Fannie Mae 2005 Annual Report Download - page 87

historic lows. Periodic declines in interest rates could result in additional future impairments on our interest-
only securities.
Beginning in 2002 and continuing in 2003, there was a significant weakening in the manufactured housing
sector. As a result, certain manufactured housing servicers began to experience financial difficulties, triggering
deterioration in the credit quality of certain securities as evidenced by credit downgrades and a considerable
decline in fair value. Other-than-temporary impairment on our investments in manufactured housing securities
totaled $15 million, $55 million and $511 million in 2005, 2004 and 2003, respectively.
We recognized other-than-temporary impairment on non-mortgage investment securities totaling $21 million,
$2 million and $139 million in 2005, 2004 and 2003, respectively. The other-than-temporary impairment
charge in 2005 related to corporate debt obligations. The other-than-temporary impairment charge in 2003 was
largely attributable to our investments in certain aircraft lease securities, which suffered a decline in value due
to the downturn in the airline industry. We completed the sale of all of our aircraft lease securities in 2005 and
did not record any other-than-temporary impairment on these securities in 2005 or 2004.
We may subsequently recover other-than-temporary impairment amounts we record on securities if we collect
all of the contractual principal and interest payments due or if we sell the security at an amount greater than
the adjusted cost basis of the security.
Lower-of-Cost-or-Market Adjustments on Held-for-Sale Loans
We record loans classified as held for sale at the lower of cost or market, with any excess of cost over fair
value reflected as a valuation allowance and changes in the valuation allowance recognized in income. The
fair value of held for sale mortgage loans will fluctuate from period to period based primarily on changes in
mortgage interest rates. As interest rates decline, the fair value of fixed-rate mortgage loans will generally
increase, and as interest rates rise, the fair value of fixed-rate mortgage loans will generally decrease. In an
environment of increasing interest rates or significant interest rate volatility, the LOCOM adjustment will
typically increase.
We recorded losses related to LOCOM adjustments totaling $114 million, $110 million and $370 million in
2005, 2004 and 2003, respectively. The slight increase in 2005 as compared to 2004 relates to higher interest
rates during the period, which reduced the value of our HFS loans and resulted in higher LOCOM adjustments.
In 2003, we purchased a significant volume of mortgage loans in response to the record level of mortgage
originations in the primary market as mortgage interest rates reached record lows in the first half of 2003. An
increase in interest rates in the second half of 2003 reduced the value of our HFS loans, resulting in a
significantly higher amount of LOCOM adjustments in 2003 as compared with 2004.
Gains (Losses) on Fannie Mae Portfolio Securitizations, Net
Portfolio securitizations involve the transfer of mortgage loans or mortgage-related securities from our balance
sheet to a trust to create Fannie Mae MBS (whether in the form of single-class Fannie Mae MBS, REMICs or
other types of beneficial interests). We may retain an interest in the assets transferred to a trust in a portfolio
securitization by receiving a portion of the resulting issued securities. If the transfer qualifies as a sale under
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(a replacement of FASB Statement No. 125) (“SFAS 140”), we determine the gain (loss) on sale by allocating
the carrying value of the financial assets sold and the interests retained based on their relative estimated fair
values. The gain (loss) we recognize is the difference between the cash proceeds from the sale, net of any
liabilities assumed, and the cost allocated to the financial assets sold. The timing of the recognition of the gain
(loss) is dependent upon meeting specific accounting criteria. As a result, the gain (loss) on sale may be
recorded in a different accounting period than the period in which the securitization is completed. In addition,
we may securitize financial assets in a different accounting period than the period in which the financial assets
were purchased. See “Notes to Consolidated Financial Statements—Note 1, Summary of Significant Account-
ing Policies” and “Notes to Consolidated Financial Statements—Note 6, Portfolio Securitizations” for
additional information on our accounting for Fannie Mae portfolio securitizations.
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