Fannie Mae 2006 Annual Report Download - page 272

consolidated balance sheets in “Guaranty obligations,” as it relates to our obligation to stand ready to perform
on our guaranty, and “Reserve for guaranty losses,” as it relates to incurred losses.
Since the retained interests that result from our guaranty do not trade in active financial markets, we estimate
their fair value by using internally developed models and market inputs for securities with similar
characteristics. The key assumptions are discount rate, or yield, derived using a projected interest rate path
consistent with the observed yield curve at the valuation date (forward rates), and the prepayment speed based
on our proprietary models that are consistent with the projected interest rate path and expressed as a 12-month
constant prepayment rate (“CPR”).
Our retained interests in Fannie Mae single-class MBS, Fannie Mae Megas, REMICs and SMBS are interests
in securities with active markets. We primarily rely on third party prices to estimate the fair value of these
retained interests. For the purpose of this disclosure, we aggregate similar securities in order to measure the
key assumptions associated with the fair values of our retained interests, which are approximated by solving
for the estimated discount rate, or yield, using a projected interest rate path consistent with the observed yield
curve at the valuation date (forward rates), and the prepayment speed based on either our proprietary models
that are consistent with the projected interest rate path, the pricing speed for newly issued REMICs, or lagging
12 month actual prepayment speed. All prepayment speeds are expressed as a 12 month CPR.
The following table displays the key assumptions used in measuring the fair value of our retained interests,
excluding our retained interests in the form of MSA which are not significant, at the time of portfolio
securitization for the years ended December 31, 2006 and 2005.
Fannie Mae
Single-Class
MBS & Fannie
Mae Megas
REMICs &
SMBS
Guaranty
Assets
For the year ended December 31, 2006
Weighted-average life
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 years 6.3 years 6.6 years
Average 12-month CPR
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.54% 13.21% 9.55%
Average discount rate assumption
(3)
. . . . . . . . . . . . . . . . . . . . . . 5.73 5.69 9.16
For the year ended December 31, 2005
Weighted-average life
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 years 6.0 years 6.6 years
Average 12-month CPR
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.39% 14.36% 12.55%
Average discount rate assumption
(3)
. . . . . . . . . . . . . . . . . . . . . . 5.17 4.92 7.74
(1)
The average number of years for which each dollar of unpaid principal on a loan or mortgage-related security remains
outstanding.
(2)
Represents the expected lifetime average payment rate, which is based on the constant annualized prepayment rate for
mortgage loans.
(3)
The interest rate used in determining the present value of future cash flows.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)