Fannie Mae 2001 Annual Report Download - page 39

based on clearly defined and quantifiable performance
thresholds. Senior managers are responsible for monitoring
key performance indicators, addressing the monthly results,
and taking corrective actions as necessary. The OTI
Committee also reviews the results and actions taken.
Balance Sheet Analysis
Fannie Mae’s primary balance sheet activities are purchasing
mortgages and other investments with proceeds from debt
issuances and repayments of mortgages and other
investments. Fannie Mae’s liquidity and capital resources
are critical to its activities and its regulatory capital
requirements. The following analysis describes trends
in these aspects of Fannie Mae’s business activities.
Mortgage Portfolio
Fannie Mae’s net mortgage portfolio grew 16 percent to
$705 billion at December 31, 2001 from $607 billion at
December 31, 2000. The volume of mortgage originations
reached record levels in 2001 as mortgage interest rates fell
to historic lows during the year. The drop in interest rates,
combined with a historically high fixed-rate share of total
mortgage originations, caused the supply of mortgages in the
secondary market to be unusually high, resulting in attractive
mortgage-to-debt spreads and increased purchase
commitments by the portfolio business.
During the second half of 2001, an unusually large number
of portfolio commitments were made for settlement a
number of months forward. Fannie Mae ended 2001 with
$55 billion in outstanding mortgage purchase commitments,
compared with $16 billion at December 31, 2000. Delayed
settlement of these commitments in 2002 is expected to add
over 5 percentage points to portfolio growth in 2002.
Additional information on mortgage portfolio composition
is presented in the Notes to Financial Statements under
Note 2, “Mortgage Portfolio, Net.”
The average yield on Fannie Mae’s net mortgage portfolio
decreased to 7.11 percent during 2001 from 7.16 percent
during 2000. The decrease in yield resulted largely from the
general decline in mortgage rates on loans sold into the
secondary market and an increase in the level of liquidations
on older, higher-rate loans. The liquidation rate on
mortgages in portfolio (excluding sales) more than doubled
in 2001, increasing to 25 percent from 10 percent in 2000.
Total mortgage liquidations increased to $164 billion in
2001 from $57 billion in 2000 largely because of extensive
refinancing in response to falling mortgage interest rates.
Net unamortized premiums, discounts, and other deferred
purchase price adjustments in Fannie Mae’s mortgage
portfolio totaled $2.1 billion and $2.5 billion at
December 31, 2001 and 2000, respectively. Fannie Mae
applies the interest method to amortize purchase price
adjustments over the estimated life of the loans. Calculating
the constant effective yield necessary to apply the interest
method in the amortization of mortgage purchase discounts
or premiums and other deferred purchase price adjustments
is a critical accounting policy that requires estimating future
mortgage prepayments. Estimating prepayments requires
significant judgment and assumptions that involve some
degree of uncertainty regarding factors such as the
forecast of movements in interest rates and predicting
borrower patterns.
Fannie Mae tracks and monitors actual prepayments received
against anticipated prepayments and regularly assesses the
sensitivity of prepayments to changes in interest rates on
a monthly basis. Based upon this analysis, Fannie Mae
determines whether it should change the estimated
prepayment rates used in the amortization calculation. If
changes are necessary, Fannie Mae recalculates the constant
effective yield and adjusts the net mortgage investment
balance to reflect the amount that would have been recorded
had the new effective yield been applied since acquisition of
the mortgages or MBS. Fannie Mae’s premium, discount,
and deferred price adjustment prepayment sensitivity
analysis at December 31, 2001 indicates that a 100 basis point
increase in interest rates would result in a decrease in
projected net interest income of approximately 1 percent and
a 100 basis point decrease in interest rates would result in an
increase in projected net interest income of approximately
2 percent over a one-year horizon. This is one component of
Fannie Mae’s overall net interest income at risk assessment.
A comprehensive analysis of the impact of interest rate
{ 37 } Fannie Mae 2001 Annual Report