Fannie Mae 2006 Annual Report Download - page 109

loans outstanding in the overall market. The HPI is a weighted repeat transactions index, meaning that it measures
average price changes in repeat sales or refinancings on the same properties. House price appreciation reported above
reflects the annual average HPI of the reported year compared with the annual average HPI of the prior year.
Changes in Non-GAAP Estimated Fair Value of Net Assets
The effects of our investment strategy, including our interest rate risk management which we discuss in “Risk
Management—Interest Rate Risk Management,” are reflected in changes in the estimated fair value of our net
assets over time. The following table summarizes the change in the fair value of our net assets for 2006 and
2005.
Table 23: Non-GAAP Estimated Fair Value of Net Assets (Net of Tax Effect)
2006 2005
Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,199 $40,094
Capital transactions:
(1)
Common dividends, common share repurchases and issuances, net . . . . . . . . . . . . . . . . . . . . . . . (1,030) (943)
Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (511) (486)
Capital transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,541) (1,429)
Change in estimated fair value of net assets, excluding capital transactions . . . . . . . . . . . . . . . . . . . 2,243 3,534
Increase in estimated fair value of net assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702 2,105
Balance as of December 31
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,901 $42,199
(1)
Represents net capital transactions, which are reflected in the Consolidated Statements of Changes in Stockholders’
Equity.
(2)
Represents estimated fair value of net assets (net of tax effect) presented in Table 21: Non-GAAP Supplemental
Consolidated Fair Value Balance Sheets.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
The estimated fair value of our net assets increased by $702 million in 2006, which included the effect of a
reduction of $1.5 billion attributable to capital transactions consisting primarily of the payment of $1.7 billion
of dividends to holders of our common and preferred stock. We experienced a $2.2 billion increase in the
estimated fair value of net assets excluding the effect of capital transactions. We discuss below how the
activities of our guaranty and capital markets businesses contributed to this net increase in fair value.
Guaranty Business Activities
The estimated fair value of our net guaranty assets decreased by approximately $1.4 billion, which includes
the impact of a $1.6 billion increase in the estimated fair value of our guaranty assets due to growth in our
guaranty book of business and a $355 million increase in the estimated fair value of master servicing assets
and credit enhancements. The increases in the fair value of our guaranty assets and related master servicing
assets and credit enhancements were more than offset by a $3.4 billion increase in our guaranty obligations,
which reflects the significant slowdown in home price appreciation that occurred during the second half of
2006. We estimate the fair value of our guaranty obligations using simulation models that project our potential
future credit losses under various economic scenarios, which incorporate assumptions about default and
severity rates and a market rate of return. The slowdown in home price appreciation increased the probability
of higher projected credit losses in our simulation models, resulting in an increase in the estimated fair value
of our guaranty obligations. However, our actual future credit losses are likely to be significantly less than the
estimated increase in the fair value of our guaranty obligations, as the fair value of our guaranty obligations
includes not only future expected credit losses but also the economic carrying costs we would expect a market
participant to require to assume such obligations. Our combined allowance for loan losses and reserve for
guaranty losses reflects our estimate of the probable credit losses inherent in our mortgage credit book of
business.
94