Fannie Mae 2007 Annual Report Download - page 171

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Estimated
Fair Value 50 +100
Change in Rates
Effect on Estimated
Fair Value
As of December 31, 2006
(5)
(Dollars in millions)
Trading financial instruments
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,514 $ 210 $ (499)
Derivative assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,747 (1,866) 4,130
Non-trading portfolio assets and debt, net
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,868 1,164 (5,694)
Net portfolio of interest-rate sensitive assets and liabilities . . . . . . . . . . . . . . . . . . . . 24,129 (492) (2,063)
Guaranty assets and guaranty obligations, net
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,593 (1,309) 1,664
Net market sensitive assets
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,722 (1,801) (399)
Other non-financial assets and liabilities, net
(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,977 636 146
Net assets
(6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,699 $(1,165) $ (253)
Percentage of net asset fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.67)% (0.58)%
(1)
Consists of securities classified in the consolidated balance sheets as trading and carried at estimated fair value. On
January 1, 2008, we adopted the fair value option under SFAS 159 for certain securities that were previously classified
as available-for-sale within our mortgage-related and non-mortgage-related investment portfolio in the amount of
$56.2 billion. We expect that the interest rate component of fair value for the securities adopted under SFAS 159 will
offset a portion of the change in the fair value of our derivatives.
(2)
“Non-trading portfolio assets and debt, net” includes the line item “Advances to lenders” reported in our consolidated
balance sheets. In addition, certain amounts have been reclassified from securities to “Guaranty assets and guaranty
obligations, net” to reflect how the risk of these securities is managed by the business.
(3)
Includes net financial assets and financial liabilities reported in “Notes to Consolidated Financial Statements—Note 19,
Fair Value of Financial Instruments” and additional market sensitive instruments that consist of master servicing assets,
master servicing liabilities and credit enhancements.
(4)
The sensitivity changes related to other non-financial assets and liabilities represent the tax effect on net assets under
these scenarios and do not include any interest rate sensitivity related to these items.
(5)
Certain prior period amounts have been reclassified to conform with the current year presentation, which resulted in
changes in the reported sensitivities of selected categories of market-sensitive assets and liabilities but did not change
the reported sensitivities of either our net market sensitive assets or net assets.
(6)
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,
which resulted in an increase in the fair value of our net assets by $798 million to $43.7 billion as of December 31,
2006. We did not recalculate the previously reported sensitivities as a result of this change.
The net portfolio of interest-rate sensitive assets and liabilities was (3.0)% for a -50 basis point shock and
(2.8)% for a +100 basis point shock as of December 31, 2007, compared with (2.7)% for a -50 basis point
shock and (0.6)% for a +100 basis point shock as of December 31, 2006. As discussed above, we structure our
debt and derivatives to match and offset the interest rate risk of our mortgage investments as much as possible.
We evaluate the sensitivity of the fair value of our net assets, excluding the sensitivity of our guaranty assets
and guaranty obligations, because, as previously discussed, we expect that the guaranty fee income generated
from future business activity will largely replace any guaranty fee income lost as a result of mortgage
prepayments due to movements in interest rates. We believe the results of these sensitivity analyses are
indicative of a relatively low level of interest rate risk.
Ourinterestrateriskmeasuresarebasedonindustrystandard financial modeling techniques that depend on our
internally developed proprietary mortgage prepayment models and interest rate models. Our prepayment models
contain many assumptions, including those regarding borrower behavior in certain interest rate environments and
borrower relocation rates. Other market inputs, such as interest rates, mortgage prices and interest rate volatility, are
also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these
assumptions, models and analytical tools as appropriate to reflect our best assessment of the environment.
149