Fannie Mae 2010 Annual Report Download - page 67

who may need help with their mortgage loans even when repeated efforts have been made to contact the
borrower.
For these reasons, our ability to actively manage the troubled loans that we own or guarantee, and to
implement our homeownership assistance and foreclosure prevention efforts quickly and effectively, may be
limited by our reliance on our mortgage servicers. Our inability to effectively manage these loans and
implement these efforts could have a material adverse effect on our business, results of operations and
financial condition.
Deficiencies in servicer and law firm foreclosure processes and the resulting foreclosure pause may cause
higher credit losses and credit-related expenses.
A number of our single-family mortgage servicers temporarily halted foreclosures in the fall of 2010 in some
or all states after discovering deficiencies in their processes and the processes of their lawyers and other
service providers relating to the execution of affidavits in connection with the foreclosure process. This
foreclosure pause could expand to additional servicers and states, and possibly to all or substantially all of our
loans in the foreclosure process. Some servicers have lifted the foreclosure pause in some jurisdictions, while
continuing the pause in others.
Although we cannot predict the ultimate impact of this foreclosure pause on our business at this time, we
expect the pause will likely result in higher serious delinquency rates, longer foreclosure timelines and higher
foreclosed property expenses. This foreclosure pause could also negatively affect the value of our REO
inventory and the severity of our losses on foreclosed properties. In addition, this foreclosure pause could
negatively affect housing market conditions and delay the recovery of the housing market. As a result, we
expect this foreclosure pause will likely result in higher credit losses and credit-related expenses. This
foreclosure pause may also negatively affect the value of the private-label securities we hold and result in
additional impairments on these securities.
The foreclosure process deficiencies have generated significant concern and are currently being investigated by
various government agencies and the attorneys general of all fifty states. These foreclosure process
deficiencies could lead to expensive or time-consuming new regulation, such as new rules applicable to the
foreclosure process recently issued by courts in some states. In addition, the failure of our servicers or a law
firm to apply prudent and effective process controls and to comply with legal and other requirements in the
foreclosure process poses operational, reputational and legal risks for us. As a result, depending on the
duration and extent of the foreclosure pause and the foreclosure process deficiencies, these matters could have
a material adverse effect on our business.
Challenges to the MERS»System could pose counterparty, operational, reputational and legal risks for us.
MERSCORP, Inc. is a privately held company that maintains an electronic registry (the “MERS System”) that
tracks servicing rights and ownership of loans in the United States. Mortgage Electronic Registration Systems,
Inc. (“MERS”), a wholly owned subsidiary of MERSCORP, Inc., can serve as a nominee for the owner of a
mortgage loan and, in that role, become the mortgagee of record for the loan in local land records. Fannie
Mae seller/servicers may choose to use MERS as a nominee; however, we have prohibited servicers from
initiating foreclosures on Fannie Mae loans in MERS’s name. Approximately half of the loans we own or
guarantee are registered in MERS’s name and the related servicing rights are tracked in the MERS System.
The MERS System is widely used by participants in the mortgage finance industry. Along with a number of
other organizations in the mortgage finance industry, we are a shareholder of MERSCORP, Inc.
Several legal challenges have been made disputing MERS’s legal standing to initiate foreclosures and/or act as
nominee in local land records. These challenges have focused public attention on MERS and on how loans are
recorded in local land records. As a result, these challenges could negatively affect MERS’s ability to serve as
the mortgagee of record in some jurisdictions. In addition, where MERS is the mortgagee of record, it must
execute assignments of mortgages, affidavits and other legal documents in connection with foreclosure
proceedings. As a result, investigations by governmental authorities and others into the servicer foreclosure
process deficiencies discussed above may impact MERS. Failures by MERS to apply prudent and effective
process controls and to comply with legal and other requirements could pose counterparty, operational,
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