Fannie Mae 2011 Annual Report Download - page 153

to the HFAs. These facilities create a credit and liquidity backstop for the HFAs. Our outstanding commitments
under the TCLF program totaled $3.0 billion as of December 31, 2011 and $3.7 billion as of December 31, 2010.
Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing
revenue bonds totaled $16.8 billion as of December 31, 2011 and $17.8 billion as of December 31, 2010. These
commitments require us to advance funds to third parties that enable them to repurchase tendered bonds or
securities that are unable to be remarketed. Any repurchased securities are pledged to us to secure funding until
the securities are remarketed. We hold cash and cash equivalents in our cash and other investments portfolio in
excess of these commitments to advance funds (exclusive of our outstanding commitments under the HFA
TCLFs program, for which we are not required to hold excess cash).
As of December 31, 2011 and 2010, there were no liquidity guarantee advances outstanding.
RISK MANAGEMENT
Our business activities expose us to the following three major categories of financial risk: credit risk, market risk
(including interest rate and liquidity risk) and operational risk. We seek to actively monitor and manage these
risks by using an established risk management framework. Our risk management framework is intended to
provide the basis for the principles that govern our risk management activities.
•Credit Risk. Credit risk is the potential for financial loss resulting from the failure of a borrower or
institutional counterparty to honor its financial or contractual obligations, resulting in a potential loss of
earnings or cash flows. In regards to financial securities or instruments, credit risk is the risk of not
receiving principal, interest or any other financial obligation on a timely basis, for any reason. Credit risk
exists primarily in our mortgage credit book of business and derivatives portfolio.
•Market Risk. Market risk is the exposure generated by adverse changes in the value of financial
instruments caused by a change in market prices or interest rates. Two significant market risks we face and
actively manage are interest rate risk and liquidity risk. Interest rate risk is the risk of changes in our long-
term earnings or in the value of our assets due to fluctuations in interest rates. Liquidity risk is our potential
inability to meet our funding obligations in a timely manner.
•Operational Risk. Operational risk is the loss resulting from inadequate or failed internal processes,
people, systems, or from external events.
We are also subject to a number of other risks that could adversely impact our business, financial condition,
earnings and cash flow, including human capital, legal, regulatory and compliance, reputational, strategic and
execution risks that may arise due to a failure to comply with laws, regulations or ethical standards and codes of
conduct applicable to our business activities and functions. These risks are typically brought to the attention of
our Management Committee, our Board of Directors or one or more of the Board’s committees and, in some
cases, FHFA for discussion.
Another risk that can impact our financial condition, earnings and cash flow is model risk, which is defined as
the potential for model errors to adversely affect the company. This occurs because of our use of modeled
estimations of future economic environments, borrower behavior or valuation methodologies. See “Risk Factors”
for a discussion of the risks associated with our reliance on models.
Our risk management framework and governance structure are intended to provide comprehensive controls and
ongoing management of the major risks inherent in our business activities. Our ability to identify, assess,
mitigate and control, and report and monitor risk is crucial to our safety and soundness.
•Risk Identification. Risk identification is the process of finding, recognizing and describing risk. The
identification of risk facilitates effective risk management by achieving awareness of the sources, impact
and magnitude of risk.
•Risk Assessment. We assess risk using a variety of methodologies, such as calculation of potential losses
from loans and stress tests relating to interest rate sensitivity. When we assess risk, we look at metrics such
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