Fannie Mae 2009 Annual Report Download - page 80

recognized on our LIHTC investments, see “Off-Balance Sheet Arrangements and Variable Interest Entities—
Partnership Investment Interests—LIHTC Partnership Interests.”
Financial liabilities measured at fair value on a recurring basis and classified as Level 3 consisted of long-term
debt with a fair value of $601 million as of December 31, 2009 and $2.9 billion as of December 31, 2008, and
derivatives liabilities with a fair value of $27 million as of December 31, 2009 and $52 million as of
December 31, 2008.
Fair Value Control Processes
We have control processes that are designed to ensure that our fair value measurements are appropriate and
reliable, that they are based on observable inputs wherever possible and that our valuation approaches are
consistently applied and the assumptions used are reasonable. Our control processes consist of a framework
that provides for a segregation of duties and oversight of our fair value methodologies and valuations and
validation procedures.
Our Valuation Oversight Committee, which includes senior representation from business areas, our Enterprise
Risk Office and our Finance Division, is responsible for reviewing the valuation methodologies used in our
fair value measurements and any significant valuation adjustments, judgments, controls and results. Actual
valuations are performed by personnel independent of our business units. Our Price Verification Group, which
is an independent control group separate from the group responsible for obtaining prices, is responsible for
performing monthly independent price verification. The Price Verification Group also performs independent
reviews of the assumptions used in determining the fair value of products we hold that have material
estimation risk because observable market-based inputs do not exist.
Our validation procedures are intended to ensure that the individual prices we receive are consistent with our
observations of the marketplace and prices that are provided to us by pricing services or other dealers. We
verify selected prices using a variety of methods, including comparing the prices to secondary pricing services,
corroborating the prices by reference to other independent market data, such as non-binding broker or dealer
quotations, relevant benchmark indices, and prices of similar instruments, checking prices for reasonableness
based on variations from prices provided in previous periods, comparing prices to internally calculated
expected prices and conducting relative value comparisons based on specific characteristics of securities. In
addition, we compare our derivatives valuations to counterparty valuations as part of the collateral exchange
process. We have formal discussions with the pricing services as part of our due diligence process in order to
maintain a current understanding of the models and related assumptions and inputs that these vendors use in
developing prices. The prices provided to us by independent pricing services reflect the existence of credit
enhancements, including monoline insurance coverage, and the current lack of liquidity in the marketplace. If
we determine that a price provided to us is outside established parameters, we will further examine the price,
including having follow-up discussions with the pricing service or dealer. If we conclude that a price is not
valid, we will adjust the price for various factors, such as liquidity, bid-ask spreads and credit considerations.
These adjustments are generally based on available market evidence. In the absence of such evidence,
management’s best estimate is used. All of these processes are executed before we use the prices in preparing
our financial statements.
We continually refine our valuation methodologies as markets and products develop and the pricing for certain
products becomes more or less transparent. While we believe our valuation methods are appropriate and
consistent with those of other market participants, using different methodologies or assumptions to determine
fair value could result in a materially different estimate of the fair value of some of our financial instruments.
The dislocation of historical pricing relationships between certain financial instruments persisted during 2009
due to the housing and financial market crisis, which continued in 2009. These conditions, which have
resulted in greater market volatility, wider credit spreads and a lack of price transparency, have made the
measurement of fair value more difficult and complex for some financial instruments, particularly for financial
instruments for which there is no active market, such as our guaranty contracts and loans purchased with
evidence of credit deterioration.
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