Fannie Mae 2009 Annual Report Download - page 79

Table 2 presents a comparison, by balance sheet category, of the amount of financial assets carried in our
consolidated balance sheets at fair value on a recurring basis and classified as Level 3 as of December 31,
2009 and 2008. The availability of observable market inputs to measure fair value varies based on changes in
market conditions, such as liquidity. As a result, we expect the amount of financial instruments carried at fair
value on a recurring basis and classified as Level 3 to vary each period.
Table 2: Level 3 Recurring Financial Assets at Fair Value
Balance Sheet Category 2009 2008
As of December 31,
(Dollars in millions)
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,861 $ 12,765
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,154 47,837
Derivatives assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 362
Guaranty assets and buy-ups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,577 1,083
Level 3 recurring assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,742 $ 62,047
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $869,141 $912,404
Total recurring assets measured at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $353,718 $359,246
Level 3 recurring assets as a percentage of total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5% 7%
Level 3 recurring assets as a percentage of total recurring assets measured at fair value. . . . . . . . . 13% 17%
Total recurring assets measured at fair value as a percentage of total assets . . . . . . . . . . . . . . . . . 41% 39%
The decrease in assets classified as Level 3 during 2009 was principally the result of a net transfer of
approximately $9.0 billion in assets to Level 2 from Level 3. The transferred assets consisted primarily of
Fannie Mae guaranteed mortgage-related securities, which includes securities backed by jumbo conforming
loans, and private-label mortgage-related securities backed by non-fixed rate Alt-A loans. During 2009, price
transparency improved as a result of increased market activity and we noted some convergence in prices
obtained from third-party vendors. As a result, we determined that our fair value estimates for these securities
did not rely on significant unobservable inputs.
Assets measured at fair value on a non-recurring basis and classified as Level 3, which are not presented in
the table above, include held-for-sale loans that are measured at the lower of cost or fair value and that were
written down to fair value during the period. Held-for-sale loans that were reported at fair value, rather than
amortized cost, totaled $3.6 billion during the year ended December 31, 2009 and $1.3 billion during the year
ended December 31, 2008. In addition, certain other assets carried at amortized cost that have been written
down to fair value during the period due to impairment are classified as non-recurring. The fair value of these
Level 3 non-recurring financial assets, which consisted of held-for-investment loans, acquired property,
guaranty assets, master servicing assets, and partnership investments, totaled $17.6 billion during the year
ended December 31, 2009 and $22.4 billion during the year ended December 31, 2008.
Our LIHTC investments trade in a market with limited observable transactions. There is decreased market
demand for LIHTC investments because there are fewer tax benefits derived from these investments by
traditional investors, as these investors are currently projecting much lower levels of future profits than in
previous years. This decreased demand has reduced the value of these investments. We determine the fair
value of our LIHTC investments using internal models that estimate the present value of the expected future
tax benefits (tax credits and tax deductions for net operating losses) expected to be generated from the
properties underlying these investments. Our estimates are based on assumptions that other market participants
would use in valuing these investments. The key assumptions used in our models, which require significant
management judgment, include discount rates and projections related to the amount and timing of tax benefits.
We compare our model results to independent third-party valuations to validate the reasonableness of our
assumptions and valuation results. We also compare our model results to the limited number of observed
market transactions and make adjustments to reflect differences between the risk profile of the observed
market transactions and our LIHTC investments. For a discussion of other-than-temporary impairments
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