Fannie Mae 2013 Annual Report Download - page 83

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We recognized fair value gains on our mortgage commitments in 2013 primarily due to gains on commitments to sell
mortgage-related securities primarily driven by interest rates increasing during the commitment period. We recognized fair
value losses on our mortgage commitments in 2012 and 2011 primarily due to losses on commitments to sell mortgage-
related securities as a result of interest rates decreasing during the commitment period. Mortgage commitment derivative fair
value losses in 2012 were greater than the losses in 2011, primarily as a result of (1) a higher volume of net commitments to
sell mortgage-related securities in 2012 and (2) a further increase in prices driven by the Federal Reserve’s announcement
that it would increase its MBS purchases from financial institutions beginning in September 2012.
Trading Securities Gains, Net
The estimated fair value of our trading securities may fluctuate substantially from period-to-period primarily due to changes
in interest rates and credit spreads. Gains from trading securities in 2013 were primarily driven by higher prices on Alt-A and
subprime private-label securities due to narrowing of credit spreads on these securities, as well as improvements in the credit
outlook of certain financial guarantors of these securities. These gains were partially offset by losses on commercial
mortgage-backed securities (“CMBS”) and agency securities due to lower prices resulting from higher interest rates.
Gains from our trading securities in 2012 were primarily driven by the narrowing of credit spreads on CMBS. Gains from our
trading securities in 2011 were primarily driven by higher prices on our CMBS as a result of significant narrowing of the U.S.
Treasury yield curve and swap yield curve spreads offset by widening credit spreads.
We provide additional information on our trading and available-for-sale securities in “Consolidated Balance Sheet Analysis—
Investments in Mortgage-Related Securities.” We 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.”
Administrative Expenses
Administrative expenses increased in 2013 compared with 2012 driven by costs related to the execution of FHFA’s 2013
conservatorship scorecard objectives, as well as costs associated with FHFA’s private-label mortgage-related securities
litigation. These costs more than offset reductions in our ongoing operating costs.
Administrative expenses were flat in 2012 compared with 2011, as continued efforts to reduce ongoing operating costs were
offset by additional costs related to the execution of FHFA’s strategic goals. We expect that our administrative expenses may
increase in 2014 compared with 2013 as we continue to execute on our strategic goals.
Credit-Related (Income) Expense
We refer to our (benefit) provision for loan losses and guaranty losses collectively as our “(benefit) provision for credit
losses.” Credit-related (income) expense consists of our (benefit) provision for credit losses and foreclosed property (income)
expense.
(Benefit) Provision for Credit Losses
Our total loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including
concessions we granted borrowers upon modification of their loans, as of each balance sheet date. We establish our loss
reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be reflected
over time in our charge-offs. When we reduce our loss reserves, we recognize a benefit for credit losses. When we determine
that a loan is uncollectible, typically upon foreclosure, we recognize a charge-off against our loss reserves. We record
recoveries of previously charged-off amounts as a reduction to charge-offs.
Table 12 displays the components of our total loss reserves and our total fair value losses previously recognized on loans
purchased out of unconsolidated MBS trusts reflected in our consolidated balance sheets. Because these fair value losses
lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of business and consequently require
lower total loss reserves. For these reasons, we consider these fair value losses as an “effective reserve,” apart from our total
loss reserves, to the extent that we expect to realize these amounts as credit losses on the acquired loans in the future. The fair
value losses shown in Table 12 represent credit losses we expect to realize in the future or amounts that will eventually be
recovered, either through net interest income for loans that cure or through foreclosed property income for loans where the
sale of the collateral exceeds our recorded investment in the loan. We exclude these fair value losses from our credit loss
calculation as described in “Credit Loss Performance Metrics.”