Fannie Mae 2008 Annual Report Download - page 147

volatility. The housing and credit markets continued to deteriorate throughout 2008, but at a much sharper
pace in the fourth quarter of 2008. In addition, the economic downturn broadened and intensified during the
last few months of 2008. Including the effect of the change in the fair value measurement of guaranty
obligations as of January 1, 2008, the key factors driving the $142.5 billion decline in the fair value of net
assets during 2008, which were attributable to these market conditions, included the following:
• A decrease of approximately $80.3 billion, or $60.6 billion net of related tax, in the fair value of our net
guaranty assets, driven by a substantial increase in the estimated fair value of our guaranty obligations,
largely attributable to an increase in expected credit losses as a result of the significant worsening of
housing, credit and economic conditions.
• A substantial decrease in the fair value of the net portfolio for our Capital Markets group, largely
attributable to a decline of approximately $52.3 billion, or $41.0 billion net of related tax, attributable to
wider spreads on our mortgage investments, particularly for our private-label securities backed by Alt-A
and subprime loans and CMBS. These wider spreads and the associated decrease in fair value largely
reflect the market expectation of higher future expected credit losses on these securities.
• A decrease due to the non-cash charge of $21.4 billion recorded during the third quarter of 2008 in our
consolidated results of operations to establish a partial deferred tax asset valuation allowance and an
additional decrease of approximately $19.5 billion related to the reversal of net deferred tax assets
associated with the fair value adjustments on our net assets, excluding our available-for sale securities.
The substantial increase in the fair value of our guaranty obligations during 2008 reflected the rapid
deterioration in mortgage performance, which has increased the underlying risk in our guaranty book of
business and resulted in both higher expected credit losses and a higher premium to assume this risk, as
indicated by the market prices of new guaranty business. Because of the severe deterioration in the mortgage
and credit markets, there is significant uncertainty regarding the full extent of future credit losses in the
mortgage sector. However, the fair value of our guaranty obligations as of each balance sheet date will always
be greater than our estimate of future expected credit losses in our existing guaranty book of business as of
that date because the fair value of our guaranty obligations includes an estimated market risk premium. We
provide additional information on the components of our guaranty obligations and how we estimate the fair
value of these obligations in “Critical Accounting Policies and Estimates—Fair Value of Financial
Instruments—Fair Value of Guaranty Obligations.”
The substantial decline in the fair value of our net portfolio during 2008 reflected the impact of continued
dislocation in the financial markets, which has resulted in illiquidity in major portions of the mortgage-related
securities market and extraordinarily wide mortgage asset spreads relative to historical averages, particularly
for Alt-A and subprime private-label securities and CMBS. These conditions intensified during the fourth
quarter of 2008, resulting in significant downward pressure on the fair value of many mortgage-related
securities. We provide additional information on the composition and estimated fair value of our mortgage
investments in “Consolidated Balance Sheet Analysis—Mortgage Investments.”
Cautionary Language Relating to Supplemental Non-GAAP Financial Measures
In reviewing our non-GAAP fair value balance sheets, there are a number of important factors and limitations
to consider. The estimated fair value of our net assets is calculated as of a particular point in time based on
our existing assets and liabilities. It does not incorporate other factors that may have a significant impact on
our long-term fair value, including revenues generated from future business activities in which we expect to
engage, the value from our foreclosure and loss mitigation efforts or the impact that potential regulatory
actions may have on us. As a result, the estimated fair value of our net assets presented in our non-GAAP fair
value balance sheets does not represent an estimate of our net realizable value, liquidation value or our market
value as a whole. Amounts we ultimately realize from the disposition of assets or settlement of liabilities may
vary significantly from the estimated fair values presented in our non-GAAP supplemental consolidated fair
value balance sheets.
Supplemental Non-GAAP Fair Value Balance Sheet Reports
We present our non-GAAP fair value balance sheet reports in Tables 32 and 33 below.
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