Fannie Mae 2001 Annual Report Download - page 48

Table 21 summarizes the risk distribution for MBS issued and outstanding for the years ended December 31, 2001, 2000,
and 1999.
{ 46 } Fannie Mae 2001 Annual Report
TABLE 21: MBS RISK DISTRIBUTION
Total Issued1Total MBS Outstanding1
Fannie Mae Lender or Fannie Mae Lender or
Dollars in millions Risk Shared Risk Total Risk Shared Risk2Total3
2001 . . . . . . . . . . . . . . . . $482,956 $42,365 $525,321 $344,739 $1,091,631 $198,720 $1,290,351 $858,867
2000 . . . . . . . . . . . . . . . . 183,016 27,295 210,311 105,407 837,538 220,212 1,057,750 706,684
1999 . . . . . . . . . . . . . . . . 225,161 75,187 300,348 174,850 751,693 209,190 960,883 679,169
1
Based on primary default risk category. Includes MBS that have been pooled to back Fannie Megas, SMBS, or REMICs. Total issued includes $181 billion, $105 billion, and $125 billion of Fannie Mae MBS purchased
by portfolio in 2001, 2000 and 1999, respectively. Total issued excludes $3 billion and $2 billion of Fannie Mae originated MBS in 2001 and 2000, respectively.
2
Included in lender risk are $154 billion, $173 billion, and $163 billion at December 31, 2001, 2000, and 1999, respectively, on which the lender or a third party has agreed to bear default risk limited to a certain
portion or percentage of the loans delivered and, in some cases, on which the lender has pledged collateral to secure that obligation. Fannie Mae is ultimately responsible for bearing default risk if the lender or third party
fails to fulfill its obligation.
3
Included are $431 billion, $351 billion, and $282 billion at December 31, 2001, 2000, and 1999, respectively, of MBS in Fannie Mae's portfolio.
MBS Issues
Acquired
by Others
Outstanding
MBS Held by
Other Investors
Fannie Mae issues MBS that are backed by mortgage loans
from a single lender or from multiple lenders, or that are
transferred from Fannie Mae’s mortgage portfolio. Single-
lender MBS are issued through lender swap transactions
whereby a lender exchanges pools of mortgages for MBS.
Multiple-lender MBS allow several lenders to
pool mortgages and receive, in return, MBS (called
Fannie Majors®) representing a proportionate share of a
larger pool. Lenders may retain the MBS or sell them to
other investors. MBS are not assets of Fannie Mae except
when acquired for investment purposes, nor are they
recorded as liabilities. In some instances, Fannie Mae buys
mortgage loans and concurrently enters into a forward sale
commitment. These loans are designated as held for sale
when acquired and sold from the portfolio as MBS.
Sellers of pools of mortgage loans may retain or transfer to
one or more third parties the primary default risk on loans
constituting the MBS pools, or they may elect to transfer this
credit risk to Fannie Mae. Fannie Mae receives a guaranty
fee for assuming the credit risk and guaranteeing timely
payment of principal and interest to MBS investors. The
guaranty fee paid by the lender varies, depending on the risk
profile of the loans securitized as well as the level of credit
risk assumed by Fannie Mae. Fannie Mae ultimately is
responsible for guaranteeing timely payment of principal and
interest to MBS investors whether or not Fannie Mae shares
primary default risk on loans underlying MBS. Fannie Mae
accrues a liability on its balance sheet for its guarantee
obligation based on the probability that mortgages
underlying MBS will not perform according to contractual
terms and the level of credit risk it has assumed. At
December 31, 2001, Fannie Mae had an accrued liability of
$598 million for estimated losses on its guaranty of MBS,
compared with $603 million at December 31, 2000.
Fannie Mae may adjust the monthly MBS guaranty fee rate
through an upfront cash payment or receipt at securitization.
Fannie Mae applies the interest method to amortize the
guaranty fee adjustment over the estimated life of the loans
underlying the MBS. Calculating the constant effective yield
method necessary to apply the interest method 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 if changes in the estimated prepayment rates
used in the amortization calculation are necessary. If so,
Fannie Mae recalculates the constant effective yield and
adjusts the deferred guaranty fee balance to reflect the
amount that would have been recorded if the new effective
yield had been applied since the initial date of the guaranty
fee adjustment. Fannie Mae’s MBS prepayment sensitivity
analysis at December 31, 2001 indicates that a 100 basis point
increase in interest rates would result in an increase in
projected guaranty fee income of approximately 2 percent
and a 100 basis point decrease in interest rates would result in
a decrease in projected guaranty fee income of approximately
4 percent over a one-year horizon.