Fannie Mae 2004 Annual Report Download - page 126

traditional markets by providing more flexible, low-cost mortgage options. We also continue to expand our
lending options for borrowers with weaker credit histories.
HCD Business
Our Housing and Community Development business generated net income of $337 million, $286 million and
$184 million in 2004, 2003 and 2002, respectively. The significant components of HCD net income include
guaranty fees, fee and other income, other expenses, and income tax benefits and losses associated with
LIHTC and other partnership investments.
Net income for the HCD business segment increased 18% from 2003 to 2004, with an increase in guaranty
fees, fee and other income, and tax benefits associated with HCD’s partnership investments partially offset by
higher losses from partnership investments, higher net interest expense and increased other expenses. Guaranty
fee income increased by 25% in 2004, as a result of growth in the average outstanding multifamily book of
business in 2004 at stable effective guaranty fee rates. Fee and other income increased by 49% in 2004,
attributable to an increase in multifamily transaction fees earned from substantially higher borrower
refinancing activity in 2004 as compared to 2003. These increases in revenues were partially offset by a 66%
increase in other expenses in 2004, reflecting HCD’s portion of the $400 million civil penalty paid to the
U.S. Treasury in connection with our settlements with the SEC and OFHEO, as well as increased direct and
allocated costs. Also offsetting these revenues was a 45% increase in net interest expense in 2004, reflecting
higher internal funding costs due to our increased investments in LIHTC and other equity investments. HCD’s
results for 2004 include a 19% increase in income tax benefits, largely attributable to growth in LIHTC and
other partnership investment balances, reduced by a 10% increase in pre-tax losses from these partnership
investments.
Net income for the HCD business segment increased 55% from 2002 to 2003, with increases in guaranty fees,
fee and other income, and tax benefits associated with HCD’s partnership investments partially offset by
higher losses from partnership investments and increased other expenses. Guaranty fee income increased by
12% in 2003, as a result of growth in the average outstanding multifamily book of business in 2003 at stable
effective guaranty fee rates. Fee and other income increased by 40% in 2003, attributable to an increase in
multifamily transaction fees earned from higher borrower refinancing activity in 2003 as compared to 2002.
These increases in revenues were partially offset by a 27% increase in other expenses in 2003, reflecting
higher direct and allocated costs. HCD’s results for 2003 include a 29% increase in income tax benefits,
largely attributable to growth in LIHTC and other partnership investment balances, reduced by a 25% increase
in pre-tax losses from these partnership investments.
The provision for credit losses remained stable for all three years, which reflects our high credit standards.
Losses from partnership investments primarily include our share of net operating losses for LIHTC and other
partnership investments accounted for under the equity method. By design, net operating losses generated by
LIHTC properties provide tax benefits to investors, in addition to the tax credits generated.
We are one of the largest participants in the multifamily secondary market. HCD’s multifamily business has
been challenged in recent years. Strong competition for loans backed by multifamily properties has led to a
decline in the availability of loans that meet our credit and return requirements. Competition has been fueled
by private-label issuers of CMBS and aggressive bidding for multifamily debt among institutional investors,
which reflects the high level of funds available for investment in the secondary mortgage market. In addition,
market fundamentals have been mixed. Low mortgage rates in 2003 and 2004 led to a record number of first-
time homebuyers, many of whom were formerly renters, and a slowly recovering job market kept potential
new renters from entering apartments. These factors led to rental vacancy rates higher than historical norms.
Capitalization rates (the ratio of net operating income to property value—a measure of expected return on
investment) meanwhile fell to extremely low levels, which likely reflected other investors’ willingness to
accept greater risk. We have seen improvement in some of these fundamentals in 2006, with monthly rents
increasing and vacancy rates falling. As a result of these trends, since the end of 2004, we have experienced a
downward trend in the average effective guaranty fee rate on new issuances of Fannie Mae MBS backed by
multifamily mortgage loans.
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