Fannie Mae 2009 Annual Report Download - page 93

Trust Management Income
Trust management income consists of the fees we earn as master servicer, issuer and trustee for Fannie Mae
MBS. We derive these fees from the interest earned on cash flows between the date of remittance of mortgage
and other payments to us by servicers and the date of distribution of these payments to MBS
certificateholders. The decreases in trust management income in 2009 as compared with 2008 and in 2008 as
compared with 2007 were attributable to significantly lower short-term interest rates.
Fee and Other Income
Fee and other income consist primarily of transaction fees, technology fees and multifamily fees. These fees
are largely driven by our business volume. The decreases in fee and other income in 2009 as compared with
2008 and in 2008 as compared with 2007 were primarily attributable to lower multifamily fees due to fewer
multifamily prepayments.
Losses on Certain Guaranty Contracts
Beginning in 2008 with our adoption of the accounting standard relating to fair value measurements, we no
longer recognize losses or record deferred profit in our consolidated financial statements at inception of our
guaranty contracts for new MBS issuances since the estimated fair value of the guaranty obligation at
inception equals the estimated fair value of the total compensation received.
The losses in 2007 reflected the increase in the estimated market risk premium that a market participant would
require to assume our guaranty obligations due to the decline in home prices and deterioration in credit
conditions. We will continue to accrete these losses into income over time as part of the accretion of the
related guaranty obligation.
Investment Gains (Losses), Net
Investment gains and losses, net includes: lower of cost or fair value adjustments on held-for-sale loans; gains
and losses recognized on the securitization of loans or securities from our portfolio; gains and losses
recognized from the sale of available-for-sale securities; and other investment gains and losses. Investment
gains and losses may fluctuate significantly from period to period depending upon our portfolio investment
and securitization activities. The shift to gains in 2009 compared with losses in 2008 was primarily
attributable to: (1) an increase in gains on portfolio securitizations as we increased our MBS issuance volumes
and sales related to whole loan conduit activity; and (2) an increase in realized gains on sales of
available-for-sale securities as tightening of investment spreads on agency MBS led to higher sale prices.
These gains were partially offset by an increase in lower of cost or fair value adjustments on loans, primarily
driven by a decline in the credit quality of these loans and an increase in interest rates. The increase in
investment losses in 2008 compared with 2007 was primarily attributable to an increase in lower of cost or
fair value adjustments on loans and lower gains from sales of available-for-sale securities, partially offset by a
shift from losses to gains on portfolio securitizations.
Net Other-Than-Temporary Impairment
Net other-than-temporary impairment increased in 2009 compared with 2008 primarily due to an increase in
the expected losses on our private-label securities. Net other-than-temporary impairment recorded in 2009 was
impacted by the adoption of a new accounting standard effective on April 1, 2009. Under the new standard,
we recognize only the credit component of other-than-temporary impairment in our consolidated statements of
operations. Approximately 57% of the impairment recorded in 2009 was recorded in the first quarter prior to
the change in accounting standards. The 2009 impairment reflects current market conditions and was primarily
driven by an increase in loss projections on our Alt-A and subprime securities due to model refinements,
changes in interest rates and net projected home prices. Model refinements were made to the collateral default
and severity models for Alt-A and subprime securities to more closely align with the observed deterioration of
the loans underlying the securities. See “Note 5, Investments in Securities” for additional information
regarding the composition and 2009 attribution on the other-than-temporary impairment recognized on our
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