Fannie Mae 2005 Annual Report Download - page 106

The changing product mix of originations in our underlying market had a pronounced effect on the
composition of mortgage assets purchased for our portfolio during 2005 and 2004. Due to a higher percentage
of adjustable-rate mortgage originations in 2005 and 2004, a substantially larger proportion of our purchases in
2005 and 2004 consisted of ARMs and floating-rate mortgage-related securities than in previous years. In
addition, higher sales of fixed-rate securities in 2005 contributed to the shift in the product mix of our
portfolio.
Debt Funding and Derivatives
Total debt outstanding was $764.7 billion as of December 31, 2005, compared with $955.5 billion as of
December 31, 2004. The 20% decline in our debt outstanding was directly correlated to the decline in our
portfolio balances. During 2005, we reduced our total short-term debt by 46%, from $322.7 billion as of
December 31, 2004 to $173.9 billion as of December 31, 2005, compared to a decrease of 7% our total long-
term debt outstanding, from $632.8 billion as of December 31, 2004 to $590.8 billion as of December 31,
2005. Our total debt outstanding declined slightly during 2006 to approximately $774.4 billion as of
December 31, 2006.
The notional value of outstanding derivative instruments used to hedge interest rate risk in our portfolio
declined to $644.1 billion as of December 31, 2005 compared with $690.1 billion as of December 31, 2004.
We periodically terminate offsetting receive-fixed and pay-fixed swaps that result from our ongoing interest
rate risk management process. The notional amount of derivatives also declines with maturing derivatives.
The total notional amount of our outstanding derivative instruments used to hedge interest rate risk in our
portfolio increased in 2006 from 2005 by approximately 16%. The increase in the notional amount of our
derivatives book at the end of 2006 reflects higher balances of both pay-fixed and receive-fixed swaps,
partially offset by a reduction in interest rate swaptions. As interest rates during the first half of the year
generally increased and the durations of our mortgage assets lengthened, we generally added to our net pay-
fixed swap position. During the second half of 2006, when interest rates generally declined and the durations
of our mortgage assets shortened, we added to our net receive-fixed swap position. These actions are consistent
with our approach to interest rate risk management.
Non-Mortgage Investments
As discussed further in “Liquidity and Capital Management”, our Capital Markets group also purchases non-
mortgage investments. Our non-mortgage investments consist primarily of high-quality securities that are
readily marketable or have short-term maturities, such as commercial paper. As of December 31, 2005 and
2004, we had approximately $52.2 billion and $55.1 billion, respectively, in liquid assets, net of any cash and
cash equivalents pledged as collateral. Our investments in non-mortgage securities, which account for the
majority of our liquid assets, totaled $37.1 billion and $43.9 billion as of December 31, 2005 and 2004,
respectively.
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