Fannie Mae 2014 Annual Report Download - page 138

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loss to changes in the economic environment. We provide information on our credit-related income and credit losses in
“Business Segment Results—Multifamily Business Results.”
Multifamily Acquisition Policy and Underwriting Standards
Our Multifamily business is responsible for pricing and managing the credit risk on multifamily mortgage loans we purchase
and on Fannie Mae MBS backed by multifamily loans (whether held in our retained mortgage portfolio or held by third
parties), with oversight from our Enterprise Risk Management division. Our primary multifamily delivery channel is the
Delegated Underwriting and Servicing, or DUS®, program, which consists of large financial institutions and independent
mortgage lenders. Multifamily loans that we purchase or that back Fannie Mae MBS are either underwritten by a Fannie
Mae-approved lender or subject to our underwriting review prior to closing, depending on the product type, loan size, market
and/or other factors. Loans delivered to us by DUS lenders and their affiliates represented 94% of our multifamily guaranty
book of business as of December 31, 2014, compared with 93% as of December 31, 2013 and 88% as of December 31, 2012.
We use various types of credit enhancement arrangements for our multifamily loans, including lender risk-sharing, lender
repurchase agreements, pool insurance, subordinated participations in mortgage loans or structured pools, cash and letter of
credit collateral agreements, and cross-collateralization/cross-default provisions. The most prevalent form of credit
enhancement on multifamily loans is lender risk-sharing. Lenders in the DUS program typically share in loan-level credit
losses in one of two ways: (1) they bear losses up to the first 5% of the unpaid principal balance of the loan and share in
remaining losses up to a prescribed limit; or (2) they share up to one-third of the credit losses on an equal basis with us. Non-
DUS lenders typically share or absorb credit losses based on a negotiated percentage of the loan or the pool balance.
Table 46 displays the percentage of the unpaid principal balance of loans in our multifamily guaranty book of business with
lender risk-sharing and with no recourse to the lender.
Table 46: Multifamily Lender Risk-Sharing
As of December 31,
2014 2013
Lender risk-sharing:
DUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85% 80%
Non-DUS negotiated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5
No recourse to the lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 15
Our maximum potential loss recovery from lenders under current risk-sharing agreements represented over 20% of the
unpaid principal balance of our multifamily guaranty book of business as of December 31, 2014. These risk-sharing
agreements not only transfer credit risk, but also better align our interest with that of the lender.
At the time of our purchase or guarantee of multifamily mortgage loans, we and our lenders rely on sound underwriting
standards, which often include third-party appraisals and cash flow analysis. Our standards for multifamily loans specify
maximum original LTV ratio and minimum original debt service coverage ratio (“DSCR”) values that vary based on loan
characteristics. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future
credit performance.
Table 47 displays original LTV ratio and DSCR metrics for our multifamily guaranty book of business.
Table 47: Multifamily Guaranty Book of Business Key Risk Characteristics
As of December 31,
2014 2013 2012
Weighted average original LTV ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66% 66% 66%
Original LTV ratio greater than 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 4
Original DSCR less than or equal to 1.10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 7 8
Multifamily Portfolio Diversification and Monitoring
Diversification within our multifamily mortgage credit book of business by geographic concentration, term to maturity,
interest rate structure, borrower concentration, and credit enhancement coverage are important factors that influence credit
performance and help reduce our credit risk.