Fannie Mae 2005 Annual Report Download - page 274

tax-exempt mortgage revenue bonds issued by state and local governmental entities to finance multifamily
housing for low- and moderate-income families. Additionally, we issue long-term standby commitments that
require us to purchase loans from lenders if the loans meet certain delinquency criteria.
We record a guaranty obligation for (i) guaranties on lender swap transactions issued or modified on or after
January 1, 2003, pursuant to FIN 45, and (ii) guaranties on portfolio securitization transactions. Our guaranty
obligation represents our estimated obligation to stand ready to perform on these guaranties. Our guaranty
obligation is recorded at fair value at inception. The carrying amount of the guaranty obligation, excluding
deferred profit, was $5.2 billion and $4.1 billion as of December 31, 2005 and 2004, respectively. We also
record an estimate of incurred credit losses on these guaranties in “Reserve for guaranty losses” in the
consolidated balance sheets, as discussed further in “Note 4, Allowance for Loan Losses and Reserve for
Guaranty Losses.”
These guaranties expose us to credit losses on the mortgage loans or, in the case of mortgage-related securities,
the underlying mortgage loans of the related securities. The contractual terms of our guaranties range from
30 days to 30 years. However, the actual term of each guaranty may be significantly less than the contractual
term based on the prepayment characteristics of the related mortgage loans. For those guaranties recorded in
the consolidated balance sheets, our maximum potential exposure under these guaranties is primarily
comprised of the unpaid principal balance of the underlying mortgage loans, which was $1.5 trillion and $1.3
trillion as of December 31, 2005 and 2004, respectively. In addition, we had exposure of $322.3 billion and
$444.5 billion for other guaranties not recorded in the consolidated balance sheets as of December 31, 2005
and 2004, respectively. See “Note 17, Concentrations of Credit Risk” for further details on these guaranties.
Our maximum potential interest payments associated with these guaranties are not expected to exceed 120 days
of interest at the certificate rate, since we typically purchase delinquent mortgage loans when the cost of
advancing interest under the guaranties exceeds the cost of holding the nonperforming loans in our mortgage
portfolio.
The maximum exposure from our guaranties is not representative of the actual loss we are likely to incur,
based on our historical loss experience. In the event we were required to make payments under our guaranties,
we would pursue recovery of these payments by exercising our rights to the collateral backing the underlying
loans or through available credit enhancements, which includes all recourse with third parties and mortgage
insurance. The maximum amount we could recover through available credit enhancements and recourse with
third-parties was $102.8 billion and $83.7 billion as of December 31, 2005 and 2004, respectively.
Guaranty Obligations
The following table displays changes in “Guaranty obligations” for the years ended December 31, 2005, 2004
and 2003.
2005 2004 2003
For the Year Ended December 31,
(Dollars in millions)
Beginning balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,784 $ 6,401 $ 7
Additions to guaranty obligations
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,982 5,050 9,314
Amortization of guaranty obligation into guaranty fee income . . . . . . . . . . . . (3,287) (2,173) (1,678)
Impact of consolidation activity
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (463) (494) (1,242)
Ending balance as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,016 $ 8,784 $ 6,401
(1)
Represents the fair value of the contractual obligation and deferred profit at issuance of new guaranties.
(2)
Upon consolidation of MBS trusts, we derecognize our guaranty obligation to the respective trust. See “Note 1,
Summary of Significant Accounting Policies” for further details on MBS trust consolidation.
F-45
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)