Fannie Mae 2011 Annual Report Download - page 70

support, our access to debt funding also could be materially adversely affected by a change or perceived change
in the creditworthiness of the U.S. government.
Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of
funds we obtain, as well as our liquidity position. If we are unable to issue both short- and long-term debt
securities at attractive rates and in amounts sufficient to operate our business and meet our obligations, it likely
would interfere with the operation of our business and have a material adverse effect on our liquidity, results of
operations, financial condition and net worth.
Our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis.
We believe that our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis.
If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our
operations could be eliminated or significantly impaired. In this event, our alternative sources of liquidity—
consisting of our cash and other investments portfolio and the unencumbered mortgage assets in our mortgage
portfolio—may not be sufficient to meet our liquidity needs.
We believe that the amount of mortgage-related assets that we could successfully sell or borrow against in the
event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgage-
related assets we hold. Due to the large size of our portfolio of mortgage assets, current market conditions and
the significant amount of distressed assets in our mortgage portfolio, there would likely be insufficient market
demand for large amounts of these assets over a prolonged period of time, which would limit our ability to
borrow against or sell these assets.
To the extent that we are able to obtain funding by pledging or selling mortgage-related securities as collateral,
we anticipate that a discount would be applied that would reduce the value assigned to those securities.
Depending on market conditions at the time, this discount could result in proceeds significantly lower than the
current market value of these securities and could thereby reduce the amount of financing we obtain. In addition,
our primary source of collateral is Fannie Mae MBS that we own. In the event of a liquidity crisis in which the
future of our company is uncertain, counterparties may be unwilling to accept Fannie Mae MBS as collateral. As
a result, we may not be able to sell or borrow against these securities in sufficient amounts to meet our liquidity
needs.
A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to
issue debt on reasonable terms and trigger additional collateral requirements, and would likely do so if such a
decrease were not based on a similar action on the credit ratings of the U.S. government.
Credit ratings on our senior unsecured debt, as well as the credit ratings of the U.S. government, are primary factors
that could affect our borrowing costs and our access to the debt capital markets. Credit ratings on our debt are
subject to revision or withdrawal at any time by the rating agencies. Actions by governmental entities impacting the
support we receive from Treasury could adversely affect the credit ratings on our senior unsecured debt.
On August 5, 2011, Standard & Poor’s Ratings Services (“S&P”) lowered the long-term sovereign credit rating
on the U.S. to “AA+.” As a result of this action, and because we directly rely on the U.S. government for capital
support, on August 8, 2011, S&P lowered our long-term senior debt rating to “AA+” with a negative outlook.
Previously, our long-term senior debt had been rated by S&P as “AAA” and had been on CreditWatch Negative.
S&P affirmed our short-term senior debt rating of “A-1+” and removed it from CreditWatch Negative. In
assigning a negative outlook on the U.S. government’s long-term debt rating, S&P noted that it may lower the
U.S. government’s long-term debt rating to “AA” within the next two years if it sees less reduction in spending
than agreed to or higher interest rates, or if new fiscal pressures during the period result in a higher general
government debt trajectory than S&P currently assumes. If S&P further lowers the U.S. government’s long-term
debt rating, we expect that S&P would lower our long-term debt rating correspondingly.
After the U.S. government’s statutory debt limit was raised on August 2, 2011, Moody’s Investors Service
(“Moody’s”) confirmed the U.S. government’s rating and our long-term debt ratings. Moody’s also removed the
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