Fannie Mae 2006 Annual Report Download - page 85

extinguishment losses (and gains) are affected by the level of debt extinguishment activity and the price
performance of our debt securities. The gain or loss we recognize when we call or repurchase debt is based on
the difference between the call price or fair value of the debt and the carrying value. Typically, the amount of
debt repurchased has a greater impact on gains and losses recognized on debt extinguishments than the
amount of debt called. Debt repurchases, unlike debt calls, may require the payment of a premium and
therefore result in higher extinguishment costs. As a result, we historically have generally repurchased high
interest rate debt at times (and in amounts) when we believed we had sufficient income available to absorb or
offset those higher costs.
We recognized a net gain of $201 million in 2006 from the repurchase of $15.5 billion and the call of
$24.1 billion of outstanding debt. These gains resulted from our decision to take advantage of favorable
funding spreads during 2006 relative to LIBOR to issue new debt and to repurchase outstanding debt trading
at attractive prices. In comparison, we recognized a loss of $68 million in 2005 from the repurchase of
$22.9 billion and the call of $28.0 billion of outstanding debt and a loss of $152 million in 2004 from the
repurchase of $4.3 billion and the call of $155.6 billion of outstanding debt.
Losses from Partnership Investments
Our partnership investments totaled approximately $10.6 billion and $9.3 billion as of December 31, 2006 and
2005, respectively. In some cases, we consolidate these entities in our financial statements. In other cases, we
account for these investments using the equity method and record our share of operating losses in the
consolidated statements of income as “Losses from partnership investments.” Investments we accounted for
under the equity method totaled $4.9 billion and $4.5 billion as of December 31, 2006 and 2005, respectively.
We provide additional information about these investments and applicable accounting in “Off-Balance Sheet
Arrangements and Variable Interest Entities—LIHTC Partnership Interests.”
Losses from partnership investments, net totaled $865 million, $849 million and $702 million in 2006, 2005
and 2004, respectively. These increased losses were primarily the result of continuing increases in the amount
we invest in LIHTC partnerships. We consider these investments to be a significant channel for advancing our
affordable housing mission. Accordingly, we expect to continue to invest in LIHTC partnerships, and we
anticipate that these new investments will generate additional net operating losses and tax credits in the future.
However, we recently sold two portfolios of LIHTC investments and expect that we may sell LIHTC
investments in the future if we believe that the economic return from the sale will be greater than the benefit
we would receive from continuing to hold these investments. In March 2007, we sold a portfolio of
investments in LIHTC partnerships totaling approximately $676 million in potential future tax credits. In July
2007, we sold a second portfolio of investments in LIHTC partnerships totaling approximately $254 million in
potential future tax credits. Together, these equity interests represented approximately 11% of our overall
LIHTC portfolio. For more information on tax credits associated with our LIHTC investments, refer to
“Provision for Federal Income Taxes” below.
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