Fannie Mae 2012 Annual Report Download - page 55

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outstanding on a fully diluted basis, the ownership interest in the company of our then existing common shareholders will be
substantially diluted, and we would thereafter have a controlling shareholder.
No longer managed for the benefit of shareholders. Because we are in conservatorship, we are no longer managed with a
strategy to maximize shareholder returns.
For additional description of the restrictions on us and the risks to our shareholders, see “Business—Conservatorship and
Treasury Agreements.”
We may incur additional credit-related expenses, particularly in light of the poor credit performance of loans we acquired
prior to 2009.
Some of the mortgage loans we acquired prior to 2009 have performed poorly, which increased our credit losses and credit-
related expenses, and our risk of future credit losses and credit-related expenses, as a result of borrowers failing to make
required payments of principal and interest on their mortgage loans. Home price declines from 2006 to 2011 and other
adverse conditions in the housing market contributed to our legacy book of business’s poor credit performance, resulting in
elevated serious delinquency rates and negatively impacting default rates and average loan loss severity on the mortgage
loans in our legacy book of business. High delinquencies, default rates and loss severity cause us to experience higher credit-
related expenses. The credit performance of our book of business was also negatively affected by the extent and duration of
high unemployment. 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 2012 credit-related expenses, credit losses and results of operations in “MD&A—Consolidated
Results of Operations.” The credit performance of loans in our guaranty book of business, particularly those in our legacy
book of business, could deteriorate in the future, particularly if we experience national and regional declines in home prices,
weakening economic conditions and high unemployment.
We may experience further losses and write-downs relating to our investment securities.
We have experienced significant fair value losses relating to our investment securities and recorded significant other-than-
temporary impairment write-downs of some of our available-for-sale securities. We may experience additional other-than-
temporary impairment write-downs of our investments in private-label mortgage-related securities. See “Note 5, Investments
in Securities” for more 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.
A failure in our operational systems or infrastructure, or those of third parties, could materially adversely affect our
business, impair our liquidity, cause financial losses and harm our reputation.
Shortcomings or failures in our internal processes, people or systems could disrupt our business or have a material adverse
effect on our risk management, liquidity, financial statement reliability, financial condition and results of operations. Such a
failure could result in legislative or regulatory intervention, liability to customers, financial losses and damage to our
reputation. For example, our business is highly dependent on our ability to manage and process, on a daily basis, an
extremely large number of transactions, many of which are highly complex, across numerous and diverse markets and in an
environment in which we must make frequent changes to our core processes in response to changing external conditions.
These transactions are subject to various legal, accounting and regulatory standards. Our financial, accounting, data
processing or other operating systems and facilities may fail to operate properly or become disabled, adversely affecting our
ability to process these transactions. In addition, we rely on information provided by third parties in processing many of our
transactions; that information may be incorrect or we may fail to properly manage or analyze it.
The magnitude of the many new initiatives we are undertaking, including as part of our effort to help build a new housing
finance system, may increase our operational risk. Some actions we have been directed to take by FHFA also present
significant operational challenges for us, and we believe that implementing these directives will increase our operational risk
and could result in one or more significant deficiencies or material weaknesses in our internal control over financial reporting