Fannie Mae 2008 Annual Report Download - page 108

Table 7: Investment Gains (Losses), Net
2008 2007 2006
For the Year Ended
December 31,
(Dollars in millions)
Other-than-temporary impairment on available-for-sale securities
(1)
. . . . . . . . . . . . . . . . . . . . $(6,974) $(814) $(853)
Lower of cost or fair value adjustments on held for sale loans . . . . . . . . . . . . . . . . . . . . . . . (430) (103) (47)
Gains (losses) on Fannie Mae portfolio securitizations, net . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (403) 152
Gains on sale of available-for-sale securities, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 703 106
Other investment losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (252) (250) (49)
Investment losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,220) $(867) $(691)
(1)
Excludes other-than-temporary impairment on guaranty assets and buy-ups as these amounts are recognized as a
component of guaranty fee income. Refer to Table 6: Analysis of Guaranty Fee Income and Average Effective
Guaranty Fee Rate.
The $6.4 billion increase in investment losses in 2008 over 2007 was primarily attributable to an increase in
other-than-temporary impairment on available-for-sale securities. The other-than-temporary impairment was
principally related to Alt-A and subprime private-label securities, reflecting a reduction in expected cash flows
due to an increase in expected defaults and loss severities on the mortgage loans underlying these securities.
See “Critical Accounting Policies and Estimates—Other-than-temporary Impairment of Investment Securities”
and “Consolidated Balance Sheet Analysis—Trading and Available-for-Sale Investment Securities—
Investments in Private-Label Mortgage Related Securities” for additional information on impairment of our
investment securities.
The $176 million increase in investment losses in 2007 over 2006 was primarily attributable to an increase in
other investment losses, reflecting the sale of $1.9 billion of securities that triggered the derecognition of
$17.3 billion of loans classified as held for investment and the recognition of $15.4 billion of securities. In
conjunction with the recognition of the $15.4 billion of securities on our consolidated balance sheet, we also
were required to record at fair value a related guaranty asset and guaranty obligation, which resulted in a loss
that we reported as a component of other investment losses.
Fair Value Gains (Losses), Net
Fair value gains and losses, net consists of (1) derivatives fair value gains and losses, including gains and
losses on derivatives designated as accounting hedges; (2) trading securities gains and losses; (3) fair value
adjustments to the carrying value of mortgage assets designated for hedge accounting that are attributable to
changes in interest rates; (4) foreign exchange gains and losses on our foreign-denominated debt; and (5) fair
value gains and losses on certain debt securities carried at fair value. By presenting these items together in our
consolidated results of operations, we are able to show the net impact of mark-to-market adjustments that
generally result in offsetting gains and losses attributable to changes in interest rates.
Beginning in mid-April 2008, we implemented fair value hedge accounting with respect to a portion of our
derivatives to hedge, for accounting purposes, the interest rate risk related to some of our mortgage assets,
including mortgage loans classified as held for investment. Fair value hedge accounting allowed us to offset
the fair value gains or losses on some of our derivative instruments against the corresponding fair value losses
or gains attributable to changes in interest rates on the hedged mortgage assets. We implemented this hedging
strategy to reduce the level of volatility in our earnings attributable to changes in interest rates for our interest
rate risk management derivatives. However, our application of hedge accounting did not affect volatility in our
financial results attributable to changes in credit spreads.
Following entry into conservatorship and the Treasury agreements, we changed our focus from reducing the
volatility in our earnings attributable to changes in interest rates to maintaining a positive net worth. As a
result of this change, we modified our hedge accounting strategy during the third quarter of 2008 to
discontinue the application of hedge accounting for mortgage loans. Applying hedge accounting for these
loans required that we record in earnings changes in the fair value of the loans attributable to changes in
interest rates. These fair value changes offset some of the volatility in our earnings caused by fluctuations in
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