Fannie Mae 2006 Annual Report Download - page 276

We record a guaranty obligation for (i) guaranties on lender swap transactions issued or modified on or after
January 1, 2003, pursuant to FIN 45, (ii) guaranties on portfolio securitization transactions, (iii) credit
enhancements on mortgage revenue bonds, and (iv) our obligation to absorb losses under long-term standby
commitments. Our guaranty obligation represents our estimated obligation to stand ready to perform on these
guaranties. Our guaranty obligation is recorded at fair value at inception. The carrying amount of the guaranty
obligation, excluding deferred profit, was $6.5 billion and $5.2 billion as of December 31, 2006 and 2005,
respectively. We also record an estimate of incurred credit losses on these guaranties in “Reserve for guaranty
losses” in the consolidated balance sheets, as discussed further in “Note 4, Allowance for Loan Losses and
Reserve for Guaranty Losses.”
These guaranties expose us to credit losses on the mortgage loans or, in the case of mortgage-related
securities, the underlying mortgage loans of the related securities. The contractual terms of our guaranties
range from 30 days to 30 years. However, the actual term of each guaranty may be significantly less than the
contractual term based on the prepayment characteristics of the related mortgage loans. For those guaranties
recorded in the consolidated balance sheets, our maximum potential exposure under these guaranties is
primarily comprised of the unpaid principal balance of the underlying mortgage loans, which was $1.7 trillion
and $1.5 trillion as of December 31, 2006 and 2005, respectively. In addition, we had exposure of
$254.6 billion and $322.3 billion for other guaranties not recorded in the consolidated balance sheets as of
December 31, 2006 and 2005, respectively. See “Note 18, Concentrations of Credit Risk” for further details on
these guaranties. Our maximum potential interest payments associated with these guaranties are not expected
to exceed 120 days of interest at the certificate rate, since we typically purchase delinquent mortgage loans
when the cost of advancing interest under the guaranties exceeds the cost of holding the nonperforming loans
in our mortgage portfolio.
The maximum exposure from our guaranties is not representative of the actual loss we are likely to incur,
based on our historical loss experience. In the event we were required to make payments under our guaranties,
we would pursue recovery of these payments by exercising our rights to the collateral backing the underlying
loans or through available credit enhancements, which includes all recourse with third parties and mortgage
insurance. The maximum amount we could recover through available credit enhancements and recourse with
third-parties was $99.4 billion and $102.8 billion as of December 31, 2006 and 2005, respectively.
Guaranty Obligations
The following table displays changes in “Guaranty obligations” for the years ended December 31, 2006, 2005
and 2004.
2006 2005 2004
For the Year Ended December 31,
(Dollars in millions)
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,016 $ 8,784 $ 6,401
Additions to guaranty obligations
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,707 4,982 5,050
Amortization of guaranty obligation into guaranty fee income . . . . . . . . . . . . (3,217) (3,287) (2,173)
Impact of consolidation activity
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (361) (463) (494)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,145 $10,016 $ 8,784
(1)
Represents the fair value of the contractual obligation and deferred profit at issuance of new guaranties.
(2)
Upon consolidation of MBS trusts, we derecognize our guaranty obligation to the respective trust.
Deferred profit is a component of “Guaranty obligations” in the consolidated balance sheets and is included in
the table above. We record deferred profit on guaranties issued or modified on or after the adoption date of
FIN 45 if the consideration we expect to receive for our guaranty exceeds the estimated fair value of the
F-45
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)