Fannie Mae 2008 Annual Report Download - page 218

“Net worth” refers to the amount by which our total assets exceed our total liabilities, as reflected on our
consolidated balance sheet prepared in accordance with generally accepted accounting principles.
“Notional amount” refers to the hypothetical dollar amount in an interest rate swap transaction on which
exchanged payments are based. The notional amount in an interest rate swap transaction generally is not paid
or received by either party to the transaction and is typically significantly greater than the potential market or
credit loss that could result from such transaction.
“Option-adjusted spread” or “OAS” refers to the incremental expected return between a security, loan or
derivative contract and a benchmark yield curve (typically, U.S. Treasury securities, LIBOR and swaps, or
agency debt securities). The OAS provides explicit consideration of the variability in the security’s cash flows
across multiple interest rate scenarios resulting from any options embedded in the security, such as
prepayment options. For example, the OAS of a mortgage that can be prepaid by the homeowner without
penalty is typically lower than a nominal yield spread to the same benchmark because the OAS reflects the
exercise of the prepayment option by the homeowner, which lowers the expected return of the mortgage
investor. In other words, OAS for mortgage loans is a risk-adjusted spread after consideration of the
prepayment risk in mortgage loans. The market convention for mortgages is typically to quote their OAS to
swaps. The OAS of our debt and derivative instruments are also frequently quoted to swaps. The OAS of our
net mortgage assets is therefore the combination of these two spreads to swaps and is the option-adjusted
spread between our assets and our funding and hedging instruments.
“Outstanding Fannie Mae MBS” refers to the total unpaid principal balance of Fannie Mae MBS that is held
by third-party investors and held in our mortgage portfolio.
“Pay-fixed swap” refers to an agreement under which we pay a predetermined fixed rate of interest based
upon a set notional principal amount and receive a variable interest payment based upon a stated index, with
the index resetting at regular intervals over a specified period of time. These contracts generally increase in
value as interest rates rise and decrease in value as interest rates fall.
“Private-label securities” refers to mortgage-related securities issued by entities other than agency issuers
Fannie Mae, Freddie Mac or Ginnie Mae.
“Receive-fixed swap” refers to an agreement under which we make a variable interest payment based upon a
stated index, with the index resetting at regular intervals, and receive a predetermined fixed rate of interest
based upon a set notional amount and over a specified period of time. These contracts generally increase in
value as interest rates fall and decrease in value as interest rates rise.
“Regulatory Reform Act” refers to the Federal Housing Finance Regulatory Reform Act of 2008 (Public Law
110-289), which was enacted on July 30, 2008, as Division A of the Housing and Economic Recovery Act of
2008 (Public Law 110-289).
“REMIC” or “Real Estate Mortgage Investment Conduit” refers to a type of mortgage-related security in
which interest and principal payments from mortgages or mortgage-related securities are structured into
separately traded securities.
“REO” refers to real-estate owned by Fannie Mae because we have foreclosed on the property or obtained the
property through a deed in lieu of foreclosure.
“Senior preferred stock” refers to the one million shares of Variable Liquidation Preference Senior Preferred
Stock, Series 2008-2 that we issued to the U.S. Department of the Treasury on September 8, 2008.
“Senior preferred stock purchase agreement” refers to the senior preferred stock purchase agreement, dated as
of September 7, 2008 and as amended and restated as of September 26, 2008, between Fannie Mae and the
U.S. Department of the Treasury. On February 18, 2009, Treasury announced that is amending specified
provisions of the agreement, as described in “Part I—Item 1—Business—Executive Summary.”
“Severity rate” or “loss severity rate” refers to percentage of the unpaid principal balance of a loan that we
believe will not be recovered in the event of default.
“Single-class Fannie Mae MBS” refers to Fannie Mae MBS where the investors receive principal and interest
payments in proportion to their percentage ownership of the MBS issue.
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