Fannie Mae 2010 Annual Report Download - page 391

The following are valuation techniques for items not subject to the fair value hierarchy either because they are
not measured at fair value other than for the purpose of the above table or because they are only measured at
fair value at inception.
Financial Instruments for which fair value approximates carrying value—We hold certain financial instruments
that are not carried at fair value but for which the carrying value approximates fair value due to the short-term
nature and negligible credit risk inherent in them. These financial instruments include cash and cash
equivalents, federal funds and securities sold/purchased under agreements to repurchase/resell (exclusive of
dollar roll repurchase transactions) and the majority of advances to lenders.
Advances to Lenders—The carrying value for the majority of our advances to lenders approximates the fair
value due to the short-term nature of the specific instruments. Other instruments include loans for which the
carrying value does not approximate fair value. These loans are valued using collateral values of similar loans
as a proxy.
Guaranty Obligations—The fair value of all guaranty obligations (“GO”), measured subsequent to their initial
recognition, is our estimate of a hypothetical transaction price we would receive if we were to issue our
guaranty to an unrelated party in a standalone arm’s-length transaction at the measurement date. We estimate
the fair value of the GO using our internal GO valuation models, which calculate the present value of
expected cash flows based on management’s best estimate of certain key assumptions such as current
mark-to-market LTV ratios, future house prices,default rates, severity rates and required rate of return. We
further adjust the model values based on our current market pricing when such transactions reflect credit
characteristics that are similar to our outstanding GO. While the fair value of the GO reflects all guaranty
arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our
adoption of the accounting standard on guarantor’s accounting and disclosure requirements for guarantees.
Fair Value Option
We elected the fair value option for certain consolidated loans and debt instruments recorded in our
consolidated balance sheets as a result of consolidating VIEs. These instruments contain embedded derivatives
that would otherwise require bifurcation. Under the fair value option, we elected to carry these instruments at
fair value instead of bifurcating the embedded derivative from the respective loan or debt instrument.
We elected the fair value option for all long-term structured debt instruments that are issued in response to
specific investor demand and have interest rates that are based on a calculated index or formula and are
economically hedged with derivatives at the time of issuance. By electing the fair value option for these
instruments, we are able to eliminate the volatility in our results of operations that would otherwise result
from the accounting asymmetry created by recording these structured debt instruments at cost while recording
the related derivatives at fair value.
We elected the fair value option for the financial assets and liabilities of the senior-subordinate trust structures
we consolidated as a result of adopting the new consolidation accounting standard on January 1, 2010. By
electing the fair value option for these instruments, we are able to eliminate the volatility in our results of
operations that would otherwise result from different accounting treatment between loans at cost and debt at
cost.
Interest income for the mortgage loans is recorded in “Mortgage loans interest income” and interest expense
for the debt instruments is recorded in “Long-term debt interest expense” in our consolidated statements of
operations.
The following table displays the fair value and unpaid principal balance of the financial instruments for which
we have made fair value elections as of December 31, 2010 and 2009. For information about the related fair
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FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)