Fannie Mae 2012 Annual Report Download - page 59

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to debt funding or on the cost of our debt funding, and would likely do so if it were not based on a similar action on the credit
ratings of the U.S. government.
An additional reduction in our credit ratings may also trigger additional collateral requirements under our derivatives
contracts because a majority of our derivatives contracts contain provisions that require our senior unsecured debt to maintain
a minimum credit rating from S&P and Moody’s. If our senior unsecured debt credit ratings were downgraded to established
thresholds in our derivatives contracts, which range from A+ to BBB+, we could be required to provide additional collateral
to or terminate transactions with certain counterparties. The aggregate fair value of all derivatives with credit-risk-related
contingent features that were in a net liability position as of December 31, 2012 was $6.4 billion, for which we posted
collateral of $6.3 billion in the normal course of business. If our senior unsecured debt had been downgraded to AA or Aa1,
or even to AA- or Aa2, we would not have been required to post any additional collateral as of December 31, 2012. If all of
the credit-risk-related contingency features underlying these agreements had been triggered, an additional $159 million would
have been required either to be posted as collateral or to immediately settle our positions based on the individual agreements
and our fair value position as of December 31, 2012. An additional reduction in our credit ratings may also materially
adversely affect our liquidity, our ability to conduct our normal business operations, our financial condition and our results of
operations. Our credit ratings and ratings outlook are included in “MD&A—Liquidity and Capital Management—Liquidity
Management—Credit Ratings.”
One or more of our institutional counterparties may fail to fulfill their contractual obligations to us, resulting in financial
losses, business disruption and decreased ability to manage risk.
We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual obligations to us. Our
primary exposures to institutional counterparty risk are with mortgage sellers/servicers that service the loans we hold in our
mortgage portfolio or that back our Fannie Mae MBS; sellers/servicers that are obligated to repurchase loans from us or
reimburse us for losses in certain circumstances; third-party providers of credit enhancement on the mortgage assets that we
hold in our mortgage portfolio or that back our Fannie Mae MBS, including mortgage insurers, lenders with risk sharing
arrangements and financial guarantors; issuers of securities held in our cash and other investments portfolio; and derivatives
counterparties.
We may have multiple exposures to one counterparty as many of our counterparties provide several types of services to us.
For example, our lender customers or their affiliates also act as derivatives counterparties, mortgage servicers, custodial
depository institutions or document custodians. Accordingly, if one of these counterparties were to become insolvent or
otherwise default on its obligations to us, it could harm our business and financial results in a variety of ways.
An institutional counterparty may default in its obligations to us for a number of reasons, such as changes in financial
condition that affect its credit rating, a reduction in liquidity, operational failures or insolvency. Although the liquidity and
financial condition of some of our institutional counterparties improved in 2012 compared with 2011, there is still significant
risk to our business of defaults by these counterparties due to bankruptcy or receivership, lack of liquidity, insufficient
capital, operational failure or other reasons. Counterparty defaults or limitations on their ability to do business with us could
result in significant financial losses or hamper our ability to do business, which would adversely affect our business, results
of operations, financial condition, liquidity and net worth. For example, failure by a significant seller/servicer counterparty, or
a number of sellers/servicers, to fulfill repurchase obligations to us could result in a significant increase in our credit losses
and have a material adverse effect on our results of operations and financial condition.
We routinely execute a high volume of transactions with counterparties in the financial services industry. Many of the
transactions we engage in with these counterparties expose us to credit risk relating to the possibility of a default by our
counterparties. In addition, to the extent these transactions are secured, our credit risk may be exacerbated to the extent that
the collateral we hold cannot be realized or can be liquidated only at prices too low to recover the full amount of the loan or
derivative exposure. We have exposure to these financial institutions in the form of unsecured debt instruments and
derivatives transactions. As a result, we could incur losses relating to defaults under these instruments or relating to
impairments to the carrying value of our assets represented by these instruments. These losses could materially and adversely
affect our business, results of operations, financial condition, liquidity and net worth.
We depend on our ability to enter into derivatives transactions in order to manage the duration and prepayment risk of our
mortgage portfolio. If we lose access to our derivatives counterparties, it could adversely affect our ability to manage these
risks, which could have a material adverse effect on our business, results of operations, financial condition, liquidity and net
worth.