Fannie Mae 2010 Annual Report Download - page 92

approximately $2.4 trillion. The lower spread on these interest-earning assets and liabilities reduced our net
interest yield for 2010 as compared with 2009.
Net interest income and net interest yield increased during 2009 compared with 2008, driven by lower funding
costs and by growth in the average size of our mortgage portfolio. The significant reduction in the average
cost of our debt was primarily attributable to a decline in borrowing rates as we replaced higher cost debt with
lower cost debt.
During 2008, we increased our portfolio balance as mortgage-to-debt spreads reached historic highs, and
liquidations were reduced due to the disruption of the housing and credit markets. As a result, we began 2009
with a substantially higher balance of interest-earning assets compared with the beginning of 2008. Although
portfolio actions and high liquidation levels reduced our balance of interest-earning assets during the course of
2009, the higher beginning balance resulted in a higher average balance of interest-earning assets for the full
year of 2009 compared with 2008.
The net interest income for our Capital Markets group reflects interest income from the assets we have
purchased and the interest expense from the debt we have issued. See “Business Segment Results” for a
detailed discussion of our Capital Markets group’s net interest income.
Guaranty Fee Income
Guaranty fee income primarily consists of contractual guaranty fees related to unconsolidated Fannie Mae
MBS trusts and other credit enhancement arrangements. Guaranty fee income also includes adjustments for the
amortization of deferred cash and non-cash fees and fair value adjustments related to our guaranty to the
trusts. Beginning January 1, 2010, the vast majority of guaranty fees related to Fannie Mae trusts are reflected
in interest income on a consolidated basis due to our adoption of new accounting standards that require us to
consolidate the substantial majority of our MBS trusts. At adoption of the new accounting standards, our
guaranty-related assets and liabilities pertaining to previously unconsolidated trusts were eliminated; therefore,
we no longer recognize amortization of previously recorded deferred cash and non-cash fees or fair value
adjustments related to our guaranty to these trusts.
Guaranty fee income decreased in 2010 compared with 2009 because, as noted above, we now recognize both
contractual guaranty fees and the amortization of deferred cash fees received after December 31, 2009 through
interest income, thereby reducing guaranty fee income to only those amounts related to unconsolidated trusts
and other credit enhancement arrangements, such as our long-term standby commitments.
The decrease in guaranty fee income in 2009 compared with 2008 resulted primarily from a decrease in the
average effective guaranty fee rate as a sharp decline in interest rates generated an acceleration of deferred
amounts into income during 2008. In addition, the effective guaranty fee rate declined due to a lower average
charged fee on new acquisitions due to a reduction in our acquisition of loans with higher risk characteristics.
This decline was partially offset by higher fair value adjustments on buy-ups and certain guaranty assets
recorded in 2009 and an increase in average outstanding Fannie Mae MBS and other guarantees.
Fee and Other Income
Fee and other income includes transaction fees, technology fees and multifamily fees. Beginning in 2010, fee
and other income also includes trust management income we earn as master servicer, issuer, and trustee for
Fannie Mae MBS relating only to unconsolidated trusts. Upon adoption of the new accounting standards, we
report trust management income earned by consolidated trusts as a component of net interest income in our
consolidated statement of operations. We derive trust management income 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 the
distribution of these payments to MBS certificateholders.
The increase in fee and other income in 2010 compared with 2009 was primarily attributable to an increase in
transaction fees due to a higher volume of structured Fannie Mae MBS created for third parties.
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