Fannie Mae 2007 Annual Report Download - page 89

recorded as charges against our loss reserves. See “Credit-Related Expenses” below for a discussion of our
current year provision for credit losses and “Critical Accounting Policies and Estimates” for illustrations of
how losses recorded at inception on certain guaranty contracts affect our earnings over time and how credit-
related expenses and actual credit losses related to our guaranties are recorded in our consolidated financial
statements. We expect that the substantial majority of our MBS guaranty transactions will generate positive
economic returns over the lives of the related MBS because, based on our experience and modeled
assessments, we expect our guaranty fees to exceed our incurred credit losses.
Investment Losses, Net
Investment losses, net includes other-than-temporary impairment on AFS securities, lower-of-cost-or-market
adjustments on HFS loans, gains and losses recognized on the securitization of loans or securities from our
portfolio and the sale of AFS securities, gains and losses on trading securities, and other investment losses.
Investment gains and losses may fluctuate significantly from period to period depending upon our portfolio
investment and securitization activities, changes in market conditions that may result in fluctuations in the fair
value of trading securities, and other-than-temporary impairment. We recorded investment losses of
$1.2 billion, $683 million and $1.3 billion in 2007, 2006 and 2005, respectively. Table 8 details the
components of investment gains and losses for each year.
Table 8: Investment Gains (Losses), Net
2007 2006 2005
For the Year Ended
December 31,
(Dollars in millions)
Other-than-temporary impairment on AFS securities
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (814) $(853) $(1,246)
Lower-of-cost-or-market adjustments on held-for-sale loans . . . . . . . . . . . . . . . . . . . . . . . . (103) (47) (114)
Gains (losses) on Fannie Mae portfolio securitizations, net . . . . . . . . . . . . . . . . . . . . . . . . (403) 152 259
Gains on sales of AFS securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703 106 252
Gains (losses) on trading securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (365) 8 (442)
Other investment losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250) (49) (43)
Investment losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,232) $(683) $(1,334)
(1)
Excludes other-than-temporary impairment on guaranty assets and buy-ups as these amounts are recognized as a
component of guaranty fee income.
The $549 million increase in investment losses in 2007 over 2006 was attributable to the following:
• A decrease of $39 million in other-than-temporary impairment on AFS securities. We recognized other-
than-temporary impairment of $814 million in 2007. Approximately $160 million of the other-than-
temporary impairment recognized in 2007 related to certain subprime private-label securities where we
concluded that it was no longer probable that we would collect all of the contractual principal and interest
amounts due. In addition, we recorded $620 million in other-than-temporary impairment losses on certain
investments in our mortgage portfolio and liquid investment portfolio that were impaired because we no
longer had the intent to hold these securities until recovery of the impairment. We reclassified these
investments as trading effective January 1, 2008 with our adoption of SFAS 159. In comparison, we
recognized $853 million in other-than-temporary impairment in 2006 due to declines in the fair value of
certain securities that we had designated for sale.
• An increase of $42 million in net gains related to the sale of AFS securities and Fannie Mae portfolio
securitizations. The increase in net gains was primarily attributable to the recovery in value of securities
we sold that we had previously written down due to other-than-temporary impairment. We sold securities
totaling $69.0 billion and $52.7 billion in 2007 and 2006, respectively. During the fourth quarter of 2007,
we actively sought to sell securities in a gain position as part of our overall capital management efforts. In
one transaction, we sold $1.9 billion of securities issued by an MBS trust in which we held 100%
ownership interest. This sale triggered the derecognition of $17.3 billion of loans classified as held for
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