Fannie Mae 2008 Annual Report Download - page 344

Deferred profit is a component of “Guaranty obligations” in our consolidated balance sheets and is included in
the table above. We recorded deferred profit on guarantees issued or modified on or after the adoption date of
FIN 45 and before the adoption of SFAS 157 on January 1, 2008, if the consideration we expected to receive
for our guaranty exceeded the estimated fair value of the guaranty obligation at issuance.
Upon the adoption of SFAS 157, the initial recognition of the fair value of guaranty obligation recorded
pursuant to FIN 45 equals the fair value of the total compensation received and we do not recognize losses or
record deferred profit at inception of those guaranty contracts issued on or after January 1, 2008. Deferred
profit had a carrying amount of $2.5 billion and $4.3 billion as of December 31, 2008 and 2007, respectively.
We recognized deferred profit amortization of $2.0 billion, $986 million and $1.2 billion of the years ended
December 31, 2008, 2007 and 2006, respectively.
Guaranty Assets
As guarantor at inception of a guaranty to an unconsolidated entity, we recognize a non-contingent liability for
the fair value of our obligation to stand ready to perform over the term of the guaranty in the event that
specified triggering events or conditions occur. We also record a guaranty asset that represents the present
value of cash flows expected to be received as compensation over the life of the guaranty.
The following table displays changes in “Guaranty assets” in our consolidated balance sheets for the years
ended December 31, 2008, 2007 and 2006.
2008 2007 2006
For the Year Ended
December 31,
(Dollars in millions)
Beginning balance, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,666 $ 7,692 $ 6,848
Fair value of expected cash flows at issuance for new guaranteed Fannie Mae
MBS issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,938 4,658 3,186
Net change in fair value of guaranty assets from portfolio securitizations. . . . . (136) 29 45
Impact of amortization on guaranty contracts . . . . . . . . . . . . . . . . . . . . . . . . (2,767) (1,898) (1,476)
Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,270) (425) (629)
Impact of consolidation of MBS trusts
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . (388) (390) (282)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,043 $ 9,666 $ 7,692
(1)
When we consolidate Fannie Mae MBS trusts, we derecognize the guaranty asset and guaranty obligation associated
with the respective trust.
Fannie Mae MBS Included in Investments in Securities
For Fannie Mae MBS included in “Investments in securities” in our consolidated balance sheets, we do not
eliminate or extinguish the guaranty arrangement because it is a contractual arrangement with the
unconsolidated MBS trusts. The fair value of Fannie Mae MBS is determined based on observable market
prices because most Fannie Mae MBS are actively traded. Fannie Mae MBS receive high credit quality ratings
primarily because of our guaranty. Absent our guaranty, Fannie Mae MBS would be subject to the credit risk
on the underlying loans. We continue to recognize a guaranty obligation and a reserve for guaranty losses
associated with these securities because we carry these securities in our consolidated financial statements as
guaranteed Fannie Mae MBS. The fair value of the guaranty obligation, net of deferred profit, associated with
Fannie Mae MBS included in “Investments in securities” approximates the fair value of the credit risk that
exists on these Fannie Mae MBS absent our guaranty. The fair value of the guaranty obligation, net of
F-66
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)