Fannie Mae 2004 Annual Report Download - page 125

revenues, which was driven by lower single-family business volumes in 2004 as compared to 2003; and (3) a
4% increase in our provision for federal income taxes, due to higher pre-tax earnings.
Net income for the Single-Family business segment increased by 27% in 2003 from 2002, with significant
increases in all revenue components partially offset by increases in other expenses, the provision for federal
income taxes and the provision for credit losses. The primary reason for the increase in Single-Family net
income in 2003 was a 29% increase in guaranty fee income in 2003 from 2002. This increase in guaranty fee
income was primarily due to growth in average outstanding single-family Fannie Mae MBS in 2003. Also
contributing to the increase in guaranty fee income in 2003 was an increase in our average effective guaranty
fee rate on single-family Fannie Mae MBS. This increase in the average effective single-family guaranty fee
rate was primarily attributable to accelerated income recognition resulting from higher than expected
prepayments that occurred in 2003. Other factors contributing to the increase in net income for the Single-
Family business segment in 2003 included: (1) a 34% increase in fee and other income in 2003, primarily due
to significantly higher technology-related transactions and associated revenues driven by higher single-family
business volumes in 2003 as compared to 2002; and (2) an 85% increase in investment gains from increased
securitization activities. These increases were partially offset by: (1) a 27% increase in the provision for
federal income taxes, due to higher pre-tax earnings in 2003 as compared to 2002; (2) a 23% increase in other
expenses in 2003 from 2002, due to higher direct and allocated costs, which were driven by higher single-
family business volumes in 2003 as compared to 2002 and higher average outstanding single-family Fannie
Mae MBS in 2003; and (3) a 40% increase in the provision for credit losses in 2003 from 2002, primarily due
to the increase in our single-family mortgage credit book of business in 2003 and an increase in the guaranty
liability relating to mortgage-related securities backed by manufactured housing.
As described in “Consolidated Results of Operations” above, we experienced exceptional growth in our single-
family mortgage credit book of business of 25.9% from 2002 to 2004. This growth was largely due to the
record pace of mortgage originations over that period. Growth in outstanding single-family Fannie Mae MBS
slowed from 2003 to 2004, reflecting the impact of a decrease in mortgage originations from the record levels
of originations in 2003, as well as increased competition from private-label issuers of single-family mortgage-
related securities.
During 2002-2004, our Single-Family business continued focusing on lender relationships, effectively
increasing revenues and managing credit risk. However, some fundamental changes in the mortgage market
began posing challenges to our participation in the secondary market, with such challenges continuing today.
• First, there was intense competition for the purchase of mortgage assets by a growing number of mortgage
investors through a variety of investment vehicles and structures. While single-family mortgage
originations posted the second strongest year in history at $2.8 trillion ($1.3 trillion for home purchase
and $1.5 trillion for refinancing) in 2004, the appetite of other investors to purchase and hold mortgages
also remained strong.
• Second, in a steeper interest rate curve environment and with a variety of new mortgage products being
introduced and accepted by investors at tightening credit spreads, consumers increasingly took advantage
of adjustable-rate mortgages, including non-traditional products such as interest-only ARMs, negative-
amortizing ARMs and a variety of other product and risk combinations. This meaningfully changed the
overall mix of mortgage originations in the primary mortgage market away from the long-term fixed-rate
mortgage, where we have historically had the greatest market penetration. In addition, the sub-prime
mortgage market, where we had little presence, began to represent a progressively greater portion of
mortgage originations.
• Third, as consumer demand for floating-rate and sub-prime mortgage loans grew, so did demand from
other mortgage investors, which accelerated the growth of competing securitization options in the form of
private-label mortgage-related securities. This development challenged the competitive position of our
Fannie Mae MBS in the secondary market and sparked aggressive competition for loans.
We are responding to these challenges with a focus on understanding and serving our customers’ needs,
strengthening our relationships with key partners, and helping lenders reach and serve new, emerging and non-
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