Fannie Mae 2006 Annual Report Download - page 91

second strongest year in history. Based on our assessment of the underlying risk, we made a strategic decision
to not pursue the guaranty of a significant portion of mortgage loan originations during 2004 and 2005, ceding
market share of new single-family mortgage-related securities issuances to private-label issuers. While we
maintained the same strategic approach in 2006, our market share did not decline significantly in 2006. Our
estimated overall market share of new single-family mortgage-related securities issuance for 2006 was
approximately 23.7% in 2006, compared with 23.5% in 2005 and 29.2% in 2004. We estimate that our market
share will increase slightly in 2007 as the marketplace shifts towards more fixed-rate mortgage products. Our
total single-family Fannie Mae MBS outstanding increased to $2.1 trillion as of June 30, 2007, from
$1.9 trillion as of June 30, 2006. The market share estimates are based on publicly available data and exclude
previously securitized mortgages.
Our conventional single-family mortgage credit book of business remained relatively strong from 2004 to
2006. We believe that our assessment and approach to the management of credit risk during these years
allowed us to maintain a conventional single-family mortgage credit book of business with strong credit risk
characteristics as evidenced by our credit losses, which remained low during the three-year period from 2004
to 2006.
We are focused on understanding and serving our customers’ needs, strengthening our relationships with key
partners, and helping lenders reach and serve new, emerging and nontraditional markets by providing more
flexible mortgage options, including Alt-A and subprime products, which have represented an increased
proportion of mortgage originations in recent years. We have increased our participation in these types of
products where we have concluded that it would be economically advantageous and/or that it would contribute
to our mission objectives. Our participation in these products reflects our assessment of anticipated guaranty
fee income in light of our expectation for potentially higher credit losses. We continue to closely monitor
credit risk and pricing dynamics across the full spectrum of mortgage product types. Our assessment of these
dynamics will continue to determine the timing and level of our acquisitions of these types of mortgage
products.
HCD Business
Our HCD business generated net income of $338 million, $503 million and $425 million in 2006, 2005 and
2004, respectively. The primary sources of net revenues for our HCD business are guaranty fee income and
fee and other income. Expenses primarily include administrative expenses, credit-related expenses and our
share of net operating losses associated with LIHTC investments that are offset by the related tax benefits
from these investments.
Net income for the HCD business segment decreased by $165 million, or 33%, in 2006 from 2005 resulting
from an increase in administrative expenses and credit enhancement expense and a decline in net revenues,
which were partially offset by investment tax credits as HCD increased its investment activity. LIHTC
investments, which comprise the largest proportion of investment activity for this segment, increased to
$8.8 billion in 2006, compared to $7.7 billion in 2005, and generated tax benefits that were the primary driver
in reducing our 2006 effective corporate tax rate to approximately 4%. Losses from partnership investments
were $865 million in 2006, a slight increase as compared to 2005. Guaranty fee income remained essentially
unchanged in 2006 from 2005. Expenses increased 46% in 2006 from 2005 primarily due to an increase in the
segment allocation of indirect corporate expenses during the period mostly driven by an increase in costs
associated with our restatement and related matters, and higher credit enhancement expenses associated with a
large multifamily transaction that liquidated in 2006.
Net income for the HCD business segment increased by $78 million, or 18%, in 2005 from 2004 as a result of
increased tax benefits from tax-advantaged investments and higher fee and other income, which were partially
offset by an increase in administrative expenses. LIHTC investments totaled $7.7 billion in 2005 compared to
$6.8 billion in 2004. Losses from partnership investments increased by $147 million as HCD increased its
investment activity but were more than offset by increased LIHTC tax benefits. Guaranty fee income was up
due to the 5% increase in the average multifamily mortgage credit book of business in 2005. Fee and other
income was up $143 million in 2005 to $347 million primarily due to an increase in multifamily transaction
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