Fannie Mae 2005 Annual Report Download - page 69

addition, subprime, Alt-A and investor borrowing grew significantly with the majority of these borrowers
selecting ARMs.
In 2006, growth in U.S. residential mortgage debt outstanding and home price appreciation slowed from recent
high levels, especially in the second half of the year. However, the volume of non-traditional mortgage
products remained high as consumers continued to struggle with affordability issues and the investor share of
home purchases remained above historical norms. Additionally, the subprime and Alt-A mortgage originations
continued to represent an elevated level of originations by historical standards.
Over the next decade, we expect demographic demand (primarily from stable household formation rates, a positive
age structure of the population for homebuying and rising homeownership rates due to the high level of
immigration over the past 25 years) to be at a level that should maintain a fundamentally strong mortgage market.
We believe that these and other underlying demographic factors will support continued long-term demand for new
capital to finance the substantial and sustained housing finance needs of American homebuyers.
In the secondary mortgage market, competition for mortgage assets among a broad range of investors was
intense in 2005, resulting in extremely narrow spreads between the cost of our funding and the yields we
would expect to generate on many mortgage assets available for purchase. The intensity of competition for
mortgage assets remained heightened in 2006 and the first quarter of 2007. Additionally, in our estimation,
compensation for credit risk in the marketplace, particularly for higher risk mortgage assets, did not reflect
adequate returns in 2005, and remained so through 2006. This dynamic was at least partly attributable to high
levels of investment capital among a broad range of global investors seeking higher yields. We believe many
investors sought out higher-yielding and higher-risk tranches of mortgage-related securities under the assump-
tion that continued home price appreciation would provide insulation from credit losses.
Summary of Our Financial Results
Net income and diluted earnings per share totaled $6.3 billion and $6.01, respectively, in 2005, compared with
$5.0 billion and $4.94 in 2004, and $8.1 billion and $8.08 in 2003.
Total stockholders’ equity increased to $39.3 billion as of December 31, 2005 from $38.9 billion as of
December 31, 2004 and $32.3 billion as of December 31, 2003. The estimated fair value of our net assets (net
of tax effect), a non-GAAP measure that we refer to as the fair value of our net assets, increased to
$42.2 billion as of December 31, 2005 from $40.1 billion and $28.4 billion as of year-end 2004 and 2003,
respectively. Refer to “Supplemental Non-GAAP Information—Fair Value Balance Sheet” for information on
the fair value of our net assets.
Below are additional comparative highlights of our performance.
2005 versus 2004
• New business acquisitions down 16% from 2004
• 1% growth in our mortgage credit book of
business
• 36% decrease in net interest income to
$11.5 billion
• 55 basis points decrease in net interest yield to
1.31%
• 5% increase in guaranty fee income to $3.8 billion
• Derivative fair value losses of $4.2 billion,
compared with derivative fair value losses of
$12.3 billion in 2004
• Losses of $68 million on debt extinguishments,
compared with losses of $152 million in 2004
2004 versus 2003
• New business acquisitions down 49% from record
level of $1.4 trillion in 2003
• 5% growth in our mortgage credit book of
business
• 7% decrease in net interest income to $18.1 billion
• 26 basis points decrease in net interest yield to
1.86%
• 10% increase in guaranty fee income to
$3.6 billion
• Derivative fair value losses of $12.3 billion,
compared with derivative fair value losses of
$6.3 billion in 2003
• Losses of $152 million on debt extinguishments,
compared with losses of $2.7 billion in 2003
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