Fannie Mae 2012 Annual Report Download - page 167

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“Mortgage credit book of business” refers to the sum of the unpaid principal balance of: (1) mortgage loans held in our
mortgage portfolio; (2) Fannie Mae MBS held in our mortgage portfolio; (3) non-Fannie Mae mortgage-related securities
held in our investment portfolio; (4) Fannie Mae MBS held by third parties; and (5) other credit enhancements that we
provide on mortgage assets.
“Multifamily mortgage loan” refers to a mortgage loan secured by a property containing five or more residential dwelling
units.
“Notional amount” refers to the hypothetical dollar amount in an interest rate swap transaction on which exchanged
payments are based. The notional amount in an interest rate swap transaction generally is not paid or received by either party
to the transaction and is typically significantly greater than the potential market or credit loss that could result from such
transaction.
“Option-adjusted spread” or “OAS” refers to the incremental expected return between a security, loan or derivative contract
and a benchmark yield curve (typically, U.S. Treasury securities, LIBOR and swaps, or agency debt securities). The OAS
provides explicit consideration of the variability in the security’s cash flows across multiple interest rate scenarios resulting
from any options embedded in the security, such as prepayment options. For example, the OAS of a mortgage that can be
prepaid by the homeowner without penalty is typically lower than a nominal yield spread to the same benchmark because the
OAS reflects the exercise of the prepayment option by the homeowner, which lowers the expected return of the mortgage
investor. In other words, OAS for mortgage loans is a risk-adjusted spread after consideration of the prepayment risk in
mortgage loans. The market convention for mortgages is typically to quote their OAS to swaps. The OAS of our debt and
derivative instruments are also frequently quoted to swaps. The OAS of our net mortgage assets is therefore the combination
of these two spreads to swaps and is the option-adjusted spread between our assets and our funding and hedging instruments.
“Outstanding Fannie Mae MBS” refers to the total unpaid principal balance of Fannie Mae MBS that is held by third-party
investors and held in our mortgage portfolio.
“Pay-fixed swap” refers to an agreement under which we pay a predetermined fixed rate of interest based upon a set notional
principal amount and receive a variable interest payment based upon a stated index, with the index resetting at regular
intervals over a specified period of time. These contracts generally increase in value as interest rates rise and decrease in
value as interest rates fall.
“Private-label securities” refers to mortgage-related securities issued by entities other than agency issuers Fannie Mae,
Freddie Mac or Ginnie Mae.
“Receive-fixed swap” refers to an agreement under which we make a variable interest payment based upon a stated index,
with the index resetting at regular intervals, and receive a predetermined fixed rate of interest based upon a set notional
amount and over a specified period of time. These contracts generally increase in value as interest rates fall and decrease in
value as interest rates rise.
“REMIC” or “Real Estate Mortgage Investment Conduit” refers to a type of mortgage-related security in which interest and
principal payments from mortgages or mortgage-related securities are structured into separately traded securities.
“REO” refers to real-estate owned by Fannie Mae because we have foreclosed on the property or obtained the property
through a deed-in-lieu of foreclosure.
“Severity rate” or “loss severity rate” refers to a measure of the amounts that will not be recovered in the event a loan
defaults. Severity rates generally reflect charge-offs as a percentage of unpaid principal balance. Additional items may be
taken into account in calculating severity rates. For example, the numerator may reflect items such as foreclosed property
expenses, taxes and insurance, and expected recoveries from pool insurance, while the denominator may reflect items such as
purchased interest, basis, and selling costs.
“Single-class Fannie Mae MBS” refers to Fannie Mae MBS where the investors receive principal and interest payments in
proportion to their percentage ownership of the MBS issue.
“Single-family mortgage loan” refers to a mortgage loan secured by a property containing four or fewer residential dwelling
units.
“Small balance loans” refers to multifamily loans with an original unpaid balance of up to $3 million nationwide or up to $5
million in high cost markets.
“Subprime mortgage loan” generally refers to a mortgage loan made to a borrower with a weaker credit profile than that of a
prime borrower. As a result of the weaker credit profile, subprime borrowers have a higher likelihood of default than prime
borrowers. Subprime mortgage loans were typically originated by lenders specializing in this type of business or by subprime
divisions of large lenders, using processes unique to subprime loans. We classify certain loans as subprime so that we can
discuss our exposure to subprime loans in this Form 10-K and elsewhere. However, there is no universally accepted