Fannie Mae 2013 Annual Report Download - page 128

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loans, our credit risk sharing securities transfer some of this credit risk to the investors in these securities, in exchange for
sharing a portion of the guaranty fee payments. We issued $675 million in credit risk sharing securities in 2013, transferring a
portion of credit risk on mortgages with an unpaid principal balance of approximately $27 billion. This first C-deal resulted
in $25 billion of credit protection and was one of two types of risk transfer transactions that we completed in 2013. We also
announced in October 2013 that we entered into a pool insurance policy with National Mortgage Insurance Corporation,
which transferred a portion of credit risk on a pool of securitized single-family mortgages with an initial unpaid principal
balance of nearly $5.2 billion. In addition, we issued $750 million in credit risk sharing securities in January 2014,
transferring a portion of credit risk on residential mortgages with an unpaid principal balance of approximately $29 billion.
This second C-deal resulted in approximately $28 billion of credit protection.
Single-Family Portfolio Diversification and Monitoring
Diversification within our single-family mortgage credit book of business by product type, loan characteristics and geography
is an important factor that influences credit quality and performance and may reduce our credit risk. We monitor various loan
attributes, in conjunction with housing market and economic conditions, to determine if our pricing and our eligibility and
underwriting criteria accurately reflect the risk associated with loans we acquire or guarantee. In some cases, we may decide
to significantly reduce our participation in riskier loan product categories. We also review the payment performance of loans
in order to help identify potential problem loans early in the delinquency cycle and to guide the development of our loss
mitigation strategies.
The profile of our guaranty book of business is comprised of the following key loan attributes:
• LTV ratio. LTV ratio is a strong predictor of credit performance. The likelihood of default and the gross severity of a
loss in the event of default are typically lower as the LTV ratio decreases. This also applies to the estimated mark-to-
market LTV ratios, particularly those over 100%, as this indicates that the borrower’s mortgage balance exceeds the
property value.
• Product type. Certain loan product types have features that may result in increased risk. Generally, intermediate-term,
fixed-rate mortgages exhibit the lowest default rates, followed by long-term, fixed-rate mortgages. Historically,
adjustable-rate mortgages (“ARMs”), including negative-amortizing and interest-only loans, and balloon/reset
mortgages have exhibited higher default rates than fixed-rate mortgages, partly because the borrower’s payments rose,
within limits, as interest rates changed.
• Number of units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on two-, three- or
four-unit properties.
• Property type. Certain property types have a higher risk of default. For example, condominiums generally are
considered to have higher credit risk than single-family detached properties.
• Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary residence tend to have
lower credit risk than mortgages on investment properties.
• Credit score. Credit score is a measure often used by the financial services industry, including our company, to assess
borrower credit quality and the likelihood that a borrower will repay future obligations as expected. A higher credit
score typically indicates lower credit risk.
• Loan purpose. Loan purpose refers to how the borrower intends to use the funds from a mortgage loan—either for a
home purchase or refinancing of an existing mortgage. Cash-out refinancings have a higher risk of default than either
mortgage loans used for the purchase of a property or other refinancings that restrict the amount of cash returned to
the borrower.
• Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the value of
collateral underlying loans. Geographic diversification reduces mortgage credit risk.
• Loan age. We monitor year of origination and loan age, which is defined as the number of years since origination.
Credit losses on mortgage loans typically do not peak until the third through six years following origination; however,
this range can vary based on many factors, including changes in macroeconomic conditions and foreclosure timelines.
Table 39 displays our single-family conventional business volumes and our single-family conventional guaranty book of
business for the periods indicated, based on certain key risk characteristics that we use to evaluate the risk profile and credit
quality of our single-family loans.