Fannie Mae 2008 Annual Report Download - page 303

of the fair value of the guaranty obligation was more or less than the fair value of the total compensation
received, we recognized a loss or recorded deferred profit, respectively, at inception of the guaranty contract.
SFAS No. 157, Fair Value Measurements (“SFAS 157”) amended FIN 45 to permit the use of a transaction
price, as a practical expedient, to measure the fair value of a guaranty obligation upon initial recognition.
Beginning January 1, 2008, as part of the implementation of SFAS 157, we changed our approach to
measuring the fair value of our guaranty obligation. Specifically, we adopted a measurement approach that is
based upon an estimate of the compensation that we would require to issue the same guaranty in a standalone
arm’s-length transaction with an unrelated party. When we initially recognize a guaranty issued in a lender
swap transaction after December 31, 2007, we measure the fair value of the guaranty obligation based on the
fair value of the total compensation we receive, which primarily consists of the guaranty fee, credit
enhancements, buy-downs, risk-based price adjustments and our right to receive interest income during the
float period in excess of the amount required to compensate us for master servicing. Because the fair value of
those guaranty obligations now equals the fair value of the total compensation we receive, we do not
recognize losses or record deferred profit in our consolidated financial statements at inception of those
guaranty contracts issued after December 31, 2007.
We also changed the way we measure the fair value of our existing guaranty obligations to be consistent with
our new approach for measuring guaranty obligations at initial recognition. The fair value of all guaranty
obligations measured subsequent to their initial recognition, is our estimate of a hypothetical transaction price
we would receive if we were to issue our guaranty to an unrelated party in a standalone arm’s-length
transaction at the measurement date. To measure this fair value, we use the models and inputs that we used
prior to our adoption of SFAS 157 and calibrate those models to our current market pricing.
Other than the measurement of fair value of our guaranty obligations as described above, the accounting for
our guarantees in our consolidated financial statements is unchanged with our adoption of SFAS 157.
Accordingly, the guaranty obligation amounts recorded in our consolidated balance sheets attributable to
guarantees issued prior to January 1, 2008 as well as those issued on or after January 1, 2008 are amortized in
accordance with our established accounting policy.
Guaranties Issued in Connection with Lender Swap Transactions
The majority of our guaranty obligations arise from lender swap transactions. In a lender swap transaction, we
receive a guaranty fee for our unconditional guaranty to the Fannie Mae MBS trust. We negotiate a contractual
guaranty fee with the lender and collect the fee on a monthly basis based on the contractual rate multiplied by
the unpaid principal balance of loans underlying a Fannie Mae MBS issuance. The guaranty fee we receive
varies depending on factors such as the risk profile of the securitized loans and the level of credit risk we
assume. In lieu of charging a higher guaranty fee for loans with greater credit risk, we may require that the
lender pay an upfront fee to compensate us for assuming additional credit risk. We refer to this payment as a
risk-based pricing adjustment. Risk-based pricing adjustments do not affect the pass-through coupon remitted
to Fannie Mae MBS certificateholders. In addition, we may charge a lower guaranty fee if the lender assumes
a portion of the credit risk through recourse or other risk-sharing arrangements. We refer to these
arrangements as credit enhancements. We also adjust the monthly guaranty fee 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”).
FIN 45 requires a guarantor, at inception of a guaranty to an unconsolidated entity, to recognize a non-
contingent liability for the fair value of its obligation to stand ready to perform over the term of the guaranty
in the event that specified triggering events or conditions occur. We record this amount on our consolidated
balance sheets as a component of “Guaranty obligations.” We also record a guaranty asset that represents the
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FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)