Fannie Mae 2004 Annual Report Download - page 114

We recorded losses related to LOCOM adjustments totaling $110 million, $370 million and $17 million in
2004, 2003 and 2002, respectively. We purchased a significant volume of mortgage loans in 2003 in response
to the record level of mortgage originations in the primary market as mortgage interest rates reached record
lows in the first half of 2003. An increase in interest rates in the second half of 2003 reduced the value of our
HFS loans, resulting in a significantly higher amount of LOCOM adjustments in 2003.
Gains (Losses) on Fannie Mae Portfolio Securitizations, Net
Portfolio securitizations involve the transfer of mortgage loans or mortgage-related securities from our balance
sheet to a trust to create Fannie Mae MBS (whether in the form of single-class Fannie Mae MBS, REMICs or
other types of beneficial interests). We may retain an interest in the assets transferred to a trust in a portfolio
securitization by receiving a portion of the resulting issued securities. If the transfer qualifies as a sale under
SFAS 140, we determine the gain (loss) on sale by allocating the carrying value of the financial assets sold
and the interests retained based on their relative estimated fair values. The gain (loss) we recognize is the
difference between the cash proceeds from the sale, net of any liabilities assumed, and the cost allocated to
the financial assets sold. The timing of the recognition of the gain (loss) is dependent upon meeting specific
accounting criteria. As a result, the gain (loss) on sale may be recorded in a different accounting period than
the period in which the securitization is completed. In addition, we may securitize financial assets in a
different accounting period than the period in which the financial assets were purchased. See “Notes to
Consolidated Financial Statements—Note 2, Summary of Significant Accounting Policies” and “Notes to
Consolidated Financial Statements—Note 7, Portfolio Securitizations” for additional information on our
accounting for Fannie Mae portfolio securitizations.
Gains (losses) on Fannie Mae portfolio securitizations in any given period are primarily affected by the level
of securitization activity, the carrying amount of the financial assets sold, and changes in interest rates and
prices from the time the financial assets are purchased until the completion of the securitization. We generally
record losses on portfolio securitization transactions because we are required to recognize a liability for the
fair value of our guaranty obligation in determining the gain or loss on the sale. We recorded net losses on
Fannie Mae portfolio securitizations of $34 million and $13 million in 2004 and 2003, respectively, and a net
gain of $13 million in 2002, related to the securitization of approximately $12.3 billion, $7.2 billion and
$3.2 billion, respectively, of mortgage assets where we were considered to be the transferor.
Gains (Losses) on Sale of Investment Securities, Net
Gains (losses) on the sale of investment securities in any given period are primarily affected by the volume of
sales and changes in interest rates and prices from the time the securities are purchased until the time they are
sold. We recorded net gains of $185 million and $87 million in 2004 and 2003, respectively, and a net loss of
$14 million in 2002, primarily related to the sale of securities totaling $18.4 billion, $24.7 billion and
$14.0 billion, respectively. We began to increase the level of sales from our mortgage portfolio beginning in
the latter part of 2004.
We sold a considerably higher amount of mortgage assets from our portfolio in 2005 and the first nine months
of 2006 relative to historical sales levels. The heightened competition for mortgage assets in 2005 and 2006
significantly increased the number of economically attractive opportunities to sell certain mortgage assets,
particularly traditional 15-year and 30-year mortgage-related securities, in addition to REMICs structured from
15-year and 30-year Fannie Mae MBS held in our portfolio. Sales of selected assets from our portfolio
contributed to both the enhancement of economic value and the reduction of portfolio balances to achieve our
capital plan objectives.
Unrealized Gains (Losses) on Trading Securities, Net
Trading securities are carried at fair value with unrealized gains and losses recorded in earnings. We expect
unrealized gains and losses on trading securities to fluctuate each period with changes in volumes, interest
rates and market prices. We recorded unrealized gains on trading securities of $24 million in 2004, unrealized
losses of $97 million in 2003 and unrealized gains of $205 million in 2002. The increase in interest rates in
the second half of 2003 resulted in unrealized losses, while the general decline in interest rates during 2002
resulted in unrealized gains.
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