Fannie Mae 2008 Annual Report Download - page 24

Program of the Department of Agriculture, manufactured housing loans, reverse mortgage loans, multifamily
mortgage loans, subordinate lien mortgage loans (for example, loans secured by second liens) and other
mortgage-related securities. Most of these loans are prepayable at the option of the borrower. Our investments
in mortgage-related securities include structured mortgage-related securities such as REMICs. For information
on our mortgage investments, including the composition of our mortgage investment portfolio by product type,
refer to “Part II—Item 7—MD&A—Consolidated Balance Sheet Analysis.”
Investment Activities
Our Capital Markets group seeks to increase the liquidity of the mortgage market by maintaining a presence
as an active investor in mortgage assets and, in particular, supports the liquidity and value of Fannie Mae
MBS in a variety of market conditions.
The Capital Markets group’s purchases and sales of mortgage assets in any given period generally are
determined by the rates of return that we expect to earn on the equity capital underlying our investments.
When we expect to earn returns greater than our other uses of capital, we generally will be an active purchaser
of mortgage loans and mortgage-related securities. When we believe that few opportunities exist to deploy
capital in mortgage investments, we generally will be a less active purchaser, and may be a net seller, of
mortgage loans and mortgage-related securities.
Our investment activities during 2008 have been affected by turmoil in the capital markets. They were also
affected by our applicable capital requirements and other regulatory constraints, as described below under
“Conservatorship, Treasury Agreements, Our Charter and Regulation of Our Activities—Regulation and
Oversight of Our Activities.” Since September 2008, our investment activities have been affected by both the
conservatorship and the limit on our debt under our agreement with Treasury. Our investment activities will
also be affected by the limit on our portfolio as of December 31, 2009 under the senior preferred stock
purchase agreement with Treasury, described below under “Conservatorship, Treasury Agreements, Our
Charter and Regulation of Our Activities—Treasury Agreements—Covenants Under Treasury Agreements,”
which includes a requirement that we reduce our mortgage portfolio by 10% per year beginning in 2010.
Debt Financing Activities
Our Capital Markets group funds its investments primarily through the issuance of debt securities in the
domestic and international capital markets. In 2008, our debt financing activities were affected by weakness in
the capital markets, regulatory constraints and other factors, including government activities in the financial
services sector, as described in “Part II—Item 7—MD&A—Liquidity and Capital Management—Liquidity
Management.”
Securitization Activities
Our Capital Markets group engages in two principal types of securitization activities:
• creating and issuing Fannie Mae MBS from our mortgage portfolio assets, either for sale into the
secondary market or to retain in our portfolio; and
• issuing structured Fannie Mae MBS for customers in exchange for a transaction fee.
Our Capital Markets group creates Fannie Mae MBS using mortgage loans and mortgage-related securities
that we hold in our investment portfolio, referred to as “portfolio securitizations.” We currently securitize a
majority of the single-family mortgage loans we purchase. Our Capital Markets group may sell these Fannie
Mae MBS into the secondary market or may retain the Fannie Mae MBS in our investment portfolio. In
addition, the Capital Markets group issues structured Fannie Mae MBS, which are generally created through
swap transactions, typically with our lender customers or securities dealer customers. In these transactions, the
customer “swaps” a mortgage asset it owns for a structured Fannie Mae MBS we issue. Our Capital Markets
group earns transaction fees for issuing structured Fannie Mae MBS for third parties.
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