Fannie Mae 2008 Annual Report Download - page 335

from our guaranty has been recorded in our consolidated balance sheets in “Guaranty obligations,” as it relates
to our obligation to stand ready to perform on our guaranty, and “Reserve for guaranty losses,” as it relates to
incurred losses.
Since our guaranty asset and MSA or MSL do not trade in active financial markets, we estimate their fair
value by using internally developed models and market inputs for securities with similar characteristics. The
key assumptions are discount rate, or yield, derived using a projected interest rate path, or paths, consistent
with the observed yield curve at the valuation date (forward rates), and the prepayment speed based on our
proprietary models that are consistent with the projected interest rate path, or paths, and expressed as a
12-month constant prepayment rate (“CPR”). Because the level of interest rates as of December 31, 2008 was
extremely low, we determined that a change in methodology was necessary in calculating our key
assumptions. As such, we estimated the discount rate and CPRs as the average across a distribution of interest
rate paths versus along a single interest rate path (the forward curve) in 2007.
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
stand-alone arm’s length transaction at the measurement date. The key assumptions associated with the fair
value of the guaranty obligations are future home prices and current loan to-value ratios.
Our investments in Fannie Mae single-class MBS, Fannie Mae Megas, REMICs and SMBS are interests in
securities with active markets. We primarily rely on third party prices to estimate the fair value of these
interests. For the purpose of this disclosure, we aggregate similar securities in order to measure the key
assumptions associated with the fair values of our interests, which are approximated by solving for the
estimated discount rate, or yield, using a projected interest rate path consistent with the observed yield curve
at the valuation date (forward rates), and the prepayment speed based on either our proprietary models that are
consistent with the projected interest rate path, the pricing speed for newly issued REMICs, or lagging
12-month actual prepayment speed. All prepayment speeds are expressed as a 12-month CPR.
To determine the fair value of our securities created via portfolio securitizations, we utilize several
independent pricing services. The prices that we receive from pricing services are based on information they
obtain on current trading activity, but may be based partly on models where trading activity is not observed.
The fair value estimates that we obtain from pricing services are evaluated for reasonableness through multiple
means, including our internal price verification organization that uses alternate forms of pricing information to
validate the prices. Given that the prices for the retained securities are not based on internal models, but rather
are based on observable market inputs obtained by our pricing services, we do not believe that it is meaningful
to provide sensitivities to the fair value of the retained securities to changes in assumptions.
F-57
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)