Fannie Mae 2009 Annual Report Download - page 314

We analyze CMBS using a third party loan level model that incorporates such factors as debt service coverage,
loan-to-value ratio, geographic location, property type, and amortization type to determine the level of
projected losses. We then compare the projected loss to the amount of subordination in the bonds that we hold
to determine whether we expect any loss on those bonds. As of December 31, 2009, we have no other-than-
temporary impairments in our holdings of CMBS as we project the remaining subordination to be more than
sufficient to absorb the level of projected losses. We believe the decline in fair value for these securities
results from the lower level of liquidity in the marketplace and the resultant higher investor required returns,
and not from an expectation of credit loss. While downgrades have occurred in this sector in recent months,
all of our holdings remain investment grade.
For mortgage revenue bonds, where we cannot utilize credit-sensitized cash flows, we perform a qualitative
and quantitative analysis to assess whether a bond is other-than-temporarily impaired. If a bond is deemed to
be other-than-temporarily impaired, the projected contractual cash flows of the security are reduced by a
default loss amount based on the security’s lowest credit rating as provided by the major nationally recognized
statistical rating organizations. The lower the security’s credit rating, the larger the amount by which the
contractual cash flows are reduced. These adjusted cash flows are then used in the present value calculation to
determine the credit portion of the other-than-temporary impairment. While we have recognized other-than-
temporary impairment on these bonds, we expect to realize no credit losses on the vast majority of our
holdings due to the inherent financial strength of the issuers, or in some cases, the amount of external credit
support from mortgage collateral or financial guarantees. The fair values of these bonds are likewise impacted
by the low levels of market liquidity and high required returns, which has led to unrealized losses in the
portfolio that we deem to be temporary.
Other mortgage-related securities include manufactured housing securities, which have been other-than-
temporarily impaired in 2009. For manufactured housing securities, we utilize models that incorporate recent
historical performance information and other relevant public data to run cash flows and assess for other-than-
temporary impairment. Given the significant seasoning of these securities we expect that the future
performance will be in line with how the securities are currently performing. We model all of these securities
assuming no benefit of any external financial guarantees and then separately assess whether we can rely on the
guaranty. If we determined that securities were not other-than-temporarily impaired, we concluded that either
the bond did not project any credit loss or, if a loss was projected, that present value of expected cash flows
was greater than the security’s cost basis.
The following table displays the modeled attributes for securities that were other-than-temporarily impaired as
of December 31, 2009.
Weighted
Average Range
Weighted
Average Range
Weighted
Average Range
Prepayment Rates Default Rates Loss Severity
Alt-A
2004 and prior . . . . . . . . . . . . . . . . . . . 7.4 4.5 - 10.2 55.4 34.2 - 72.1 41.2 29.7 - 55.5
2005. . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 2.4 - 8.9 59.8 15.6 - 86.0 57.1 40.2 - 69.0
2006. . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 2.3 - 8.2 68.2 18.4 - 87.0 59.7 42.6 - 74.7
Subprime
2005. . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 1.9 - 2.2 80.3 78.4 - 81.9 76.7 75.5 - 78.2
2006. . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 0.5 - 2.6 80.2 69.3 - 91.6 76.9 73.7 - 85.1
2007. . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.3 - 3.0 73.7 71.5 - 80.4 72.3 66.5 - 77.2
Manufactured Housing 2004 and prior . . . . 2.7 1.7 - 4.0 36.1 23.7 - 54.1 82.0 75.6 - 106.9
F-56
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)