Fannie Mae 2004 Annual Report Download - page 314

$1.0 billion for the years ended December 31, 2004 and 2003, respectively. Prior to the adoption of FIN 45,
we did not separately recognize deferred profit or related amortization.
Fannie Mae MBS Included in Investments in Securities
For Fannie Mae MBS included in “Investments in securities,” we do not eliminate or extinguish the guaranty
arrangement because it is a contractual arrangement with the unconsolidated MBS trusts. The fair value of
Fannie Mae MBS is determined based on observable market prices because most Fannie Mae MBS are
actively traded. Fannie Mae MBS receive high credit quality ratings primarily because of our guaranty. Absent
our guaranty, Fannie Mae MBS would be subject to the credit risk on the underlying loans. We continue to
recognize a guaranty obligation and a reserve for guaranty losses associated with these securities because we
carry these securities in the consolidated financial statements as guaranteed Fannie Mae MBS. The fair value
of the guaranty obligation, net of deferred profit, associated with Fannie Mae MBS included in “Investments
in securities” approximates the fair value of the credit risk that exists on these Fannie Mae MBS absent our
guaranty. The fair value of the guaranty obligation, net of deferred profit, associated with the Fannie Mae
MBS included in “Investments in securities” was $256 million and $364 million as of December 31, 2004 and
2003, respectively.
Master Servicing
We do not perform the day-to-day servicing of mortgage loans in an MBS trust in a Fannie Mae securitization
transaction; however, we are compensated to carry out administrative functions for the trust and oversee the
primary servicer’s performance of the day-to-day servicing of the trust’s mortgage assets. This arrangement
gives rise to either an MSA or an MSL.
Our MSA, net of a valuation allowance, was $580 million and $368 million as of December 31, 2004 and
2003, respectively. We recognized additions to MSA of $212 million and $299 million for the years ended
December 31, 2004 and 2003, respectively. For the years ended December 31, 2004, 2003 and 2002, we
recognized MSA amortization of $22 million, $76 million and $53 million, respectively, with a proportionate
reduction of related deferred profit, where applicable. The MSA fair value was $808 million and $431 million
as of December 31, 2004 and 2003, respectively.
We record LOCOM adjustments to the MSA through a valuation allowance. The MSA valuation allowance
was $19 million, $74 million and $81 million as of December, 31, 2004, 2003 and 2002, respectively. We
recognized LOCOM adjustments (recoveries) to the MSA of $(56) million, $(7) million and $57 million for
the years ended December 31, 2004, 2003 and 2002, respectively. In addition, we recognized other-than-tem-
porary impairment of $23 million, $148 million and $187 million for the years ended December 31, 2004,
2003 and 2002, respectively, which directly reduced the value of the MSA as well the valuation allowance for
any amount previously recorded as a LOCOM adjustment.
9. Short-term Borrowings and Long-term Debt
We obtain the funds to finance our mortgage purchases and other business activities by selling debt securities
in both the domestic and international capital markets. We issue a variety of debt securities to fulfill our
ongoing funding needs.
Short-term Borrowings
Our short-term borrowings consist of both “Federal funds purchased and securities sold under agreements to
repurchase” and “Short-term debt” in the consolidated balance sheets. These are defined as borrowings with an
original contractual maturity of one year or less. The following table displays our short-term borrowings as of
December 31, 2004 and 2003.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)