Fannie Mae 2004 Annual Report Download - page 345

2003, respectively. In the event that we would be required to make payments under these guaranties, we would
pursue recovery through our right to the collateral backing the underlying loans and available credit
enhancements that provide a maximum coverage of $42.6 billion and $65.6 billion for the years ended
December 31, 2004 and 2003, respectively.
The following table displays the contractual amount of off-balance sheet financial instruments as of
December 31, 2004 and 2003. Contractual or notional amounts do not necessarily represent the credit risk of
the positions.
2004 2003
As of December 31,
(Restated)
(Dollars in millions)
Fannie Mae MBS and other guaranties
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $444,526 $683,860
Loan purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,410 1,486
(1)
Represents maximum exposure on guaranties not reflected in the consolidated balance sheets. See “Note 8, Financial
Guaranties and Master Servicing” for maximum exposure associated with guaranties reflected in the consolidated bal-
ance sheets.
We do not require collateral from our counterparties to secure their obligations to us for loan purchase
commitments.
19. Fair Value of Financial Instruments
We carry financial instruments at fair value, amortized cost or lower of cost or market. Fair value is the
amount at which a financial instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. When available, the fair value of our financial instruments is based
on observable market prices, or market prices that we obtain from third parties. Pricing information we obtain
from third parties is internally validated for reasonableness prior to use in the consolidated financial
statements.
When observable market prices are not readily available, we estimate the fair value using market data and
model-based interpolation using standard models that are widely accepted within the industry. Market data
includes prices of financial instruments with similar maturities and characteristics, duration, interest rate yield
curves, measures of volatility and prepayment rates. If market data needed to estimate fair value is not
available, we estimate fair value using internally developed models that employ a discounted cash flow
approach.
These estimates are based on pertinent information available to us at the time of the applicable reporting
periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate
as economic and market factors vary, and our evaluation of those factors changes. Although we use our best
judgment in estimating the fair value of these financial instruments, there are inherent limitations in any
estimation technique. In these cases, any minor change in an assumption could result in a significant change in
our estimate of fair value thereby increasing or decreasing the value of the consolidated assets, liabilities,
stockholders’ equity and net income.
The disclosure included herein excludes certain financial instruments, such as plan obligations for pension and
other post-retirement benefits, employee stock option and stock purchase plans, and also excludes all non-
financial instruments. In addition, the disclosure includes off-balance sheet financial instruments, including
most credit enhancements and commitments to purchase multifamily mortgage loans, which are not recorded
in the consolidated balance sheets. As a result, the following presentation of the fair value of our financial
assets and liabilities does not represent the underlying fair value of the total consolidated assets or liabilities.
F-94
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)