Fannie Mae 2005 Annual Report Download - page 84

recognize these amounts as a component of guaranty fee income over the expected life of the underlying
assets of the related MBS trusts. We record buy-up payments we make to lenders as an asset and reduce the
recorded asset as cash flows are received over the expected life of the underlying assets of the related MBS
trusts. We assess buy-ups for other-than-temporary impairment and include any impairment recognized as a
component of guaranty fee income. The extent to which we amortize deferred payments into income depends
on the rate of expected prepayments, which is affected by interest rates. In general, as interest rates decrease,
expected prepayment rates increase, resulting in accelerated accretion into income of deferred fee amounts,
which increases our guaranty fee income. Prepayment rates also affect the estimated fair value of buy-ups.
Faster than expected prepayment rates shorten the average expected life of the underlying assets of the related
MBS trusts, which reduces the value of our buy-up assets and may trigger the recognition of other-than
temporary impairment.
The average effective guaranty fee rate reflects our average contractual guaranty fee rate adjusted for the
impact of amortization of deferred amounts and buy-up impairment. Table 6 shows our guaranty fee income,
including and excluding buy-up impairments, our average effective guaranty fee rate, and Fannie Mae MBS
activity for 2005, 2004 and 2003.
Table 6: Analysis of Guaranty Fee Income and Average Effective Guaranty Fee Rate
Amount Rate
(1)
Amount Rate
(1)
Amount Rate
(1)
2005
vs. 2004
2004
vs. 2003
2005 2004 2003
For the Year Ended December 31, Variance
(Dollars in millions)
Guaranty fee income and average
effective guaranty fee rate, excluding
impairment of buy-ups . . . . . . . . . . . . $ 3,828 21.3 bp $ 3,640 21.0 bp $ 3,474 22.2 bp 5% 5%
Impairment of buy-ups . . . . . . . . . . . . . (49) (0.3) (36) (0.2) (193) (1.2) 36 (81)
Guaranty fee income and average
effective guaranty fee rate. . . . . . . . . . $ 3,779 21.0 bp $ 3,604 20.8 bp $ 3,281 21.0 bp 5% 10%
Average outstanding Fannie Mae MBS
and other guaranties
(2)
. . . . . . . . . . . . $1,797,547 $1,733,060 $1,564,812 4% 11%
Fannie Mae MBS issues
(3)
. . . . . . . . . . . 510,138 552,482 1,220,066 (8) (55)
(1)
Presented in basis points and calculated based on guaranty fee income components divided by average outstanding
Fannie Mae MBS and other guaranties.
(2)
Other guaranties include $19.2 billion, $14.7 billion and $12.8 billion as of December 31, 2005, 2004 and 2003,
respectively, related to long-term standby commitments and credit enhancements.
(3)
Reflects unpaid principal balance of MBS issued and guaranteed by us, including mortgage loans held in our portfolio
that we securitize and MBS issues during the period that we acquire for our portfolio.
Guaranty fee income of $3.8 billion for 2005 was up approximately 5% over 2004, primarily due to a 4%
increase in average outstanding Fannie Mae MBS and other guaranties. Guaranty fee income of $3.6 billion
for 2004 was up 10% over 2003, primarily due to an 11% increase in average outstanding Fannie Mae MBS
and other guaranties. Our average effective guaranty fee rate, which includes the effect of buy-up impairments,
remained essentially unchanged during the three-year period at 21.0 basis points in 2005, 20.8 basis points in
2004, and 21.0 basis points in 2003.
Growth in outstanding Fannie Mae MBS depends largely on the volume of mortgage assets made available for
securitization and our assessment of the credit risk and pricing dynamics of these mortgage assets. Growth in
outstanding Fannie Mae MBS slowed in 2004 and 2005 as compared to 2003, reflecting the impact of a
decline in mortgage originations from the record level of $3.9 trillion in 2003 that fueled growth in Fannie
Mae MBS issuances to a record level of $1.2 trillion. In addition, the product mix in the primary mortgage
market began to shift in 2004 as the share of originations of lower credit quality loans, loans with reduced
documentation and loans to fund investor properties increased. At the same time, originations of traditional
mortgages, such as conventional fixed-rate loans, which historically have represented the majority of our
business volume, decreased. Competition from private-label issuers, which have been a significant source of
79