Fannie Mae 2004 Annual Report Download - page 135

value of our debt and approximately $200 million is due to a decrease in the estimated fair value of our
derivatives.
Change in Estimated Fair Value of Net Assets as of December 31, 2004
The estimated fair value of our net assets (net of tax effect) was $40.1 billion as of December 31, 2004, an
increase of $11.7 billion, or 41%, from the restated net asset fair value of $28.4 billion as of
December 31, 2003. Both our own activities and market conditions cause changes in the estimated fair value of
our net assets (non-GAAP).
Of the total $11.7 billion increase, approximately $2.8 billion of the increase is attributable to our capital
transactions, consisting primarily of $5.0 billion of gross proceeds we received from a preferred stock offering
in 2004, partially offset by the payment of $2.2 billion of dividends to holders of our common and preferred
stock. Net cash inflows generated by our Single-Family, HCD and Capital Markets businesses also contributed
to the increase in fair value of our net assets (non-GAAP).
The remainder of the increase is largely attributable to changes in market conditions. Selected relevant market
information is shown in Table 25. Since our goal is to minimize our risk associated with changes in interest
rates, we expect that changes in implied volatility, mortgage OAS and debt OAS are the market conditions that
will have the most significant impact on the fair value of our net assets. Implied volatility decreased
considerably during 2004 compared to 2003. For example, the implied volatility of 3-year swaptions on
10-year underlying instruments declined by 280 basis points, from 22.9% as of December 31, 2003 to 20.1%
as of December 31, 2004. As indicated in Table 24, this decrease in implied volatility had the effect of
increasing the value of our mortgage assets more than it increased our debt and derivatives funding of those
assets. Changes in OAS had less of an impact on the fair value of our net assets over this period. According to
the Lehman U.S. MBS Index, the OAS of mortgages, including those in the Fannie Mae MBS component of
the Lehman U.S. MBS Index, decreased by 5.1 basis points to 22.5 basis points at December 31, 2004. A
tighter, or lower, OAS on mortgages generally increases the fair value of our mortgage assets. The OAS on
debt securities included in the Lehman U.S. Agency Debt Index decreased by 4.7 basis points to 32.2 basis
points as of December 31, 2004. A tighter, or lower, debt OAS generally increases the fair value of our
liabilities.
Table 25: Selected Market Information
(1)
2004 2003 Change
As of
December 31,
10-year U.S. Treasury Note Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.22% 4.25 % (0.03) %
Implied volatility
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1% 22.9 % (2.80) %
30-year Fannie Mae MBS par coupon rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.21% 5.28 % (0.07) %
Lehman U.S. MBS Index OAS (in basis points) over U.S. Treasury yield curve . . . . . 22.5 bp 27.6 bp (5.1) bp
Lehman U.S. Agency Debt Index OAS (in basis points) over U.S. Treasury yield
curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.2 bp 36.9 bp (4.7) bp
(1)
Information obtained from Lehman Live and Bloomberg.
(2)
Implied volatility for an interest rate swaption with a 3-year option on a 10-year final maturity.
Effect of Market Conditions on Estimated Fair Value of Our Net Assets
We expect periodic fluctuations in the estimated fair value of our net assets due to changes in market
conditions, including changes in interest rates, changes in relative spreads between our mortgage assets and
debt, and changes in implied volatility. Based on market conditions and the composition of our consolidated
balance sheets in 2005 and 2006, we do not expect that we will experience the same level of increase, if any,
in the estimated fair value of our net assets in 2005 and 2006 that we experienced in 2004. We discuss the
sensitivity of the estimated fair value of our net assets in “Risk Management—Interest Rate Risk Management
and Other Market Risks.”
130