Fannie Mae 2011 Annual Report Download - page 157

portion of our guaranty book of business for which we have access to detailed loan-level information, which
constituted approximately 99% of each of our single-family conventional guaranty book of business and our
multifamily guaranty book of business, excluding defeased loans, as of December 31, 2011 and 2010. We
typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business and
receive representations and warranties from them as to the accuracy of the information. While we perform
various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility
criteria, we do not independently verify all reported information and we rely on lender representations regarding
the accuracy of the characteristics of loans in our guaranty book of business. See “Risk Factors” for a discussion
of the risk that we could experience mortgage fraud as a result of this reliance on lender representations.
Single-Family Mortgage Credit Risk Management
Our strategy in managing single-family mortgage credit risk consists of four primary components: (1) our
acquisition and servicing policies and underwriting and servicing standards, including the use of credit
enhancements; (2) portfolio diversification and monitoring; (3) management of problem loans; and (4) REO
management. These strategies, which we discuss below, may increase our expenses and may not be effective in
reducing our credit-related expenses or credit losses. We provide information on our credit-related expenses and
credit losses in “Consolidated Results of Operations—Credit-Related Expenses.”
In evaluating our single-family mortgage credit risk, we closely monitor changes in housing and economic
conditions and the impact of those changes on the credit risk profile of our single-family mortgage credit book of
business. We regularly review and provide updates to our underwriting standards and eligibility guidelines that
take into consideration changing market conditions. The credit risk profile of our single-family mortgage credit
book of business is influenced by, among other things, the credit profile of the borrower, features of the loan,
loan product type, the type of property securing the loan and the housing market and general economy. We focus
more on loans that we believe pose a higher risk of default, which typically have been loans associated with
higher mark-to-market LTV ratios, loans to borrowers with lower FICO credit scores and certain higher risk loan
product categories, such as Alt-A loans. These and other factors affect both the amount of expected credit loss on
a given loan and the sensitivity of that loss to changes in the economic environment.
Because we believe we have limited credit exposure on our government loans, the single-family credit statistics
we focus on and report in the sections below generally relate to our single-family conventional guaranty book of
business, which represents the substantial majority of our total single-family guaranty book of business.
We provide information on the performance of non-Fannie Mae mortgage-related securities held in our portfolio,
including the impairment that we have recognized on these securities, in “Consolidated Balance Sheet
Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related
Securities.”
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
Our Single-Family business, with the oversight of our Enterprise Risk Management division, is responsible for
pricing and managing credit risk relating to the portion of our single-family mortgage credit book of business
consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans
(whether held in our portfolio or held by third parties). Desktop Underwriter™, our proprietary automated
underwriting system which measures default risk by assessing the primary risk factors of a mortgage, is used to
evaluate the majority of the loans we purchase or securitize. As part of our regular evaluation of Desktop
Underwriter, we conduct periodic examinations of the underlying risk assessment models and recalibrate the
models based on actual loan performance and market assumptions to improve Desktop Underwriter’s ability to
effectively analyze risk. Subject to our prior approval, we also may purchase and securitize mortgage loans that
have been underwritten using other automated underwriting systems, as well as manually underwritten mortgage
loans that meet our stated underwriting requirement or meet agreed-upon standards that differ from our standard
underwriting and eligibility criteria. Additionally, as the number of our delinquent and defaulted loans has
increased, so has the corresponding number of these loans reviewed for compliance with our requirements. We
- 152 -