Fannie Mae 2006 Annual Report Download - page 92

fees caused by higher borrower refinancing activity in 2005 as compared to 2004. Expenses increased 28% in
2005 due to an increase in the segment’s allocation of a portion of the costs associated with our restatement
and related matters.
We expect to maintain our LIHTC partnership investments strategy in the future, which is likely to continue to
result in an effective tax rate significantly below the statutory rate of 35%. We view these investments as a
significant vehicle for advancing our affordable housing mission and expect to continue to invest in LIHTC
partnerships. In March 2007, we sold a portfolio of investments in LIHTC partnerships totaling approximately
$676 million in LIHTC credits. In July 2007, we sold a second portfolio of investments in LIHTC partnerships
totaling approximately $254 million in LIHTC credits. Together, these equity interests represented
approximately 11% of our overall LIHTC portfolio. We may sell additional 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.
HCD’s Multifamily Group continued to benefit from the improvement in multifamily real estate fundamentals
during 2006. Rental unit vacancies declined to an estimated 5.3% nationally at year-end 2006 for institutional-
type multifamily properties, compared to an estimated vacancy rate of approximately 6.1% at the end of 2005.
However, the multifamily real estate sector is beginning to experience the effects of the overall slowdown in
the housing market. We expect the vacancy rate for multifamily rental properties to increase in 2007 as a
result of an increasing supply of new condominiums reverting to rental units. As of March 31, 2007, estimated
vacancy rates were approximately 5.8%.
We are one of the largest participants in the multifamily secondary market. HCD’s multifamily business has
been challenged in recent years. Competition has been fueled by private-label issuers of CMBS and aggressive
bidding for multifamily debt among institutional investors, which reflects the high level of funds available for
investment in the secondary mortgage market. We have responded to market challenges with an increased
emphasis on serving partner needs with customized lending options and advanced a number of efficiency
initiatives to make it quicker, easier and less expensive to do business with us.
HCD continues to grow and diversify its business into new areas that expand the supply of affordable housing,
such as increased investment in rental and for-sale housing projects, including LIHTC investments. HCD
further enables the expansion of affordable housing stock by participating in specialized debt financing,
acquiring mortgage loans from a variety of new public and private partners, and increasing other community
lending activities.
Capital Markets Group
Our Capital Markets group generated net income of $1.7 billion, $3.2 billion and $2.1 billion in 2006, 2005
and 2004, respectively. The primary sources of net revenues for our Capital Markets group include net interest
income and fee and other income. Derivatives fair value losses, investment gains and losses, and debt
extinguishment gains and losses also have a significant impact on the financial performance of our Capital
Markets group.
Net income for the Capital Markets group decreased by $1.5 billion or 48%, in 2006 from 2005, primarily due
to a significant decline in net interest income, which was partially offset by a reduction in derivatives fair
value losses, lower impairment expense and lower income tax expense.
Net interest income was $6.2 billion, $10.9 billion, and $17.8 billion in 2006, 2005 and 2004, respectively.
The decrease in net interest income of $4.7 billion, or 44%, in 2006 from 2005 was driven by lower average
balances of asset in 2006 versus 2005 and by the compression of the spread between interest earned on our
assets and interest expense on our debt. In addition, our product mix shifted as floating-rate securities and
adjustable-rate mortgage products increased as a percentage of our total mortgage portfolio. Increasing interest
rates had the effect of increasing the cost of our debt, which further reduced net interest income. The decrease
in fee and other income was primarily attributable to a foreign currency exchange loss of $230 million in 2006
compared with a foreign currency exchange gain of $625 million in 2005 on our foreign denominated debt. As
discussed in “Risk Management—Interest Rate Risk Management and Other Market Risks,” when we issue
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