Fannie Mae 2006 Annual Report Download - page 277

guaranty obligation. Deferred profit had a carrying amount of $4.6 billion and $4.8 billion as of December 31,
2006 and 2005, respectively. We recognized deferred profit amortization of $1.2 billion, $1.5 billion and
$1.3 billion for the years ended December 31, 2006, 2005 and 2004, respectively.
Fannie Mae MBS Included in Investments in Securities
For Fannie Mae MBS included in “Investments in securities,” we do not eliminate or extinguish the guaranty
arrangement because it is a contractual arrangement with the unconsolidated MBS trusts. The fair value of
Fannie Mae MBS is determined based on observable market prices because most Fannie Mae MBS are
actively traded. Fannie Mae MBS receive high credit quality ratings primarily because of our guaranty. Absent
our guaranty, Fannie Mae MBS would be subject to the credit risk on the underlying loans. We continue to
recognize a guaranty obligation and a reserve for guaranty losses associated with these securities because we
carry these securities in the consolidated financial statements as guaranteed Fannie Mae MBS. The fair value
of the guaranty obligation, net of deferred profit, associated with Fannie Mae MBS included in “Investments
in securities” approximates the fair value of the credit risk that exists on these Fannie Mae MBS absent our
guaranty. The fair value of the guaranty obligation, net of deferred profit, associated with the Fannie Mae
MBS included in “Investments in securities” was $95 million and $118 million as of December 31, 2006 and
2005, respectively.
Master Servicing
We do not perform the day-to-day servicing of mortgage loans in an MBS trust in a Fannie Mae securitization
transaction; however, we are compensated to carry out administrative functions for the trust and oversee the
primary servicer’s performance of the day-to-day servicing of the trust’s mortgage assets. This arrangement
gives rise to either an MSA or an MSL.
The following table displays the carrying value and fair value of our MSA for the years ended December 31,
2006, 2005, and 2004.
2006 2005 2004
For the Year Ended December 31,
(Dollars in millions)
Cost basis:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 812 $ 599 $ 442
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371 350 212
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (127) (111) (22)
Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (2) (23)
Reductions for MBS trusts paid-off and impact of consolidation activity . . (27) (24) (10)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,017 812 599
Valuation allowance:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 19 74
LOCOM adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 96 404
LOCOM recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (155) (106) (459)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 19
Carrying Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,008 $ 803 $ 580
Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,690 $1,452 $ 808
F-46
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)