Fannie Mae 2007 Annual Report Download - page 126

other liabilities generally approximate fair value. We assume that certain other liabilities, such as deferred revenues,
have no fair value.
(8)
“Preferred stockholders’ equity” is reflected in our non-GAAP supplemental consolidated fair value balance sheets at
the estimated fair value amount.
(9)
“Common stockholders’ equity” consists of the stockholders’ equity components presented on the following five line
items in our GAAP consolidated balance sheets: (i) Common stock; (ii) Additional paid-in capital; (iii) Retained
earnings; (iv) Accumulated other comprehensive loss; and (v) Treasury stock, at cost. “Common stockholders’ equity”
is the residual of the excess of the estimated fair value of total assets over the estimated fair value of total liabilities,
after taking into consideration preferred stockholders’ equity and minority interest in consolidated subsidiaries.
(10)
The previously reported fair value of our net assets was $42.9 billion as of December 31, 2006. This amount reflected
our LIHTC partnership investments based on the carrying amount of these investments. We revised the previously
reported fair value of our net assets as of December 31, 2006 to reflect the estimated fair value of these investments.
This revision increased the fair value of our net assets by $798 million to $43.7 billion as of December 31, 2006.
Key Drivers of Changes in the Estimated Fair Value of Net Assets (Non-GAAP)
We expect periodic fluctuations in the estimated fair value of our net assets due to our business activities, as
well as due to changes in market conditions, including changes in interest rates, changes in relative spreads
between our mortgage assets and debt, and changes in implied volatility. Following is a discussion of the
effects these market conditions generally have on the fair value of our net assets and the factors we consider
to be the principal drivers of changes in the estimated fair value of our net assets. We also disclose the
sensitivity of the estimated fair value of our net assets to changes in interest rates in “Risk Management—
Interest Rate Risk Management and Other Market Risks—Measuring Interest Rate Risk—Fair Value
Sensitivity of Net Assets.”
•Capital Transactions, Net. Capital transactions include our issuances of common and preferred stock,
our repurchases of stock and our payment of dividends. Cash we receive from the issuance of preferred
and common stock results in an increase in the fair value of our net assets, while repurchases of stock and
dividends we pay on our stock reduce the fair value of our net assets.
•Estimated Net Interest Income from OAS. OAS income represents the estimated net interest income
generated during the current period that is attributable to the market spread between the yields on our
mortgage-related assets and the yields on our debt during the period, calculated on an option-adjusted
basis.
•Guaranty Fees, Net. Guaranty fees, net, represent the net cash receipts during the reported period related
to our guaranty business and are generally calculated as the difference between the contractual guaranty
fees we receive during the period and the expenses we incur during the period that are associated with our
guaranty business. Changes in guaranty fees, net, result from changes in portfolio size and composition,
changes in actual and expected credit performance, and changes in the market spreads for similar
instruments.
•Fee and Other Income and Other Expenses, Net. Fee and other income includes miscellaneous fees,
such as resecuritization transaction fees and technology-related fees. Other expenses primarily include
costs incurred during the period that are associated with the Capital Markets group.
•Return on Risk Positions. Our investment activities expose us to market risks, including duration and
convexity risks, yield curve risk, OAS risk and volatility risk. The return on risk positions represents the
estimated net increase or decrease in the fair value of our net assets resulting from net exposures related
to the market risks we actively manage. We actively manage, or hedge, interest rate risk related to our
mortgage investments in order to maintain our interest rate risk exposure within prescribed limits.
However, we do not actively manage certain other market risks. Specifically, we do not attempt to
actively manage or hedge changes in mortgage-to-debt OAS after we purchase mortgage assets or the
interest rate risk related to our guaranty business.
•Mortgage-to-debt OAS. Funding mortgage investments with debt exposes us to mortgage-to-debt OAS
risk, which represents basis risk. Basis risk is the risk that interest rates in different market sectors will
104