Fannie Mae 2011 Annual Report Download - page 66

If we are unable to retain, promote and attract employees with the necessary skills and talent, we would face
increased risks for operational failures. Our ability to conduct our business and our results of operations would
likely be materially adversely affected.
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, and we expect this deterioration to continue and result in
additional credit-related expenses.
Deterioration in the credit performance of mortgage loans we own or that back our guaranteed Fannie Mae MBS
has increased our risk of incurring credit losses and credit-related expenses as a result of borrowers failing to
make required payments of principal and interest on their mortgage loans.
Conditions in the housing market continue to contribute to deterioration in the credit performance of our legacy
book of business, resulting in elevated serious delinquency rates and negatively impacting default rates and
average loan loss severity on the mortgage loans we hold or that back our guaranteed Fannie Mae MBS.
Increases in delinquencies, default rates and loss severity cause us to experience higher credit-related expenses.
The credit performance of our single-family book of business has also been negatively affected by the extent and
duration of the decline in home prices and high unemployment. Home price declines, adverse market conditions
and continuing high levels of unemployment also have affected and may continue to affect the credit
performance of and future results for 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 distressed
homeowners will sell their homes in a “short sale” for significantly less than the unpaid amount of the loans. We
present detailed information about the risk characteristics of our single-family conventional guaranty book of
business in “MD&A—Risk Management—Credit Risk Management—Mortgage Credit Risk Management,” and
we present detailed information on our 2011 credit-related expenses, credit losses and results of operations in
“MD&A—Consolidated Results of Operations.”
Adverse credit performance trends may increase, 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 have experienced significant fair value losses and other-than-temporary impairment write-downs relating to
our investment securities and recorded significant other-than-temporary impairment write-downs of some of our
available-for-sale securities. 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. 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 we
were to sell these securities could be materially lower than the estimated fair value at which we carry them on our
balance sheet.
Any of the above factors could require us to record additional write-downs in the value of our investment
portfolio, which could have a material adverse effect on our business, results of operations, financial condition,
liquidity and net worth.
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