Fannie Mae 2007 Annual Report Download - page 70

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with our consolidated financial statements as of December 31,
2007 and related notes. Readers should also review carefully “Part I—Item 1—Business—Forward-Looking
Statements” and “Part I—Item 1A—Risk Factors” for a description of the forward-looking statements in this
report and a discussion of the factors that might cause our actual results to differ, perhaps materially, from
these forward-looking statements. Please refer to “Glossary of Terms Used in This Report” for an explanation
of key terms used throughout this discussion.
EXECUTIVE SUMMARY
Summary of Our Financial Results
Our financial results for 2007 were severely affected by the disruption in the mortgage and credit markets
during the second half of 2007 and continued weakness in the housing markets. We recorded a net loss of
$2.1 billion and a diluted loss per share of $2.63 in 2007, compared with net income and diluted earnings per
share of $4.1 billion and $3.65 in 2006, and $6.3 billion and $6.01 in 2005.
Our financial results for the first half of 2007 differed markedly from our financial results for the second half
of 2007. For the first half of 2007, we recorded net income of $2.9 billion and diluted earnings per share of
$2.72. The second half of 2007, however, was marked by significant disruption and uncertainty in the housing,
mortgage and credit markets. For the second half of 2007, we recorded a net loss of $5.0 billion, as market
factors such as significant increases in serious delinquency rates and foreclosures, home price declines,
widening credit spreads, shifts in interest rates and illiquidity in the capital markets had a material adverse
effect on our results, more than offsetting the income we earned in the first half of the year.
The following factors had the most significant adverse effect on our 2007 financial results:
• an increase of $2.8 billion in our provision for credit losses, excluding the component of our provision
attributable to fair value losses recorded in connection with our purchase of seriously delinquent loans
from MBS trusts pursuant to Statement of Position No. 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (“SOP 03-3”), which are referred to in this report as “SOP 03-3 fair
value losses”;
• an increase of $5.1 billion in market-based valuation losses, including derivatives fair value losses, losses
on certain guaranty contracts, SOP 03-3 fair value losses and losses on trading securities; and
• a decrease of $2.2 billion in net interest income.
The effect of these adverse factors more than offset the favorable impact of an increase of $821 million in our
guaranty fee income.
Impact of Market Conditions on Our Business
We are experiencing a significant disruption in the housing, mortgage and credit markets. The market
downturn that began in 2006 continued throughout 2007, and is continuing in 2008, with significant declines
in new and existing home sales, housing starts, mortgage originations and home prices, as well as significant
increases in inventories of unsold homes, mortgage delinquencies and foreclosures. During the second half of
2007, the capital markets also were characterized by high levels of volatility, reduced levels of liquidity in the
mortgage and broader credit markets, significantly wider credit spreads and rating agency downgrades on a
growing number of mortgage-related securities. We discuss these and other market and economic factors that
affect our business in more detail in “Part I—Item 1—Business—Residential Mortgage Market Overview—
Market and Economic Factors Affecting Our Business.”
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