Fannie Mae 2014 Annual Report Download - page 305

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-90
Appraisal and Broker Price Opinion Walk Forwards (“Walk Forwards”): We use these techniques to adjust appraisal and
broker price opinion valuations for changing market conditions by applying a walk forward factor based on local price
movements since the time the third-party value was obtained. The majority of third-party values are updated by comparing
the difference in our internal home price model from the month of the original appraisal/broker price opinion to the current
period and by applying the resulting percentage change to the original value. If a price is not determinable through our
internal home price model, we use our zip code level home price index to update the valuations.
Internal Model: We use an internal model to estimate fair value for distressed properties. The valuation methodology and
inputs used are described under “Mortgage Loans Held for Investment.”
Multifamily acquired property valuation techniques
Appraisals: We use this method to estimate property values for distressed properties. The valuation methodology and inputs
used are described under “Mortgage Loans Held for Investment.”
Broker Price Opinions: We use this method to estimate property values for distressed properties. The valuation methodology
and inputs used are described under “Mortgage Loans Held for Investment.”
Derivatives Assets and Liabilities (collectively “Derivatives”)
Derivatives are recorded in our consolidated balance sheets at fair value on a recurring basis. The valuation process for the
majority of our risk management derivatives uses observable market data provided by third-party sources, resulting in Level
2 classification of the valuation hierarchy.
A description of our derivatives valuation techniques is as follows:
Internal Model: We use internal models to value interest rate swaps which are valued by referencing yield curves derived
from observable interest rates and spreads to project and discount swap cash flows to present value. Option-based derivatives
use an internal model that projects the probability of various levels of interest rates by referencing swaption volatilities
provided by market makers/dealers. The projected cash flows of the underlying swaps of these option-based derivatives are
discounted to present value using yield curves derived from observable interest rates and spreads.
Dealer Mark: Certain highly complex structured swaps primarily use a single dealer mark due to lack of transparency in the
market and may be modeled using observable interest rates and volatility levels as well as significant unobservable
assumptions, resulting in Level 3 classification of the valuation hierarchy. Mortgage commitment derivatives that use
observable market data, quotes and actual transaction price levels adjusted for market movement are typically classified as
Level 2 of the valuation hierarchy. To the extent mortgage commitment derivatives include adjustments for market movement
that cannot be corroborated by observable market data, we classify them as Level 3 of the valuation hierarchy.
Debt
The majority of debt of Fannie Mae is recorded in our consolidated balance sheets at the principal amount outstanding, net of
cost basis adjustments. We elected the fair value option for certain structured Fannie Mae debt instruments and debt of
consolidated trusts with embedded derivatives, which are recorded in our consolidated balance sheets at fair value on a
recurring basis.
We classify debt instruments that have quoted market prices in active markets for similar liabilities when traded as assets as
Level 2 of the valuation hierarchy. For all valuation techniques used for debts instruments where there is limited activity or
less transparency around these inputs to the valuation, these debt instruments are classified as Level 3 of the valuation
hierarchy.
A description of our debt valuation techniques is as follows:
Consensus: We estimate the fair value of debt of Fannie Mae and our debt of consolidated trusts using an average of two or
more vendor prices or dealer marks that represents estimated fair value for similar liabilities when traded as assets.
Single Vendor: We estimate the fair value of debt of Fannie Mae and our debt of consolidated trusts using a single vendor
price that represents estimated fair value for these liabilities when traded as assets.
Discounted Cash Flow: In the absence of prices provided by third-party pricing services supported by observable market
data, we estimate the fair value of a portion of the debt of Fannie Mae and our debt of consolidated trusts using a discounted
cash flow technique that uses spreads based on market assumptions where available.