Fannie Mae 2010 Annual Report Download - page 60

attractive opportunities become available to our employees. If we lose a significant number of employees and
are not able to quickly recruit and train new employees, it could negatively affect customer relationships and
goodwill, and could have a material adverse effect on our ability to do business and our results of operations.
In addition, management turnover may impair our ability to manage our business effectively. Since August
2008, we have had significant departures by various members of senior management, including two Chief
Executive Officers and two Chief Financial Officers. Further turnover in key management positions and
challenges in integrating new management could harm our ability to manage our business effectively and
ultimately adversely affect our financial performance.
Since 2008, we have experienced substantial deterioration in the credit performance of mortgage loans that
we own or that back our guaranteed Fannie Mae MBS, which we expect to continue and result in
additional credit-related expenses.
We are exposed to mortgage credit risk relating to the mortgage loans that we hold in our investment portfolio
and the mortgage loans that back our guaranteed Fannie Mae MBS. When borrowers fail to make required
payments of principal and interest on their mortgage loans, we are exposed to the risk of credit losses and
credit-related expenses.
While serious delinquency rates improved in recent months, conditions in the housing market contributed to a
deterioration in the credit performance of our book of business, negatively impacting serious delinquency
rates, default rates and average loan loss severity on the mortgage loans we hold or that back our guaranteed
Fannie Mae MBS, as well as increasing our inventory of foreclosed properties. Increases in delinquencies,
default rates and loss severity cause us to experience higher credit-related expenses. The credit performance of
our book of business has also been negatively affected by the extent and duration of the decline in home
prices and high unemployment. These credit performance trends have been notable in certain of our higher
risk loan categories, states and vintages. Home price declines, adverse market conditions and continuing high
levels of unemployment also have affected the credit performance of our broader book of business. Further,
home price declines have resulted in a large number of borrowers with “negative equity” in their properties
(that is, they owe more on their mortgage loans than their houses are worth), which increases the likelihood
that either these borrowers will strategically default on their mortgage loans even if they have the ability to
continue to pay the loans or that their homes will be sold in a “short sale” for significantly less than the
unpaid amount of the loans. We present detailed information about the risk characteristics of our conventional
single-family guaranty book of business in “MD&A—Risk Management—Credit Risk Management—
Mortgage Credit Risk Management,” and we present detailed information on our 2010 credit-related expenses,
credit losses and results of operations in “MD&A—Consolidated Results of Operations.”
Adverse credit performance trends may resume, particularly if we experience further national and regional
declines in home prices, weak economic conditions and high unemployment.
We expect further losses and write-downs relating to our investment securities.
We experienced significant fair value losses and other-than-temporary impairment write-downs relating to our
investment securities in 2008 and recorded significant other-than-temporary impairment write-downs of some
of our available-for-sale securities in 2009. A substantial portion of these fair value losses and write-downs
related to our investments in private-label mortgage-related securities backed by Alt-A and subprime mortgage
loans and, in the case of fair value losses, our investments in commercial mortgage-backed securities
(“CMBS”) due to the decline in home prices and the weak economy. We expect to experience additional
other-than-temporary impairment write-downs of our investments in private-label mortgage-related securities,
including those that continue to be AAA-rated. See “MD&A—Consolidated Balance Sheet Analysis—
Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related Securities” for
detailed information on our investments in private-label mortgage-related securities backed by Alt-A and
subprime mortgage loans.
If the market for securities we hold in our investment portfolio is not liquid, we must use a greater amount of
management judgment to value these securities. Later valuations and any price we ultimately would realize if
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