Fannie Mae 2009 Annual Report Download - page 283

In 2008, we also changed the way we measure the fair value of our existing guaranty obligations subsequent
to inception to be consistent with our new approach for measuring guaranty obligations at initial recognition.
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
standalone arm’s-length transaction at the measurement date. To measure this fair value, we continue to use
our models and inputs that were used prior to our adoption of the revised fair value measurement standards
and, in 2008, calibrated those models to our current market pricing. Beginning in the first quarter of 2009, we
concluded that the credit characteristics of the pools of loans upon which we were issuing new guarantees
increasingly did not reflect the credit characteristics of our existing guaranteed pools; thus, current market
prices for our new guarantees were not a relevant input to our estimate of the hypothetical transaction price
for our existing guaranty obligations. Therefore, our estimate of the fair value of our existing guaranty
obligations is based solely upon our model results, without further adjustment.
Other than the measurement of fair value of our guaranty obligations as described above, the accounting for
our guarantees in our consolidated financial statements is unchanged. Accordingly, the guaranty obligation
amounts recorded in our consolidated balance sheets attributable to guarantees issued prior to 2008 as well as
those issued on or after 2008 are amortized in accordance with our established accounting policy.
Guaranties Issued in Connection with Lender Swap Transactions
The majority of our guaranty obligations arise from lender swap transactions. In a lender swap transaction, we
receive a guaranty fee for our unconditional guaranty to the Fannie Mae MBS trust. We negotiate a contractual
guaranty fee with the lender and collect the fee on a monthly basis based on the contractual rate multiplied by
the unpaid principal balance of loans underlying a Fannie Mae MBS issuance. The guaranty fee we receive
varies depending on factors such as the risk profile of the securitized loans and the level of credit risk we
assume. In lieu of charging a higher guaranty fee for loans with greater credit risk, we may require that the
lender pay an upfront fee to compensate us for assuming additional credit risk. We refer to this payment as a
risk-based pricing adjustment. Risk-based pricing adjustments do not affect the pass-through coupon remitted
to Fannie Mae MBS certificateholders. In addition, we may charge a lower guaranty fee if the lender assumes
a portion of the credit risk through recourse or other risk-sharing arrangements. We refer to these
arrangements as credit enhancements. We also adjust the monthly guaranty fee so that the pass-through
coupon rates on Fannie Mae MBS are in more easily tradable increments of a whole or half percent by
making an upfront payment to the lender (“buy-up”) or receiving an upfront payment from the lender (“buy-
down”).
At inception of a guaranty to an unconsolidated entity, we recognize on our consolidated balance sheets 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 as a component of “Guaranty obligations.” 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. As described above, for lender swap transactions entered into from
2003 to 2007, if the fair value of the guaranty obligation was less than the present value of the consideration
we expected to receive, including the fair value of the guaranty asset and any upfront assets exchanged, we
deferred the excess as deferred profit, which was recorded as an additional component of “Guaranty
obligations.” If the fair value of the guaranty obligation exceeded the compensation received, we recognized a
loss in “Losses on certain guaranty contracts” in our consolidated statements of operations at inception of the
guaranty fee contract. Beginning in 2008, we consider the fair value of the guaranty obligations to be equal to
the fair value of the total compensation received for providing the guaranty. Therefore, we do not recognize
losses or record deferred profit in our consolidated financial statements at inception of those guaranty
contracts issued after 2007.
F-25
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)