Fannie Mae 2004 Annual Report Download - page 111

Table 15: Analysis of Guaranty Fee Income and Average Effective Guaranty Fee Rate
Amount Rate
(1)
Amount Rate
(1)
Amount Rate
(1)
2004
vs. 2003
2003
vs. 2002
2004 2003 2002
VarianceFor the Year Ended December 31,
(Restated) (Restated)
(Dollars in millions)
Guaranty fee income,
excluding impairment of
buy-ups . . . . . . . . . . . . . $ 3,640 21.0 bp $ 3,474 22.2 bp $ 2,808 21.5 bp 5% 24%
Impairment of buy-ups . . . . (36) (0.2) (193) (1.2) (292) (2.2) (81) (34)
Guaranty fee income and
average effective guaranty
fee rate . . . . . . . . . . . . . $ 3,604 20.8 bp $ 3,281 21.0 bp $ 2,516 19.3 bp 10% 30%
Average outstanding Fannie
Mae MBS and other
guaranties
(2)
. . . . . . . . . . $1,733,060 $1,564,812 $1,303,677 11% 20%
Fannie Mae MBS issues . . . 552,482 1,220,066 743,630 (55) 64
(1)
Calculated based on guaranty fee income components divided by average outstanding Fannie Mae MBS and other
guaranties. Shown in basis points.
(2)
Reflects average during the reported period calculated based on beginning and end of year balances of the aggregate
unpaid principal balance of loans underlying Fannie Mae MBS and other guaranties. Other guaranties include $14.7 bil-
lion, $12.8 billion and $11.8 billion as of December 31, 2004, 2003 and 2002, respectively, related to long-term
standby commitments and credit enhancements.
Guaranty fee income of $3.6 billion for 2004 was up 10% over 2003, primarily due to an 11% increase in
average outstanding Fannie Mae MBS and other guaranties. Our average effective guaranty fee rate remained
essentially flat at 20.8 basis points in 2004, compared to 21.0 basis points in 2003. Guaranty fee income of
$3.3 billion for 2003 was up 30% over 2002, driven by a 20% increase in average outstanding Fannie Mae
MBS and other guaranties and a 9% increase in the average effective guaranty fee rate to 21.0 basis points
from 19.3 basis points.
Growth in outstanding Fannie Mae MBS depends largely on the volume of mortgage assets made available for
securitization and our assessment of the credit risk and pricing dynamics of these mortgage assets. During the
three-year period from 2002 to 2004, we experienced exceptional growth in the amount of outstanding Fannie
Mae MBS. Outstanding Fannie Mae MBS increased by 47% during this period, reflecting an average annual
rate of growth of approximately 16%. A key driver of this growth was the record pace of mortgage
originations in the primary market during the period, with originations reaching a record $3.9 trillion in 2003
and our issuance of Fannie Mae MBS reaching a record $1.2 trillion in 2003. Borrowers took advantage of
historically low interest rates and refinanced into long-term fixed-rate mortgages, which represent the majority
of our business volume. Increased market demand among depository institutions for investments in fixed-rate
mortgages, partially stemming from the unusually steep yield curve during the period, also fueled growth in
outstanding Fannie Mae MBS during this period.
Growth in outstanding Fannie Mae MBS slowed in 2004, reflecting the impact of a considerable drop in the
volume of refinancings from the record levels in 2003 and a shift in the primary market to an increasing share
of originations of lower credit quality loans, loans with reduced documentation and loans to fund investor
properties, as well as a decline in originations of traditional mortgages, such as conventional fixed-rate loans.
Competition from private-label issuers, who have been a significant source of funding for these mortgage
products, reduced our market share and level of MBS issuances. This trend continued in 2005 and 2006;
however, we began to increase our participation in these product types where we concluded that it would be
economically advantageous or that it would contribute to our mission objectives.
Our average effective guaranty fee rate, excluding the effect of buy-up impairments, declined to 21.0 basis
points in 2004 from 22.2 basis points in 2003, reflecting a decrease in the accretion of deferred fees into
income. Mortgage interest rates were higher in 2004 relative to 2003, which increased the average expected
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