Fannie Mae 2007 Annual Report Download - page 33

The Capital Markets group’s purchases and sales of mortgage assets in any given period generally are
determined by the rates of return that we expect to earn on the equity capital underlying our investments.
When we expect to earn returns greater than our other uses of capital, we generally will be an active purchaser
of mortgage loans and mortgage-related securities. When we believe that few opportunities exist to deploy
capital in mortgage investments, we generally will be a less active purchaser, and may be a net seller, of
mortgage loans and mortgage-related securities. This investment strategy is consistent with our chartered
liquidity function, as the periods during which our purchase of mortgage assets is economically attractive to us
generally have been periods in which market demand for mortgage assets is low.
The spread between the amount we earn on mortgage assets available for purchase or sale and our funding costs,
after consideration of the net risks associated with the investment, is an important factor in determining whether
we are a net buyer or seller of mortgage assets. When the spread between the yield on mortgage assets and our
borrowing costs is wide, which is typically when market demand for mortgage assets is low, we will look for
opportunities to add liquidity to the market primarily by purchasing mortgage assets and issuing debt to investors
to fund those purchases. When this spread is narrow, which is typically when market demand for mortgage
assets is high, we will look for opportunities to meet demand by selling mortgage assets from our portfolio.
Our investment activities are also affected by our capital requirements and other regulatory constraints, as
described below under “Our Charter and Regulation of Our Activities—Regulation and Oversight of Our
Activities.”
Debt Financing Activities
Our Capital Markets group funds its investments primarily through the issuance of debt securities in the
domestic and international capital markets. The objective of our debt financing activities is to manage our
liquidity requirements while obtaining funds as efficiently as possible. We structure our financings not only to
satisfy our funding and risk management requirements, but also to access the capital markets in an orderly
manner using debt securities designed to appeal to a wide range of investors. International investors, seeking
many of the features offered in our debt programs for their U.S. dollar-denominated investments, have been a
significant source of funding in recent years.
Our debt trades in the “agency sector” of the capital markets, along with the debt of other GSEs. Debt in the
agency sector benefits from bank regulations that allow commercial banks to invest in our debt and other
agency debt to a greater extent than other corporate debt. These factors, along with the high credit rating of
our senior unsecured debt securities and the manner in which we conduct our financing programs, have
contributed to the favorable trading characteristics of our debt. As a result, we generally have been able to
borrow at lower interest rates than other corporate debt issuers. For information on the credit ratings of our
long-term and short-term senior unsecured debt, subordinated debt and preferred stock, refer to “Part II—
Item 7—MD&A—Liquidity and Capital Management—Liquidity—Credit Ratings and Risk Ratings.”
Securitization Activities
Our Capital Markets group engages in two principal types of securitization activities:
• creating and issuing Fannie Mae MBS from our mortgage portfolio assets, either for sale into the
secondary market or to retain in our portfolio; and
• issuing structured Fannie Mae MBS for customers in exchange for a transaction fee.
Our Capital Markets group creates Fannie Mae MBS using mortgage loans and mortgage-related securities that
we hold in our investment portfolio, referred to as “portfolio securitizations.” We currently securitize a majority
of the single-family mortgage loans we purchase within the first month of purchase. Our Capital Markets group
may sell these Fannie Mae MBS into the secondary market or may retain the Fannie Mae MBS in our
investment portfolio. In addition, the Capital Markets group issues structured Fannie Mae MBS, which are
generally created through swap transactions, typically with our lender customers or securities dealer customers.
In these transactions, the customer “swaps” a mortgage asset it owns for a structured Fannie Mae MBS we issue.
Our Capital Markets group earns transaction fees for issuing structured Fannie Mae MBS for third parties.
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