Fannie Mae 2008 Annual Report Download - page 390

Mortgage Loans Held for Sale—Held for sale (“HFS”) loans are reported at the lower of cost or fair value in
our consolidated balance sheets. We determine the fair value of our mortgage loans based on comparisons to
Fannie Mae MBS with similar characteristics. Specifically, we use the observable market value of our Fannie
Mae MBS as a base value, from which we subtract or add the fair value of the associated guaranty asset,
guaranty obligation and master servicing arrangements.
Mortgage Loans Held for Investment—Held for investment (“HFI”) loans are recorded in our consolidated
balance sheets at the principal amount outstanding, net of unamortized premiums and discounts, cost basis
adjustments and an allowance for loan losses. We determine the fair value of our mortgage loans based on
comparisons to Fannie Mae MBS with similar characteristics. Specifically, we use the observable market value
of our Fannie Mae MBS as a base value, from which we subtract or add the fair value of the associated
guaranty asset, guaranty obligation and master servicing arrangements. Certain loans that do not qualify for
MBS securitization are valued using market based data for similar loans or through a model approach that
simulates a loan sale via a synthetic structure.
Advances to Lenders—The carrying value of the majority of our advances to lenders approximates the fair
value of these instruments due to their short-term nature. Advances to lenders for which the carrying value
does not approximate fair value are valued based on comparisons to Fannie Mae MBS with similar
characteristics, and applying the same pricing methodology as used for HFI loans as described above.
Derivatives Assets and Liabilities (collectively, “Derivatives”)—Our risk management derivatives and
mortgage commitment derivatives are recognized in our consolidated balance sheets at fair value, taking into
consideration the effects of any legally enforceable master netting agreements that allow us to settle derivative
asset and liability positions with the same counterparty on a net basis, as well as cash collateral. We use
observable market prices or market prices obtained from third parties for derivatives, when available. For
derivative instruments where market prices are not readily available, we estimate fair value using model-based
interpolation based on direct market inputs. Direct market inputs include prices of instruments with similar
maturities and characteristics, interest rate yield curves and measures of interest rate volatility. Details of these
estimated fair values by type are displayed in “Note 11, Derivative Instruments and Hedging Activities.”
Guaranty Assets and Buy-ups—We estimate the fair value of guaranty assets based on the present value of
expected future cash flows of the underlying mortgage assets using management’s best estimate of certain key
assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with
the risks involved. These cash flows are projected using proprietary prepayment, interest rate and credit risk
models. Because guaranty assets are like an interest-only income stream, the projected cash flows from our
guaranty assets are discounted using one month LIBOR plus the option-adjusted spread (“OAS”) for interest-
only trust securities. The interest-only OAS is calibrated using prices of a representative sample of interest-
only trust securities. We believe the remitted fee income is less liquid than interest-only trust securities and
more like an excess servicing strip. We take a further haircut of the present value for liquidity considerations.
The haircut is based on market quotes from dealers. The fair value of the guaranty assets as presented in the
table above and the recurring fair value measurement table below include the fair value of any associated
buy-ups, which is estimated in the same manner as guaranty assets but are recorded separately as a component
of “Other assets” in our consolidated balance sheets. While the fair value of the guaranty assets reflect all
guaranty arrangements, the carrying value primarily reflects only those arrangements entered into subsequent
to our adoption of FIN 45.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase—The carrying value of our
federal funds purchased and securities sold under agreements to repurchase approximate the fair value of these
instruments due to the short-term nature of these liabilities, exclusive of dollar roll repurchase transactions.
F-112
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)