Fannie Mae 2004 Annual Report Download - page 127

We expect private-label issuers of CMBS to continue to provide significant competition to our HCD business.
HCD has been responding to market challenges with an increased emphasis on serving partner needs with
customized lending options and is advancing a number of efficiency initiatives that will help make it quicker
and easier to do business with us and at a lower cost. HCD also continues to grow and diversify its business
into new areas that expand the supply of affordable housing, such as increased investment in rental and for-
sale housing projects, including LIHTC investments. HCD further enables the expansion of affordable housing
stock by participating in specialized debt financing, acquiring mortgage loans from a variety of new public
and private partners, and increasing other community lending activities.
Capital Markets Group
Our Capital Markets segment generated net income of $2.1 billion, $5.3 billion and $1.8 billion in 2004, 2003
and 2002, respectively. The $3.2 billion, or 60%, decrease in the net income of our Capital Markets segment
in 2004 from 2003 was primarily due to:
• a $6.0 billion, or 95%, increase in derivatives fair value losses to $12.3 billion in 2004, primarily due to
changes in interest rates and a decrease in implied volatility that resulted in a decline in the fair value of
our option-based derivatives; and
• a $1.3 billion, or 7%, decline in net interest income in 2004 from 2003, primarily due to a 12% decline in
our net interest yield due to increasing short-term interest rates and a shift in portfolio purchases to a
greater percentage of ARM loans, floating-rate securities and other short-term assets that have lower
initial spreads, partially offset by a 6% increase in average interest-earning assets.
These factors were partially offset in 2004 by the following:
• a $2.5 billion, or 94%, decrease in debt extinguishment losses in 2004 as compared to 2003, primarily
due to a significant decrease in the amount of our debt securities repurchased;
• a $1.3 billion, or 70%, decrease in the provision for federal income taxes in 2004 as compared to 2003,
primarily due to a significant reduction in taxable income; and
• a $861 million, or 66%, decrease in investment losses from 2004 to 2003, primarily due to a significant
reduction in other-than-temporary impairments compared to 2003 on certain securities backed by
manufactured housing loans and aircraft leases, and reduced losses from lower-of-cost-or-market
adjustments on HFS loans, resulting from lower loan acquisition volumes and more stable interest rates in
2004.
The $3.5 billion, or 200%, increase in the net income of our Capital Markets segment in 2003 from 2002 was
driven primarily by:
• a $6.6 billion, or 51%, decrease in derivatives fair value losses to $6.3 billion in 2003, primarily due to an
increase in interest rates during the second half of 2003 as compared to a decline in interest rates in
2002; and
• a $1.0 billion, or 6%, increase in net interest income in 2003 from 2002, primarily due to a 12% increase
in the amount of average interest-earning assets, partially offset by a 6% decline in the net interest yield.
These factors were partially offset in 2003 by the following:
• a $1.9 billion, or 231%, increase in debt extinguishment losses in 2003 as compared to 2002, primarily
due to a significant increase in the amount of our debt securities repurchased;
• a $1.5 billion, or 372%, increase in the provision for federal income taxes in 2003 as compared to 2002,
primarily due to a significant increase in taxable income; and
• a $765 million, or 141%, increase in investment losses in 2003 as compared to 2002, primarily due to
increased losses on our trading portfolio and higher losses on lower-of-cost-or-market adjustments on HFS
loans.
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