Fannie Mae 2006 Annual Report Download - page 170

“Net mortgage portfolio assets” refers to the amount reported to OFHEO for purposes of computing the
portfolio limit and is defined as the unpaid principal balance of our mortgage assets, net of market valuation
adjustments, allowance for loan losses, impairments, and unamortized premiums and discounts, excluding
consolidated mortgage-related assets acquired through the assumption of debt.
“Nontraditional mortgages” generally refer to mortgage products that allow borrowers to defer payment of
principal and/or interest, such as interest-only mortgages, negative-amortizing mortgages, and payment option
ARMs.
“Notional principal amount” refers to the hypothetical dollar amount in an interest rate swap transaction on
which exchanged payments are based. The notional principal amount in an interest rate swap transaction
generally is not paid or received by either party to the transaction and is typically significantly greater than the
potential market or credit loss that could result from such transaction.
“OFHEO” refers to the Office of Federal Housing Enterprise Oversight, our safety and soundness regulator.
“OFHEO-directed minimum capital requirement” refers to a 30% capital surplus over our minimum capital
requirement.
“Option-adjusted spread” or “OAS” refers to the incremental expected return between a security, loan or
derivative contract and a benchmark yield curve (typically, U.S. Treasury securities, LIBOR and swaps, or
agency debt securities). The OAS provides explicit consideration of the variability in the security’s cash flows
across multiple interest rate scenarios resulting from any options embedded in the security, such as
prepayment options. For example, the OAS of a mortgage that can be prepaid by the homeowner without
penalty is typically lower than a nominal yield spread to the same benchmark because the OAS reflects the
exercise of the prepayment option by the homeowner, which lowers the expected return of the mortgage
investor. In other words, OAS for mortgage loans is a risk-adjusted spread after consideration of the
prepayment risk in mortgage loans. The market convention for mortgages is typically to quote their OAS to
swaps. The OAS of our debt and derivative instruments are also frequently quoted to swaps. The OAS of our
net mortgage assets is therefore the combination of these two spreads to swaps and is the option-adjusted
spread between our assets and our funding and hedging instruments.
“Outstanding Fannie Mae MBS” refers to the total unpaid principal balance of Fannie Mae MBS that is held
by third-party investors and held in our mortgage portfolio.
“Pay-fixed, receive variable swap contract” refers to an agreement under which we pay a predetermined fixed
rate of interest based upon a set notional amount and receive a variable interest payment based upon a stated
index, with the index resetting at regular intervals over a specified period of time. These contracts generally
increase in value as interest rates rise.
“Pay-fixed swaption” refers to an option that allows us to enter into a pay-fixed, receive variable interest rate
swap at some point in the future. These contracts generally increase in value as interest rates rise.
“Private-label issuers” or “non-agency issuers” refers to issuers of mortgage-related securities other than
agency issuers Fannie Mae, Freddie Mac and Ginnie Mae.
“Private-label securities” or “non-agency securities” refers to mortgage-related securities issued by entities
other than agency issuers Fannie Mae, Freddie Mac or Ginnie Mae.
“Qualifying subordinated debt” refers to our subordinated debt that contains an interest deferral feature that
requires us to defer the payment of interest for up to five years if either: (1) our core capital is below 125% of
our critical capital requirement; or (2) our core capital is below our minimum capital requirement and the
U.S. Secretary of the Treasury, acting on our request, exercises his or her discretionary authority pursuant to
Section 304(c) of the Charter Act to purchase our debt obligations.
“Receive-fixed swaption” refers to an option that allows us to enter into a receive-fixed, pay variable interest
rate swap at some point in the future. These contracts generally increase in value as interest rates fall.
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