Fannie Mae 2014 Annual Report Download - page 140

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We have exposure primarily to the following types of institutional counterparties:
• mortgage sellers and/or servicers that service the loans we hold in our retained mortgage portfolio or that back our
Fannie Mae MBS and that are obligated to repurchase loans from us or reimburse us for losses in certain
circumstances;
• credit guarantors that provide credit enhancements on the mortgage assets that we hold in our retained mortgage
portfolio or that back our Fannie Mae MBS, including mortgage insurers, financial guarantors, reinsurers and lenders
with risk sharing arrangements;
• custodial depository institutions that hold principal and interest payments for Fannie Mae portfolio loans and MBS
certificateholders, as well as collateral posted by derivatives counterparties, mortgage sellers and mortgage servicers;
• the financial institutions that issue the investments held in our cash and other investments portfolio;
• derivatives counterparties;
• mortgage originators, investors and dealers;
• debt security dealers; and
• document custodians.
We routinely enter into a high volume of transactions with counterparties in the financial services industry, including brokers
and dealers, mortgage lenders and commercial banks, and mortgage insurers, resulting in a significant credit concentration
with respect to this industry. We also have significant concentrations of credit risk with particular counterparties. Many of our
institutional counterparties provide several types of services for us. For example, many of our lender customers or their
affiliates act as mortgage sellers, mortgage servicers, derivatives counterparties, custodial depository institutions or document
custodians on our behalf.
Although the liquidity and financial condition of some of our institutional counterparties continued to improve in 2014, 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.
In the event of a bankruptcy or receivership of one of our counterparties, we may be required to establish our ownership
rights to the assets these counterparties hold on our behalf to the satisfaction of the bankruptcy court or receiver, which could
result in a delay in accessing these assets causing a decline in their value. In addition, if we are unable to replace a defaulting
counterparty that performs services that are critical to our business with another counterparty, it could adversely affect our
ability to conduct our operations. See “Risk Factors” for further discussion of the risks to our business posed by our
counterparties’ failure to fulfill their obligations to us.
Mortgage Sellers and Servicers
One of our primary exposures to institutional counterparty risk is with mortgage servicers that service the loans we hold in
our retained mortgage portfolio or that back our Fannie Mae MBS, as well as mortgage sellers and servicers that are
obligated to repurchase loans from us or reimburse us for losses in certain circumstances. We rely on mortgage servicers to
meet our servicing standards and fulfill their servicing obligations. We also rely on mortgage sellers and servicers to fulfill
their repurchase obligations.
Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow
accounts, monitor and report delinquencies, and perform other required activities on our behalf. We have minimum standards
and financial requirements for mortgage servicers. For example, we require mortgage servicers to collect and retain a
sufficient level of servicing fees to reasonably compensate a replacement mortgage servicer in the event of a servicing
contract breach. In addition, we perform periodic on-site and financial reviews of our mortgage servicers and monitor their
financial and portfolio performance as compared to peers and internal benchmarks. We work with our largest mortgage
servicers to establish performance goals and monitor performance against the goals, and our servicing consultants work with
mortgage servicers to improve servicing results and compliance with our Servicing Guide.
We likely would incur costs and potential increases in servicing fees and could also face operational risks if we replace a
mortgage servicer. If a mortgage servicer defaults, it could result in a temporary disruption in servicing and loss mitigation
activities relating to the loans serviced by that mortgage servicer, particularly if there is a loss of experienced servicing
personnel. We may also face challenges in transferring a large servicing portfolio.
Pursuant to FHFA’s 2014 conservatorship scorecard and at FHFA’s direction, we worked with both FHFA and Freddie Mac to
develop a set of proposed new minimum financial eligibility requirements for approved single-family sellers and servicers.
These newly proposed eligibility requirements align the minimum financial requirements for mortgage sellers and servicers