7. Financial Guarantees and Master Servicing
We generate revenue by absorbing the credit risk of mortgage loans in unconsolidated trusts in exchange for a
guaranty fee. We also provide credit enhancements on taxable or tax-exempt mortgage revenue bonds issued
by state and local governmental entities to finance multifamily housing for low- and moderate-income
families. Additionally, we issue long-term standby commitments that require us to purchase loans from lenders
if the loans meet certain delinquency criteria.
As a result of adopting the new accounting standards, we derecognized the previously recognized guaranty
assets, guaranty obligations, MSAs, and master servicing liabilities (“MSLs”) associated with the newly
consolidated trusts from our consolidated balance sheets.
For our guarantees to unconsolidated trusts and other guaranty arrangements, we recognize a guaranty
obligation for our obligation to stand ready to perform on these guarantees. For those guarantees recognized in
our consolidated balance sheet, our maximum potential exposure under these guarantees is primarily
comprised of the unpaid principal balance of the underlying mortgage loans, which totaled $52.4 billion as of
December 31, 2010. The maximum amount we could recover through available credit enhancements and
recourse with third parties on guarantees recognized in our consolidated balance sheet was $12.6 billion as of
December 31, 2010. In addition, we had exposure of $10.3 billion for other guarantees not recognized in our
consolidated balance sheet as of December 31, 2010, which primarily represents the unpaid principal balance
of loans underlying guarantees issued prior to the effective date of the current accounting standards on
guaranty accounting. The maximum amount we could recover through available credit enhancements and
recourse with third parties on guarantees not recognized in our consolidated balance sheet was $3.9 billion as
of December 31, 2010. Recoverability of such credit enhancements and recourse is subject to, among other
factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us.
As of December 31, 2009, our maximum potential exposure for guarantees recognized in our consolidated
balance sheet was primarily comprised of the unpaid principal balance of the underlying mortgage loans,
which totaled $2.5 trillion. The maximum amount we could recover through available credit enhancements and
recourse with third parties for these guarantees was $113.4 billion. In addition, we had exposure of
$135.7 billion for other guarantees not recognized in our consolidated balance sheet as of December 31, 2009.
The maximum amount we could recover through available credit enhancements and recourse with third parties
on guarantees not recognized in our consolidated balance sheet was $13.6 billion as of December 31, 2009.
Risk Characteristics of our Book of Business
We gauge our performance risk under our guaranty based on the delinquency status of the mortgage loans we
hold in portfolio, or in the case of mortgage-backed securities, the underlying mortgage loans of the related
securities. Management also monitors the serious delinquency rate, which is the percentage of single-family
loans three or more months past due or in the foreclosure process, and the percentage of multifamily loans
60 days or more past due, of loans with certain higher risk characteristics, such as high mark-to-market
loan-to-value ratios and low originating debt service coverage ratios. We use this information, in conjunction
with housing market and economic conditions, to structure our pricing and our eligibility and underwriting
criteria to accurately reflect the current risk of loans with these higher-risk characteristics, and in some cases
we decide to significantly reduce our participation in riskier loan product categories. Management also uses
this data together with other credit risk measures to identify key trends that guide the development of our loss
mitigation strategies.
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FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)