Fannie Mae 2014 Annual Report Download - page 68

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require adjustments to such reserves. In addition, responding to these matters could divert significant internal resources away
from managing our business.
An active trading market in our equity securities may cease to exist, which would adversely affect the market price and
liquidity of our common and preferred stock.
Our common stock and preferred stock are now traded exclusively in the over-the-counter market. We cannot predict the
actions of market makers, investors or other market participants, and can offer no assurances that the market for our securities
will be stable. If there is no active trading market in our equity securities, the market price and liquidity of the securities will
be adversely affected.
Mortgage fraud could result in significant financial losses and harm to our reputation.
We use a process of delegated underwriting in which lenders make specific representations and warranties about the
characteristics of the mortgage loans we purchase and securitize. As a result, we do not independently verify most borrower
information that is provided to us. This exposes us to the risk that one or more of the parties involved in a transaction (the
borrower, seller, broker, appraiser, title agent, lender or servicer) will engage in fraud by misrepresenting facts about a
mortgage loan. Similarly, we rely on delegated servicing of loans and use of a variety of external resources to manage our
REO. We have experienced financial losses resulting from mortgage fraud, including institutional fraud perpetrated by
counterparties. In the future, we may experience additional financial losses or reputational damage as a result of mortgage
fraud.
RISKS RELATING TO OUR INDUSTRY
Our business and financial results are affected by general economic conditions, particularly home prices and employment
trends, and a deterioration of economic conditions or the financial markets may materially adversely affect our result of
operations, net worth and financial condition.
Our business is significantly affected by the status of the U.S. economy, particularly home prices and employment trends.
Although the U.S. economy has continued to gradually improve, economic growth and improvement in the housing market
have been modest. A prolonged period of slow growth in the U.S. economy or any deterioration in general economic
conditions or the financial markets could materially adversely affect our result of operations, net worth and financial
condition. For example, if home prices decrease or the unemployment rate increases, it could result in significantly higher
levels of credit losses and credit-related expense.
Global economic conditions can also adversely affect our business and financial results. Changes or volatility in market
conditions resulting from deterioration in or uncertainty regarding global economic conditions can adversely affect the value
of our assets, which could materially adversely affect our results of operations, net worth and financial condition. For
example, weak economic conditions in Europe and concerns about the European banking system resulted in a significant
decline in interest rates in the fourth quarter of 2014. This decline in interest rates contributed to the fair value losses on our
derivatives in the fourth quarter of 2014. Volatility or uncertainty in global political conditions can also significantly affect
economic conditions and the financial markets. We describe above the risks to our business posed by changes in interest rates
and changes in spreads. In addition, as described above, future changes or disruptions in the financial markets could
significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position.
A decline in activity in the U.S. housing market or increasing interest rates could lower our business volumes.
Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and the size of the
U.S. residential mortgage market. A decline in mortgage debt outstanding reduces the unpaid principal balance of mortgage
loans available for us to securitize or purchase, which in turn could reduce our guaranty fee income and net interest income.
Even if we were able to increase our share of the secondary mortgage market, it may not be sufficient to make up for a
decline in the rate of growth in mortgage originations.
Mortgage interest rates also affect our business volume. Rising interest rates generally result in fewer mortgage originations,
particularly for refinances. Interest rates increased significantly in the second half of 2013, which reduced our business
volume in the second half of 2013 and in 2014. Interest rates subsequently declined in late 2014 and early 2015 to levels
similar to mid-2013. If interest rates rise again, particularly if the increase is sudden and steep, it could significantly reduce
our business volume. Significant reductions in our business volume could adversely affect our results of operations and
financial condition.