Fannie Mae 2009 Annual Report Download - page 192

“Interest rate swap” refers to a transaction between two parties in which each agrees to exchange payments
tied to different interest rates or indices for a specified period of time, generally based on a notional principal
amount. An interest rate swap is a type of derivative.
“LIHTC partnerships” refer to low-income housing tax credit limited partnerships or limited liability
companies.
“Loans,” “mortgage loans” and “mortgages” refer to both whole loans and loan participations, secured by
residential real estate, cooperative shares or by manufactured housing units.
“Mortgage assets,” when referring to our assets, refers to both mortgage loans and mortgage-related securities
we hold in our investment portfolio.
“Mortgage credit book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans
held in our mortgage portfolio; (2) Fannie Mae MBS held in our mortgage portfolio; (3) non-Fannie Mae
mortgage-related securities held in our investment portfolio; (4) Fannie Mae MBS held by third parties; and
(5) other credit enhancements that we provide on mortgage assets.
“Multifamily mortgage loan” refers to a mortgage loan secured by a property containing five or more
residential dwelling units.
“Notional amount” refers to the hypothetical dollar amount in an interest rate swap transaction on which
exchanged payments are based. The notional amount in an interest rate swap transaction generally is not paid
or received by either party to the transaction and is typically significantly greater than the potential market or
credit loss that could result from such transaction.
“Option-adjusted spread” or “OAS” refers to the incremental expected return between a security, loan or
derivative contract and a benchmark yield curve (typically, U.S. Treasury securities, LIBOR and swaps, or
agency debt securities). The OAS provides explicit consideration of the variability in the security’s cash flows
across multiple interest rate scenarios resulting from any options embedded in the security, such as
prepayment options. For example, the OAS of a mortgage that can be prepaid by the homeowner without
penalty is typically lower than a nominal yield spread to the same benchmark because the OAS reflects the
exercise of the prepayment option by the homeowner, which lowers the expected return of the mortgage
investor. In other words, OAS for mortgage loans is a risk-adjusted spread after consideration of the
prepayment risk in mortgage loans. The market convention for mortgages is typically to quote their OAS to
swaps. The OAS of our debt and derivative instruments are also frequently quoted to swaps. The OAS of our
net mortgage assets is therefore the combination of these two spreads to swaps and is the option-adjusted
spread between our assets and our funding and hedging instruments.
“Outstanding Fannie Mae MBS” refers to the total unpaid principal balance of Fannie Mae MBS that is held
by third-party investors and held in our mortgage portfolio.
“Pay-fixed swap” refers to an agreement under which we pay a predetermined fixed rate of interest based
upon a set notional principal amount and receive a variable interest payment based upon a stated index, with
the index resetting at regular intervals over a specified period of time. These contracts generally increase in
value as interest rates rise and decrease in value as interest rates fall.
“Private-label securities” refers to mortgage-related securities issued by entities other than agency issuers
Fannie Mae, Freddie Mac or Ginnie Mae.
“Receive-fixed swap” refers to an agreement under which we make a variable interest payment based upon a
stated index, with the index resetting at regular intervals, and receive a predetermined fixed rate of interest
based upon a set notional amount and over a specified period of time. These contracts generally increase in
value as interest rates fall and decrease in value as interest rates rise.
“REMIC” or “Real Estate Mortgage Investment Conduit” refers to a type of mortgage-related security in
which interest and principal payments from mortgages or mortgage-related securities are structured into
separately traded securities.
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