Fannie Mae 2002 Annual Report Download - page 50

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48 FANNIE MAE 2002 ANNUAL REPORT
OFF-BALANCE SHEET TRANSACTIONS
We enter into certain off-balance sheet financial
arrangements to facilitate our statutory purpose of
providing mortgage funds to the secondary market and
reduce Fannie Mae’s exposure to interest rate fluctuations.
These arrangements, which may involve elements of credit
and interest rate risk in excess of amounts recognized on
Fannie Mae’s balance sheet, primarily include guaranteed
MBS and other mortgage-related securities and
commitments to purchase mortgage assets or issue and
guarantee MBS. Following is an overview of our off-balance
sheet exposure related to these transactions, including a
description of how our MBS are created and our role
in the process.
Guaranteed MBS and Other Mortgage-Related
Securities
We issue MBS that are backed by mortgage loans from a
single lender or from multiple lenders, or that are transferred
from our held-for-sale mortgage portfolio. Single-lender
MBS are typically 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 (referred to as
“Fannie Majors”) representing a proportionate share of a
larger pool. Lenders may retain the MBS or sell them to
other investors. When we issue MBS, we assume trustee
responsibilities. The loans underlying MBS are not our
assets. Therefore, we do not record them on our balance
sheet except when acquired and held in our mortgage
portfolio for investment purposes, nor do we record them
as liabilities. In some instances we buy mortgage loans or
mortgage-related securities and concurrently enter into
a forward sale commitment. We designate these loans as
held-for-sale when acquired, and we sell them from the
mortgage portfolio as MBS.
The Credit Guaranty business receives a guaranty fee for
assuming the credit risk and guaranteeing timely payment
of scheduled principal and interest to MBS investors and
investors in other mortgage-related securities. The guaranty
fee varies, depending on factors such as the risk profile of the
loans securitized as well as the level of credit risk we assume.
We are ultimately responsible for guaranteeing timely
payment of scheduled principal and interest to investors
whether or not we share primary default risk on loans
underlying outstanding MBS. We accrue a liability on
our balance sheet for our guaranty obligation based on the
probability that mortgages underlying the $1.029 trillion
of outstanding MBS will not perform according to
contractual terms. At December 31, 2002, we have accrued
a liability of $471 million for estimated losses on our
guaranty of outstanding MBS, compared with $598 million
at December 31, 2001. These amounts are a component of
the “Guaranty liability for MBS” on our balance sheet.
We issue REMICs backed by single-class MBS, SMBS,
Government National Mortgage Association (Ginnie Mae)
mortgage-related securities, other REMIC securities,
or whole loans that are not owned or guaranteed by
Fannie Mae. The Portfolio Investment business receives
transaction fees for structuring REMICs backed by MBS,
SMBS, Ginnie Mae securities, or existing Fannie Mae
REMIC classes. When we issue REMICs, we assume trustee
responsibilities. REMICs backed by guaranteed MBS do not
subject us to any additional mortgage credit risk. We are only
subject to additional credit risk if Fannie Mae guarantees
REMICs backed by whole loans owned by other entities or
private label securities. REMICs are not our assets except
when acquired and held in our mortgage portfolio for
investment purposes, nor do we record them as liabilities.
Table 17 summarizes issued and outstanding amounts for
guaranteed MBS and other mortgage-related securities,
including REMICs, for the years ended December 31, 2002,
2001, and 2000.