Fannie Mae 2006 Annual Report Download - page 110

Capital Markets Business Activities
As indicated in Table 22 above, the Lehman U.S. MBS index, which primarily includes 30-year and 15-year
mortgages, reflected a decrease in OAS during 2006. However, during 2006, the OAS on securities held by us
that are not in the index, such as hybrid ARMs and REMICs, widened and resulted in an overall widening of
the OAS for mortgage assets held in our portfolio during 2006 and a decrease in the fair value of our
mortgage assets. In addition, debt OAS based on the Lehman U.S. Agency Debt Index to LIBOR decreased by
2.8 basis points to minus 13.8 basis points as of year-end 2006, resulting in an increase in the fair value of our
liabilities that further decreased the overall fair value of our net assets. More than offsetting the decline in the
fair value of our net assets due to movements in spreads was an increase in fair value due to the decrease in
implied volatility during 2006. The combined effect of these market changes and net cash inflows resulted in a
modest increase in the fair value of our capital markets business.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
The estimated fair value of our net assets increased by $2.1 billion in 2005, which included the effect of the
payment of $1.4 billion of dividends to holders of our common and preferred stock. We experienced a
$3.5 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 increased by approximately $1.5 billion. This increase in
fair value was primarily due to higher interest rates and a significant increase in home price appreciation
during the year. The 30-year Fannie Mae MBS par coupon rate and the 10-year U.S. Treasury note yield
increased in 2005, which slowed the rate of expected prepayments and increased the fair value of our net
guaranty assets.
Capital Markets Business Activities
Mortgage OAS based on the Lehman U.S. MBS Index to LIBOR increased by 15.7 basis points to 4.2 basis
points as of year-end 2005, from minus 11.5 basis points as of year-end 2004. Debt OAS based on the
Lehman U.S. Agency Debt Index to LIBOR decreased by 4.7 basis points to minus 11.0 basis points as of
year-end 2005, from minus 6.3 basis points as of year-end 2004. This net increase in mortgage-to-debt OAS, a
slight decline in interest rates and the flattening of the yield curve resulted in a decline in the fair value of our
net mortgage assets. More than offsetting this decline were the cash inflows from our net mortgage assets and
a slight decrease in implied volatility.
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity is essential to our business. We actively manage our liquidity and capital position with the objective
of preserving stable, reliable and cost-effective sources of cash to meet all of our current and future operating
financial commitments and regulatory capital requirements. We obtain the funds we need to operate our
business primarily from the proceeds we receive from the issuance of debt. We seek to maintain sufficient
excess liquidity in the event that factors, whether internal or external to our business, temporarily prevent us
from issuing debt in the capital markets.
Liquidity
We manage our cash position on a daily basis. Our primary source of cash is proceeds from the issuance of
our debt securities, especially short-term debt securities. Our uses of cash currently consist primarily of: the
repayment of matured, redeemed and repurchased debt; the purchase of mortgage loans, mortgage-related
securities and other investments; and the payment of interest payments on outstanding debt.
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