Fannie Mae 2009 Annual Report Download - page 371

the collectability of timely interest and ultimate principal payments on the guaranteed securities if the cash flows
generated by the underlying collateral are not sufficient to fully support these payments.
If a financial guarantor fails to meet its obligations to us with respect to the securities for which we have
obtained financial guarantees, it could reduce the fair value of our mortgage-related securities and result in
financial losses to us, which could have a material adverse effect on our earnings, liquidity, financial condition
and net worth. Nine financial guarantors provided bond insurance coverage to us as of December 31, 2009, of
which only one of the financial guarantors had an investment grade rating. We considered the financial
strength of our financial guarantors in assessing our securities for other-than-temporary impairment.
Derivatives Counterparties. For information on credit risk associated with our derivatives transactions refer
to “Note 10, Derivative Instruments and Hedging Activities.”
Parties Associated with Our Off-Balance Sheet Transactions. We enter into financial instrument transactions
that create off-balance sheet credit risk in the normal course of our business. These transactions are designed
to meet the financial needs of our customers, and manage our credit, market or liquidity risks.
We have entered into guarantees for which we have not recognized a guaranty obligation in our consolidated
balance sheets relating to periods prior to 2003, the effective date of accounting pronouncements related to
guaranty accounting. Our maximum potential exposure under these guaranties is $135.7 billion and
$172.2 billion as of December 31, 2009 and 2008, respectively. If we were required to make payments under
these guaranties, we would pursue recovery through our right to the collateral backing the underlying loans,
available credit enhancements and recourse with third parties that provide a maximum coverage of
$13.6 billion and $17.6 billion as of December 31, 2009 and 2008, respectively.
The following table displays the contractual amount of off-balance sheet financial instruments as of December 31,
2009 and 2008. Contractual or notional amounts do not necessarily represent the credit risk of the positions.
2009 2008
As of December 31,
(Dollars in millions)
Fannie Mae MBS and other guarantees
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135,697 $172,188
Loan purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 4,951
(1)
Represents maximum exposure on guarantees not reflected in our consolidated balance sheets.
19. Fair Value
We use fair value measurements for the initial recording of certain assets and liabilities, periodic
remeasurement of certain assets and liabilities on a recurring or non-recurring basis, and the recording of
assets and liabilities for which we have elected the fair value option.
Fair Value Measurement
Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and
expands disclosures around fair value measurements. We adopted the fair value measurement guidance on
January 1, 2008. This guidance applies whenever other accounting pronouncements require or permit assets or
liabilities to be measured at fair value. The guidance establishes a three-level fair value hierarchy that
prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives
the highest priority, Level 1, to measurements based on unadjusted quoted prices in active markets for
identical assets or liabilities and lowest priority, Level 3, to measurements based on unobservable inputs and
classifies assets and liabilities with limited observable inputs or observable inputs for similar assets or
liabilities as Level 2 measurements.
F-113
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)