Fannie Mae 2004 Annual Report Download - page 112

life of the underlying assets of outstanding Fannie Mae MBS and slowed the pace of the amortization of fees.
The increase in the average expected life of outstanding Fannie Mae MBS resulted in an increase in the value
of our buy-up assets. Consequently, we recognized substantially less buy-up impairment in 2004 than in 2003.
Our average effective guaranty fee rate, excluding the effect of buy-up impairments, increased to 22.2 basis
points in 2003 from 21.5 basis points in 2002 as we accelerated the accretion of deferred fees into income in
response to substantially higher than expected prepayment rates that resulted from record low mortgage rates.
The decrease in the average expected life of outstanding Fannie Mae MBS caused the value of our buy-up
assets to decline, which triggered the recognition of impairment.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and foreign currency
transaction gains and losses. Transaction and technology fees are largely driven by business volume, while
foreign currency transaction gains and losses are driven by fluctuations in exchange rates on our foreign
denominated debt. Fee and other income totaled $404 million, $340 million and $89 million in 2004, 2003
and 2002, respectively. The increase in fee and other income in 2004 from 2003 was primarily due to a
reduction in net foreign currency transaction losses, which more than offset a decline in transaction fees from
reduced business volumes. The increase in 2003 from 2002 was largely due to an increase in transaction,
technology and multifamily fees resulting from a substantial increase in business volumes.
Investment Losses, Net
Investment losses, net includes other-than-temporary impairment on available-for-sale securities, lower-of-cost-
or-market adjustments on held for sale loans, gains and losses recognized on the securitization of loans from
our portfolio and the sale of securities, unrealized gains and losses on trading securities and other investment
losses. Investment gains and losses may fluctuate significantly from period to period depending upon our
portfolio investment and securitization activities, changes in market conditions that may result in fluctuations
in the fair value of trading securities, and other-than-temporary impairment. Table 16 summarizes the
components of investment gains and losses for 2004, 2003 and 2002.
Table 16: Investment Losses, Net
2004 2003 2002
(Restated) (Restated)
For the Year Ended December 31,
(Dollars in millions)
Other-than-temporary impairment on available-for-sale securities
(1)
. . . . . . . . . $(389) $ (733) $(676)
Lower-of-cost-or-market adjustments on held for sale loans . . . . . . . . . . . . . . (110) (370) (17)
Gains (losses) on Fannie Mae portfolio securitizations, net . . . . . . . . . . . . . . . (34) (13) 13
Gains (losses) on sale of investment securities, net . . . . . . . . . . . . . . . . . . . . 185 87 (14)
Unrealized gains (losses) on trading securities, net . . . . . . . . . . . . . . . . . . . . 24 (97) 205
Other investment losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38) (105) (12)
Investment losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(362) $(1,231) $(501)
(1)
Excludes other-than-temporary impairment on guaranty assets and buy-ups as these amounts are recognized as a
component of guaranty fee income.
Other-than-Temporary Impairment
We routinely evaluate available-for-sale securities for other-than-temporary impairment. We identify securities
that are impaired based on the extent to which the estimated fair value is less than the amortized cost. We
consider the impairment to be other than temporary if we determine that it is probable that we will be unable
to collect all of the contractual principal and interest payments or if we do not have the ability and intent to
hold the security until it recovers to its carrying amount. We consider many factors in assessing
other-than-temporary impairment, including the severity and duration of the impairment, recent events specific
to the issuer and/or the industry to which the issuer belongs, external credit ratings and recent downgrades, as
well as our ability and intent to hold such securities until recovery. When we decide to sell an impaired
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