Fannie Mae 2006 Annual Report Download - page 298

segment has responsibility for managing our credit risk exposure relating to the multifamily Fannie Mae MBS
held by third parties, as well as the multifamily mortgage loans and multifamily Fannie Mae MBS held in our
mortgage portfolio. Revenues in the segment are derived from a variety of sources, including the guaranty fees
the segment receives as compensation for assuming the credit risk on the mortgage loans underlying
multifamily Fannie Mae MBS and on the multifamily mortgage loans held in our portfolio, transaction fees
associated with the multifamily business and bond credit enhancement fees. In addition, HCD’s investments in
housing projects eligible for the low-income housing tax credit and other investments generate both tax credits
and net operating losses that reduce our federal income tax liability. While the HCD guaranty business is
similar to our Single-Family business, neither the economic return nor the nature of the credit risk are similar
to those of Single-Family.
Capital Markets. Our Capital Markets segment manages our investment activity in mortgage loans and
mortgage-related securities, and has responsibility for managing our assets and liabilities and our liquidity and
capital positions. We fund mortgage loan and mortgage-related securities purchases by issuing debt in the
global capital markets. The Capital Markets segment also has responsibility for managing our interest rate risk.
The Capital Markets segment generates income primarily from the difference, or spread, between the yield on
the mortgage assets we own and the cost of the debt we issue in the global capital markets to fund these
assets.
Segment Allocations and Results
Our segment financial results include directly attributable revenues and expenses. Additionally, we allocate
(i) capital using OFHEO minimum capital requirements adjusted for over- or under-capitalization (ii) indirect
administrative costs (iii) a provision for federal income taxes to each of our segments, and (iv) allocation of
intercompany guaranty fee income as a charge to Capital Markets from Single-Family and HCD segments for
managing the credit risk on mortgage loans held by the Capital Markets segment.
Subsequent to the issuance of our 2005 consolidated financial statements, we identified that we incorrectly
allocated certain amounts in our prior year’s segment presentation because allocation methodologies were not
consistently applied. The allocations impacted were related to guaranty fee income, prepayment fees,
restatement and related regulatory expenses, and tax credits. We have adjusted our 2005 and 2004 segment
presentation to correct these allocations. As compared to amounts previously reported, these changes result in
a decrease to net income for Single-Family of $213 million and $18 million for 2005 and 2004, respectively,
an increase in net income for HCD of $82 million and $88 million for 2005 and 2004, respectively, and an
increase in net income for Capital Markets of $131 million in 2005 and a decrease to net income of
$70 million for 2004. Such adjustments had no effect on previously reported consolidated net income for 2005
or 2004.
Additionally, in the preparation of our 2006 segment results, we refined our allocation of intercompany
guaranty fee income. As a result of applying specific loan level data to determine the guaranty fee allocation,
we determined that the refined measurement should be applied to prior periods for comparability purposes. As
such, we reduced the allocation of the intercompany guaranty fee charge to Capital Markets, increasing net
income by $94 million and $100 million for 2005 and 2004, respectively. This reduction resulted in a decrease
to Single-Family intercompany guaranty fee income, reducing net income by $53 million and $100 million in
2005 and 2004, respectively. HCD intercompany guaranty fee income also decreased, reducing net income by
$41 million in 2005, and resulting in no change in 2004. This refinement of our allocation methodology had
no effect on previously reported consolidated net income for 2005 or 2004.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)