Fannie Mae 2011 Annual Report Download - page 26

Our estimates of home price declines are based on our home price index, which is calculated differently from the
S&P/Case-Shiller U.S. National Home Price Index and therefore results in different percentages for comparable
declines. Our 23% to 30% peak-to-trough home price decline estimate corresponds to an approximate 32% to
40% peak-to-trough decline using the S&P/Case-Shiller index method. Our estimates differ from the S&P/Case-
Shiller index in two principal ways: (1) our estimates weight expectations by number of properties, whereas the
S&P/Case-Shiller index weights expectations based on property value, causing home price changes on higher
priced homes to have a greater effect on the overall result; and (2) the S&P/Case-Shiller index includes sales of
foreclosed homes while our estimates attempt to exclude foreclosed home sales, because we believe that differing
maintenance practices and the forced nature of the sales make foreclosed home prices less representative of
market values. We believe, however, that the impact of sales of foreclosed homes is indirectly reflected in our
estimates as a result of their impact on the pricing of non- distressed sales. We estimate S&P/Case-Shiller
comparison numbers by adjusting our internal home price estimates to compensate for the principal differences—
weighting based on property value and including foreclosed property sales. In addition to these differences, our
estimates are based on our own internally available data combined with publicly available data, and are therefore
based on data collected nationwide, whereas the S&P/Case-Shiller index is based on publicly available data,
which may be limited in certain geographic areas of the country. Our comparative calculations to the S&P/Case-
Shiller index provided above are not adjusted to compensate for this data pool difference.
Credit-Related Expenses and Credit Losses. Our credit-related expenses, which include our provision for credit
losses, reflect our recognition of losses on our loans. Through our provision for credit losses, we recognize
credit-related expenses on loans in the period in which we determine that we have incurred a probable loss on the
loans as of the end of the period, or in which we have granted concessions to the borrowers. Accordingly, our
credit-related expenses in each period are affected by changes in actual and expected home prices, borrower
payment behavior, the types and volumes of loss mitigation activities and foreclosures we complete, and
estimated recoveries from our lender and mortgage insurer counterparties. Our credit losses, which include our
charge-offs, net of recoveries, reflect our realization of losses on our loans. We realize losses on loans, through
our charge-offs, when foreclosure sales are completed or when we accept short sales or deeds-in-lieu of
foreclosure. We expect that our credit-related expenses will remain high in 2012 but that, overall, our credit-
related expenses will be lower in 2012 than in 2011. We expect our credit losses in 2012 to remain high. To the
extent delays in foreclosures continue in 2012, our realization of some credit losses will be delayed. We further
describe our credit loss outlook in “Our Strong New Book of Business and Expected Losses on our Legacy Book
of Business—Expected Losses on Our Legacy Book of Business.”
Uncertainty Regarding our Long-Term Financial Sustainability and Future Status. There is significant
uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that we
currently anticipate, such as home prices and unemployment, may cause our future credit-related expenses and
credit losses to vary significantly from our current expectations. Although Treasury’s funds under the senior
preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend
payments are substantial. We do not expect to earn profits in excess of our annual dividend obligation to
Treasury for the indefinite future. In his February 2012 letter to Congress, the Acting Director of FHFA wrote,
“[I]t is clear that the draws [Fannie Mae and Freddie Mac] have taken from the Treasury are so large they cannot
be repaid under any foreseeable scenarios.” We expect to request additional draws under the senior preferred
stock purchase agreement in future periods, which will further increase the dividends we owe to Treasury on the
senior preferred stock. We expect that, over time, our dividend obligation to Treasury will constitute an
increasing portion of our future draws under the senior preferred stock purchase agreement. As a result of these
factors, there is significant uncertainty about our long-term financial sustainability.
In addition, there is significant uncertainty regarding the future of our company, including how long the company
will continue to be in its current form, the extent of our role in the market, what form we will have, and what
ownership interest, if any, our current common and preferred stockholders will hold in us after the
conservatorship is terminated. We expect this uncertainty to continue. In February 2011, Treasury and HUD
released a report to Congress on reforming America’s housing finance market. The report states that the
Administration will work with FHFA to determine the best way to responsibly wind down both Fannie Mae and
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