Fannie Mae 2007 Annual Report Download - page 274

the largest net exposure to a single interest rate and foreign currency counterparty was with a counterparty
rated AA-, which represented approximately $87 million, or 16%, of our total net exposure of $542 million.
As of December 31, 2006, all of our interest rate and foreign currency derivative transactions, consisting of
$663 million net collateral exposure and $744.9 billion notional amount, were with counterparties rated A or
better by Standard & Poor’s and Moody’s. To reduce our credit risk concentration, our interest rate and foreign
currency derivative instruments were diversified among 21 counterparties with which we had outstanding
transactions as of December 31, 2006. Of the $65 million in other derivatives as of December 31, 2006,
approximately 97% of the net exposure consisted of mortgage insurance contracts, all of which were with
counterparties rated better than A by any of Standard & Poor’s, Moody’s or Fitch. As of December 31, 2006,
the largest net exposure to a single interest rate and foreign currency counterparty was with a counterparty
rated AA, which represented approximately $74 million, or 10%, of our total net exposure of $728 million.
Parties Associated with our Off-Balance Sheet Transactions. We enter into financial instrument transactions
that create off-balance sheet credit risk in the normal course of our business. These transactions are designed
to meet the financial needs of our customers, and manage our credit, market or liquidity risks.
We have entered into guaranties for which a guaranty obligation has not been recognized in the consolidated
balance sheets relating to periods prior to our adoption of FIN 45. Our maximum potential exposure under
these guaranties is $206.5 billion and $254.6 billion as of December 31, 2007 and 2006, respectively. If we
were required to make payments under these guaranties, we would pursue recovery through our right to the
collateral backing the underlying loans, available credit enhancements and recourse with third parties that
provide a maximum coverage of $22.7 billion and $28.8 billion as of December 31, 2007 and 2006,
respectively.
The following table displays the contractual amount of off-balance sheet financial instruments as of
December 31, 2007 and 2006. Contractual or notional amounts do not necessarily represent the credit risk of
the positions.
2007 2006
As of December 31,
(Dollars in millions)
Fannie Mae MBS and other guaranties
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $206,519 $254,566
Loan purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,998 3,502
(1)
Represents maximum exposure on guaranties not reflected in the consolidated balance sheets. Refer to “Note 8,
Financial Guaranties and Master Servicing” for maximum exposure associated with guaranties reflected in the
consolidated balance sheets.
We do not require collateral from our counterparties to secure their obligations to us for loan purchase
commitments.
19. Fair Value of Financial Instruments
We carry financial instruments at fair value, amortized cost or lower of cost or market. Fair value is the
amount at which a financial instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. When available, the fair value of our financial instruments is based
on observable market prices, or market prices that we obtain from third parties. Pricing information we obtain
from third parties is internally validated for reasonableness prior to use in the consolidated financial
statements.
When observable market prices are not readily available, we estimate the fair value using market data and
model-based interpolation using standard models that are widely accepted within the industry. Market data
includes prices of financial instruments with similar maturities and characteristics, duration, interest rate yield
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)