Fannie Mae 2006 Annual Report Download - page 150

Table 41 shows our single-family credit loss sensitivity, before and after consideration of the effect of
projected credit risk sharing proceeds, such as private mortgage insurance claims and other credit
enhancement, as of December 31, 2006 and 2005. These estimated credit loss sensitivities are generated using
the same models that we use to estimate fair value and impairment. We have made certain modifications to
our models from those used to report previous credit loss sensitivities. The increase in the net credit loss
sensitivity of $818 million, or 72%, to $2.0 billion as of December 31, 2006, was attributable to the significant
slowing of home price appreciation during the second half of 2006.
Table 41: Single-Family Credit Loss Sensitivity
(1)
2006 2005
As of December 31,
(Dollars in millions)
Gross credit loss sensitivity
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,887 $ 2,310
Less: Projected credit risk sharing proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,926) (1,167)
Net credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,961 $ 1,143
Single-family whole loans and Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,203,246 $2,035,704
Single-family net credit loss sensitivity as a percentage of single-family whole loans and
Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.09% 0.06%
(1)
Represents total economic credit losses, which include net charge-offs/recoveries, foreclosed property expenses, forgone
interest and the cost of carrying foreclosed properties. Calculations based on approximately 92% of our total single-
family mortgage credit book of business as of December 31, 2006 and 2005. The mortgage loans and mortgage-related
securities that are included in these estimates consist of single-family single-class Fannie Mae MBS (whether held in our
portfolio or held by third parties) and single-family mortgage loans, excluding mortgages secured only by second liens
and reverse mortgages. We expect the inclusion in our estimates of these excluded products may impact the estimated
sensitivities set forth in the preceding paragraphs.
(2)
Reflects the gross sensitivity of our expected future credit losses to an immediate 5% decline in home values for first
lien single-family whole loans we own or that back Fannie Mae MBS. After the initial shock, we estimate home price
growth rates return to the rate projected by our credit pricing models.
Allowance for Loan Losses and Reserve for Guaranty Losses
We maintain a separate allowance for loan losses for single-family and multifamily loans classified as held for
investment in our mortgage portfolio and a reserve for guaranty losses for credit losses associated with certain
mortgage loans that back Fannie Mae MBS held in our portfolio and held by other investors. The allowance
for loan losses and reserve for guaranty losses represent our estimate of incurred credit losses inherent in our
loans held for investment and loans underlying Fannie Mae MBS, respectively, as of each balance sheet date.
We use the same methodology to determine our allowance for loan losses and our reserve for guaranty losses
because the relevant factors affecting credit risk are the same. For a discussion of the methodology used in
developing our allowance for loan losses and reserve for guaranty losses, see “Notes to Consolidated Financial
Statements—Note 1, Summary of Significant Accounting Policies.”
We report the allowance for loan losses and reserve for guaranty losses as separate line items in the
consolidated balance sheets. The provision for credit losses is reported in the consolidated statements of
income. Table 42 summarizes changes in our allowance for loan losses and reserve for guaranty losses for the
five-year period ended December 31, 2006.
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