Fannie Mae 2006 Annual Report Download - page 162

Carrying
Value
Estimated
Fair Value $ % $ %
⫺50 Basis Points +100 Basis Points
Effect on Estimated Fair Value
As of December 31, 2005
(Dollars in millions)
Trading financial instruments
(1)
. . . . . . . . . . . . . . . . . . $ 15,110 $ 15,110 $ 262 1.73% $ (641) (4.24)%
Non-trading mortgage assets and consolidated debt
(2)
. . . 760,586 759,054 9,544 1.26 (24,059) (3.17)
Debt
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (754,320) (760,002) (8,617) 1.13 17,640 (2.32)
Subtotal before derivatives . . . . . . . . . . . . . . . . . . . . 21,376 14,162 1,189 8.40 (7,060) (49.85)
Derivative assets and liabilities, net . . . . . . . . . . . . . . . 4,374 4,374 (1,577) (36.05) 5,696 130.22
Subtotal after derivatives . . . . . . . . . . . . . . . . . . . . . 25,750 18,536 (388) (2.09) (1,364) (7.36)
Guaranty assets and guaranty obligations, net
(2)
. . . . . . . (2,274) 8,993 (1,392) (15.48) 2,116 23.53
Net market sensitive assets
(2)(3)
. . . . . . . . . . . . . . . . . 23,476 27,529 (1,780) (6.47) 752 2.73
Other non-financial assets and liabilities, net
(4)
. . . . . . . 15,826 14,670 489 3.33 (397) (2.71)
Net assets
(5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,302 $ 42,199 $(1,291) (3.06)% $ 355 0.84%
(1)
Consists of securities classified in the consolidated balance sheets as trading and carried at estimated fair value.
(2)
“Non-trading mortgage assets and consolidated debt” includes the line item “Advances to lenders” reported in our
consolidated GAAP balance sheets and the reclassification of consolidated debt with a carrying value and estimated
fair value of $7.9 billion as of December 31, 2006, respectively, and a carrying value of $10.4 billion and estimated
fair value of $10.5 billion as of December 31, 2005, respectively. In addition, certain amounts have been reclassified
from securities to “Guaranty assets and guaranty obligations, net” to reflect how the risk of these securities is managed
by the business.
(3)
Includes net financial assets and financial liabilities reported in “Notes to Consolidated Financial Statements—Note 19,
Fair Value of Financial Instruments” and additional market sensitive instruments that consist of master servicing assets,
master servicing liabilities and credit enhancements.
(4)
The sensitivity changes related to other non-financial assets and liabilities represent the tax effect on net assets under
these scenarios and do not include any interest rate sensitivity related to these items.
(5)
The carrying value for net assets equals total stockholders’ equity as reported in the consolidated balance sheets.
(6)
Certain prior period amounts have been reclassified to conform with the current year presentation, which resulted in
changes in the reported sensitivities of selected categories of market-sensitive assets and liabilities but did not change
the reported sensitivities of either our net market sensitive assets or net assets.
The net asset sensitivities (excluding the sensitivity of the “Guaranty assets and guaranty obligations, net”),
net of tax was (0.7)% for a ⫺50 basis point shock and (3.1)% for a +100 basis point shock as of December 31,
2006, compared with (0.9)% for a ⫺50 basis point shock and (2.4)% for a +100 basis point shock as of
December 31, 2005. We evaluate the sensitivity of the fair value of our net assets, excluding the sensitivity of
our guaranty assets and guaranty obligations, because, as previously discussed, we expect that the guaranty fee
income generated from future business activity will largely replace any guaranty fee income lost as a result of
mortgage prepayments due to movements in interest rates. As discussed above, we structure our debt and
derivatives to match and offset the interest rate risk of our mortgage investments as much as possible. We
believe the results of these sensitivity analyses are indicative of a relatively low level of interest rate risk.
Our interest rate risk measures are based on industry standard financial modeling techniques that depend on
our internally developed proprietary mortgage prepayment models and interest rate models. Our prepayment
models contain many assumptions, including those regarding borrower behavior in certain interest rate
environments and borrower relocation rates. Other market inputs, such as interest rates, mortgage prices and
interest rate volatility, are also critical components of our interest rate risk measures. We maintain a research
program to constantly evaluate, update and enhance these assumptions, models and analytical tools as
appropriate to reflect our best assessment of the environment.
Although we perform a wide range of sensitivity analyses using industry standard methodologies, there are
inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. It is
not possible to fully model the market risk in instruments with option or prepayment risks. Our sensitivity
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