Fannie Mae 2005 Annual Report Download - page 101

with our settlements with the SEC and OFHEO, as well as increased direct and allocated costs. Net interest
expense increased, reflecting higher internal funding costs due to our increased investment in LIHTC and other
equity investments.
We expect tax credits resulting from our investments in LIHTC partnerships to grow in the future, which is
likely to reduce our effective tax rate. The extent to which we are able to use all of the tax credits generated
by existing or future investments in housing tax credit partnerships to reduce our federal income tax liability
will depend on the amount of our future federal income tax liability, which we cannot predict with certainty.
However, we may make a strategic decision to sell certain investments in the future as another means of
realizing the benefits. In March 2007, we sold a portfolio of investments in LIHTC partnerships totaling
approximately $676 million in LIHTC credits. These equity interests represented less than 10% of our overall
LIHTC portfolio. We may sell LIHTC investments in the future if we believe that the economic return from
the sale will be greater than the benefit we would receive from continuing to hold these investments. However,
we view these investments as a significant vehicle for advancing our affordable housing mission and expect to
continue to invest in LIHTC partnerships.
HCD’s Multifamily Group benefited from the improvement in multifamily real estate fundamentals during
2005. The two key drivers were an increase in the population of prime apartment renters and solid job growth
throughout 2005. These factors contributed to a decline in overall apartment vacancies and an increase in
monthly rental rates in 2005. These multifamily real estate fundamentals continued to improve during 2006.
Our multifamily serious delinquency rate increased to 0.32% in December 2005, compared with 0.11% in
December 2004, as a result of Hurricane Katrina in 2005. Our multifamily serious delinquency rate
subsequently improved, declining to 0.08% in December 2006. As discussed further in “Risk Manage-
ment—Mortgage Credit Risk Management—Credit Losses”, we have reduced and refined our estimate of the
potential impact of Hurricane Katrina due to our ongoing loss mitigation activities. We currently do not
believe that we have credit concerns on multifamily properties related to the hurricanes.
We are one of the largest participants in the multifamily secondary market. HCD’s multifamily business has
been challenged in recent years. 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. We have responded to market challenges with an increased
emphasis on serving partner needs with customized lending options and advanced a number of efficiency
initiatives that will help make it quicker and easier to do business with us and at a lower cost. HCD 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 group generated net income of $3.0 billion, $2.1 billion and $5.3 billion in 2005, 2004
and 2003, respectively. The primary sources of revenues for our Capital Markets group include net interest
income and fee and other income. Derivatives fair value losses, investment gains and losses, and debt
extinguishment gains and losses also have a significant impact on the financial performance of our Capital
Markets group.
Net income for the Capital Markets group increased by $880 million, or 42%, in 2005 from 2004. The
reduction in net interest income and an increase in investment losses were almost completely offset by lower
derivatives fair value losses. Net interest income decreased $6.9 billion, or 39%, in 2005 from 2004 largely
due to a 10% decline in the average mortgage portfolio balance resulting from a decrease in securities
purchases and an increase in sales activity throughout 2005. The majority of the portfolio sales and a large
portion of portfolio liquidations were comprised of fixed-rate Fannie Mae MBS, which caused the product mix
of the portfolio to shift slightly as floating-rate securities and adjustable-rate mortgage products increased as a
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