Fannie Mae 2008 Annual Report Download - page 105

Guaranty fee income is primarily affected by the amount of outstanding Fannie Mae MBS and our other
guarantees and the amount of compensation we receive for providing our guaranty on Fannie Mae MBS and
for other guarantees. The amount of compensation we receive and the form of payment varies depending on
factors such as the risk profile of the securitized loans, the level of credit risk we assume and the negotiated
payment arrangement with the lender. We typically negotiate a contractual guaranty fee with the lender and
collect the fee on a monthly basis based on the contractual fee rate multiplied by the unpaid principal balance
of loans underlying a Fannie Mae MBS. In lieu of charging a higher contractual fee rate for loans with greater
credit risk, we may require that the lender pay an upfront fee to compensate us for assuming the additional
credit risk. We refer to this payment as a risk-based pricing adjustment. We also may adjust the monthly
contractual guaranty fee rate so that the pass-through coupon rates on Fannie Mae MBS are in more easily
tradable increments of a whole or half percent by making an upfront payment to the lender (“buy-up”) or
receiving an upfront payment from the lender (“buy-down”).
As we receive monthly contractual payments for our guaranty, we recognize guaranty fee income. We
recognize upfront risk-based pricing adjustments and buy-down payments over the expected life of the
underlying assets of the related MBS trusts as a component of guaranty fee income. We record buy-up
payments as an asset and reduce the recorded asset as cash flows are received over the expected life of the
underlying assets of the related MBS trusts. We assess buy-ups for other-than-temporary impairment and
include any impairment recognized as a component of guaranty fee income. The extent to which we amortize
upfront payments and other deferred amounts into income depends on the rate of expected prepayments,
which is affected by interest rates. In general, as interest rates decrease, expected prepayment rates increase,
resulting in accelerated accretion into income of deferred amounts, which increases our guaranty fee income.
Conversely, as interest rates increase, expected prepayments rates decrease, resulting in slower amortization of
deferred amounts. Prepayment rates also affect the estimated fair value of buy-ups. Faster than expected
prepayment rates shorten the average expected life of the underlying assets of the related MBS trusts, which
reduces the value of our buy-up assets. This reduction in value may trigger the recognition of other-than-
temporary impairment, which reduces our guaranty fee income.
Table 6 shows the components of our guaranty fee income, our average effective guaranty fee rate and Fannie
Mae MBS activity for 2008, 2007 and 2006.
Table 6: Analysis of Guaranty Fee Income and Average Effective Guaranty Fee Rate
(1)
Amount Rate
(2)
Amount Rate
(2)
2006 Rate
(2)
2008 vs.
2007
2007 vs.
2006
2008 2007 2006
For the Year Ended December 31, % Change
(Dollars in millions)
Guaranty fee income/average
effective guaranty fee rate,
excluding certain fair value
adjustments and buy-up
impairment
(3)
. . . . . . . . . . . . . . $ 7,913 32.2 bp $ 5,063 23.7 bp $ 4,288 22.4 bp 56% 18%
Net change in fair value of buy-ups
and guaranty assets
(4)
. . . . . . . . . (18) (0.1) 24 0.1 — — (175) —
Buy-up impairment . . . . . . . . . . . . (274) (1.1) (16) (0.1) (38) (0.2) 1,613 (58)
Guaranty fee income/average
effective guaranty fee rate
(5)
. . . . $ 7,621 31.0 bp $ 5,071 23.7 bp $ 4,250 22.2 bp 50% 19%
Average outstanding Fannie Mae
MBS and other guarantees
(6)
. . . . $2,459,383 $2,139,481 $1,915,457 15% 12%
Fannie Mae MBS issues
(7)
. . . . . . . 542,813 629,607 481,704 (14) 31
(1)
Losses recognized at inception on certain guaranty contracts for periods prior to January 1, 2008 are excluded from
guaranty fee income and the average effective guaranty fee rate; however, as described in footnote 5 below, the
accretion of these losses into income over time is included in our guaranty fee income and average effective guaranty
fee rate.
(2)
Presented in basis points and calculated based on guaranty fee income components divided by average outstanding
Fannie Mae MBS and other guarantees for each respective period.
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