Fannie Mae 2010 Annual Report Download - page 370

repurchase is made in connection with the issuance of additional shares or obligations in at least an equivalent
amount and will reduce our financial obligations or otherwise improve our financial condition.
Restrictions Relating to Subordinated Debt. During any period in which we defer payment of interest on
qualifying subordinated debt, we may not declare or pay dividends on, or redeem, purchase or acquire, our
common stock or preferred stock. Our qualifying subordinated debt provides for the deferral of the payment of
interest for up to five years if either: our core capital is below 125% of our critical capital requirement; or our
core capital is below our statutory minimum capital requirement, and the U.S. Secretary of the Treasury,
acting on our request, exercises his or her discretionary authority pursuant to Section 304(c) of the Charter Act
to purchase our debt obligations. As of December 31, 2010 and 2009, our core capital was below 125% of our
critical capital requirement; however, we have been directed by FHFA to continue paying principal and
interest on our outstanding subordinated debt during the conservatorship and thereafter until directed
otherwise, regardless of our existing capital levels.
Prior to conservatorship, we were subject to certain regulatory capital requirements, including minimum
capital requirements, under the terms of various agreements and consent orders with OFHEO. We were in
compliance with these regulatory capital requirements until they were suspended October 9, 2008 following
our entry into conservatorship.
18. Concentrations of Credit Risk
Concentrations of credit risk arise when a number of customers and counterparties engage in similar activities
or have similar economic characteristics that make them susceptible to similar changes in industry conditions,
which could affect their ability to meet their contractual obligations. Based on our assessment of business
conditions that could impact our financial results, including those conditions arising through February 24,
2011, we have determined that concentrations of credit risk exist among single-family and multifamily
borrowers (including geographic concentrations and loans with certain non-traditional features), mortgage
insurers, mortgage servicers, financial guarantors, lenders with risk sharing, derivative counterparties and
parties associated with our off-balance sheet transactions. Concentrations for each of these groups are
discussed below.
Single-Family Loan Borrowers
Regional economic conditions may affect a borrower’s ability to repay his or her mortgage loan and the
property value underlying the loan. Geographic concentrations increase the exposure of our portfolio to
changes in credit risk. Single-family borrowers are primarily affected by home prices and interest rates. The
geographic dispersion of our Single-Family business has been consistently diversified over both years ended
December 31, 2010 and 2009, with our largest exposures in the Western region of the United States, which
represented 27% of our single-family conventional guaranty book of business as of December 31, 2010.
Except for California, where 18% and 17% of the gross unpaid principal balance of our conventional single-
family mortgage loans held or securitized in Fannie Mae MBS as of December 31, 2010 and 2009,
respectively, were located, no other significant concentrations existed in any state.
To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance
or other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan
to the current value of the property that serves as collateral) of a single-family conventional mortgage loan is
greater than 80% when the loan is delivered to us. We may also require credit enhancements if the original
LTV ratio of a single-family conventional mortgage loan is less than 80%.
F-112
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)