Fannie Mae 2007 Annual Report Download - page 139

accounting required to be applied to, the arrangement. These arrangements are commonly referred to as “off-
balance sheet arrangements” and expose us to potential losses in excess of the amounts recorded in the
consolidated balance sheets.
The most significant off-balance sheet arrangements that we engage in result from the mortgage loan
securitization and resecuritization transactions that we routinely enter into as part of the normal course of our
business operations. Our Single-Family business generates most of its revenues through the guaranty fees
earned from these securitization transactions. In addition, our HCD business generates a significant amount of
its revenues through the guaranty fees earned from these securitization transactions. We also enter into other
guaranty transactions, liquidity support transactions and hold LIHTC partnership interests that may involve
off-balance sheet arrangements.
Fannie Mae MBS Transactions and Other Financial Guaranties
While we hold some Fannie Mae MBS in our investment portfolio, the substantial majority of outstanding
Fannie Mae MBS is held by third parties and therefore is generally not reflected in our consolidated balance
sheets, except as described below. Of the $2.3 trillion and $2.0 trillion in total outstanding Fannie Mae MBS
and other financial guaranties as of December 31, 2007 and 2006, respectively, we held $180.2 billion and
$199.6 billion, respectively, in our portfolio. Fannie Mae MBS held in our investment portfolio is reflected in
the consolidated balance sheets as “Investments in securities.” In addition, we consolidate certain Fannie Mae
MBS trusts depending on the significance of our interest in those MBS trusts. Upon consolidation, we
recognize the assets of the consolidated trust. As of December 31, 2007 and 2006, we recognized $80.9 billion
and $105.6 billion, respectively, of assets from the consolidation of certain Fannie Mae MBS trusts.
Accordingly, as of December 31, 2007 and 2006, there was approximately $2.2 trillion and $1.8 trillion,
respectively, in outstanding and unconsolidated Fannie Mae MBS held by third parties and other financial
guaranties that was not included in our consolidated balance sheets.
Although the unpaid principal balance of Fannie Mae MBS held by third parties is generally not reflected on
our consolidated balance sheets, we record in our consolidated balance sheets a guaranty obligation based on
an estimate of our non-contingent obligation to stand ready to perform in connection with Fannie Mae MBS
and other guaranties issued after January 1, 2003, whether held in our portfolio or held by third parties. We
also record in the consolidated balance sheets a reserve for guaranty losses based on an estimate of our
incurred credit losses on all of our guaranties.
While our guaranties relating to Fannie Mae MBS represent the substantial majority of our guaranty activity,
we also provide other financial guaranties. Our HCD business provides credit enhancements primarily for
taxable and tax-exempt bonds issued by state and local governmental entities to finance multifamily housing
for low- and moderate-income families. Under these credit enhancement arrangements, we guarantee to the
trust that we will supplement proceeds as required to permit timely payment on the related bonds, which
improves the bond ratings and thereby results in lower-cost financing for multifamily housing. We also
provide liquidity support for variable-rate demand housing bonds as part of our credit enhancement
arrangements. Our HCD business generates revenue from the fees earned on these transactions. These
transactions also contribute to our housing goals and help us meet other mission-related objectives.
Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae
MBS held by third parties and our other financial guaranties is significantly higher than the carrying amount
of the guaranty obligations and reserve for guaranty losses that are reflected in the consolidated balance
sheets. In the case of outstanding and unconsolidated Fannie Mae MBS held by third parties, our maximum
potential exposure arising from these guaranties is primarily represented by the unpaid principal balance of the
mortgage loans underlying these Fannie Mae MBS, which was $2.1 trillion and $1.8 trillion as of
December 31, 2007 and 2006, respectively. In the case of the other financial guaranties that we provide, our
maximum potential exposure arising from these guaranties is primarily represented by the unpaid principal
balance of the underlying bonds and loans, which totaled $41.6 billion and $19.7 billion as of December 31,
2007 and 2006, respectively.
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