Fannie Mae 2009 Annual Report Download - page 96

Mortgage Commitment Derivatives Fair Value Gains (Losses), Net
Commitments to purchase or sell some mortgage-related securities and to purchase single-family mortgage
loans generally are derivatives. For these mortgage commitment derivatives, we include changes in their fair
value in our consolidated statements of operations. When derivative purchase commitments settle, we include
their fair value on the settlement date in the cost basis of the security we purchase. We recorded increased
losses on our mortgage commitments securities in 2009 compared with 2008, driven primarily by increased
losses on commitments to sell, associated in large part with dollar roll transactions, due to an increase in
mortgage-related securities prices during the commitment period. We recorded increased losses on our
mortgage commitments securities in 2008 compared with 2007 due primarily to losses in 2008 on our
securities purchase commitments as mortgage-related securities prices decreased during the commitment
period.
Trading Securities Gains (Losses), Net
Gains on trading securities in 2009 were primarily attributable to the narrowing of spreads on CMBS, agency
MBS and non-mortgage related securities. These gains were partially offset by an increase in interest rates.
The primary driver of our losses on trading securities in 2008 was a significant widening of spreads,
particularly on private-label mortgage-related securities backed by Alt-A and subprime loans and CMBS, as
well as losses on non-mortgage securities in our cash and other investments portfolio. The losses on trading
securities in 2007 were primarily attributable to widening of credit spreads.
We provide additional information on our trading and available-for-sale securities in “Consolidated Balance
Sheet Analysis—Trading and Available-for-Sale Investment Securities” and disclose the sensitivity of changes
in the fair value of our trading securities to changes in interest rates in “Risk Management—Market Risk
Management, Including Interest Rate Risk Management—Measurement of Interest Rate Risk.”
Hedged Mortgage Assets Gains (Losses), Net
We implemented hedge accounting during the second quarter of 2008 and discontinued hedge accounting in
the fourth quarter of 2008. We did not have any derivatives designated as hedges during 2007 or 2009.
Our hedge accounting relationships during 2008 consisted of pay-fixed interest rate swaps designated as fair
value hedges of changes in the fair value, attributable to changes in the LIBOR benchmark interest rate, of
specified mortgage assets. For these relationships, we included changes in the fair value of hedged mortgage
assets attributable to changes in the benchmark interest rate in our assessment of hedge effectiveness. These
fair value accounting hedges resulted in gains on the hedged mortgage assets of $2.2 billion for 2008, which
were offset by losses of $2.2 billion on the pay-fixed swaps designated as hedging instruments. The losses on
these pay-fixed swaps are included as a component of derivatives fair value losses, net. We also recorded as a
component of derivatives fair value losses $94 million of ineffectiveness, or the portion of the change in the
fair value of our derivatives that was not effective in offsetting the change in the fair value of the designated
hedged mortgage assets.
Losses from Partnership Investments
We are a limited liability investor in LIHTC and non-LIHTC investments formed for the purpose of providing
equity funding for affordable multifamily rental properties. We generally receive tax benefits (tax credits and
tax deductions for net operating losses) on our LIHTC investments that we have historically used to reduce
our income tax expense. Given our current tax position, it is unlikely that we will be able to use the tax
benefits that we expect to receive in the future from these LIHTC investments.
Prior to September 30, 2009, we entered into a nonbinding letter of intent to transfer equity interests in our
LIHTC investments to third party investors at a price above carrying value. This transaction was subject to the
Treasury’s approval under the terms of our senior preferred stock purchase agreement. In November of 2009,
Treasury notified FHFA and us that it did not consent to the proposed transaction. Treasury stated the
proposed sale would result in a loss of aggregate tax revenues that would be greater than the savings to the
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