Fannie Mae 2009 Annual Report Download - page 30

For more information about lender swaps and how they differ from portfolio securitizations, please see
“Mortgage Securitizations—Lender Swaps and Portfolio Securitizations.” For a description of single-
class Fannie Mae MBS, please see “Mortgage Securitizations—Single-Class and Multi-Class Fannie Mae
MBS.”
Other Customer Services
Our Capital Markets group provides our lender customers and their affiliates with services that include
offering to purchase a wide variety of mortgage assets, including non-standard mortgage loan products;
segregating customer portfolios to obtain optimal pricing for their mortgage loans; and assisting customers
with hedging their mortgage business. These activities provide a significant flow of assets for our mortgage
portfolio, help to create a broader market for our customers and enhance liquidity in the secondary mortgage
market.
Mortgage Asset Portfolio
Although our Capital Markets group’s business activities are increasingly focused on short-term financing and
investing, revenue from our Capital Markets group is derived primarily from the difference, or spread, between
the interest we earn on our mortgage and non-mortgage investments and the interest we incur on the debt we
issue to fund these assets. Accordingly, our Capital Markets revenues are primarily derived from our asset
portfolio, which is capped under our senior preferred stock purchase agreement with Treasury at a limit that
decreases each year. See “Conservatorship and Treasury Agreements—Treasury Agreements—Covenants
under Treasury Agreements” for more information on the decreasing limits on the amount of mortgage assets
we are permitted to hold. Our Capital Markets group also earns fee and other income on various transactions
we provide as a service to our customers, which we describe below. Our Capital Markets group accounted for
approximately 58% of our net revenues in 2009, compared with 43% in 2008 and 33% in 2007.
We describe the interest rate risk management process employed by our Capital Markets group, including its
key strategies in managing interest rate risk and key metrics used in measuring and evaluating our interest rate
risk in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk.”
Investment and Financing Activities
Our Capital Markets group seeks to increase the liquidity of the mortgage market by maintaining a presence
as an active investor in mortgage loans and mortgage-related securities and, in particular, supports the liquidity
and value of Fannie Mae MBS in a variety of market conditions.
Our Capital Markets group funds its investments primarily through the issuance of a variety of debt securities
in a wide range of maturities in the domestic and international capital markets. The most active investors in
our debt securities include commercial bank portfolios and trust departments, investment fund managers,
insurance companies, pension funds, state and local governments, and central banks. The approved dealers for
underwriting various types of Fannie Mae debt securities may differ by funding program. See “MD&A—
Liquidity and Capital Management—Liquidity Management” for information on the composition of our
outstanding debt and a discussion of our liquidity.
Our Capital Markets group’s investment and financing activities are affected by market conditions and the
target rates of return that we expect to earn on the equity capital underlying our investments. When we
estimate that we can earn returns in excess of our targets, we generally will be an active purchaser of
mortgage loans and mortgage-related securities. When potential returns are below our investment targets, we
generally will be a less active purchaser, and may be a net seller, of mortgage assets. The Federal Reserve
agency MBS purchase program, which we describe in “Residential Mortgage Market—Housing and Mortgage
Market and Economic Conditions,” had a significant impact on our investment activity during 2009. Our
investment activities also are subject to capital requirements, contractual limitations, and other regulatory
constraints, to the extent described below under “Conservatorship and Treasury Agreements” and “Our Charter
and Regulation of Our Activities.”
25