Fannie Mae 2005 Annual Report Download - page 181

Investment gains in the second quarter of 2005 totaled $596 million as compared to investment losses of
$1.5 billion in the second quarter of 2004. Investment gains in the second quarter of 2005 were primarily
attributable to unrealized gains on trading securities as interest rates dropped during the second quarter of
2005. The investment losses in the second quarter of 2004 were primarily due to unrealized losses on trading
securities and LOCOM adjustments on HFS loans as interest rates increased significantly in the second quarter
of 2004.
We recorded derivatives fair value losses of $2.6 billion in the second quarter of 2005 as compared to
derivatives fair value gains of $2.3 billion in the second quarter of 2004. The second quarter of 2005 losses
were primarily the result of losses in the fair value of open derivative positions at quarter-end caused by a
decrease in interest rates during the second quarter of 2005. We recorded derivatives fair value gains of
$2.3 billion in the second quarter of 2004 primarily as a result of a $4.1 billion gain in the fair value of open
derivative positions at quarter-end caused by a rise in interest rates. This gain was reduced by a $1.4 billion
loss from net periodic contractual interest expense, a $139 million loss in the fair value of terminated
derivatives from the beginning of the quarter to the date of termination, and a $273 million loss on
commitments.
We recorded tax expense of $332 million, including tax benefit on extraordinary losses, in the second quarter
of 2005 as compared to $1.8 billion in the second quarter of 2004. The provision for federal income taxes
includes taxes at the federal statutory rate of 35% adjusted for tax credits recognized for our LIHTC
partnership investments and other tax credits.
Third Quarter Ended September 30, 2005 versus September 30, 2004
We recorded net income of $1.7 billion in the third quarter of 2005, compared with a net loss of $867 million
in the third quarter of 2004. The increase in our net income was primarily due to lower derivatives fair value
losses, partially offset by the reduction in our net interest income, higher investment losses and a provision for
taxes compared to a tax benefit from a net loss recorded in the third quarter of 2004.
Net interest income totaled $2.7 billion in the third quarter of 2005 from $4.0 billion in the third quarter of
2004. The compression of our average yield continued during the third quarter of 2005 as our portfolio
balance declined as a result of higher sales activity and the composition of our mortgage portfolio shifted to a
higher share of adjustable rate loans and floating-rate securities. In the third quarter of 2005, portfolio sales
were $52.9 billion, up from $3.8 billion during the third quarter of 2004 and $29.8 billion in the second
quarter of 2005. In addition, rising short-term interest rates increased the cost of our short-term debt, further
contributing to the decline in net interest income.
Guaranty fee income decreased to $832 million in the third quarter of 2005 as compared to $1.1 billion in the
third quarter of 2004. In the third quarter of 2005, we saw a decrease in our effective guaranty fee primarily
due to slower recognition of deferred fee amounts, resulting from an increasing interest rate environment.
Investment losses in the third quarter of 2005 totaled $169 million as compared to investment gains of
$887 million in the third quarter of 2004. The third quarter of 2005 losses were primarily due to unrealized
losses on trading securities as the fair value of our mortgage assets declined due to rising interest rates on the
third quarter of 2005 versus a decline in interest rates during the third quarter of 2004.
We recorded derivatives fair value losses of $539 million in the third quarter of 2005 as compared to a loss of
$7.1 billion in the third quarter of 2004. The loss in derivative fair value in the third quarter of 2005 primarily
related to losses of $225 million in net periodic contractual interest expense and losses of $218 million related
to changes in fair value of open derivative positions as of September 31, 2005. Losses in the third quarter of
2004 was comprised of a $4.7 billion loss in the fair value of open derivative positions at quarter-end caused
by declines in interest rates, a $1.2 billion loss in net periodic contractual interest expense, and a $1.4 billion
loss on the fair value of terminated derivatives from the beginning of the quarter to the date of termination.
These decreases were slightly mitigated by a $163 million gain on commitments in the third quarter of 2004.
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