Fannie Mae 2010 Annual Report Download - page 323

(“ARM”)) and subprime private-label securities for other-than-temporary impairment by discounting the
projected cash flows from econometric models to estimate the portion of loss in value attributable to credit. To
reduce costs associated with maintaining our internal model and decrease the operational risk, in the fourth
quarter of 2010, we ceased to use our internally developed model and began using a third-party model to
project cash flow estimates on our private-label securities. Separate components of the third-party model
project regional home prices, unemployment and interest rates. The model combines these factors with
available current information regarding attributes of loans in pools backing the private-label mortgage-related
securities to project prepayment speeds, conditional default rates, loss severities and delinquency rates. It
incorporates detailed information on security-level subordination levels and cash flow priority of payments to
project security level cash flows. We model securities assuming the benefit of those external financial
guarantees that are deemed creditworthy. We have recorded other-than-temporary impairments for the year
ended December 31, 2010 based on this analysis, with amounts related to credit loss recognized in our
consolidated statements of operations. For securities we determined were not other-than-temporarily impaired,
we concluded that either the bond had no projected credit loss or if we projected a loss, that the present value
of expected cash flows was greater than the security’s cost basis.
The following table displays the modeled attributes, including default rates and severities, which are used to
determine whether our senior interests in certain non-agency mortgage-related securities will experience a cash
shortfall. Assumption of voluntary prepayment rates are also an input to the present value of expected losses.
Subprime Option ARM Fixed Rate Variable Rate Hybrid Rate
Alt-A
As of December 31, 2010
(Dollars in millions)
Vintage Year
2004 & Prior:
Unpaid principal balance . . . . . . . . . . . . . . . . $ 2,216 $ 521 $3,862 $ 544 $2,521
Weighted average collateral default
(1)
. . . . . . . 40.5% 38.8% 11.2% 34.9% 19.5%
Weighted average collateral severities
(2)
. . . . . . 61.9% 46.6% 43.4% 45.0% 38.0%
Weighted average voluntary prepayment
rates
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0% 6.1% 8.5% 8.3% 10.6%
Average credit enhancement
(4)
. . . . . . . . . . . . 51.1% 19.5% 11.9% 21.6% 10.7%
2005
Unpaid principal balance . . . . . . . . . . . . . . . . $ 206 $1,401 $1,297 $ 585 $2,578
Weighted average collateral default
(1)
. . . . . . . 76.2% 59.8% 41.9% 57.9% 42.0%
Weighted average collateral severities
(2)
. . . . . . 73.9% 55.5% 59.3% 60.2% 52.6%
Weighted average voluntary prepayment
rates
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6% 3.9% 6.4% 7.0% 7.9%
Average credit enhancement
(4)
. . . . . . . . . . . . 63.5% 30.0% 2.4% 19.5% 7.1%
2006
Unpaid principal balance . . . . . . . . . . . . . . . . $12,565 $1,379 $ 626 $1,793 $1,965
Weighted average collateral default
(1)
. . . . . . . 78.9% 73.8% 45.9% 61.8% 34.4%
Weighted average collateral severities
(2)
. . . . . . 74.1% 62.0% 64.1% 64.6% 49.5%
Weighted average voluntary prepayment
rates
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7% 3.2% 5.8% 6.2% 9.3%
Average credit enhancement
(4)
. . . . . . . . . . . . 20.4% 22.8% 3.2% 2.2% 2.1%
F-65
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)