Fannie Mae 2008 Annual Report Download - page 396

result in fluctuations in the estimated fair values of our master servicing assets and liabilities. If actual
prepayment experience differs from the anticipated rates used in our model, this difference may result in a
material change in the fair value. Our master servicing assets and liabilities are classified within level 3 of the
valuation hierarchy.
Partnership Investments—Our investments in LIHTC partnerships trade in a market with limited observable
transactions. We determine fair value based on internal models designed to estimate the present value of
expected future tax benefits (tax credits and tax deductions for net operating losses) of the underlying
operating properties using management’s assumptions about significant inputs, including discount rates and
projections related to the amount and timing of tax benefits, used by market participants. We compare the
model results to the limited number of observed market transactions and make adjustments to reflect
differences between the risk profiles of the LIHTC investments and that of the observed market transactions.
Our equity investments in LIHTC limited partnerships are classified within the level 3 hierarchy of fair value
measurement.
Short-Term Debt and Long-Term Debt—The majority of our debt instruments are priced using pricing services.
When third-party pricing is not available on non-callable debt, we use a discounted cash flow approach based
on the Fannie Mae yield curve with an adjustment to reflect fair values at the offer side of the market. When
third-party pricing is not available for callable bonds, we use internally-developed models calibrated to market
to price these bonds. Included within short-term debt and long-term debt are structured notes for which we
elected the fair value option under SFAS 159. To estimate the fair value of structured notes, cash flows are
evaluated taking into consideration any derivatives through which we have swapped out of the structured
features of the notes. Where the inputs into the valuation are primarily based upon observable market data, our
debt is classified within level 2 of the valuation hierarchy. Where significant inputs are unobservable or valued
with a quote from a single source, our debt is classified within level 3 of the valuation hierarchy.
Other Liabilities—Represents dollar roll repurchase transactions that reflect prices for similar securities in the
market. Valuations are based on observable market-based inputs, quoted market prices and actual transaction
levels adjusted for market movement and are typically classified as level 2. Adjustments for market movement
that require internal model results that cannot be corroborated by observable market data are classified as
level 3.
Fair Value Option
On January 1, 2008, we adopted SFAS 159. SFAS 159 allows companies the irrevocable option to elect fair
value for the initial and subsequent measurement for certain financial assets and liabilities, and requires that
the difference between the carrying value before election of the fair value option and the fair value of these
instruments be recorded as an adjustment to beginning retained earnings in the period of adoption on a
contract-by-contract basis.
F-118
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)