e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2004
Commission File No.: 0-50231
Federal National Mortgage
Association
(Exact name of registrant as
specified in its charter)
Fannie Mae
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Federally chartered
corporation
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52-0883107
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3900 Wisconsin Avenue,
NW Washington, DC
(Address of principal
executive offices)
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20016
(Zip
Code)
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Registrants telephone number, including area code:
(202) 752-7000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, without par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant computed by reference to the
price at which the common stock was last sold on June 30,
2006 (the last business day of the registrants most
recently completed second fiscal quarter) was approximately
$46,790 million.
As of October 31, 2006, there were 975,052,687 shares
of common stock of the registrant outstanding.
MD&A
TABLE REFERENCE
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Table
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Description
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Page
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Selected Financial
Data
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62
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Cumulative Impact
of Restatement
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74
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Balance Sheet
Impact of Restatement as of December 31, 2003
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87
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Balance Sheet
Impact of Restatement as of December 31, 2002
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89
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Balance Sheet
Impact of Restatement as of December 31, 2001
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90
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Stockholders
Equity Impact of Restatement as of December 31,
2001
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91
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Income Statement
Impact of Restatement for the Year Ended December 31,
2003
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92
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Income Statement
Impact of Restatement for the Year Ended December 31,
2002
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93
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Impact of
Restatement on Statements of Cash Flows for the Years Ended
December 31, 2003 and 2002
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94
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Regulatory Capital
Impact of Restatement as of December 31, 2003 and
2002
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95
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Risk Management
Derivative Fair Value Sensitivity Analysis
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97
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Amortization of
Cost Basis Adjustments
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98
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Condensed
Consolidated Results of Operations
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101
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Analysis of Net
Interest Income and Yield
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103
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Rate/Volume
Analysis of Net Interest Income
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104
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Analysis of
Guaranty Fee Income and Average Effective Guaranty Fee
Rate
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106
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Investment Losses,
Net
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107
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Changes in Risk
Management Derivative Assets (Liabilities) at Fair Value,
Net
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111
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Derivatives Fair
Value Gains (Losses), Net
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113
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Notional and Fair
Value of Derivatives
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114
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Business Segment
Results Summary
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119
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Mortgage Portfolio
Activity
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123
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Mortgage Portfolio
Composition
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125
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Amortized Cost,
Maturity and Average Yield of Investments in
Securities
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126
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Non-GAAP
Supplemental Consolidated Fair Value Balance Sheets
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128
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Selected Market
Information
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130
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Composition of
Mortgage Credit Book of Business
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136
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Risk
Characteristics of Conventional Single-Family Mortgage Credit
Book
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140
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Risk
Characteristics of Conventional Single-Family Mortgage Business
Volumes
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142
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Statistics on
Conventional Single-Family Problem Loan Workouts
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148
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Serious Delinquency
Rates
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150
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Nonperforming
Single-Family and Multifamily Loans
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151
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Single-Family and
Multifamily Credit Loss Performance
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151
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Single-Family
Credit Loss Sensitivity
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152
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Single-Family
Foreclosed Property Activity
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153
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Allowance for Loan
Losses and Reserve for Guaranty Losses
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154
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Credit Loss
Exposure of Derivative Instruments
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158
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iii
PART I
EXPLANATORY
NOTE ABOUT THIS REPORT
This annual report is our first periodic report covering periods
after June 30, 2004. Because of the delay in our periodic
reporting and the changes that have occurred in our business
since our last periodic filing, where appropriate, the
information contained in this report reflects current
information about our business.
This report contains our consolidated financial statements and
related notes for the year ended December 31, 2004, as well
as a restatement of our previously issued consolidated financial
statements and related notes for the years ended
December 31, 2003 and 2002, and for the quarters ended
June 30, 2004 and March 31, 2004. All restatement
adjustments relating to periods prior to January 1, 2002
have been presented as adjustments to retained earnings as of
December 31, 2001, which is available in
Item 6Selected Financial Data. In light
of the substantial time, effort and expense incurred since
December 2004 to complete the restatement of our consolidated
financial statements for 2003 and 2002, we have determined that
extensive additional efforts would be required to restate all
2001 and 2000 financial data. In particular, significant
complexities of accounting standards, turnover of relevant
personnel, and limitations of systems and data all limit our
ability to reconstruct additional financial information for 2001
and 2000.
OVERVIEW
Fannie Maes activities enhance the liquidity and stability
of the mortgage market. These activities include providing funds
to mortgage lenders through our purchases of mortgage assets,
and issuing and guaranteeing mortgage-related securities that
facilitate the flow of additional funds into the mortgage
market. We also make other investments that increase the supply
of affordable rental housing. Our activities contribute to
making housing in the United States more affordable and more
available to low-, moderate- and middle-income Americans.
We are a government-sponsored enterprise (GSE)
chartered by the U.S. Congress under the name Federal
National Mortgage Association and are aligned with
national policies to support expanded access to housing and
increased opportunities for homeownership. We are subject to
government oversight and regulation. Our regulators include the
Office of Federal Housing Enterprise Oversight
(OFHEO), the Department of Housing and Urban
Development (HUD), the Securities and Exchange
Commission (SEC) and the Department of the Treasury.
While we are a Congressionally-chartered enterprise, the
U.S. government does not guarantee, directly or indirectly,
our securities or other obligations. We are a stockholder-owned
corporation, and our business is self-sustaining and funded
exclusively with private capital. Our common stock is listed on
the New York Stock Exchange and traded under the symbol
FNM. Our debt securities are actively traded in the
over-the-counter
market.
FINANCIAL
RESTATEMENT, REGULATORY REVIEWS AND OTHER SIGNIFICANT RECENT
EVENTS
We have undertaken comprehensive reviews of our accounting
policies and procedures, financial reporting, internal controls,
corporate governance and the structure of our management team
and Board of Directors. We commenced these reviews in 2004
following our Board of Directors receipt of an interim
report from OFHEO on its findings in a special examination.
Since then, we have made extensive organizational and
operational changes, improved our internal controls, and been
subject to additional reviews and investigations. The following
are summary descriptions of these events.
OFHEO Special Examination and Interim
Report. In July 2003, OFHEO notified us that it
intended to conduct a special examination of our accounting
policies and internal controls, as well as other areas of
inquiry. OFHEO began its special examination in November 2003
and delivered an interim report of its findings to our Board of
Directors in September 2004. In this interim report, and as
further outlined in its May 2006 final report described below,
OFHEO identified areas within our accounting that it determined
did not
1
conform to U.S. generally accepted accounting principles
(GAAP) and specified weaknesses in our internal
controls, compensation practices and corporate governance. We
entered into agreements with OFHEO in September 2004 and March
2005 in which we agreed to take specified actions with respect
to our accounting practices, capital levels and activities,
organization and staffing, corporate governance, internal
controls, compensation practices and other matters. See also
OFHEO Final Report and Settlement below.
Special Review Committee and Paul Weiss Investigation and
Report. After receiving OFHEOs interim
report in September 2004, our Board of Directors established a
Special Review Committee of independent directors to review
OFHEOs findings and oversee an independent investigation
of issues raised in the report. The Special Review Committee
engaged former Senator Warren B. Rudman and the law firm of
Paul, Weiss, Rifkind, Wharton & Garrison LLP
(Paul Weiss) to conduct the investigation and to
prepare a detailed report of its findings and conclusions. Paul
Weiss obtained independent professional accounting assistance
and, in February 2006, reported its findings that our accounting
practices in many areas were not consistent with GAAP, and
aspects of our accounting were designed to show stable earnings
growth and achieve forecasted earnings. Paul Weiss also
concluded that the accounting systems we previously utilized
were inadequate.
SEC Review of Our Accounting
Practices. Following the receipt of OFHEOs
interim report, we requested that the SECs Office of the
Chief Accountant review our accounting practices with respect to
two areas identified in OFHEOs interim
findings hedge accounting and the amortization of
purchase premiums and discounts on securities and loans, as well
as other deferred charges to determine whether our
practices complied with the applicable GAAP requirements. In
December 2004, the SECs Office of the Chief Accountant
advised us that, from 2001 to mid-2004, our accounting practices
with respect to these two areas did not comply in material
respects with GAAP requirements. Accordingly, the Office of the
Chief Accountant advised us to (1) restate our financial
statements filed with the SEC to eliminate the use of hedge
accounting and (2) evaluate our accounting for the
amortization of premiums and discounts, and restate our
financial statements filed with the SEC if the amounts required
for correction were material. The SECs Office of the Chief
Accountant also advised us to reevaluate the GAAP and non-GAAP
information that we previously provided to investors,
particularly in view of the decision that hedge accounting was
not appropriate.
Accounting-Related Changes and Financial
Restatement. After receiving OFHEOs interim
findings and the SECs determination, the Audit Committee
of our Board of Directors concluded in December 2004 that our
previously filed interim and audited consolidated financial
statements should not be relied upon since they were prepared
applying accounting practices that did not comply with GAAP and,
consequently, we would restate our consolidated financial
statements. As part of the restatement, we have undertaken a
comprehensive review of, and made numerous corrections to, our
accounting policies and procedures as well as the information
systems used to produce our accounting records and financial
reports. The consolidated financial statements for the years
ended December 31, 2003 and 2002 included in this Annual
Report on
Form 10-K
include restatement adjustments that we have categorized into
the following seven areas: our accounting for debt and
derivatives; our accounting for commitments; our accounting for
investments in securities; our accounting for MBS trust
consolidation and sale accounting; our accounting for financial
guaranties and master servicing; our accounting for amortization
of cost basis adjustments; and other adjustments.
The overall impact of our restatement was a total reduction in
retained earnings of $6.3 billion through June 30,
2004. This amount includes:
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a $7.0 billion net decrease in earnings for periods prior
to January 1, 2002 (as reflected in beginning retained
earnings as of January 1, 2002);
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a $705 million net decrease in earnings for the year ended
December 31, 2002;
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a $176 million net increase in earnings for the year ended
December 31, 2003; and
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a $1.2 billion net increase in earnings for the six months
ended June 30, 2004.
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We previously estimated that errors in accounting for derivative
instruments, including mortgage commitments, would result in a
total of $10.8 billion in after-tax cumulative losses
through December 31, 2004. In a subsequent
12b-25
filing in August 2006, we confirmed our estimate of after-tax
cumulative losses on
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derivatives of $8.4 billion, but disclosed that our
previous estimate of $2.4 billion in after-tax cumulative
losses on mortgage commitments would be significantly less. We
did not provide estimates of the effects on net income or
retained earnings of any other accounting errors, nor did we
provide any estimates of the effects of our restatement on total
assets, total liabilities or stockholders equity. As
reflected in the results we are reporting in this Annual Report
on
Form 10-K,
our retained earnings as of December 31, 2004 includes
after-tax cumulative losses on derivatives of $8.4 billion
and after-tax cumulative net gains on derivative mortgage
commitments of $535 million, net of related amortization,
for a total after-tax cumulative impact as of December 31,
2004 of approximately $7.9 billion related to these two
restatement items. For more information regarding the
restatement, see Item 7Managements
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A)Restatement and
Notes to Consolidated Financial
StatementsNote 1, Restatement of Previously Issued
Financial Statements.
Changes to Management and Board of
Directors. Since the announcement of our decision
to restate in December 2004, we have made extensive changes in
our senior management team and our Board of Directors. In
December 2004, Franklin D. Raines, who had served as Chairman of
the Board and our Chief Executive Officer, left his position.
Our Board of Directors appointed Daniel H. Mudd as our new Chief
Executive Officer. In addition, we have replaced all of our
senior financial and accounting officers who served during the
period in which we issued the consolidated financial statements
that have been restated, including our Chief Financial Officer
and Controller, and we hired a new General Counsel, Chief Risk
Officer, Chief Audit Executive and Chief Compliance Officer. Our
Board of Directors also appointed Stephen B. Ashley as
non-executive Chairman of the Board of Directors and has added
six new directors to the Board since our receipt of OFHEOs
interim report in September 2004. In addition to these
appointments and new additions to our Board of Directors and
management team, we have reorganized our internal operations and
made changes in the committee structure of our Board of
Directors.
Replacement of Independent Auditors. In
December 2004, the Audit Committee of our Board of Directors
dismissed KPMG LLP (KPMG) as our independent
registered public accounting firm. KPMG had served as our
independent auditor since 1969 and had audited the previously
issued financial statements that we have restated. The Audit
Committee engaged Deloitte & Touche LLP
(Deloitte & Touche) to serve as our
independent registered public accounting firm effective January
2005. The consolidated financial statements included in this
Annual Report on
Form 10-K
have been audited by Deloitte & Touche.
Capital Restoration Plan and 30% Capital Surplus
Requirement. In December 2004, OFHEO determined
that we were significantly undercapitalized as of
September 30, 2004. We prepared a capital restoration plan
to comply with OFHEOs directive that we achieve a 30%
surplus over our statutory minimum capital requirement by
September 30, 2005. In accordance with our plan, we met
this capital requirement principally by issuing
$5.0 billion in non-cumulative preferred stock,
significantly decreasing the size of our mortgage investment
portfolio, accumulating retained earnings and reducing our
quarterly common stock dividend from $0.52 per share to
$0.26 per share. Pursuant to our May 2006 consent order
with OFHEO (described below), this requirement to maintain a 30%
capital surplus remains in effect and may be modified or
terminated only at OFHEOs discretion. For additional
information on our capital requirements, see
Item 7MD&ALiquidity and Capital
ManagementCapital ManagementCapital Adequacy
Requirements.
OFHEO Final Report and Settlement. On
May 23, 2006, OFHEO issued a final report on its special
examination. OFHEOs final report concluded that, during
the period covered by the report (1998 to mid-2004), a large
number of our accounting policies and practices did not comply
with GAAP and we had serious problems in our internal controls,
financial reporting and corporate governance. On May 23,
2006, we agreed to OFHEOs issuance of a consent order that
resolved open matters relating to their investigation of us.
Under the consent order, we neither admitted nor denied any
wrongdoing and agreed to make changes and take actions in
specified areas, including our accounting practices, capital
levels and activities, corporate governance, Board of Directors,
internal controls, public disclosures, regulatory reporting,
personnel and compensation practices. In addition, as part of
this consent order and our settlement with the SEC discussed
below, we have paid a $400 million civil penalty, with
$50 million paid to the U.S. Treasury and
$350 million paid to the SEC for distribution to
stockholders pursuant to the Fair Funds for Investors provision
of the Sarbanes-Oxley Act of 2002.
3
Limitation on the Size of Our Mortgage
Portfolio. As part of OFHEOs May 2006
consent order, we agreed not to increase the size of our net
mortgage portfolio above the $727.75 billion amount of net
mortgage assets held as of December 31, 2005, except in
limited circumstances at OFHEOs discretion. Our net
mortgage assets refers to the unpaid principal balance of
our mortgage assets, net of GAAP adjustments. The consent order
permitted us to propose increases in the size of our mortgage
portfolio in a business plan submitted to OFHEO by July 2006. We
may also propose to OFHEO increases in the size of our portfolio
to respond to disruptions in the mortgage markets. The business
plan we submitted to OFHEO in July 2006 did not request an
increase in the current limitation on the size of our mortgage
portfolio during 2006. We anticipate submitting an updated
business plan to OFHEO in early 2007 that may include a request
for modest growth in our mortgage portfolio. Until the Director
of OFHEO has determined that modification or expiration of the
limitation is appropriate, we will remain subject to this
limitation on portfolio growth.
SEC Investigation and Settlement. The SEC
initiated an investigation of our accounting practices and, in
May 2006, without admitting or denying the SECs
allegations, we consented to the entry of a final judgment which
resolved all of the SECs claims against us in its civil
proceeding. The judgment permanently restrains and enjoins us
from future violations of specified provisions of the federal
securities laws. In addition, as discussed under OFHEO
Final Report and Settlement above, as part of our
settlements with OFHEO and the SEC, we have paid a
$400 million civil penalty, with $50 million paid to
the U.S. Treasury and $350 million paid to the SEC for
distribution to stockholders pursuant to the Fair Funds for
Investors provision of the Sarbanes-Oxley Act of 2002.
Investigation by the U.S. Attorneys
Office. In October 2004, the
U.S. Attorneys Office for the District of Columbia
notified us that it was investigating our past accounting
practices. In August 2006, the U.S. Attorneys Office
advised us that it had discontinued its investigation and would
not be filing any charges against us.
Stockholder Lawsuits and Other Litigation. A
number of lawsuits related to our accounting practices prior to
December 2004 are currently pending against us and certain of
our current and former officers and directors. For more
information on these lawsuits, see Item 3Legal
Proceedings.
Impairment Determination. On December 6,
2006, the Audit Committee of our Board of Directors reviewed the
conclusion of our Chief Financial Officer and our Controller
that we are required under GAAP to take the impairment charges
described in this Annual Report on
Form 10-K
for the periods presented in this report and, following
discussion with our independent registered public accounting
firm, the Audit Committee affirmed that material impairments
have occurred. Additional information relating to the impairment
charges, including the amounts of the impairment charges and our
estimates of the amounts of the impairment charges that we
expect to result in future cash expenditures, are discussed in
Item 7MD&ARestatementSummary of
Restatement Adjustments.
RESIDENTIAL
MORTGAGE MARKET OVERVIEW
Residential
Mortgage Debt Outstanding
Our business operates within the U.S. residential mortgage
market. Because we support activity in the U.S. residential
mortgage market, we consider the amount of U.S. residential
mortgage debt outstanding to be the best measure of the size of
our overall market. As of June 30, 2006, the latest date
for which information was available, the amount of
U.S. residential mortgage debt outstanding was estimated by
the Federal Reserve to be approximately $10.5 trillion. Our book
of business, which includes mortgage assets we hold in our
mortgage portfolio and our Fannie Mae mortgage-backed securities
held by third parties, was $2.4 trillion as of June 30,
2006, or nearly 23% of total U.S. residential mortgage debt
outstanding. Fannie Mae mortgage-backed securities
or Fannie Mae MBS generally refers to those
mortgage-related securities that we issue and with respect to
which we guarantee to the related trusts that we will supplement
mortgage loan collections as required to permit timely payment
of principal and interest due on these Fannie Mae MBS. We also
issue some forms of mortgage-related securities for which we do
not provide this guaranty.
The mortgage market has experienced strong long-term growth.
According to Federal Reserve estimates, total
U.S. residential mortgage debt outstanding has increased
each year from 1945 to 2005. Growth in U.S.
4
residential mortgage debt outstanding averaged 10.6% per
year over that period, which is faster than the 6.9% average
growth in the U.S. economy over the same period, as
measured by nominal gross domestic product. Growth in
U.S. residential mortgage debt outstanding was particularly
strong during 2001 through 2005. Total U.S. residential
mortgage debt outstanding grew at an estimated annual rate of
almost 13% in 2002 and 2003, approximately 15% in 2004 and
approximately 14% in 2005.
Homeownership rates, home price appreciation and certain
macroeconomic factors such as interest rates are large drivers
of growth in U.S. residential mortgage debt outstanding.
Growth in U.S. residential mortgage debt outstanding in
recent years has been driven primarily by record home sales,
strong home price appreciation and historically low interest
rates. Also contributing to growth in U.S. residential
mortgage debt outstanding in recent years was the increased use
of mortgage debt financing by homeowners and demographic trends
that contributed to increased household formation and higher
homeownership rates. Growth in U.S. residential mortgage
debt outstanding has moderated in 2006 in response to slower
home price growth, a sharp drop-off in home sales and declining
refinance activity. While total U.S. residential mortgage
debt outstanding as of June 30, 2006 was 12.3% higher than
year-ago levels, the annualized growth rate in the second
quarter of 2006 slowed to 9.6%. We expect that growth in total
U.S. residential mortgage debt outstanding will continue at
a slower pace in 2007, as the housing market continues to cool
and home price gains moderate further or possibly decline
modestly. We believe that the continuation of positive
demographic trends, such as stable household formation rates,
will help mitigate this slowdown in the growth in residential
mortgage debt outstanding, but these trends are unlikely to
completely offset the slowdown in the short- to medium-term.
Over the past 30 years, home values (as measured by the
OFHEO House Price Index) and income (as measured by per capita
personal income) have both risen at around a 6% annualized rate.
During 2001 through 2005, however, this comparability between
home values and income eroded, with income growth averaging
approximately 4.1% and home price appreciation averaging over
9%. Moreover, home price appreciation was especially rapid in
2004 and 2005, with rates of home price appreciation of
approximately 11% in 2004 and 13% in 2005 on a national basis
(with some regional variations). This period of extraordinary
home price appreciation appears to be ending. According to the
OFHEO House Price Index, home prices increased at a 3.45%
annualized rate in the third quarter of 2006, which was the
slowest pace of home price appreciation since 1998. We believe a
modest decline in national home prices in 2007 is possible.
The amount of residential mortgage debt available for us to
purchase or securitize and the mix of available loan products
are affected by several factors, including the volume of
single-family mortgages within the loan limits imposed under our
charter, consumer preferences for different types of mortgages,
and the purchase and securitization activity of other financial
institutions. See Item 1ARisk Factors for
a description of the risks associated with the recent slowdown
in home price appreciation, as well as competitive factors
affecting our business.
Our Role
in the Secondary Mortgage Market
The mortgage market comprises a major portion of the domestic
capital markets and provides a vital source of financing for the
large housing segment of the economy, as well as one of the most
important means for Americans to achieve their homeownership
objectives. The U.S. Congress chartered Fannie Mae and
certain other GSEs to help ensure stability and liquidity within
the secondary mortgage market. Our activities are especially
valuable when economic or financial market conditions constrain
the flow of funds for mortgage lending. In addition, we believe
our activities and those of other GSEs help lower the costs of
borrowing in the mortgage market, which makes housing more
affordable and increases homeownership, especially for low- to
moderate-income families. We believe our activities also
increase the supply of affordable rental housing.
Our principal customers are lenders that operate within the
primary mortgage market by originating mortgage loans for
homebuyers and current homeowners refinancing their existing
mortgage loans. Our customers include mortgage banking
companies, savings and loan associations, savings banks,
commercial banks, credit unions, community banks, and state and
local housing finance agencies. Lenders originating mortgages in
the primary market often sell them in the secondary mortgage
market in the form of loans or in the form of mortgage-related
securities.
5
We operate in the secondary mortgage market where mortgages are
bought and sold. We securitize mortgage loans originated by
lenders in the primary market into Fannie Mae MBS, which can
then be readily bought and sold in the secondary mortgage
market. We also participate in the secondary mortgage market by
purchasing mortgage loans (often referred to as whole
loans) and mortgage-related securities, including Fannie
Mae MBS, for our mortgage portfolio. By delivering loans to us
in exchange for Fannie Mae MBS, lenders gain the advantage of
holding a highly liquid instrument and the flexibility to
determine under what conditions they will hold or sell the MBS.
By selling loans to us, lenders replenish their funds and,
consequently, are able to make additional loans. Pursuant to our
charter, we do not lend money directly to consumers in the
primary mortgage market.
BUSINESS
SEGMENTS
We operate an integrated business that contributes to providing
liquidity to the mortgage market and increasing the availability
and affordability of housing in the United States. We are
organized in three complementary business segments:
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Our Single-Family Credit Guaranty business
(Single-Family) works with our lender customers to
securitize single-family mortgage loans into Fannie Mae MBS and
to facilitate the purchase of single-family mortgage loans for
our mortgage portfolio. Our Single-Family business has
responsibility for managing our credit risk exposure relating to
the single-family Fannie Mae MBS held by third parties (such as
lenders, depositories and global investors), as well as the
single-family mortgage loans and single-family Fannie Mae MBS
held in our mortgage portfolio. Our Single-Family business also
has responsibility for pricing the credit risk of the
single-family mortgage loans we purchase for our mortgage
portfolio. Revenues in the segment are derived primarily from
the guaranty fees the segment receives as compensation for
assuming the credit risk on the mortgage loans underlying
single-family Fannie Mae MBS and on the single-family mortgage
loans held in our portfolio.
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Our Housing and Community Development business
(HCD) helps to expand the supply of affordable and
market-rate rental housing in the United States by working with
our lender customers to securitize multifamily mortgage loans
into Fannie Mae MBS and to facilitate the purchase of
multifamily mortgage loans for our mortgage portfolio. Our HCD
business also helps to expand the supply of affordable housing
by making investments in rental and for-sale housing projects,
including investments in rental housing that qualify for federal
low-income housing tax credits. Our HCD business has
responsibility for managing our credit risk exposure relating to
the multifamily Fannie Mae MBS held by third parties, as well as
the multifamily mortgage loans and multifamily Fannie Mae MBS
held in our mortgage portfolio. Revenues in the segment are
derived from a variety of sources, including the guaranty fees
the segment receives as compensation for assuming the credit
risk on the mortgage loans underlying multifamily Fannie Mae MBS
and on the multifamily mortgage loans held in our portfolio,
transaction fees associated with the multifamily business and
bond credit enhancement fees. In addition, HCDs
investments in housing projects eligible for the low-income
housing tax credit and other investments generate both tax
credits and net operating losses that reduce our federal income
tax liability.
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Our Capital Markets group manages our investment activity
in mortgage loans and mortgage-related securities, and has
responsibility for managing our assets and liabilities and our
liquidity and capital positions. Through the issuance of debt
securities in the capital markets, our Capital Markets group
attracts capital from investors globally to finance housing in
the United States. In addition, our Capital Markets group
increases the liquidity of the mortgage market by maintaining a
constant, reliable presence as an active investor in mortgage
assets. Our Capital Markets group has responsibility for
managing our interest rate risk. Our Capital Markets group
generates income primarily from the difference, or spread,
between the yield on the mortgage assets we own and the cost of
the debt we issue in the global capital markets to fund these
assets.
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6
Although we operate our business through three separate business
segments, there are important interrelationships among the
functions of these three segments. For example:
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Mortgage Acquisition. As noted above, our
Single-Family and HCD business segments work with our lender
customers to securitize mortgage loans into Fannie Mae MBS and
to facilitate the purchase of mortgage loans for our mortgage
portfolio. Accordingly, although the Single-Family and HCD
businesses principally manage the relationships with our lender
customers, our Capital Markets group works closely with
Single-Family and HCD in making mortgage acquisition decisions.
Our Capital Markets group works directly with our lender
customers on structured Fannie Mae MBS transactions.
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Portfolio Credit Risk Management. Our
Single-Family and HCD business segments support our Capital
Markets group by assuming and managing the credit risk of
borrowers defaulting on payments of principal and interest on
the mortgage loans held in our mortgage portfolio or underlying
Fannie Mae MBS held in our mortgage portfolio. Our Single-Family
business also prices the credit risk of the single-family
mortgage loans purchased by our Capital Markets group for our
mortgage portfolio.
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Securitization Activities. All three of our
business segments engage in securitization activities. Our
Single-Family business issues our single-class, single-family
Fannie Mae MBS. These securities are principally created through
lender swap transactions and constitute the substantial majority
of our Fannie Mae MBS issues. The Multifamily Group within our
HCD business segment issues our single-class, multifamily Fannie
Mae MBS that are principally created through lender swap
transactions. Our Capital Markets group creates Fannie Mae MBS
using mortgage loans that we hold in our mortgage portfolio and
also issues structured Fannie Mae MBS.
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Liquidity Support. The Capital Markets group
supports the liquidity of single-family and multifamily Fannie
Mae MBS by holding Fannie Mae MBS in our mortgage portfolio.
This support of our Fannie Mae MBS helps to maintain the
competitiveness of our Single-Family and HCD businesses, and
increases the value of our Fannie Mae MBS.
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Mission Support. All three of our business
segments contribute to meeting the statutory housing goals
established by HUD. We meet our housing goals both by purchasing
mortgage loans for our mortgage portfolio and by securitizing
mortgage loans into Fannie Mae MBS. Both our Single-Family and
HCD businesses securitize mortgages that contribute to our
housing goals. In addition, our Capital Markets group purchases
mortgages for our mortgage portfolio that contribute to our
housing goals.
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7
The table below displays the revenues, net income and total
assets for each of our business segments for each of the three
years in the period ended December 31, 2004. In our
previously reported financial statements, we disclosed only two
business segments, Portfolio Investment (which has since been
renamed Capital Markets) and Credit Guaranty,
because we aggregated the Single-Family Credit Guaranty and the
HCD business segments into a single Credit Guaranty business
segment. As described in Notes to Consolidated Financial
StatementsNote 15, Segment Reporting, we
determined that this previous presentation of our business
segments did not comply with GAAP.
Business
Segment Summary Financial Information
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For the Year Ended December 31,
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2004
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2003
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2002
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|
|
|
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(Restated)
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(Restated)
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(Dollars in millions)
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Revenue(1):
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Single-Family Credit Guaranty
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$
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5,153
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$
|
4,994
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$
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3,957
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Housing and Community Development
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538
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|
398
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305
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Capital Markets
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46,135
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47,293
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49,267
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|
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|
|
|
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Total
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$
|
51,826
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$
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52,685
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$
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53,529
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|
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|
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|
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Net income:
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|
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Single-Family Credit Guaranty
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$
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2,514
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$
|
2,481
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$
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1,958
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Housing and Community Development
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|
|
337
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|
|
|
286
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184
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Capital Markets
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2,116
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|
|
5,314
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|
|
|
1,772
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|
|
|
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|
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|
|
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Total
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$
|
4,967
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$
|
8,081
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|
$
|
3,914
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|
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|
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|
|
|
|
|
|
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As of December 31,
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2004
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2003
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(Restated)
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Total assets:
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Single-Family Credit Guaranty
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$
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11,543
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$
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8,724
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Housing and Community Development
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10,166
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7,853
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Capital Markets
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999,225
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1,005,698
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Total
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$
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1,020,934
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$
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1,022,275
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(1) |
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Includes interest income, guaranty
fee income, and fee and other income.
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We use various management methodologies to allocate certain
balance sheet and income statement line items to the responsible
operating segment. For a description of our allocation
methodologies, see Notes to Consolidated Financial
StatementsNote 15, Segment Reporting. For
further information on the results and assets of our business
segments, see Item 7MD&ABusiness
Segment Results.
Single-Family
Credit Guaranty
Our Single-Family Credit Guaranty business works with our lender
customers to securitize single-family mortgage loans into Fannie
Mae MBS and to facilitate the purchase of single-family mortgage
loans for our mortgage portfolio. Our Single-Family business
manages our relationships with over 1,000 lenders from which we
obtain mortgage loans. These lenders are part of the primary
mortgage market, where mortgage loans are originated and funds
are loaned to borrowers. Our lender customers include mortgage
companies, savings and loan associations, savings banks,
commercial banks, credit unions, and state and local housing
finance agencies.
In our Single-Family business, mortgage lenders generally
deliver mortgage loans to us in exchange for our Fannie Mae MBS.
In a typical MBS transaction, we guaranty to each MBS trust that
we will supplement mortgage loan collections as required to
permit timely payment of principal and interest due on the
related
8
Fannie Mae MBS. In return, we receive a fee for providing that
guaranty. Our guaranty supports the liquidity of Fannie Mae MBS
and makes it easier for lenders to sell these securities. When
lenders receive Fannie Mae MBS in exchange for mortgage loans,
they may hold the Fannie Mae MBS for investment or sell the MBS
in the secondary mortgage market. This option allows lenders to
manage their assets so that they continue to have funds
available to make new mortgage loans. In holding Fannie Mae MBS
created from a pool of whole loans, a lender has securities that
are generally more liquid than whole loans, which provides the
lender with greater financial flexibility. The ability of
lenders to sell Fannie Mae MBS quickly allows them to continue
making mortgage loans even under economic and capital markets
conditions that might otherwise constrain mortgage financing
activities.
The following table provides a breakdown of our single-family
mortgage credit book of business as of December 31, 2004.
Our single-family mortgage credit book of business refers to the
sum of the unpaid principal balance of: (1) the
single-family mortgage loans we hold in our investment
portfolio; (2) the Fannie Mae MBS and non-Fannie Mae
mortgage-related securities backed by single-family mortgage
loans we hold in our investment portfolio; (3) Fannie Mae
MBS backed by single-family mortgage loans that are held by
third parties; and (4) credit enhancements that we provide
on single-family mortgage assets. Our Single-Family business
manages the risk that borrowers will default in the payment of
principal and interest due on the single-family mortgage loans
held in our investment portfolio or underlying Fannie Mae MBS
(whether held in our investment portfolio or held by third
parties).
Single-Family
Mortgage Credit Book of Business
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As of December 31, 2004
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Conventional(1)
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Government(2)
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Total
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(Dollars in millions)
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Mortgage
portfolio:(3)
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Mortgage
loans(4)
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$
|
345,575
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$
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10,112
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$
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355,687
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|
Fannie Mae
MBS(4)
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|
|
341,768
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|
|
1,239
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|
|
|
343,007
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|
Agency mortgage-related
securities(4)(5)
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|
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37,422
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|
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|
4,273
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|
41,695
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Mortgage revenue bonds
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|
6,344
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|
|
|
4,951
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|
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|
11,295
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|
Other mortgage-related
securities(6)
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|
|
108,082
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|
|
|
669
|
|
|
|
108,751
|
|
|
|
|
|
|
|
|
|
|
|
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Total mortgage portfolio
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|
839,191
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|
|
|
21,244
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|
|
|
860,435
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|
Fannie Mae MBS held by third
parties(7)
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|
|
1,319,066
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|
|
|
32,337
|
|
|
|
1,351,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of business
|
|
|
2,158,257
|
|
|
|
53,581
|
|
|
|
2,211,838
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|
Other(8)
|
|
|
346
|
|
|
|
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total single-family mortgage credit
book of business
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|
$
|
2,158,603
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|
|
$
|
53,581
|
|
|
$
|
2,212,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
|
Refers to mortgage loans and
mortgage-related securities that are not guaranteed or insured
by the U.S. government or any of its agencies.
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(2) |
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Refers to mortgage loans and
mortgage-related securities guaranteed or insured by the
U.S. government or one of its agencies.
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(3) |
|
Mortgage portfolio data is reported
based on unpaid principal balance. Our Single-Family business
manages the credit risk relating to the single-family mortgage
loans and Fannie Mae MBS held in our portfolio that are backed
by single-family mortgage loans. Our Capital Markets group
manages the institutional counterparty credit risk relating to
the agency mortgage-related securities, mortgage revenue bonds
and other mortgage-related securities held in our portfolio.
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(4) |
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Mortgage loan data includes
mortgage-related securities that were consolidated and reported
in our consolidated balance sheet as loans.
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(5) |
|
Includes mortgage-related
securities issued by Freddie Mac and Ginnie Mae.
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(6) |
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Includes mortgage-related
securities issued by entities other than Fannie Mae, Freddie Mac
or Ginnie Mae.
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(7) |
|
Includes Fannie Mae MBS held by
third-party investors. The principal balance of resecuritized
Fannie Mae MBS is included only once.
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(8) |
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Includes additional single-family
credit enhancements that we provide not otherwise reflected in
the table.
|
9
To ensure that acceptable loans are received from lenders as
well as to assist lenders in efficiently and accurately
processing loans that they deliver to us, we have established
guidelines for the types of loans and credit risks that we
accept. These guidelines also ensure compliance with the types
of loans that our charter authorizes us to purchase. For a
description of our charter requirements, see Our Charter
and Regulation of Our Activities. We have developed
technology-based solutions that assist our lender customers in
delivering loans to us efficiently and at lower costs. Our
automated underwriting system for single-family mortgage loans,
known as Desktop
Underwriter®,
assists lenders in applying our underwriting guidelines to the
single-family loans they originate. Desktop Underwriter is
designed to help lenders process mortgage applications in a more
efficient and accurate manner and to apply our underwriting
criteria to all prospective borrowers consistently and
objectively. After assessing the creditworthiness of the
borrowers and originating the loans, lenders deliver the whole
loans to us and represent and warrant to us that the loans meet
our guidelines and any agreed-upon variances from the guidelines.
Guaranty
Services
Our Single-Family business provides guaranty services by
assuming the credit risk of the single-family mortgage loans
underlying our guaranteed Fannie Mae MBS held by third parties.
Our Single-Family business also assumes the credit risk of the
single-family mortgage loans held in our investment portfolio,
as well as the single-family mortgage loans underlying Fannie
Mae MBS held in our portfolio.
Our most common type of guaranty transaction is referred to as a
lender swap transaction. Lenders pool their loans
and deliver them to us in exchange for Fannie Mae MBS backed by
these loans. After receiving the loans in a lender swap
transaction, we place them in a trust that is established for
the sole purpose of holding the loans separate and apart from
our assets. We serve as trustee for the trust. Upon creation of
the trust, we deliver to the lender (or its designee) Fannie Mae
MBS that are backed by the pool of mortgage loans in the trust
and that represent a beneficial ownership interest in each of
the loans. We guarantee to each MBS trust that we will
supplement mortgage loan collections as required to permit
timely payment of principal and interest due on the related
Fannie Mae MBS. The mortgage servicers for the underlying
mortgage loans collect the principal and interest payments from
the borrowers. We permit them to retain a portion of the
interest payment as compensation for servicing the mortgage
loans before distributing the principal and remaining interest
payments to us. We retain a portion of the interest payment as
the fee for providing our guaranty, and then, on behalf of the
trust, we make monthly distributions to the Fannie Mae MBS
certificate holders from the principal and interest payments and
other collections on the underlying mortgage loans.
The following diagram illustrates the basic process by which we
create a typical Fannie Mae MBS in the case where a lender
chooses to sell the Fannie Mae MBS to a third party investor.
10
To better serve the needs of our lender customers as well as to
respond to changing market conditions and investor preferences,
we offer different types of Fannie Mae MBS backed by
single-family loans, as described below:
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Single-Family Single-Class Fannie Mae MBS represent
beneficial interests in single-family mortgage loans held in an
MBS trust that were delivered to us typically by a single lender
in exchange for the single-class Fannie Mae MBS. The
certificate holders in a single-class Fannie Mae MBS issue
receive principal and interest payments in proportion to their
percentage ownership of the MBS issue.
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Fannie
Majors®
are a form of single-class Fannie Mae MBS in which
generally two or more lenders deliver mortgage loans to us, and
we then group all of the loans together in one MBS pool. In this
case, the certificate holders receive beneficial interests in
all of the loans in the pool and, as a result, may benefit from
a diverse group of lenders contributing loans to the MBS rather
than having an interest in loans obtained from only one lender,
as well as increased liquidity from a larger-sized pool.
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Single-Family Whole Loan Multi-Class Fannie Mae MBS
are multi-class Fannie Mae MBS that are formed from
single-family whole loans. Our Single-Family business works with
our Capital Markets group in structuring these single-family
whole loan multi-class Fannie Mae MBS. Single-family whole
loan multi-class Fannie Mae MBS divide the cash flows on
the underlying loans and create several classes of securities,
each of which represents a beneficial ownership interest in a
separate portion of the cash flows.
|
Guaranty
Fees
We enter into agreements with our lender customers that
establish the guaranty fee arrangements for that customers
Fannie Mae MBS transactions. Guaranty fees are generally paid to
us on a monthly basis from a portion of the interest payments
made on the underlying mortgage loans in the MBS trust.
The aggregate amount of single-family guaranty fees we receive
in any period depends on the amount of Fannie Mae MBS
outstanding during that period and the applicable guaranty fee
rates. The amount of Fannie Mae MBS outstanding at any time is
primarily determined by the rate at which we issue new Fannie
Mae MBS and by the repayment rate for the loans underlying our
outstanding Fannie Mae MBS. Less significant factors affecting
the amount of Fannie Mae MBS outstanding are the rates of
borrower defaults on the loans and the extent to which lenders
repurchase loans from the pools because the loans do not conform
to the representations made by the lenders.
Since we began issuing our Fannie Mae MBS nearly 25 years
ago, the total amount of our outstanding single-family Fannie
Mae MBS (which includes both Fannie Mae MBS held in our
portfolio and Fannie Mae MBS held by third parties) has grown
steadily. As of December 31, 2004 and 2005, total
outstanding single-family Fannie Mae MBS was $1.8 trillion and
$1.9 trillion, respectively. As of September 30, 2006, our
total outstanding single-family Fannie Mae MBS was $2.0
trillion. Growth in our total outstanding Fannie Mae MBS has
been supported by the value that lenders and other investors
place on Fannie Mae MBS.
Our
Customers
Our Single-Family business is primarily responsible for managing
the relationships with our lender customers that supply mortgage
loans both for securitization into Fannie Mae MBS and for
purchase by our mortgage portfolio. During 2004, over 1,000
lenders delivered mortgage loans to us, either for purchase by
our mortgage portfolio or for securitization into Fannie Mae
MBS. We acquire a significant portion of our single-family
mortgage loans from several large mortgage lenders. During 2004,
our top five lender customers, in the aggregate, accounted for
approximately 53% of our single-family business volumes (which
refers to both single-family mortgage loans that we purchase for
our mortgage portfolio as well as single-family mortgage loans
that we securitize into Fannie Mae MBS). Our top customer,
Countrywide Financial Corporation (through its subsidiaries),
accounted for approximately 26% of our single-family business
volumes in 2004. Due to consolidation within the mortgage
industry, we, as well as our competitors, have been competing
for business from a decreasing number of large mortgage lenders.
See Item 1ARisk Factors for a discussion
of the risks to our business resulting from this customer
concentration.
11
TBA
Market
The TBA, or to be announced, securities market is a
forward, or delayed delivery, market for
30-year and
15-year
fixed-rate single-family mortgage-related securities issued by
us and other agency issuers. Most of our single-class
single-family Fannie Mae MBS are sold by lenders in the TBA
market. Lenders use the TBA market both to purchase and sell
Fannie Mae MBS.
A TBA trade represents a forward contract for the purchase or
sale of single-family mortgage-related securities to be
delivered on a specified future date. In a typical TBA trade,
the specific mortgage pools that will be delivered to fulfill
the forward contract are unknown at the time of the trade.
Parties to a TBA trade agree upon the issuer, coupon, price,
product type, amount of securities and settlement date for
delivery. Settlement for TBA trades is standardized to occur on
one specific day each month. The mortgage-related securities
that ultimately will be delivered, and the loans backing those
mortgage-related securities, frequently have not been created or
originated at the time of the TBA trade, even though a price for
the securities is agreed to at that time. Some trades are
stipulated trades, in which the buyer and seller agree on
specific characteristics of the mortgage loans underlying the
mortgage-related securities to be delivered (such as loan age,
loan size or geographic area of the loan). Some other
transactions are specified trades, in which the buyer and seller
identify the actual mortgage pool to be traded (specifying the
pool or CUSIP number). These specified trades typically involve
existing, seasoned TBA-eligible securities issued in the market.
TBA sales enable originating mortgage lenders to hedge their
interest rate risk and efficiently lock in interest rates for
mortgage loan applicants throughout the loan origination
process. The TBA market lowers transaction costs, increases
liquidity and facilitates efficient settlement of sales and
purchases of mortgage-related securities.
Credit
Risk Management
Our Single-Family business bears the credit risk of borrowers
defaulting on their payments of principal and interest on the
single-family mortgage loans that back our guaranteed Fannie Mae
MBS, including Fannie Mae MBS held in our mortgage portfolio. In
addition, Single-Family bears the credit risk associated with
the single-family whole mortgage loans held in our mortgage
portfolio. The Single-Family business receives a guaranty fee in
return for bearing the credit risk on guaranteed single-family
Fannie Mae MBS, including Fannie Mae MBS held in our mortgage
portfolio. In return for bearing credit risk on the
single-family whole mortgage loans held in our mortgage
portfolio, Single-Family is allocated fees from the Capital
Markets group comparable to the guaranty fees that Single-Family
receives on guaranteed Fannie Mae MBS. As a result, in our
segment reporting, the expenses of the Capital Markets group
include the transfer cost of the guaranty fees and related fees
allocated to Single-Family, and the revenues of Single-Family
include the guaranty fees and related fees received from the
Capital Markets group.
The credit risk associated with a single-family mortgage loan is
largely determined by the creditworthiness of the borrower, the
nature and terms of the loan, the type of property securing the
loan, the ratio of the unpaid principal amount of the loan to
the value of the property that serves as collateral for the loan
(the
loan-to-value
ratio or LTV ratio) and general economic
conditions, including employment levels and the rate of
increases or decreases in home prices. We actively manage, on an
aggregate basis, the extent and nature of the credit risk we
bear, with the objective of ensuring that we are adequately
compensated for the credit risk we take, consistent with our
mission goals. For a description of our methods for managing
mortgage credit risk and a description of the credit
characteristics of our single-family mortgage credit book of
business, refer to Item 7MD&ARisk
ManagementCredit Risk Management. Refer to
Item 1ARisk Factors for a description of
the risks associated with our management of credit risk.
Our Single-Family business is also responsible for managing the
credit risk to our business posed by defaults by most of our
institutional counterparties, such as our mortgage insurance
providers and mortgage servicers. See
Item 7MD&ARisk ManagementCredit
Risk Management for a description of our methods for
managing institutional counterparty credit risk and
Item 1ARisk Factors for a description of
the risks associated with our management of credit risk.
12
Housing
and Community Development
Our Housing and Community Development business engages in a
range of activities primarily related to increasing the supply
of affordable rental and for-sale housing, as well as increasing
liquidity in the debt and equity markets related to such
housing. In 2005, approximately 88% of the multifamily mortgage
loans we purchased or securitized contributed to the housing
goals established by HUD. See Our Charter and Regulation
of Our ActivitiesRegulation and Oversight of Our
ActivitiesHUD RegulationHousing Goals for a
description of our housing goals.
Our HCD business also engages in other activities through our
Community Investment and Community Lending Groups, including
investing in affordable rental properties that qualify for
federal low-income housing tax credits, making equity
investments in other rental and for-sale housing, investing in
acquisition, development and construction financing for
single-family and multifamily housing developments, providing
loans and credit support to public entities such as housing
finance agencies and public housing authorities to support their
affordable housing efforts, and working with
not-for-profit
entities and local banks to support community development
projects in underserved areas.
Multifamily
Group
HCDs Multifamily Group securitizes multifamily mortgage
loans into Fannie Mae MBS and facilitates the purchase of
multifamily mortgage loans for our mortgage portfolio. The
amount of multifamily mortgage loan volume that we purchase for
our portfolio as compared to the amount that we securitize into
Fannie Mae MBS fluctuates from period to period. In recent
years, the percentage of our multifamily business that has
consisted of purchases for our investment portfolio has
increased relative to our securitization activities. Our
multifamily mortgage loans relate to properties with five or
more residential units. The properties may be apartment
communities, cooperative properties or manufactured housing
communities.
Most of the multifamily loans we purchase or securitize are made
by lenders that participate in our Delegated Underwriting and
Servicing, or
DUStm,
program. Under the DUS program, we delegate the underwriting of
loans to qualified lenders. As long as the lender represents and
warrants that eligible loans meet our underwriting guidelines,
we will not require the lender to obtain
loan-by-loan
approval before acquisition by us. DUS lenders generally act as
servicers on the loans they sell to us, and servicing transfers
must be approved by us. We also work with DUS lenders to provide
credit enhancement for taxable and tax-exempt bonds issued by
entities such as housing finance authorities. DUS lenders
generally share the credit risk of loans they sell to us by
absorbing a portion of the loss incurred as a result of a loan
default. DUS lenders receive a higher servicing fee to
compensate them for this risk. We believe that the risk-sharing
feature of the DUS program aligns our interests and the
interests of the lenders in making a sound credit decision at
the time the loan is originated by the lender and acquired by
us, and in servicing the loan throughout its life.
13
The following table provides a breakdown of our multifamily
mortgage credit book of business as of December 31, 2004.
Our multifamily mortgage credit book of business refers to the
sum of the unpaid principal balance of: (1) the multifamily
mortgage loans we hold in our investment portfolio; (2) the
Fannie Mae MBS and non-Fannie Mae mortgage-related securities
backed by multifamily mortgage loans we hold in our investment
portfolio; (3) Fannie Mae MBS backed by multifamily
mortgage loans that are held by third parties; and
(4) credit enhancements that we provide on multifamily
mortgage assets. Our HCD business manages the risk that
borrowers will default in the payment of principal and interest
due on the multifamily mortgage loans held in our investment
portfolio or underlying Fannie Mae MBS (whether held in our
investment portfolio or held by third parties).
Multifamily
Mortgage Credit Book of Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(4)
|
|
$
|
43,396
|
|
|
$
|
1,074
|
|
|
$
|
44,470
|
|
Fannie Mae
MBS(4)
|
|
|
505
|
|
|
|
892
|
|
|
|
1,397
|
|
Agency mortgage-related
securities(4)(5)
|
|
|
|
|
|
|
68
|
|
|
|
68
|
|
Mortgage revenue bonds
|
|
|
8,037
|
|
|
|
2,744
|
|
|
|
10,781
|
|
Other mortgage-related
securities(6)
|
|
|
12
|
|
|
|
46
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
51,950
|
|
|
|
4,824
|
|
|
|
56,774
|
|
Fannie Mae MBS held by third
parties(7)
|
|
|
54,639
|
|
|
|
2,005
|
|
|
|
56,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of business
|
|
|
106,589
|
|
|
|
6,829
|
|
|
|
113,418
|
|
Other(8)
|
|
|
14,111
|
|
|
|
368
|
|
|
|
14,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily mortgage credit
book of business
|
|
$
|
120,700
|
|
|
$
|
7,197
|
|
|
$
|
127,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refers to mortgage loans and
mortgage-related securities that are not guaranteed or insured
by the U.S. government or any of its agencies.
|
|
(2) |
|
Refers to mortgage loans and
mortgage-related securities guaranteed or insured by the
U.S. government or one of its agencies.
|
|
(3) |
|
Mortgage portfolio data is reported
based on unpaid principal balance. Our HCD business manages the
credit risk relating to the multifamily mortgage loans and
Fannie Mae MBS held in our portfolio that are backed by
multifamily mortgage loans. Our Capital Markets group manages
the institutional counterparty credit risk relating to the
agency mortgage-related securities, mortgage revenue bonds and
other mortgage-related securities held in our portfolio.
|
|
(4) |
|
Mortgage loan data includes
mortgage-related securities that were consolidated and reported
in our consolidated balance sheet as loans.
|
|
(5) |
|
Includes mortgage-related
securities issued by Freddie Mac and Ginnie Mae.
|
|
(6) |
|
Includes mortgage-related
securities issued by entities other than Fannie Mae, Freddie Mac
or Ginnie Mae.
|
|
(7) |
|
Includes Fannie Mae MBS held by
investors other than Fannie Mae. The principal balance of
resecuritized Fannie Mae MBS is included only once.
|
|
(8) |
|
Includes additional multifamily
credit enhancements that we provide not otherwise reflected in
the table.
|
Unlike single-family loans, most multifamily loans require that
the borrower pay a prepayment premium if the loan is paid before
the maturity date. Additionally, some multifamily loans are
subject to lock-out periods during which the loan may not be
prepaid. The prepayment premium can take a variety of forms,
including yield maintenance, defeasance or declining percentage.
These prepayment provisions may provide incremental levels of
certainty and reinvestment cash flow protection to investors in
multifamily loans and mortgage-related securities, and may
reduce the likelihood that a borrower will prepay a loan during
a period of declining interest rates.
Our Multifamily Group generally creates multifamily Fannie Mae
MBS in the same manner as our Single-Family business creates
single-family Fannie Mae MBS. Mortgage lenders deliver
multifamily mortgage loans
14
to us in exchange for our Fannie Mae MBS, which thereafter may
be held by the lenders or sold in the capital markets. We
guarantee to each MBS trust that we will supplement mortgage
loan collections as required to permit timely payment of
principal and interest due on the related multifamily Fannie Mae
MBS. In return for our guaranty, we are paid a guaranty fee out
of a portion of the interest on the loans underlying the
multifamily Fannie Mae MBS. For a description of a typical
lender swap transaction by which we create Fannie Mae MBS, see
Single-Family Credit GuarantyGuaranty Services
above.
As with our Single-Family business, our Multifamily Group offers
different types of Fannie Mae MBS as a service to our lenders
and as a response to specific investor preferences. The most
commonly issued multifamily Fannie Mae MBS are described below:
|
|
|
|
|
Multifamily Single-Class Fannie Mae MBS represent
beneficial interests in multifamily mortgage loans held in an
MBS trust and that were delivered to us by a lender in exchange
for the single-class Fannie Mae MBS. The certificate
holders in a single-class Fannie Mae MBS issue receive
principal and interest payments in proportion to their
percentage ownership of the MBS issue.
|
|
|
|
Discount Fannie Mae MBS are short-term securities that
generally have maturities between three and nine months and are
backed by one or more participation certificates representing
interests in multifamily loans. Investors earn a return on their
investment in these securities by purchasing them at a discount
to their principal amounts and receiving the full principal
amount when the securities reach maturity. Discount MBS have no
prepayment risk since prepayments are not allowed prior to
maturity.
|
|
|
|
Multifamily Whole Loan Multi-Class Fannie Mae MBS
are multi-class Fannie Mae MBS that are formed from
multifamily whole loans, Federal Housing Administration
(FHA) participation certificates
and/or
Government National Mortgage Association (Ginnie
Mae) participation certificates. Our HCD business works
with our Capital Markets group in structuring these multifamily
whole loan multi-class Fannie Mae MBS. Multifamily whole
loan multi-class Fannie Mae MBS divide the cash flows on
the underlying loans or participation certificates and create
several classes of securities, each of which represents a
beneficial ownership interest in a separate portion of the cash
flows.
|
The fee and guaranty arrangements between HCD and Capital
Markets are similar to the arrangements between Single-Family
and Capital Markets. Our HCD business bears the credit risk of
borrowers defaulting on their payments of principal and interest
on the multifamily mortgage loans that back our guaranteed
Fannie Mae MBS, including Fannie Mae MBS held in our mortgage
portfolio. In addition, HCD bears the credit risk associated
with the multifamily whole mortgage loans held in our mortgage
portfolio. The HCD business receives a guaranty fee in return
for bearing the credit risk on guaranteed multifamily Fannie Mae
MBS, including Fannie Mae MBS held in our mortgage portfolio. In
return for bearing credit risk on the multifamily whole mortgage
loans held in our mortgage portfolio, our HCD business is
allocated fees from the Capital Markets group comparable to the
guaranty fees that it receives on guaranteed Fannie Mae MBS. As
a result, in our segment reporting, the expenses of the Capital
Markets group include the transfer cost of the guaranty fees and
related fees allocated to our HCD segment, and the revenues of
the HCD segment include the guaranty fees and related fees
received from the Capital Markets group.
HCDs Multifamily Group manages credit risk in a manner
similar to that of Single-Family by managing the quality of the
mortgages we acquire for our portfolio or securitize into Fannie
Mae MBS, diversifying our exposure to credit losses, continually
assessing the level of credit risk that we bear, and actively
managing problem loans and assets to mitigate credit losses.
Additionally, multifamily loans sold to us are often subject to
lender risk-sharing or other lender recourse arrangements. As of
December 31, 2004, credit enhancements existed on
approximately 95% of the multifamily mortgage loans that we
owned or that backed our Fannie Mae MBS. As described above, in
our DUS program, lenders typically bear a portion of the losses
incurred on an individual DUS loan. From time to time, we
acquire multifamily loans pursuant to transactions in which the
lenders do not bear any risk on the loan and we therefore bear
all of the risk. In such cases, we are compensated accordingly
for bearing all of the credit risk on the loan. For a
description of our management of multifamily credit risk, see
Item 7MD&ARisk ManagementCredit
Risk Management. Refer to Item 1ARisk
Factors for a description of the risks associated with our
management of credit risk.
15
Community
Investment Group
HCDs Community Investment Group makes investments that
increase the supply of affordable housing. Most of these
investments are in rental housing that qualifies for federal
low-income housing tax credits, and the remainder are in
conventional rental and primarily entry-level, for-sale housing.
These investments are consistent with our focus on serving
communities in need and making affordable housing more available
and easier to rent or own.
The Community Investment Groups investments have been made
predominantly in low-income housing tax credit
(LIHTC) limited partnerships or limited liability
companies (referred to collectively in this report as
LIHTC partnerships) that directly or indirectly own
an interest in rental housing that the partnerships or companies
have developed or rehabilitated. By renting a specified portion
of the housing units to qualified low-income tenants over a
15-year
period, the partnerships become eligible for the federal
low-income housing tax credit. The low-income housing tax credit
was enacted as part of the Tax Reform Act of 1986 to encourage
investment by private developers and investors in low-income
rental housing. To qualify for this tax credit, among other
requirements, the project owner must irrevocably elect that
either (1) a minimum of 20% of the residential units will
be rent-restricted and occupied by tenants whose income does not
exceed 50% of the area median gross income, or (2) a
minimum of 40% of the residential units will be rent-restricted
and occupied by tenants whose income does not exceed 60% of the
area median gross income. The LIHTC partnerships are generally
organized by fund manager sponsors who seek out investments with
third-party developers who in turn develop or rehabilitate the
properties and subsequently manage them. We invest in these
partnerships as a limited partner with the fund manager acting
as the general partner.
In making investments in these LIHTC partnerships, our Community
Investment Group identifies qualified sponsors and structures
the terms of our investment. Our risk exposure is limited to the
amount of our investment and the possible recapture of the tax
benefits we have received from the partnership. To manage the
risks associated with a partnership, we track compliance with
the LIHTC requirements, as well as the property condition and
financial performance of the underlying investment throughout
the life of the investment. In addition, we evaluate the
strength of the partnerships sponsor through periodic
financial and operating assessments. Furthermore, in some of our
partnership investments, our exposure to loss is further
mitigated by our having a guaranteed economic return from an
investment grade counterparty.
As of December 31, 2004, we had a recorded investment in
these LIHTC partnerships of $6.8 billion. We earn a return
on our investments in LIHTC partnerships through reductions in
our federal income tax liability as a result of the use of the
tax credits for which the partnerships qualify, as well as the
deductibility of the partnerships net operating losses.
The tax benefits associated with these partnerships was the
primary reason for our effective tax rate in 2004 being 17%
versus the federal statutory rate of 35%.
In addition to its investments in LIHTC partnerships, HCDs
Community Investment Group provides equity investments for
rental and for-sale housing. These investments are typically
made through fund managers or directly with developers and
operators that are well-recognized firms within the industry.
Because we invest as a limited partner or as a non-managing
member in a limited liability company, our exposure is generally
limited to the amount of our investment. Most of our investments
in for-sale housing involve the construction of entry-level
homes that are generally eligible for conforming mortgages. As
of December 31, 2004, we had a recorded investment in these
equity investments of $1.3 billion.
Community
Lending Group
HCDs Community Lending Group supports the expansion of
available housing by participating in specialized debt financing
for a variety of customers and by acquiring mortgage loans.
These activities include:
|
|
|
|
|
helping to meet the financing needs of single-family and
multifamily home builders by purchasing participation interests
in acquisition, development and construction
(AD&C) loans from lending institutions;
|
|
|
|
acquiring small multifamily loans from a variety of lending
institutions;
|
16
|
|
|
|
|
providing financing to designated communities to expand the
affordable housing stock in those communities as part of their
community development efforts; and
|
|
|
|
providing financing for single-family and multifamily housing to
housing finance agencies, public housing authorities and
municipalities.
|
In August 2006, OFHEO advised us to suspend new AD&C
business until we have finalized and implemented specified
policies and procedures required to strengthen risk management
practices related to this business. We expect to have finalized
and substantially completed implementation of these policies and
procedures by December 2006. We will not engage in new AD&C
business until OFHEO determines the finalized policies and
procedures are satisfactory.
Capital
Markets
Our Capital Markets group manages our investment activity in
mortgage loans, mortgage-related securities and other liquid
investments. We purchase mortgage loans and mortgage-related
securities from mortgage lenders, securities dealers, investors
and other market participants. We also sell mortgage loans and
mortgage-related securities.
We fund our investments primarily through the proceeds from our
issuance of debt securities in the domestic and international
capital markets. By using the proceeds of this debt funding to
invest in mortgage loans and mortgage-related securities, we
directly and indirectly increase the amount of funding available
to mortgage lenders. By managing the structure of our debt
obligations and through our use of derivatives, we strive to
substantially limit adverse changes in the net fair value of our
investment portfolio that result from interest rate changes.
Our Capital Markets group earns most of its income from the
difference, or spread, between the interest we earn on our
mortgage portfolio and the interest we pay on the debt we issue
to fund this portfolio, which is referred to as our net interest
yield. As described below, our Capital Markets group uses
various debt and derivative instruments to help manage the
interest rate risk inherent in our mortgage portfolio. Changes
in the fair value of the derivative instruments we hold impact
the net income reported by the Capital Markets group business
segment. Our Capital Markets group also earns transaction fees
for issuing structured Fannie Mae MBS, as described below under
Securitization Activities.
Mortgage
Investments
The amount of our net mortgage investments was
$924.8 billion as of December 31, 2004 and
$919.3 billion as of December 31, 2003. As described
in Item 7MD&ABusiness Segment
ResultsCapital Markets Group, the amount of our
mortgage investments has decreased since December 31, 2004.
We estimate that the amount of our net mortgage investments was
$720.3 billion as of September 30, 2006. As described
above under Financial Restatement, Regulatory Reviews and
Other Significant Recent Events, as part of our May 2006
consent order with OFHEO, we agreed not to increase the size of
our net mortgage portfolio above $727.75 billion, except in
limited circumstances at OFHEOs discretion. We will be
subject to this limitation on mortgage investment growth until
the Director of OFHEO has determined that modification or
expiration of the limitation is appropriate in light of
specified factors such as resolution of accounting and internal
control issues. For additional information on our capital
requirements and regulations affecting the amount of our
mortgage investments, see Our Charter and Regulation of
Our Activities and
Item 7MD&ALiquidity and Capital
ManagementCapital Management.
Our mortgage investments include both mortgage-related
securities and mortgage loans. We purchase primarily
conventional single-family fixed-rate or adjustable-rate, first
lien mortgage loans, or mortgage-related securities backed by
such loans. In addition, we purchase loans insured by the FHA,
loans guaranteed by the Department of Veterans Affairs
(VA) or by the Rural Housing Service of the
Department of Agriculture (RHS), manufactured
housing loans, multifamily mortgage loans, subordinate lien
mortgage loans (e.g., loans secured by second liens) and
other mortgage-related securities. Most of these loans are
prepayable at the option of the borrower. Some of our
investments in mortgage-related securities are effected in the
TBA market, which is described above under Single-Family
Credit GuarantyTBA Market. Our investments in
mortgage-related
17
securities include structured mortgage-related securities such
as real estate mortgage investment conduits
(REMICs). The interest rates on the structured
mortgage-related securities held in our portfolio may not be the
same as the interest rates on the underlying loans. For example,
we may hold a floating rate REMIC security with an interest rate
that adjusts periodically based on changes in a specified market
reference rate, such as the London Inter-Bank Offered Rate
(LIBOR); however, the REMIC may be backed by
fixed-rate mortgage loans. The REMIC securities we own primarily
fall into two categories: agency REMICs, which are generally
Fannie Mae-issued REMICs, and non-agency REMICs issued by
private-label issuers. For information on the composition of our
mortgage investment portfolio by product type, refer to Table 22
in Item 7MD&ABusiness Segment
ResultsCapital Markets GroupMortgage
Investments.
While our Single-Family and HCD businesses are responsible for
managing the credit risk associated with our investments in
mortgage loans and Fannie Mae MBS, our Capital Markets group is
responsible for managing the credit risk of the non-Fannie Mae
mortgage-related securities in our portfolio.
Investment
Activities and Objectives
Our Capital Markets group seeks to maximize long-term total
returns, subject to our risk constraints, while fulfilling our
chartered liquidity function. We pursue these objectives by
purchasing, selling and managing mortgage assets based on market
dynamics and our assessment of the economic attractiveness of
specific transactions at given points in time. This approach is
an enhancement to our strategy prior to 2005, which focused
primarily on buying mortgage assets when anticipated returns met
or exceeded our hurdle rates and generally holding those assets
to maturity. We now also consider asset sales in order to
generate economic value when supply and demand dynamics in our
market result in attractive pricing for certain assets in our
portfolio.
The level of our purchases and sales of mortgage assets in any
given period has been generally determined by the rates of
return that we expect to be able to earn on the equity capital
underlying our investments. When we expect to earn returns
greater than our cost of equity capital, we generally will be an
active purchaser of mortgage loans and mortgage-related
securities. When few opportunities exist to earn returns above
our cost of equity capital, we generally will be a less active
purchaser, and may be a net seller, of mortgage loans and
mortgage-related securities. This investment strategy is
consistent with our chartered liquidity function, as the periods
during which our purchase of mortgage assets is economically
attractive to us generally have been periods in which market
demand for mortgage assets is low.
The difference, or spread, between the yield on mortgage assets
available for purchase or sale and our borrowing costs, after
consideration of the net risks associated with the investment,
is an important factor in determining whether we are a net buyer
or seller of mortgage assets. When the spread between the yield
on mortgage assets and our borrowing costs is wide, which is
typically when demand for mortgage assets from other investors
is low, we will look for opportunities to add liquidity to the
market primarily by purchasing mortgage assets and issuing debt
to investors to fund those purchases. When this spread is
narrow, which is typically when market demand for mortgage
assets is high, we will look for opportunities to meet demand by
selling mortgage assets from our portfolio. Even in periods of
high market demand for mortgage assets, however, we expect to be
an active purchaser of less liquid forms of mortgage loans and
mortgage-related securities. The amount of our purchases of
these mortgage loans and mortgage-related securities may be less
than the amortization, prepayments and sales of mortgage loans
we hold and, as a result, our investment balances may decline
during periods of high market demand.
We determine our total return by measuring the change in the
fair value of our net assets attributable to common
stockholders, as adjusted for our capital transactions, such as
dividend payments and share issuances and repurchases. The fair
value of our net assets will change from period to period as a
result of changes in the mix of our assets and liabilities and
changes in interest rates, expected volatility and other market
factors. The fair value of our net assets is also subject to
change due to inherent market fluctuations in the yields on our
mortgage assets relative to the yields on our debt securities.
The fair value of our guaranty assets and guaranty obligations
will also fluctuate in the short term due to changes in interest
rates. These fluctuations are likely to produce volatility in
the fair value of our net assets in the short-term that may not
be representative of our long-term performance.
18
Customer
Transactions and Services
Our Capital Markets group provides services to our lender
customers and their affiliates, which include:
|
|
|
|
|
offering to purchase a wide variety of mortgage assets,
including non-standard mortgage loan products, which we either
retain in our portfolio for investment or sell to other
investors as a service to assist our customers in accessing the
market;
|
|
|
|
segregating customer portfolios to obtain optimal pricing for
their mortgage loans (for example, segregating Community
Reinvestment Act or CRA eligible loans, which
typically command a premium);
|
|
|
|
providing funds at the loan delivery date for purchase of loans
delivered for securitization; and
|
|
|
|
assisting customers with the hedging of their mortgage business,
including entering into options and forward contracts on
mortgage-related securities, which we offset in the capital
markets.
|
These activities provide a significant source of assets for our
mortgage portfolio, help to create a broader market for our
customers and enhance liquidity in the secondary mortgage
market. Although certain securities acquired in this activity
are accounted for as trading securities, we
contemporaneously enter into economically offsetting positions
if we do not intend to retain the securities in our portfolio.
In connection with our customer transactions and services
activities, we may enter into forward commitments to purchase
mortgage loans or mortgage-related securities that we decide not
to retain in our portfolio. In these instances, we generally
will enter into an offsetting sell commitment with another
investor or require the lender to deliver a sell commitment to
us together with the loans to be pooled into mortgage-related
securities.
Mortgage
Innovation
Our Capital Markets group also aids our lender customers in
their efforts to introduce new mortgage products into the
marketplace. Lenders often face limited secondary market
appetite for new or innovative mortgage products. Our Capital
Markets group supports these lenders by purchasing new products
for our investment portfolio before they develop full track
records for credit performance and pricing. Among the
innovations that our Capital Markets group has supported
recently are
40-year
mortgages, interest-only mortgages and reverse mortgages.
Housing
Goals
Our Capital Markets group contributes to our regulatory housing
goals by purchasing goals-qualifying mortgage loans and
mortgage-related securities for our mortgage portfolio. In
particular, our Capital Markets group is able to purchase
highly-rated mortgage-related securities backed by mortgage
loans that meet our regulatory housing goals requirements. Our
Capital Markets groups purchase of goals-qualifying
mortgage loans is a critical factor in our ability to meet our
housing goals.
Funding
of Our Investments
Our Capital Markets group funds its investments primarily
through the issuance of debt securities in the domestic and
international capital markets. The objective of our debt
financing activities is to manage our liquidity requirements
while obtaining funds as efficiently as possible. We structure
our financings not only to satisfy our funding and risk
management requirements, but also to access the market in an
orderly manner with debt securities designed to appeal to a wide
range of investors. International investors, seeking many of the
features offered in our debt programs for their
U.S. dollar-denominated investments, have been a
19
significant and growing source of funding in recent years. The
most significant of the debt financing programs that we conduct
are the following:
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Benchmark
Securities®. Through
our Benchmark Securities program, we sell large, regularly
scheduled issues of unsecured debt. Our Benchmark Securities
issues tend to appeal to investors who value liquidity and price
transparency. The Benchmark Securities program includes:
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Benchmark Bills have maturities of up to one
year. On a weekly basis, we auction three-month and
six-month Benchmark Bills with a minimum issue size of
$1.0 billion. On a monthly basis, we auction one-year
Benchmark Bills with a minimum issue size of $1.0 billion.
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Benchmark Notes have maturities ranging between two and
ten years. Each month, we typically sell one or more new,
fixed-rate issues of Benchmark Notes through dealer syndicates.
Each issue has a minimum size of $3.0 billion.
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Discount Notes. We issue short-term debt
securities called Discount Notes with maturities ranging from
overnight to 360 days from the date of issuance. Investors
purchase these notes at a discount to the principal amount and
receive the principal amount when the notes mature.
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Medium-Term Notes. We issue medium-term notes
(MTNs) with a wide range of maturities, interest
rates and call features. The specific terms of our MTN issuances
are determined through individually-negotiated transactions with
broker-dealers. Our MTNs are often callable prior to maturity.
We issue both fixed-rate and floating-rate securities, as well
as various types of structured notes that combine features of
traditional debt with features of other capital market
instruments.
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Subordinated Debt. Pursuant to voluntary
commitments that we made in October 2000, from time to time we
have issued subordinated debt. The terms of our qualifying
subordinated debt require us to defer interest payments on this
debt in specified limited circumstances. The difference, or
spread, between the trading prices of our subordinated debt and
our senior debt serves as a market indicator to investors of the
relative credit risk of our debt. A narrow spread between the
trading prices of our subordinated debt and senior debt implies
that the market perceives the credit risk of our debt to be
relatively low. A wider spread between these prices implies that
the market perceives our debt to have a higher relative credit
risk. As of the date of this filing, we had $11.0 billion
in qualifying subordinated debt outstanding. We have not issued
any subordinated debt since 2003. During 2004, we suspended
further issuances of subordinated debt and are not likely to
resume issuances until we return to timely reporting of our
financial results. Our October 2000 voluntary commitments
relating to subordinated debt have been replaced by an agreement
we entered into with OFHEO on September 1, 2005, pursuant
to which we agreed to maintain a specified amount of qualifying
subordinated debt. Although we have not issued subordinated debt
since 2003, we are in compliance with our obligations relating
to the maintenance of subordinated debt under our
September 1, 2005 agreement with OFHEO. For more
information on our subordinated debt, see
Item 7MD&ALiquidity and Capital
ManagementCapital ManagementCapital
ActivitySubordinated Debt.
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For more information regarding our approach to funding our
investments and other activities, see
Item 7MD&ALiquidity and Capital
ManagementLiquidityDebt Funding.
While we are a corporation chartered by the U.S. Congress,
we are solely responsible for our debt obligations, and neither
the U.S. government nor any instrumentality of the
U.S. government guarantees any of our debt. Our debt trades
in the agency sector of the capital markets, along
with the debt of other GSEs. Debt in the agency sector benefits
from bank regulations that allow commercial banks to invest in
our debt and other agency debt to a greater extent than other
debt. These factors, along with the high credit rating of our
senior unsecured debt securities and the manner in which we
conduct our financing programs, contribute to the favorable
trading characteristics of our debt. As a result, we generally
are able to borrow at lower interest rates than other corporate
debt issuers. For information on the credit ratings of our
long-term and short-term senior unsecured debt, qualifying
subordinated debt and preferred stock, refer to
Item 7MD&ALiquidity and Capital
ManagementLiquidityCredit Ratings and Risk
Ratings.
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In order to support the liquidity and strength of our debt
programs, we engage in periodic repurchases of our debt
securities. During 2004, we repurchased $4.3 billion of our
outstanding debt through market purchases. We also called
$155.6 billion of our outstanding debt.
Securitization
Activities
Our Capital Markets group engages in two principal types of
securitization activities:
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creating and issuing Fannie Mae MBS from our mortgage portfolio
assets, either for sale into the secondary market or to retain
in our portfolio; and
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issuing structured Fannie Mae MBS for customers in exchange for
a transaction fee.
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Our Capital Markets group creates Fannie Mae MBS using mortgage
loans and mortgage-related securities that we hold in our
investment portfolio (referred to as portfolio
securitizations). Our Capital Markets group may sell these
Fannie Mae MBS into the secondary market or may retain the
Fannie Mae MBS in our investment portfolio. The types of Fannie
Mae MBS that our Capital Markets group creates through portfolio
securitizations include the same types as those created by our
Single-Family and HCD businesses, as described in
Single-Family Credit GuarantyGuaranty Services
above. In addition, the Capital Markets group issues structured
Fannie Mae MBS, which are described below. The structured Fannie
Mae MBS are generally created through swap transactions,
typically with our lender customers or securities dealer
customers. In these transactions, the customer swaps
a mortgage-related security they own for one of the types of
structured Fannie Mae MBS described below. This process is
referred to as resecuritization.
Our Capital Markets group earns transaction fees for issuing
structured Fannie Mae MBS for third parties. The most common
forms of such securities are the following:
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Fannie
Megas®,
which are resecuritized single-class Fannie Mae MBS that are
created in transactions in which a lender or a securities dealer
contributes two or more previously issued
single-class Fannie Mae MBS or previously issued Megas, or
a combination of Fannie Mae MBS and Megas, in return for a new
issue of Mega certificates.
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Multi-class Fannie Mae MBS, including REMICs,
which may separate the cash flows from underlying single-class
and/or
multi-class Fannie Mae MBS, other mortgage-related
securities or whole mortgage loans into separately tradable
classes of securities. By separating the cash flows, the
resulting classes may consist of: (1) interest-only
payments; (2) principal-only payments; (3) different
portions of the principal and interest payments; or
(4) combinations of each of these. Terms to maturity of
some multi-class Fannie Mae MBS, particularly REMIC
classes, may match or be shorter than the maturity of the
underlying mortgage loans
and/or
mortgage-related securities. As a result, each of the classes in
a multi-class Fannie Mae MBS may have a different coupon
rate, average life, repayment sensitivity or final maturity. In
some of our multi-class Fannie Mae MBS transactions, we may
issue senior classes where we have guaranteed to the trust that
we will supplement collections on the underlying mortgage assets
as required to permit timely payment of principal and interest
due on the related senior class. In these
multi-class Fannie Mae MBS transactions, we also may issue
one or more subordinated classes for which we do not provide a
guaranty. Our Capital Markets group may work with our
Single-Family or HCD businesses in structuring multi-class
Fannie Mae MBS.
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Interest
Rate Risk Management
Our Capital Markets group is subject to the risks of changes in
long-term earnings and net asset values that may occur due to
changes in interest rates, interest rate volatility and other
factors within the financial markets. These risks arise because
the expected cash flows of our mortgage assets are not perfectly
matched with the cash flows of our debt instruments.
Our principal source of interest rate risk arises from our
investment in mortgage assets that give the borrower the option
to prepay the mortgage at any time. For example, if interest
rates decrease, borrowers are more likely to refinance their
mortgages. Refinancings could result in prepaid loans being
replaced with new investments in lower interest rate loans and,
consequently, a decrease in future interest income earned on our
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mortgage assets. At the same time, we may not be able to redeem
or repay a sufficient portion of our existing debt to lower our
interest expense by the same amount, which may reduce our net
interest yield.
We strive to maintain low exposure to the risks associated with
changes in interest rates. To manage our exposure to interest
rate risk, we engage in the following activities:
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Issuance of Callable and Non-Callable Debt. We
issue a broad range of both callable and non-callable debt
securities to manage the duration and prepayment risk of
expected cash flows of the mortgage assets we own.
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Use of Derivative Instruments. While our debt
is the primary means by which we manage our interest rate risk
exposure, we supplement our issuance of debt with interest
rate-related derivatives to further manage duration and
prepayment risk. We use derivatives in combination with our
issuance of debt to reduce the volatility of the estimated fair
value of our mortgage investments. The benefits of derivatives
include:
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the speed and efficiency with which we can alter our risk
position; and
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the ability to modify some aspects of our expected cash flows in
a specialized manner that might not be readily achievable with
debt instruments.
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The use of derivatives also involves costs to our business.
Changes in the estimated fair value of these derivatives impact
our net income. Accordingly, our net income will be reduced to
the extent that we incur losses relating to our derivative
instruments. In addition, our use of derivatives exposes us to
credit risk relating to our derivative counterparties. We have
derivative transaction policies and controls in place to
minimize our derivative counterparty risk. See
Item 7MD&ARisk ManagementCredit
Risk ManagementInstitutional Counterparty Credit Risk
ManagementDerivatives Counterparties for a
description of our derivative counterparty risk and our policies
and controls in place to minimize such risk. Refer to
Item 1ARisk Factors for a description of
the risks associated with transactions with our derivatives
counterparties.
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Continuous Monitoring of Our Risk Position. We
continuously monitor our risk position and actively rebalance
our portfolio of interest-rate sensitive financial instruments
to maintain a close match between the duration of our assets and
liabilities. We use a wide range of risk measures and analytical
tools to assess our exposure to the risks inherent in the asset
and liability structure of our business and use these
assessments in the
day-to-day
management of the mix of our assets and liabilities. If market
conditions do not permit us to fund and manage our investments
within our risk parameters, we will not be an active purchaser
of mortgage assets.
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For more information regarding our methods for managing interest
rate risk and other market risks that impact our business, refer
to Item 7MD&ARisk
ManagementInterest Rate Risk Management and Other Market
Risks.
COMPETITION
Our competitors include the Federal Home Loan Mortgage
Corporation, referred to as Freddie Mac, the Federal Home
Loan Banks, financial institutions, securities dealers,
insurance companies, pension funds and other investors. Our
market share of loans purchased for our investment portfolio or
securitized into Fannie Mae MBS is affected by the amount of
residential mortgage loans offered for sale in the secondary
market by loan originators and other market participants, and
the amount purchased or securitized by our competitors. Our
market share is also affected by the mix of available mortgage
loan products and the credit risk and prices associated with
those loans.
We are an active investor in mortgage-related assets and we
compete with a broad range of investors for the purchase and
sale of these assets. Our primary competitors for the purchase
and sale of mortgage assets are participants in the secondary
mortgage market that we believe also share our general
investment objective of seeking to maximize the returns they
receive through the purchase and sale of mortgage assets. In
addition, in recent years, several large mortgage lenders have
increased their retained holdings of the mortgage loans they
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originate. Competition for mortgage-related assets among
investors in the secondary market was intense in 2004 and 2005.
The spreads between the yield on our debt securities and
expected yields on mortgage assets, after consideration of the
net risks associated with the investments, were very narrow in
2004 and 2005, reflecting strong investor demand from banks,
funds and other investors. This high demand for mortgage assets
increased the price of mortgage assets relative to the credit
risks associated with these assets.
We have been the largest agency issuer of mortgage-related
securities in every year since 1990. Competition for the
issuance of mortgage-related securities is intense and
participants compete on the basis of the value of their products
and services relative to the prices they charge. Value can be
delivered through the liquidity and trading levels for an
issuers securities, the range of products and services
offered, and the reliability and consistency with which it
conducts its business. In recent years, there has been a
significant increase in the issuance of mortgage-related
securities by non-agency issuers. Non-agency issuers, also
referred to as private-label issuers, are those issuers of
mortgage-related securities other than agency issuers Fannie
Mae, Freddie Mac or Ginnie Mae. Private-label issuers have
significantly increased their share of the mortgage-related
securities market and accounted for more than half of new
single-family mortgage-related securities issuances in 2005. As
the market share for private-label securities has increased, our
market share has decreased. During 2005, our estimated market
share of new single-family mortgage-related securities issuance
was 23.5%, compared to 29.2% in 2004 and 45.0% in 2003. For the
third quarter of 2006, our estimated market share of new
single-family mortgage-related securities issuance was 24.7%.
Our estimates of market share are based on publicly available
data and exclude previously securitized mortgages. We expect
private-label issuers to continue to provide significant
competition to our Single-Family business.
We also expect private-label issuers to provide increasingly
significant competition to our HCD business. The commercial
mortgage-backed securities (CMBS) issued by
private-label issuers are typically backed not only by loans
secured by multifamily residential property, but also by loans
secured by a mix of retail, office, hotel and other commercial
properties. We are restricted by our charter to issuing Fannie
Mae MBS backed by residential loans, which often have lower
yields than other types of commercial real estate loans.
Private-label issuers include multifamily residential loans in
pools backing CMBS because those properties, while generally
generating lower cash flow than other types of commercial
properties, generally have lower default rates, which improves
the overall performance of CMBS pools. To obtain multifamily
residential property loans for CMBS pools, private-label issuers
are sometimes willing to purchase loans of a lesser credit
quality than the loans we purchase and to price their purchases
of these loans more aggressively than we typically price our
purchases. Because we usually guarantee our Fannie Mae MBS, we
generally maintain high credit standards to limit our exposure
to defaults. Private-label issuers often structure their CMBS
transactions so that certain classes of the securities issued in
each transaction bear most of the default risk on the loans
underlying the transaction. These securities are placed with
investors that are prepared to assume that risk in exchange for
higher yields. We are responding to this increased competition
from private-label issuers of CMBS, in part, by investing in
investment grade CMBS securities backed by multifamily loans.
OUR
CHARTER AND REGULATION OF OUR ACTIVITIES
We are a stockholder-owned corporation organized and existing
under the Federal National Mortgage Association Charter Act,
which we refer to as the Charter Act or our charter. We were
established in 1938 pursuant to the National Housing Act and
originally operated as a U.S. government entity.
Title III of the National Housing Act amended our charter
in 1954, and we became a mixed-ownership corporation, with our
preferred stock owned by the federal government and our common
stock held by private investors. In 1968, our charter was
further amended and our predecessor entity was divided into the
present Fannie Mae and Ginnie Mae. Ginnie Mae remained a
government entity, but all of the preferred stock of Fannie Mae
that had been held by the U.S. government was retired, and
Fannie Mae became privately owned.
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Charter
Act
The Charter Act, as it was further amended from 1970 through
1998, sets forth the activities that we are permitted to
conduct, authorizes us to issue debt and equity securities, and
describes our general corporate powers. The Charter Act states
that our purpose is to:
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provide stability in the secondary market for residential
mortgages;
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respond appropriately to the private capital market;
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provide ongoing assistance to the secondary market for
residential mortgages (including activities relating to
mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than the
return earned on other activities) by increasing the liquidity
of mortgage investments and improving the distribution of
investment capital available for residential mortgage
financing; and
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promote access to mortgage credit throughout the nation
(including central cities, rural areas and underserved areas) by
increasing the liquidity of mortgage investments and improving
the distribution of investment capital available for residential
mortgage financing.
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In addition to our overall strategy being aligned with these
purposes, all of our business activities must be permissible
under the Charter Act. Our charter specifically authorizes us to
deal in conventional mortgage loans and to
purchase, sell, service, and
lend on the security of these types of mortgages,
subject to limitations on the maximum original principal balance
for single-family loans and requirements for credit enhancement
for some loans. Under our Charter Act authority, we can purchase
mortgage loans secured by first or second liens, issue debt and
issue mortgage-backed securities. In addition, we can guarantee
mortgage-backed securities. We can also act as a depository,
custodian or fiscal agent for our own account or as
fiduciary, and for the account of others. Furthermore, the
Charter Act expressly enables us to lease, purchase, or
acquire any property, real, personal, or mixed, or any interest
therein, to hold, rent, maintain, modernize, renovate, improve,
use, and operate such property, and to sell, for cash or credit,
lease, or otherwise dispose of the same as we may deem
necessary or appropriate and also to do all things as are
necessary or incidental to the proper management of [our]
affairs and the proper conduct of [our] business.
Loan
Standards
The single-family conventional mortgage loans we purchase or
securitize must meet the following standards required by the
Charter Act.
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Principal Balance Limitations. Our charter
permits us to purchase and securitize single-family conventional
mortgage loans subject to maximum original principal balance
limits. Conventional mortgage loans are loans that are not
federally insured or guaranteed. The principal balance limits
are often referred to as conforming loan limits and
are established each year by OFHEO based on the national average
price of a one-family residence. In 2004, 2005 and 2006, the
conforming loan limit for a one-family residence generally was
$333,700, $359,650 and $417,000, respectively. In November 2006,
OFHEO announced that the conforming loan limit will remain at
$417,000 for 2007. Higher original principal balance limits
apply to mortgage loans secured by two- to four-family
residences and also to loans in Alaska, Hawaii, Guam and the
Virgin Islands. No statutory limits apply to the maximum
original principal balance of multifamily mortgage loans (loans
secured by properties that have five or more residential
dwelling units) that we purchase or securitize. In addition, the
Charter Act imposes no maximum original principal balance limits
on loans we purchase or securitize that are insured by the FHA
or guaranteed by the VA.
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Quality Standards. The Charter Act requires
that, so far as practicable and in our judgment, the mortgage
loans we purchase or securitize must be of a quality, type and
class that generally meet the purchase standards of private
institutional mortgage investors. To comply with this
requirement and for the efficient operation of our business, we
have eligibility policies and make available guidelines for the
mortgage loans we purchase or securitize as well as for the
sellers and servicers of these loans.
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Loan-to-Value
and Credit Enhancement Requirements. The Charter
Act requires credit enhancement on any conventional
single-family mortgage loan that we purchase or securitize if it
has a
loan-to-value
ratio
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over 80% at the time of purchase or securitization. Credit
enhancement may take the form of insurance or a guaranty issued
by a qualified insurer, a repurchase arrangement with the seller
of the loans or seller-retained loan participation interests. In
addition, our policies and guidelines have
loan-to-value
ratio requirements that depend upon a variety of factors, such
as the borrower credit history, the loan purpose, the repayment
terms and the number of dwelling units in the property securing
the loan. Depending on these factors and the amount and type of
credit enhancement we obtain, our underwriting guidelines
provide that the
loan-to-value
ratio for loans that we purchase or securitize can be up to 100%
for conventional single-family loans; however, from time to
time, we may make an exception to these guidelines and acquire
loans with a
loan-to-value
ratio greater than 100%.
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Other
Charter Act Limitations and Requirements
In addition to specifying our purpose, authorizing our
activities and establishing various limitations and requirements
relating to the loans we purchase and securitize, the Charter
Act has the following provisions related to issuances of our
securities, exemptions for our securities from the registration
requirements of the federal securities laws, the taxation of our
income, the structure of our Board of Directors and other
limitations and requirements.
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Issuances of Our Securities. The Charter Act
authorizes us, upon approval of the Secretary of the Treasury,
to issue debt obligations and mortgage-related securities. At
the discretion of the Secretary of the Treasury, the
U.S. Department of the Treasury may purchase obligations of
Fannie Mae up to a maximum of $2.25 billion outstanding at
any one time. We have not used this facility since our
transition from government ownership in 1968. Neither the United
States nor any of its agencies guarantees our debt or is
obligated to finance our operations or assist us in any other
manner. On June 13, 2006, the U.S. Department of the
Treasury announced that it would undertake a review of its
process for approving our issuances of debt. We cannot predict
whether the outcome of this review will materially impact our
current business activities.
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Exemptions for Our Securities. Securities we
issue are exempted securities under laws
administered by the SEC. As a result, registration statements
with respect to offerings of our securities are not filed with
the SEC. In March 2003, however, we voluntarily registered our
common stock with the SEC pursuant to Section 12(g) of the
Securities Exchange Act of 1934 (the Exchange Act).
We are thereby required to file periodic and current reports
with the SEC, including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
Since undertaking to restate our 2002 and 2003 consolidated
financial statements and improve our accounting practices and
internal control over financial reporting, we have not been a
timely filer of our periodic reports on
Form 10-K
or
Form 10-Q.
We are continuing to improve our accounting and internal control
over financial reporting and are striving to become a timely
filer as soon as practicable. We are also required to file proxy
statements with the SEC. In addition, our directors and certain
officers are required to file reports with the SEC relating to
their ownership of Fannie Mae equity securities.
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Exemption from Certain Taxes and
Qualifications. Pursuant to the Charter Act, we
are exempt from taxation by states, counties, municipalities or
local taxing authorities, except for taxation by those
authorities on our real property. We are not exempt from the
payment of federal corporate income taxes. In addition, we may
conduct our business without regard to any qualification or
similar statute in any state of the United States, including the
District of Columbia, the Commonwealth of Puerto Rico, and the
territories and possessions of the United States. In accordance
with OFHEO regulation, we have elected to follow the applicable
corporate governance practices and procedures of the Delaware
General Corporation Law, as it may be amended from time to time.
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Structure of Our Board of Directors. The
Charter Act provides that our Board of Directors will consist of
18 persons, five of whom are to be appointed by the President of
the United States and the remainder of whom are to be elected
annually by our stockholders at our annual meeting of
stockholders. All members of our Board of Directors either are
elected by our stockholders for one-year terms, or until their
successors are elected and qualified, or are appointed by the
President for one-year terms. The five appointed director
positions have been vacant since May 2004. Of the remaining
13 director positions, one director has announced that he
will be resigning at the end of 2006. Our Board has determined
that
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all but two of our current directors, one of whom is our Chief
Executive Officer, are independent directors under New York
Stock Exchange standards. Because we have not held an annual
meeting of stockholders since 2004, some of our directors have
currently served for longer than one-year terms.
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Other Limitations and Requirements. Under the
Charter Act, we may not originate mortgage loans or advance
funds to a mortgage seller on an interim basis, using mortgage
loans as collateral, pending the sale of the mortgages in the
secondary market. In addition, we may only purchase or
securitize mortgages originated in the United States, including
the District of Columbia, the Commonwealth of Puerto Rico, and
the territories and possessions of the United States.
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Regulation
and Oversight of Our Activities
As a federally chartered corporation, we are subject to
Congressional legislation and oversight and are regulated by HUD
and OFHEO. In addition, we are subject to regulation by the U.S.
Department of the Treasury and by the SEC. The Government
Accountability Office is authorized to audit our programs,
activities, receipts, expenditures and financial transactions.
HUD
Regulation
Program
Approval
HUD has general regulatory authority to promulgate rules and
regulations to carry out the purposes of the Charter Act,
excluding authority over matters granted exclusively to OFHEO.
We are required under the Charter Act to obtain approval of the
Secretary of HUD for any new conventional mortgage program that
is significantly different from those approved or engaged in
prior to the 1992 amendment of the Charter Act through enactment
of the Federal Housing Enterprises Financial Safety and
Soundness Act (the 1992 Act). The Secretary must
approve any new program unless the Charter Act does not
authorize it or the Secretary finds that it is not in the public
interest.
On June 13, 2006, HUD announced that it would conduct a
review of our investments and holdings, including certain equity
and debt investments classified in our consolidated financial
statements as other assets/other liabilities, to
determine whether our investment activities are consistent with
our charter authority. We are fully cooperating with this
review, but cannot predict the outcome of this review or whether
it may require us to modify our investment approach or restrict
our current business activities.
Housing
Goals
The Secretary of HUD establishes annual housing goals pursuant
to the 1992 Act for housing (1) for low- and
moderate-income families, (2) in HUD-defined underserved
areas, including central cities and rural areas, and
(3) for low-income families in low-income areas and for
very low-income families, which is referred to as special
affordable housing. Each of these three goals is set as a
percentage of the total number of dwelling units financed by
eligible mortgage loan purchases. A dwelling unit may be counted
in more than one category of goals. Included in eligible
mortgage loan purchases are loans underlying our Fannie Mae MBS
issuances, second mortgage loans and refinanced mortgage loans.
Several activities are excluded from eligible mortgage loan
purchases, such as most purchases of non-conventional mortgage
loans, equity investments (even if they facilitate low-income
housing), mortgage loans secured by second homes and commitments
to purchase or securitize mortgage loans at a later date. In
addition to the three goals set as a percentage of dwelling
units financed by eligible mortgage loan purchases, beginning in
2005, HUD also established three home purchase mortgage subgoals
that measure our purchase or securitization of loans by the
number of loans (not dwelling units) providing purchase money
for owner-occupied single-family housing in metropolitan areas.
We also have a subgoal for multifamily special affordable
housing that is expressed as a dollar amount.
Each year, we are required to submit an annual report on our
performance in meeting our housing goals. We deliver the report
to the Secretary of HUD as well as to the House Committee on
Financial Services and the Senate Committee on Banking, Housing
and Urban Affairs. The following table shows each of the housing
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goals, which were constant during the 2002 through 2004 period,
and our performance against those goals in each of the years in
this period.
Housing
Goals Performance:
2002-2004
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Goal(1)
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Fannie Mae Actual
Results(2)
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(2002-2004)
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2004
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2003
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2002
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Low- and moderate-income housing
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50.0
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%
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53.4
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%
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52.3
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%
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51.8
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%
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Underserved areas
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31.0
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33.5
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32.1
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32.8
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Special affordable housing
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|
|
20.0
|
|
|
|
23.6
|
|
|
|
21.2
|
|
|
|
21.4
|
|
Multifamily minimum in special
affordable housing ($ in billions)
|
|
$
|
2.85
|
|
|
$
|
7.32
|
|
|
$
|
12.23
|
|
|
$
|
7.57
|
|
|
|
|
(1) |
|
Goals are expressed as a percentage
of the total number of dwelling units financed by eligible
mortgage loan purchases during the period, except for the
multifamily subgoal.
|
|
(2) |
|
Actual results for 2004, 2003 and
2002 reflect the impact of provisions that allow us to estimate
the affordability of units with missing income and rent data.
Actual results for 2003 and 2002 reflect the impact of incentive
points for small multifamily and owner-occupied rental housing,
which were no longer available starting in 2004. The source of
this data is HUDs analysis of data we submitted to HUD.
Some results differ from the results we reported in our Annual
Housing Activities Reports for 2002, 2003 and 2004.
|
As shown by the table above, we were able to meet all of our
housing goals in each of the years from 2002 through 2004.
On November 2, 2004, HUD published a final regulation
amending its housing goals rule effective January 1, 2005.
The regulation increased housing goal levels and also created
the three new home purchase mortgage subgoals described above.
The increased housing goal levels and new subgoal levels over
the four-year period beginning January 1, 2005 are shown
below.
New
Housing Goals and Home Purchase Subgoals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Housing goals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low- and moderate-income housing
|
|
|
52.0
|
%
|
|
|
53.0
|
%
|
|
|
55.0
|
%
|
|
|
56.0
|
%
|
Underserved areas
|
|
|
37.0
|
|
|
|
38.0
|
|
|
|
38.0
|
|
|
|
39.0
|
|
Special affordable housing
|
|
|
22.0
|
|
|
|
23.0
|
|
|
|
25.0
|
|
|
|
27.0
|
|
Home purchase subgoals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low- and moderate-income housing
|
|
|
45.0
|
%
|
|
|
46.0
|
%
|
|
|
47.0
|
%
|
|
|
47.0
|
%
|
Underserved areas
|
|
|
32.0
|
|
|
|
33.0
|
|
|
|
33.0
|
|
|
|
34.0
|
|
Special affordable housing
|
|
|
17.0
|
|
|
|
17.0
|
|
|
|
18.0
|
|
|
|
18.0
|
|
Multifamily minimum in special
affordable housing ($ in billions)
|
|
$
|
5.49
|
|
|
$
|
5.49
|
|
|
$
|
5.49
|
|
|
$
|
5.49
|
|
27
The following table shows each of our housing goals and home
purchase subgoals during 2005, and our performance against those
goals and subgoals in 2005.
Housing
Goals and Subgoals Performance: 2005
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
Fannie Mae Actual
|
|
|
Goal(1)
|
|
Results(2)
|
|
Housing goals:
|
|
|
|
|
|
|
|
|
Low- and moderate-income housing
|
|
|
52.0
|
%
|
|
|
55.1
|
%
|
Underserved areas
|
|
|
37.0
|
|
|
|
41.4
|
|
Special affordable housing
|
|
|
22.0
|
|
|
|
26.3
|
|
Home purchase subgoals:
|
|
|
|
|
|
|
|
|
Low- and moderate-income housing
|
|
|
45.0
|
%
|
|
|
44.6
|
%
|
Underserved areas
|
|
|
32.0
|
|
|
|
32.6
|
|
Special affordable housing
|
|
|
17.0
|
|
|
|
17.0
|
|
Multifamily minimum in special
affordable housing ($ in billions)
|
|
$
|
5.49
|
|
|
$
|
10.39
|
|
|
|
|
(1) |
|
The home purchase subgoals measure
our performance by the number of loans (not dwelling units)
providing purchase money for owner-occupied single-family
housing in metropolitan areas.
|
|
(2) |
|
The source of this data is
HUDs analysis of data we submitted to HUD. Some results
differ from the results reported in our Annual Housing
Activities Report for 2005.
|
As shown in the table above, we met all of our three affordable
housing goals: the low- and moderate-income housing goal, the
underserved areas goal and the special affordable housing goal.
We also met three of the four subgoals: the special affordable
home purchase subgoal, the underserved areas home purchase
subgoal, and the special affordable multifamily subgoal. We fell
slightly short of the low- and moderate-income home purchase
subgoal.
The affordable housing goals are subject to enforcement by the
Secretary of HUD. HUDs regulations allow HUD to require us
to submit a housing plan if we fail to meet our housing goals
and HUD determines that achievement was feasible, taking into
account market and economic conditions and our financial
condition. The housing plan must describe the actions we will
take to meet the goals in the next calendar year. If HUD
determines that we have failed to submit a housing plan or to
make a good faith effort to comply with the plan, HUD has the
right to take certain administrative actions. The potential
penalties for failure to comply with HUDs housing plan
requirements are a
cease-and-desist
order and civil money penalties. Pursuant to the 1992 Act, the
low- and moderate-income housing subgoal and the underserved
areas subgoal are not enforceable by HUD. As noted above, we did
not meet the low- and moderate-income home purchase subgoal in
2005. Because this subgoal is not enforceable, there is no
penalty for failing to meet this subgoal.
These new housing goals and subgoals are designed to increase
the amount of mortgage financing that we make available to
target populations and geographic areas defined by the goals. We
have made, and continue to make, significant adjustments to our
mortgage loan sourcing and purchase strategies in an effort to
meet these increased housing goals and the subgoals. These
strategies include entering into some purchase and
securitization transactions with lower expected economic returns
than our typical transactions. We have also relaxed some of our
underwriting criteria to obtain goals-qualifying mortgage loans
and increased our investments in higher-risk mortgage loan
products that are more likely to serve the borrowers targeted by
HUDs goals and subgoals, which could increase our credit
losses. The Charter Act explicitly authorizes us to undertake
activities . . . involving a reasonable economic return
that may be less than the return earned on other
activities in order to meet these goals.
We believe that we are making progress toward achieving our 2006
housing goals and subgoals. Meeting the higher subgoals for 2006
is challenging, however, as increased home prices and higher
interest rates have reduced housing affordability. Since HUD set
the home purchase subgoals in 2004, the affordable housing
markets have experienced a dramatic change. Newly-released Home
Mortgage Disclosure Act data show that the share of the primary
mortgage market serving low- and moderate-income borrowers
declined in 2005,
28
reducing our ability to purchase and securitize mortgage loans
that meet the HUD subgoals. The National Association of
REALTORS®
(NAR) housing affordability index has dropped from
130.7 in 2003 to 99.6 in July of 2006the lowest level of
affordability seen in the market since 1986. If our efforts to
meet the new housing goals and subgoals prove to be
insufficient, we may need to take additional steps that could
increase our credit losses and reduce our profitability. See
Item 1ARisk Factors for more information
on how changes we are making to our business strategies in order
to meet HUDs new housing goals and subgoals may reduce our
profitability.
OFHEO
Regulation
OFHEO is an independent office within HUD that is responsible
for ensuring that we are adequately capitalized and operating
safely in accordance with the 1992 Act. We are required to
submit to OFHEO annual and quarterly reports on our financial
condition and results of operations. OFHEO is authorized to levy
annual assessments on Fannie Mae and Freddie Mac, to the extent
authorized by Congress, to cover OFHEOs reasonable
expenses. OFHEOs formal enforcement powers include the
power to impose temporary and final
cease-and-desist
orders and civil monetary penalties on us and our directors and
executive officers. OFHEO also may use other informal
supervisory procedures of the type that are generally used by
federal bank regulatory agencies.
OFHEO
Special Examination
In 2003, OFHEO commenced a special examination of our accounting
policies and practices, internal controls, financial reporting,
corporate governance, and other matters. In its September 2004
interim report and May 2006 final report of the findings of its
special examination, OFHEO concluded that, during the period
covered by the reports (1998 to mid-2004), a large number of our
accounting policies and practices did not comply with GAAP and
we had serious problems in our internal controls, financial
reporting and corporate governance. We entered into agreements
with OFHEO in September 2004 and March 2005 pursuant to which we
agreed to take specified corrective actions to address the
concerns and issues that OFHEO raised in its examination.
On May 23, 2006, concurrently with OFHEOs release of
its final report, we agreed to OFHEOs issuance of a
consent order without admitting or denying any wrongdoing or any
asserted or implied finding or other basis for the consent
order. This consent order superseded and terminated both our
September 2004 and March 2005 agreements with OFHEO, and
resolved all matters addressed by OFHEOs interim and final
reports of its special examination. Under this consent order, we
agreed to undertake specified remedial actions to address the
recommendations contained in OFHEOs May 2006 report,
including actions relating to our corporate governance, Board of
Directors, capital plans, internal controls, accounting
practices, public disclosures, regulatory reporting, personnel
and compensation practices. We also agreed not to increase our
net mortgage assets above the amount shown in our minimum
capital report to OFHEO for December 31, 2005
($727.75 billion), except in limited circumstances at
OFHEOs discretion. Given our need to remediate our
identified control deficiencies, the business plan we submitted
to OFHEO in July 2006 did not request an increase in the current
limitation on the size of our mortgage portfolio during 2006. We
anticipate submitting an updated business plan to OFHEO in early
2007 that will take into account our remediation efforts
completed at that time. The business plan may include a request
for modest growth in our mortgage portfolio.
As part of this consent order and our settlement with the SEC
discussed below, we agreed to pay a $400 million civil
penalty, with $50 million payable to the U.S. Treasury
and $350 million payable to the SEC for distribution to
stockholders pursuant to the Fair Funds for Investors provision
of the Sarbanes-Oxley Act of 2002. We have paid this civil
penalty in full and it has been recorded as an expense in our
2004 consolidated financial statements.
Capital
Requirements
As part of its responsibilities under the 1992 Act, OFHEO has
regulatory authority as to the capital requirements established
by the 1992 Act, issuing regulations on capital adequacy and
enforcing capital standards. The 1992 Act capital requirements
include minimum and critical capital requirements calculated as
specified percentages of our assets and our off-balance sheet
obligations, such as outstanding guaranties. In
29
addition, the 1992 Act capital requirements include a risk-based
capital requirement that is calculated as the amount of capital
needed to withstand a severe ten-year stress period in which it
is assumed that there would simultaneously be extreme movements
in interest rates and severe credit losses. Moreover, to allow
for management and operations risks, an additional 30% is added
to the amount necessary to withstand the ten-year stress period.
On a quarterly basis, we are required by regulation to report to
OFHEO on the level of our capital and whether we are in
compliance with the capital requirements established by OFHEO.
We also provide monthly reports to OFHEO on the level of our
capital and our compliance with the capital requirements.
Compliance with the capital requirements could limit our
operations that require intensive use of capital and could
restrict our ability to make payments on our qualifying
subordinated debt or pay dividends on our preferred and common
stock. If we fail to meet our capital requirements, OFHEO is
permitted or required, depending on the requirement we fail to
meet, to take remedial actions. Further, if we fail to meet our
capital requirements, we are required to submit a capital
restoration plan. We currently operate under a capital
restoration plan, described below, that OFHEO approved in
February 2005. In addition, if OFHEO determines that we are
engaging in conduct not approved by OFHEOs Director that
could result in a rapid depletion of our core capital, or that
the value of the property securing mortgage loans we hold or
have securitized has decreased significantly, or if OFHEO does
not approve the capital restoration plan or determines that we
have failed to make reasonable efforts to comply with the plan,
then OFHEO may take remedial measures as if we were not meeting
the capital requirements that we otherwise meet.
The 1992 Act gives OFHEO the authority, after following
prescribed procedures, to appoint a conservator. Under
OFHEOs regulations, appointment of a conservator is
mandatory, with limited exceptions, if we are critically
undercapitalized (that is, our core capital is less than our
critical capital). Appointment of a conservator is discretionary
under OFHEOs rules if we are significantly
undercapitalized (that is, our core capital is less than our
required minimum capital), and alternative remedies are
unavailable. The 1992 Act and OFHEOs rules also specify
other grounds for appointing a conservator.
In December 2004, OFHEO determined that we were significantly
undercapitalized as of September 30, 2004. We prepared a
capital restoration plan to comply with OFHEOs directive
that we achieve a 30% surplus over our statutory minimum capital
requirement by September 30, 2005. Our plan was accepted by
OFHEO in February 2005 and, in accordance with the plan, we
increased our capital in 2005 by:
|
|
|
|
|
generating capital through retained earnings;
|
|
|
|
significantly reducing the size of our mortgage portfolio, which
reduced our overall minimum capital requirements;
|
|
|
|
issuing $5.0 billion in non-cumulative preferred stock in
December 2004;
|
|
|
|
reducing our quarterly common stock dividend from $0.52 per
share to $0.26 per share; and
|
|
|
|
canceling our plans to build major new corporate facilities in
Southwest Washington, DC and undertaking other cost-cutting
efforts.
|
OFHEO announced on November 1, 2005 that we had achieved a
30% surplus over our minimum capital requirement as of
September 30, 2005. Under our May 2006 consent order with
OFHEO, we agreed to continue to maintain a 30% capital surplus
over our statutory minimum capital requirement until the
Director of OFHEO, in his discretion, determines the requirement
should be modified or allowed to expire, taking into account
factors such as resolution of accounting and internal control
issues. For additional information on our capital requirements,
see
Item 7MD&ALiquidity
and Capital ManagementCapital ManagementCapital
Adequacy Requirements.
30
Dividend
Restrictions
Our capital requirements under the Charter Act and as
administered by OFHEO may restrict the ability of our Board of
Directors to declare dividends, authorize repurchases of our
preferred or common stock, or approve any other capital
distributions in the following circumstances:
|
|
|
|
|
if a capital distribution would decrease our total capital below
the risk-based capital requirement or our core capital below the
minimum capital requirement, we may not make the distribution;
|
|
|
|
if we do not meet the risk-based capital requirement but do meet
the minimum capital requirement, we may not make any capital
distribution that would cause us to fail to meet the minimum
capital requirement; and
|
|
|
|
if we meet neither the risk-based capital requirement nor the
minimum capital requirement, but do meet the critical capital
requirement established under the 1992 Act, we may make a
capital distribution only if, immediately after making the
distribution, we would still meet the critical capital
requirement and the Director of OFHEO approves the distribution
after determining that specified statutory conditions are
satisfied.
|
In addition, under our May 2006 consent order with OFHEO, we
agreed to the following additional restrictions relating to our
capital distributions:
|
|
|
|
|
As long as the capital restoration plan is in effect, we must
seek the approval of the Director of OFHEO before engaging in
any transaction that could have the effect of reducing our
capital surplus below an amount equal to 30% more than our
statutory minimum capital requirement; and
|
|
|
|
We must submit a written report to OFHEO detailing the rationale
and process for any proposed capital distribution before making
the distribution.
|
Refer to Item 7MD&ALiquidity and
Capital ManagementCapital ManagementCapital Adequacy
Requirements for a description of our statutory capital
requirements and our core capital, total capital and other
capital classification measures as of December 31, 2004,
2003 and 2002.
Recent
Legislative Developments and Possible Changes in Our
Regulations
The U.S. Congress is considering legislation that would
change the regulatory framework under which we, Freddie Mac and
the Federal Home Loan Banks operate. The Senate Committee
on Banking, Housing and Urban Affairs and the U.S. House of
Representatives each advanced GSE regulatory oversight
legislation in 2005 during the first session of the
109th Congress. On October 26, 2005, the House of
Representatives passed a bill and on July 28, 2005, the
Senate Committee on Banking, Housing and Urban Affairs passed a
bill, which has not yet been brought to the floor of the Senate
for a vote. While the House and Senate bills differ in a number
of respects, both bills would affect us and other GSEs by
significantly altering the scope of:
|
|
|
|
|
our authorized and permissible activities;
|
|
|
|
the potential level of our required capital;
|
|
|
|
the size and composition of our mortgage investment portfolio (a
potential limitation in the House bill and a specific limitation
in the Senate bill);
|
|
|
|
the levels of affordable housing goals; and
|
|
|
|
the process by which any new activities and programs would be
approved and the extent of regulatory oversight.
|
In addition, the House bill would require Fannie Mae and Freddie
Mac to contribute a portion of their profits to a fund to
support affordable housing.
The specific provisions of legislation, if any, that may
ultimately be passed by both the House and the Senate are
uncertain. Also uncertain is the timing for enactment of such
legislation. We support any legislation that
31
will improve our effectiveness in increasing liquidity and
lowering the cost of borrowing in the mortgage market and, as a
result, expanding access to housing and increasing opportunities
for homeownership.
As Fannie Mae has testified before Congress, we continue to
support legislation:
|
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|
|
|
to create a single independent, well-funded regulator with
oversight for safety and soundness and mission;
|
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|
|
to provide the regulator with strong bank-like regulatory powers
over capital, activities, supervision and prompt corrective
action;
|
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|
|
to provide the regulator with bank-like regulatory authority to
reduce on-balance sheet activities, based on safety and
soundness; and
|
|
|
|
to provide a structure for housing goals that includes an
affordable housing fund that strengthens our housing and
liquidity mission.
|
It is possible, however, that the enactment of legislation could
have a material adverse effect on our earnings and the prospects
for our business. Refer to Item 1ARisk
Factors for a description of how these proposed changes in
the regulation of our business could materially adversely affect
our business and earnings.
EMPLOYEES
As of December 31, 2004, we employed approximately 5,400
personnel, including full-time and part-time employees, term
employees and employees on leave. During 2005 and 2006, we
increased the number of our employees, both as part of
significantly improving our accounting practices, risk
management, internal controls and corporate governance, and as
appropriate to complete the restatement of our previously issued
consolidated financial statements. As of October 31, 2006,
we employed approximately 6,400 personnel, including full-time
and part-time employees, term employees and employees on leave.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the
SEC. Our Web site address is
www.fanniemae.com,
and we make available free of charge through our Web site our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all other SEC reports and amendments to those reports as
soon as reasonably practicable after we electronically file the
material with, or furnish it to, the SEC. Materials that we file
with the SEC are also available from the SECs Web site,
www.sec.gov. In addition, these materials may be inspected,
without charge, and copies may be obtained at prescribed rates,
at the SECs Public Reference Room at 100 F Street, NE,
Room 1580, Washington, DC 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330.
You may also request copies of any filing from us, at no cost,
by telephone at
(202) 752-7000
or by mail at 3900 Wisconsin Avenue, NW, Washington, DC 20016.
Effective March 31, 2003, we voluntarily registered our
common stock with the SEC under Section 12(g) of the
Exchange Act. Our common stock, as well as the debt, preferred
stock and mortgage-backed securities we issue, are exempt from
registration under the Securities Act of 1933 and are
exempted securities under the 1934 Act. The
voluntary registration of our common stock does not affect the
exempt status of the debt, equity and mortgage-backed securities
that we issue.
With regard to OFHEOs regulation of our activities, you
may obtain materials from OFHEOs Web site, www.ofheo.gov.
These materials include the September 2004 interim report of
OFHEOs findings of its special examination and the May
2006 final report on its findings.
We are providing our Web site address and the Web site addresses
of the SEC and OFHEO solely for your information. Information
appearing on our Web site or on the SECs Web site or
OFHEOs Web site is not incorporated into this Annual
Report on
Form 10-K
except as specifically stated in this Annual Report on
Form 10-K.
32
FORWARD-LOOKING
STATEMENTS
This report contains forward-looking statements, which are
statements about matters that are not historical or current
facts. In addition, our senior management may from time to time
make forward-looking statements orally to analysts, investors,
the news media and others. Forward-looking statements often
include words such as expects,
anticipates, intends, plans,
believes, seeks, estimates,
will, would, should,
could, may, or similar words. Among the
forward-looking statements in this report are statements
relating to:
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our intent to submit an updated business plan to OFHEO in early
2007 that may include a request for modest growth in our
mortgage portfolio;
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|
our expectations regarding industry and economic trends,
including our expectations that:
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|
|
|
growth in total U.S. residential mortgage debt outstanding
will continue at a slower pace in 2007, as the housing market
continues to cool and home price gains moderate further or
decline modestly;
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|
|
the continuation of positive demographic trends, such as stable
household formation rates, will help mitigate the slowdown in
the growth in residential mortgage debt outstanding, but are
unlikely to completely offset the slowdown in the short- to
medium-term;
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|
there is a possibility of a modest decline in national home
prices in 2007;
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|
our belief that demographic factors (such as stable household
formation rates, a positive age structure of the population for
homebuying and rising homeownership rates due to the high level
of immigration over the past 25 years) that suggest a
fundamentally strong mortgage market will support continued
long-term demand for new capital to finance the substantial and
sustained housing finance needs of American homebuyers;
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our credit losses will increase and serious delinquencies may
trend upward, as a result of the sharp decline in the rate of
home price appreciation during 2006 and the possibility of
modest home price declines in 2007;
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our expectation that we will have finalized and substantially
completed implementation of new policies and procedures to
strengthen risk management practices relating to AD&C
business by December 2006;
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|
our expectation that, when we expect to earn returns greater
than our cost of equity capital, we generally will be an active
purchaser of mortgage loans and mortgage-related securities, and
that when few opportunities exist to earn returns above our cost
of equity capital, we generally will be a less active purchaser,
and may be a net seller, of mortgage loans and mortgage-related
securities;
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our expectation that we will be an active purchaser of less
liquid forms of mortgage loans and mortgage-related securities
even in periods of high market demand for mortgage assets;
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our expectation that private-label issuers of mortgage-related
securities will continue to provide significant competition for
our Single-Family and HCD businesses;
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our belief that major elements of the restatement, including our
comprehensive review of our accounting policies and practices,
will contribute to a more expeditious completion of financial
statements for the years ended December 31, 2005 and 2006;
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our belief that the estimated fair value of our derivatives may
fluctuate substantially from period to period because of changes
in interest rates, expected interest rate volatility and our
derivative activity;
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our expectation that, based on the composition of our
derivatives, we generally expect to report decreases in the
aggregate fair value of our derivatives as interest rates
decrease;
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our expectation that, as a result of the variety of ways in
which we record financial instruments in our consolidated
financial statements, our earnings will vary, perhaps
substantially, from period to period and result in volatility in
our stockholders equity and regulatory capital;
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33
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|
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|
our expectation that we will experience high levels of period to
period volatility in our financial results as part of our normal
business activities, primarily due to changes in market
conditions that result in periodic fluctuations in the estimated
fair value of our derivatives;
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|
our expectation of a reduction in our net interest income and
net interest yield in 2005 and 2006, due to the decrease in the
volume of our interest-earning assets as well as in the spread
between the average yield on these assets and our borrowing
costs since year-end 2004;
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our expectation that unrealized gains and losses on trading
securities will fluctuate each period with changes in volumes,
interest rates and market prices;
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our expectation that tax credits and net operating losses
resulting from our investments in LIHTC partnerships will grow
in the future, which is likely to reduce our effective tax rate,
and that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize
the entire tax benefit;
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our belief that the guaranty fee income generated from future
business activity will largely replace any guaranty fee income
lost as a result of mortgage prepayments;
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our expectation that loans that permit a borrower to defer
principal or interest payments, such as negative-amortizing and
interest-only loans, will default more often than traditional
mortgage loans;
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our belief that our short-term and long-term funding needs and
uses of cash in 2007 will remain generally consistent with
current needs and uses, and that our sources of liquidity will
remain adequate to meet both our short-term and long-term
funding needs in 2007;
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our expectation that, over the long term, our funding needs and
sources of liquidity will remain relatively consistent with
current needs and sources;
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our intent to consider an increase in our issuance of debt in
future years, if we decide to increase our purchase of mortgage
assets following the modification or expiration of the current
limitation on the size of our mortgage portfolio;
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our expectation that the aggregate estimated fair value of our
derivatives will decline and result in derivative losses if
long-term interest rates decline;
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our expectation that the outcome of the current FASB assessment
of what activities a QSPE may perform might affect the entities
we consolidate in future periods;
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our estimate that we will complete testing of most of our newly
implemented internal controls and remediate most of our
remaining material weaknesses in connection with the filing of
our Annual Report on
Form 10-K
for the year ended December 31, 2006, which we will not
file on a timely basis;
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our expectation that the continued downturn in the manufactured
housing sector will result in the recognition of additional
impairment on our investments in manufactured housing securities;
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our expectation that there will not be any change in our ability
to borrow funds through the issuance of debt securities in the
capital markets in the foreseeable future;
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our expectation that our internal control environment will
continue to be modified and enhanced in order to enable us to
file periodic reports with the SEC on a current basis in the
future;
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our intention to continue to make significant adjustments to our
mortgage loan sourcing and purchase strategies in an effort to
meet HUDs increased housing goals and subgoals;
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our expectation that the Compensation Committee and the Board
will review the performance shares program and determine the
appropriate approach for settling our obligations with respect
to the existing unpaid performance share cycles;
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our intent that, in the event that we were required to make
payments under Fannie Mae MBS guaranties, we would pursue
recovery of these payments by exercising our rights to the
collateral backing the underlying loans or through available
credit enhancements (which includes all recourse with third
parties and mortgage insurance);
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our expectation that we will experience periodic fluctuations in
the estimated fair value of our net assets due to changes in
market conditions, including changes in interest rates, changes
in relative spreads between our mortgage assets and debt, and
changes in implied volatility;
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our expectation that changes in implied volatility, mortgage OAS
and debt OAS are the market conditions that will have the most
significant impact on the fair value of our net assets;
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our expectation that, based on market conditions and the
composition of our consolidated balance sheets in 2005 and 2006,
we will not experience the same level of increase in the
estimated fair value of our net assets in 2005 and 2006 that we
experienced in 2004;
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our expectation that we will continue to incur significant
administrative expenses in connection with complying with our
remediation obligations, which will reduce our earnings for the
years ended December 31, 2005 and 2006;
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our estimate that, for 2006, our restatement and related
regulatory costs will total approximately $850 million and
costs attributable to or associated with the preparation of our
consolidated financial statements and periodic SEC financial
reports for periods subsequent to 2004 will total over
$200 million;
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our expectation that the costs associated with preparation of
our post-2004 financial statements and periodic SEC reports will
continue to have a substantial impact on administrative expenses
until we are current in filing our periodic financial reports
with the SEC;
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our belief that our administrative expenses for 2007 will be
comparable to those for 2006;
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our expectation that the reduction in the size of our mortgage
portfolio beginning in 2005 will contribute to significantly
reduced net interest income for the years ended
December 31, 2005 and 2006, compared to the years ended
December 31, 2004 and 2003;
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our expectation that we will report significantly lower losses
from our risk management derivatives in 2005 and 2006, relative
to the losses reported in 2004;
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our belief that we will continue to work on improving our
internal controls and procedures relating to the management of
operational risk; and
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descriptions of assumptions underlying or relating to any of the
foregoing.
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Forward-looking statements reflect our managements
expectations or predictions of future conditions, events or
results based on various assumptions and managements
estimates of trends and economic factors in the markets in which
we are active, as well as our business plans. They are not
guarantees of future performance. By their nature,
forward-looking statements are subject to risks and
uncertainties. Our actual results and financial condition may
differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking
statements. There are a number of factors that could cause
actual conditions, events or results to differ materially from
those described in the forward-looking statements contained in
this report. A discussion of factors that could cause actual
conditions, events or results to differ materially from those
expressed in any forward-looking statements appears in
Item 1ARisk Factors.
Readers are cautioned not to place undue reliance on
forward-looking statements in this report or that we make from
time to time, and to consider carefully the factors discussed in
Item 1ARisk Factors in evaluating these
forward-looking statements. These forward-looking statements are
representative only as of the date they are made, and we
undertake no obligation to update any forward-looking statement
as a result of new information, future events or otherwise.
GLOSSARY
OF TERMS USED IN THIS REPORT
Terms used in this report have the following meanings, unless
the context indicates otherwise.
Agency issuers refers to the
government-sponsored enterprises Fannie Mae and Freddie Mac, as
well as Ginnie Mae.
Alt-A mortgage refers to a mortgage loan
underwritten using more liberal standards such as higher
loan-to-value ratios and less documentation of borrower income
or assets.
35
ARM or adjustable-rate mortgage
refers to a mortgage loan with an interest rate that adjusts
periodically over the life of the mortgage based on changes in a
specified index.
Book of business refers to the sum of:
(1) the unpaid principal balance of the mortgage loans and
mortgage-related securities we hold in our mortgage portfolio
and (2) the unpaid principal balance of Fannie Mae MBS held
by third parties.
Business volume refers to both the unpaid
principal balance of the mortgage loans and mortgage-related
securities we purchase for our mortgage portfolio in a given
period and the unpaid principal balance of the mortgage loans we
securitize into Fannie Mae MBS that are acquired by third
parties in such period.
Charter Act or our charter
refers to the Federal National Mortgage Association Charter
Act, 12 U.S.C. §1716 et seq.
Conforming mortgage refers to a conventional
single-family mortgage loan with an original principal balance
that is equal to or less than the applicable conforming loan
limit, which is the applicable maximum original principal
balance for a mortgage loan that we are permitted by our charter
to purchase or securitize. The conforming loan limit is
established each year by OFHEO based on the national average
price of a one-family residence. The current conforming loan
limit for a one-family residence in most geographic areas is
$417,000.
Conventional mortgage refers to a mortgage
loan that is not guaranteed or insured by the
U.S. government or its agencies, such as the VA, FHA or RHS.
Conventional single-family mortgage credit book of
business refers to the sum of the unpaid principal
balance of: (1) the conventional single-family mortgage
loans we hold in our investment portfolio; (2) the Fannie
Mae MBS and non-Fannie Mae mortgage-related securities backed by
conventional single-family mortgage loans we hold in our
investment portfolio; (3) Fannie Mae MBS backed by
conventional single-family mortgage loans that are held by third
parties; and (4) credit enhancements that we provide on
conventional single-family mortgage assets.
Core capital refers to a regulatory measure
of our capital that represents the sum of the stated value of
our outstanding common stock (common stock less treasury stock),
the stated value of our outstanding non-cumulative perpetual
preferred stock, our paid-in capital and our retained earnings,
as determined in accordance with GAAP.
Credit enhancement refers to a method to
reduce credit risk by requiring collateral, letters of credit,
mortgage insurance, corporate guaranties, or other agreements to
provide an entity with some assurance that it will be
recompensed to some degree in the event of a financial loss.
Critical capital requirement refers to the
amount of core capital below which we would be classified by
OFHEO as critically undercapitalized and generally would be
required to be placed in conservatorship. Our critical capital
requirement is generally equal to the sum of: (1) 1.25% of
on-balance sheet assets; (2) 0.25% of the unpaid principal
balance of outstanding Fannie Mae MBS held by third parties; and
(3) up to 0.25% of other off-balance sheet obligations.
Delinquency refers to an instance in which a
principal or interest payment on a mortgage loan has not been
made in full by the due date.
Derivative refers to a financial instrument
that derives its value based on changes in an underlying, such
as security or commodity prices, interest rates, currency rates
or other financial indices. Examples of derivatives include
futures, options and swaps.
Duration refers to the sensitivity of the
value of a security to changes in interest rates. It can be
calculated for non-callable securities as the weighted-average
maturity of a securitys future cash flows, both principal
and interest, where the present values of the cash flows serve
as the weights.
Fannie Mae mortgage-backed securities or
Fannie Mae MBS generally refer to those
mortgage-related securities that we issue and with respect to
which we guarantee to the related trusts that we will supplement
mortgage loan collections as required to permit timely payment
of principal and interest due on the related
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Fannie Mae MBS. We also issue some forms of mortgage-related
securities for which we do not provide this guaranty. The term
Fannie Mae MBS refers to all forms of
mortgage-related securities that we issue, including
single-class Fannie Mae MBS and multi-class Fannie Mae
MBS.
Fixed-rate mortgage refers to a mortgage loan
with an interest rate that does not change during the entire
term of the loan.
GAAP refers to generally accepted accounting
principles in the United States.
GSEs refers to government-sponsored
enterprises such as Fannie Mae, Freddie Mac and the Federal Home
Loan Banks.
HUD refers to the Department of Housing and
Urban Development.
Implied volatility refers to the
markets expectation of potential changes in interest rates.
Interest-only loan refers to a mortgage loan
that allows the borrower to pay only the monthly interest due,
and none of the principal, for a fixed term. After the end of
that term, typically five to ten years, the borrower can choose
to refinance, pay the principal balance in a lump sum, or begin
paying the monthly scheduled principal due on the loan, which
results in a higher monthly payment at that time. Interest-only
loans can be adjustable-rate or fixed-rate mortgage loans.
Interest rate swap refers to a transaction
between two parties in which each agrees to exchange payments
tied to different interest rates or indices for a specified
period of time, generally based on a notional principal amount.
An interest rate swap is a type of derivative.
Intermediate-term mortgage refers to a
mortgage loan with a contractual maturity at the time of
purchase equal to or less than 15 years.
LIHTC partnerships refer to low-income
housing tax credit limited partnerships or limited liability
companies. For a description of these partnerships, refer to
Business SegmentsHousing and Community
DevelopmentCommunity Investment Group above.
Liquid assets refers to our holdings of
non-mortgage investments, cash and cash equivalents, and funding
agreements with our lenders, including advances to lenders and
repurchase agreements.
Loans, mortgage loans and
mortgages refer to both whole loans and loan
participations, secured by residential real estate, cooperative
shares or by manufactured housing units.
Loan-to-value
ratio or LTV ratio refers to the
ratio, at any point in time, of the unpaid principal amount of a
borrowers mortgage loan to the value of the property that
serves as collateral for the loan (expressed as a percentage).
Minimum capital requirement refers to the
amount of core capital below which we would be classified by
OFHEO as undercapitalized. Our minimum capital requirement is
generally equal to the sum of: (1) 2.50% of on-balance
sheet assets; (2) 0.45% of the unpaid principal balance of
outstanding Fannie Mae MBS held by third parties; and
(3) up to 0.45% of other off-balance sheet obligations.
Mortgage assets, when referring to our
assets, refers to both mortgage loans and mortgage-related
securities we hold in our portfolio.
Mortgage credit book of business refers to
the sum of the unpaid principal balance of: (1) the
mortgage loans we hold in our investment portfolio; (2) the
Fannie Mae MBS and non-Fannie Mae mortgage-related securities we
hold in our investment portfolio; (3) Fannie Mae MBS that
are held by third parties; and (4) credit enhancements that
we provide on mortgage assets.
Mortgage-related securities or
mortgage-backed securities refer generally to
securities that represent beneficial interests in pools of
mortgage loans or other mortgage-related securities. These
securities may be issued by Fannie Mae or by others.
37
Multifamily mortgage loan refers to a
mortgage loan secured by a property containing five or more
residential dwelling units.
Multifamily mortgage credit book of business
refers to the sum of the unpaid principal balance of:
(1) the multifamily mortgage loans we hold in our
investment portfolio; (2) the Fannie Mae MBS and non-Fannie
Mae mortgage-related securities backed by multifamily mortgage
loans we hold in our investment portfolio; (3) Fannie Mae
MBS backed by multifamily mortgage loans that are held by third
parties; and (4) credit enhancements that we provide on
multifamily mortgage assets.
Negative-amortizing
loan refers to a mortgage loan that allows the
borrower to make monthly payments that are less than the
interest actually accrued for the period. The unpaid interest is
added to the principal balance of the loan, which increases the
outstanding loan balance.
Negative-amortizing
loans are typically adjustable-rate mortgage loans.
Notional principal amount refers to the
hypothetical dollar amount in an interest rate swap transaction
on which exchanged payments are based. The notional principal
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.
OFHEO refers to the Office of Federal Housing
Enterprise Oversight, our safety and soundness regulator.
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 securitys 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 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 OASs of
our funding and hedging instruments are also frequently quoted
to swaps. The OAS of our net 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,
without reflecting the impact of the consolidation of variable
interest entities.
Private-label issuers or non-agency
issuers refers to issuers of mortgage-related
securities other than agency issuers Fannie Mae, Freddie Mac and
Ginnie Mae.
Private-label securities or
non-agency securities refers to
mortgage-related securities issued by entities other than agency
issuers Fannie Mae, Freddie Mac or Ginnie Mae.
Qualifying subordinated debt refers to our
subordinated debt that contains an interest deferral feature
that requires us to defer the payment of interest for up to five
years if either: (1) our core capital is below 125% of our
critical capital requirement; or (2) our core capital is
below our minimum capital requirement and the
U.S. Secretary of the Treasury, acting on our request,
exercises his or her discretionary authority pursuant to
Section 304(c) of the Charter Act to purchase our debt
obligations.
REO refers to real-estate owned by Fannie
Mae, generally because we have foreclosed on the property or
obtained the property through a deed in lieu of foreclosure.
Reverse mortgage refers to a financial tool
that provides seniors with funds from the equity in their homes.
Generally, no borrower payments are made on a reverse mortgage
until the borrower moves or the property is sold. The final
repayment obligation is designed not to exceed the proceeds from
the sale of the home.
Risk-based capital requirement refers to the
amount of capital necessary to absorb losses throughout a
hypothetical ten-year period marked by severely adverse
circumstances. Refer to
Item 7MD&ALiquidity
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and Capital ManagementCapital ManagementCapital
Adequacy RequirementsStatutory Risk-Based Capital
Requirements for a detailed definition of our statutory
risk-based capital requirement.
Secondary mortgage market refers to the
financial market in which residential mortgages and
mortgage-related securities are bought and sold.
Single-family mortgage loan refers to a
mortgage loan secured by a property containing four or fewer
residential dwelling units.
Single-family mortgage credit book of business
refers to the sum of the unpaid principal balance of:
(1) the single-family mortgage loans we hold in our
investment portfolio; (2) the Fannie Mae MBS and non-Fannie
Mae mortgage-related securities backed by single-family mortgage
loans we hold in our investment portfolio; (3) Fannie Mae
MBS backed by single-family mortgage loans that are held by
third parties; and (4) credit enhancements that we provide
on single-family mortgage assets.
Sub-prime
mortgage refers to a mortgage loan underwritten using
lower credit standards than those used in the prime lending
market.
Swaptions refers to options on interest rate
swaps in the form of contracts granting an option to one party
and creating a corresponding commitment from the counterparty to
enter into specified interest rate swaps in the future.
Swaptions are usually traded in the over-the-counter market and
not through an exchange.
Total capital refers to a regulatory measure
of our capital that represents the sum of core capital plus the
total allowance for loan losses and reserve for guaranty losses
in connection with Fannie Mae MBS, less the specific loss
allowance (that is, the allowance required on
individually-impaired loans).
Yield curve or shape of the yield
curve refers to a graph showing the relationship
between the yields on bonds of the same credit quality with
different maturities. For example, a normal or
positive sloping yield curve exists when long-term bonds have
higher yields than short-term bonds. A flat yield
curve exists when yields are relatively the same for short-term
and long-term bonds. A steep yield curve exists when
yields on long-term bonds are significantly higher than on
short-term bonds. An inverted yield curve, which is
rare, exists when yields on long-term bonds are lower than
yields on short-term bonds.
This section identifies specific risks that should be considered
carefully in evaluating our business. The risks described in
Company Risks are specific to us and our business,
while those described in Risks Relating to Our
Industry relate to the industry in which we operate. Any
of these risks could adversely affect our business, results of
operations or financial condition. Although we believe that
these risks represent the material risks relevant to us, our
business and our industry, new material risks may emerge that we
are currently unable to predict. As a result, this description
of the risks that affect our business and our industry is not
exhaustive. The risks discussed below could cause our actual
results to differ materially from our historical results or the
results contemplated by the forward-looking statements contained
in this report.
COMPANY
RISKS
Material
weaknesses and other control deficiencies relating to our
internal controls could result in errors in our reported results
and could have a material adverse effect on our operations,
investor confidence in our business and the trading prices of
our securities.
Managements assessment of our internal control over
financial reporting as of December 31, 2004 identified
numerous material weaknesses in our control environment, our
application of GAAP, our financial reporting process, and our
information technology applications and infrastructure as of
December 31, 2004. Further, we identified additional
material weaknesses in the independent model review process,
treasury and trading operations, pricing and independent price
verification processes, and wire transfer controls. In addition,
following their separate investigations of our business and
accounting practices, OFHEO and the law firm of Paul Weiss each
issued reports identifying significant problems and deficiencies
in our prior processes for corporate governance and internal
controls. Until they are remediated, these material weaknesses
and other
39
control deficiencies could lead to errors in our reported
financial results and could have a material adverse effect on
our operations, investor confidence in our business and the
trading prices of our securities.
As described in Item 9AControls and
ProceduresRemediation Activities and Changes in Internal
Control Over Financial Reporting, we are currently in the
process of remediating our identified material weaknesses;
however, management will not make a final determination that we
have completed our remediation of these material weaknesses
until we have completed testing of our newly implemented
internal controls. In addition, we have not filed our Quarterly
Reports on
Form 10-Q
for 2005 or 2006, or our Annual Report on
Form 10-K
for 2005, and we are not able at this time to file our periodic
SEC reports on
Form 10-Q
and
Form 10-K
on a timely basis. We believe that we will not have remediated
the material weakness relating to our disclosure controls and
procedures until we are able to file required reports with the
SEC and the New York Stock Exchange on a timely basis.
In the future, we may identify further material weaknesses or
significant deficiencies in our internal control over financial
reporting that we have not discovered to date. In addition, we
cannot be certain that we will be able to maintain adequate
controls over our financial processes and reporting in the
future.
Competition
in the mortgage and financial services industries, and the need
to develop, enhance and implement strategies to adapt to
changing trends in the mortgage industry and capital markets,
may adversely affect our business and earnings.
Increasing Competition. We compete to acquire
mortgage loans for our mortgage portfolio or for securitization
based on a number of factors, including our speed and
reliability in closing transactions, our products and services,
the liquidity of Fannie Mae MBS, our reputation and our pricing.
We face increasing competition in the secondary mortgage market
from other GSEs and from large commercial banks, savings and
loan institutions, securities dealers, investment funds,
insurance companies and other financial institutions. In
addition, increasing consolidation within the financial services
industry has created larger private financial institutions,
which has increased pricing pressure. The recent decreased rate
of growth in U.S. residential mortgage debt outstanding in
2006 also has increased competition in the secondary mortgage
market by decreasing the number of new mortgage loans available
for purchase. This increased competition may adversely affect
our business and earnings.
Potential Decrease in Earnings Resulting from Changes in
Industry Trends. The manner in which we compete
and the products for which we compete are affected by changing
trends in our industry. If we do not effectively respond to
these trends, or if our strategies to respond to these trends
are not as successful as our prior business strategies, our
business, earnings and total returns could be adversely
affected. For example, in recent years, an increasing proportion
of single-family mortgage loan originations has consisted of
non-traditional mortgages such as interest-only mortgages,
negative-amortizing
mortgages and sub-prime mortgages, and demand for traditional
30-year
fixed-rate mortgages has decreased. We did not participate in
large amounts of these non-traditional mortgages in 2004 and
2005 because we determined that the pricing offered for these
mortgages often was insufficient compensation for the additional
credit risk associated with these mortgages. These trends and
our decision not to participate in large amounts of these
non-traditional mortgages contributed to a significant loss in
our share of new single-family mortgage-related securities
issuances to private-label issuers during this period, with our
market share decreasing from 45.0% in 2003 to 29.2% in 2004 and
23.5% in 2005.
We have modified and enhanced a number of our strategies as part
of our ongoing efforts to adapt to recent changes in the
industry. For example, our Capital Markets group focused on
buying and holding mortgage assets to maturity prior to 2005.
Beginning in 2005, however, in response to both our capital plan
requirements and market conditions at that time, our Capital
Markets group engaged in more active management of our portfolio
through both purchases and sales of mortgage assets, with the
dual goals of supporting our chartered purpose of providing
liquidity to the secondary mortgage market and maximizing total
returns. In addition, we have been working with our lender
customers to support a broad range of mortgage products,
including sub-prime products, while closely monitoring credit
risk and pricing dynamics across the full spectrum of mortgage
product types. We may not be able to execute successfully any
new or enhanced strategies that we adopt. In
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addition, these strategies may not increase our share of the
secondary mortgage market, our revenues or our total returns.
The
restatement of our consolidated financial statements and related
events, including the lack of current financial and operating
information about the company, have had, and likely will
continue to have, a material adverse effect on our business and
reputation.
We have become subject to several significant risks since our
announcement in December 2004 that we would restate our
previously filed consolidated financial statements. This Annual
Report on
Form 10-K,
which contains information for the years ended December 31,
2004, 2003 and 2002, includes restated consolidated financial
statements for the years ended December 31, 2003 and 2002,
and is our first periodic report covering periods after
June 30, 2004. Our need to restate our historical financial
statements and the delay in producing both restated and more
current consolidated financial statements has resulted in
several risks to our business, as discussed in the following
paragraphs.
Risks Relating to Lack of Current Information about our
Business. Material information about our current
operating results and financial condition is unavailable because
of the delay in filing our 2005 and 2006 annual and quarterly
reports with the SEC. As a result, investors do not have access
to full information about the current state of our business.
When this information becomes available to investors, it may
result in an adverse effect on the trading price of our common
stock.
Risks Relating to Suspension and Delisting of Our Securities
from the NYSE. The delay in filing our Annual
Report on
Form 10-K
for the year ended December 31, 2005 with the SEC could
cause the New York Stock Exchange, or NYSE, to commence
suspension and delisting proceedings of our common stock. In
addition, we expect that we will not be able to file our Annual
Report on
Form 10-K
for the year ended December 31, 2006 by its due date of
March 1, 2007, which would be a separate violation of the
NYSEs listing rules. If the NYSE were to delist our common
stock it could result in a significant decline in the trading
price, trading volume and liquidity of our common stock and
could have a similar effect on our preferred stock listed on the
NYSE. We also expect that the suspension and delisting of our
common stock could lead to decreases in analyst coverage and
market-making activity relating to our common stock, as well as
reduced information about trading prices and volume.
Risks Associated with Pending Civil
Litigation. We are subject to pending civil
litigation that, if decided against us, could require us to pay
substantial judgments or settlement amounts or provide for other
relief, as discussed in Item 3Legal
Proceedings.
Reputational Risks and Other Risks Relating to Negative
Publicity. We have been subject to continuing
negative publicity as a result of our accounting restatement and
related problems, which we believe have contributed to
significant declines in the price of our common stock.
Continuing negative publicity could increase our cost of funds
and adversely affect our customer relationships and the trading
price of our stock. Negative publicity associated with our
accounting restatement and related problems also has resulted in
increased regulatory and legislative scrutiny of our business.
Decrease in Common Stock Dividends and Limitation on Our
Ability to Increase Our Dividend Payments. In
January 2005, in an effort to accelerate our achievement of a
30% capital surplus over our minimum capital requirement as
required by OFHEO, we reduced our previous quarterly common
stock dividend rate by 50%, from $0.52 per share to
$0.26 per share. Under our May 2006 consent order with
OFHEO, we are required to continue to operate under the capital
restoration plan approved by OFHEO in February 2005. Our consent
order with OFHEO also requires us to provide OFHEO with prior
notice of any planned dividend and a description of the
rationale for its payment. In addition, our Board of Directors
is not permitted to increase the dividend at any time if payment
of the increased dividend would reduce our capital surplus to
less than 30% above our minimum capital requirement. On
December 6, 2006, the Board of Directors increased the
quarterly common stock dividend to $0.40 per share.
41
Changes
in interest rates could materially impact our financial
condition and our earnings.
We fund our operations primarily through the issuance of debt
and invest our funds primarily in mortgage-related assets that
permit the mortgage borrowers to prepay the mortgages at any
time. These business activities expose us to market risk, which
is the risk of loss from adverse changes in market conditions.
Our most significant market risks are interest rate risk and
option-adjusted spread risk. Interest rate risk is the risk of
changes in our long-term earnings or in the value of our net
assets due to changes in interest rates. Changes in interest
rates affect both the value of our mortgage assets and
prepayment rates on our mortgage loans. Changes in interest
rates could have a material adverse impact on our business
results and financial condition, particularly if actual
conditions differ significantly from our expectations.
Our ability to manage interest rate risk depends on our ability
to issue debt instruments with a range of maturities and other
features at attractive rates and to engage in derivative
transactions. We must exercise judgment in selecting the amount,
type and mix of debt and derivative instruments that will most
effectively manage our interest rate risk. The amount, type and
mix of financial instruments we select may not offset possible
future changes in the spread between our borrowing costs and the
interest we earn on our mortgage assets. A discussion of how we
manage interest rate risk is included in
Item 7MD&ARisk
ManagementInterest Rate Risk Management and Other Market
Risks.
Option-adjusted spread risk is the risk that the option-adjusted
spreads on mortgage assets relative to those on our funding and
hedging instruments (referred to as the OAS of our net assets)
may increase or decrease. These increases or decreases may be a
result of market supply and demand dynamics, including credit
pricing basis risk between our assets and swaps and between
swaps and our funding and hedging instruments. A widening of the
OAS of our net assets typically causes a decline in the fair
value of the company. A narrowing of the OAS of our net assets
will reduce our opportunities to acquire mortgage assets and
therefore could have a material adverse effect on our future
earnings and financial condition. We do not attempt to actively
manage or hedge the impact of changes in
mortgage-to-debt
OAS after we purchase mortgage assets, other than through asset
monitoring and disposition.
We make significant use of business and financial models to
manage risk, although we recognize that models are inherently
imperfect predictors of actual results because they are based on
assumptions about factors such as future loan demand, prepayment
speeds and other factors that may overstate or understate future
experience. Our business could be adversely affected if our
models fail to produce reliable results.
We
have several key lender customers and the loss of business
volume from any one of these customers could adversely affect
our business, market share and results of
operations.
Our ability to generate revenue from the purchase and
securitization of mortgage loans depends on our ability to
acquire a steady flow of mortgage loans from the originators of
those loans. We acquire a significant portion of our
single-family mortgage loans from several large mortgage
lenders. During 2004, our top five lender customers accounted
for a total of approximately 53% of our single-family business
volumes (which refers to both single-family mortgage loans that
we purchase for our mortgage portfolio and single-family
mortgage loans that we securitize into Fannie Mae MBS), with our
top customer accounting for approximately 26% of that amount.
Accordingly, maintaining our current business relationships and
business volumes with our top lender customers is critical to
our business. If any of our key lender customers significantly
reduces the volume of mortgage loans that the lender delivers to
us, we could lose significant business volume that we might be
unable to replace. The loss of business from any one of our key
lender customers could adversely affect our business, market
share and results of operations. In addition, a significant
reduction in the volume of mortgage loans that we securitize
could reduce the liquidity of Fannie Mae MBS, which in turn
could have an adverse effect on their market value.
We are
subject to credit risk relating to the mortgage loans that we
purchase or that back our Fannie Mae MBS, and any resulting
delinquencies and credit losses could adversely affect our
financial condition and results of operations.
Borrowers of mortgage loans that we purchase or that back our
Fannie Mae MBS may fail to make the required payments of
principal and interest on those loans, exposing us to the risk
of credit losses. In addition,
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due to the current competitive dynamics of the mortgage market,
we have recently increased our purchase and securitization of
mortgage loans that pose a higher credit risk, such as
negative-amortizing
loans and interest-only loans. We also have increased the
proportion of reduced documentation loans that we purchase or
that back our Fannie Mae MBS.
For example, negative-amortizing adjustable-rate mortgages
(ARMs) represented approximately 2% and 3%,
respectively, of our conventional single-family business volumes
(which refers to both conventional single-family mortgage loans
we purchase for our mortgage portfolio and conventional
single-family mortgage loans we securitize into Fannie Mae MBS)
in 2004 and 2005, and approximately 4% for the first nine months
of 2006. Interest-only mortgage loans represented approximately
5% and 10%, respectively, of our conventional single-family
business volumes in 2004 and 2005, and approximately 15% for the
first nine months of 2006. We estimate that
negative-amortizing
ARMs and interest-only loans represented approximately 2% and
6%, respectively, of our conventional single-family mortgage
credit book of business as of September 30, 2006.
The increase in our exposure to credit risk resulting from the
increase in these loans with higher credit risk may cause us to
experience increased delinquencies and credit losses in the
future, which could adversely affect our financial condition and
results of operations. A discussion of how we manage mortgage
credit risk and a description of the risk characteristics of our
mortgage credit book of business is included in
Item 7MD&ARisk ManagementCredit
Risk ManagementMortgage Credit Risk Management.
We
depend on our institutional counterparties to provide services
that are critical to our business, and our financial condition
and results of operations may be adversely affected by defaults
by our institutional counterparties.
We face the risk that our institutional counterparties may fail
to fulfill their contractual obligations to us. Our primary
exposure to institutional counterparties risk is with our
mortgage insurers, mortgage servicers, lender customers, issuers
of investments held in our liquid investment portfolio, dealers
that commit to sell mortgage pools or loans to us, and
derivatives counterparties. The products or services that these
counterparties provide are critical to our business operations
and a default by a counterparty with significant obligations to
us could adversely affect our financial condition and results of
operations. A discussion of how we manage institutional
counterparty credit risk is included in
Item 7MD&ARisk ManagementCredit
Risk ManagementInstitutional Counterparty Credit Risk
Management.
Mortgage Insurers. A mortgage insurer could
fail to fulfill its obligation to reimburse us for claims under
our mortgage insurance policies, which would require us to bear
the full loss of the borrower default on the mortgage loans. As
of December 31, 2004, we were the beneficiary of primary
mortgage insurance coverage on $285.4 billion of
single-family loans held in our portfolio or underlying Fannie
Mae MBS, which represented approximately 13% of our
single-family mortgage credit book of business.
Lender Risk-Sharing Agreements. We enter into
risk-sharing agreements with some of our lender customers that
require them to reimburse us for losses under the loans that are
the subject of those agreements. A lenders default in its
obligation to reimburse us could decrease our net income.
Mortgage Servicers. One or more of our
mortgage servicers could fail to fulfill its mortgage loan
servicing obligations, which include collecting payments from
borrowers under the mortgage loans that we own or that are part
of the collateral pools supporting our Fannie Mae MBS, paying
taxes and insurance on the properties secured by the mortgage
loans, monitoring and reporting loan delinquencies, and
repurchasing any loans that are subsequently found to have not
met our underwriting criteria. In that event, we could incur
credit losses associated with loan delinquencies or penalties
for late payment of taxes and insurance on the properties that
secure the mortgage loans serviced by that mortgage servicer. In
addition, we likely would be forced to incur the costs necessary
to replace the defaulting mortgage servicer. These events would
result in a decrease in our net income. As of December 31,
2004, our ten largest single-family mortgage servicers serviced
71% of our single-family mortgage credit book of business, and
the largest single-family mortgage servicer serviced 21% of the
single-family mortgage credit book of business. Accordingly, the
effect of a default by one of these servicers could result in a
more significant decrease in our net income than if our loans
were serviced by a more diverse group of servicers.
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Agreements with Dealers. We enter into
agreements with dealers under which they commit to deliver pools
of mortgages to us at an agreed-upon date and price. We commit
to sell Fannie Mae MBS based in part on these commitments. If a
dealer defaults in its commitment obligation, it could cause us
to default in our obligation to deliver the Fannie Mae MBS on
our commitment date or may force us to replace the loans at a
higher cost in order to meet our commitment.
Liquid Investment Portfolio Issuers. The
primary credit exposure associated with investments held in our
liquid investment portfolio is that the issuers of these
investments will not repay principal and interest in accordance
with the contractual terms. The failure of these issuers to make
these payments could have a material adverse effect on our
business results.
Derivatives Counterparties. If a derivatives
counterparty defaults on payments due to us, we may need to
enter into a replacement derivative contract with a different
counterparty at a higher cost or we may be unable to obtain a
replacement contract. As of December 31, 2004, we had 23
interest rate and foreign currency derivatives counterparties.
Eight of these counterparties accounted for approximately 83% of
the total outstanding notional amount of our derivatives
contracts, and each of these eight counterparties accounted for
between approximately 7% and 14% of the total outstanding
notional amount. The insolvency of one of our largest
derivatives counterparties combined with an adverse move in the
market before we are able to transfer or replace the contracts
could adversely affect our financial condition and results of
operations. A discussion of how we manage the credit risk posed
by our derivatives transactions and a detailed description of
our derivatives credit exposure is contained in
Item 7MD&ARisk ManagementCredit
Risk ManagementInstitutional Counterparty Credit Risk
ManagementDerivatives Counterparties.
Our
ability to operate our business, meet our obligations and
generate net interest income depends primarily on our ability to
issue substantial amounts of debt frequently and at attractive
rates.
The issuance of short-term and long-term debt securities in the
domestic and international capital markets is our primary source
of funding for purchasing assets for our mortgage portfolio and
repaying or refinancing our existing debt. Moreover, our primary
source of revenue is the net interest income we earn from the
difference, or spread, between our borrowing costs and the
return that we receive on our mortgage assets. Our ability to
obtain funds through the issuance of debt, and the cost at which
we are able to obtain these funds, depends on many factors,
including:
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our corporate and regulatory structure, including our status as
a GSE;
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legislative or regulatory actions relating to our business,
including any actions that would affect our GSE status;
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rating agency actions relating to our credit ratings;
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our financial results and changes in our financial condition;
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significant events relating to our business or industry;
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the publics perception of the risks to and financial
prospects of our business or industry;
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the preferences of debt investors;
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the breadth of our investor base;
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prevailing conditions in the capital markets;
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interest rate fluctuations; and
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general economic conditions in the United States and abroad.
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In addition, the other GSEs, such as Freddie Mac and the Federal
Home Loan Banks, also issue significant amounts of
AAA-rated agency debt to fund their operations, which may
negatively impact the prices we are able to obtain for these
securities.
Approximately 47% of the Benchmark Notes we have issued in 2006
were purchased by
non-U.S. investors,
including both private institutions and
non-U.S. governments
and government agencies. Accordingly, a significant reduction in
the purchase of our debt securities by
non-U.S. investors
could have a material adverse effect on both the amount of debt
securities we are able to issue and the price we are able to
obtain for these securities. Many of the factors that affect the
amount of our securities that foreign investors purchase,
including economic
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downturns in the countries where these investors are located,
currency exchange rates and changes in domestic or foreign
fiscal or monetary policies, are outside our control.
If we are unable to issue debt securities at attractive rates in
amounts sufficient to operate our business and meet our
obligations, it would have a material adverse effect on our
liquidity, financial condition and results of operations. A
description of how we obtain funding for our business by issuing
debt securities in the capital markets is contained in
Item 7MD&ALiquidity and Capital
ManagementLiquidityDebt Funding. For a
description of how we manage liquidity risk, see
Item 7MD&ALiquidity and Capital
ManagementLiquidityLiquidity Risk Management.
On June 13, 2006, the U.S. Department of the Treasury
announced that it would undertake a review of its process for
approving our issuances of debt, which could adversely impact
our flexibility in issuing debt securities in the future. We
cannot predict whether the outcome of this review will
materially impact our current business activities.
A
decrease in our current credit ratings would have an adverse
effect on our ability to issue debt on acceptable terms, which
could adversely affect our liquidity and our results of
operations.
Our borrowing costs and our broad access to the debt capital
markets depends in large part on our high credit ratings. Our
senior unsecured debt currently has the highest credit rating
available from Moodys Investors Service
(Moodys), Standard & Poors, a
division of The McGraw-Hill Companies (Standard &
Poors), and Fitch Ratings (Fitch). These
ratings are subject to revision or withdrawal at any time by the
rating agencies. Any reduction in our credit ratings could
increase our borrowing costs, limit our access to the capital
markets and trigger additional collateral requirements in
derivative contracts and other borrowing arrangements. A
substantial reduction in our credit ratings would reduce our
earnings and materially adversely affect our liquidity, our
ability to conduct our normal business operations and our
competitive position. A description of our credit ratings and
current ratings outlook is included in
Item 7MD&ALiquidity and Capital
ManagementLiquidityCredit Ratings and Risk
Ratings.
Our
business is subject to laws and regulations that may restrict
our ability to compete optimally. In addition, legislation that
would change the regulation of our business could, if enacted,
reduce our competitiveness and adversely affect our results of
operations and financial condition. The impact of existing
regulation on our business is significant, and both existing and
future regulation may adversely affect our
business.
As a federally chartered corporation, we are subject to the
limitations imposed by the Charter Act, extensive regulation,
supervision and examination by OFHEO and HUD, and regulation by
other federal agencies, such as the U.S. Department of the
Treasury and the SEC. We are also subject to many laws and
regulations that affect our business, including those regarding
taxation and privacy. A description of the laws and regulations
that affect our business is contained in
Item 1BusinessOur Charter and Regulation
of Our Activities.
Regulation by OFHEO. OFHEO has broad authority
to regulate our operations and management in order to ensure our
financial safety and soundness. For example, in order to meet
our capital plan requirements in 2005, we were required to make
significant changes to our business in 2005, including reducing
the size of our mortgage portfolio and reducing our quarterly
common stock dividend by 50%. Pursuant to our May 2006 consent
order with OFHEO, we may not increase our net mortgage portfolio
assets above $727.75 billion, except in limited
circumstances at OFHEOs discretion. We expect that this
reduction in the size of our mortgage portfolio beginning in
2005 will contribute to significantly reduced net interest
income for the years ended December 31, 2005 and 2006, as
compared to the years ended December 31, 2004 and 2003. In
addition, we have incurred and expect to continue to incur
significant administrative expenses in connection with complying
with our remediation obligations, which will reduce our earnings
for the years ended December 31, 2005 and 2006. If we fail
to comply with any of our agreements with OFHEO or with any
OFHEO regulation, we may incur penalties and could be subject to
further restrictions on our activities and operations, or to
investigation and enforcement actions by OFHEO.
Regulation by HUD and Charter Act
Limitations. HUD supervises our compliance with
the Charter Act, which defines our permissible business
activities. For example, our business is limited to the
U.S. housing finance sector and we may not purchase loans
in excess of our conforming loan limits, which are currently
$417,000 for a one-family mortgage loan in most geographic
regions and may be lower in future periods
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subsequent to 2007. As a result of these limitations on our
ability to diversify our operations, our financial condition and
earnings depend almost entirely on conditions in a single sector
of the U.S. economy, specifically, the U.S. housing
market. Our substantial reliance on conditions in the
U.S. housing market may adversely affect the investment
returns we are able to generate. In addition, the Secretary of
HUD must approve any new Fannie Mae conventional mortgage
program that is significantly different from those approved or
engaged in prior to the enactment of the 1992 Act. As a result,
we have only limited ability to respond quickly to changes in
market conditions by offering new programs in response to these
changes. These restrictions on our business operations may
negatively affect our ability to compete successfully with other
companies in the mortgage industry from time to time, which in
turn may adversely affect our market share, our earnings and our
financial condition. As described below under To meet
HUDs new housing goals and subgoals, we enter into
transactions that may reduce our profitability, we are
also subject to housing goals established by HUD, which require
that a specified portion of our business relate to the purchase
or securitization of mortgages for low- and moderate-income
housing, underserved areas and special affordable housing.
Meeting these goals may adversely affect our profitability.
Legislative Proposals. Legislative proposals
currently being considered by the U.S. Congress, if enacted
into law, could materially restrict our operations and adversely
affect our business and our earnings. During 2005, several bills
were introduced in Congress that propose to change the
regulatory framework under which we, Freddie Mac and the Federal
Home Loan Banks operate. The Senate Committee on Banking,
Housing and Urban Affairs and the U.S. House of
Representatives each advanced GSE regulatory oversight
legislation in 2005 during the first session of the
109th Congress. On October 26, 2005, the House of
Representatives passed a bill and on July 28, 2005, the
Senate Committee on Banking, Housing and Urban Affairs passed a
bill, which has not yet been brought to the floor of the Senate
for a vote. While the House and Senate bills differ in a number
of respects, both bills would affect us and other GSEs by
significantly altering the scope of:
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our authorized and permissible activities;
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the potential level of our required capital;
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the size and composition of our mortgage investment portfolio (a
potential limitation in the House bill and a specific limitation
in the Senate bill);
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the levels of affordable housing goals; and
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the process by which any new activities and programs would be
approved and the extent of regulatory oversight.
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In addition, the House bill would require Fannie Mae and Freddie
Mac to contribute a portion of their profits to a fund to
support affordable housing.
This legislation could materially adversely affect our business
and earnings. We cannot predict the prospects for the enactment,
timing or content of any legislation, the form any enacted
legislation will take or its impact on our financial condition
or results of operations.
Changes in Existing Regulations or Regulatory
Practices. Our business and earnings could also
be materially affected by changes in the regulation of our
business made by any one or more of our existing regulators. A
regulator may change its current process for regulating our
business, change its current interpretations of our regulatory
requirements or exercise regulatory authority over our business
beyond current practices, and any of these changes could have a
material adverse effect on our business and earnings. For
example, on June 13, 2006, HUD announced that it will
conduct a review of specified investments and holdings to
determine whether our investment activities are consistent with
our charter authority. We cannot predict the outcome of this
review or whether HUD will seek to restrict our current business
activities as a result of this or other reviews.
To
meet HUDs new housing goals and subgoals, we enter into
transactions that may reduce our profitability.
As part of our mission of increasing the availability and
affordability of financing for residential mortgage loans in the
United States, we must comply with the housing goals and
subgoals established by HUD. HUDs housing goals require
that a specified portion of our business relate to the purchase
or securitization of
46
mortgage loans serving low- and moderate-income households,
households in underserved areas and households qualifying under
the definition of special affordable housing. HUD has increased
our housing goals for 2005 through 2008, and has created new
purchase money mortgage subgoals effective beginning in 2005
that also increase over the 2005 to 2008 period.
Meeting the increased housing goals and subgoals established by
HUD for 2006 and future years may reduce our profitability and
compete with our goal of maximizing total returns. In order to
obtain business that contributes to our new housing goals and
subgoals, we have made, and continue to make, significant
adjustments to our mortgage loan sourcing and purchase
strategies. These strategies include entering into some purchase
and securitization transactions with lower expected economic
returns than our typical transactions. We have also relaxed some
of our underwriting criteria to obtain goals-qualifying mortgage
loans and increased our investments in higher-risk mortgage loan
products that are more likely to serve the borrowers targeted by
HUDs goals and subgoals, which could increase our credit
losses.
The specific housing goals and subgoals levels for 2005 through
2008, as well as our performance against these goals in 2005,
are described in Item 1BusinessOur
Charter and Regulation of Our ActivitiesRegulation and
Oversight of Our ActivitiesHUD RegulationHousing
Goals. We did not meet one of our 2005 subgoals, and it is
possible that we may not meet one or more of our 2006 subgoals.
Meeting the higher subgoals for 2006 is particularly challenging
because increased home prices and higher interest rates have
reduced housing affordability. Since HUD set the home purchase
subgoals in 2004, the affordable housing markets have
experienced a dramatic change. Newly-released Home Mortgage
Disclosure Act data show that the share of the primary mortgage
market serving low- and moderate-income borrowers declined in
2005, reducing our ability to purchase and securitize mortgage
loans that meet the HUD subgoals. If our efforts to meet the new
housing goals and subgoals in 2006 and future years prove to be
insufficient, we may need to take additional steps that could
increase our credit losses and reduce our profitability.
Our
business faces significant operational risks and an operational
failure could materially adversely affect our
business.
Shortcomings or failures in our internal processes, people or
systems could have a material adverse effect on our risk
management, liquidity, financial condition and results of
operations; disrupt our business; and result in legislative or
regulatory intervention, damage to our reputation and liability
to customers. For example, our business is dependent on our
ability to manage and process, on a daily basis, a large number
of transactions across numerous and diverse markets. These
transactions are subject to various legal and regulatory
standards. We rely on the ability of our employees and our
internal financial, accounting, data processing and other
operating systems, as well as technological systems operated by
third parties, to process these transactions and to manage our
business. As a result of events that are wholly or partially
beyond our control, these employees or third parties could
engage in improper or unauthorized actions, or these systems
could fail to operate properly. In the event of a breakdown in
the operation of our or a third partys systems, or
improper actions by employees or third parties, we could
experience financial losses, business disruptions, legal and
regulatory sanctions, and reputational damage.
Because we use a process of delegated underwriting for the
single-family mortgage loans we purchase and securitize, we do
not independently verify most borrower information that is
provided to us. This exposes us to mortgage fraud risk, which is
the risk that one or more parties involved in a transaction (the
borrower, seller, broker, appraiser, title agent, lender or
servicer) will misrepresent the facts about a mortgage loan. We
may experience financial losses and reputational damage as a
result of mortgage fraud.
In addition, our operations rely on the secure processing,
storage and transmission of a large volume of private borrower
information, such as names, residential addresses, social
security numbers, credit rating data and other consumer
financial information. Despite the protective measures we take
to reduce the likelihood of information breaches, this
information could be exposed in several ways, including through
unauthorized access to our computer systems, computer viruses
that attack our computer systems, software or networks,
accidental delivery of information to an unauthorized party and
loss of unencrypted media containing this information. Any of
these events could result in significant financial losses, legal
and regulatory sanctions, and reputational damage.
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The
occurrence of a major natural or other disaster in the United
States could increase our delinquency rates and credit losses or
disrupt our business operations and lead to financial
losses.
The occurrence of a major natural disaster, terrorist attack or
health epidemic in the United States could increase our
delinquency rates and credit losses in the affected region or
regions, which could have a material adverse effect on our
financial condition and results of operations. For example, we
experienced an increase in our delinquency rates and credit
losses as a result of Hurricanes Katrina and Rita. In addition,
as of December 31, 2004, approximately 18% of the gross
unpaid principal balance of the conventional single-family loans
we held or securitized in Fannie Mae MBS and approximately 28%
of the gross unpaid principal balance of the multifamily loans
we held or securitized in Fannie Mae MBS were concentrated in
California. Due to this geographic concentration in California,
a major earthquake or other disaster in that state could lead to
significant increases in delinquency rates and credit losses.
Despite the contingency plans and facilities that we have in
place, our ability to conduct business also may be adversely
affected by a disruption in the infrastructure that supports our
business and the communities in which we are located. Potential
disruptions may include those involving electrical,
communications, transportation and other services we use or that
are provided to us. Substantially all of our senior management
and investment personnel work out of our offices in the
Washington, DC metropolitan area. If a disruption occurs and our
senior management or other employees are unable to occupy our
offices, communicate with other personnel or travel to other
locations, our ability to service and interact with each other
and with our customers may suffer, and we may not be successful
in implementing contingency plans that depend on communication
or travel. A description of our disaster recovery plans and
facilities in the event of a disruption of this type is included
in Item 7MD&ARisk
ManagementOperational Risk Management.
In
many cases, our accounting policies and methods, which are
fundamental to how we report our financial condition and results
of operations, require management to make estimates and rely on
the use of models about matters that are inherently
uncertain.
Our accounting policies and methods are fundamental to how we
record and report our financial condition and results of
operations. Our management must exercise judgment in applying
many of these accounting policies and methods so that these
policies and methods comply with GAAP and reflect
managements judgment of the most appropriate manner to
report our financial condition and results of operations. In
some cases, management must select the appropriate accounting
policy or method from two or more alternatives, any of which
might be reasonable under the circumstances but might affect the
amount of assets, liabilities, revenues and expenses that we
report. See Notes to Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies for a description of our significant accounting
policies.
We have identified the following four accounting policies as
critical to the presentation of our financial condition and
results of operations:
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estimating the fair value of financial instruments;
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amortizing cost basis adjustments on mortgage loans and
mortgage-related securities held in our portfolio and underlying
outstanding Fannie Mae MBS using the effective interest method;
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determining our allowance for loan losses and reserve for
guaranty losses; and
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determining whether an entity in which we have an ownership
interest is a variable interest entity and whether we are the
primary beneficiary of that variable interest entity and
therefore must consolidate the entity.
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We believe these policies are critical because they require
management to make particularly subjective or complex judgments
about matters that are inherently uncertain and because of the
likelihood that materially different amounts would be reported
under different conditions or using different assumptions. Due
to the complexity of these critical accounting policies, our
accounting methods relating to these policies involve
substantial use of models. Models are inherently imperfect
predictors of actual results because they are based on
assumptions, including assumptions about future events, and
actual results could differ significantly. More information
about these policies is included in
Item 7MD&ACritical Accounting
Policies and Estimates.
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We are
subject to pending civil litigation that, if decided against us,
could require us to pay substantial judgments, settlements or
other penalties.
A number of lawsuits have been filed against us and certain of
our current and former officers and directors relating to our
accounting restatement. These suits are currently pending in the
U.S. District Court for the District of Columbia and fall
within three primary categories: a consolidated shareholder
class action lawsuit, a consolidated shareholder derivative
lawsuit and a consolidated Employee Retirement Income Security
Act of 1974 (ERISA)-based class action lawsuit. We
may be required to pay substantial judgments, settlements or
other penalties and incur significant expenses in connection
with the consolidated shareholder class action and consolidated
ERISA-based class action, which could have a material adverse
effect on our business, results of operations and cash flows. In
addition, our current and former directors, officers and
employees may be entitled to reimbursement for the costs and
expenses of these lawsuits pursuant to our indemnification
obligations with those persons. We are also a party to several
other lawsuits that, if decided against us, could require us to
pay substantial judgments, settlements or other penalties. These
include a proposed class action lawsuit alleging violations of
federal and state antitrust laws and state consumer protection
laws in connection with the setting of our guaranty fees and a
proposed class action lawsuit alleging that we violated
purported fiduciary duties with respect to certain escrow
accounts for FHA-insured multifamily mortgage loans. We are
unable at this time to estimate our potential liability in these
matters. We expect all of these lawsuits to be time-consuming,
and they may divert managements attention and resources
from our ordinary business operations. More information
regarding these lawsuits is included in
Item 3Legal Proceedings and Notes
to Consolidated Financial StatementsNote 20,
Commitments and Contingencies.
RISKS
RELATING TO OUR INDUSTRY
Changes
in general market and economic conditions in the United States
and abroad may adversely affect our financial condition and
results of operations.
Our financial condition and results of operations may be
adversely affected by changes in general market and economic
conditions in the United States and abroad. These conditions
include short-term and long-term interest rates, the value of
the U.S. dollar as compared to foreign currencies,
fluctuations in both the debt and equity capital markets,
employment rates and the strength of the U.S. national
economy and local economies. These conditions are beyond our
control, and may change suddenly and dramatically.
Changes in market and economic conditions could adversely affect
us in many ways, including the following:
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fluctuations in the global debt and equity capital markets,
including sudden and unexpected changes in short-term or
long-term interest rates, could decrease the fair value of our
mortgage assets, derivatives positions and other investments,
negatively affect our ability to issue debt at attractive rates,
and reduce our net interest income; and
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an economic downturn or rising unemployment in the United States
could decrease homeowner demand for mortgage loans and increase
the number of homeowners who become delinquent or default on
their mortgage loans. An increase in delinquencies or defaults
would likely result in a higher level of credit losses, which
would adversely affect our earnings. Also, decreased homeowner
demand for mortgage loans could reduce our guaranty fee income,
net interest income and the fair value of our mortgage assets.
An economic downturn could also increase the risk that our
counterparties will default on their obligations to us,
increasing our liabilities and reducing our earnings.
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A
decline in U.S. housing prices or in activity in the
U.S. housing market could negatively impact our earnings
and financial condition.
U.S. housing prices have risen significantly in recent
years. As described above, this period of extraordinary home
price appreciation appears to be ending. The rate of home price
appreciation has slowed and we believe there is a possibility of
a modest decline in national home prices in 2007. Declines in
housing prices could result in increased delinquencies or
defaults on the mortgage loans we own or that back our
guaranteed Fannie Mae MBS. An increase in delinquencies or
defaults would likely result in a higher level of credit losses,
which would adversely affect our earnings. In addition, housing
price declines would reduce the fair value of our mortgage
assets.
49
Growth in the amount of U.S. residential mortgage debt
outstanding has also been significant in recent years. Our
business volume is affected by the rate of growth in total
U.S. residential mortgage debt outstanding and the size of
the U.S. residential mortgage market. If the rate of growth
in total U.S. residential mortgage debt outstanding were to
decline, the growth rate of mortgage loans available for us to
purchase or securitize likely would slow, which could lead to a
reduction in our net interest income and guaranty fee income.
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Item 1B.
|
Unresolved
Staff Comments
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None.
We own our principal office, which is located at 3900 Wisconsin
Avenue, NW, Washington, DC, as well as additional Washington, DC
facilities at 3939 Wisconsin Avenue, NW and 4250 Connecticut
Avenue, NW. We also own two office facilities in Herndon,
Virginia, as well as two additional facilities located in
Reston, Virginia, and Urbana, Maryland. These owned facilities
contain a total of approximately 1,460,000 square feet of
space. We lease the land underlying the 4250 Connecticut Avenue
building pursuant to a lease that automatically renews on
July 1, 2029 for an additional 49 years unless we
elect to terminate the lease by providing notice to the landlord
of our decision to terminate at least one year prior to the
automatic renewal date. In addition, we lease approximately
375,000 square feet of office space at 4000 Wisconsin
Avenue, NW, which is adjacent to our principal office. The
present lease for 4000 Wisconsin Avenue expires in 2008,
and we have the option to extend the lease for up to 10
additional years, in
5-year
increments. We also lease an additional approximately
417,000 square feet of office space at five locations in
Washington, DC, suburban Virginia and Maryland. We maintain
approximately 426,000 square feet of office space in leased
premises in Pasadena, California; Atlanta, Georgia; Chicago,
Illinois; Philadelphia, Pennsylvania; and Dallas, Texas. In
addition, we have 55 Fannie Mae Community Business Centers
around the United States, which work with cities, rural areas
and underserved communities.
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Item 3.
|
Legal
Proceedings
|
This item describes the material legal proceedings, examinations
and other matters that: (1) were pending as of
December 31, 2004; (2) were terminated during the
period from the beginning of the third quarter of 2004 through
the filing of this report; or (3) are pending as of the
filing of this report. Thus, the description of a matter may
include developments that occurred since December 31, 2004,
as well as those that occurred during 2004. The matters include
legal proceedings relating to the restatement of our
consolidated financial statements, such as class action and
individual securities lawsuits, shareholder derivative actions
and governmental proceedings, and class action lawsuits alleging
antitrust violations and abuse of escrow accounts.
As described below, a number of lawsuits have been filed against
us and certain of our current and former officers and directors
relating to the accounting matters discussed in our SEC filings
and OFHEOs interim and final reports, and in the report
issued by the law firm of Paul Weiss on the results of its
independent investigation. These lawsuits currently are pending
in the U.S. District Court for the District of Columbia and
fall within three primary categories: (1) a consolidated
shareholder class action, (2) a consolidated shareholder
derivative lawsuit, and (3) a consolidated ERISA-based
class action lawsuit. In addition, the Department of Labor is
conducting a review of our Employee Stock Ownership Plan
(ESOP).
In 2003, OFHEO commenced its special examination of us. The SEC
and the U.S. Attorneys Office for the District of
Columbia also commenced investigations against us relating to
matters discussed in the OFHEO reports. On May 23, 2006, we
reached a settlement with OFHEO and the SEC. In August 2006, we
were advised by the U.S. Attorneys Office for the
District of Columbia that it was discontinuing its investigation
of us and does not plan to file charges against us.
Presently, we are also a defendant in a proposed class action
lawsuit alleging violations of federal and state antitrust laws
and state consumer protection laws in connection with the
setting of our guaranty fees. In addition, we are a defendant in
a proposed class action lawsuit alleging that we violated
purported fiduciary duties with respect to certain escrow
accounts for FHA-insured multifamily mortgage loans.
50
We are involved in a number of legal and regulatory proceedings
that arise in the ordinary course of business. For example, we
are involved in legal proceedings that arise in connection with
properties acquired either through foreclosure on properties
securing delinquent mortgage loans we own or through our receipt
of deeds to those properties in lieu of foreclosure. Claims
related to possible tort liability occur from time to time,
primarily in the case of single-family real estate owned
(REO) property.
From time to time, we are also a party to legal proceedings
arising from our relationships with our sellers and servicers.
Litigation can result from disputes with lenders concerning
their loan origination or servicing obligations to us, or can
result from disputes concerning termination by us (for a variety
of reasons) of a lenders authority to do business with us
as a seller
and/or
servicer. In addition, loan servicing and financing issues
sometimes result in claims, including potential class actions,
brought against us by borrowers.
We also are a party to legal proceedings arising from time to
time from the conduct of our business and administrative
functions, including contractual disputes and employment-related
claims.
Litigation claims and proceedings of all types are subject to
many factors that generally cannot be predicted accurately. For
additional information on these proceedings, see Notes to
Consolidated Financial StatementsNote 20, Commitments
and Contingencies.
RESTATEMENT-RELATED
MATTERS
Securities
Class Action Lawsuits
In Re
Fannie Mae Securities Litigation
Beginning on September 23, 2004, 13 separate complaints
were filed by holders of our securities against us, as well as
certain of our former officers, in the U.S. District Court
for the District of Columbia, the U.S. District Court for
the Southern District of New York and other courts. The
complaints in these lawsuits purport to have been made on behalf
of a class of plaintiffs consisting of purchasers of Fannie Mae
securities between April 17, 2001 and September 21,
2004. The complaints alleged that we and certain of our
officers, including Franklin D. Raines, J. Timothy Howard and
Leanne Spencer, made material misrepresentations
and/or
omissions of material facts in violation of the federal
securities laws. Plaintiffs claims were based on findings
contained in OFHEOs September 2004 interim report
regarding its findings to that date in its special examination
of our accounting policies, practices and controls.
All of the cases were consolidated
and/or
transferred to the U.S. District Court for the District of
Columbia. A consolidated complaint was filed on March 4,
2005 against us and former officers Franklin D. Raines,
J. Timothy Howard and Leanne Spencer. The court entered an
order naming the Ohio Public Employees Retirement System and
State Teachers Retirement System of Ohio as lead plaintiffs. The
consolidated complaint generally made the same allegations as
the individually-filed complaints, which is that we and certain
of our former officers made false and misleading statements in
violation of the federal securities laws in connection with
certain accounting policies and practices. More specifically,
the consolidated complaint alleged that the defendants made
materially false and misleading statements in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and SEC
Rule 10b-5
promulgated thereunder, largely with respect to accounting
statements that were inconsistent with the GAAP requirements
relating to hedge accounting and the amortization of premiums
and discounts. Plaintiffs contend that the alleged fraud
resulted in artificially inflated prices for our common stock.
Plaintiffs seek compensatory damages, attorneys fees, and
other fees and costs. Discovery commenced in this action
following the denial of the defendants motions to dismiss
on February 10, 2006.
On April 17, 2006, the plaintiffs in the consolidated class
action filed an amended consolidated complaint against us and
former officers Franklin D. Raines, J. Timothy Howard and Leanne
Spencer, that added purchasers of publicly traded call options
and sellers of publicly traded put options to the putative class
and sought to extend the end of the putative class period from
September 21, 2004 to September 27, 2005. We and the
individual defendants filed motions to dismiss addressing the
extended class period and the deficiency of the additional
accounting allegations. On August 14, 2006, while those
motions were still pending, the plaintiffs filed a second
amended complaint adding KPMG LLP and Goldman, Sachs &
Co., Inc. as additional
51
defendants and adding allegations based on the May 2006 report
issued by OFHEO and the February 2006 report issued by Paul
Weiss. Our answer to the second amended complaint is due to be
filed on January 8, 2007. Plaintiffs filed a motion for
class certification on May 17, 2006 that is still pending.
In addition, two individual securities cases have been filed by
institutional investor shareholders in the U.S. District
Court for the District of Columbia. The first case was filed on
January 17, 2006 by Evergreen Equity Trust, Evergreen
Select Equity Trust, Evergreen Variable Annuity Trust and
Evergreen International Trust against us and the following
current and former officers and directors: Franklin D. Raines,
J. Timothy Howard, Leanne Spencer, Thomas P. Gerrity, Anne M.
Mulcahy, Frederick V. Malek, Taylor Segue, III, William
Harvey, Joe K. Pickett, Victor Ashe, Stephen B. Ashley, Molly
Bordonaro, Kenneth M. Duberstein, Jamie Gorelick, Manuel Justiz,
Ann McLaughlin Korologos, Donald B. Marron, Daniel H. Mudd, H.
Patrick Swygert and Leslie Rahl.
The second individual securities case was filed on
January 25, 2006 by 25 affiliates of Franklin Templeton
Investments against us, KPMG LLP, and all of the following
current and former officers and directors: Franklin D. Raines,
J. Timothy Howard, Leanne Spencer, Thomas P. Gerrity, Anne M.
Mulcahy, Frederick V. Malek, Taylor Segue, III, William
Harvey, Joe K. Pickett, Victor Ashe, Stephen B. Ashley, Molly
Bordonaro, Kenneth M. Duberstein, Jamie Gorelick, Manuel Justiz,
Ann McLaughlin Korologos, Donald B. Marron, Daniel H. Mudd, H.
Patrick Swygert and Leslie Rahl.
The two related individual securities actions assert various
federal and state securities law and common law claims against
us and certain of our current and former officers and directors
based upon essentially the same alleged conduct as that at issue
in the consolidated shareholder class action, and also assert
insider trading claims against certain former officers. Both
cases seek compensatory and punitive damages, attorneys
fees, and other fees and costs. In addition, the Evergreen
plaintiffs seek an award of treble damages under state law.
On June 29, 2006 and then again on August 14 and 15,
2006, the individual securities plaintiffs filed first amended
complaints and then second amended complaints seeking to address
certain of the arguments made by the defendants in their
original motions to dismiss and adding additional allegations
regarding improper accounting practices. On August 17,
2006, we filed motions to dismiss certain claims and allegations
of the individual securities plaintiffs second amended
complaints. The individual plaintiffs seek to proceed
independently of the potential class of shareholders in the
consolidated shareholder class action, but the court has
consolidated these cases as part of the consolidated shareholder
class action for pretrial purposes and possibly through final
judgment.
We believe we have defenses to the claims in these lawsuits and
intend to defend these lawsuits vigorously.
Shareholder
Derivative Lawsuits
In Re
Fannie Mae Shareholder Derivative Litigation
Beginning on September 28, 2004, ten plaintiffs filed
twelve shareholder derivative actions (i.e., lawsuits
filed by shareholder plaintiffs on our behalf) in three
different federal district courts and the Superior Court of the
District of Columbia on behalf of the company against certain of
our current and former officers and directors and against us as
a nominal defendant. Plaintiffs contend that the defendants
purposefully misapplied GAAP, maintained poor internal controls,
issued a false and misleading proxy statement, and falsified
documents to cause our financial performance to appear smooth
and stable, and that Fannie Mae was harmed as a result. The
claims are for breaches of the duty of care, breach of fiduciary
duty, waste, insider trading, fraud, gross mismanagement,
violations of the Sarbanes-Oxley Act of 2002 and unjust
enrichment. Plaintiffs seek compensatory damages, punitive
damages, attorneys fees, and other fees and costs, as well
as injunctive relief related to the adoption by us of certain
proposed corporate governance policies and internal controls.
All of these individual actions have been consolidated into the
U.S. District Court for the District of Columbia and the
court entered an order naming Pirelli Armstrong Tire Corporation
and Wayne County Employees Retirement System as co-lead
plaintiffs. A consolidated complaint was filed on
September 26, 2005. The consolidated complaint named the
following current and former officers and directors as
defendants: Franklin D. Raines, J. Timothy Howard, Thomas P.
Gerrity, Frederick V. Malek, Joe K. Pickett, Anne M. Mulcahy,
52
Daniel H. Mudd, Kenneth M. Duberstein, Stephen B. Ashley, Ann
McLaughlin Korologos, Donald B. Marron, Leslie Rahl, H. Patrick
Swygert and John K. Wulff.
When document production commenced in In re Fannie Mae
Securities Litigation, we agreed to simultaneously provide
our document production from that action to the plaintiffs in
the shareholder derivative action.
All of the defendants filed motions to dismiss the action on
December 14, 2005. These motions were fully briefed but not
ruled upon. In the interim, the plaintiffs filed an amended
complaint on September 1, 2006, thus mooting the previously
filed motions to dismiss. Among other things, the amended
complaint adds Goldman Sachs Group Inc., Goldman,
Sachs & Co., Inc., Lehman Brothers Inc. and Radian
Insurance Inc. as defendants, adds allegations concerning the
nature of certain transactions between these entities and Fannie
Mae, adds additional allegations from OFHEOs May 2006
report on its special examination, the Paul Weiss report and
other additional details. We filed motions to dismiss the first
amended complaint on October 20, 2006.
ERISA
Action
In re
Fannie Mae ERISA Litigation (formerly David Gwyer v. Fannie
Mae)
Three ERISA-based cases have been filed against us, our Board of
Directors Compensation Committee, and against the
following former and current officers and directors: Franklin D.
Raines, J. Timothy Howard, Daniel H. Mudd, Vincent A. Mai,
Stephen Friedman, Anne M. Mulcahy, Ann McLaughlin
Korologos, Joe K. Pickett, Donald B. Marron, Kathy Gallo
and Leanne Spencer.
On October 15, 2004, David Gwyer filed a class action
complaint in the U.S. District Court for the District of
Columbia. Two additional class action complaints were filed by
other plaintiffs on May 6, 2005 and May 10, 2005. All
of these cases were consolidated on May 24, 2005 in the
U.S. District Court for the District of Columbia. A
consolidated complaint was filed on June 15, 2005. The
plaintiffs in the consolidated ERISA-based lawsuit purport to
represent a class of participants in our ESOP between
January 1, 2001 and the present. Their claims are based on
alleged breaches of fiduciary duty relating to accounting
matters discussed in our SEC filings and in OFHEOs interim
report. Plaintiffs seek unspecified damages, attorneys
fees, and other fees and costs, and other injunctive and
equitable relief. We filed a motion to dismiss the consolidated
complaint on June 29, 2005. Our motion and all of the other
defendants motions to dismiss were fully briefed and
argued on January 13, 2006. As of the date of this filing,
these motions are still pending.
We believe we have defenses to the claims in these lawsuits and
intend to defend these lawsuits vigorously.
Department
of Labor ESOP Investigation
In November 2003, the Department of Labor commenced a review of
our ESOP and Retirement Savings Plan. The Department of Labor
has concluded its investigation of our Retirement Savings Plan,
but continues to review the ESOP. We continue to cooperate fully
in this investigation.
RESTATEMENT-RELATED
INVESTIGATIONS BY U.S. ATTORNEYS OFFICE, OFHEO AND
THE SEC
U.S. Attorneys
Office Investigation
In October 2004, we were told by the U.S. Attorneys
Office for the District of Columbia that it was conducting an
investigation of our accounting policies and practices. In
August 2006, we were advised by the U.S. Attorneys
Office for the District of Columbia that it was discontinuing
its investigation of us and does not plan to file charges
against us.
OFHEO and
SEC Settlements
On May 23, 2006, we entered into comprehensive settlements
with OFHEO and the SEC that resolved open matters related to
their recent investigations of us.
53
OFHEO
Special Examination and Settlement
In July 2003, OFHEO notified us that it intended to conduct a
special examination of our accounting policies and internal
controls, as well as other areas of inquiry. OFHEO began its
special examination in November 2003 and delivered an interim
report of its findings in September 2004. On May 23, 2006,
OFHEO released its final report on its special examination.
OFHEOs final report concluded that, during the period
covered by the report (1998 to mid-2004), a large number of our
accounting policies and practices did not comply with GAAP and
we had serious problems in our internal controls, financial
reporting and corporate governance. The final OFHEO report is
available on our Web site (www.fanniemae.com) and on
OFHEOs Web site (www.ofheo.gov).
Concurrently with OFHEOs release of its final report, we
entered into comprehensive settlements that resolved open
matters with OFHEO, as well as with the SEC (described below).
As part of the OFHEO settlement, we agreed to OFHEOs
issuance of a consent order. In entering into this settlement,
we neither admitted nor denied any wrongdoing or any asserted or
implied finding or other basis for the consent order. Under this
consent order, in addition to the civil penalty described below,
we agreed to undertake specified remedial actions to address the
recommendations contained in OFHEOs final report,
including actions relating to our corporate governance, Board of
Directors, capital plans, internal controls, accounting
practices, public disclosures, regulatory reporting, personnel
and compensation practices. We also agreed not to increase our
net mortgage assets above the amount shown in our minimum
capital report to OFHEO for December 31, 2005
($727.75 billion), except in limited circumstances at
OFHEOs discretion. The consent order superseded and
terminated both our September 27, 2004 agreement with OFHEO
and the March 7, 2005 supplement to that agreement, and
resolved all matters addressed by OFHEOs interim and final
reports of its special examination. As part of the OFHEO
settlement, we also agreed to pay a $400 million civil
penalty, with $50 million payable to the U.S. Treasury
and $350 million payable to the SEC for distribution to
stockholders pursuant to the Fair Funds for Investors provision
of the Sarbanes-Oxley Act of 2002. We have paid this civil
penalty in full. This $400 million civil penalty, which has
been recorded as an expense in our 2004 consolidated financial
statements, is not deductible for tax purposes.
SEC
Investigation and Settlement
Following the issuance of the September 2004 interim OFHEO
report, the SEC informed us that it was investigating our
accounting practices.
Concurrently, at our request, the SEC reviewed our accounting
practices with respect to hedge accounting and the amortization
of premiums and discounts, which OFHEOs interim report had
concluded did not comply with GAAP. On December 15, 2004,
the SECs Office of the Chief Accountant announced that it
had advised us to (1) restate our financial statements
filed with the SEC to eliminate the use of hedge accounting, and
(2) evaluate our accounting for the amortization of
premiums and discounts, and restate our financial statements
filed with the SEC if the amounts required for correction were
material. The SECs Office of the Chief Accountant also
advised us to reevaluate the GAAP and non-GAAP information that
we previously provided to investors.
On May 23, 2006, without admitting or denying the
SECs allegations, we consented to the entry of a final
judgment requiring us to pay the civil penalty described above
and permanently restraining and enjoining us from future
violations of the anti-fraud, books and records, internal
controls and reporting provisions of the federal securities
laws. The settlement, which included the $400 million civil
penalty described above, resolved all claims asserted against us
in the SECs civil proceeding. Our consent to the final
judgment was filed as an exhibit to the
Form 8-K
that we filed with the SEC on May 30, 2006. The final
judgment was entered by the U.S. District Court of the
District of Columbia on August 9, 2006.
OTHER
LEGAL PROCEEDINGS
Former
CEO Arbitration
On September 19, 2005, Franklin D. Raines, our former
Chairman and Chief Executive Officer, initiated arbitration
proceedings against Fannie Mae before the American Arbitration
Association. On April 10, 2006,
54
the parties convened an evidentiary hearing before the
arbitrator. The principal issue before the arbitrator was
whether we were permitted to waive a requirement contained in
Mr. Raines employment agreement that he provide six
months notice prior to retiring. On April 24, 2006, the
arbitrator issued a decision finding that we could not
unilaterally waive the notice period, and that the effective
date of Mr. Raines retirement was June 22, 2005,
rather than December 21, 2004 (his final day of active
employment). Under the arbitrators decision,
Mr. Raines election to receive an accelerated,
lump-sum payment of a portion of his deferred compensation must
now be honored. Moreover, we must pay Mr. Raines any salary
and other compensation to which he would have been entitled had
he remained employed through June 22, 2005, less any
pension benefits that Mr. Raines received during that
period. On November 7, 2006, the parties entered into a
consent award, which partially resolved the issue of amounts due
Mr. Raines. In accordance with the consent award, we paid
Mr. Raines $2.6 million on November 17, 2006. By
agreement, final resolution of the unresolved issues was
deferred until after our accounting restatement results are
announced. Each party has the right, within sixty days of the
announcement of our accounting restatement results, to notify
the arbitrator whether it believes that further proceedings are
necessary.
Antitrust
Lawsuits
In Re
G-Fees Antitrust Litigation
Since January 18, 2005, we have been served with 11
proposed class action complaints filed by single-family
borrowers that allege that we and Freddie Mac violated the
Clayton and Sherman Acts and state antitrust and consumer
protection statutes by agreeing to artificially fix, raise,
maintain or stabilize the price of our and Freddie Macs
guaranty fees. Two of these cases were filed in state courts.
The remaining cases were filed in federal court. The two state
court actions were voluntarily dismissed. The federal court
actions were consolidated in the U.S. District Court for
the District of Columbia. Plaintiffs filed a consolidated
amended complaint on August 5, 2005. Plaintiffs in the
consolidated action seek to represent a class of consumers whose
loans allegedly contain a guarantee fee set by us or
Freddie Mac between January 1, 2001 and the present. The
consolidated amended complaint alleges violations of federal and
state antitrust laws and state consumer protection and other
laws. Plaintiffs seek unspecified damages, treble damages,
punitive damages, and declaratory and injunctive relief, as well
as attorneys fees and costs.
We and Freddie Mac filed a motion to dismiss on October 11,
2005. The motion to dismiss has been fully briefed and remains
pending.
We believe we have defenses to the claims in these lawsuits and
intend to defend these lawsuits vigorously.
Escrow
Litigation
Casa
Orlando Apartments, Ltd., et al. v. Federal National
Mortgage Association (formerly known as Medlock Southwest
Management Corp., et al. v. Federal National Mortgage
Association)
We are the subject of a lawsuit in which plaintiffs purport to
represent a class of multifamily borrowers whose mortgages are
insured under Sections 221(d)(3), 236 and other sections of
the National Housing Act and are held or serviced by us. The
complaint identified as a class low- and moderate-income
apartment building developers who maintained uninvested escrow
accounts with us or our servicer. Plaintiffs Casa Orlando
Apartments, Ltd., Jasper Housing Development Company and the
Porkolab Family Trust No. 1 allege that we violated
fiduciary obligations that they contend we owe to borrowers with
respect to certain escrow accounts and that we were unjustly
enriched. In particular, plaintiffs contend that, starting in
1969, we misused these escrow funds and are therefore liable for
any economic benefit we received from the use of these funds.
Plaintiffs seek a return of any profits, with accrued interest,
earned by us related to the escrow accounts at issue, as well as
attorneys fees and costs.
The complaint was filed in the U.S. District Court for the
Eastern District of Texas (Texarkana Division) on June 2,
2004 and served on us on June 16, 2004. Our motion to
dismiss and motion for summary judgment were denied on
March 10, 2005. We filed a partial motion for
reconsideration of our motion for summary judgment, which was
denied on February 24, 2006.
55
Plaintiffs have filed an amended complaint and a motion for
class certification. A hearing on plaintiffs motion for
class certification was held on July 19, 2006, and the
motion remains pending.
We believe we have defenses to the claims in this lawsuit and
intend to defend this lawsuit vigorously.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
56
PART II
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Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is publicly traded on the New York, Pacific and
Chicago stock exchanges and is identified by the ticker symbol
FNM. The transfer agent and registrar for our common
stock is Computershare, P.O. Box 43081, Providence,
Rhode Island 02940.
Quarterly
Common Stock Data
The following table shows, for the periods indicated, the high
and low sales prices per share of our common stock in the
consolidated transaction reporting system as reported in the
Bloomberg Financial Markets service, as well as the dividends
per share paid in each period.
Quarterly
Common Stock Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
70.40
|
|
|
$
|
58.40
|
|
|
$
|
0.39
|
|
Second Quarter
|
|
|
75.84
|
|
|
|
65.30
|
|
|
|
0.39
|
|
Third Quarter
|
|
|
72.07
|
|
|
|
60.11
|
|
|
|
0.45
|
|
Fourth Quarter
|
|
|
75.95
|
|
|
|
68.47
|
|
|
|
0.45
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
80.82
|
|
|
$
|
70.75
|
|
|
$
|
0.52
|
|
Second Quarter
|
|
|
75.47
|
|
|
|
65.89
|
|
|
|
0.52
|
|
Third Quarter
|
|
|
77.80
|
|
|
|
63.05
|
|
|
|
0.52
|
|
Fourth Quarter
|
|
|
73.81
|
|
|
|
62.95
|
|
|
|
0.52
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
71.70
|
|
|
$
|
53.72
|
|
|
$
|
0.26
|
|
Second Quarter
|
|
|
61.66
|
|
|
|
49.75
|
|
|
|
0.26
|
|
Third Quarter
|
|
|
60.21
|
|
|
|
41.34
|
|
|
|
0.26
|
|
Fourth Quarter
|
|
|
50.80
|
|
|
|
41.41
|
|
|
|
0.26
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
58.60
|
|
|
$
|
48.41
|
|
|
$
|
0.26
|
|
Second Quarter
|
|
|
54.53
|
|
|
|
46.17
|
|
|
|
0.26
|
|
Third Quarter
|
|
|
56.31
|
|
|
|
46.30
|
|
|
|
0.26
|
|
Holders
As of October 31, 2006, we had approximately 20,000
registered holders of record of our common stock.
Dividends
The table set forth under Quarterly Common Stock
Data above sets forth the quarterly dividends we have paid
on our common stock from the first quarter of 2003 through and
including the third quarter of 2006.
In January 2005, our Board of Directors reduced our quarterly
common stock dividend rate by 50%, from $0.52 per share to
$0.26 per share. We reduced our common stock dividend rate
in order to increase our capital surplus, which was a component
of our capital restoration plan. See
Item 7MD&ALiquidity and Capital
ManagementCapital ManagementCapital Adequacy
RequirementsCapital Restoration Plan and OFHEO-Directed
Minimum Capital Requirement for a description of our
capital restoration plan. On December 6, 2006, the Board of
Directors increased the quarterly common stock dividend to $0.40
per share. The Board determined that the increased dividend
would be effective beginning in the fourth quarter of 2006, and
therefore declared a special common stock dividend of $0.14 per
share, payable on December 29, 2006, to stockholders of
record on December 15, 2006. This special dividend of
$0.14, combined with our previously declared dividend of $0.26
paid on November 27, 2006, will result in a total common
stock
57
dividend of $0.40 per share for the fourth quarter of 2006. Our
Board of Directors will continue to assess dividend payments for
each quarter based upon the facts and conditions existing at the
time.
Our payment of dividends is subject to certain restrictions,
including the submission of prior notification to OFHEO
detailing the rationale and process for the proposed dividend
and prior approval by the Director of OFHEO of any dividend
payment that would cause our capital to fall below specified
capital levels. See
Item 7MD&A Liquidity and Capital
ManagementCapital ManagementCapital
ActivityOFHEO Oversight of Our Capital Activity for
a description of these restrictions. Payment of dividends on our
common stock is also subject to the prior payment of dividends
on our 13 series of preferred stock, representing an aggregate
of 132,175,000 shares outstanding. Quarterly dividends on
the shares of our preferred stock outstanding totaled
$130.7 million for the quarter ended September 30,
2006. See Notes to Consolidated Financial
StatementsNote 17, Preferred Stock for detailed
information on our preferred stock dividends.
Securities
Authorized for Issuance under Equity Compensation
Plans
The information required by Item 201(d) of
Regulation S-K
is provided under Item 12Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters, which is incorporated herein by reference.
Recent
Sales of Unregistered Securities
Under the Stock Compensation Plan of 1993 and the Stock
Compensation Plan of 2003 (the Plans), we regularly
provide stock compensation to our employees and members of our
Board of Directors to attract, motivate and retain these
individuals and promote an identity of interests with our
stockholders. During the year ended December 31, 2004, we
issued 3,262,894 shares of common stock upon the exercise
of stock options for an aggregate exercise price of
approximately $129 million, almost all of which was paid in
cash and the remainder of which was paid by the delivery of
8,936 shares of common stock. Additionally, in
consideration of services rendered or to be rendered, we issued
2,594,769 options to purchase common stock at a weighted average
exercise price of $78.04 per share, 998,425 shares of
restricted stock and 38,134 restricted stock units. Options
granted under the Plans typically vest 25% per year
beginning on the first anniversary of the date of grant and
expire ten years after the grant. Shares of restricted stock and
restricted stock units granted under the Plans typically vest in
equal annual installments over three or four years beginning on
the first anniversary of the date of grant. Each restricted
stock unit represents the right to receive a share of common
stock at the time of vesting. As a result, the economic
consequences of restricted stock units are generally similar to
restricted stock, except that restricted stock units do not
confer voting rights on their holders.
All options and shares of restricted stock and restricted stock
units were granted to persons who were employees or members of
the Board of Directors. During the year ended December 31,
2004, 236,521 restricted stock awards vested, as a result of
which 155,679 shares of common stock were issued and
80,842 shares of common stock that otherwise would have
been issued were withheld in lieu of requiring the recipients to
pay the withholding taxes due upon vesting to us. Additionally,
during the year ended December 31, 2004, 8,014 restricted
stock units vested, as a result of which 5,252 shares of
common stock were issued and 2,762 shares of common stock
that otherwise would have been issued were withheld in lieu of
requiring the recipients to pay the withholding taxes due upon
vesting to us.
In January 2004, we contributed an aggregate of
104,886 shares to the Employee Stock Ownership Plan
(ESOP). Benefits for employees vest under the ESOP
based on age or years of service. Eligible employees become 100%
vested in their ESOP accounts upon the earlier of age 65 or
completion of five years of service.
During the year ended December 31, 2004, we also issued
2,568 shares under our Employee Stock Purchase Plan for an
aggregate exercise price of approximately $190,000 to former
employees or the estates of former employees.
We have a Performance Share Program that compensates senior
management for meeting financial and non-financial objectives
over a three-year period. Objectives are set at the beginning of
the three-year period and
58
the Compensation Committee of the Board of Directors determines
achievement against the goals at the end of such period, setting
the amount of the award at that time. The performance shares are
generally paid out over a two- or three-year period. In January
2004, we paid out 87,329 and 224,926 shares of common stock
to senior management under our Performance Share Program for the
three-year performance share cycles that ended in 2001 and 2002,
respectively. Additionally, we determined that senior management
was entitled to receive 662,780 shares of common stock
under our Performance Share Program for the three-year
performance share cycle that ended in 2003, of which
366,428 shares were paid out in 2004, and the balance of
which was scheduled to be paid out in January 2005. Of the
678,683 aggregate shares of common stock that were paid out in
2004 under our Performance Share Program, 444,281 shares of
common stock were issued and 234,402 shares of common stock
that otherwise would have been issued were withheld in lieu of
requiring the recipients to pay the withholding taxes due to us
at the time of issuance. As previously announced, and in
connection with the restatement of our consolidated financial
statements, because we did not have reliable financial data for
years within the award cycles, the Compensation Committee and
the Board decided to postpone the determination of the amount of
the awards under the Performance Share Program for the
three-year performance share cycles that ended in 2004 and 2005,
and to postpone payment of the second installment of shares for
the three-year performance share cycle that ended in 2003 (the
first installment of which was paid in January 2004). In the
future, the Compensation Committee and the Board will review the
Performance Share Program and determine the appropriate approach
for settling its obligations with respect to the existing unpaid
performance share cycles.
The securities we issue are exempted securities
under the Securities Act and the Exchange Act to the same extent
as obligations of, or guaranteed as to principal and interest
by, the United States. As a result, we do not file registration
statements with the SEC with respect to offerings of our
securities.
59
Purchases
of Equity Securities by the Issuer
The following table shows shares of our common stock we
repurchased during 2004, 2005 and the first three quarters of
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares that
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
May Yet be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
Purchased(1)
|
|
|
per Share
|
|
|
Announced
Program(2)
|
|
|
the
Program(3)
|
|
|
|
(Shares in thousands)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
51
|
|
|
$
|
74.49
|
|
|
|
|
|
|
|
70,433
|
|
February
|
|
|
843
|
|
|
|
77.56
|
|
|
|
840
|
|
|
|
69,798
|
|
March
|
|
|
3,273
|
|
|
|
75.52
|
|
|
|
3,270
|
|
|
|
67,246
|
|
April
|
|
|
1,486
|
|
|
|
72.78
|
|
|
|
1,485
|
|
|
|
67,072
|
|
May
|
|
|
976
|
|
|
|
68.48
|
|
|
|
970
|
|
|
|
66,969
|
|
June
|
|
|
353
|
|
|
|
67.43
|
|
|
|
350
|
|
|
|
66,725
|
|
July
|
|
|
185
|
|
|
|
70.33
|
|
|
|
185
|
|
|
|
66,572
|
|
August
|
|
|
1
|
|
|
|
71.49
|
|
|
|
|
|
|
|
66,390
|
|
September
|
|
|
1
|
|
|
|
75.33
|
|
|
|
|
|
|
|
65,540
|
|
October
|
|
|
0
|
|
|
|
68.74
|
|
|
|
|
|
|
|
65,025
|
|
November
|
|
|
35
|
|
|
|
69.62
|
|
|
|
|
|
|
|
64,890
|
|
December
|
|
|
1
|
|
|
|
70.48
|
|
|
|
|
|
|
|
64,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,205
|
|
|
$
|
73.67
|
|
|
|
7,100
|
|
|
|
64,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
107
|
|
|
$
|
65.60
|
|
|
|
|
|
|
|
63,503
|
|
February
|
|
|
21
|
|
|
|
57.86
|
|
|
|
|
|
|
|
63,234
|
|
March
|
|
|
3
|
|
|
|
57.17
|
|
|
|
|
|
|
|
63,957
|
|
April
|
|
|
3
|
|
|
|
55.02
|
|
|
|
|
|
|
|
63,723
|
|
May
|
|
|
11
|
|
|
|
57.24
|
|
|
|
|
|
|
|
63,510
|
|
June
|
|
|
9
|
|
|
|
58.79
|
|
|
|
|
|
|
|
63,359
|
|
July
|
|
|
5
|
|
|
|
58.86
|
|
|
|
|
|
|
|
63,070
|
|
August
|
|
|
4
|
|
|
|
52.44
|
|
|
|
|
|
|
|
62,951
|
|
September
|
|
|
15
|
|
|
|
46.70
|
|
|
|
|
|
|
|
62,755
|
|
October
|
|
|
37
|
|
|
|
45.42
|
|
|
|
|
|
|
|
62,525
|
|
November
|
|
|
259
|
|
|
|
47.35
|
|
|
|
|
|
|
|
62,123
|
|
December
|
|
|
18
|
|
|
|
47.67
|
|
|
|
|
|
|
|
61,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
492
|
|
|
$
|
52.29
|
|
|
|
|
|
|
|
61,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
196
|
|
|
$
|
53.23
|
|
|
|
|
|
|
|
60,596
|
|
February
|
|
|
58
|
|
|
|
58.10
|
|
|
|
|
|
|
|
60,112
|
|
March
|
|
|
61
|
|
|
|
54.04
|
|
|
|
|
|
|
|
60,269
|
|
April
|
|
|
10
|
|
|
|
52.60
|
|
|
|
|
|
|
|
61,267
|
|
May
|
|
|
13
|
|
|
|
50.38
|
|
|
|
4
|
|
|
|
61,160
|
|
June
|
|
|
13
|
|
|
|
48.11
|
|
|
|
4
|
|
|
|
61,046
|
|
July
|
|
|
11
|
|
|
|
48.55
|
|
|
|
|
|
|
|
60,983
|
|
August
|
|
|
52
|
|
|
|
49.29
|
|
|
|
23
|
|
|
|
60,900
|
|
September
|
|
|
19
|
|
|
|
53.91
|
|
|
|
7
|
|
|
|
60,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
433
|
|
|
$
|
53.20
|
|
|
|
38
|
|
|
|
60,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
(1) |
|
In addition to shares repurchased
as part of the publicly announced programs described in
footnote 2 below, these shares consist of:
(a) 563,229 shares of common stock reacquired from
employees to pay an aggregate of approximately
$33.1 million in withholding taxes due upon the vesting of
restricted stock; (b) 92,590 shares of common stock
reacquired from employees to pay an aggregate of approximately
$4.8 million in withholding taxes due upon the exercise of
stock options; (c) 321,405 shares of common stock
repurchased from employees and members of our Board of Directors
to pay an aggregate exercise price of approximately
$15.8 million for stock options; and
(d) 14,430 shares of common stock repurchased from
employees in a limited number of instances relating to
employees financial hardship.
|
|
(2) |
|
Consists of
(a) 7,100,200 shares of common stock purchased
pursuant to our publicly announced share repurchase program in
open market transactions effected in compliance with SEC
Rule 10b-18,
and (b) 38,217 shares of common stock repurchased from
employees pursuant to our publicly announced employee stock
repurchase program. On January 21, 2003, we publicly
announced that the Board of Directors had approved a share
repurchase program (the General Repurchase
Authority) under which we could purchase in open market
transactions the sum of (a) up to 5% of the shares of
common stock outstanding as of December 31, 2002
(49.4 million shares) and (b) additional shares to
offset stock issued or expected to be issued under our employee
benefit plans. On May 9, 2006, we announced that the Board
of Directors had authorized a stock repurchase program (the
Employee Stock Repurchase Program) under which we
may repurchase up to $100 million of Fannie Mae shares from
non-officer employees. Neither the General Repurchase Authority
nor the Employee Stock Repurchase Program has a specified
expiration date.
|
|
(3) |
|
Consists of the total number of
shares that may yet be purchased under the General Repurchase
Authority as of the end of the month, including the number of
shares that may be repurchased to offset stock that may be
issued pursuant to the Stock Compensation Plan of 1993 and the
Stock Compensation Plan of 2003. Repurchased shares are first
offset against any issuances of stock under our employee benefit
plans. To the extent that we repurchase more shares than have
been issued under our plans in a given month, the excess number
of shares is deducted from the 49.4 million shares approved
for repurchase under the General Repurchase Authority. Because
of new stock issuances and expected issuances pursuant to new
grants under our employee benefit plans, the number of shares
that may be purchased under the General Repurchase Authority
fluctuates from month to month. No shares were repurchased from
August 2004 through September 30, 2006 in the open market
pursuant to the General Repurchase Authority. See Notes to
Consolidated Financial StatementsNote 13, Stock-Based
Compensation Plans, for information about shares issued,
shares expected to be issued, and shares remaining available for
grant under our employee benefit plans. Excludes the remaining
number of shares authorized to be repurchased under the Employee
Stock Repurchase Program. Assuming a price per share of $55.93,
the average of the high and low stock prices of Fannie Mae
common stock on September 30, 2006, approximately
1.8 million shares may yet be purchased under the Employee
Stock Repurchase Program.
|
61
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial data presented below is
summarized from our results of operations for the three-year
period ended December 31, 2004 (restated for 2003 and
2002), as well as selected consolidated balance sheet data as of
December 31, 2004, 2003, 2002 and 2001. All restatement
adjustments relating to periods prior to January 1, 2002
have been presented as adjustments to retained earnings as of
December 31, 2001. In light of the substantial time, effort
and expense incurred since December 2004 to complete the
restatement of our consolidated financial statements for 2003
and 2002, we have determined that extensive additional efforts
would be required to restate all 2001 and 2000 financial data.
In particular, significant complexities of accounting standards,
turnover of relevant personnel, and limitations of systems and
data all limit our ability to reconstruct additional financial
information for 2001 and 2000. Previously published information
for 2001 and 2000 should not be relied upon.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions, except
|
|
|
|
per share amounts)
|
|
|
Income Statement
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
18,081
|
|
|
$
|
19,477
|
|
|
$
|
18,426
|
|
Guaranty fee income
|
|
|
3,604
|
|
|
|
3,281
|
|
|
|
2,516
|
|
Derivative fair value losses, net
|
|
|
(12,256
|
)
|
|
|
(6,289
|
)
|
|
|
(12,919
|
)
|
Other income
(loss)(1)
|
|
|
(812
|
)
|
|
|
(4,220
|
)
|
|
|
(1,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
|
4,975
|
|
|
|
7,852
|
|
|
|
3,914
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
(8
|
)
|
|
|
195
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,967
|
|
|
|
8,081
|
|
|
|
3,914
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(165
|
)
|
|
|
(150
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
4,802
|
|
|
$
|
7,931
|
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before
extraordinary gains (losses) and cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.96
|
|
|
$
|
7.88
|
|
|
$
|
3.83
|
|
Diluted
|
|
|
4.94
|
|
|
|
7.85
|
|
|
|
3.81
|
|
Earnings per share after
extraordinary gains (losses) and cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.95
|
|
|
$
|
8.12
|
|
|
$
|
3.83
|
|
Diluted
|
|
|
4.94
|
|
|
|
8.08
|
|
|
|
3.81
|
|
Weighted-average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
970
|
|
|
|
977
|
|
|
|
992
|
|
Diluted
|
|
|
973
|
|
|
|
981
|
|
|
|
998
|
|
Cash dividends declared per share
|
|
$
|
2.08
|
|
|
$
|
1.68
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Activity
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS
issues(2)
|
|
$
|
552,482
|
|
|
$
|
1,220,066
|
|
|
$
|
743,630
|
|
Mortgage portfolio
purchases(3)
|
|
|
258,478
|
|
|
|
525,759
|
|
|
|
353,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business volume
|
|
$
|
810,960
|
|
|
$
|
1,745,825
|
|
|
$
|
1,096,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading(4)
|
|
$
|
35,287
|
|
|
$
|
43,798
|
|
|
$
|
14,909
|
|
|
$
|
(45
|
)
|
Available-for-sale
|
|
|
532,095
|
|
|
|
523,272
|
|
|
|
520,176
|
|
|
|
503,381
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
11,721
|
|
|
|
13,596
|
|
|
|
20,192
|
|
|
|
11,327
|
|
Loans held for investment, net of
allowance
|
|
|
389,651
|
|
|
|
385,465
|
|
|
|
304,178
|
|
|
|
267,510
|
|
Total assets
|
|
|
1,020,934
|
|
|
|
1,022,275
|
|
|
|
904,739
|
|
|
|
814,561
|
|
Short-term debt
|
|
|
320,280
|
|
|
|
343,662
|
|
|
|
293,538
|
|
|
|
280,848
|
|
Long-term debt
|
|
|
632,831
|
|
|
|
617,618
|
|
|
|
547,755
|
|
|
|
484,182
|
|
Total liabilities
|
|
|
981,956
|
|
|
|
990,002
|
|
|
|
872,840
|
|
|
|
791,305
|
|
Preferred stock
|
|
|
9,108
|
|
|
|
4,108
|
|
|
|
2,678
|
|
|
|
2,303
|
|
Total stockholders equity
|
|
|
38,902
|
|
|
|
32,268
|
|
|
|
31,899
|
|
|
|
23,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
capital(5)
|
|
$
|
34,514
|
|
|
$
|
26,953
|
|
|
$
|
20,431
|
|
|
$
|
18,234
|
|
Total
capital(6)
|
|
|
35,196
|
|
|
|
27,487
|
|
|
|
20,831
|
|
|
|
18,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of Business
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
portfolio(7)
|
|
$
|
917,209
|
|
|
$
|
908,868
|
|
|
$
|
799,779
|
|
|
$
|
715,953
|
|
Fannie Mae MBS held by third
parties(8)
|
|
|
1,408,047
|
|
|
|
1,300,520
|
|
|
|
1,040,439
|
|
|
|
878,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of business
|
|
$
|
2,325,256
|
|
|
$
|
2,209,388
|
|
|
$
|
1,840,218
|
|
|
$
|
1,593,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets
ratio(9)*
|
|
|
0.47
|
%
|
|
|
0.82
|
%
|
|
|
0.44
|
%
|
Return on equity
ratio(10)*
|
|
|
16.6
|
|
|
|
27.6
|
|
|
|
15.2
|
|
Equity to assets
ratio(11)*
|
|
|
3.5
|
|
|
|
3.3
|
|
|
|
3.2
|
|
Dividend payout
ratio(12)*
|
|
|
42.1
|
|
|
|
20.8
|
|
|
|
34.5
|
|
Average effective guaranty fee rate
(in basis
points)(13)*
|
|
|
20.8
|
bp
|
|
|
21.0
|
bp
|
|
|
19.3
|
bp
|
Credit loss ratio (in basis
points)(14)*
|
|
|
1.0
|
bp
|
|
|
0.9
|
bp
|
|
|
0.8
|
bp
|
Earnings to combined fixed charges
and preferred stock dividends and issuance costs at redemption
ratio(15)
|
|
|
1.22:1
|
|
|
|
1.36:1
|
|
|
|
1.16:1
|
|
|
|
|
(1) |
|
Includes investment losses,
net; debt extinguishment losses, net; loss from partnership
investments; and fee and other income.
|
|
(2) |
|
Unpaid principal balance of Fannie
Mae MBS acquired by third-party investors during the reporting
period.
|
|
(3) |
|
Unpaid principal balance of
mortgage loans and mortgage-related securities we purchased for
our portfolio during the reporting period.
|
|
(4) |
|
Balance as of December 31,
2001 primarily represents the fair value of forward purchases of
TBA mortgage securities that were in a loss position.
|
|
(5) |
|
The sum of (a) the stated
value of outstanding common stock (common stock less treasury
stock); (b) the stated value of outstanding non-cumulative
perpetual preferred stock;
(c) paid-in-capital;
and (d) retained earnings. Core capital excludes
accumulated other comprehensive income.
|
|
(6) |
|
The sum of (a) core capital
and (b) the total allowance for loan losses and reserve for
guaranty losses, less (c) the specific loss allowance (that
is, the allowance required on individually-impaired loans).
|
|
(7) |
|
Unpaid principal balance of
mortgage loans and mortgage-related securities held in our
portfolio.
|
63
|
|
|
(8) |
|
Unpaid principal balance of Fannie
Mae MBS held by third-party investors. The principal balance of
resecuritized Fannie Mae MBS is included only once.
|
|
(9) |
|
Net income available to common
stockholders divided by average total assets.
|
|
(10) |
|
Net income available to common
stockholders divided by average outstanding common equity.
|
|
(11) |
|
Average stockholders equity
divided by average total assets.
|
|
(12) |
|
Common dividend payments divided by
net income available to common stockholders.
|
|
(13) |
|
Guaranty fee income as a percentage
of average outstanding Fannie Mae MBS and other guaranties.
|
|
(14) |
|
Charge-offs, net of recoveries and
foreclosed property expense (income), as a percentage of the
average mortgage credit book of business.
|
|
(15) |
|
Earnings includes
reported income before extraordinary gains (losses), net of tax
effect and cumulative effect of change in accounting principle,
net of tax effect plus (a) provision for federal income
taxes, minority interest in earnings of consolidated
subsidiaries, loss from partnership investments, capitalized
interest and total interest expense. Combined fixed
charges and preferred stock dividends and issuance costs at
redemption includes (a) fixed charges
(b) preferred stock dividends and issuance costs on
redemptions of preferred stock, defined as pretax earnings
required to pay dividends on outstanding preferred stock using
our effective income tax rate for the relevant periods. Fixed
charges represent total interest expense and capitalized
interest.
|
Notes
|
|
* |
Average balances for purposes of the ratio calculations are
based on beginning and end of year balances.
|
64
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
ORGANIZATION
OF MD&A
We intend for our MD&A to provide information that will
assist in better understanding our consolidated financial
statements. This section explains the changes in certain key
items in our consolidated financial statements from year to
year, the primary factors driving those changes, our risk
management processes and results, any known trends or
uncertainties of which we are aware that we believe may have a
material effect on our future performance, as well as how
certain accounting principles affect our consolidated financial
statements. Our MD&A also provides information about our
three complementary business segments in order to explain how
the activities of each segment impact our results of operations
and financial condition. This discussion also addresses the
accounting errors that resulted in the restatement of our
consolidated financial statements for the years ended
December 31, 2003 and 2002, and the six months ended
June 30, 2004, and the impact of the restatement on our
previously reported financial results.
Our MD&A is organized as follows:
|
|
|
|
|
Executive Summary
|
|
|
|
Restatement
|
|
|
|
Critical Accounting Policies and Estimates
|
|
|
|
Consolidated Results of Operations
|
|
|
|
Business Segment Results
|
|
|
|
Supplemental Non-GAAP InformationFair Value Balance
Sheet
|
|
|
|
Risk Management
|
|
|
|
Liquidity and Capital Management
|
|
|
|
Off-Balance Sheet Arrangements
|
|
|
|
Impact of Future Adoption of Accounting Pronouncements
|
|
|
|
2004 Quarterly Review
|
This discussion should be read in conjunction with our
consolidated financial statements as of December 31, 2004
and the notes accompanying those consolidated financial
statements. Readers should also review carefully
Item 1BusinessForward-Looking
Statements and Item 1ARisk Factors
for a description of the forward-looking statements in this
report and a discussion of the factors that might cause our
actual results to differ, perhaps materially, from these
forward-looking statements. Readers may refer to
Item 1BusinessGlossary of Terms Used in
this Report for an explanation of key terms used
throughout this discussion. Unless otherwise noted, all
financial information provided in this report gives effect to
our restatement as described in Restatement.
EXECUTIVE
SUMMARY
Our
Mission and Business
We are a stockholder-owned corporation (NYSE: FNM) chartered by
the U.S. Congress to support liquidity and stability in the
secondary mortgage market. Our business includes three
integrated business segmentsSingle-Family Credit Guaranty,
Housing and Community Development and Capital Marketsthat
work together to provide services, products and solutions to our
lender customers and a broad range of housing partners.
Together, our business segments contribute to our chartered
mission objectives, helping to increase the total amount of
funds available to finance housing in the United States and to
make homeownership more available and affordable for low-,
moderate- and middle-income Americans. We also work with our
customers and partners to increase the availability and
affordability of rental housing.
65
In our Single-Family and HCD business segments, we
securitize mortgage loans delivered to us by mortgage lenders
and then return Fannie Mae MBS to the lenders. We generally
guarantee to the MBS trust that we will supplement mortgage loan
collections as required to permit timely payment of principal
and interest due on the related Fannie Mae MBS. Our Fannie Mae
MBS are generally highly liquid, enabling mortgage lenders to
raise capital to fund additional mortgage loans by selling the
Fannie Mae MBS in the secondary mortgage market. We generate
revenues in our Single-Family business segment primarily from
the guaranty fees the segment receives as compensation for
assuming the credit risk on the mortgage loans underlying
single-family Fannie Mae MBS and on the single-family mortgage
loans held in our portfolio.
Our HCD business also engages in a number of additional
activities designed to expand the supply of affordable housing
in America. These activities, which are described in detail in
Item 1Business SegmentsHousing and
Community Development, include investing in affordable
rental properties that qualify for low-income housing tax
credits; making equity investments in affordable for-sale and
rental housing; and providing loans and credit support to
housing finance agencies and other public entities to support
their affordable housing efforts. Revenues in the segment are
derived from a variety of sources, including the guaranty fees
the segment receives as compensation for assuming the credit
risk on the mortgage loans underlying multifamily Fannie Mae MBS
and on the multifamily mortgage loans held in our portfolio,
transaction fees associated with the multifamily business and
bond credit enhancement fees. In addition, HCDs
investments in housing projects eligible for the low-income
housing tax credit and other investments generate both tax
credits and net operating losses that reduce our federal income
tax liability.
In our Capital Markets group, our principal business is
the purchase and sale of mortgage loans and mortgage-related
assets through a full range of economic and competitive cycles.
By maintaining a constant, reliable presence as an active
investor in mortgage assets, we support liquidity and increase
the stability of the pricing of mortgage loans in the secondary
mortgage market. To fund our investment activities, our Capital
Markets group issues Fannie Mae debt securities that attract
capital from investors globally to support housing in the United
States. Our Capital Markets group generates income primarily
from the difference, or spread, between the yield on the
mortgage assets we own and the cost of the debt we issue to fund
these assets. Through our investment activities, we seek to
maximize total returns, subject to our risk constraints, while
fulfilling our chartered liquidity function.
Our businesses are self-sustaining and funded exclusively with
private capital. The U.S. government does not guarantee,
directly or indirectly, our securities or other obligations.
We operate our three business segments with oversight by our
Board of Directors. Relevant committees of the Board (Audit
Committee, Risk Policy and Capital Committee, Nominating and
Corporate Governance Committee, Compensation Committee,
Technology and Operations Committee, Compliance Committee,
Housing and Community Finance Committee and Executive Committee)
engage on matters within their respective charters. We encourage
management and employees to have frequent and open dialogue with
the Board.
Our non-executive Chairman of the Board is an important link
between the Board and the company, and our CEO sits on the Board
to ensure translation of Board policies into business
activities. Within the company, the CEO works with the
Management Executive Committee, comprised primarily of officers
directly reporting to him, to develop, implement and execute the
companys plans and strategy. Our strategy is managed as a
set of initiatives, which are typically assigned to individual
executives within each business. The Management Executive
Committee tracks these initiatives throughout the year and
regularly reviews progress with management and the Board. We
have established cross-functional management committees to
ensure appropriate focus and effective decision-making in
critical areas such as risk management, operations, compliance
and disclosure.
Managing
Our Risk
Our business activities expose us to four primary risks: credit
risk, market risk (including interest rate risk), operational
risk and liquidity risk. Effectively managing these risks is a
principal focus of our organization, a key determinant of our
success in achieving our mission and business objectives, and is
critical to our safety
66
and soundness. A detailed discussion of our risk management
strategies, processes and measures is included in Risk
Management below.
We devoted significant resources in 2005 and 2006 to addressing
weaknesses identified in our risk governance structure and to
ensuring that we have the personnel, processes and controls in
place to allow us to achieve our risk management objectives. In
2005, we adopted an enhanced corporate risk governance
framework, including the creation of a corporate risk oversight
function led by a Chief Risk Officer who reports directly to our
Chief Executive Officer and independently to the Risk Policy and
Capital Committee of the Board of Directors.
Our businesses have responsibility for managing the
day-to-day
risks inherent in our business activities. Risk management at
the business level is conducted in accordance with
enterprise-wide corporate risk policies approved by our Board of
Directors.
Our Single-Family and HCD businesses have responsibility for
managing the credit risk inherent in the mortgage loans and
Fannie Mae MBS that we either hold in our portfolio or
guarantee. We take a disciplined approach in managing credit
risk. We believe our mortgage credit book of business has strong
credit characteristics, as measured by
loan-to-value
ratios, credit scores and other loan characteristics that
reflect the effectiveness of our credit risk management
strategy. Our credit losses for the period 2002 to 2004 have
remained at what we consider to be low levels, averaging
approximately 0.01% of our mortgage credit book of business. A
detailed discussion of our credit risk management strategies and
results can be found in Risk ManagementCredit Risk
Management.
Our Capital Markets group is responsible for managing the
interest rate risk inherent in the mortgage loans and
mortgage-related securities that we purchase and the debt we
issue. The objective of our interest rate risk management
strategy is to maintain a conservative, disciplined approach to
managing interest rate risk. A detailed discussion of our
interest rate risk management strategy and results can be found
in Risk ManagementInterest Rate Risk Management and
Other Market Risks below. Our Capital Markets group is
also responsible for managing the credit risk of the non-Fannie
Mae mortgage-related securities in our portfolio.
Our
Restatement
In December 2004, we announced that we would restate our
previously filed consolidated financial statements because those
financial statements were prepared applying accounting practices
that did not comply with GAAP. Since the time of our
announcement, we have devoted substantial resources towards the
completion of our restatement. We have worked closely with and
benefited from the guidance of OFHEO, our safety and soundness
regulator, throughout this process. We have also obtained
assistance from a variety of resources, including
PricewaterhouseCoopers LLP, technology consulting firms and
outside counsel.
The restatement process included a comprehensive review of our
accounting policies and practices, implementing revised
accounting policies, obtaining
and/or
validating market values for various financial instruments at
multiple points in time, and enhancing or developing new systems
to track, value and account for our transactions. The
restatement was a complex undertaking that required the
dedicated efforts of thousands of financial and accounting
professionals, including external consultants. As described
below under Consolidated Results of OperationsOther
Non-interest ExpenseAdministrative Expenses, our
administrative expenses in 2005 and 2006 were substantially
affected by costs associated with our restatement and related
matters, which we estimate totaled $1.3 billion. We
anticipate that the costs associated with preparation of our
post-2004 financial statements and periodic SEC reports will
continue to have a substantial impact on administrative expenses
until we are current in filing our periodic financial reports
with the SEC. As part of our settlements with OFHEO and the SEC,
we paid a $400 million civil penalty, which has been
recorded as an expense in our 2004 consolidated financial
statements.
In this Annual Report on
Form 10-K,
we have restated our previously filed audited consolidated
financial statements for the years ended December 31, 2003
and 2002, and our unaudited consolidated financial statements
for the quarters ended March 31, 2004 and June 30,
2004. The restatement adjustments resulted in a cumulative net
decrease in retained earnings of $6.3 billion as of
June 30, 2004 and a cumulative net
67
increase in stockholders equity of $4.1 billion as of
June 30, 2004. The restatement adjustments also resulted in
an increase in previously reported net income attributable to
common stockholders of $176 million for the year ended
December 31, 2003 and a reduction in previously reported
net income attributable to common stockholders of
$705 million for the year ended December 31, 2002. For
more information on the background, details and results of our
restatement efforts, please see Restatement below.
The filing of this Annual Report on
Form 10-K
for the year ended December 31, 2004 represents a
significant achievement in our efforts to return to timely
financial reporting. We believe that major elements of the
restatement, including our comprehensive review of our
accounting policies and practices, will contribute to a more
expeditious completion of financial statements for the years
ended December 31, 2005 and 2006.
Our
Organizational Changes and Remediation Progress
Using the findings of the OFHEO special examination, the Paul
Weiss review and our own internal reviews of our business and
the practices of other financial services companies as a guide,
we have taken a number of steps to address specific identified
weaknesses and to build a foundation for what we believe will be
a fundamentally stronger and sounder company.
We believe the items highlighted below, in addition to specific
remediation actions related to our accounting policies and
practices, reflect significant remediation progress.
|
|
|
|
|
We have made significant changes to our Board of Directors,
including the appointment of a non-executive Chairman of the
Board, the creation of a Risk Policy and Capital Committee of
the Board, the creation of a Technology and Operations Committee
of the Board, and the re-designation of a new Compliance
Committee of the Board composed entirely of independent
directors. We have also added six new Board members with
substantial experience and knowledge related to business
operations, accounting and finance since our receipt of
OFHEOs interim report in September 2004, including a new
Chairman of the Audit Committee and three other new members of
the Audit Committee.
|
|
|
|
We have made significant changes to our executive management
team, including the appointment of a new Chief Executive Officer
and a new Chief Financial Officer. Over 35% of our senior
officers, including our Chief Financial Officer, Controller,
Chief Audit Executive, Chief Risk Officer, General Counsel and
all senior officers in our Controllers and Accounting
Policy functions, joined the company after December 2004.
|
|
|
|
We have initiated a comprehensive plan to transform our
corporate culture into one focused on service, open and honest
engagement, accountability and effective management practices.
|
|
|
|
We have modified our compensation practices to include
non-financial metrics relating to our controls, culture and
mission goals.
|
|
|
|
We have established an enterprise-wide risk oversight
organization to oversee the management of credit risk, market
risk and operational risk. We hired a new Chief Risk Officer to
lead the build-out and responsibilities of this organization. In
addition, we have implemented a new organizational risk
structure that includes risk management personnel within each
business unit.
|
|
|
|
We appointed a new Chief Audit Executive from outside the
company, reporting directly to the Audit Committee of the Board
of Directors. We have completed a comprehensive review of
Internal Audits organizational design and audit processes.
We have filled the key management positions of Internal Audit
with highly credentialed and experienced audit professionals,
and we continue to enhance staffing in this area.
|
|
|
|
We have appointed a new Chief Compliance Officer and
substantially enhanced the staffing and scope of our compliance
function.
|
Our efforts to change the culture of our company, to implement
effective controls and governance processes, to fully staff
certain areas of our operations and to build out our
infrastructure are ongoing. As noted in
Item 1ARisk Factors, we are still in the
process of remediating the material weaknesses we had identified
in our internal control over financial reporting as of
December 31, 2004. Accordingly, we still have significant
68
remediation work remaining before we will be able to file
periodic financial reports with the SEC and the NYSE on a timely
basis. However, we believe the actions described above are
representative of our commitment to making fundamental, lasting
changes that will strengthen the governance, controls,
operational discipline and culture of our organization.
Summary
of Our Financial Results
The financial performance discussed in this Annual Report on
Form 10-K is based on our consolidated financial results for the
year ended December 31, 2004 and our restated consolidated
financial results for the years ended December 31, 2003 and
2002. Net income and diluted earnings per share totaled
$5.0 billion and $4.94, respectively, in 2004, compared
with $8.1 billion and $8.08 in 2003, and $3.9 billion
and $3.81 in 2002. Below are highlights of our performance.
2004 versus 2003
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|
|
|
Business volume down 54% from record level of $1.7 trillion
in 2003
|
|
|
|
5% growth in our book of business
|
|
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|
7% decrease in net interest income to $18.1 billion
|
|
|
|
25 basis point decrease in net interest yield to 1.87%
|
|
|
|
10% increase in guaranty fee income to $3.6 billion
|
|
|
|
Derivative fair value losses of $12.3 billion, compared
with derivative fair value losses of $6.3 billion in 2003
|
|
|
|
Losses of $152 million on debt extinguishments, compared
with losses of $2.7 billion in 2003
|
|
2003 versus 2002
|
|
|
|
|
|
Business volume up 59% to record level of $1.7 trillion
|
|
|
|
20% growth in our book of business
|
|
|
|
6% increase in net interest income to $19.5 billion
|
|
|
|
12 basis point decrease in net interest yield to 2.12%
|
|
|
|
30% increase in guaranty fee income to $3.3 billion
|
|
|
|
Derivative fair value losses of $6.3 billion, compared with
derivative fair value losses of $12.9 billion in 2002
|
|
|
|
Losses of $2.7 billion on debt extinguishments, compared
with losses of $814 million in 2002
|
|
Our assets and liabilities consist predominately of financial
instruments. We expect significant volatility from period to
period in our financial results, due in part to the various
manners in which we account for our financial instruments under
GAAP. We routinely use fair value measures to make investment
decisions and to measure, monitor and manage our risk. As
described more fully in Critical Accounting Policies and
EstimatesFair Value of Financial Instruments, we use
various methodologies to estimate fair value depending on the
nature of the instrument and availability of observable market
information. However, under GAAP we are required to measure and
record some financial instruments at fair value, while other
financial instruments are recorded at historical cost. In
addition, as summarized below, changes in the carrying values of
financial instruments that we report at fair value in our
consolidated balance sheets under GAAP are recognized in our
results of operations in a variety of ways depending on the
nature of the asset or liability.
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|
|
We record derivatives, mortgage commitments and trading
securities at fair value in our consolidated balance sheets and
recognize changes in the fair value of those financial
instruments in our net income.
|
|
|
|
We record
available-for-sale
securities, retained interests and guaranty fee buy-ups at fair
value in our consolidated balance sheets and recognize changes
in the fair value of those financial instruments in accumulated
other comprehensive income (AOCI), a component of
stockholders equity.
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|
|
We record held for sale mortgage loans at the lower of cost or
market (LOCOM) in our consolidated balance sheets
and recognize changes in the fair value (not to exceed the cost
basis of these loans) in our net income.
|
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|
At the inception of a guaranty contract, we estimate the fair
value of the guaranty asset and guaranty obligation and record
each of those amounts in our consolidated balance sheet. In each
subsequent period, we reduce the guaranty asset for guaranty
fees received and any impairment. We amortize the guaranty
|
69
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|
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|
|
obligation in proportion to the reduction of the guaranty asset
and recognize the amortization as guaranty fee income in our net
income. We do not record subsequent changes in the fair value of
the guaranty asset or guaranty obligation in our consolidated
financial statements. The guaranty assets are, however, reviewed
for impairment.
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|
|
|
|
We record debt instruments at amortized cost and recognize
interest expense in our net interest income.
|
As a result of the variety of ways in which we record financial
instruments in our consolidated financial statements, we expect
our earnings to vary, perhaps substantially, from period to
period and result in volatility in our stockholders equity
and regulatory capital. For example, we purchase mortgage assets
and use a combination of debt and derivatives to fund those
assets and manage the interest rate risk inherent in our
mortgage investments. Our net income reflects changes in the
fair value of the derivatives we use to manage interest rate
risk; however, it does not reflect offsetting changes in the
fair value of the majority of our mortgage investments and none
of our debt obligations.
We do not evaluate or manage changes in the fair value of our
various financial instruments on a stand-alone basis. Rather, we
manage the interest rate exposure on our net assets, which
includes all of our assets and liabilities, on an aggregate
basis regardless of the manner in which changes in the fair
value of different types of financial instruments are recorded
in our consolidated financial statements. In Supplemental
Non-GAAP InformationFair Value Balance Sheet,
we provide a fair value balance sheet that presents all of our
assets and liabilities on a comparable basis. Management uses
the fair value balance sheet, in conjunction with other risk
management measures, to assess our risk profile, evaluate the
effectiveness of our risk management strategies and adjust our
risk management decisions as necessary. Because the fair value
of our net assets reflects the full impact of managements
actions as well as current market conditions, management uses
this information to assess performance and gauge how much
management is adding to the long-term value of the company as
well as to understand how the overall value of the company is
changing. Our consolidated GAAP balance sheet as of
December 31, 2004 reflects an increase in the reported
value of our net assets of $6.6 billion from the prior
year, while our consolidated fair value balance sheet as of
December 31, 2004 reflects an increase in the fair value of
our net assets of $11.7 billion.
Our
Market
Our business operates within the U.S. residential mortgage
market, which represents a major portion of the domestic capital
markets. As of June 30, 2006, the latest date for which
data was available, the Federal Reserve estimated that total
U.S. residential mortgage debt outstanding was
approximately $10.5 trillion. This compares with total
U.S. residential mortgage debt outstanding of $6.9
trillion, $7.7 trillion, $8.9 trillion and $10.1 trillion for
the years 2002, 2003, 2004 and 2005, respectively.
U.S. residential mortgage debt outstanding has increased
each year from 1945 to 2005, at an average annualized rate of
approximately 10.6%. For the years 2002 through 2005, growth in
U.S. residential mortgage debt outstanding was particularly
strong, growing at an estimated annual rate of nearly 13% in
2002 and 2003, approximately 15% in 2004 and approximately 14%
in 2005. Our book of business, which includes both mortgage
assets we hold in our mortgage portfolio and our Fannie Mae MBS
held by third parties, was $2.4 trillion as of June 30,
2006, representing nearly 23% of total U.S. residential
mortgage debt outstanding.
In 2006, growth in U.S. residential mortgage debt
outstanding and home price appreciation has slowed from recent
high levels. The annualized growth rate for
U.S. residential mortgage debt outstanding slowed to 9.6%
in the second quarter of 2006. According to the OFHEO House
Price Index, home prices increased at a 3.45% annualized rate in
the third quarter of 2006, which represents a substantial
decline in home price appreciation from the double-digit growth
recorded for each of the prior two years. We expect that growth
in U.S. residential mortgage debt outstanding will continue
at a slower pace in 2007, as the housing market continues to
cool and home price gains moderate further or possibly decline
modestly. However, due to the cumulative appreciation in home
prices during the past several years, affordability continues to
pose a challenge for many potential homebuyers. The volume of
non-traditional mortgage products, including interest-only and
negative-amortizing
mortgage loans, remains high as consumers continue to struggle
with affordability issues. Additionally, the sub-prime and Alt-A
mortgage originations that account for a large portion of the
growth in market share of
70
private-label issuers of mortgage-related securities in recent
years continue to represent an elevated level of originations by
historical standards.
Over the next decade, we expect demographic demand (primarily
from stable household formation rates, a positive age structure
of the population for homebuying and rising homeownership rates
due to the high level of immigration over the past
25 years) that suggests a fundamentally strong mortgage
market. We believe that these and other underlying demographic
factors will support continued long-term demand for new capital
to finance the substantial and sustained housing finance needs
of American homebuyers.
RESTATEMENT
Overview
Background. In September 2004, OFHEO delivered
to our Board of Directors an interim report of its findings,
through that date, of its special examination of our accounting
policies and internal controls. OFHEOs interim report
concluded that we misapplied GAAP in specified areas, including
hedge accounting and the amortization of purchase premiums and
discounts on securities and loans and on other deferred charges.
The interim report also identified numerous control weaknesses
relating to, among other matters, our processes for estimating
amortization and developing and implementing accounting
policies. The control weaknesses identified by the interim
report included inadequate segregation of duties, key person
dependencies, and a lack of written procedures and supporting
documentation.
Following the receipt of OFHEOs interim report, we
requested that the SECs Office of the Chief Accountant
review our accounting practices relating to hedge accounting and
to our amortization of purchase premiums and discounts on
securities and loans and on other deferred charges. On
December 15, 2004, the SECs Office of the Chief
Accountant announced that it had advised us to (1) restate
our financial statements filed with the SEC to eliminate the use
of hedge accounting, and (2) evaluate our accounting for
the amortization of premiums and discounts, and restate our
financial statements filed with the SEC if the amounts required
for correction were material. The SECs Office of the Chief
Accountant also advised us to reevaluate the GAAP and non-GAAP
information that we previously provided to investors,
particularly in view of the decision that hedge accounting was
not appropriate.
Announcement of Restatement and Non-reliance on Previous
Financial Statements. On December 16, 2004,
we announced that we would comply fully with the determination
of the SECs Office of the Chief Accountant. On
December 17, 2004, the Audit Committee of our Board of
Directors concluded that our previously filed interim and
audited consolidated financial statements for the periods from
January 2001 through the second quarter of 2004 should no longer
be relied upon because these financial statements were prepared
applying accounting practices that did not comply with GAAP.
Replacement of Independent Registered Public Accounting
Firm. On December 21, 2004, the Audit
Committee of the Board of Directors dismissed the firm of KPMG
LLP as our independent registered public accounting firm and,
effective January 28, 2005, engaged Deloitte &
Touche LLP as our independent registered public accounting firm.
Changes to Senior Management. On
December 21, 2004, our Board of Directors appointed Stephen
B. Ashley to serve as non-executive Chairman of the Board, and
appointed Daniel H. Mudd as interim Chief Executive Officer and
Robert J. Levin as interim Chief Financial Officer to replace
Franklin D. Raines as Chairman of the Board of Directors and
Chief Executive Officer, and Timothy Howard as Chief Financial
Officer. In addition to our Chief Financial Officer, all of our
other senior financial officers, including the previous
Controller and previous Chief Audit Executive, were replaced
following the discovery and announcement of the accounting
errors discussed above. The Board of Directors subsequently
appointed Daniel H. Mudd as Chief Executive Officer and Robert
T. Blakely as Chief Financial Officer. The Board appointed
Daniel H. Mudd as CEO following the completion of an executive
search effort overseen by a subcommittee of the Board comprised
of independent Board members and utilizing the services of an
executive search firm.
71
Restatement of Prior Consolidated Financial
Statements. Our restatement process began in
December 2004. Due to the significant complexities associated
with our restatement and the lack of effective internal control
over financial reporting, the restatement process has required
an extensive effort by thousands of financial and accounting
professionals, including both employees and external
consultants. The restatement process has included thoroughly and
comprehensively reviewing our accounting policies and practices
to ensure compliance with GAAP; implementing revised accounting
policies; obtaining
and/or
validating market values for our various financial instruments
at multiple points in time over the restatement period; and
enhancing or developing new systems to track, value and account
for our transactions. Beyond the initial errors identified by
our regulators, we also identified additional errors in our
accounting and a substantial number of material weaknesses in
our internal control over financial reporting, including a
material weakness relating to our application of GAAP. See
Item 9AControls and Procedures for a
description of these material weaknesses, as well as our
remediation activities relating to these material weaknesses.
We have restated our previously reported audited consolidated
financial statements for the years ended December 31, 2003
and 2002, as well as our unaudited consolidated financial
statements for the quarters ended March 31, 2004 and
June 30, 2004. We have also restated our previously
reported December 31, 2001 balance sheet to reflect
corrected items that relate to prior periods. As described in
more detail below, the cumulative impact of the restatement
adjustments resulted in:
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|
|
a net decrease in retained earnings of $6.3 billion as of
June 30, 2004;
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|
a net increase in stockholders equity of $4.1 billion
as of June 30, 2004; and
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|
a net decrease in regulatory core capital of $7.5 billion
as of December 31, 2003.
|
Stockholders equity increased despite a decrease in
retained earnings. This was because AOCI restatement adjustments
were significantly higher than retained earnings restatement
adjustments. Our restatement adjustments resulted in an increase
in AOCI of $10.4 billion, a decrease in retained earnings
of $6.3 billion and an increase of $91 million in
other equity changes as of June 30, 2004. The most
significant causes of the $10.4 billion AOCI adjustments
were the reversal of previously recorded derivative cash flow
hedge adjustments and the recognition of fair value adjustments
on
available-for-sale
securities that were previously classified as
held-to-maturity
securities and recorded at amortized cost. The most significant
cause of the $6.3 billion retained earnings adjustments was
the recognition in income of fair value adjustments associated
with derivatives due to the loss of hedge accounting.
Overall
Impact
The overall impact of our restatement was a total reduction in
retained earnings of $6.3 billion through June 30,
2004. This amount includes:
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|
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|
|
a $7.0 billion net decrease in earnings for periods prior
to January 1, 2002 (as reflected in beginning retained
earnings as of January 1, 2002);
|
|
|
|
a $705 million net decrease in earnings for the year ended
December 31, 2002;
|
|
|
|
a $176 million net increase in earnings for the year ended
December 31, 2003; and
|
|
|
|
a $1.2 billion net increase in earnings for the six months
ended June 30, 2004.
|
We previously estimated that errors in accounting for derivative
instruments, including mortgage commitments, would result in a
total of $10.8 billion in after-tax cumulative losses
through December 31, 2004. In a subsequent
12b-25
filing in August 2006, we confirmed our estimate of after-tax
cumulative losses on derivatives of $8.4 billion, but
disclosed that our previous estimate of $2.4 billion in
after-tax cumulative losses on mortgage commitments would be
significantly less. We did not provide estimates of the effects
on net income or retained earnings of any other accounting
errors, nor did we provide any estimates of the effects of our
restatement on total assets, total liabilities or
stockholders equity. As reflected in the results we are
reporting in this Annual Report on
Form 10-K,
our retained earnings as of December 31, 2004 includes
after-tax cumulative losses on derivatives of $8.4 billion
and after-tax cumulative net gains on derivative mortgage
commitments of $535 million, net of related amortization,
for a total after-tax cumulative impact as of
72
December 31, 2004 of approximately $7.9 billion
related to these two restatement items. As a result of the
restatement and our recognition of the $8.4 billion in the
periods the losses were incurred, we will not amortize the
$8.4 billion through earnings in future periods. Under our
prior accounting, we would have amortized through earnings
amounts related to closed derivatives positions while open
derivatives positions would continue to have changes in fair
value deferred and recognized in AOCI according to the hedge
accounting guidelines. Of the $8.4 billion recognized from
restating our derivatives accounting, $8.0 billion of
closed derivatives positions would have amortized through
earnings, with approximately $3.6 billion of that amount
amortizing during the period from 2005 through 2009, and the
remaining $4.4 billion amortizing from 2010 through 2038.
With respect to commitments, the after-tax cumulative net gains
on derivative mortgage commitments of $535 million, net of
related amortization, will be recognized in future periods as a
reduction to our earnings.
Except to the extent otherwise specified, all information
presented in the consolidated financial statements includes all
such restatements and adjustments.
Summary
of Restatement Adjustments
The cumulative restatement period extended through June 30,
2004, which is the last period for which we filed a periodic
report with the SEC. We have classified our restatement
adjustments into the seven primary categories as set forth in
the table below. These categories involve subjective judgments
by management regarding classification of amounts and particular
accounting errors that may fall within more than one category.
While such classifications are not required under GAAP,
management believes these classifications may assist investors
in understanding the nature and impact of the corrections made
in completing the restatement.
73
Table
1: Cumulative Impact of Restatement
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
Periods
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Six Months
|
|
|
Cumulative
|
|
|
|
Prior to
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
as of
|
|
|
Ended
|
|
|
Adjustments as
|
|
|
|
January 1,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
of June 30,
|
|
|
|
2002
|
|
|
2002
|
|
|
2003
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Retained earnings, as previously
reported
|
|
$
|
26,175
|
|
|
$
|
29,385
|
|
|
$
|
35,496
|
|
|
|
|
|
|
|
|
|
|
$
|
37,414
|
|
Restatement adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and derivatives
|
|
|
(10,622
|
)
|
|
|
(5,877
|
)
|
|
|
4,356
|
|
|
$
|
(12,143
|
)
|
|
$
|
3,036
|
|
|
|
(9,107
|
)
|
Commitments
|
|
|
413
|
|
|
|
5,387
|
|
|
|
(1,826
|
)
|
|
|
3,974
|
|
|
|
(546
|
)
|
|
|
3,428
|
|
Investments in securities
|
|
|
(660
|
)
|
|
|
(715
|
)
|
|
|
(332
|
)
|
|
|
(1,707
|
)
|
|
|
(142
|
)
|
|
|
(1,849
|
)
|
MBS trust consolidation and sale
accounting
|
|
|
119
|
|
|
|
(59
|
)
|
|
|
(226
|
)
|
|
|
(166
|
)
|
|
|
(185
|
)
|
|
|
(351
|
)
|
Financial guaranties and master
servicing
|
|
|
(206
|
)
|
|
|
178
|
|
|
|
175
|
|
|
|
147
|
|
|
|
(143
|
)
|
|
|
4
|
|
Amortization of cost basis
adjustments
|
|
|
154
|
|
|
|
135
|
|
|
|
(1,348
|
)
|
|
|
(1,059
|
)
|
|
|
(70
|
)
|
|
|
(1,129
|
)
|
Other adjustments
|
|
|
296
|
|
|
|
(343
|
)
|
|
|
(926
|
)
|
|
|
(973
|
)
|
|
|
(320
|
)
|
|
|
(1,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of restatement
adjustments before federal income taxes, extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
|
(10,506
|
)
|
|
|
(1,294
|
)
|
|
|
(127
|
)
|
|
|
(11,927
|
)
|
|
|
1,630
|
|
|
|
(10,297
|
)
|
(Benefit) provision for federal
income taxes
|
|
|
(3,465
|
)
|
|
|
(589
|
)
|
|
|
(259
|
)
|
|
|
(4,313
|
)
|
|
|
397
|
|
|
|
(3,916
|
)
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
195
|
|
|
|
7
|
|
|
|
202
|
|
Cumulative effect of a change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
(151
|
)
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of current period
restatement adjustments, except where cumulative
|
|
|
(7,041
|
)
|
|
|
(705
|
)
|
|
|
176
|
|
|
$
|
(7,570
|
)
|
|
$
|
1,240
|
|
|
|
(6,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of prior period restatement
and other stockholders equity
adjustments(1)
|
|
|
|
|
|
|
(7,042
|
)
|
|
|
(7,749
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, as restated
|
|
$
|
19,134
|
|
|
$
|
21,638
|
|
|
$
|
27,923
|
|
|
|
|
|
|
|
|
|
|
$
|
31,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the impact of stock-based
compensation dividend adjustments.
|
See the Financial Statement Impact section below for
further details on the impact of the restatement adjustments in
the consolidated financial statements for the restatement
periods.
Debt
and Derivatives
We identified five errors associated with our debt and
derivatives. The most significant error was that we incorrectly
designated derivatives as cash flow or fair value hedges for
accounting and reporting purposes. For derivatives designated as
cash flow hedges, this error resulted in the recognition of
changes in the fair value of these derivatives in AOCI in the
consolidated balance sheets instead of in the consolidated
statements of income. For derivatives designated as fair value
hedges, this error resulted in the recognition of changes in the
fair value of the hedged items as fair value adjustments in the
consolidated balance sheets and as gain or loss in the
consolidated statements of income. In conjunction with the
review of these transactions, we identified the following
additional errors associated with our debt and derivatives: we
incorrectly excluded foreign exchange derivatives from netting
adjustments for transactions executed with the same
counterparty; we did
74
not record a small number of financial instruments as
derivatives; we incorrectly valued certain option-based and
foreign exchange derivatives; and we incorrectly calculated
interest expense by using inappropriate estimates in our
amortization of debt cost basis adjustments.
The restatement adjustments associated with these errors
resulted in a cumulative pre-tax reduction in retained earnings
of $12.1 billion as of December 31, 2003. This pre-tax
loss, in combination with an incremental loss reflected in the
2004 consolidated financial statements of $729 million,
resulted in a cumulative reduction in pre-tax net income of
$12.9 billion, or $8.4 billion after tax, as of
December 31, 2004. These restatement adjustments also
resulted in a reduction in total assets of $5.0 billion as
of December 31, 2003, primarily from a reduction in
Deferred tax assets as a result of no longer
applying hedge accounting and deferring losses. Additionally, we
decreased total liabilities by $9.1 billion as of
December 31, 2003, primarily from no longer recording debt
at fair value due to the loss of hedge accounting as well as
correcting the amortization of debt cost basis adjustments. The
effect from the change in debt cost basis adjustments, in turn,
had the effect of increasing the amount of Debt
extinguishment losses, net recognized in the consolidated
statements of income. Each of the errors that resulted in these
adjustments is described below.
We incorrectly classified derivatives as cash flow or fair value
hedges for accounting and reporting purposes, even though they
did not qualify for hedge accounting treatment pursuant to
Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133). The primary reasons for the
loss of hedge accounting treatment were the improper use of the
shortcut method as defined by SFAS 133 and
inadequate assessments of hedge effectiveness and
ineffectiveness measurement, both at hedge inception and at each
reporting period thereafter. In other instances, hedging
relationships were not properly documented at the inception of
the hedge. Under cash flow hedge accounting, we initially
recorded unrealized gains or losses on derivatives in AOCI in
the consolidated balance sheets to be recognized into income in
subsequent periods. Under fair value hedge accounting, we
recorded unrealized gains or losses on derivatives in the
consolidated statements of income offset by unrealized gains or
losses on the asset or liability being hedged. The impact of
correcting errors on derivatives that were previously classified
as cash flow hedges resulted in the reversal of all previously
recorded fair value adjustments in AOCI and the recognition of
these fair value adjustments in Derivatives fair value
losses, net in the consolidated statements of income. The
impact of correcting errors on derivatives that were previously
classified as fair value hedges resulted in the reversal of
previously recorded fair value adjustments recorded on the
hedged items. As the majority of these derivatives were
designated as hedges against debt, the reversal of fair value
adjustments resulted in a reduction of Short-term
debt and Long-term debt in the consolidated
balance sheets and changes in Interest expense in
the consolidated statements of income. This error impacted all
previously reported results and varied substantially from period
to period based on the portfolio size and prevailing interest
rates.
We incorrectly excluded foreign exchange derivatives from
netting adjustments for transactions executed with the same
counterparty where we had the legal right and intent to offset
pursuant to Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 39,
Offsetting of Amounts Related to Certain Contracts (an
interpretation of APB Opinion No. 10 and FASB Statement
No. 105). As a result, the amounts of derivative assets
and liabilities in the consolidated balance sheets were
misstated. The impact of correcting this error changed the
reported amount of derivative assets and liabilities in the
consolidated balance sheets.
We did not record a small number of financial instruments that
met the definition of a derivative pursuant to SFAS 133,
which resulted in a misstatement of derivative assets and
liabilities at fair value in the consolidated balance sheets.
The correction of this error resulted in the recognition of
derivative assets and liabilities at fair value with subsequent
changes in the fair value of these derivatives recognized in the
consolidated statements of income.
We incorrectly valued certain option-based and foreign exchange
derivatives. We incorrectly valued certain option-based
derivatives by using inaccurate volatility measures, which
resulted in incorrect fair value adjustments to the previously
reported consolidated financial statements. To correct this
error, we revalued option-based derivatives with new volatility
measures supported by market analysis and revalued foreign
exchange derivatives. We also incorrectly recorded fair value
adjustments on foreign exchange derivatives
75
previously accounted for as fair value hedges. We recorded
adjustments on these derivatives equal to foreign currency
translation adjustments of our foreign denominated debt. These
foreign exchange derivatives should have been independently
recorded at fair value. The impact of correcting this error
resulted in changes in the fair value gain or loss associated
with these derivatives, which was recognized in the consolidated
statements of income.
We incorrectly calculated interest expense by using
inappropriate estimates in our amortization of debt cost basis
adjustments. We amortized discounts, premiums and other deferred
price adjustments by amortizing these amounts through the
expected call date of the borrowings as opposed to amortizing
these amounts through the contractual maturity date of the
borrowings. Additionally, we utilized a convention in the
calculation that was based on the average number of days of
interest in a month regardless of the days contractually agreed
upon. We corrected these errors by recalculating amortization of
these costs through the contractual maturity date of the
respective borrowings and using the contractual number of days
in the month. The correction of these errors resulted in changes
in the recognition of Interest expense and
Debt extinguishment losses, net in the consolidated
statements of income.
For the six-month period ended June 30, 2004, we recorded a
pre-tax increase in net income of $3.0 billion related to
the accounting errors described above. In combination with the
effect of these errors through December 31, 2003 discussed
above, the cumulative impact of the restatement of these errors
on our consolidated financial statements was to decrease
retained earnings by $9.1 billion as of June 30, 2004.
The increase in net income in the six-month period ended
June 30, 2004 was primarily the result of the loss of hedge
accounting, as the remaining errors described above had minimal
impact on restated results for the six-month period.
Commitments
We identified five errors associated with mortgage loan and
security commitments. The most significant errors were that we
did not record certain mortgage loan and security commitments as
derivatives under SFAS 133 and we incorrectly classified
mortgage loan and security commitments as cash flow hedges,
which resulted in changes in fair value not being reflected in
earnings. We also incorrectly interpreted SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities (SFAS 149), and
therefore we incorrectly recorded a transition adjustment in
2003. In conjunction with the review of these transactions, we
identified the following additional errors associated with
mortgage loan and security commitments: we did not record
certain security commitments as securities and we incorrectly
valued mortgage loan and security commitments.
The restatement adjustments associated with these errors
resulted in a cumulative pre-tax increase in retained earnings
of $4.0 billion as of December 31, 2003. This pre-tax
increase, combined with a commitments-related gain of
$135 million reflected in the 2004 consolidated financial
statements, resulted in a cumulative pre-tax increase in
retained earnings of $4.1 billion as of December 31,
2004. The net impact on retained earnings, including tax effects
and the $185 million after-tax charge to Cumulative
effect of change in accounting principle as described
below, was $2.5 billion as of December 31, 2004. After
considering the increased amortization recognized in restatement
attributable to the commitments adjustment, the total net impact
of these commitment adjustments was an increase in retained
earnings of $535 million, net of tax, as of
December 31, 2004. Each of the errors that resulted in
these adjustments is described below.
Prior to July 1, 2003, we did not record as derivatives
mortgage loan and security commitments that were derivatives
pursuant to SFAS 133, which resulted in a misstatement of
our derivative assets and liabilities in the consolidated
balance sheets. The impact of correcting this error resulted in
the recognition of these commitments as derivatives at fair
value in the consolidated balance sheets, with changes in the
fair value of these commitments recorded in the consolidated
statements of income. This error impacted previously reported
results and varied substantially from period to period based on
volume, prevailing interest rates and the market price of the
underlying collateral. The correction of this error also
resulted in recording cost basis adjustments to the acquired
assets for the value of these derivatives as of their settlement
date. These cost basis adjustments are amortized into interest
income over the life of the acquired assets. The impact of this
amortization is reflected in the Amortization of Cost
Basis Adjustments section below.
76
We incorrectly classified mortgage loan and security commitments
as cash flow hedges. The primary reasons we did not qualify for
hedge accounting treatment were the lack of assessment of the
effectiveness of the hedging relationship and the failure to
adequately identify and document the forecasted transactions. As
discussed above, under cash flow hedge accounting, we deferred
unrealized gains or losses on derivatives in AOCI in the
consolidated balance sheets. The impact of correcting this error
resulted in the recognition of derivatives at fair value in the
consolidated balance sheets, with changes in the fair value of
these derivatives recognized in the consolidated statements of
income. This error impacted previously reported results and
varied substantially from period to period based on volume,
prevailing interest rates and the market price of the underlying
collateral.
As part of the adoption of SFAS 149 in 2003, we
incorrectly recorded a SFAS 149 transition adjustment that
was not required because the commitments for which the
transition adjustment was recorded should previously have been
accounted for as derivatives under SFAS 133 or as
securities under Emerging Issues Task Force (EITF)
Issue
No. 96-11,
Accounting for Forward Contracts and Purchased Options to
Acquire Securities Covered by FASB Statement No. 115
(EITF 96-11). We also incorrectly recorded
as derivatives certain multifamily mortgage loan commitments
that did not qualify as derivatives. The transition adjustment
originally recorded was an after-tax charge of $185 million
in the consolidated statement of income for the year ended
December 31, 2003 as a Cumulative effect of change in
accounting principle. The impact of correcting these
errors resulted in the removal of the fair value adjustments
related to multifamily loan commitments and the reversal of the
entire transition adjustment in the consolidated statement of
income for the year ended December 31, 2003.
Prior to July 1, 2003, the effective date of SFAS 149,
we did not account for certain qualifying security purchase
commitments in the consolidated balance sheets pursuant to
EITF 96-11, which resulted in a misstatement of
Investments in securities and AOCI in the
consolidated balance sheets and related Investment losses,
net in the consolidated statements of income associated
with these commitments. The impact of correcting this error
resulted in the recognition of these commitments as either
trading or
available-for-sale
(AFS) securities, and the recognition of changes in
the fair value of the securities in Investment losses,
net in the consolidated statements of income for trading
securities or in AOCI in the consolidated balance sheets for AFS
securities.
We incorrectly valued mortgage loan and security commitments
that we recorded as derivatives by utilizing inconsistent or
inaccurate pricing. We corrected this error by revaluing
mortgage loan and security commitment derivatives. The impact of
correcting this error resulted in changes in unrealized gains or
losses associated with these commitments in the consolidated
statements of income and corresponding changes in derivatives at
fair value in the consolidated balance sheets.
For the six-month period ended June 30, 2004, we recorded a
pre-tax decrease in net income of $546 million related to
the accounting errors described above. In combination with the
effect of these errors through December 31, 2003 discussed
above, the cumulative impact of the restatement of these errors
on our consolidated financial statements was to increase
retained earnings by $3.4 billion as of June 30, 2004.
The decrease in net income in the six-month period ended
June 30, 2004 was primarily the result of the loss of hedge
accounting, as the remaining errors described above had minimal
impact on restated results for the six-month period.
Investments
in Securities
We identified the accounting errors described below related to
our investments in securities that resulted in a cumulative
pre-tax reduction in retained earnings of $1.7 billion as
of December 31, 2003.
Classification
and Valuation of Securities
We identified three errors associated with the classification
and valuation of securities. The most significant error was that
we incorrectly classified securities at acquisition as
held-to-maturity
(HTM) that we did not intend to hold to maturity,
which resulted in not recognizing changes in the fair value of
these securities in AOCI or earnings. As a result of our review
of acquired securities, we derecognized all previously recorded
HTM securities recorded at amortized cost and recognized at fair
value $419.5 billion and $69.5 billion of
77
AFS and trading securities, respectively, in 2003. Our holding
of investments in trading securities is a significant change
from our previously reported consolidated financial statements,
as the majority of our investments in securities were
historically classified as HTM. As a part of our review of these
transactions, we identified the following additional errors: we
incorrectly valued securities and we incorrectly classified
certain dollar roll repurchase transactions as short-term
borrowings instead of purchases and sales of securities.
The restatement adjustments associated with these errors
resulted in a cumulative pre-tax decrease in retained earnings
of $186 million as of December 31, 2003. These
restatement adjustments also resulted in an increase of
$2.4 billion in total assets and $37 million in total
liabilities as of December 31, 2003. Each of the errors
that resulted in these adjustments is described below.
We incorrectly classified securities as HTM pursuant to
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115).
SFAS 115 requires that securities be classified based on
managements investment intent on the date of acquisition
and that securities originally designated as HTM can only be
reclassified if specified criteria are met. Previously, we
selected HTM as a default designation on the date we acquired
the security. Subsequently, we would select classification as
either HTM or AFS at the end of the month in which the security
was acquired. The effect of this error was that securities were
incorrectly reclassified from HTM to AFS and the
reclassification did not meet the criteria of SFAS 115 for
such reclassification. The impact of correcting this error
resulted in the classification of all securities previously
classified as HTM securities as either AFS or trading
securities, with changes in the fair value of securities
classified as AFS recorded in AOCI and changes in the fair value
of securities classified as trading recognized in
Investment losses, net in the consolidated
statements of income. We discontinued the use of the HTM
designation during the restatement period. In our restatement
process, we corrected this error using information contained
within the historical trade system to determine the original
investment intent for each security and the appropriate
classification. Fair value adjustments related to
Investments in securities resulted in an increase in
AOCI of $2.3 billion for AFS securities as of
December 31, 2003 in the consolidated balance sheet and a
decrease of $100 million for trading securities for the
year ended December 31, 2003 in Investment losses,
net in the consolidated statement of income.
We had valuation errors associated with securities. We
incorrectly recorded the cost basis for certain securities in
connection with implementing a new settlement system in 2002. We
also incorrectly accounted for certain securities on a
settlement date basis rather than a trade date basis pursuant to
Statement of Position (SOP)
No. 01-6,
Accounting by Certain Entities (Including Entities with Trade
Receivables) That Lend to or Finance the Activities of
Others. In addition, we incorrectly valued our previously
reported AFS securities. To correct these errors, we revalued
securities and corrected the cost basis of the impacted
securities. The impact of correcting these errors resulted in a
change in the realized and unrealized gains or losses associated
with these securities as well as amortization of the cost basis
adjustments in Interest income in the consolidated
statements of income. The impact of the amortization of the
revised cost basis adjustments is reflected in the
Amortization of Cost Basis Adjustments section below.
We enter into agreements referred to as dollar roll
repurchase transactions, where we transfer MBS in exchange
for funds and agree to repurchase substantially the same
securities at a future date. We incorrectly classified some
dollar roll repurchase transactions as secured borrowings as
these repurchase transactions did not qualify for secured
borrowing treatment under SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 125)
and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(a replacement of FASB Statement No. 125)
(SFAS 140). For transactions that did not
qualify for secured borrowing treatment, the impact of
correcting the errors resulted in the reversal of
Short-term debt in the consolidated balance sheets
and the recognition of a sale or purchase of a security for each
transaction, resulting in the recognition of gains and losses in
Investment losses, net in the consolidated
statements of income.
Impairment
of Securities
We identified the following errors associated with the
impairment of securities: we did not assess certain types of
securities for impairment and we did not assess interest-only
securities and lower credit quality investments for impairment.
78
The restatement adjustments associated with these errors
resulted in a cumulative pre-tax decrease in retained earnings
of $1.5 billion and a decrease in total assets of
$1.2 billion as of December 31, 2003. Additionally,
for the six-month period ended June 30, 2004, we recorded a
pre-tax increase in net income of $233 million, resulting
from the reversal of historical impairment charges that were
recorded in 2003 in the restated financial statements. Each of
the errors that resulted in these adjustments is described below.
We did not appropriately assess certain securities for
impairment due to deteriorated credit quality of the
securities underlying collateral and, in some cases,
deteriorated credit quality of the securities issuer
during the restatement period. Included in this population of
securities were investments in manufactured housing bonds.
Additionally, when we recorded impairment, in certain
circumstances we did not use contemporaneous market prices where
available. To correct these errors, we remeasured securities and
assessed them for credit-related impairments. The impact of
correcting these errors resulted in a change in the carrying
amount of these securities in the consolidated balance sheets
and a reduction in net income recorded in Investment
losses, net in the consolidated statements of income.
We did not assess interest-only securities and lower credit
quality investments for impairment pursuant to EITF Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets
(EITF 99-20). In certain instances, we
incorrectly combined interest-only and principal-only
certificates issued from securitization trusts for impairment
evaluation purposes even though the interest-only certificates
could not be, or had not been, legally combined into a single
security. To correct this error, we assessed these securities
separately for impairment. The impact of correcting this error
resulted in a decrease in the carrying amount of these
securities in the consolidated balance sheets and a reduction in
net income recorded in Investment losses, net in the
consolidated statements of income.
For the six-month period ended June 30, 2004, we recorded a
pre-tax decrease in net income of $142 million related to
the accounting errors described above. In combination with the
effect of these errors through December 31, 2003 discussed
above, the cumulative impact of the restatement of these errors
on our consolidated financial statements was to decrease
retained earnings by $1.8 billion as of June 30, 2004.
The decrease in net income in the six-month period ended
June 30, 2004 was primarily the result of reversal of the
held-to-maturity classification, as the remaining errors
described above had minimal impact on restated results for the
six-month period.
MBS
Trust Consolidation and Sale Accounting
We identified three errors associated with MBS trust
consolidation and sale accounting: we incorrectly recorded asset
sales that did not meet sale accounting criteria; we did not
consolidate certain MBS trusts that were not considered
qualifying special purpose entities (QSPE) and for
which we were deemed to be the primary beneficiary or sponsor of
the trust; and we did not consolidate certain MBS trusts in
which we owned 100% of the securities issued by the trust and
had the ability to unilaterally cause the trust to liquidate.
The restatement adjustments associated with these errors
resulted in a cumulative pre-tax decrease in retained earnings
of $166 million as of December 31, 2003. This was the
result of the net change in the value of the assets and
liabilities that were recognized and derecognized in conjunction
with consolidation or sale activity. These restatement
adjustments also resulted in an increase of $8.9 billion in
total assets and an increase of $8.6 billion in total
liabilities as of December 31, 2003. Each of the errors
that resulted in these adjustments is described below.
We incorrectly recorded asset sales that did not meet the sale
accounting criteria set forth in SFAS 125 and
SFAS 140, primarily because the assets were transferred to
an MBS trust that did not meet the QSPE criteria. To correct
this error, we reviewed our MBS trusts and accounted for the
transfers of assets that did not meet the sale accounting
criteria as secured borrowings. The impact of correcting this
error resulted in the derecognition of retained interest and
recourse obligations recorded upon transfer of the assets, the
re-recognition
of the transferred assets and the recognition of
Short-term debt or Long-term debt in the
consolidated balance sheets to the extent of any proceeds
received in connection with the transfer of assets.
79
Correcting this error also resulted in the reversal of any gains
or losses related to these failed asset sales recorded in
Investment losses, net in the consolidated
statements of income.
We failed to consolidate MBS trusts that were not considered
QSPEs and for which we were deemed to be the primary beneficiary
or sponsor of the trust. These entities included those to which
we transferred assets in a transaction that initially qualified
as a sale and for QSPE status, but where the trust subsequently
failed to meet the criteria to be a QSPE, primarily because our
ownership interests in the trust exceeded the threshold
permitted for a QSPE. Additionally, these entities included
those where we were not the transferor of assets to the trust,
but where the trust is not considered a QSPE and our investments
or guaranty contracts provide us with the majority of the
expected losses or residual returns, as defined by
FIN No. 46 (revised December 2003), Consolidation
of Variable Interest Entities (an interpretation of ARB
No. 51) (FIN 46R). To correct this
error, we consolidated these trusts, then deconsolidated trusts
when they no longer required consolidation.
We incorrectly did not consolidate MBS trusts in which we owned
or acquired over time 100% of the related securities issued by
the trust and had the ability to unilaterally liquidate the
trust. To correct this error, we consolidated those MBS trusts
in which we had the unilateral ability to liquidate and
deconsolidated these trusts when we no longer had the unilateral
ability to liquidate.
Correcting these errors related to MBS trust consolidation and
sale accounting resulted in a decrease in Investments in
securities of $154.0 billion, an increase in
Mortgage loans of $162.8 billion and an
increase in debt of $9.9 billion as of December 31,
2003.
In situations where we were required to consolidate an MBS
trust, we derecognized the MBS recorded in the consolidated
balance sheets as Investments in securities and
recognized the underlying assets held by the trust, either as
mortgage loans or mortgage-related securities. Loans that were
consolidated from trusts in which we were the transferor have
been classified as held for sale (HFS) and are
recorded at the lower of cost or market, whereas loans that were
consolidated from trusts in which we were not the transferor
have been classified as held for investment (HFI)
and recorded at amortized cost. Mortgage-related securities that
were consolidated from trusts have been classified as AFS
securities. We also derecognized assets and liabilities
associated with our guaranty and master servicing arrangements
associated with the consolidated MBS trusts and recognized these
amounts as cost basis adjustments to Mortgage loans
in the consolidated balance sheets, where applicable. The impact
of the amortization of this cost basis adjustment is reflected
in the Amortization of Cost Basis Adjustments
section below. For consolidated MBS trusts in which we owned
less than 100% of the related securities, we recorded short-term
or long-term debt in the consolidated balance sheets for the
portion of the security position due to third parties.
Correcting these errors related to MBS trust consolidation and
sale accounting also impacted the consolidated statements of
income. We recorded an additional loss of $230 million and
$26 million in Investments losses, net in the
consolidated statements of income for the years ended
December 31, 2003 and 2002, respectively, primarily due to
reversing previously recorded asset sales. As a result of
adopting FIN 46R, we consolidated certain MBS trusts
created prior to February 1, 2003 and recorded a
$34 million gain in Cumulative effect of change in
accounting principle, net of tax effect in the
consolidated statement of income for the year ended
December 31, 2003. For MBS trusts created after
January 31, 2003 and that were consolidated due to the
application of FIN 46R, we recorded a $195 million
gain in Extraordinary gains (losses), net of tax
effect in the consolidated statement of income for the
year ended December 31, 2003, reflecting the difference
between the fair value of the consolidated assets and
liabilities and the carrying amount of our interest in the MBS
trust. In addition, we recorded a decrease in Guaranty fee
income of $247 million and $198 million and an
increase in Interest income of $594 million and
$710 million for the years ended December 31, 2003 and
2002, respectively, as a result of derecognizing our guaranty
assets and obligations and recognizing cost basis adjustments to
the consolidated mortgage loans and mortgage-related securities.
For the six-month period ended June 30, 2004, we recorded a
pre-tax decrease in net income of $185 million related to
the accounting errors described above. In combination with the
effect of these errors through December 31, 2003 discussed
above, the cumulative impact of the restatement of these errors
on our consolidated financial statements was to decrease
retained earnings by $351 million as of June 30, 2004.
80
Additionally, two REMIC transactions were specifically
identified and questioned by OFHEO regarding our intent for
entering into the transactions and the timing of income
recognition. Our review concluded that the historical treatment
of accounting for these transfers was appropriate and
consistently applied.
Financial
Guaranties and Master Servicing
We identified the accounting errors described below related to
our financial guaranties and master servicing that resulted in a
cumulative pre-tax increase in retained earnings of
$147 million as of December 31, 2003.
Recognition,
Valuation and Amortization of Guaranties and Master
Servicing
We identified seven errors associated with the recognition,
valuation and amortization of our guaranty and master servicing
contracts. The most significant errors were that we incorrectly
amortized guaranty fee buy-downs and risk-based pricing
adjustments; we incorrectly valued our guaranty assets and
guaranty obligations; we incorrectly accounted for buy-ups; we
did not record credit enhancements associated with our
guaranties as separate assets; and we incorrectly recorded
adjustments to guaranty assets and guaranty obligations based on
the amount of Fannie Mae MBS held in the consolidated balance
sheets. In conjunction with the review of these issues, we
identified the following additional errors: we did not record
guaranty assets and guaranty obligations associated with our
guaranties to MBS trusts in which we were the transferor of the
trusts underlying loans and we did not recognize master
servicing assets and related deferred profit, where applicable.
The restatement adjustments associated with these errors
resulted in a cumulative pre-tax increase in retained earnings
of $2.4 billion as of December 31, 2003. These
restatement adjustments also resulted in an increase of
$144 million in total assets and a decrease in total
liabilities of $1.6 billion as of December 31, 2003.
Each of the errors that resulted in these adjustments is
described below.
For guaranties entered into before January 1, 2003, the
effective date of FIN No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation
of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No.
34) (FIN 45), we made errors in
applying amortization to up-front cash receipts associated with
our guaranties, known as buy-downs and risk-based pricing
adjustments, pursuant to SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases (an amendment
of FASB Statements No. 13, 60, and 65 and rescission of
FASB Statement No. 17) (SFAS 91). The
errors in amortization of these items are described in the
Amortization of Cost Basis Adjustments section
below. The impact of correcting these errors resulted in changes
in the periodic recognition of Guaranty fee income
in the consolidated statements of income. For guaranties entered
into or modified after the adoption of FIN 45, buy-downs
and risk-based pricing adjustments should have been recorded as
an additional component of Guaranty obligations and
amortized in proportion to the reduction to Guaranty
assets. The impact of correcting this error resulted in
changes in the carrying amount of Other liabilities
and Guaranty obligations in the consolidated balance
sheets and changes in the periodic recognition of Guaranty
fee income in the consolidated statements of income.
We had valuation errors associated with our guaranty assets and
guaranty obligations. We incorrectly included up-front cash
payments associated with our guaranties, known as buy-ups, in
the basis of our guaranty assets while also recording these
buy-ups as a separate asset included in Other assets
in the consolidated balance sheets. We recorded guaranty
obligations equal to the recorded guaranty assets, including any
buy-ups, when we should have independently measured guaranty
obligations at fair value based on estimates of expected credit
losses and recorded deferred profit associated with these
arrangements. The impact of correcting these errors resulted in
decreases in Other assets and Guaranty
obligations in the consolidated balance sheets.
We did not correctly account for buy-ups. Historically, we
accounted for buy-ups at amortized cost under the retrospective
effective interest method pursuant to SFAS 91. However,
since the recognition of income on a
buy-up is
subject to the risk that we may not substantially recover our
investment due to prepayments, we should have subsequently
measured the fair value of the buy-ups as if they were debt
securities pursuant to SFAS 140 and recorded imputed
interest as a component of Guaranty fee income in
the consolidated statements of income under the prospective
interest method pursuant to EITF 99-20. The impact of
correcting
81
this error resulted in recording buy-ups at fair value as a
component of Other assets in the consolidated
balance sheets with changes in the fair value recorded in AOCI
in the consolidated balance sheets.
In some transactions, we receive the benefit of lender-provided
credit enhancements, such as lender recourse, in lieu of
receiving a higher guaranty fee. Previously, we did not record
these credit enhancements as assets in the consolidated balance
sheets. The impact of correcting this error resulted in the
recognition of credit enhancements as a component of Other
assets, an offsetting increase to Guaranty
obligations and subsequent amortization of the credit
enhancement as a component of Other expenses in the
consolidated statements of income.
Historically, when we acquired a Fannie Mae MBS, we reduced the
recorded guaranty asset and guaranty obligation by an amount
equal to the pro rata portion of Fannie Mae MBS held in the
consolidated balance sheets relative to the total amount of
gross outstanding Fannie Mae MBS. In addition, we reclassified a
pro rata portion of recorded guaranty fee income to interest
income in an amount equal to the ratio of the Fannie Mae MBS
held in the consolidated balance sheets relative to the total
amount of gross outstanding Fannie Mae MBS. Because each Fannie
Mae MBS trust to which we have a guaranty obligation, and from
which we have the right to receive guaranty fees, is separate
from us, we should not have reduced the recorded guaranty asset
and guaranty obligation or reclassified guaranty fee income with
respect to Fannie Mae MBS held in the consolidated balance
sheets unless we had consolidated the related MBS trust.
Correcting this error increased Guaranty assets and
Guaranty obligations in the consolidated balance
sheets, and resulted in a decrease in Net interest
income of $948 million and a corresponding increase
in Guaranty fee income in the consolidated
statements of income for the year ended December 31, 2003.
We did not record certain retained interests as guaranty assets
and certain recourse obligations as guaranty obligations in
connection with the transfer of loans to MBS trusts for which we
were the transferor pursuant to SFAS 125 and SFAS 140.
To correct this error, we examined all of our guaranty
arrangements in these transactions and recorded guaranty assets
and guaranty obligations as applicable. The impact of correcting
this error resulted in an increase in Guaranty
assets and Guaranty obligations in the
consolidated balance sheets with any remaining difference being
recorded as a component of Investment losses, net in
the consolidated statements of income.
We assume an obligation to perform certain limited master
servicing activities in connection with securitizations and are
compensated for assuming this obligation. We did not previously
recognize master servicing assets and related deferred profit
associated with our role as master servicer pursuant to
SFAS 125 and SFAS 140. To correct this error, we
reviewed our trust agreements to determine when we had master
servicing responsibilities. The impact of correcting this error
generally resulted in the recognition of master servicing assets
as a component of Other assets and the recognition
of a corresponding amount of deferred profit as a component of
Other liabilities, with subsequent amortization and
impairment recorded to Fee and other income in the
consolidated statements of income.
Impairment
of Guaranty Assets and Buy-ups
We identified the following errors associated with the
impairment of guaranties: we did not assess guaranty assets or
buy-ups for impairment in accordance with EITF 99-20 and
SFAS 115, as appropriate.
The restatement adjustments related to impairments resulted in a
cumulative pre-tax decrease in retained earnings of
$2.3 billion and a decrease of $1.8 billion in total
assets as of December 31, 2003. Each of the errors that
resulted in these adjustments is described below.
We did not assess guaranty assets for impairment. As a result,
guaranty assets were overstated in previously issued financial
statements. The impact of correcting this error resulted in a
reduction to Guaranty assets with a proportional
reduction to Guaranty obligations in the
consolidated balance sheets. The impairment of the guaranty
asset was fully offset by amortization of the guaranty
obligation. While the impairment of the guaranty asset is
categorized in this section, the proportionate reduction of the
guaranty obligation is categorized in the Recognition,
Valuation and Amortization of Guaranties and Master
Servicing section above.
82
We did not assess buy-ups for impairment. As a result,
Other assets and Guaranty fee income
were overstated in previously issued financial statements. The
impact of correcting this error resulted in a decrease in
Other assets in the consolidated balance sheets and
a decrease in Guaranty fee income in the
consolidated statements of income.
For the six-month period ended June 30, 2004, we recorded a
pre-tax decrease in net income of $143 million related to
the accounting errors described above. In combination with the
effect of these errors through December 31, 2003 discussed
above, the cumulative impact of the restatement of these errors
on our consolidated financial statements was to increase
retained earnings by $4 million as of June 30, 2004.
The decrease in net income in the six-month period ended
June 30, 2004 was primarily the result of the amortization
of Guaranty obligations.
Amortization
of Cost Basis Adjustments
We identified multiple errors in amortization of mortgage loan
and securities premiums, discounts and other cost basis
adjustments. The most significant errors were that we applied
incorrect prepayment speeds to cost basis adjustments; we
aggregated dissimilar assets in computing amortization; and we
incorrectly recorded cumulative amortization adjustments.
Additionally, the correction of cost basis adjustments in other
error categories, primarily settled mortgage loan and security
commitments, resulted in the recognition of additional
amortization. The errors that led to these corrected cost basis
adjustments are described in the Commitments,
Investments in Securities and MBS Trust
Consolidation and Sale Accounting sections above.
The restatement adjustments relating to these amortization
errors resulted in a cumulative pre-tax decrease in retained
earnings of $1.1 billion as of December 31, 2003. Each
of the errors that resulted in these adjustments is described
below.
SFAS 91 requires the recognition of cost basis adjustments
as an adjustment to interest income over the life of a loan or
security by using the interest method and applying a constant
effective yield (level yield). In calculating a
level yield, we calculate amortization factors, based on
prepayment and interest rate assumptions. Our method for
estimating prepayment rates applied incorrect assumptions to
certain assets.
In addition, we incorrectly aggregated dissimilar assets in
computing amortization. Our amortization calculation aggregated
loans with a wide range of coupon rates, which in some cases led
to amortization results that did not produce an appropriate
level yield over the life of the loans. To correct this error,
we recalculated amortization of loans and securities factoring
in prepayment and interest rate assumptions that were applied to
the appropriate asset types. The impact of correcting these
errors resulted in changes in the periodic recognition of
interest income in the consolidated statements of income.
The manner in which we calculated and recorded the cumulative
catch-up adjustment was inconsistent with the
provisions of SFAS 91. The impact of correcting this error
resulted in changes in the periodic recognition of interest
income in the consolidated statements of income.
For the six-month period ended June 30, 2004, we recorded a
pre-tax decrease in net income of $70 million related to
the accounting errors described above. In combination with the
effect of these errors through December 31, 2003 discussed
above, the cumulative impact of the restatement of these errors
on our consolidated financial statements was to decrease
retained earnings by $1.1 billion as of June 30, 2004.
Other
Adjustments
In addition to the previously noted errors, we identified and
recorded other restatement adjustments related to accounting,
presentation, classification and other errors that did not fall
within the six categories described above.
The accumulation of the other restatement adjustments listed
below resulted in a cumulative pre-tax decrease in retained
earnings of $973 million as of December 31, 2003. The
other restatement adjustments resulted in an increase of
$5.0 billion in total assets and an increase of
$5.2 billion in total liabilities as of December 31,
2003.
83
The following categories summarize the most significant other
adjustments recorded as part of the restatement:
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Accounting for partnership investments. We
incorrectly accounted for a portion of our LIHTC and other
partnership investments using the effective yield method instead
of using the equity method of accounting. The correction of this
error resulted in changes in the carrying amount of these
investments in the consolidated balance sheets, the recognition
of our obligations to fund the partnerships, and changes in the
income recognition on these investments in the consolidated
statements of income. Additionally, we failed to consolidate a
portion of the LIHTC and other partnership investments in which
we were deemed to be the primary beneficiary pursuant to
FIN 46R, which resulted in the reversal of any previously
recorded investment and recognition of the underlying assets and
liabilities of the entity in the consolidated balance sheets
and, at the same time, we incorrectly consolidated some
partnership investments which had the reverse effect. We also
made errors in the capitalization of interest expense,
measurement of impairment and the recognition of our obligations
to fund our partnership investments. The correction of these
errors resulted in changes in the amount of interest expense and
impairment recognized in the consolidated statements of income.
Lastly, we made errors in the computation of net operating
losses and tax credits allocated to us from these partnerships.
The correction of these errors resulted in changes in
Deferred tax assets in the consolidated balance
sheets and changes in the Provision for federal income
taxes in the consolidated statements of income. These
restatement adjustments resulted in a cumulative pre-tax
decrease in retained earnings of $603 million, an increase
of $791 million in total assets and an increase of
$878 million in total liabilities as of December 31,
2003. In addition to the tax provision recorded for the
partnership investments restatement adjustments, we also
recorded a decrease in federal income tax expense of
$138 million for the year ended December 31, 2003 due
to changes in the recognition and classification of related tax
credits and net operating losses.
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Classification of loans held for sale. We
incorrectly classified loans held for securitization at a future
date as HFI loans rather than HFS loans pursuant to
SFAS No. 65, Accounting for Certain Mortgage
Banking Activities. Accordingly, we did not record LOCOM
adjustments on these loans. To correct this error, we recorded
an adjustment to reclassify such loans from HFI to HFS and
recorded an associated LOCOM adjustment. These restatement
adjustments resulted in a cumulative pre-tax decrease in
retained earnings of $386 million as of December 31,
2003.
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Provision for credit losses. We incorrectly
recorded the Provision for credit losses due to
errors associated with the Allowance for loan
losses, Reserve for guaranty losses, as well
as REO and troubled debt restructurings (TDRs).
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We made errors in developing our estimates of the
Allowance for loan losses and the Reserve for
guaranty losses, which resulted in an understatement of
the provision for credit losses. These errors were primarily
related to the use of inappropriate data in the calculation of
the allowance and reserve, such as incorrect loan populations,
inaccurate default statistics and inaccurate loss severity in
the event that loans default. We also made judgmental
adjustments to the calculated allowance without adequate support
and incorrectly included an estimate of credit enhancement
collections in the estimate of the Allowance for loan
losses. Estimates of recoveries from credit enhancements
that were not entered into contemporaneously or in contemplation
of a guaranty or loan purchase should not have been included in
the overall estimate of the allowance or the reserve. As a
result of misclassifying certain loans as HFI, we incorrectly
recorded an Allowance for loan losses on these
loans. Finally, we did not properly allocate the reserve between
the Allowance for loan losses and the Reserve
for guaranty losses. To correct these errors, we
recalculated the allowance and reserve with updated information
and supportable data, reviewed and documented any judgmental
adjustments and appropriately applied estimates of recoveries
from credit enhancements to the loan population.
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|
We made errors in calculating loan charge-off amounts. These
errors were related to REO and foreclosed property expense,
including making inappropriate determinations of the initial
cost basis of REO assets at foreclosure, as well as not
expensing costs related to foreclosure activities in the proper
periods. To correct these errors, we reviewed REO and foreclosed
property expense to determine and record the appropriate cost
basis and timing of charge-offs and expense recognition. We also
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84
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|
incorrectly recognized insurance proceeds in excess of estimated
charge-off at foreclosure and fair value gains above the
recorded investment of REO properties as recoveries to the
allowance and the reserve. To correct this error, we
recalculated the allowance and reserve.
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|
We historically did not recognize modifications that granted
concessions to borrowers as TDRs pursuant to
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan (an amendment of FASB Statement No. 5
and 15) (SFAS 114). To correct this
error, we recognized these modifications as TDRs and recorded an
adjustment to the Allowance for loan losses and the
Provision for credit losses in the consolidated
balance sheets and consolidated statements of income,
respectively.
|
The restatement adjustments associated with these errors
resulted in a pre-tax increase in the provision for credit
losses of $273 million for the year ended December 31,
2003; however, the cumulative impact on retained earnings was a
decrease of $87 million as of December 31, 2003.
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Early funding. We offer early funding options
to lenders that allow them to receive cash payments for mortgage
loans that will be securitized into Fannie Mae MBS at a future
date. A corresponding forward commitment to sell the security
that will be backed by the mortgage loans is required to be
delivered with the mortgage loans and is executed on the
settlement date of the commitment. We incorrectly recorded these
transactions as HFS loans prior to the actual creation of the
Fannie Mae MBS when we were the intended purchaser of the MBS.
The impact of correcting this error was to remove any previous
HFS loans from these transactions and record the transactions as
Advances to lenders, carried at amortized cost, in
the consolidated balance sheets, resulting in a decrease of
$4.7 billion in Mortgage loans with a
corresponding increase in Advances to lenders as of
December 31, 2003.
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Collateral associated with derivatives
contracts. We did not record cash collateral we
received associated with some derivatives contracts. The impact
of correcting this error was to record additional Cash and
cash equivalents of $2.3 billion and Restricted
cash of $1.1 billion, and a corresponding liability
to our derivative counterparties in Other
liabilities of $3.4 billion, as of December 31,
2003.
|
The following items, while restatement errors, were not
individually significant to the consolidated financial
statements for the restatement period:
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|
Accounting for reverse mortgages. We made
errors in accounting for reverse mortgages. When computing
interest income on reverse mortgages we did not use the expected
life of the borrower and house price expectations in the
interest income calculations and did not apply the retrospective
level yield method. To correct this error, we recalculated
interest income for these mortgages and recorded the change in
Interest income in the consolidated statements of
income. We also incorrectly recorded loan loss reserves on these
mortgages. To correct this error, we adjusted the
Allowance for loan losses and the Provision
for credit losses in the consolidated balance sheets and
consolidated statements of income, respectively.
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Accrued interest on delinquent loans. We
incorrectly included a recovery rate, which was based on
historic trends of loans that subsequently changed to current
payment status, in calculating accrued interest on delinquent
loans. The effect of this error was to record interest income on
loans that should have been on nonaccrual status. The correction
of this error resulted in the reversal of interest income
recorded in the periods when loans should have been on
nonaccrual status.
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|
Amortization of prepaid mortgage insurance. We
amortized prepaid mortgage insurance over a period that is not
representative of the period in which we received the benefits
of the mortgage insurance. To correct this error, we
recalculated amortization of this mortgage insurance and
recorded the difference in Other expenses in the
consolidated statements of income.
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|
Computation of interest income. We incorrectly
calculated interest income on certain investments. The
calculations utilized a convention that was based on the average
number of days of interest in a month regardless of the actual
number of days in the month. We corrected the calculation of
interest using the actual number of days in the month and
adjusted the timing of interest income recognition.
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85
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Mortgage insurance contract. We entered into a
mortgage insurance contract that did not transfer sufficient
underlying risk of economic loss to the insurer and therefore
did not qualify as mortgage insurance for accounting purposes.
We incorrectly amortized the premiums paid as an expense. To
correct this error, we recorded premiums paid on the policy as a
deposit, reducing such deposit as recoveries from the policy
were received.
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|
Stock-based compensation. We made errors in
the computation and classification of stock-based compensation,
including the misclassification of some awards as
non-compensatory when they were compensatory. The impact of
correcting these errors resulted in the recognition of
additional Salaries and employee benefits expense in
the consolidated statements of income, a decrease in Other
liabilities and an increase in Additional paid-in
capital in the consolidated balance sheets. None of these
errors related to awards that were not properly authorized and
priced.
|
In addition to the specified errors listed and described above,
we recognized other restatement adjustments related to our
revised accounting policies and practices. These adjustments,
both individually and in the aggregate, did not have a
significant impact on the consolidated financial statements.
As a result of our restatement adjustments, our effective tax
rate decreased from the previously reported 26% to 24% for the
year ended December 31, 2003 and from the previously
reported 24% to 18% for the year ended December 31, 2002.
These decreases resulted from errors in our tax provision
primarily relating to the recognition of higher levels of tax
credits from our investment in affordable housing projects and
changes to deferred tax balances. As a result, the change in the
provision for federal taxes as a percentage of the change in
pre-tax income was higher than the statutory federal rate or our
effective tax rate. See Notes to Consolidated Financial
StatementsNote 11, Income Taxes for our
restated tax rate reconciliation. In addition, the tax effects
were applied to each of the categories identified above to
display each error category net of tax and with the earnings per
share impact.
For the six-month period ended June 30, 2004, we recorded a
pre-tax decrease in net income of $320 million related to
the accounting errors described above. In combination with the
effect of these errors through December 31, 2003 discussed
above, the cumulative impact of the restatement of these errors
on our consolidated financial statements was to decrease
retained earnings by $1.3 billion as of June 30, 2004.
The decrease in net income in the six-month period ended
June 30, 2004 was primarily the result of accounting for
partnership investments, classification of loans held for sale
and the provision for credit losses.
In addition to the consolidated financial statement errors
discussed above, we incorrectly applied the treasury stock
method in computing the weighted average shares pursuant to
SFAS No. 128, Earnings per Share. This resulted
in a different number of weighted average dilutive shares
outstanding being utilized in the earnings per share
calculation. While common stock outstanding has not been
restated, diluted EPS has been recalculated using the revised
weighted average diluted shares.
We also identified errors in the presentation of business
segments that were not in conformity with the requirements of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. For further information
on this error, see Notes to Consolidated Financial
StatementsNote 15, Segment Reporting.
We made errors in the fair value disclosure of financial
instruments pursuant to SFAS No. 107, Disclosures
about Fair Value of Financial Instruments
(SFAS 107), by incorrectly calculating the fair
value of our derivatives, commitments and AFS securities, as
described above. In addition, we incorrectly calculated the fair
value of our guaranty assets and guaranty obligations, which
affected the fair value of our whole loans. We also incorrectly
calculated the fair value of our HTM securities and debt. For
our guaranty obligations, we did not appropriately consider an
estimate of the return on capital required by a third party to
assume our liability. Correcting this error resulted in an
increase in our guaranty obligations of approximately $1.2
billion (net of tax) and a decrease in the fair value of our
whole loans of approximately $200 million (net of tax).
This increase in the fair value of our guaranty obligations,
coupled with other fair value changes made in re-estimating the
guaranty components, resulted in a decrease in the fair value of
our net guaranty assets of approximately $1.7 billion (net
of tax) as of December 31, 2003. For our HTM securities, we
did not
86
appropriately consider security characteristics and aggregation
in developing our estimate of fair value. Correcting these
errors resulted in a reduction in the fair value of these assets
of approximately $800 million (net of tax) as of
December 31, 2003, which was primarily due to changes in
the estimated fair values of mortgage revenue bonds and REMICs.
For our debt, we did not appropriately exclude certain
commission costs associated with the issuance of new debt
securities in creating the yield curve we used for estimating
fair value. Correcting this error resulted in an increase in the
estimated fair value of our debt of approximately
$300 million (net of tax) as of December 31, 2003. For
our
out-of-the-money
derivative options, we did not fully incorporate available
market information that differentiates at-the-money volatilities
from out-of-the-money volatilities in estimating fair value.
Correcting the error resulted in a decrease in the estimated
fair value of our derivatives of approximately $200 million
(net of tax) as of December 31, 2003. To correct these
errors, we recalculated the fair value of these items using new
assumptions, observable data and appropriate levels of
specificity. The impact of recalculating the estimated fair
value of these items is reflected in Notes to Consolidated
Financial Statements Note 19, Fair Value of
Financial Instruments.
Financial
Statement Impact
The following tables display the net impact of restatement
adjustments in the previously issued consolidated balance
sheets, consolidated statements of income, consolidated
statements of cash flows and regulatory capital for 2003 and
2002. In addition, we have included tables displaying the net
impact of restatement adjustments on stockholders equity
and in the consolidated balance sheet as of December 31,
2001. The following consolidated financial statements are
presented in a condensed format.
Balance
Sheet Impact
The following table displays the cumulative impact of the
restatement on the condensed consolidated balance sheet through
and as of December 31, 2003.
Table
2: Balance Sheet Impact of Restatement as of
December 31, 2003
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|
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|
Restatement Adjustments for:
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|
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|
|
|
|
|
|
MBS Trust
|
|
|
Financial
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|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
Guaranties
|
|
|
of Cost
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
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|
Debt and
|
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|
|
|
|
Investments
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|
and Sale
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|
and Master
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|
Basis
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|
Other
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|
Restatement
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As
|
|
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|
Reported(a)
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|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
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|
Adjustments
|
|
|
Adjustments
|
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|
Adjustments
|
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Restated
|
|
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|
(Dollars in millions)
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|
Assets:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Investments in securities
|
|
$
|
712,763
|
|
|
$
|
|
|
|
$
|
3,479
|
|
|
$
|
5,458
|
|
|
$
|
(153,971
|
)
|
|
$
|
|
|
|
$
|
(401
|
)
|
|
$
|
(258
|
)
|
|
$
|
(145,693
|
)(b)
|
|
$
|
567,070
|
|
Mortgage loans
|
|
|
240,844
|
|
|
|
|
|
|
|
874
|
|
|
|
115
|
|
|
|
162,780
|
|
|
|
|
|
|
|
(519
|
)
|
|
|
(5,033
|
)
|
|
|
158,217
|
(c)
|
|
|
399,061
|
|
Derivative assets at fair value
|
|
|
8,191
|
|
|
|
(1,014
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
(973
|
)(d)
|
|
|
7,218
|
|
Guaranty assets
|
|
|
5,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
(1,184
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,384
|
)(e)
|
|
|
4,282
|
|
Deferred tax assets
|
|
|
9,142
|
|
|
|
(2,221
|
)
|
|
|
(2,613
|
)
|
|
|
(646
|
)
|
|
|
(175
|
)
|
|
|
(106
|
)
|
|
|
332
|
|
|
|
369
|
|
|
|
(5,060
|
)(f)
|
|
|
4,082
|
|
Other assets
|
|
|
32,963
|
|
|
|
(1,760
|
)
|
|
|
3,097
|
|
|
|
(3,685
|
)
|
|
|
487
|
|
|
|
(411
|
)
|
|
|
10
|
|
|
|
9,861
|
|
|
|
7,599
|
(g)
|
|
|
40,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,009,569
|
|
|
$
|
(4,995
|
)
|
|
$
|
4,845
|
|
|
$
|
1,242
|
|
|
$
|
8,921
|
|
|
$
|
(1,701
|
)
|
|
$
|
(578
|
)
|
|
$
|
4,972
|
|
|
$
|
12,706
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
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|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
958,064
|
|
|
$
|
(6,748
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,906
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
58
|
|
|
$
|
3,216
|
(h)
|
|
$
|
961,280
|
|
Derivative liabilities at fair value
|
|
|
1,600
|
|
|
|
1,632
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625
|
(d)
|
|
|
3,225
|
|
Guaranty obligations
|
|
|
5,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(796
|
)
|
|
|
1,531
|
|
|
|
|
|
|
|
|
|
|
|
735
|
(i)
|
|
|
6,401
|
|
Other liabilities
|
|
|
21,815
|
|
|
|
(4,002
|
)
|
|
|
(1
|
)
|
|
|
37
|
|
|
|
(507
|
)
|
|
|
(3,442
|
)
|
|
|
39
|
|
|
|
5,157
|
|
|
|
(2,719
|
)(j)
|
|
|
19,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
987,145
|
|
|
|
(9,118
|
)
|
|
|
(8
|
)
|
|
|
37
|
|
|
|
8,603
|
|
|
|
(1,911
|
)
|
|
|
39
|
|
|
|
5,215
|
|
|
|
2,857
|
|
|
|
990,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated
subsidiaries
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
(46
|
)
|
|
|
5
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
35,496
|
|
|
|
(8,079
|
)
|
|
|
2,399
|
|
|
|
(1,106
|
)
|
|
|
118
|
|
|
|
101
|
|
|
|
(688
|
)
|
|
|
(318
|
)
|
|
|
(7,573
|
)(k)
|
|
|
27,923
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(12,032
|
)
|
|
|
12,202
|
|
|
|
2,454
|
|
|
|
2,311
|
|
|
|
200
|
|
|
|
109
|
|
|
|
71
|
|
|
|
|
|
|
|
17,347
|
(l)
|
|
|
5,315
|
|
Other stockholders equity
|
|
|
(1,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
121
|
|
|
|
(970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
22,373
|
|
|
|
4,123
|
|
|
|
4,853
|
|
|
|
1,205
|
|
|
|
318
|
|
|
|
210
|
|
|
|
(617
|
)
|
|
|
(197
|
)
|
|
|
9,895
|
|
|
|
32,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,009,569
|
|
|
$
|
(4,995
|
)
|
|
$
|
4,845
|
|
|
$
|
1,242
|
|
|
$
|
8,921
|
|
|
$
|
(1,701
|
)
|
|
$
|
(578
|
)
|
|
$
|
4,972
|
|
|
$
|
12,706
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
(a) |
|
Certain previously reported
balances have been reclassified to conform to the current
condensed consolidated balance sheet presentation, as described
in Notes to Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies.
|
|
(b) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the derecognition of HTM
securities at amortized cost and recognition of AFS and trading
securities at fair value; the reversal of the SFAS 149
transition adjustment and recognition of revised securities
commitment basis adjustments; the recognition of revised
amortization on securities cost basis adjustments; and the
derecognition of securities related to failed dollar roll
repurchase transactions that did not meet the criteria for
secured borrowing accounting.
|
|
(c) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the reclassification of
Mortgage loans to Advances to lenders;
the recognition of revised mortgage loan commitment basis
adjustments; the recognition of the LOCOM adjustment for loans
classified as HFS; and the recognition of revised amortization
on mortgage loan cost basis adjustments.
|
|
(d) |
|
Reflects the reclassification of
interest rate swap accruals from accrued interest and
recognition of derivative fair value adjustments.
|
|
(e) |
|
Reflects the impairment of guaranty
assets; the reversal of
buy-up
amounts included in the basis of the guaranty assets; and the
derecognition of guaranty arrangements upon consolidation.
|
|
(f) |
|
Reflects the impact of restatement
adjustments on deferred taxes and the correction of tax
credit-related errors associated with partnership investments.
|
|
(g) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative assets at fair
value; the reclassification of Advances to
lenders from Mortgage loans; the impairment of
buy-ups; the recognition of Restricted cash and
Cash and cash equivalents related to collateral
received from derivatives counterparties; and the impact of cost
basis transfers between error categories.
|
|
(h) |
|
Reflects the reversal of previously
recorded unrealized gains and losses on the hedged items
associated with fair value hedges; the recognition of revised
amortization of debt basis adjustments; and the recognition of
short-term and long-term debt upon consolidation of MBS trusts
in which we own less than 100% of the related securities.
|
|
(i) |
|
Reflects the valuation adjustment
related to the guaranty obligations; the reclassification of
buy-downs and risk-based pricing adjustments from Other
liabilities; and the derecognition of guaranty
arrangements upon consolidation.
|
|
(j) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative liabilities at
fair value; the reversal of short-term debt associated
with failed dollar roll repurchase transactions; the
reclassification of buy-downs and risk-based pricing adjustments
to Guaranty obligations; and the recognition of
liabilities to derivative counterparties associated with
restricted cash.
|
|
(k) |
|
Reflects the recognition of
derivative fair value adjustments to the consolidated statements
of income and other income or expense related adjustments.
|
|
(l) |
|
Reflects the reversal of previously
recorded derivatives fair value adjustments and the recognition
of unrealized gains (losses) on AFS securities and
buy-ups.
|
88
The following table displays the cumulative impact of the
restatement on the condensed consolidated balance sheet through
and as of December 31, 2002.
Table
3: Balance Sheet Impact of Restatement as of
December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS Trust
|
|
|
Financial
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
Guaranties
|
|
|
of Cost
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Debt and
|
|
|
|
|
|
Investments
|
|
|
and Sale
|
|
|
and Master
|
|
|
Basis
|
|
|
Other
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
650,616
|
|
|
$
|
|
|
|
$
|
230
|
|
|
$
|
33,278
|
|
|
$
|
(128,809
|
)
|
|
$
|
|
|
|
$
|
558
|
|
|
$
|
(20,788
|
)
|
|
$
|
(115,531
|
)(b)
|
|
$
|
535,085
|
|
Mortgage loans
|
|
|
206,905
|
|
|
|
|
|
|
|
683
|
|
|
|
(20,576
|
)
|
|
|
136,097
|
|
|
|
|
|
|
|
(291
|
)
|
|
|
1,552
|
|
|
|
117,465
|
(c)
|
|
|
324,370
|
|
Derivative assets at fair value
|
|
|
3,666
|
|
|
|
(297
|
)
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,257
|
(d)
|
|
|
4,923
|
|
Deferred tax assets
|
|
|
8,053
|
|
|
|
(2,885
|
)
|
|
|
(2,035
|
)
|
|
|
(2,969
|
)
|
|
|
(309
|
)
|
|
|
(23
|
)
|
|
|
(111
|
)
|
|
|
279
|
|
|
|
(8,053
|
)(e)
|
|
|
|
|
Other assets
|
|
|
18,275
|
|
|
|
(501
|
)
|
|
|
3,737
|
|
|
|
(4,539
|
)
|
|
|
674
|
|
|
|
(864
|
)
|
|
|
108
|
|
|
|
23,471
|
|
|
|
22,086
|
(f)
|
|
|
40,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
887,515
|
|
|
$
|
(3,683
|
)
|
|
$
|
4,169
|
|
|
$
|
5,194
|
|
|
$
|
7,653
|
|
|
$
|
(887
|
)
|
|
$
|
264
|
|
|
$
|
4,514
|
|
|
$
|
17,224
|
|
|
$
|
904,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
841,899
|
|
|
$
|
(8,237
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,516
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
115
|
|
|
$
|
(606
|
)(g)
|
|
$
|
841,293
|
|
Derivative liabilities at fair value
|
|
|
5,697
|
|
|
|
1,036
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,205
|
(d)
|
|
|
6,902
|
|
Other liabilities
|
|
|
23,631
|
|
|
|
(1,840
|
)
|
|
|
220
|
|
|
|
(324
|
)
|
|
|
(438
|
)
|
|
|
(890
|
)
|
|
|
58
|
|
|
|
4,228
|
|
|
|
1,014
|
(h)
|
|
|
24,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
871,227
|
|
|
|
(9,041
|
)
|
|
|
389
|
|
|
|
(324
|
)
|
|
|
7,078
|
|
|
|
(890
|
)
|
|
|
58
|
|
|
|
4,343
|
|
|
|
1,613
|
|
|
|
872,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
29,385
|
|
|
|
(10,909
|
)
|
|
|
3,771
|
|
|
|
(891
|
)
|
|
|
39
|
|
|
|
(18
|
)
|
|
|
188
|
|
|
|
73
|
|
|
|
(7,747
|
)(i)
|
|
|
21,638
|
|
Accumulated other comprehensive
(loss) income
|
|
|
(11,792
|
)
|
|
|
16,267
|
|
|
|
9
|
|
|
|
6,409
|
|
|
|
536
|
|
|
|
21
|
|
|
|
18
|
|
|
|
|
|
|
|
23,260
|
(j)
|
|
|
11,468
|
|
Other stockholders equity
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
98
|
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
16,288
|
|
|
|
5,358
|
|
|
|
3,780
|
|
|
|
5,518
|
|
|
|
575
|
|
|
|
3
|
|
|
|
206
|
|
|
|
171
|
|
|
|
15,611
|
|
|
|
31,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
887,515
|
|
|
$
|
(3,683
|
)
|
|
$
|
4,169
|
|
|
$
|
5,194
|
|
|
$
|
7,653
|
|
|
$
|
(887
|
)
|
|
$
|
264
|
|
|
$
|
4,514
|
|
|
$
|
17,224
|
|
|
$
|
904,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain previously reported
balances have been reclassified to conform to the current
condensed consolidated balance sheet presentation, as described
in Notes to Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies.
|
|
(b) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the derecognition of HTM
securities at amortized cost and recognition of AFS and trading
securities at fair value, including commitments accounted for
under EITF 96-11; the recognition of revised securities
commitment basis adjustments; the recognition of revised
amortization on securities cost basis adjustments; and the
derecognition of securities related to failed dollar roll
repurchase transactions that did not meet the criteria for
secured borrowing accounting.
|
|
(c) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the reclassification of
Mortgage loans to Advances to lenders;
the recognition of mortgage loan commitment basis adjustments;
the recognition of the LOCOM adjustment for loans classified as
HFS; and the recognition of revised amortization on mortgage
loan cost basis adjustments.
|
|
(d) |
|
Reflects the reclassification of
interest rate swap accruals from accrued interest and
recognition of derivative fair value adjustments.
|
|
(e) |
|
Reflects the impact of restatement
adjustments on deferred taxes and the correction of tax
credit-related errors associated with partnership investments.
|
|
(f) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative assets at fair
value; the reclassification of Advances to
lenders from Mortgage loans; the impairment of
buy-ups; the recognition of Restricted cash and
Cash and cash equivalents related to collateral
received from derivatives counterparties; and the impact of cost
basis transfers between error categories.
|
|
(g) |
|
Reflects the reversal of previously
recorded unrealized gains and losses on hedged items associated
with fair value hedges; the recognition of revised amortization
of debt basis adjustments; and the recognition of short-term and
long-term debt upon consolidation of MBS trusts in which we own
less than 100% of the related securities.
|
|
(h) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative liabilities at
fair value; the reversal of short-term debt associated
with failed dollar roll repurchase transactions; the correction
of amortization of buy-downs and risk-based pricing adjustments;
and the recognition of liabilities to derivative counterparties
associated with restricted cash.
|
89
|
|
|
(i) |
|
Reflects the recognition of
derivative fair value adjustments to the consolidated statements
of income and other income or expense related adjustments.
|
|
(j) |
|
Reflects the reversal of previously
recorded derivatives fair value adjustments and the recognition
of unrealized gains (losses) on AFS securities and
buy-ups.
|
The following table displays the cumulative impact of the
restatement on the condensed consolidated balance sheet for all
periods through and as of December 31, 2001.
Table
4: Balance Sheet Impact of Restatement as of
December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
602,429
|
|
|
$
|
(99,093
|
)(b)
|
|
$
|
503,336
|
|
Mortgage loans
|
|
|
172,127
|
|
|
|
106,710
|
(c)
|
|
|
278,837
|
|
Derivative assets at fair value
|
|
|
954
|
|
|
|
(130
|
)(d)
|
|
|
824
|
|
Deferred tax assets
|
|
|
3,821
|
|
|
|
(2,634
|
)(e)
|
|
|
1,187
|
|
Other assets
|
|
|
20,617
|
|
|
|
9,760
|
(f)
|
|
|
30,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
799,948
|
|
|
$
|
14,613
|
|
|
$
|
814,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
757,510
|
|
|
$
|
7,520
|
(g)
|
|
$
|
765,030
|
|
Derivative liabilities at fair value
|
|
|
5,069
|
|
|
|
2,508
|
(d)
|
|
|
7,577
|
|
Other liabilities
|
|
|
19,251
|
|
|
|
(553
|
)(h)
|
|
|
18,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
781,830
|
|
|
|
9,475
|
|
|
|
791,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
26,175
|
|
|
|
(7,041
|
)(i)
|
|
|
19,134
|
|
Accumulated other comprehensive
(loss) income
|
|
|
(7,065
|
)
|
|
|
12,087
|
(j)
|
|
|
5,022
|
|
Other stockholders equity
|
|
|
(992
|
)
|
|
|
92
|
|
|
|
(900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
18,118
|
|
|
|
5,138
|
|
|
|
23,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
799,948
|
|
|
$
|
14,613
|
|
|
$
|
814,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain previously reported
balances have been reclassified to conform to the current
condensed consolidated balance sheet presentation, as described
in Notes to Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies.
|
|
(b) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the derecognition of HTM
securities at amortized cost and recognition of AFS and trading
securities at fair value, including commitments accounted for
under EITF 96-11; the recognition of revised securities
commitment basis adjustments; the recognition of revised
amortization on securities cost basis adjustments; and the
derecognition of securities related to failed dollar roll
repurchase transactions that did not meet the criteria for
secured borrowing accounting.
|
|
(c) |
|
Reflects impact of MBS trust
consolidation and sale accounting; the reclassification of
Mortgage loans to Advances to lenders;
the recognition of mortgage loan commitment basis adjustments;
the recognition of the LOCOM adjustment for loans classified as
HFS; and the recognition of revised amortization on mortgage
loan cost basis adjustments.
|
|
(d) |
|
Reflects the reclassification of
interest rate swap accruals from accrued interest and
recognition of derivative fair value adjustments.
|
|
(e) |
|
Reflects the impact of restatement
adjustments on deferred taxes and the correction of tax
credit-related errors associated with partnership investments.
|
|
(f) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative assets at fair
value; the reclassification of Advances to
lenders from Mortgage loans; the impairment of
buy-ups; the recognition of Restricted cash and
Cash and cash equivalents related to collateral
received from derivatives counterparties; and the impact of cost
basis transfers between error categories.
|
90
|
|
|
(g) |
|
Reflects the reversal of previously
recorded unrealized gains and losses on hedged items associated
with fair value hedges; the recognition of revised amortization
of debt basis adjustments; and the recognition of short-term and
long-term debt upon consolidation of MBS trusts in which we own
less than 100% of the related securities.
|
|
(h) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative liabilities at
fair value; the reversal of short-term debt associated
with failed dollar roll repurchase transactions; the correction
of amortization of buy-downs and risk-based pricing adjustments;
and the recognition of liabilities to derivative counterparties
associated with restricted cash.
|
|
(i) |
|
Reflects the recognition of
derivative fair value adjustments to the consolidated statements
of income and other income or expense related adjustments.
|
|
(j) |
|
Reflects the reversal of previously
recorded derivatives fair value adjustments and the recognition
of unrealized gains (losses) on AFS securities and
buy-ups.
|
The following table displays the cumulative impact of the
restatement on consolidated stockholders equity in the
condensed consolidated balance sheet through and as of
December 31, 2001.
Table
5: Stockholders Equity Impact of Restatement as
of December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Stockholders
|
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Equity
|
|
|
|
(Dollars in millions)
|
|
|
December 31, 2001 balance, as
previously reported
|
|
$
|
26,175
|
|
|
$
|
(7,065
|
)
|
|
$
|
(992
|
)
|
|
$
|
18,118
|
|
Restatement adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and derivatives
|
|
|
(10,622
|
)(a)
|
|
|
11,363
|
(b)
|
|
|
|
|
|
|
741
|
|
Commitments
|
|
|
413
|
|
|
|
1
|
|
|
|
|
|
|
|
414
|
|
Investments in securities
|
|
|
(660
|
)
|
|
|
6,880
|
(c)
|
|
|
|
|
|
|
6,220
|
|
MBS trust consolidation and sale
accounting
|
|
|
119
|
|
|
|
81
|
|
|
|
|
|
|
|
200
|
|
Financial guaranties and master
servicing
|
|
|
(206
|
)
|
|
|
268
|
|
|
|
|
|
|
|
62
|
|
Amortization of cost basis
adjustments
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
Other adjustments
|
|
|
296
|
|
|
|
|
|
|
|
92
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax total impact of restatement
adjustments
|
|
|
(10,506
|
)
|
|
|
18,593
|
|
|
|
92
|
|
|
|
8,179
|
|
Tax impact (benefit) of restatement
adjustments
|
|
|
(3,465
|
)
|
|
|
6,506
|
|
|
|
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of restatement
adjustments
|
|
|
(7,041
|
)
|
|
|
12,087
|
|
|
|
92
|
|
|
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001 balance, as
restated
|
|
$
|
19,134
|
|
|
$
|
5,022
|
|
|
$
|
(900
|
)
|
|
$
|
23,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the recognition of
derivative fair value gains (losses) and revised amortization of
debt cost basis adjustments.
|
|
(b) |
|
Reflects the reversal of previously
recorded derivative fair value losses.
|
|
(c) |
|
Reflects the recognition of net
unrealized gains on AFS securities.
|
91
Statement
of Income Impact
The following table displays the impact of the restatement on
the December 31, 2003 condensed consolidated statement of
income.
Table
6: Income Statement Impact of Restatement for the
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS Trust
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
Guaranties
|
|
|
Amortization
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Debt and
|
|
|
|
|
|
Investments
|
|
|
and Sale
|
|
|
and Master
|
|
|
of Cost Basis
|
|
|
Other
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Net interest income
|
|
$
|
13,569
|
|
|
$
|
8,098
|
|
|
$
|
|
|
|
$
|
(162
|
)
|
|
$
|
251
|
|
|
$
|
(948
|
)
|
|
$
|
(1,355
|
)
|
|
$
|
24
|
|
|
$
|
5,908
|
|
|
$
|
19,477
|
|
Guaranty fee income
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(247
|
)
|
|
|
1,126
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
870
|
|
|
|
3,281
|
|
Investment losses, net
|
|
|
(123
|
)
|
|
|
(53
|
)
|
|
|
(280
|
)
|
|
|
(241
|
)
|
|
|
(230
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(303
|
)
|
|
|
(1,108
|
)
|
|
|
(1,231
|
)
|
Derivatives fair value losses, net
|
|
|
(2,180
|
)
|
|
|
(2,567
|
)
|
|
|
(1,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(4,109
|
)
|
|
|
(6,289
|
)
|
Debt extinguishments losses, net
|
|
|
(2,261
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(431
|
)
|
|
|
(2,692
|
)
|
Loss from partnership investments
|
|
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
(301
|
)
|
|
|
(637
|
)
|
Fee and other income
|
|
|
1,076
|
|
|
|
(692
|
)
|
|
|
(3
|
)
|
|
|
72
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(736
|
)
|
|
|
340
|
|
Expenses
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
(8
|
)
|
|
|
211
|
|
|
|
220
|
|
|
|
1,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes,
extraordinary gains (losses), and cumulative effect of a change
in accounting principle
|
|
|
10,413
|
|
|
|
4,356
|
|
|
|
(1,826
|
)
|
|
|
(332
|
)
|
|
|
(226
|
)
|
|
|
175
|
|
|
|
(1,348
|
)
|
|
|
(926
|
)
|
|
|
(127
|
)
|
|
|
10,286
|
|
Provision (benefit) for federal
income taxes
|
|
|
2,693
|
|
|
|
1,525
|
|
|
|
(639
|
)
|
|
|
(116
|
)
|
|
|
(77
|
)
|
|
|
56
|
|
|
|
(472
|
)
|
|
|
(536
|
)
|
|
|
(259
|
)
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses) and cumulative effect of a change in accounting
principle
|
|
|
7,720
|
|
|
|
2,831
|
|
|
|
(1,187
|
)
|
|
|
(216
|
)
|
|
|
(149
|
)
|
|
|
119
|
|
|
|
(876
|
)
|
|
|
(390
|
)
|
|
|
132
|
|
|
|
7,852
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
195
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
185
|
|
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,905
|
|
|
|
2,831
|
|
|
|
(1,372
|
)
|
|
|
(216
|
)
|
|
|
80
|
|
|
|
119
|
|
|
|
(876
|
)
|
|
|
(390
|
)
|
|
|
176
|
|
|
|
8,081
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
7,755
|
|
|
$
|
2,831
|
|
|
$
|
(1,372
|
)
|
|
$
|
(216
|
)
|
|
$
|
80
|
|
|
$
|
119
|
|
|
$
|
(876
|
)
|
|
$
|
(390
|
)
|
|
$
|
176
|
|
|
$
|
7,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
7.93
|
|
|
$
|
2.90
|
|
|
$
|
(1.40
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.19
|
|
|
$
|
8.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
7.91
|
|
|
$
|
2.89
|
|
|
$
|
(1.40
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
|
$
|
(0.89
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.17
|
|
|
$
|
8.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain amounts have been
reclassified to conform to the current condensed income
statements presentation, as described in Notes to
Consolidated Financial StatementsNote 2, Summary of
Significant Accounting Policies.
|
92
The following table displays the impact of the restatement on
the December 31, 2002 condensed consolidated statement of
income.
Table
7: Income Statement Impact of Restatement for the
Year Ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS Trust
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
Guaranties
|
|
|
Amortization
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Debt and
|
|
|
|
|
|
Investments
|
|
|
and Sale
|
|
|
and Master
|
|
|
of Cost Basis
|
|
|
Other
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Net interest income
|
|
$
|
10,566
|
|
|
$
|
8,317
|
|
|
$
|
|
|
|
$
|
(81
|
)
|
|
$
|
165
|
|
|
$
|
(768
|
)
|
|
$
|
144
|
|
|
$
|
83
|
|
|
$
|
7,860
|
|
|
$
|
18,426
|
|
Guaranty fee income
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(198
|
)
|
|
|
908
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
700
|
|
|
|
2,516
|
|
Investment gains (losses), net
|
|
|
24
|
|
|
|
(13
|
)
|
|
|
189
|
|
|
|
(638
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
2
|
|
|
|
(39
|
)
|
|
|
(525
|
)
|
|
|
(501
|
)
|
Derivatives fair value losses, net
|
|
|
(4,545
|
)
|
|
|
(13,572
|
)
|
|
|
5,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,374
|
)
|
|
|
(12,919
|
)
|
Debt extinguishments losses, net
|
|
|
(710
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104
|
)
|
|
|
(814
|
)
|
Loss from partnership investments
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203
|
)
|
|
|
(203
|
)
|
|
|
(509
|
)
|
Fee and other income
|
|
|
637
|
|
|
|
(505
|
)
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
38
|
|
|
|
(19
|
)
|
|
|
(67
|
)
|
|
|
(548
|
)
|
|
|
89
|
|
Expenses
|
|
|
1,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
108
|
|
|
|
100
|
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes
|
|
|
6,048
|
|
|
|
(5,877
|
)
|
|
|
5,387
|
|
|
|
(715
|
)
|
|
|
(59
|
)
|
|
|
178
|
|
|
|
135
|
|
|
|
(343
|
)
|
|
|
(1,294
|
)
|
|
|
4,754
|
|
Provision (benefit) for federal
income taxes
|
|
|
1,429
|
|
|
|
(2,057
|
)
|
|
|
1,886
|
|
|
|
(251
|
)
|
|
|
(21
|
)
|
|
|
63
|
|
|
|
47
|
|
|
|
(256
|
)
|
|
|
(589
|
)
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,619
|
|
|
|
(3,820
|
)
|
|
|
3,501
|
|
|
|
(464
|
)
|
|
|
(38
|
)
|
|
|
115
|
|
|
|
88
|
|
|
|
(87
|
)
|
|
|
(705
|
)
|
|
|
3,914
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
4,508
|
|
|
$
|
(3,820
|
)
|
|
$
|
3,501
|
|
|
$
|
(464
|
)
|
|
$
|
(38
|
)
|
|
$
|
115
|
|
|
$
|
88
|
|
|
$
|
(87
|
)
|
|
$
|
(705
|
)
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.54
|
|
|
$
|
(3.85
|
)
|
|
$
|
3.53
|
|
|
$
|
(0.47
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.52
|
|
|
$
|
(3.83
|
)
|
|
$
|
3.51
|
|
|
$
|
(0.47
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain amounts have been
reclassified to conform to the current condensed income
statements presentation, as described below in Notes to
Consolidated Financial StatementsNote 2, Summary of
Significant Accounting Policies.
|
See the Summary of Restatement Adjustments section
above for further details on the impact of the restatement
errors on the consolidated statements of income.
93
Statement
of Cash Flows Impact
The following table displays the impact of the restatement on
the December 31, 2003 and 2002 consolidated statements of
cash flows.
Table
8: Impact of Restatement on Statements of Cash Flows
for the Years Ended December 31, 2003 and 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2003
|
|
|
For the Year Ended December 31, 2002
|
|
|
|
As
|
|
|
Total
|
|
|
|
|
|
As
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions)
|
|
|
Net cash flows provided by
operating activities
|
|
$
|
19,519
|
|
|
$
|
38,704
|
|
|
$
|
58,223
|
|
|
$
|
12,848
|
|
|
$
|
30,783
|
|
|
$
|
43,631
|
|
Net cash flows used in investing
activities
|
|
|
(115,801
|
)
|
|
|
(36,946
|
)
|
|
|
(152,747
|
)
|
|
|
(71,426
|
)
|
|
|
(42,162
|
)
|
|
|
(113,588
|
)
|
Net cash flows provided by
financing activities
|
|
|
95,987
|
|
|
|
206
|
|
|
|
96,193
|
|
|
|
58,770
|
|
|
|
11,868
|
|
|
|
70,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
$
|
(295
|
)
|
|
$
|
1,964
|
|
|
$
|
1,669
|
|
|
$
|
192
|
|
|
$
|
489
|
|
|
$
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of the period
|
|
|
1,710
|
|
|
|
16
|
|
|
|
1,726
|
|
|
|
1,518
|
|
|
|
(473
|
)
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
the period
|
|
$
|
1,415
|
|
|
$
|
1,980
|
|
|
$
|
3,395
|
|
|
$
|
1,710
|
|
|
$
|
16
|
|
|
$
|
1,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restatement adjustments resulted in a net increase in
Cash and cash equivalents of $2.0 billion and
$489 million during the years ended December 31, 2003
and 2002, respectively. The restatement adjustment to increase
cash and cash equivalents was the result of recognizing cash
collateral associated with certain derivatives contracts, which
was partially offset by classifying cash due to certain MBS
trusts as restricted cash.
These restatement adjustments and errors in the prior cash flow
presentation resulted in a net increase of $38.7 billion in
cash flows from operating activities, a net decrease of
$36.9 billion in cash flows from investing activities and a
net increase of $206 million in cash flows from financing
activities for the year ended December 31, 2003. The
primary causes of these changes were misclassifications of cash
flows related to derivatives, trading securities and HFS loans,
and an overstatement of cash flows from the sale of mortgage
loans. In connection with the misapplication of hedge
accounting, we incorrectly classified derivatives cash flows as
investing and financing activities instead of as operating
activities. We determined that we misapplied
SFAS No. 102, Statement of Cash
FlowsExemption of Certain Enterprises and Classification
of Cash Flows from Certain Securities Acquired for Resale (an
amendment to FASB Statement No. 95), which requires
cash flows from trading securities and HFS loans to be
classified as operating cash flows. As previously discussed, we
incorrectly recorded sales of mortgage loans to MBS trusts that
did not meet the definition of a QSPE under SFAS 140, which
resulted in a net overall increase in cash flows from investing
activities.
94
Regulatory
Capital Impact
The following table displays the impact of the restatement on
regulatory capital as of December 31, 2003 and 2002.
Table
9: Regulatory Capital Impact of Restatement as of
December 31, 2003 and 2002
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in millions)
|
|
|
Core capital, as previously reported
|
|
$
|
34,405
|
|
|
$
|
28,079
|
|
Total restatement adjustments
|
|
|
(7,452
|
)
|
|
|
(7,648
|
)
|
|
|
|
|
|
|
|
|
|
Core capital, as restated
|
|
$
|
26,953
|
|
|
$
|
20,431
|
|
|
|
|
|
|
|
|
|
|
Required minimum capital, as
previously reported
|
|
$
|
31,520
|
|
|
$
|
27,203
|
|
Total restatement adjustments
|
|
|
296
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
Required minimum capital, as
restated
|
|
$
|
31,816
|
|
|
$
|
27,688
|
|
|
|
|
|
|
|
|
|
|
Surplus of required minimum
capital, as previously reported
|
|
$
|
2,885
|
|
|
$
|
877
|
|
Total restatement adjustments
|
|
|
(7,748
|
)
|
|
|
(8,134
|
)
|
|
|
|
|
|
|
|
|
|
Surplus (deficit) of required
minimum capital, as restated
|
|
$
|
(4,863
|
)
|
|
$
|
(7,257
|
)
|
|
|
|
|
|
|
|
|
|
Required critical capital, as
previously reported
|
|
$
|
16,113
|
|
|
$
|
13,880
|
|
Total restatement adjustments
|
|
|
148
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
Required critical capital, as
restated
|
|
$
|
16,261
|
|
|
$
|
14,126
|
|
|
|
|
|
|
|
|
|
|
Surplus of required critical
capital, as previously reported
|
|
$
|
18,292
|
|
|
$
|
14,199
|
|
Total restatement adjustments
|
|
|
(7,601
|
)
|
|
|
(7,894
|
)
|
|
|
|
|
|
|
|
|
|
Surplus of required critical
capital, as restated
|
|
$
|
10,691
|
|
|
$
|
6,305
|
|
|
|
|
|
|
|
|
|
|
The restatement adjustments resulted in a net decrease in
regulatory core capital of $7.5 billion and
$7.6 billion as of December 31, 2003 and 2002,
respectively. Additionally, the restatement adjustments of
$7.7 billion and $8.1 billion as of December 31,
2003 and 2002, respectively, caused the previously reported
surplus of required minimum capital to become a deficit.
Although we had a deficit of required minimum capital and the
restatement adjustments decreased required critical capital by
$7.6 billion and $7.9 billion as of December 31,
2003 and 2002, we maintained a surplus of required critical
capital.
These changes in our regulatory capital measures were primarily
the result of errors relating to our accounting for derivative
instruments. As AOCI is not included in the calculation of
required minimum or critical capital, the reclassification of
net derivative losses from AOCI into net income had a
significant negative impact on required minimum and critical
capital, despite an increase in stockholders equity.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP
requires management to make a number of judgments, estimates and
assumptions that affect the reported amount of assets,
liabilities, income and expenses in the consolidated financial
statements.
We have identified four accounting policies that require
significant estimates and judgments and have a significant
impact on our financial condition and results of operations.
These policies are considered critical because the estimated
amounts are likely to fluctuate from period to period due to the
significant judgments and assumptions about highly complex and
inherently uncertain matters and because the use of different
assumptions related to these estimates could have a material
impact on our financial condition or results of operations.
These four accounting policies are: (i) the fair value of
financial instruments; (ii) the amortization of cost basis
adjustments using the effective interest method; (iii) the
allowance for loan losses and reserve for
95
guaranty losses; and (iv) the assessment of variable
interest entities. We evaluate our critical accounting estimates
and judgments required by our policies on an ongoing basis and
update as necessary based on changing conditions. We describe
our most significant accounting policies in Notes to
Consolidated Financial StatementsNote 2, Summary of
Significant Accounting Policies.
Fair
Value of Financial Instruments
Valuation of financial instruments is a critical component of
our consolidated financial statements because a significant
portion of our assets and liabilities are recorded at estimated
fair value. Our estimate of fair value of these assets and
liabilities may have a major impact on our consolidated net
income or stockholders equity. The principal assets and
liabilities that we record at fair value, and the manner in
which changes in that fair value affect our net income or
stockholders equity, are:
|
|
|
|
|
Derivatives initiated for risk management purposes and mortgage
commitments, both of which are recorded in the consolidated
balance sheets at fair value with changes in fair value
recognized through earnings;
|
|
|
|
Guaranty assets and guaranty obligations, which are recorded in
the consolidated balance sheets at fair value at the inception
of the guaranty and amortized through earnings;
|
|
|
|
Investments in securities that are classified as either trading
or AFS, which are recorded in the consolidated balance sheets at
fair value with the change in fair value of trading securities
recognized through earnings and the change in fair value of AFS
securities recorded in AOCI;
|
|
|
|
Loans included in our portfolio that are classified as held for
sale, which are recorded in the consolidated balance sheets at
the lower of cost or market with changes in the fair value (not
to exceed the cost basis of these loans) recorded through
earnings; and
|
|
|
|
Retained interests in securitizations and guaranty fee buy-ups
on Fannie Mae MBS, which are recorded in the consolidated
balance sheets at fair value with unrealized gains and losses
recorded in AOCI.
|
Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between
willing unrelated parties, other than in a forced or liquidation
sale. We determine the fair value of these assets and
obligations based on our judgment of appropriate valuation
methods and assumptions. The degree of management judgment
involved in determining the fair value of a financial instrument
depends on the availability and reliability of relevant market
data, such as quoted market prices. Financial instruments that
are actively traded and have quoted market prices or readily
available market data require minimal judgment in determining
fair value. When observable market prices and data are not
readily available or do not exist, management must make fair
value estimates based on assumptions and judgments. In these
cases, even minor changes in managements assumptions could
result in significant changes in our estimate of fair value.
These changes could increase or decrease the value of our
assets, liabilities, stockholders equity and net income.
We estimate fair values using the following practices:
|
|
|
|
|
We use actual, observable market prices or market prices
obtained from multiple third parties. Pricing information
obtained from third parties is internally validated for
reasonableness prior to use in the consolidated financial
statements.
|
|
|
|
Where observable market prices are not readily available, we
estimate the fair value using market data and model-based
interpolations using standard models that are widely accepted
within the industry. Market data includes prices of instruments
with similar maturities and characteristics, duration, interest
rate yield curves, measures of volatility and prepayment rates.
|
|
|
|
If market data used to estimate fair value as described above is
not available, we estimate fair value using internally developed
models that employ techniques such as a discounted cash flow
approach. These models include market-based assumptions that are
also derived from internally developed models for prepayment
speeds, default rates and severity.
|
Of all assets and liabilities recorded at fair value in our
consolidated balance sheet as of December 31, 2004, 96%
were valued using observable market prices or market price data
obtained from third parties, 3% were
96
valued using market data or standard modeling techniques with
market inputs and 1% were valued using internally developed
models with inputs based on managements judgment of
market-based assumptions rather than market observations.
Our determination of fair value also affects our accounting for
other financial instruments. Certain cost basis adjustments that
affect the value of our financial instruments are based on fair
value. Master servicing assets and liabilities are recorded at
the lower of cost or fair value. Impairment of certain assets
requires an assessment of fair value and the judgment of
management to determine whether the asset is other than
temporarily impaired. In the case of an other than temporarily
impaired security, impairment would negatively affect the
recorded value of the security and reduce our net income.
Sensitivity
Analysis for Risk Management Derivatives
Of the financial instruments discussed above, changes in the
fair value of our derivatives have the most significant impact
on net income. The table below provides a sensitivity analysis
to illustrate the potential impact that changes in the fair
value of our derivatives would have on our net income. The two
key variables used in the determination of the fair value of our
derivatives are the level of interest rates and the implied
volatility of interest rates. Implied volatility represents the
markets expectation of potential changes in interest
rates. It is not uncommon for interest rates and implied
volatility to change significantly from period to period. These
changes could affect the valuation of our derivatives in the
consolidated balance sheets and the resulting gain or loss that
would be recorded in our net income in the consolidated
statements of income. Table 10 below shows the potential effect
on the estimated fair value of our derivatives and on our net
income of (i) a 10% change in implied volatility,
(ii) a 100 basis point increase in interest rates and
(iii) a 50 basis point decrease in interest rates as of
December 31, 2004 and 2003. Our analysis is based on these
interest rate changes because we believe they reflect reasonably
possible outcomes as of December 31, 2004.
Table
10: Risk Management Derivative Fair Value Sensitivity
Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Effect
|
|
|
|
|
|
|
of Change in
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
On Reported Net
|
|
|
|
Estimated Fair Value of
Derivatives(1)
|
|
|
Income(2)
|
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Derivative assets at fair value
|
|
$
|
6,527
|
|
|
$
|
7,058
|
|
|
|
|
|
|
|
|
|
Derivative liabilities at fair value
|
|
|
1,095
|
|
|
|
3,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets at fair value
|
|
$
|
5,432
|
|
|
$
|
3,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+10% change in implied volatility
|
|
$
|
973
|
|
|
$
|
1,173
|
|
|
|
13
|
%
|
|
|
9
|
%
|
−10% change in implied
volatility
|
|
|
(956
|
)
|
|
|
(1,173
|
)
|
|
|
(13
|
)
|
|
|
(9
|
)
|
+100 bps change in rate
|
|
$
|
8,525
|
|
|
$
|
14,211
|
|
|
|
112
|
%
|
|
|
114
|
%
|
− 50 bps change in rate
|
|
|
(3,150
|
)
|
|
|
(6,675
|
)
|
|
|
(41
|
)
|
|
|
(54
|
)
|
|
|
|
(1) |
|
Excludes commitments accounted for
as derivatives.
|
|
(2) |
|
Reflects after-tax effect of
derivative market value adjustment based on applicable federal
income tax rate of 35%.
|
|
(3) |
|
Calculated based on an
instantaneous change in volatility or interest rate.
|
Amortization
of Cost Basis Adjustments on Mortgage Loans and Mortgage-Related
Securities
We amortize cost basis adjustments on mortgage loans and
mortgage-related securities through earnings using the interest
method, applying a constant effective yield. Cost basis
adjustments include premiums, discounts and other cost basis
adjustments on mortgage loans or mortgage-related securities
that are generally incurred at the time of acquisition, which we
historically referred to as deferred price
adjustments. When we buy mortgage loans or
mortgage-related securities, we may not pay the seller the exact
amount of the unpaid
97
principal balance. If we pay more than the unpaid principal
balance and purchase the mortgage assets at a premium, the
premium reduces the yield below the stated coupon amount. If we
pay less than the unpaid principal balance and purchase the
mortgage assets at a discount, the discount increases the yield
above the stated coupon amount.
Cost basis adjustments are amortized into earnings as an
adjustment to the yield of the mortgage loan or mortgage-related
security based on the contractual terms of the instrument.
However, SFAS 91 permits the anticipation of prepayments of
principal to shorten the term of the mortgage loan or
mortgage-related security if we (i) hold a large number of
similar loans for which prepayments are probable and
(ii) the timing and amount of prepayments can be reasonably
estimated. We meet both criteria on substantially all of the
mortgage loans and mortgage-related securities held in our
portfolio. Therefore, for loans where both criteria are met, we
use prepayment estimates in determining periodic amortization of
the cost basis adjustments related to these loans. For loans
that do not meet the foregoing criteria, we use the contractual
term of the mortgage loan or mortgage-related securities to
calculate the rate of amortization, which assumes no prepayment
but considers actual prepayments that occurred during the period
in determining the amount to be amortized.
We calculate and apply an effective yield to determine the rate
of amortization of cost basis adjustments into interest income
over the estimated lives of the investment using the
retrospective effective interest method to arrive at a constant
effective yield. When appropriate, our methodology involves
grouping loans into pools or cohorts based on similar risk
categories including origination year, coupon bands, acquisition
period and product type. We update our calculations based on
changes in estimated prepayment rates and, if necessary, we
record cumulative adjustments to reflect the updated constant
effective yield as if it had been in effect since acquisition.
For mortgage loans and mortgage-related securities where we
anticipate prepayments, our estimate of prepayments requires
assumptions about borrower prepayment patterns in various
interest rate environments that involve a significant degree of
judgment. Typically, we use prepayment forecasts from
independent third parties in estimating future prepayments.
Actual prepayments differing from our estimated prepayments
could increase or decrease current period interest income as
well as future recognition of interest income. Refer to Table 11
below for the impact of changes in assumptions.
Sensitivity
Analysis for Amortizable Cost Basis Adjustments
Interest rates are a key assumption used in our prepayment
models. Table 11 shows the estimated effect on our net interest
income of the amortization of cost basis adjustments using the
retrospective effective interest method applying a constant
effective yield based on (i) a 100 basis point
increase in interest rates and (ii) a 50 basis point
decrease in interest rates as of December 31, 2004 and
2003. Our analysis is based on these interest rate changes
because we believe they reflect reasonably possible outcomes as
of December 31, 2004.
Table
11: Amortization of Cost Basis Adjustments
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Unamortized cost basis adjustments
|
|
$
|
1,820
|
|
|
$
|
3,210
|
|
Reported net interest income
|
|
$
|
18,081
|
|
|
$
|
19,477
|
|
Decrease in net interest income
from net amortization
|
|
$
|
(1,221
|
)
|
|
$
|
(1,866
|
)
|
Percentage effect on net interest
income of change in interest
rates:(1)
|
|
|
|
|
|
|
|
|
100 basis point increase
|
|
|
4.5
|
%
|
|
|
2.8
|
%
|
50 basis point decrease
|
|
|
(4.9
|
)
|
|
|
(2.9
|
)
|
|
|
|
(1) |
|
Calculated based on an
instantaneous change in interest rates.
|
98
As mortgage rates increase, expected prepayment rates generally
decrease, which slows the amortization of cost basis
adjustments. Conversely, as mortgage rates decrease, expected
prepayment rates generally increase, which accelerates the
amortization of cost basis adjustments.
Allowance
for Loan Losses and Reserve for Guaranty Losses
The allowance for loan losses and the reserve for guaranty
losses represent our estimate of probable credit losses arising
from loans classified as held for investment in our mortgage
portfolio as well as loans that back mortgage-related securities
we guarantee. We use the same methodology to determine our
allowance for loan losses and our reserve for guaranty losses as
the relevant factors affecting credit risk are the same. Credit
risk is the risk of loss to future earnings or future cash flows
that may result from the failure of a borrower to make the
payments required by his or her mortgage loan. We are exposed to
credit risk because we own mortgage loans and have guaranteed to
MBS trusts that we will supplement mortgage loan collections as
required to permit timely payment of principal and interest on
the related Fannie Mae MBS. We strive to mitigate our credit
risk by, among other things, working with lender servicers,
monitoring
loan-to-value
ratios and requiring mortgage insurance. See Risk
ManagementCredit Risk Management below for further
discussion of how we manage credit risk.
We employ a systematic methodology to determine our best
estimate of incurred credit losses. This includes aggregating
homogeneous loans into pools based on similar risk attributes,
using models to measure historical default and loss experience
on the homogeneous loan populations, evaluating larger
multifamily loans individually for impairment, monitoring
observable data for key trends, as well as documenting the
results of our estimation process.
Determining the adequacy of the allowance for loan losses and
the reserve for guaranty losses is complex and requires
significant judgment by management about the effect of matters
that are inherently uncertain. When appropriate, our methodology
involves grouping loans into pools or cohorts based on similar
risk categories including origination year,
loan-to-value
ratios, loan product types and loan ratings. We use internally
developed models that consider relevant factors historically
affecting loan collectibility, such as default rates, severity
of loss rates and adverse situations that may have occurred
affecting the borrowers ability to repay. Management also
applies judgment in considering factors that have occurred but
are not yet reflected in the loss factors, such as the estimated
value of the underlying collateral, other recoveries and
external and economic factors. The methodology and the amount of
our allowance for loan losses and reserve for guaranty losses on
Fannie Mae MBS are reviewed and approved on a quarterly basis by
our Allowance for Loan Loss Oversight Committee, which is a
committee chaired by the Chief Risk Officer and comprised of
senior management from the Single-Family and HCD businesses, the
Chief Risk Office and the finance organization.
We adjust our estimate of the allowance for loan losses and
reserve for guaranty losses based on
period-to-period
fluctuations in loss experience, economic conditions in areas of
geographic concentration and profile of mortgage
characteristics. Using different assumptions about default
rates, severity and estimated deterioration in borrowers
financial condition than those used in estimating our allowance
for loan losses and reserve for guaranty losses could have a
material effect on our net income.
Given that a minimal change in any factor listed above that is
used for calculation purposes would have a significant impact to
the allowance and reserve liability and these factors have
significant interdependencies, we do not believe a sensitivity
analysis isolating one factor is realistic. Therefore, the
following example illustrates the impact to the allowance and
reserve liability given changes to multiple assumptions used for
these factors. For example, a natural disaster, such as a
hurricane, might have an adverse impact on net income and our
allowance for loan losses and reserve for guaranty losses. The
damage to the properties that serve as collateral for the
mortgages held in our portfolio and the mortgages underlying our
mortgage-backed securities could increase our exposure to credit
risk if the damage to the properties is not covered by hazard
insurance. Our estimate of probable credit losses related to a
hurricane would involve considerable judgment and assumptions
about the extent of the property damage, the impact on borrower
default rates, the value of the collateral underlying the loans
and the amount of insurance recoveries. In the case of
Hurricanes Katrina and Rita in 2005, we preliminarily estimated
default rates, severity of loss rates, value of the underlying
collateral, and other potential recoveries. As more information
became available, we determined that the property damage
99
was less extensive than had previously been estimated and the
amount of insurance recoveries would be greater than previously
expected. Accordingly, we revised our assumptions that in turn
reduced estimated losses by over 50%.
ConsolidationVariable
Interest Entities
We are a party to various entities that are considered to be
variable interest entities (VIEs) as defined in
FIN 46R. Generally, a VIE is a corporation, partnership,
trust or any other legal structure that either does not have
equity investors with substantive voting rights or has equity
investors that do not provide sufficient financial resources for
the entity to support its activities. We invest in securities
issued by VIEs, including Fannie Mae MBS created as part of our
securitization program, certain mortgage- and asset-backed
securities that were not issued by us and interests in LIHTC
partnerships and other limited partnerships. Our involvement
with a VIE may also include providing a guaranty to the entity.
There is a significant amount of judgment required in
interpreting the provisions of FIN 46R and applying them to
specific transactions. FIN 46R indicates that either a
qualitative assessment or a quantitative assessment may be
required to support the conclusion that an entity is a VIE, as
well as an assessment of which party, if any, is the primary
beneficiary. The primary beneficiary is the party that will
absorb a majority of the expected losses or a majority of the
expected returns. If the entity is determined to be a VIE, and
we either qualitatively or quantitatively determine that we are
the primary beneficiary, we are required to consolidate the
assets, liabilities and non-controlling interests of that entity.
In order to determine if an entity is considered a VIE, we first
perform a qualitative analysis, which requires certain
subjective decisions regarding our assessment, including, but
not limited to, the design of the entity, the variability that
the entity was designed to create and pass along to its interest
holders, the rights of the parties and the purpose of the
arrangement. If we cannot conclude after qualitative analysis
whether we are the primary beneficiary, we perform a
quantitative analysis. Quantifying the variability of a
VIEs assets is complex and subjective, requiring analysis
of a significant number of possible future outcomes as well as
the probability of each outcome occurring. The results of each
possible outcome are allocated to the parties holding interests
in the VIE and, based on the allocation, a calculation is
performed to determine which, if any, is the primary beneficiary.
Qualitative analyses were performed on certain mortgage- and
asset-backed investment trusts. These analyses considered
whether the nature of our variable interests exposed us to
credit or prepayment risk, the two primary drivers of expected
losses for these VIEs. For those mortgage-backed investment
trusts that we evaluated using quantitative analyses, we used
internal models to generate Monte Carlo simulations of cash
flows associated with the different credit, interest rate and
housing price environments. Material assumptions include our
projections of interest rates and housing prices, as well as our
expectations of prepayment, default and severity rates. The
projection of future cash flows is a subjective process
involving significant management judgment. This is primarily due
to inherent uncertainties related to the interest rate and
housing price environment, as well as the actual credit
performance of the mortgage loans and securities that were held
by each investment trust. If we determined an investment trust
to be a VIE, we consolidated the investment trust when the
modeling resulted in our absorption of more than 50% of the
variability in the expected losses or expected residual returns.
To demonstrate the sensitivity of the FIN 46R modeling
results, we considered the impact of different primary
beneficiary conclusions for the trusts in which a change in the
variability would affect our primary beneficiary assessment and
our consolidation determination at adoption of FIN 46R.
|
|
|
|
|
If assumptions were changed to cause our variability in trusts
to increase from an amount between 40% and 50% to greater than
50%, our total assets and liabilities would increase by
approximately $1.0 billion.
|
|
|
|
If assumptions were changed to cause our variability in trusts
to decrease from an amount between 60% and 50.1% to 50% or less,
our total assets and liabilities would decrease by approximately
$500 million.
|
We also quantitatively examined our LIHTC partnerships and other
limited partnerships. Internal cash flow models were also used
to determine if these were VIEs and, if so, whether we were the
primary beneficiary. LIHTC partnerships are created by third
parties to finance construction of property, giving rise to tax
credits for these partnerships. Material assumptions include the
degree of development cost overruns related to the
100
construction of the building, the probability of the lender
foreclosing on the building, as well as an investors
ability to use the tax credits to offset taxable income. The
projection of these cash flows and probabilities thereof
requires significant management judgment because of the inherent
limitations that relate to the use of favorable historical data
for the projection of future events. Additionally, we reviewed
similar assumptions and applied cash flow models to determine
both VIE status and primary beneficiary status for our other
limited partnership investments.
We are exempt from applying FIN 46R to certain investment
trusts if the investment trusts meet the criteria of a QSPE, and
if we do not have the unilateral ability to cause the trust to
liquidate or change the trusts QSPE status. The QSPE
requirements significantly limit the activities in which a QSPE
may engage and the types of assets and liabilities it may hold.
Management judgment is required to determine whether a
trusts activities meet the QSPE requirements. To the
extent any trust fails to meet these criteria, we would be
required to consolidate its assets and liabilities if, based on
the provisions of FIN 46R, we are determined to be the
primary beneficiary of the entity.
The FASB currently is assessing further what activities a QSPE
may perform. The outcome of these and future assessments may
affect our interpretation of this guidance, and, consequently,
the entities we consolidate in future periods.
CONSOLIDATED
RESULTS OF OPERATIONS
The following discussion of our consolidated results of
operations is based on our results for the year ended
December 31, 2004 and restated results for the years ended
December 31, 2003 and 2002. In conjunction with the
restatement, we revised the presentation of our consolidated
statements of income. Table 12 presents a condensed summary of
our consolidated results of operations.
Table
12: Condensed Consolidated Results of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
For the Year Ended December 31,
|
|
|
2004 vs. 2003
|
|
|
2003 vs. 2002
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
|
Net interest income
|
|
$
|
18,081
|
|
|
$
|
19,477
|
|
|
$
|
18,426
|
|
|
$
|
(1,396
|
)
|
|
|
(7
|
)%
|
|
$
|
1,051
|
|
|
|
6
|
%
|
Guaranty fee income
|
|
|
3,604
|
|
|
|
3,281
|
|
|
|
2,516
|
|
|
|
323
|
|
|
|
10
|
|
|
|
765
|
|
|
|
30
|
|
Fee and other income
|
|
|
404
|
|
|
|
340
|
|
|
|
89
|
|
|
|
64
|
|
|
|
19
|
|
|
|
251
|
|
|
|
282
|
|
Investment losses, net
|
|
|
(362
|
)
|
|
|
(1,231
|
)
|
|
|
(501
|
)
|
|
|
869
|
|
|
|
71
|
|
|
|
(730
|
)
|
|
|
(146
|
)
|
Derivatives fair value losses, net
|
|
|
(12,256
|
)
|
|
|
(6,289
|
)
|
|
|
(12,919
|
)
|
|
|
(5,967
|
)
|
|
|
(95
|
)
|
|
|
6,630
|
|
|
|
51
|
|
Debt extinguishment losses, net
|
|
|
(152
|
)
|
|
|
(2,692
|
)
|
|
|
(814
|
)
|
|
|
2,540
|
|
|
|
94
|
|
|
|
(1,878
|
)
|
|
|
(231
|
)
|
Loss from partnership investments
|
|
|
(702
|
)
|
|
|
(637
|
)
|
|
|
(509
|
)
|
|
|
(65
|
)
|
|
|
(10
|
)
|
|
|
(128
|
)
|
|
|
(25
|
)
|
Provision for credit losses
|
|
|
(352
|
)
|
|
|
(365
|
)
|
|
|
(284
|
)
|
|
|
13
|
|
|
|
4
|
|
|
|
(81
|
)
|
|
|
(29
|
)
|
Other non-interest expense
|
|
|
(2,266
|
)
|
|
|
(1,598
|
)
|
|
|
(1,250
|
)
|
|
|
(668
|
)
|
|
|
(42
|
)
|
|
|
(348
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes,
extraordinary gains (losses), and cumulative effect of change in
accounting principle
|
|
|
5,999
|
|
|
|
10,286
|
|
|
|
4,754
|
|
|
|
(4,287
|
)
|
|
|
(42
|
)
|
|
|
5,532
|
|
|
|
116
|
|
Provision for federal income taxes
|
|
|
(1,024
|
)
|
|
|
(2,434
|
)
|
|
|
(840
|
)
|
|
|
1,410
|
|
|
|
58
|
|
|
|
(1,594
|
)
|
|
|
(190
|
)
|
Extraordinary gains (losses), net
of tax effect
|
|
|
(8
|
)
|
|
|
195
|
|
|
|
|
|
|
|
(203
|
)
|
|
|
(104
|
)
|
|
|
195
|
|
|
|
100
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
(100
|
)
|
|
|
34
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,967
|
|
|
$
|
8,081
|
|
|
$
|
3,914
|
|
|
$
|
(3,114
|
)
|
|
|
(39
|
)%
|
|
$
|
4,167
|
|
|
|
106
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
4.94
|
|
|
$
|
8.08
|
|
|
$
|
3.81
|
|
|
$
|
(3.14
|
)
|
|
|
(39
|
)%
|
|
$
|
4.27
|
|
|
|
112
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and diluted earnings per share (EPS)
totaled $5.0 billion and $4.94, respectively, in 2004,
compared with $8.1 billion and $8.08 in 2003, and
$3.9 billion and $3.81 in 2002. We expect high levels of
101
period to period volatility in our financial results as part of
our normal business activities. This volatility is primarily due
to changes in market conditions that result in periodic
fluctuations in the estimated fair value of our derivative
instruments, which we recognize in our consolidated statements
of income as Derivatives fair value losses, net.
Although we use derivatives as economic hedges to help us manage
interest rate risk and achieve our targeted interest rate risk
profile, we do not meet the criteria for hedge accounting under
SFAS 133. Accordingly, we record our derivative instruments
at fair value as assets or liabilities in our consolidated
balance sheets and recognize the fair value gains and losses in
our consolidated statements of income without consideration of
offsetting changes in the fair value of the economically hedged
exposure. The estimated fair value of our derivatives may
fluctuate substantially from period to period because of changes
in interest rates, expected interest rate volatility and our
derivative activity. Based on the composition of our
derivatives, we generally expect to report decreases in the
aggregate fair value of our derivatives as interest rates
decrease.
Our business segments generate revenues from three principal
sources: net interest income, guaranty fee income, and fee and
other income. Other significant factors affecting our net income
include the timing and size of investment and debt repurchase
gains and losses, equity investments, the provision for credit
losses, and administrative expenses. We provide a comparative
discussion of the impact of these items on our consolidated
results of operations for the three-year period ended
December 31, 2004 below. We also discuss other items
presented in our consolidated statements of income.
Net
Interest Income
Net interest income, which is the difference between interest
income and interest expense, is a primary source of our revenue.
Interest income consists of accrued interest on our consolidated
interest-earning assets, plus income from the amortization of
discounts for assets acquired at prices below the principal
value, less expense from the amortization of premiums for assets
acquired at prices above principal value. The amount of interest
income and interest expense recognized in the consolidated
statements of income is affected by our investment activity,
debt activity, asset yields, and our cost of debt and will
fluctuate based on changes in interest rates and changes in the
amount and composition of our interest-earning assets and
interest-bearing liabilities. We present net interest income and
the related net interest yield on a taxable-equivalent basis in
order to consistently reflect income from taxable and tax-exempt
investments. We calculate the taxable-equivalent amounts based
on a marginal tax rate of 35%, which is our statutory tax rate.
Table 13 presents an analysis of our net interest income and net
interest yield for 2004, 2003 and 2002.
As described below in Derivatives Fair Value Losses,
Net, we supplement our issuance of debt with interest
rate-related derivatives to manage the prepayment and duration
risk inherent in our mortgage investments. The effect of these
derivatives, in particular the periodic net interest expense
accruals on interest rate swaps, is not reflected in net
interest income. See Derivatives Fair Value Losses,
Net for additional information.
102
Table
13: Analysis of Net Interest Income and
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
Average(1)
|
|
|
|
|
|
|
|
|
Average(1)
|
|
|
|
|
|
|
|
|
Average(1)
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(2)
|
|
$
|
400,603
|
|
|
$
|
21,390
|
|
|
|
5.34
|
%
|
|
$
|
362,002
|
|
|
$
|
21,370
|
|
|
|
5.90
|
%
|
|
$
|
301,821
|
|
|
$
|
19,870
|
|
|
|
6.58
|
%
|
Mortgage securities
|
|
|
514,529
|
|
|
|
25,302
|
|
|
|
4.92
|
|
|
|
495,219
|
|
|
|
26,483
|
|
|
|
5.35
|
|
|
|
456,755
|
|
|
|
29,444
|
|
|
|
6.45
|
|
Non-mortgage
securities(3)
|
|
|
46,440
|
|
|
|
1,009
|
|
|
|
2.17
|
|
|
|
44,375
|
|
|
|
1,069
|
|
|
|
2.41
|
|
|
|
51,390
|
|
|
|
1,460
|
|
|
|
2.84
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
8,308
|
|
|
|
84
|
|
|
|
1.01
|
|
|
|
6,509
|
|
|
|
32
|
|
|
|
0.49
|
|
|
|
2,972
|
|
|
|
43
|
|
|
|
1.45
|
|
Advances to lenders
|
|
|
4,773
|
|
|
|
33
|
|
|
|
0.69
|
|
|
|
12,613
|
|
|
|
110
|
|
|
|
0.87
|
|
|
|
14,524
|
|
|
|
107
|
|
|
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
974,653
|
|
|
$
|
47,818
|
|
|
|
4.91
|
|
|
$
|
920,718
|
|
|
$
|
49,064
|
|
|
|
5.33
|
|
|
$
|
827,462
|
|
|
$
|
50,924
|
|
|
|
6.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
331,971
|
|
|
$
|
4,380
|
|
|
|
1.32
|
%
|
|
$
|
318,600
|
|
|
$
|
3,967
|
|
|
|
1.25
|
%
|
|
$
|
287,193
|
|
|
$
|
5,373
|
|
|
|
1.87
|
%
|
Long-term debt
|
|
|
625,225
|
|
|
|
25,338
|
|
|
|
4.05
|
|
|
|
582,686
|
|
|
|
25,575
|
|
|
|
4.39
|
|
|
|
515,968
|
|
|
|
27,099
|
|
|
|
5.25
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
3,037
|
|
|
|
19
|
|
|
|
0.63
|
|
|
|
6,421
|
|
|
|
45
|
|
|
|
0.70
|
|
|
|
7,485
|
|
|
|
26
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
960,233
|
|
|
$
|
29,737
|
|
|
|
3.10
|
%
|
|
$
|
907,707
|
|
|
$
|
29,587
|
|
|
|
3.26
|
%
|
|
$
|
810,646
|
|
|
$
|
32,498
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of net non-interest bearing
funding
|
|
$
|
14,420
|
|
|
|
|
|
|
|
0.05
|
%
|
|
$
|
13,011
|
|
|
|
|
|
|
|
0.05
|
%
|
|
$
|
16,816
|
|
|
|
|
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable-equivalent adjustment on
tax-exempt
investments(4)
|
|
|
|
|
|
|
101
|
|
|
|
0.01
|
|
|
|
|
|
|
|
72
|
|
|
|
0.01
|
|
|
|
|
|
|
|
74
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable-equivalent net interest
income and net interest
yield(5)
|
|
|
|
|
|
$
|
18,182
|
|
|
|
1.87
|
%
|
|
|
|
|
|
$
|
19,549
|
|
|
|
2.12
|
%
|
|
|
|
|
|
$
|
18,500
|
|
|
|
2.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average balances have been
calculated based on beginning of year and end of year amortized
cost.
|
|
(2) |
|
Includes average balance on
nonaccrual loans of $7.6 billion, $6.8 billion and
$5.3 billion for the years ended December 31, 2004,
2003 and 2002, respectively.
|
|
(3) |
|
Includes cash equivalents.
|
|
(4) |
|
Represents adjustment to permit
comparison of yields on tax-exempt and taxable assets calculated
using a 35% marginal tax rate for each of the years presented.
|
|
(5) |
|
Net interest yield is calculated
based on taxable-equivalent net interest income divided by
average balance of total interest-earning assets.
|
Table 14 shows the changes in our net interest income between
2004 and 2003 and between 2003 and 2002 that are attributable to
changes in the volume of our interest-earning assets and
interest-bearing liabilities versus changes in interest rates.
103
Table
14: Rate/Volume Analysis of Net Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 vs. 2003
|
|
|
2003 vs. 2002
|
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
20
|
|
|
$
|
2,164
|
|
|
$
|
(2,144
|
)
|
|
$
|
1,500
|
|
|
$
|
3,692
|
|
|
$
|
(2,192
|
)
|
Mortgage securities
|
|
|
(1,181
|
)
|
|
|
1,006
|
|
|
|
(2,187
|
)
|
|
|
(2,961
|
)
|
|
|
2,340
|
|
|
|
(5,301
|
)
|
Non-mortgage securities
|
|
|
(60
|
)
|
|
|
48
|
|
|
|
(108
|
)
|
|
|
(391
|
)
|
|
|
(185
|
)
|
|
|
(206
|
)
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
52
|
|
|
|
11
|
|
|
|
41
|
|
|
|
(11
|
)
|
|
|
29
|
|
|
|
(40
|
)
|
Advances to lenders
|
|
|
(77
|
)
|
|
|
(58
|
)
|
|
|
(19
|
)
|
|
|
3
|
|
|
|
(15
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(1,246
|
)
|
|
|
3,171
|
|
|
|
(4,417
|
)
|
|
|
(1,860
|
)
|
|
|
5,861
|
|
|
|
(7,721
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
413
|
|
|
|
171
|
|
|
|
242
|
|
|
|
(1,406
|
)
|
|
|
539
|
|
|
|
(1,945
|
)
|
Long-term debt
|
|
|
(237
|
)
|
|
|
1,797
|
|
|
|
(2,034
|
)
|
|
|
(1,524
|
)
|
|
|
3,251
|
|
|
|
(4,775
|
)
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
(26
|
)
|
|
|
(22
|
)
|
|
|
(4
|
)
|
|
|
19
|
|
|
|
(4
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
150
|
|
|
|
1,946
|
|
|
|
(1,796
|
)
|
|
|
(2,911
|
)
|
|
|
3,786
|
|
|
|
(6,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
(1,396
|
)
|
|
$
|
1,225
|
|
|
$
|
(2,621
|
)
|
|
|
1,051
|
|
|
$
|
2,075
|
|
|
$
|
(1,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable-equivalent adjustment on
tax-exempt
investments(2)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable-equivalent net interest
income
|
|
$
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Combined rate/volume variances are
allocated to the rate and volume variances based on their
relative size.
|
|
(2) |
|
Represents adjustment to permit
comparison of yields on tax-exempt and taxable assets calculated
using a 35% marginal tax rate for each of the years presented.
|
Taxable-equivalent net interest income of $18.2 billion for
2004 decreased 7% from 2003, driven by a 12% (25 basis points)
decline in our taxable-equivalent net interest yield to 1.87%
that was partially offset by a 6% increase in average
interest-earning assets. The average yield on our
interest-earning assets declined 42 basis points to 4.91%, which
exceeded the benefit we received from a 16 basis point decrease
in the average yield on our interest-bearing liabilities to
3.10%. During 2004, our mortgage asset purchases consisted of a
greater proportion of floating-rate and ARM products, which tend
to earn lower initial yields than fixed-rate mortgage assets.
Partially offsetting this reduction in average yield on our
mortgage investments was a slower rate of amortization of
premiums in 2004 relative to 2003 due to slower prepayment
rates. The yield on our total average debt decreased in 2004 due
to the repurchase and call of a significant amount of higher
cost long-term debt during 2003 and the issuance of new
long-term debt at lower rates. However, as short-term interest
rates began to increase in 2004, the yield on our short-term
debt began to rise.
Taxable-equivalent net interest income of $19.5 billion for
2003 increased 6% over 2002, driven by a 11% increase in average
interest-earning assets that was partially offset by a 5% (12
basis points) decline in our taxable-equivalent net interest
yield to 2.12%. Although liquidations of our mortgage assets
reached a record level during 2003, we experienced growth in our
average interest-earning assets due in part to the low interest
rate environment and related increase in mortgage refinancing
volumes, which contributed to a record level of mortgage asset
purchases. The interest income generated from a larger volume of
mortgage assets was partially offset by a reduction in the
average yield on those assets as we replaced higher yielding
assets with lower yielding assets. The decline in interest rates
during the first half of 2003 resulted in faster prepayment
rates relative to 2002, which accelerated the amortization of
premiums and contributed to a substantial reduction in the
average yield on our mortgage assets. The decrease in the yield
on our
interest-earning
assets was partially
104
offset by a reduction in our borrowing costs, as we redeemed
callable debt and issued new debt at lower interest rates.
Since year-end 2004, we have experienced a decrease in the
volume of our interest-earning assets as well as in the spread
between the average yield on these assets and our borrowing
costs, which we expect to result in a reduction in our net
interest income and net interest yield in 2005 and 2006.
Guaranty
Fee Income
Guaranty fee income primarily consists of contractual guaranty
fees related to Fannie Mae MBS held in our portfolio and held by
third-party investors, adjusted for the amortization of upfront
fees and impairment of guaranty assets, net of a proportionate
reduction in the related guaranty obligation and deferred
profit, and impairment of buy-ups.
Guaranty fee income is primarily affected by the amount of
outstanding Fannie Mae MBS and the compensation we receive for
providing our guaranty on Fannie Mae MBS. The amount of
compensation we receive and the form of payment varies depending
on factors such as the risk profile of the securitized loans,
the level of credit risk we assume and the negotiated payment
arrangement with the lender. Our payment arrangements may be in
the form of an upfront exchange of payments, an ongoing payment
stream from the cash flows of the MBS trusts, or a
combination. We typically negotiate a contractual guaranty fee
with the lender and collect the fee on a monthly basis based on
the contractual fee rate multiplied by the unpaid principal
balance of loans underlying a Fannie Mae MBS issuance. In lieu
of charging a higher contractual fee rate for loans with greater
credit risk, we may require that the lender pay an upfront fee
to compensate us for assuming the additional credit risk. We
refer to this payment as a risk-based pricing adjustment. We
also may adjust the monthly contractual guaranty fee rate so
that the pass-through coupon rates on Fannie Mae MBS are in more
easily tradable increments of a whole or half percent by making
an upfront payment to the lender (buy-up) or
receiving an upfront payment from the lender
(buy-down).
As we receive monthly contractual payments for our guaranty
obligation, we recognize guaranty fee income. We defer upfront
risk-based pricing adjustments and buy-down payments that we
receive from lenders and recognize these amounts as a component
of guaranty fee income over the expected life of the underlying
assets of the related MBS trusts. We record
buy-up
payments we make to lenders as an asset and reduce the recorded
asset as cash flows are received over the expected life of the
underlying assets of the related MBS trusts. We assess buy-ups
for
other-than-temporary
impairment and include any impairment recognized as a component
of guaranty fee income. The extent to which we amortize deferred
payments into income depends on the rate of expected
prepayments, which is affected by interest rates. In general, as
interest rates decrease, expected prepayment rates increase,
resulting in accelerated accretion into income of deferred fee
amounts, which increases our guaranty fee income. Prepayment
rates also affect the estimated fair value of buy-ups. Faster
than expected prepayment rates shorten the average expected life
of the underlying assets of the related MBS trusts, which
reduces the value of our
buy-up
assets and may trigger the recognition of
other-than
temporary impairment.
The average effective guaranty fee rate reflects our average
contractual guaranty fee rate adjusted for the impact of
amortization of deferred amounts and
buy-up
impairment. Table 15 shows our guaranty fee income, including
and excluding
buy-up
impairments, our average effective guaranty fee rate, and Fannie
Mae MBS activity for 2004, 2003 and 2002.
105
Table
15: Analysis of Guaranty Fee Income and Average
Effective Guaranty Fee Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2004
|
|
|
2003
|
|
|
|
Amount
|
|
|
Rate(1)
|
|
|
Amount
|
|
|
Rate(1)
|
|
|
Amount
|
|
|
Rate(1)
|
|
|
vs. 2003
|
|
|
vs. 2002
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Guaranty fee income, excluding
impairment of buy-ups
|
|
$
|
3,640
|
|
|
|
21.0
|
bp |
|
$
|
3,474
|
|
|
|
22.2 |
bp |
|
$
|
2,808
|
|
|
|
21.5 |
bp |
|
|
5
|
%
|
|
|
24
|
%
|
Impairment of buy-ups
|
|
|
(36
|
)
|
|
|
(0.2
|
)
|
|
|
(193
|
)
|
|
|
(1.2
|
)
|
|
|
(292
|
)
|
|
|
(2.2
|
)
|
|
|
(81
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income and average
effective guaranty fee rate
|
|
$
|
3,604
|
|
|
|
20.8 |
bp |
|
$
|
3,281
|
|
|
|
21.0 |
bp |
|
$
|
2,516
|
|
|
|
19.3 |
bp |
|
|
10
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding Fannie Mae MBS
and other
guaranties(2)
|
|
$
|
1,733,060
|
|
|
|
|
|
|
$
|
1,564,812
|
|
|
|
|
|
|
$
|
1,303,677
|
|
|
|
|
|
|
|
11
|
%
|
|
|
20
|
%
|
Fannie Mae MBS issues
|
|
|
552,482
|
|
|
|
|
|
|
|
1,220,066
|
|
|
|
|
|
|
|
743,630
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
64
|
|
|
|
|
(1) |
|
Calculated based on guaranty fee
income components divided by average outstanding Fannie Mae MBS
and other guaranties. Shown in basis points.
|
|
(2) |
|
Reflects average during the
reported period calculated based on beginning and end of year
balances of the aggregate unpaid principal balance of loans
underlying Fannie Mae MBS and other guaranties. Other guaranties
include $14.7 billion, $12.8 billion and
$11.8 billion as of December 31, 2004, 2003 and 2002,
respectively, related to long-term standby commitments and
credit enhancements.
|
Guaranty fee income of $3.6 billion for 2004 was up 10%
over 2003, primarily due to an 11% increase in average
outstanding Fannie Mae MBS and other guaranties. Our average
effective guaranty fee rate remained essentially flat at
20.8 basis points in 2004, compared to 21.0 basis points in
2003. Guaranty fee income of $3.3 billion for 2003 was up
30% over 2002, driven by a 20% increase in average outstanding
Fannie Mae MBS and other guaranties and a 9% increase in the
average effective guaranty fee rate to 21.0 basis points
from 19.3 basis points.
Growth in outstanding Fannie Mae MBS depends largely on the
volume of mortgage assets made available for securitization and
our assessment of the credit risk and pricing dynamics of these
mortgage assets. During the three-year period from 2002 to 2004,
we experienced exceptional growth in the amount of outstanding
Fannie Mae MBS. Outstanding Fannie Mae MBS increased by 47%
during this period, reflecting an average annual rate of growth
of approximately 16%. A key driver of this growth was the record
pace of mortgage originations in the primary market during the
period, with originations reaching a record $3.9 trillion in
2003 and our issuance of Fannie Mae MBS reaching a record $1.2
trillion in 2003. Borrowers took advantage of historically low
interest rates and refinanced into long-term fixed-rate
mortgages, which represent the majority of our business volume.
Increased market demand among depository institutions for
investments in fixed-rate mortgages, partially stemming from the
unusually steep yield curve during the period, also fueled
growth in outstanding Fannie Mae MBS during this period.
Growth in outstanding Fannie Mae MBS slowed in 2004, reflecting
the impact of a considerable drop in the volume of refinancings
from the record levels in 2003 and a shift in the primary market
to an increasing share of originations of lower credit quality
loans, loans with reduced documentation and loans to fund
investor properties, as well as a decline in originations of
traditional mortgages, such as conventional fixed-rate loans.
Competition from private-label issuers, who have been a
significant source of funding for these mortgage products,
reduced our market share and level of MBS issuances. This trend
continued in 2005 and 2006; however, we began to increase our
participation in these product types where we concluded that it
would be economically advantageous or that it would contribute
to our mission objectives.
Our average effective guaranty fee rate, excluding the effect of
buy-up
impairments, declined to 21.0 basis points in 2004 from
22.2 basis points in 2003, reflecting a decrease in the
accretion of deferred fees into income. Mortgage interest rates
were higher in 2004 relative to 2003, which increased the
average expected
106
life of the underlying assets of outstanding Fannie Mae MBS and
slowed the pace of the amortization of fees. The increase in the
average expected life of outstanding Fannie Mae MBS resulted in
an increase in the value of our
buy-up
assets. Consequently, we recognized substantially less
buy-up
impairment in 2004 than in 2003.
Our average effective guaranty fee rate, excluding the effect of
buy-up
impairments, increased to 22.2 basis points in 2003 from
21.5 basis points in 2002 as we accelerated the accretion
of deferred fees into income in response to substantially higher
than expected prepayment rates that resulted from record low
mortgage rates. The decrease in the average expected life of
outstanding Fannie Mae MBS caused the value of our
buy-up
assets to decline, which triggered the recognition of impairment.
Fee and
Other Income
Fee and other income includes transaction fees, technology fees,
multifamily fees and foreign currency transaction gains and
losses. Transaction and technology fees are largely driven by
business volume, while foreign currency transaction gains and
losses are driven by fluctuations in exchange rates on our
foreign denominated debt. Fee and other income totaled
$404 million, $340 million and $89 million in
2004, 2003 and 2002, respectively. The increase in fee and other
income in 2004 from 2003 was primarily due to a reduction in net
foreign currency transaction losses, which more than offset a
decline in transaction fees from reduced business volumes. The
increase in 2003 from 2002 was largely due to an increase in
transaction, technology and multifamily fees resulting from a
substantial increase in business volumes.
Investment
Losses, Net
Investment losses, net includes
other-than-temporary
impairment on
available-for-sale
securities,
lower-of-cost-or-market
adjustments on held for sale loans, gains and losses recognized
on the securitization of loans from our portfolio and the sale
of securities, unrealized gains and losses on trading securities
and other investment losses. Investment gains and losses may
fluctuate significantly from period to period depending upon our
portfolio investment and securitization activities, changes in
market conditions that may result in fluctuations in the fair
value of trading securities, and
other-than-temporary
impairment. Table 16 summarizes the components of investment
gains and losses for 2004, 2003 and 2002.
Table
16: Investment Losses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Other-than-temporary
impairment on
available-for-sale
securities(1)
|
|
$
|
(389
|
)
|
|
$
|
(733
|
)
|
|
$
|
(676
|
)
|
Lower-of-cost-or-market
adjustments on held for sale loans
|
|
|
(110
|
)
|
|
|
(370
|
)
|
|
|
(17
|
)
|
Gains (losses) on Fannie Mae
portfolio securitizations, net
|
|
|
(34
|
)
|
|
|
(13
|
)
|
|
|
13
|
|
Gains (losses) on sale of
investment securities, net
|
|
|
185
|
|
|
|
87
|
|
|
|
(14
|
)
|
Unrealized gains (losses) on
trading securities, net
|
|
|
24
|
|
|
|
(97
|
)
|
|
|
205
|
|
Other investment losses, net
|
|
|
(38
|
)
|
|
|
(105
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment losses, net
|
|
$
|
(362
|
)
|
|
$
|
(1,231
|
)
|
|
$
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes
other-than-temporary
impairment on guaranty assets and buy-ups as these amounts are
recognized as a component of guaranty fee income.
|
Other-than-Temporary
Impairment
We routinely evaluate
available-for-sale
securities for
other-than-temporary
impairment. We identify securities that are impaired based on
the extent to which the estimated fair value is less than the
amortized cost. We consider the impairment to be other than
temporary if we determine that it is probable that we will be
unable to collect all of the contractual principal and interest
payments or if we do not have the ability and intent to hold the
security until it recovers to its carrying amount. We consider
many factors in assessing
other-than-temporary
impairment, including the severity and duration of the
impairment, recent events specific to the issuer
and/or the
industry to which the issuer belongs, external credit ratings
and recent downgrades, as well as our ability and intent to hold
such securities until recovery. When we decide to sell an
impaired
107
security and do not expect the fair value of the security to
fully recover prior to the expected time of sale, we identify
the security as
other-than-temporarily
impaired in the period that the decision to sell is made. We
provide additional detail on our assessment of
other-than-temporary
impairment in Notes to Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies.
We recognized
other-than-temporary
impairment on AFS securities totaling $389 million,
$733 million and $676 million in 2004, 2003 and 2002,
respectively, primarily related to our investments in
manufactured housing securities, commercial aircraft lease
securities, mortgage-related interest-only securities and other
mortgage-related securities. The impairment amounts are
reflected in the results of our Capital Markets group and
detailed below.
Beginning in 2002, there was a significant weakening in the
manufactured housing sector. As a result, certain manufactured
housing servicers began to experience financial difficulties,
triggering a deterioration in the credit quality of certain
securities as evidenced by credit downgrades and a considerable
decline in fair value.
Other-than-temporary
impairment on our investments in manufactured housing securities
totaled $55 million, $511 million and
$174 million in 2004, 2003 and 2002, respectively. In
addition, the downturn in the airline industry contributed to a
decline in the fair value of our aircraft lease securities that
we deemed to be other than temporary.
Other-than-temporary
impairment on our investments in aircraft lease securities
totaled $121 million and $39 million in 2003 and 2002,
respectively. We did not record any other-than-temporary
impairment on our investments in aircraft lease securities in
2004.
We are required to write down the cost basis of our investments
in mortgage-related interest-only securities when there is both
a decline in fair value below the carrying amount and an adverse
change in expected cash flows. Decreases in interest rates cause
the expected lives of these securities to shorten, which
decreases the expected cash flows and fair value of the
securities. Interest rates began to decline in 2002 and reached
a historic low in mid-2003 before beginning to increase during
the second half of 2003 and 2004. The
other-than-temporary
impairment of $49 million, $78 million and
$403 million we recognized on mortgage-related
interest-only securities in 2004, 2003 and 2002, respectively,
is reflective of the interest rate environment during each year.
We recognized a significantly higher impairment amount during
2002 because of the declining interest rate environment.
We also recognized
other-than-temporary
impairment on certain other mortgage-related securities totaling
$285 million, $23 million and $60 million in
2004, 2003 and 2002, respectively. The $285 million of
impairment recognized in 2004 primarily relates to certain
securities with unrealized losses as of December 31, 2004
that we identified for possible sale subsequent to
December 31, 2004 to comply with OFHEOs directive
that we achieve a 30% surplus over our statutory minimum capital
requirement by September 30, 2005. Our intent was to hold
the identified securities, but as capital requirements dictated,
we would evaluate selling. Because of the uncertainty of our
ability to hold these securities until the value fully
recovered, we were required to recognize the unrealized losses
as other-than-temporary impairments as of December 31, 2004.
We will continue to regularly assess our investments for
impairment. A significant downward trend in interest rates could
result in additional future impairments on our mortgage-related
interest-only securities. We expect the continued downturn in
the manufactured housing sector to result in the recognition of
additional impairment on our investments in manufactured housing
securities, which had a carrying value of $5.4 billion as
of December 31, 2004.
Lower-of-Cost-or-Market
Adjustments on Held for Sale Loans
We record loans classified as held for sale at the lower of cost
or market, with any excess of cost over fair value reflected as
a valuation allowance and changes in the valuation allowance
recognized in income. The fair value of held for sale mortgage
loans will fluctuate from period to period based primarily on
changes in mortgage interest rates. As interest rates decline,
the fair value of fixed-rate mortgage loans will generally
increase, and as interest rates rise, the fair value of
fixed-rate mortgage loans will generally decrease. In an
environment of increasing interest rates or significant interest
rate volatility, the LOCOM adjustment will typically increase.
108
We recorded losses related to LOCOM adjustments totaling
$110 million, $370 million and $17 million in
2004, 2003 and 2002, respectively. We purchased a significant
volume of mortgage loans in 2003 in response to the record level
of mortgage originations in the primary market as mortgage
interest rates reached record lows in the first half of 2003. An
increase in interest rates in the second half of 2003 reduced
the value of our HFS loans, resulting in a significantly
higher amount of LOCOM adjustments in 2003.
Gains
(Losses) on Fannie Mae Portfolio Securitizations,
Net
Portfolio securitizations involve the transfer of mortgage loans
or mortgage-related securities from our balance sheet to a trust
to create Fannie Mae MBS (whether in the form of
single-class Fannie Mae MBS, REMICs or other types of
beneficial interests). We may retain an interest in the assets
transferred to a trust in a portfolio securitization by
receiving a portion of the resulting issued securities. If the
transfer qualifies as a sale under SFAS 140, we determine
the gain (loss) on sale by allocating the carrying value of the
financial assets sold and the interests retained based on their
relative estimated fair values. The gain (loss) we recognize is
the difference between the cash proceeds from the sale, net of
any liabilities assumed, and the cost allocated to the financial
assets sold. The timing of the recognition of the gain (loss) is
dependent upon meeting specific accounting criteria. As a
result, the gain (loss) on sale may be recorded in a different
accounting period than the period in which the securitization is
completed. In addition, we may securitize financial assets in a
different accounting period than the period in which the
financial assets were purchased. See Notes to Consolidated
Financial StatementsNote 2, Summary of Significant
Accounting Policies and Notes to Consolidated
Financial StatementsNote 7, Portfolio
Securitizations for additional information on our
accounting for Fannie Mae portfolio securitizations.
Gains (losses) on Fannie Mae portfolio securitizations in any
given period are primarily affected by the level of
securitization activity, the carrying amount of the financial
assets sold, and changes in interest rates and prices from the
time the financial assets are purchased until the completion of
the securitization. We generally record losses on portfolio
securitization transactions because we are required to recognize
a liability for the fair value of our guaranty obligation in
determining the gain or loss on the sale. We recorded net losses
on Fannie Mae portfolio securitizations of $34 million and
$13 million in 2004 and 2003, respectively, and a net gain
of $13 million in 2002, related to the securitization of
approximately $12.3 billion, $7.2 billion and
$3.2 billion, respectively, of mortgage assets where we
were considered to be the transferor.
Gains
(Losses) on Sale of Investment Securities, Net
Gains (losses) on the sale of investment securities in any given
period are primarily affected by the volume of sales and changes
in interest rates and prices from the time the securities are
purchased until the time they are sold. We recorded net gains of
$185 million and $87 million in 2004 and 2003,
respectively, and a net loss of $14 million in 2002,
primarily related to the sale of securities totaling
$18.4 billion, $24.7 billion and $14.0 billion,
respectively. We began to increase the level of sales from our
mortgage portfolio beginning in the latter part of 2004.
We sold a considerably higher amount of mortgage assets from our
portfolio in 2005 and the first nine months of 2006 relative to
historical sales levels. The heightened competition for mortgage
assets in 2005 and 2006 significantly increased the number of
economically attractive opportunities to sell certain mortgage
assets, particularly traditional
15-year and
30-year
mortgage-related securities, in addition to REMICs structured
from 15-year
and 30-year
Fannie Mae MBS held in our portfolio. Sales of selected
assets from our portfolio contributed to both the enhancement of
economic value and the reduction of portfolio balances to
achieve our capital plan objectives.
Unrealized
Gains (Losses) on Trading Securities, Net
Trading securities are carried at fair value with unrealized
gains and losses recorded in earnings. We expect unrealized
gains and losses on trading securities to fluctuate each period
with changes in volumes, interest rates and market prices. We
recorded unrealized gains on trading securities of
$24 million in 2004, unrealized losses of $97 million
in 2003 and unrealized gains of $205 million in 2002. The
increase in interest rates in the second half of 2003 resulted
in unrealized losses, while the general decline in interest
rates during 2002 resulted in unrealized gains.
109
Derivatives
Fair Value Losses, Net
We record all derivatives as either assets or liabilities in the
consolidated balance sheets at estimated fair value and
recognize changes in fair value in our consolidated statements
of income. Changes in the fair value of our derivatives,
including mortgage commitments, resulted in losses of
$12.3 billion, $6.3 billion and $12.9 billion in
2004, 2003 and 2002, respectively.
Because we did not qualify for hedge accounting during the
reported periods, we changed the timing of the recognition of
the derivative gains and losses in our consolidated statements
of income and the classification of net contractual interest
expense accruals on interest rate swaps. Prior to the
restatement, we had pre-tax cumulative deferred net derivative
losses reported in AOCI and cumulative debt basis adjustments
totaling $13.5 billion as of June 30, 2004 and
$15.8 billion and $16.6 billion as December 31,
2003 and December 31, 2002, respectively. Had we qualified
for hedge accounting, the cumulative deferred losses would have
been amortized into income in future periods, resulting in a
decrease in our future net income. The restatement shifted the
recognition of the cumulative deferred losses on our derivatives
to net income from AOCI for the restatement period and
eliminated the cumulative debt basis adjustments. In addition,
the net contractual interest expense accruals on interest rate
swaps, which were previously recorded in our income statement as
a component of interest expense, are included in
Derivative fair value losses, net.
To fully understand the derivatives fair value gains and losses
recognized in our consolidated statements of income, it is
important to examine the gains and losses in the context of our
overall interest rate risk management objectives and strategy,
including the economic objective in our use of various types of
derivative instruments, the factors that drive changes in the
fair value of our derivatives, how these factors affect changes
in the fair value of other assets and liabilities, and the
differences in accounting for our derivatives and other
financial instruments.
While we use debt instruments as the primary means to fund our
mortgage investments and manage our interest rate risk exposure,
we supplement our issuance of debt with interest rate-related
derivatives to manage the prepayment and duration risk inherent
in our mortgage investments. As an example, by combining a
pay-fixed swap with short-term variable-rate debt, we can
achieve the economic effect of converting short-term
variable-rate debt into long-term fixed-rate debt. By combining
a pay-fixed swaption with short-term variable-rate debt, we can
achieve the economic effect of converting short-term
variable-rate debt into long-term callable debt. The cost of
derivatives used in our management of interest rate risk is an
inherent part of the cost of funding and hedging our mortgage
investments and is economically similar to the interest expense
that we recognize on the debt we issue to fund our mortgage
investments. However, because we do not apply hedge accounting
to our derivatives, the fair value gains or losses on our
derivatives, including the periodic net contractual interest
expense accruals on our swaps, are reported as Derivatives
fair value losses, net in our consolidated statements of
income rather than as interest expense.
Our derivatives consist primarily of
over-the-counter
(OTC) contracts and commitments to purchase and sell
mortgage assets that are valued using a variety of valuation
models. The valuation model that we select to estimate the fair
value of our derivatives requires assumptions and inputs, such
as market prices, yield curves and measures of interest rate
volatility, which often require judgment. Accordingly, we have
identified the estimation of the fair value of our derivatives
as a critical accounting policy, which we discuss further in
Critical Accounting Policies and EstimatesFair Value
of Financial InstrumentsSensitivity Analysis for Risk
Management Derivatives and Notes to Consolidated
Financial StatementsNote 19, Fair Value of Financial
Instruments. We also discuss the primary factors affecting
changes in the fair value of our derivatives. These factors
include the following:
|
|
|
|
|
Changes in the level of interest
rates: Because our derivatives predominately
consist of pay-fixed swaps, we typically report losses in fair
value when interest rates decrease. As part of our economic
hedging strategy, these derivatives, in combination with our
debt issuances, are intended to offset changes in the fair value
of our mortgage assets, which tend to increase in value when
interest rates decrease.
|
|
|
|
Implied interest rate volatility: We purchase
option-based derivatives to economically hedge the embedded
prepayment option in our mortgage investments. A key variable in
estimating the fair value of
|
110
|
|
|
|
|
option-based derivatives is implied volatility, which reflects
the markets expectation about the future volatility of
interest rates. Assuming all other factors are held equal,
including interest rates, a decrease in implied volatility would
reduce the fair value of our derivatives.
|
|
|
|
|
|
Changes in our derivative activity: As
interest rates change, we are likely to take actions to
rebalance our portfolio to manage our interest rate exposure. As
interest rates decrease, expected mortgage prepayments are
likely to increase, which reduces the duration of our mortgage
investments. In this scenario, we generally will rebalance our
existing portfolio to manage this risk by terminating pay-fixed
swaps or adding receive-fixed swaps, which shortens the duration
of our liabilities. Conversely, when interest rates increase and
the duration of our mortgage assets increases, we are likely to
rebalance our existing portfolio by adding pay-fixed swaps that
have the effect of extending the duration of our liabilities. We
also add derivatives in various interest rate environments to
hedge the risk of incremental mortgage purchases that we are not
able to accomplish solely through our issuance of debt
securities.
|
The following tables show the impact of derivatives on our
consolidated statements of income and consolidated balance
sheets. Table 17 provides an analysis of changes in the
estimated fair value of the net derivative asset (liability),
excluding mortgage commitments, recorded in our consolidated
balance sheets between the periods December 31, 2004, 2003
and 2002, including the components of the derivatives fair value
gains (losses) recorded in our consolidated statements of
income. As indicated in Table 17, the net derivative
estimated fair value amount recorded in our consolidated balance
sheet shifted to a net asset of $5.4 billion as of
December 31, 2004, from a net liability of
$6.1 billion as of the beginning of 2002. The general
effect on our consolidated financial statements of the changes
in estimated fair value shown in this table is described
following the table.
Table
17: Changes in Risk Management Derivative Assets
(Liabilities) at Fair Value,
Net(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Beginning net derivative asset
(liability)(2)
|
|
$
|
3,988
|
|
|
$
|
(3,365
|
)
|
|
$
|
(6,135
|
)
|
Effect of cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at inception of
contracts entered into during the
period(3)
|
|
|
2,998
|
|
|
|
5,221
|
|
|
|
5,425
|
|
Fair value at date of termination
of contracts settled during the
period(4)
|
|
|
4,129
|
|
|
|
1,520
|
|
|
|
7,554
|
|
Periodic net cash contractual
interest payments
|
|
|
6,526
|
|
|
|
5,365
|
|
|
|
7,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash payments
|
|
|
13,653
|
|
|
|
12,106
|
|
|
|
20,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement impact of
recognized amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic net contractual interest
expense accruals on interest rate swaps
|
|
|
(4,981
|
)
|
|
|
(6,363
|
)
|
|
|
(7,583
|
)
|
Net change in fair value during the
period
|
|
|
(7,228
|
)
|
|
|
1,610
|
|
|
|
(10,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives fair value losses,
net(5)
|
|
|
(12,209
|
)
|
|
|
(4,753
|
)
|
|
|
(18,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending derivative asset
(liability)(2)
|
|
$
|
5,432
|
|
|
$
|
3,988
|
|
|
$
|
(3,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives fair value gains
(losses) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic net contractual interest
expense accruals on interest rate swaps
|
|
$
|
(4,981
|
)
|
|
$
|
(6,363
|
)
|
|
$
|
(7,583
|
)
|
Net change in fair value of
terminated derivative contracts from end of prior year to date
of termination
|
|
|
(4,096
|
)
|
|
|
(1,103
|
)
|
|
|
(4,056
|
)
|
Net change in fair value of
outstanding derivative contracts, including derivative contracts
entered into during the period
|
|
|
(3,132
|
)
|
|
|
2,713
|
|
|
|
(6,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives fair value losses,
net(5)
|
|
$
|
(12,209
|
)
|
|
$
|
(4,753
|
)
|
|
$
|
(18,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes mortgage commitments.
|
|
(2) |
|
Represents the net of
Derivative assets at fair value and Derivative
liabilities at fair value recorded in our consolidated
balance sheets, excluding mortgage commitments.
|
111
|
|
|
(3) |
|
Primarily includes upfront premiums
paid on option contracts.
|
|
(4) |
|
Primarily represents cash paid upon
termination of derivative contracts.
|
|
(5) |
|
Reflects net derivatives fair value
losses recognized in the consolidated statements of income,
excluding mortgage commitments.
|
Amounts presented in Table 17 have the following effect on our
consolidated financial statements:
|
|
|
|
|
Cash payments made to purchase options (purchased options
premiums) increase the derivative asset recorded in the
consolidated balance sheets.
|
|
|
|
Cash payments to terminate and/or sell derivative contracts
reduce the derivative liability recorded in the consolidated
balance sheets.
|
|
|
|
Periodic interest payments on our interest rate swap contracts
also reduce the derivative liability as we accrue these amounts
based on the contractual terms and recognize the accrual as an
increase to the net derivative liability recorded in the
consolidated balance sheets. The corresponding offsetting amount
is recorded as expense and included as a component of
derivatives fair value losses in the consolidated statements of
income.
|
|
|
|
Changes in the estimated fair value of our derivatives that
result in a loss are recorded as an increase to the derivative
liability or as a decrease to the derivative asset recorded in
the consolidated balance sheets. The corresponding offsetting
amount is recorded as a component of derivatives fair value
losses in the consolidated statements of income.
|
|
|
|
Changes in the estimated fair value of our derivatives that
result in a gain are recorded as a decrease to the derivative
liability or as an increase to the derivative asset recorded in
the consolidated balance sheets. The corresponding offsetting
amount is recorded as a component of derivatives fair value
gains in the consolidated statements of income.
|
Table 18 provides additional detail on the derivatives fair
value gains and losses recognized in our consolidated statements
of income for 2004, 2003 and 2002 by type of derivative
instrument. The
5-year
interest rate swap rate, which is shown below in Table 18 for
each period, is a key reference interest rate affecting the
estimated fair value of these derivatives.
112
Table
18: Derivatives Fair Value Gains (Losses),
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
(10,640
|
)
|
|
$
|
(4,269
|
)
|
|
$
|
(24,477
|
)
|
Receive-fixed
|
|
|
3,917
|
|
|
|
1,849
|
|
|
|
4,550
|
|
Basis swaps
|
|
|
51
|
|
|
|
(1
|
)
|
|
|
10
|
|
Foreign currency swaps
|
|
|
379
|
|
|
|
695
|
|
|
|
369
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
(3,841
|
)
|
|
|
387
|
|
|
|
(1,918
|
)
|
Receive-fixed
|
|
|
(1,913
|
)
|
|
|
(3,047
|
)
|
|
|
4,279
|
|
Interest rate caps
|
|
|
(140
|
)
|
|
|
(339
|
)
|
|
|
(734
|
)
|
Other(1)
|
|
|
(22
|
)
|
|
|
(28
|
)
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management derivatives fair
value losses, net
|
|
|
(12,209
|
)
|
|
|
(4,753
|
)
|
|
|
(18,118
|
)
|
Mortgage commitment derivatives
fair value gains (losses), net
|
|
|
(47
|
)
|
|
|
(1,536
|
)
|
|
|
5,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives fair value
losses, net
|
|
$
|
(12,256
|
)
|
|
$
|
(6,289
|
)
|
|
$
|
(12,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
5-year
swap rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning rate
|
|
|
3.64
|
%
|
|
|
3.20
|
%
|
|
|
5.09
|
%
|
Change
|
|
|
0.38
|
|
|
|
0.44
|
|
|
|
(1.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending rate
|
|
|
4.02
|
%
|
|
|
3.64
|
%
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes MBS options, forward
starting debt, forward purchase and sale agreements, swap credit
enhancements, mortgage insurance contracts and exchange-traded
futures.
|
113
Table 19 provides additional detail on the estimated fair value
of derivatives recorded in our consolidated balance sheets and
the related outstanding notional amount by derivative instrument
type as of December 31, 2004 and 2003. We describe our risk
management derivative activity in Risk
ManagementInterest Rate Risk Management and Other Market
Risks. We describe our credit exposure on our risk
management derivatives in Risk ManagementCredit Risk
ManagementInstitutional Counterparty Credit Risk
Management.
Table
19: Notional and Fair Value of Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value(1)
|
|
|
Amount
|
|
|
Value(1)
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
142,017
|
|
|
$
|
(6,687
|
)
|
|
$
|
364,377
|
|
|
$
|
(12,197
|
)
|
Receive-fixed
|
|
|
81,193
|
|
|
|
479
|
|
|
|
201,229
|
|
|
|
3,393
|
|
Basis swaps
|
|
|
32,273
|
|
|
|
7
|
|
|
|
32,303
|
|
|
|
(8
|
)
|
Foreign currency swaps
|
|
|
11,453
|
|
|
|
686
|
|
|
|
5,195
|
|
|
|
335
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
170,705
|
|
|
|
3,370
|
|
|
|
163,980
|
|
|
|
5,693
|
|
Receive-fixed
|
|
|
147,570
|
|
|
|
7,711
|
|
|
|
141,195
|
|
|
|
8,468
|
|
Interest rate caps
|
|
|
104,150
|
|
|
|
638
|
|
|
|
130,350
|
|
|
|
607
|
|
Other(2)
|
|
|
733
|
|
|
|
84
|
|
|
|
379
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690,094
|
|
|
|
6,288
|
|
|
|
1,039,008
|
|
|
|
6,389
|
|
Accrued interest
|
|
|
|
|
|
|
(856
|
)
|
|
|
|
|
|
|
(2,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk management derivatives
|
|
$
|
690,094
|
|
|
$
|
5,432
|
|
|
$
|
1,039,008
|
|
|
$
|
3,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitment derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitments to purchase
whole loans
|
|
$
|
2,118
|
|
|
$
|
4
|
|
|
$
|
2,709
|
|
|
$
|
10
|
|
Forward contracts to purchase
mortgage-related securities
|
|
|
20,059
|
|
|
|
43
|
|
|
|
19,882
|
|
|
|
142
|
|
Forward contracts to sell
mortgage-related securities
|
|
|
18,423
|
|
|
|
(35
|
)
|
|
|
20,969
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage commitment
derivatives
|
|
$
|
40,600
|
|
|
$
|
12
|
|
|
$
|
43,560
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the net amount of
Derivative assets at fair value and Derivative
liabilities at fair value in the consolidated balance
sheets.
|
|
(2) |
|
Includes MBS options, swap credit
enhancements, and the fair value of mortgage insurance contracts
that are accounted for as derivatives. These mortgage insurance
contracts have payment provisions that are not based on a
notional amount.
|
As discussed above, because a significant portion of our
derivatives consists of pay-fixed swaps, we expect the aggregate
estimated fair value of our derivatives to decline and result in
derivative losses when long-term interest rates decline because
we are paying a higher fixed rate of interest relative to the
current interest rate environment. For the years ended
December 31, 2004, 2003 and 2002, we recorded net periodic
contractual interest expense accruals on our interest rate swaps
totaling $5.0 billion, $6.4 billion and
$7.6 billion, respectively, which are shown above in Table
17 and included in the derivatives fair value losses recognized
in the consolidated statements of income. Had we elected to fund
our mortgage investments with long-term fixed- rate debt instead
of a combination of short-term variable-rate debt and interest
rate swaps, the expense related to our interest rate swap
accruals would have been reflected as interest expense instead
of as a component of our derivatives fair value losses.
114
During 2004, there was a decrease in implied volatility that
resulted in a decline in the estimated fair value of our
option-based derivatives, including both our pay-fixed and
receive-fixed swaptions. Although we recorded derivatives fair
value losses of $12.3 billion in our consolidated
statements of income due to the decrease in the estimated fair
value of our derivatives, as discussed in Supplemental
Non-GAAP InformationFair Value Balance Sheet,
the estimated fair value of our net assets increased by
$8.9 billion in 2004, net of equity transactions that
included proceeds from the issuance of preferred stock and
payment of dividends. This increase in estimated fair value was
driven in part by an increase in the estimated fair value of our
mortgage assets that resulted from the decrease in implied
volatility. Since
year-end
2004, interest rates have generally increased through 2005 and
remain at generally higher levels through November 2006. As a
result, we expect to report significantly lower losses from our
risk management derivatives in 2005 and 2006, relative to the
losses reported in 2004.
While changes in the estimated fair value of our derivatives
resulted in net expense in each reported period, we incurred
this expense as part of our overall interest rate risk
management strategy to economically hedge the prepayment and
duration risk of our mortgage investments. As more fully
described in Risk ManagementInterest Rate Risk
Management and Other Market Risks, we believe our duration
gap, which is a measure of the difference between the estimated
durations of our interest rate sensitive assets and liabilities,
is a useful tool in assessing our interest rate exposure and our
management thereof as it shows the extent to which changes in
the fair value of our mortgage investments are offset by changes
in the fair value of our debt and derivatives.
During 2002 and prior periods, our interest rate risk parameters
were consistent with maintaining our duration gap within a range
of plus or minus six months about two-thirds of the time. This
resulted in our taking more interest rate risk than if we had
managed the duration within a tighter range, which could prove
beneficial or detrimental to our investment results depending
upon interest rate changes and how we managed them. Changes in
market conditions during 2002, including significant interest
rate volatility coupled with low interest rates that fueled a
surge in refinancings and a substantial increase in expected
prepayments, caused the duration of our mortgages to shorten by
a much larger extent than the duration of our liabilities. As a
result, our duration gap during this period fell outside of our
target range for three consecutive months and reached minus
14 months, reflecting the unusually large mismatch between
the durations of our assets and liabilities. As this occurred,
the fair value of our assets increased less than the fair value
of our liabilities, and as such the fair value of our net assets
and our operating results were significantly less than had we
managed our duration gap to a tighter range. In other periods,
managing our duration gap to a wider range benefited the fair
value of our net assets and our operating results.
In mid-2003, we announced the implementation of new corporate
financial disciplines that resulted in our taking less interest
rate exposure, which had the effect of reducing the potential
for economic losses resulting from changes in interest rates but
also reducing the potential for economic gains. As part of these
disciplines, we committed to managing the portfolios
duration gap within a target range of plus or minus six months
substantially all of the time. Our duration gap has not exceeded
plus or minus one month for any month since October 2004. We
present our monthly duration gap for the period January 1,
2002 to December 31, 2004 in Risk
ManagementInterest Rate Risk Management and Other Market
RisksMonitoring and Measuring Interest Rate Risk. To
maintain our duration gap within the tighter tolerances, we
issue more callable debt, purchase more options and take
rebalancing actions earlier and with greater frequency than we
did prior to adopting this policy. However, the increased level
of optionality provided by our callable debt and option-based
derivatives generally reduces the magnitude of rebalancing
actions needed for a given change in interest rates. The effects
of our investment strategy, including our interest rate risk
management, are reflected in changes in the fair value of our
net assets over time.
Debt
Extinguishment Losses, Net
We call debt securities in order to reduce future debt costs as
a part of our integrated interest rate risk management strategy.
We also repurchase debt in order to enhance the liquidity of our
debt. Debt extinguishment losses are affected by the level of
debt extinguishment activity and the price performance of our
debt securities. Typically, the amount of debt repurchased has a
greater impact on gains and losses
115
recognized on debt extinguishments than the amount of debt
called. Debt repurchases, unlike debt calls, may require the
payment of a premium and therefore result in higher
extinguishment costs. As a result, we historically have
generally repurchased high interest rate debt at times (and in
amounts) when we believed we had sufficient income available to
absorb or offset those higher costs. In its May 2006 report,
OFHEO stated that our debt repurchases undertaken during 2001
through 2003 were made to help achieve a stable pattern of
earnings growth and meet analyst expectations.
We recognized a pre-tax loss of $152 million in 2004 from
the repurchase of $4.3 billion and call of
$155.6 billion of debt. In comparison, we recognized a
pre-tax loss of $2.7 billion in 2003 from the repurchase of
$19.8 billion and call of $188.7 billion of debt, and
a pre-tax loss of $814 million in 2002 from the repurchase
of $7.9 billion and call of $121.0 billion of debt. As
interest rates began to rise in 2004, we began to curb our debt
repurchase activity.
Loss from
Partnership Investments
We make numerous investments in limited partnerships, which
primarily include investments in LIHTC partnerships that sponsor
affordable housing projects and provide tax credits. These
investments assist us in achieving our affordable housing
mission and also provide a satisfactory return on capital. These
investments, which totaled approximately $8.1 billion and
$6.4 billion as of December 31, 2004 and 2003,
respectively, generate tax credits and net operating losses that
reduce our federal income tax liability. In some cases, we
consolidate these entities in our financial statements. In other
cases, we account for these investments using the equity method
and record our share of operating losses in the consolidated
statements of income as Loss from partnership
investments. Investments we accounted for under the equity
method totaled $4.2 billion and $6.0 billion as of
December 31, 2004 and 2003, respectively. We provide
additional information on the nature of these investments and
applicable accounting in Off-Balance Sheet
ArrangementsLIHTC Partnership Interests.
Loss from partnership investments, net, accounted for under the
equity method totaled $702 million, $637 million and
$509 million in 2004, 2003 and 2002, respectively. The
increase in losses in each year was primarily due to our
increased level of LIHTC partnership investments. We further
increased our investments in LIHTC partnerships in 2005 and
2006, which we expect will generate additional tax credits and
net operating losses. For more information on our use of tax
credits associated with our LIHTC investments, refer to
Provision for Federal Income Taxes below.
Provision
for Credit Losses
The provision for credit losses results from a detailed analysis
estimating an appropriate allowance for loan losses for
single-family and multifamily loans classified as held for
investment in our mortgage portfolio and reserve for guaranty
losses for credit-related losses associated with certain
mortgage loans that back Fannie Mae MBS held in our portfolio
and held by other investors. The provision for credit losses may
reflect an increase or decrease, depending on whether we need to
increase or decrease the allowance for loan losses and reserve
for guaranty losses based on our estimate of incurred losses in
our portfolio as of each balance sheet date.
While the combined allowance for loan losses and reserve for
guaranty losses increased as of December 31, 2004 from
December 31, 2003, the provision for credit losses
decreased slightly to $352 million in 2004, down $13 million, or
4%, from 2003. The increase in the combined allowance for loan
losses and reserve for guaranty losses was due to an observed
trend of reduced levels of recourse proceeds from lenders on
charged-off loans. While this trend had the effect of increasing
the provision for credit losses in 2004, lower than anticipated
charge-offs more than offset this impact, leading to a slight
reduction in the provision compared to 2003.
The provision for credit losses increased to $365 million
in 2003, up $81 million, or 29%, over 2002, primarily due
to the significant increase in our single-family mortgage credit
book of business and higher incurred losses on certain
manufactured housing securities guaranteed by us.
116
We provide additional detail on charge-offs and factors
affecting our allowance for loan losses and reserve for guaranty
losses in Risk ManagementCredit Risk
ManagementMortgage Credit Risk ManagementAllowance
for Loan Losses and Reserve for Guaranty Losses and
Critical Accounting Policies and EstimatesAllowance
for Loan Losses and Reserve for Guaranty Losses.
Other
Non-interest Expense
Foreclosed
Property Expense (Income)
Foreclosed property expense (income) includes gains and losses
on the sale of acquired properties and valuation losses on REO
properties held for sale. Foreclosed property expense (income)
is affected by the level of foreclosures and the loss severity
rate (average loss per case). Home price appreciation and credit
enhancements generally reduce the severity of our losses.
We recorded foreclosed property expense of $11 million in
2004, compared with income of $12 million and
$11 million in 2003 and 2002, respectively. The
acceleration of home prices during this period helped to
mitigate our foreclosure losses and resulted in gains on the
sale of certain REO properties. The slowdown in the housing
market during 2006 has resulted in substantially lower home
price appreciation, which is likely to increase our loss
severity rates. We provide additional detail on our management
of credit losses, including foreclosed property expense, in
Risk ManagementCredit Risk ManagementMortgage
Credit Risk Management.
Administrative
Expenses
Administrative expenses include costs incurred to run our daily
operations, such as salaries and employee benefits, professional
services, occupancy expense and technology expenses.
Administrative expenses totaled $1.7 billion in 2004, up
14% over 2003, primarily due to the write off of
$159 million of software that had been previously
capitalized in conjunction with the reengineering of our core
technology infrastructure. Administrative expenses totaled
$1.5 billion in 2003, up 26% over 2002, primarily due to
higher levels of charitable contributions, including a
$75 million contribution to the Fannie Mae Foundation, and
an increase in stock-based compensation expense recognized in
conjunction with our adoption of the fair value recognition
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), in
2003.
Costs associated with the restatement process and related
regulatory examinations, investigations and litigation defense
significantly increased our administrative expenses in 2005 and
for the first nine months of 2006. Administrative expenses
totaled an estimated $2.2 billion for 2005 and an estimated
$2.3 billion for the first nine months of 2006. Based on
our current projections, we estimate that, for 2006, our
restatement and related regulatory costs will total
approximately $850 million and costs attributable to or
associated with the preparation of our consolidated financial
statements and periodic SEC financial reports for periods
subsequent to 2004 will total over $200 million. We
anticipate that the costs associated with the preparation of our
post-2004 financial statements and periodic SEC reports will
continue to have a substantial impact on administrative expenses
until we are current in filing our periodic financial reports
with the SEC. We believe that our administrative expenses for
2007 will be comparable to those for 2006.
Other
Expenses
Other expenses include credit enhancement expenses that relate
to costs associated with the purchase of additional mortgage
insurance to protect against credit losses, regulatory penalties
and other miscellaneous expenses. Other expenses totaled
$607 million, $156 million and $105 million in
2004, 2003 and 2002, respectively. The increase in other
expenses in 2004 from 2003 primarily stems from the recognition
in 2004 of the $400 million civil penalty that we paid to
the U.S. Treasury in 2006 pursuant to our settlements with
OFHEO and the SEC.
Provision
for Federal Income Taxes
The provision for federal income taxes includes deferred tax
expense plus current tax expense. Deferred tax expense
represents the net change in the deferred tax asset or liability
balance during the year plus any change in a valuation
allowance. The current tax expense represents the amount of tax
currently payable to or
117
receivable from tax authorities. The provision for income taxes
does not include the tax effect related to adjustments recorded
in AOCI.
Our effective income tax rate, excluding the provision for taxes
related to extraordinary amounts and the cumulative effect of
change in accounting principle, was reduced below our 35%
statutory rate to 17%, 24% and 18% in 2004, 2003 and 2002,
respectively. The difference in our statutory rate and effective
tax rate is primarily due to the tax benefits we receive from
our investments in LIHTC partnerships that help in supporting
our mission. As disclosed in Notes to Consolidated
Financial StatementsNote 11, Income Taxes, our
effective tax rate would have been 32%, 31% and 30% in 2004,
2003 and 2002, respectively, had we not received the tax
benefits from our investments in LIHTC partnerships.
The variance in our effective income tax rate over the past
three years is primarily due to the combined effect of
fluctuations in our pre-tax income, which affects the relative
tax benefit of tax-exempt income and tax credits, and an
increase in the actual dollar amount of tax credits. Our
effective income tax rate may vary from period to period,
depending on, among other factors, our earnings and the level of
tax credits. We expect tax credits resulting from our
investments in LIHTC partnerships to grow in the future, which
is likely to reduce our effective tax rate. The extent to which
we are able to use all of the tax credits generated by existing
or future investments in housing tax credit partnerships to
reduce our federal income tax liability will depend on the
amount of our future federal income tax liability, which we
cannot predict with certainty.
We recorded a net deferred tax asset of $6.1 billion and
$4.1 billion as of December 31, 2004 and 2003,
respectively. We have not recorded a valuation allowance against
our net deferred tax asset as we anticipate it is more likely
than not that the results of future operations will generate
sufficient taxable income to realize the entire tax benefit.
Extraordinary
Gains (Losses), Net of Tax Effect
When we determine that we are the primary beneficiary of a VIE
under FIN 46R, we are required to consolidate the assets
and liabilities of the VIE in our consolidated financial
statements at fair value. Effective with the adoption of
FIN 46R, any difference between the then fair value and the
previous carrying amount of our interests in the VIE is recorded
as an extraordinary gain (loss), net of tax effect, in our
consolidated statements of income. As a result of our adoption
of FIN 46R in 2003, we recorded an extraordinary gain, net
of tax effect, of $195 million due to the consolidation of
VIEs.
118
BUSINESS
SEGMENT RESULTS
Table 20 provides a summary of the financial results for each of
our business segments for the years ended December 31,
2004, 2003 and 2002.
Table
20: Business Segment Results Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
For the Year Ended December 31,
|
|
|
2004 vs. 2003
|
|
|
2003 vs. 2002
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family Credit Guaranty
|
|
$
|
5,153
|
|
|
$
|
4,994
|
|
|
$
|
3,957
|
|
|
$
|
159
|
|
|
|
3
|
%
|
|
$
|
1,037
|
|
|
|
26
|
%
|
Housing and Community Development
|
|
|
538
|
|
|
|
398
|
|
|
|
305
|
|
|
|
140
|
|
|
|
35
|
|
|
|
93
|
|
|
|
30
|
|
Capital Markets
|
|
|
46,135
|
|
|
|
47,293
|
|
|
|
49,267
|
|
|
|
(1,158
|
)
|
|
|
(2
|
)
|
|
|
(1,974
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,826
|
|
|
$
|
52,685
|
|
|
$
|
53,529
|
|
|
$
|
(859
|
)
|
|
|
(2
|
)%
|
|
$
|
(844
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family Credit Guaranty
|
|
$
|
2,514
|
|
|
$
|
2,481
|
|
|
$
|
1,958
|
|
|
$
|
33
|
|
|
|
1
|
%
|
|
$
|
523
|
|
|
|
27
|
%
|
Housing and Community Development
|
|
|
337
|
|
|
|
286
|
|
|
|
184
|
|
|
|
51
|
|
|
|
18
|
|
|
|
102
|
|
|
|
55
|
|
Capital Markets
|
|
|
2,116
|
|
|
|
5,314
|
|
|
|
1,772
|
|
|
|
(3,198
|
)
|
|
|
(60
|
)
|
|
|
3,542
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,967
|
|
|
$
|
8,081
|
|
|
$
|
3,914
|
|
|
$
|
(3,114
|
)
|
|
|
(39
|
)%
|
|
$
|
4,167
|
|
|
|
106
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family Credit Guaranty
business
|
|
$
|
11,543
|
|
|
$
|
8,724
|
|
|
|
|
|
|
$
|
2,819
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
Housing and Community Development
|
|
|
10,166
|
|
|
|
7,853
|
|
|
|
|
|
|
|
2,313
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
Capital Markets Group
|
|
|
999,225
|
|
|
|
1,005,698
|
|
|
|
|
|
|
|
(6,473
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,020,934
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
$
|
(1,341
|
)
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest income, guaranty
fee income, and fee and other income.
|
We use various methodologies to allocate certain balance sheet
and income statement line items to the responsible operating
segment. For a description of our allocation methodologies and
more financial detail on our business segments, see Notes
to Consolidated Financial StatementsNote 15, Segment
Reporting. Following is an analysis and discussion of the
performance of our business segments.
Single-Family
Credit Guaranty Business
Our Single-Family Credit Guaranty business generated net income
of $2.5 billion, $2.5 billion and $2.0 billion in
2004, 2003 and 2002, respectively. The significant components of
Single-Family net income include guaranty fees, net interest
income, fee and other income, the provision for credit losses
and other expenses.
Net income for the Single-Family business segment remained
essentially flat in 2004 from 2003, with an increase in guaranty
fee income offset by lower fee and other income, and higher
expenses. Guaranty fee income increased by 6% in 2004 from 2003,
primarily due to growth in average outstanding single-family
Fannie Mae MBS in 2004. The average effective guaranty fee rate
on single-family Fannie Mae MBS remained essentially flat in
2004 as compared to 2003. This increase in guaranty fee income
was offset primarily by: (1) an 11% increase in other
expenses in 2004, due to the allocation of a portion of the $400
million civil penalty paid to the U.S. Treasury in connection
with our settlements with the SEC and OFHEO; (2) a 21%
decline in fee and other income in 2004 due to lower
technology-related transactions and associated
119
revenues, which was driven by lower single-family business
volumes in 2004 as compared to 2003; and (3) a 4% increase
in our provision for federal income taxes, due to higher pre-tax
earnings.
Net income for the Single-Family business segment increased by
27% in 2003 from 2002, with significant increases in all revenue
components partially offset by increases in other expenses, the
provision for federal income taxes and the provision for credit
losses. The primary reason for the increase in Single-Family net
income in 2003 was a 29% increase in guaranty fee income in 2003
from 2002. This increase in guaranty fee income was primarily
due to growth in average outstanding single-family Fannie Mae
MBS in 2003. Also contributing to the increase in guaranty fee
income in 2003 was an increase in our average effective guaranty
fee rate on single-family Fannie Mae MBS. This increase in the
average effective single-family guaranty fee rate was primarily
attributable to accelerated income recognition resulting from
higher than expected prepayments that occurred in 2003. Other
factors contributing to the increase in net income for the
Single-Family business segment in 2003 included: (1) a 34%
increase in fee and other income in 2003, primarily due to
significantly higher technology-related transactions and
associated revenues driven by higher single-family business
volumes in 2003 as compared to 2002; and (2) an 85%
increase in investment gains from increased securitization
activities. These increases were partially offset by: (1) a
27% increase in the provision for federal income taxes, due to
higher pre-tax earnings in 2003 as compared to 2002; (2) a
23% increase in other expenses in 2003 from 2002, due to higher
direct and allocated costs, which were driven by higher
single-family business volumes in 2003 as compared to 2002 and
higher average outstanding single-family Fannie Mae MBS in 2003;
and (3) a 40% increase in the provision for credit losses
in 2003 from 2002, primarily due to the increase in our
single-family mortgage credit book of business in 2003 and an
increase in the guaranty liability relating to mortgage-related
securities backed by manufactured housing.
As described in Consolidated Results of Operations
above, we experienced exceptional growth in our single-family
mortgage credit book of business of 25.9% from 2002 to 2004.
This growth was largely due to the record pace of mortgage
originations over that period. Growth in outstanding
single-family Fannie Mae MBS slowed from 2003 to 2004,
reflecting the impact of a decrease in mortgage originations
from the record levels of originations in 2003, as well as
increased competition from private-label issuers of
single-family mortgage-related securities.
During
2002-2004,
our Single-Family business continued focusing on lender
relationships, effectively increasing revenues and managing
credit risk. However, some fundamental changes in the mortgage
market began posing challenges to our participation in the
secondary market, with such challenges continuing today.
|
|
|
|
|
First, there was intense competition for the purchase of
mortgage assets by a growing number of mortgage investors
through a variety of investment vehicles and structures. While
single-family mortgage originations posted the second strongest
year in history at $2.8 trillion ($1.3 trillion for home
purchase and $1.5 trillion for refinancing) in 2004, the
appetite of other investors to purchase and hold mortgages also
remained strong.
|
|
|
|
Second, in a steeper interest rate curve environment and with a
variety of new mortgage products being introduced and accepted
by investors at tightening credit spreads, consumers
increasingly took advantage of adjustable-rate mortgages,
including non-traditional products such as interest-only ARMs,
negative-amortizing ARMs and a variety of other product and risk
combinations. This meaningfully changed the overall mix of
mortgage originations in the primary mortgage market away from
the long-term fixed-rate mortgage, where we have historically
had the greatest market penetration. In addition, the sub-prime
mortgage market, where we had little presence, began to
represent a progressively greater portion of mortgage
originations.
|
|
|
|
Third, as consumer demand for floating-rate and sub-prime
mortgage loans grew, so did demand from other mortgage
investors, which accelerated the growth of competing
securitization options in the form of private-label
mortgage-related securities. This development challenged the
competitive position of our Fannie Mae MBS in the secondary
market and sparked aggressive competition for loans.
|
We are responding to these challenges with a focus on
understanding and serving our customers needs,
strengthening our relationships with key partners, and helping
lenders reach and serve new, emerging and non-
120
traditional markets by providing more flexible, low-cost
mortgage options. We also continue to expand our lending options
for borrowers with weaker credit histories.
HCD
Business
Our Housing and Community Development business generated net
income of $337 million, $286 million and
$184 million in 2004, 2003 and 2002, respectively. The
significant components of HCD net income include guaranty fees,
fee and other income, other expenses, and income tax benefits
and losses associated with LIHTC and other partnership
investments.
Net income for the HCD business segment increased 18% from 2003
to 2004, with an increase in guaranty fees, fee and other
income, and tax benefits associated with HCDs partnership
investments partially offset by higher losses from partnership
investments, higher net interest expense and increased other
expenses. Guaranty fee income increased by 25% in 2004, as a
result of growth in the average outstanding multifamily book of
business in 2004 at stable effective guaranty fee rates. Fee and
other income increased by 49% in 2004, attributable to an
increase in multifamily transaction fees earned from
substantially higher borrower refinancing activity in 2004 as
compared to 2003. These increases in revenues were partially
offset by a 66% increase in other expenses in 2004, reflecting
HCDs portion of the $400 million civil penalty paid
to the U.S. Treasury in connection with our settlements
with the SEC and OFHEO, as well as increased direct and
allocated costs. Also offsetting these revenues was a 45%
increase in net interest expense in 2004, reflecting higher
internal funding costs due to our increased investments in LIHTC
and other equity investments. HCDs results for 2004
include a 19% increase in income tax benefits, largely
attributable to growth in LIHTC and other partnership investment
balances, reduced by a 10% increase in pre-tax losses from these
partnership investments.
Net income for the HCD business segment increased 55% from 2002
to 2003, with increases in guaranty fees, fee and other income,
and tax benefits associated with HCDs partnership
investments partially offset by higher losses from partnership
investments and increased other expenses. Guaranty fee income
increased by 12% in 2003, as a result of growth in the average
outstanding multifamily book of business in 2003 at stable
effective guaranty fee rates. Fee and other income increased by
40% in 2003, attributable to an increase in multifamily
transaction fees earned from higher borrower refinancing
activity in 2003 as compared to 2002. These increases in
revenues were partially offset by a 27% increase in other
expenses in 2003, reflecting higher direct and allocated costs.
HCDs results for 2003 include a 29% increase in income tax
benefits, largely attributable to growth in LIHTC and other
partnership investment balances, reduced by a 25% increase in
pre-tax losses from these partnership investments.
The provision for credit losses remained stable for all three
years, which reflects our high credit standards. Losses from
partnership investments primarily include our share of net
operating losses for LIHTC and other partnership investments
accounted for under the equity method. By design, net operating
losses generated by LIHTC properties provide tax benefits to
investors, in addition to the tax credits generated.
We are one of the largest participants in the multifamily
secondary market. HCDs multifamily business has been
challenged in recent years. Strong competition for loans backed
by multifamily properties has led to a decline in the
availability of loans that meet our credit and return
requirements. Competition has been fueled by private-label
issuers of CMBS and aggressive bidding for multifamily debt
among institutional investors, which reflects the high level of
funds available for investment in the secondary mortgage market.
In addition, market fundamentals have been mixed. Low mortgage
rates in 2003 and 2004 led to a record number of first-time
homebuyers, many of whom were formerly renters, and a slowly
recovering job market kept potential new renters from entering
apartments. These factors led to rental vacancy rates higher
than historical norms. Capitalization rates (the ratio of net
operating income to property valuea measure of expected
return on investment) meanwhile fell to extremely low levels,
which likely reflected other investors willingness to
accept greater risk. We have seen improvement in some of these
fundamentals in 2006, with monthly rents increasing and vacancy
rates falling. As a result of these trends, since the end of
2004, we have experienced a downward trend in the average
effective guaranty fee rate on new issuances of Fannie Mae MBS
backed by multifamily mortgage loans.
121
We expect private-label issuers of CMBS to continue to provide
significant competition to our HCD business. HCD has been
responding to market challenges with an increased emphasis on
serving partner needs with customized lending options and is
advancing a number of efficiency initiatives that will help make
it quicker and easier to do business with us and at a lower
cost. HCD also continues to grow and diversify its business into
new areas that expand the supply of affordable housing, such as
increased investment in rental and for-sale housing projects,
including LIHTC investments. HCD further enables the expansion
of affordable housing stock by participating in specialized debt
financing, acquiring mortgage loans from a variety of new public
and private partners, and increasing other community lending
activities.
Capital
Markets Group
Our Capital Markets segment generated net income of
$2.1 billion, $5.3 billion and $1.8 billion in
2004, 2003 and 2002, respectively. The $3.2 billion, or
60%, decrease in the net income of our Capital Markets segment
in 2004 from 2003 was primarily due to:
|
|
|
|
|
a $6.0 billion, or 95%, increase in derivatives fair value
losses to $12.3 billion in 2004, primarily due to changes
in interest rates and a decrease in implied volatility that
resulted in a decline in the fair value of our option-based
derivatives; and
|
|
|
|
a $1.3 billion, or 7%, decline in net interest income in
2004 from 2003, primarily due to a 12% decline in our net
interest yield due to increasing short-term interest rates and a
shift in portfolio purchases to a greater percentage of ARM
loans, floating-rate securities and other short-term assets that
have lower initial spreads, partially offset by a 6% increase in
average interest-earning assets.
|
These factors were partially offset in 2004 by the following:
|
|
|
|
|
a $2.5 billion, or 94%, decrease in debt extinguishment
losses in 2004 as compared to 2003, primarily due to a
significant decrease in the amount of our debt securities
repurchased;
|
|
|
|
a $1.3 billion, or 70%, decrease in the provision for
federal income taxes in 2004 as compared to 2003, primarily due
to a significant reduction in taxable income; and
|
|
|
|
a $861 million, or 66%, decrease in investment losses from
2004 to 2003, primarily due to a significant reduction in
other-than-temporary
impairments compared to 2003 on certain securities backed by
manufactured housing loans and aircraft leases, and reduced
losses from
lower-of-cost-or-market
adjustments on HFS loans, resulting from lower loan acquisition
volumes and more stable interest rates in 2004.
|
The $3.5 billion, or 200%, increase in the net income of
our Capital Markets segment in 2003 from 2002 was driven
primarily by:
|
|
|
|
|
a $6.6 billion, or 51%, decrease in derivatives fair value
losses to $6.3 billion in 2003, primarily due to an
increase in interest rates during the second half of 2003 as
compared to a decline in interest rates in 2002; and
|
|
|
|
a $1.0 billion, or 6%, increase in net interest income in
2003 from 2002, primarily due to a 12% increase in the amount of
average interest-earning assets, partially offset by a 6%
decline in the net interest yield.
|
These factors were partially offset in 2003 by the following:
|
|
|
|
|
a $1.9 billion, or 231%, increase in debt extinguishment
losses in 2003 as compared to 2002, primarily due to a
significant increase in the amount of our debt securities
repurchased;
|
|
|
|
a $1.5 billion, or 372%, increase in the provision for
federal income taxes in 2003 as compared to 2002, primarily due
to a significant increase in taxable income; and
|
|
|
|
a $765 million, or 141%, increase in investment losses in
2003 as compared to 2002, primarily due to increased losses on
our trading portfolio and higher losses on
lower-of-cost-or-market
adjustments on HFS loans.
|
122
Mortgage
Investments
Table 21 summarizes our purchases, sales and liquidations of
mortgage-related assets for the years ended December 31,
2004, 2003 and 2002.
Table
21: Mortgage Portfolio
Activity(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
|
Liquidations(2)
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
$
|
53,305
|
|
|
$
|
98,474
|
|
|
$
|
61,594
|
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
69,182
|
|
|
$
|
135,002
|
|
|
$
|
83,839
|
|
Intermediate-term(3)
|
|
|
23,470
|
|
|
|
56,591
|
|
|
|
36,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,446
|
|
|
|
37,331
|
|
|
|
18,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate loans
|
|
|
76,775
|
|
|
|
155,065
|
|
|
|
98,450
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
100,628
|
|
|
|
172,333
|
|
|
|
102,831
|
|
Adjustable-rate
|
|
|
9,118
|
|
|
|
8,800
|
|
|
|
3,476
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
7,640
|
|
|
|
6,679
|
|
|
|
6,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
85,893
|
|
|
|
163,865
|
|
|
|
101,926
|
|
|
|
66
|
|
|
|
8
|
|
|
|
|
|
|
|
108,268
|
|
|
|
179,012
|
|
|
|
109,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
58,412
|
|
|
|
292,675
|
|
|
|
223,013
|
|
|
|
14,691
|
|
|
|
18,079
|
|
|
|
12,792
|
|
|
|
107,309
|
|
|
|
257,760
|
|
|
|
153,391
|
|
Intermediate-term(4)
|
|
|
4,834
|
|
|
|
37,499
|
|
|
|
18,782
|
|
|
|
3,460
|
|
|
|
5,350
|
|
|
|
792
|
|
|
|
8,097
|
|
|
|
12,623
|
|
|
|
10,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate securities
|
|
|
63,246
|
|
|
|
330,174
|
|
|
|
241,795
|
|
|
|
18,151
|
|
|
|
23,429
|
|
|
|
13,584
|
|
|
|
115,406
|
|
|
|
270,383
|
|
|
|
163,961
|
|
Adjustable-rate
|
|
|
109,339
|
|
|
|
31,720
|
|
|
|
9,472
|
|
|
|
161
|
|
|
|
1,283
|
|
|
|
396
|
|
|
|
24,785
|
|
|
|
6,756
|
|
|
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage securities
|
|
|
172,585
|
|
|
|
361,894
|
|
|
|
251,267
|
|
|
|
18,312
|
|
|
|
24,712
|
|
|
|
13,980
|
|
|
|
140,191
|
|
|
|
277,139
|
|
|
|
167,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
258,478
|
|
|
$
|
525,759
|
|
|
$
|
353,193
|
|
|
$
|
18,378
|
|
|
$
|
24,720
|
|
|
$
|
13,980
|
|
|
$
|
248,459
|
|
|
$
|
456,151
|
|
|
$
|
276,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual liquidation
rate(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.9
|
%
|
|
|
55.1
|
%
|
|
|
37.4
|
%
|
|
|
|
(1) |
|
Excludes premiums, discounts and
other deferred price adjustments.
|
|
(2) |
|
Includes scheduled repayments,
prepayments and foreclosures.
|
|
(3) |
|
Consists of mortgage loans with
contractual maturities at purchase equal to or less than
15 years.
|
|
(4) |
|
Consists of mortgage securities
with maturities of 15 years or less at issue date.
|
|
(5) |
|
Represents liquidations as a
percentage of the average gross mortgage portfolio.
|
Mortgage
Investment Activity in 2004
Our mortgage purchases in 2004 decreased by $267.3 billion,
or 51%, from our purchases in 2003. In 2004, spreads between our
debt and mortgage assets were very narrow throughout the year,
reflecting both strong investor demand for mortgage assets from
banks, funds and other investors, and the impact of a steep
yield curve. Accordingly, because fewer available mortgage
assets met our risk/return objectives in 2004 as compared to
2003, we purchased fewer mortgage assets in 2004. In addition,
mortgage liquidations in 2004 decreased by $207.7 billion,
or 46%, from liquidations in 2003, due to higher prevailing
mortgage rates in 2004, which reduced refinancing activity in
2004 as compared to 2003. Due to lower levels of liquidations,
fewer purchases of mortgage assets were necessary in order to
maintain the size of our mortgage portfolio. Because
liquidations of the mortgage assets in our portfolio in 2004
were roughly equal to our purchases of mortgage assets in 2004,
our mortgage portfolio balance increased only slightly from 2003
to 2004.
123
Mortgage
Investment Activity in 2003
Our mortgage purchases in 2003 increased by $172.6 billion,
or 49%, from our purchases in 2002. Mortgage originations
reached a record level of $3.9 trillion in 2003 based on
historically low mortgage rates, particularly during the first
half of the year, which led to significant refinancing activity
in 2003. This, coupled with a favorable spread between our debt
and mortgage assets led to high levels of purchases by us, which
were partially offset by portfolio liquidations. Mortgage
liquidations in 2003 increased by $179.3 billion, or 65%,
from liquidations in 2002. Our purchases of mortgage assets in
2003 outpaced the amount of mortgage liquidations by
$69.6 billion, contributing to the increase in the net
mortgage portfolio.
Recent
Trends in Mortgage Investment Activity
Our mortgage investment activities during 2005 and 2006 were
conducted within the context of our capital restoration plan,
which defined the management of total balance sheet size
by reducing the portfolio principally through normal mortgage
liquidations as one of two key elements that would
contribute to the achievement of our capital goal. The plan also
provided that, as a contingency measure to provide additional
capital, we would also consider reducing our mortgage portfolio
balances through asset sales.
OFHEO announced on November 1, 2005 that we had achieved a
30% surplus over minimum capital at September 30, 2005.
Under our May 23, 2006 consent order with OFHEO, we agreed
to continue to maintain a 30% capital surplus over our statutory
minimum capital requirement until the Director of OFHEO, in his
discretion, determines the requirement should be modified or
allowed to expire, taking into account factors such as
resolution of accounting and internal control issues. We also
agreed not to increase the size of our net mortgage portfolio
above the $727.75 billion amount of net mortgage assets
held as of December 31, 2005, except in limited
circumstances at OFHEOs discretion.
Our portfolio purchases in 2005 were significantly lower than in
2004, due to both our assessment of the pricing for fixed-rate
mortgage assets and our focus on managing our balance sheet size
to achieve our capital plan objectives. Portfolio liquidations
were lower in 2005 than in 2004. Our portfolio sales in 2005
were significantly higher than in 2004. The net impact of our
purchases, liquidations and sales in 2005 was an approximately
20% decline in the size of our net mortgage portfolio as of
December 31, 2005, as compared to year-end 2004. Similar
dynamics have existed through the first nine months of 2006,
resulting in a net mortgage portfolio essentially unchanged from
the end of 2005.
If market conditions change significantly, the limit on the size
of our net mortgage portfolio could constrain our ability to
capitalize fully on economically attractive opportunities to add
mortgage assets to our portfolio. The portfolio limit may also
affect the pace or size of sales from our portfolio,
particularly when our balance of net mortgage assets approaches
the portfolio limit. We regularly meet with OFHEO to discuss
current market conditions and our mortgage and capital markets
activities. In addition, we will contact OFHEO immediately if
the market environment changes markedly and we determine that
such changes could limit our ability to provide liquidity, meet
our housing goals, or compete effectively in the secondary
mortgage market while remaining within the portfolio limit
prescribed by OFHEO. We anticipate submitting an updated
business plan to OFHEO in early 2007 that will take into account
our completed remediation efforts at that time. The business
plan may include a request for modest growth in the mortgage
portfolio.
124
Table 22 shows the balance of our mortgage portfolio, which
reflects the net impact of our purchases, sales and
liquidations, and the composition of our mortgage portfolio by
product type as of December 31, 2004, 2003, 2002 and 2001.
Table
22: Mortgage Portfolio
Composition(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
$
|
10,112
|
|
|
$
|
7,284
|
|
|
$
|
6,404
|
|
|
$
|
6,381
|
|
Conventional:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term, fixed-rate
|
|
|
230,585
|
|
|
|
250,915
|
|
|
|
223,794
|
|
|
|
198,468
|
|
Intermediate-term,
fixed-rate(3)
|
|
|
76,640
|
|
|
|
85,130
|
|
|
|
59,521
|
|
|
|
45,018
|
|
Adjustable-rate
|
|
|
38,350
|
|
|
|
19,155
|
|
|
|
12,142
|
|
|
|
12,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family
|
|
|
345,575
|
|
|
|
355,200
|
|
|
|
295,457
|
|
|
|
256,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
355,687
|
|
|
|
362,484
|
|
|
|
301,861
|
|
|
|
262,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
|
1,074
|
|
|
|
1,204
|
|
|
|
1,898
|
|
|
|
2,116
|
|
Conventional
|
|
|
43,396
|
|
|
|
33,945
|
|
|
|
19,485
|
|
|
|
14,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
44,470
|
|
|
|
35,149
|
|
|
|
21,383
|
|
|
|
16,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
400,157
|
|
|
|
397,633
|
|
|
|
323,244
|
|
|
|
279,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums (discounts)
and deferred price adjustments, net
|
|
|
1,647
|
|
|
|
1,768
|
|
|
|
1,358
|
|
|
|
(493
|
)
|
Lower of cost or market adjustments
on loans held for sale
|
|
|
(83
|
)
|
|
|
(50
|
)
|
|
|
(16
|
)
|
|
|
(36
|
)
|
Allowance for loan losses for loans
held for investment
|
|
|
(349
|
)
|
|
|
(290
|
)
|
|
|
(216
|
)
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net
|
|
|
401,372
|
|
|
|
399,061
|
|
|
|
324,370
|
|
|
|
278,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
|
272,665
|
|
|
|
337,463
|
|
|
|
292,611
|
|
|
|
237,051
|
|
Non-Fannie Mae single-class
mortgage securities
|
|
|
35,656
|
|
|
|
33,367
|
|
|
|
38,731
|
|
|
|
50,982
|
|
Fannie Mae structured MBS
|
|
|
71,739
|
|
|
|
68,459
|
|
|
|
87,772
|
|
|
|
90,147
|
|
Non-Fannie Mae structured mortgage
securities
|
|
|
109,455
|
|
|
|
45,065
|
|
|
|
28,188
|
|
|
|
29,137
|
|
Mortgage revenue bonds
|
|
|
22,076
|
|
|
|
20,359
|
|
|
|
19,650
|
|
|
|
18,391
|
|
Other mortgage-related securities
|
|
|
5,461
|
|
|
|
6,522
|
|
|
|
9,583
|
|
|
|
10,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
517,052
|
|
|
|
511,235
|
|
|
|
476,535
|
|
|
|
436,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value
adjustments(4)
|
|
|
6,680
|
|
|
|
7,973
|
|
|
|
17,868
|
|
|
|
7,205
|
|
Other-than-temporary
impairments
|
|
|
(432
|
)
|
|
|
(412
|
)
|
|
|
(204
|
)
|
|
|
(22
|
)
|
Unamortized premiums (discounts)
and deferred price adjustments, net
|
|
|
173
|
|
|
|
1,442
|
|
|
|
1,842
|
|
|
|
(1,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities,
net
|
|
|
523,473
|
|
|
|
520,238
|
|
|
|
496,041
|
|
|
|
442,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage portfolio, net
|
|
$
|
924,845
|
|
|
$
|
919,299
|
|
|
$
|
820,411
|
|
|
$
|
721,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mortgage loans and mortgage-related
securities are reported at unpaid principal balance.
|
|
(2) |
|
Mortgage loans include
$152.7 billion, $162.5 billion, $135.8 billion
and $113.4 billion of mortgage-related securities that were
consolidated in the consolidated balance sheets as loans as of
December 31, 2004, 2003, 2002 and 2001, respectively.
|
|
(3) |
|
Intermediate-term, fixed-rate
consists of mortgage loans with contractual maturities at
purchase equal to or less than 15 years.
|
|
(4) |
|
Includes unrealized gains and
losses on mortgage-related securities and securities commitments
classified as trading and available for sale.
|
125
The changing product mix of originations in our underlying
market had a pronounced effect on the composition of mortgage
assets purchased for our portfolio during 2004. Due to an
increase in the percentage of adjustable-rate mortgage
originations in 2004, a substantially higher proportion of our
purchases in 2004 consisted of ARMs and floating-rate
mortgage-related securities. These floating-rate securities and
adjustable-rate mortgage products typically have lower initial
interest yields than fixed-rate mortgage products. Accordingly,
our purchase of a greater proportion of these lower initial
yield mortgage products adversely affected our net interest
yield during 2004.
Non-mortgage
Investments
Our Capital Markets group also purchases non-mortgage
investments. Our non-mortgage investments consist primarily of
high-quality securities that are readily marketable or have
short-term maturities, such as commercial paper. As of
December 31, 2004 and 2003, we had approximately
$55.1 billion and $67.1 billion, respectively, in
liquid assets, net of any cash and cash equivalents pledged as
collateral. Our investments in non-mortgage securities, which
account for the majority of our liquid assets, totaled
$43.9 billion and $46.8 billion as of
December 31, 2004 and 2003, respectively.
Table 23 shows the amortized cost, maturity and weighted average
yield of our investments in mortgage and non-mortgage securities.
Table
23: Amortized Cost, Maturity and Average Yield of
Investments in Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One Year
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
One Year or Less
|
|
|
Through Five Years
|
|
|
Through Ten Years
|
|
|
After Ten Years
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
single-class MBS(2)
|
|
$
|
238,386
|
|
|
$
|
241,828
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
701
|
|
|
$
|
746
|
|
|
$
|
3,163
|
|
|
$
|
3,338
|
|
|
$
|
234,522
|
|
|
$
|
237,744
|
|
Non-Fannie Mae single-class
mortgage
securities(2)
|
|
|
34,429
|
|
|
|
35,168
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
61
|
|
|
|
420
|
|
|
|
435
|
|
|
|
33,951
|
|
|
|
34,672
|
|
Fannie Mae structured
MBS(2)
|
|
|
72,093
|
|
|
|
73,367
|
|
|
|
188
|
|
|
|
239
|
|
|
|
78
|
|
|
|
79
|
|
|
|
426
|
|
|
|
444
|
|
|
|
71,401
|
|
|
|
72,605
|
|
Non-Fannie Mae structured mortgage
securities(2)
|
|
|
109,564
|
|
|
|
109,820
|
|
|
|
4
|
|
|
|
4
|
|
|
|
10
|
|
|
|
10
|
|
|
|
56
|
|
|
|
57
|
|
|
|
109,494
|
|
|
|
109,749
|
|
Mortgage revenue bonds
|
|
|
22,124
|
|
|
|
22,657
|
|
|
|
180
|
|
|
|
179
|
|
|
|
687
|
|
|
|
686
|
|
|
|
658
|
|
|
|
674
|
|
|
|
20,599
|
|
|
|
21,118
|
|
Other mortgage-related
securities(3)
|
|
|
5,043
|
|
|
|
5,346
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,043
|
|
|
|
5,349
|
|
Asset-backed
securities(2)
|
|
|
25,632
|
|
|
|
25,645
|
|
|
|
5,094
|
|
|
|
5,094
|
|
|
|
17,532
|
|
|
|
17,521
|
|
|
|
1,552
|
|
|
|
1,554
|
|
|
|
1,454
|
|
|
|
1,476
|
|
Corporate debt securities
|
|
|
15,102
|
|
|
|
15,098
|
|
|
|
5,302
|
|
|
|
5,305
|
|
|
|
9,700
|
|
|
|
9,693
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
865
|
|
|
|
863
|
|
|
|
865
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-mortgage-related
securities
|
|
|
2,302
|
|
|
|
2,303
|
|
|
|
1,782
|
|
|
|
1,783
|
|
|
|
520
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525,540
|
|
|
$
|
532,095
|
|
|
$
|
13,415
|
|
|
$
|
13,464
|
|
|
$
|
29,286
|
|
|
$
|
29,316
|
|
|
$
|
6,375
|
|
|
$
|
6,602
|
|
|
$
|
476,464
|
|
|
$
|
482,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield(4)
|
|
|
4.64
|
%
|
|
|
|
|
|
|
2.78
|
%
|
|
|
|
|
|
|
1.74
|
%
|
|
|
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
(1) |
|
Amortized cost includes unamortized
premiums, discounts and other deferred price adjustments, as
well as
other-than-temporary
impairment write downs.
|
|
(2) |
|
Asset-backed securities, including
mortgage-backed securities, are reported based on contractual
maturities assuming no prepayments.
|
|
(3) |
|
Includes commitments related to
mortgage securities that are accounted for as securities.
|
|
(4) |
|
Yields are determined by dividing
interest income (including the amortization and accretion of
premiums, discounts and other deferred price adjustments) by
amortized cost balances as of year-end.
|
SUPPLEMENTAL
NON-GAAP INFORMATIONFAIR VALUE BALANCE
SHEET
Because our assets and liabilities consist predominately of
financial instruments, we routinely use fair value measures to
make investment decisions and to measure, monitor and manage our
risk. The balance sheets
126
presented in our consolidated financial statements reflect some
financial assets measured and reported at fair value while other
financial assets, along with most of our financial liabilities,
are measured and reported at historical cost.
Each of the non-GAAP supplemental consolidated fair value
balance sheets presented below in Table 24 reflects all of our
assets and liabilities at estimated fair value. Estimated fair
value is the amount at which an asset or liability could be
exchanged between willing parties, other than in a forced or
liquidation sale. We believe that the non-GAAP supplemental
consolidated fair value balance sheets are useful to investors
because they provide consistency in the measurement and
reporting of all of our assets and liabilities. Management
principally uses this information to gain a clearer picture of
changes in our assets and liabilities from period to period and
to understand how the overall value of the company is changing
from period to period.
Our consolidated fair value balance sheets include the following
non-GAAP financial measures:
|
|
|
|
|
the fair value of our other assets and our total assets;
|
|
|
|
the fair value of our other liabilities and our total
liabilities; and
|
|
|
|
the fair value of our net assets.
|
These items are not defined terms within GAAP and may not be
comparable to similarly titled measures reported by other
companies. The estimated fair value of our net assets (net of
tax effect) presented in the non-GAAP supplemental consolidated
fair value balance sheets is not intended as a substitute for
our consolidated financial statements prepared in accordance
with GAAP. We believe, however, that the non-GAAP supplemental
consolidated fair value balance sheets and the fair value of our
net assets, when used in conjunction with our consolidated
financial statements prepared in accordance with GAAP, can serve
as valuable incremental tools for investors to assess changes in
our overall value over time relative to changes in market
conditions.
Cautionary
Language Relating to Supplemental Non-GAAP Financial
Measures
In reviewing our non-GAAP supplemental consolidated fair value
balance sheets, there are a number of important factors and
limitations to consider. The estimated fair value of our net
assets is calculated as of a particular point in time based on
our existing assets and liabilities and does not incorporate
other factors that may have a significant impact on that value,
most notably any value from future business activities in which
we expect to engage. As a result, the estimated fair value of
our net assets presented in our non-GAAP supplemental
consolidated fair value balance sheets does not represent an
estimate of our net realizable value, liquidation value or our
market value as a whole. Amounts we ultimately realize from the
disposition of assets or settlement of liabilities may vary
significantly from the estimated fair values presented in our
non-GAAP supplemental consolidated fair value balance sheets.
Because temporary changes in market conditions can substantially
affect the fair value of our net assets, we do not believe that
short-term fluctuations in the fair value of our net assets
attributable to
mortgage-to-debt
OAS or changes in the fair value of our guaranty business are
necessarily representative of the effectiveness of our
investment strategy or the long-term underlying value of our
business. We believe the long-term value of our business depends
primarily on our ability to acquire new assets and funding at
attractive prices and to effectively manage the risks of these
assets and liabilities over time. However, we believe that
focusing on the factors that affect near-term changes in the
estimated fair value of our net assets helps us evaluate our
long-term value and assess whether temporary market factors have
caused our net assets to become overvalued or undervalued
relative to the level of risk and expected long-term
fundamentals of our business.
In addition, as discussed in Critical Accounting Policies
and EstimatesFair Value of Financial Instruments,
when quoted market prices or observable market data are not
available, we rely on internally developed models that require
management judgment and assumptions to estimate fair value.
Differences in assumptions used in our models could result in
significant changes in our estimates of fair value.
127
Table
24: Non-GAAP Supplemental Consolidated Fair
Value Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
As of December 31, 2003
|
|
|
|
Carrying
|
|
|
Fair Value
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Fair Value
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
Value
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,701
|
|
|
$
|
|
|
|
$
|
3,701
|
(2)
|
|
$
|
4,804
|
|
|
$
|
|
|
|
$
|
4,804
|
(2)
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
3,930
|
|
|
|
|
|
|
|
3,930
|
(2)
|
|
|
12,686
|
|
|
|
|
|
|
|
12,686
|
(2)
|
Trading securities
|
|
|
35,287
|
|
|
|
|
|
|
|
35,287
|
(2)
|
|
|
43,798
|
|
|
|
|
|
|
|
43,798
|
(2)
|
Available-for-sale
securities
|
|
|
532,095
|
|
|
|
|
|
|
|
532,095
|
(2)
|
|
|
523,272
|
|
|
|
|
|
|
|
523,272
|
(2)
|
Mortgage loans held for sale
|
|
|
11,721
|
|
|
|
131
|
|
|
|
11,852
|
(2)
|
|
|
13,596
|
|
|
|
154
|
|
|
|
13,750
|
(2)
|
Mortgage loans held for investment,
net of allowance for loan losses
|
|
|
389,651
|
|
|
|
7,952
|
|
|
|
397,603
|
(2)
|
|
|
385,465
|
|
|
|
9,269
|
|
|
|
394,734
|
(2)
|
Derivative assets at fair value
|
|
|
6,589
|
|
|
|
|
|
|
|
6,589
|
(2)
|
|
|
7,218
|
|
|
|
|
|
|
|
7,218
|
(2)
|
Guaranty assets and buy-ups
|
|
|
6,616
|
|
|
|
2,647
|
|
|
|
9,263
|
(2)(3)
|
|
|
4,998
|
|
|
|
3,619
|
|
|
|
8,617
|
(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
|
989,590
|
|
|
|
10,730
|
|
|
|
1,000,320
|
|
|
|
995,837
|
|
|
|
13,042
|
|
|
|
1,008,879
|
|
Other assets
|
|
|
31,344
|
|
|
|
(23
|
)
|
|
|
31,321
|
(4)(5)
|
|
|
26,438
|
|
|
|
2,885
|
|
|
|
29,323
|
(4)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,020,934
|
|
|
$
|
10,707
|
|
|
$
|
1,031,641
|
(6)
|
|
$
|
1,022,275
|
|
|
$
|
15,927
|
|
|
$
|
1,038,202
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
$
|
2,400
|
|
|
$
|
(1
|
)
|
|
$
|
2,399
|
(2)
|
|
$
|
3,673
|
|
|
$
|
(5
|
)
|
|
$
|
3,668
|
(2)
|
Short-term debt
|
|
|
320,280
|
|
|
|
(567
|
)
|
|
|
319,713
|
(2)
|
|
|
343,662
|
|
|
|
(96
|
)
|
|
|
343,566
|
(2)
|
Long-term debt
|
|
|
632,831
|
|
|
|
15,445
|
|
|
|
648,276
|
(2)
|
|
|
617,618
|
|
|
|
23,053
|
|
|
|
640,671
|
(2)
|
Derivative liabilities at fair value
|
|
|
1,145
|
|
|
|
|
|
|
|
1,145
|
(2)
|
|
|
3,225
|
|
|
|
|
|
|
|
3,225
|
(2)
|
Guaranty obligations
|
|
|
8,784
|
|
|
|
(3,512
|
)
|
|
|
5,272
|
(2)
|
|
|
6,401
|
|
|
|
(1,256
|
)
|
|
|
5,145
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
|
965,440
|
|
|
|
11,365
|
|
|
|
976,805
|
|
|
|
974,579
|
|
|
|
21,696
|
|
|
|
996,275
|
|
Other liabilities
|
|
|
16,516
|
|
|
|
(1,850
|
)
|
|
|
14,666
|
(5)(7)
|
|
|
15,423
|
|
|
|
(1,894
|
)
|
|
|
13,529
|
(5)(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
981,956
|
|
|
|
9,515
|
|
|
|
991,471
|
(8)
|
|
|
990,002
|
|
|
|
19,802
|
|
|
|
1,009,804
|
(8)
|
Minority interests in consolidated
subsidiaries
|
|
|
76
|
|
|
|
|
|
|
|
76
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, net of tax effect
(non-GAAP)
|
|
$
|
38,902
|
|
|
$
|
1,192
|
|
|
$
|
40,094
|
(9)
|
|
$
|
32,268
|
|
|
$
|
(3,875
|
)
|
|
$
|
28,393
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustments
|
|
|
|
|
|
|
|
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
|
|
|
|
3,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(GAAP)
|
|
|
|
|
|
|
|
|
|
$
|
38,902
|
|
|
|
|
|
|
|
|
|
|
$
|
32,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Explanation and Reconciliation
of Non-GAAP Measures to GAAP Measures
|
|
|
(1) |
|
Each of the amounts listed as a
fair value adjustment represents the difference
between the carrying value reported in our GAAP consolidated
balance sheets and our best judgment of the estimated fair value
of the listed asset or liability.
|
|
(2) |
|
The estimated fair value of each of
these financial instruments has been computed in accordance with
the GAAP fair value guidelines prescribed by SFAS 107, as
described in Notes to Consolidated Financial
StatementsNote 19, Fair Value of Financial
Instruments. In Note 19, we also discuss the methodologies
and assumptions we use in estimating the fair value of our
financial instruments.
|
|
(3) |
|
Represents the estimated fair value
produced by combining the estimated fair value of our guaranty
assets as of December 31, 2004 and 2003, respectively, with
the estimated fair value of buy-ups. In our GAAP consolidated
balance sheets, we report our guaranty assets as a separate line
item and include all buy-ups associated with our guaranty assets
in Other assets. As a result, the GAAP carrying
value of our guaranty assets reflects only those arrangements
entered
|
128
|
|
|
|
|
into subsequent to our adoption of
FIN 45 on January 1, 2003. On a GAAP basis, our
guaranty assets totaled $5.9 billion and $4.3 billion as of
December 31, 2004 and 2003, respectively, and the
associated buy-ups totaled $692 million and
$716 million as of December 31, 2004 and 2003,
respectively.
|
|
(4)
|
|
In addition to the $7.1 billion and
$6.2 billion of assets included in Other assets in
the GAAP consolidated balance sheets as of December 31,
2004 and 2003, respectively, the assets included in the
estimated fair value of our non-GAAP other assets
consist primarily of the assets presented on five line items in
our GAAP consolidated balance sheets, consisting of advances to
lenders, accrued interest receivable, partnership investments,
acquired property, net, and deferred tax assets, which together
totaled $24.9 billion in 2004 and $21.0 billion in
2003, in both the GAAP consolidated balance sheets and the
non-GAAP supplemental consolidated balance sheets for those
periods. In addition, we subtract from our GAAP other assets the
carrying value of the buy-ups associated with our guaranty
obligation because we combine the guaranty asset with the
associated buy-ups when we determine the fair value of the asset.
|
|
(5)
|
|
The fair value of other assets and
other liabilities generally approximates the carrying value of
these assets for purposes of GAAP. We assume that other deferred
assets and liabilities, consisting of prepaid expenses and
deferred charges such as deferred debt issuance costs, have no
fair value. We adjust the GAAP-basis deferred taxes for purposes
of each of our non-GAAP supplemental consolidated fair value
balance sheets to include estimated income taxes on the
difference between our non-GAAP supplemental consolidated fair
value balance sheets net assets, including deferred taxes from
the GAAP consolidated balance sheets, and our GAAP consolidated
balance sheets stockholders equity. To the extent the
adjusted deferred taxes are a net asset, this amount is included
in the fair value of other assets. If the adjusted deferred
taxes are a net liability, the amount is included in the fair
value of other liabilities.
|
|
(6)
|
|
Non-GAAP total assets represent the
sum of the estimated fair value of (i) all financial
instruments carried at fair value in our GAAP balance sheets,
including all financial instruments that are not carried at fair
value in our GAAP balance sheets but that are reported at fair
value in accordance with SFAS 107 in Notes to
Consolidated Financial StatementsNote 19, Fair Value
of Financial Instruments, (ii) non-GAAP other assets,
which include all items listed in footnote 4 that are
presented as separate line items in our GAAP consolidated
balance sheets rather than being included in our GAAP other
assets and (iii) the estimated fair value of credit
enhancements, which are not included in Other assets
in the consolidated balance sheets.
|
|
(7)
|
|
In addition to the $7.2 billion and
$7.0 billion of liabilities included in Other
liabilities in the GAAP consolidated balance sheets as of
December 31, 2004 and 2003, respectively, the liabilities
included in the estimated fair value of our non-GAAP other
liabilities consist primarily of the liabilities presented
on three line items on our GAAP consolidated balance sheets,
consisting of accrued interest payable, reserve for guaranty
losses and partnership liabilities, which together totaled
$9.3 billion in 2004 and $8.4 billion in 2003, in both
our GAAP consolidated balance sheets and our non-GAAP
supplemental consolidated balance sheets for those periods.
|
|
(8)
|
|
Non-GAAP total liabilities
represent the sum of the estimated fair value of (i) all
financial instruments that are carried at fair value in our GAAP
balance sheets, including those financial instruments that are
not carried at fair value in our GAAP balance sheets but that
are reported at fair value in accordance with SFAS 107 in
Notes to Consolidated Financial
StatementsNote 19, Fair Value of Financial
Instruments, and (ii) non-GAAP other liabilities,
which include all items listed in footnote 6 that are
presented as separate line items in our GAAP consolidated
balance sheets rather than being included in our GAAP other
liabilities.
|
|
(9)
|
|
Represents the estimated fair value
of total assets less the estimated fair value of total
liabilities, which reconciles to total stockholders equity
(GAAP).
|
Restated
Fair Value of Net Assets as of December 31, 2003
The restated fair value of our net assets (net of tax effect) as
of December 31, 2003 was $28.4 billion, a reduction of
$3.2 billion from the previously reported amount of
$31.6 billion as a result of the errors described in
Notes to Consolidated Financial
StatementsNote 1, Restatement of Previously Issued
Financial Statements.
The $3.2 billion reduction is primarily attributable to the
correction of errors in our fair value calculations.
Approximately $1.9 billion of the $3.2 billion
reduction is due to correction of errors associated with
estimating the fair value of our guaranty assets and guaranty
obligations, and the remaining approximately $1.3 billion
is due to correction of errors associated with estimating the
fair value of HTM securities, debt and derivatives. Of the
$1.9 billion reduction related to guaranty assets and
guaranty obligations, approximately $1.2 billion is due to
an increase in the estimated fair value of our guaranty
obligation, approximately $200 million is due to a decrease
in the estimated fair value of our whole loans, and the
remaining approximately $500 million is due to other
changes made in re-estimating the fair value of the guaranty
asset and the guaranty obligation. Of the $1.3 billion
reduction related to HTM securities, debt and derivatives,
approximately $800 million is due to a decrease in the
estimated fair value of our mortgage assets, primarily mortgage
revenue bonds and REMICs, approximately $300 million is due
to an increase in the estimated fair
129
value of our debt and approximately $200 million is due to
a decrease in the estimated fair value of our derivatives.
Change in
Estimated Fair Value of Net Assets as of December 31,
2004
The estimated fair value of our net assets (net of tax effect)
was $40.1 billion as of December 31, 2004, an increase
of $11.7 billion, or 41%, from the restated net asset fair
value of $28.4 billion as of December 31, 2003. Both
our own activities and market conditions cause changes in the
estimated fair value of our net assets (non-GAAP).
Of the total $11.7 billion increase, approximately
$2.8 billion of the increase is attributable to our capital
transactions, consisting primarily of $5.0 billion of gross
proceeds we received from a preferred stock offering in 2004,
partially offset by the payment of $2.2 billion of
dividends to holders of our common and preferred stock. Net cash
inflows generated by our Single-Family, HCD and Capital Markets
businesses also contributed to the increase in fair value of our
net assets (non-GAAP).
The remainder of the increase is largely attributable to changes
in market conditions. Selected relevant market information is
shown in Table 25. Since our goal is to minimize our risk
associated with changes in interest rates, we expect that
changes in implied volatility, mortgage OAS and debt OAS are the
market conditions that will have the most significant impact on
the fair value of our net assets. Implied volatility decreased
considerably during 2004 compared to 2003. For example, the
implied volatility of
3-year
swaptions on
10-year
underlying instruments declined by 280 basis points, from 22.9%
as of December 31, 2003 to 20.1% as of December 31,
2004. As indicated in Table 24, this decrease in implied
volatility had the effect of increasing the value of our
mortgage assets more than it increased our debt and derivatives
funding of those assets. Changes in OAS had less of an impact on
the fair value of our net assets over this period. According to
the Lehman U.S. MBS Index, the OAS of mortgages, including those
in the Fannie Mae MBS component of the Lehman U.S. MBS Index,
decreased by 5.1 basis points to 22.5 basis points at
December 31, 2004. A tighter, or lower, OAS on mortgages
generally increases the fair value of our mortgage assets. The
OAS on debt securities included in the Lehman U.S. Agency Debt
Index decreased by 4.7 basis points to 32.2 basis points as of
December 31, 2004. A tighter, or lower, debt OAS generally
increases the fair value of our liabilities.
Table
25: Selected Market
Information(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
10-year
U.S. Treasury Note Yield
|
|
|
4.22
|
%
|
|
|
4.25
|
%
|
|
|
(0.03
|
) %
|
Implied
volatility(2)
|
|
|
20.1
|
%
|
|
|
22.9
|
%
|
|
|
(2.80
|
) %
|
30-year
Fannie Mae MBS par coupon rate
|
|
|
5.21
|
%
|
|
|
5.28
|
%
|
|
|
(0.07
|
) %
|
Lehman U.S. MBS Index OAS (in basis
points) over U.S. Treasury yield curve
|
|
|
22.5
|
bp
|
|
|
27.6
|
bp
|
|
|
(5.1
|
) bp
|
Lehman U.S. Agency Debt Index OAS
(in basis points) over U.S. Treasury yield curve
|
|
|
32.2
|
bp
|
|
|
36.9
|
bp
|
|
|
(4.7
|
) bp
|
|
|
|
(1) |
|
Information obtained from Lehman
Live and Bloomberg.
|
|
(2) |
|
Implied volatility for an interest
rate swaption with a 3-year option on a 10-year final maturity.
|
Effect of
Market Conditions on Estimated Fair Value of Our Net
Assets
We expect periodic fluctuations in the estimated fair value of
our net assets due to changes in market conditions, including
changes in interest rates, changes in relative spreads between
our mortgage assets and debt, and changes in implied volatility.
Based on market conditions and the composition of our
consolidated balance sheets in 2005 and 2006, we do not expect
that we will experience the same level of increase, if any, in
the estimated fair value of our net assets in 2005 and 2006 that
we experienced in 2004. We discuss the sensitivity of the
estimated fair value of our net assets in Risk
ManagementInterest Rate Risk Management and Other Market
Risks.
130
Key
Elements of Changes in Estimated Fair Value of Net Assets
(Non-GAAP)
Although we have not provided specific attribution of fair value
changes for 2004, we consider the factors described in the
following paragraphs in evaluating changes in the estimated fair
value of our net assets because they are the principal drivers
of these changes.
|
|
|
|
|
Capital Transactions, Net. Capital
transactions include our issuances of common and preferred
stock, our repurchases of stock and our payment of dividends.
Cash we receive from the issuance of preferred and common stock
results in an increase in the fair value of our net assets,
while repurchases of stock and dividends we pay on our stock
reduce the fair value of our net assets.
|
|
|
|
Estimated Net Interest Income from OAS. OAS
income represents the estimated net interest income generated
during the current period that is attributable to the market
spread between the yields on our mortgage-related assets and the
yields on our debt during the period, calculated on an
option-adjusted basis.
|
|
|
|
Guaranty Fees, Net. Guaranty fees, net,
represent the net cash receipts during the reported period
related to our guaranty business, and are generally calculated
as the difference between the contractual guaranty fees we
receive during the period and the expenses we incur during the
period that are associated with our guaranty business. Changes
in guaranty fees, net, result from changes in portfolio size and
composition, changes in the credit quality of the underlying
assets and changes in the market spreads for similar instruments.
|
|
|
|
Fee and Other Income and Other Expenses,
Net. Fee and other income includes miscellaneous
fees, such as resecuritization transaction fees and
technology-related fees. Other expenses primarily include costs
incurred during the period that are associated with the Capital
Markets group.
|
|
|
|
Return on Risk Positions. Our investment
activities expose us to market risks, including duration and
convexity risks, yield curve risk, OAS risk and volatility risk.
The return on risk positions represents the estimated net
increase or decrease in the fair value of our net assets
resulting from net exposures related to the market risks we
actively manage. We actively manage, or hedge, interest rate
risk related to our mortgage investments in order to maintain
our interest rate risk exposure within prescribed limits.
However, we do not actively manage certain other market risks.
Specifically, we do not actively manage the
mortgage-to-debt
OAS or interest rate risk related to our guaranty business, as
discussed below. Additional information about credit, market and
operational risks and our strategies for managing these types of
risks is included in Risk Management.
|
|
|
|
Mortgage-to-debt
OAS. Funding mortgage investments with debt
exposes us to
mortgage-to-debt
OAS risk, which represents basis risk. Basis risk is the risk
that interest rates in different market sectors will not move in
the same direction or amount at the same time. We generally hold
our mortgage investments to generate a spread over our debt on a
long-term basis. The fair value of our assets and liabilities
can be significantly affected by periodic changes in the net OAS
between the mortgage and agency debt sectors. The fair value
impact of changes in
mortgage-to-debt
OAS for a given period represents an estimate of the net
unrealized increase or decrease in the fair value of our net
assets resulting from fluctuations during the reported period in
the net OAS between our mortgage assets and our outstanding debt
securities. When the
mortgage-to-debt
OAS on a given mortgage asset increases, or widens, the fair
value of the asset will typically decline relative to the debt.
|
We work to manage the OAS risk that exists at the time we
purchase mortgage assets through our asset selection process. We
use models to evaluate mortgage assets on the basis of
yield-to-maturity,
option-adjusted yield spread, historical valuations and embedded
options. Our models also take into account risk factors such as
credit quality, price volatility and prepayment experience. We
purchase mortgage assets that appear economically attractive to
us in the context of current market conditions and that fall
within our OAS targets. Although a widening of
mortgage-to-debt
OAS during a period generally results in lower fair values
during that period, it can provide us with better investment
opportunities to purchase mortgage assets because a wider OAS is
indicative of higher expected returns. We generally purchase
mortgage assets when
mortgage-to-debt
OAS is relatively wide and restrict our purchase activity or
sell mortgage assets when
mortgage-to-debt
OAS is relatively narrow. We do not, however, attempt to
actively
131
manage or hedge the impact of changes in
mortgage-to-debt
OAS after we purchase mortgage assets, other than through asset
monitoring and disposition.
|
|
|
|
|
Change in the Guaranty Business Fair Value. As
described more fully in Notes to Consolidated Financial
StatementsNote 19, Fair Value of Financial
Instruments, we calculate the estimated fair value of our
existing guaranty business based on the difference between the
estimated fair value of the guaranty fees we expect to receive
and the estimated fair value of the guaranty obligations we
assume. The fair value of both our guaranty assets and our
guaranty obligations is highly sensitive to changes in interest
rates and credit quality. Changes in interest rates can result
in significant periodic fluctuations in the fair value of our
net assets. For example, as interest rates decline, the expected
prepayment rate on fixed-rate mortgages increases, which lowers
the fair value of our existing guaranty business. We do not
believe, however, that periodic changes in fair value are the
best indication of the long-term value of our guaranty business
because they do not take into account future guaranty business
activity. Based on our historical experience, we expect that the
guaranty fee income generated from future business activity will
largely replace any guaranty fee income lost as a result of
mortgage prepayments. Accordingly, we do not actively manage or
hedge expected changes in the fair value of our guaranty
business related to changes in interest rates. To assess the
value of our underlying guaranty business, we focus primarily on
changes in the fair value of our guaranty business resulting
from business growth, changes in the credit quality of existing
guaranty arrangements and changes in anticipated future credit
performance.
|
RISK
MANAGEMENT
Overview
Our businesses expose us to the following four major categories
of risk:
|
|
|
|
|
Credit Risk. Credit risk is the risk of
financial loss resulting from the failure of a borrower or
institutional counterparty to honor its contractual obligations
to us and exists primarily in our mortgage credit book of
business and derivatives portfolio.
|
|
|
|
Market Risk. Market risk represents the
exposure to potential changes in the market value of our net
assets from changes in prevailing market conditions. A
significant market risk we face and actively manage is interest
rate riskthe risk of changes in our long-term earnings or
in the value of our net assets due to changes in interest rates.
|
|
|
|
Operational Risk. Operational risk relates to
the risk of loss resulting from inadequate or failed internal
processes, people or systems, or from external events.
|
|
|
|
Liquidity Risk. Liquidity risk is the risk to
our earnings and capital arising from an inability to meet our
cash obligations in a timely manner.
|
We also are subject to a number of other risks that could
adversely impact our business, financial condition, results of
operations and cash flows, including legal and reputational
risks that may arise due to a failure to comply with laws,
regulations or ethical standards and codes of conduct applicable
to our business activities and functions.
Effective management of risks is an integral part of our
business and critical to our safety and soundness. In the
following sections, we provide an overview of our corporate risk
governance structure and risk management processes, which are
intended to identify, measure, monitor and manage the principal
risks we assume in conducting our business activities in
accordance with defined policies and procedures. Following the
overview, we provide additional information on how we manage
each of our four major categories of risk. In
Item 1ARisk Factors, we identify other
risk factors that may adversely affect our business.
Risk
Governance Structure
We made significant organizational changes in 2005 and 2006 to
enhance our risk governance structure and strengthen our
internal controls due to identified material weaknesses. During
2005, we adopted an enhanced corporate risk framework to address
weaknesses in our risk governance structure. This new framework
is intended to ensure that people and processes are organized in
a way that promotes a cross-functional approach to risk
management and controls are in place to better manage our risks.
Basic tenets of our corporate risk
132
framework include establishing corporate-wide policies for risk
management, delegating to business units primary responsibility
for the management of the
day-to-day
risks inherent in the activities of the business unit, and
monitoring aggregate risks and compliance with risk policies at
a corporate level.
Our corporate risk framework is supported by a governance
structure encompassing the Board of Directors, an independent
corporate risk oversight organization, business units,
management-level risk committees and Internal Audit. As we
continue in our efforts to build out our risk oversight
organization, our goal is to establish clear lines of authority,
clarify roles and responsibilities, and enact policies and
procedures designed to ensure that we have an independent risk
oversight function and a well-disciplined risk management
process with appropriate checks and balances throughout our
company.
Risk
Policy and Capital Committee of the Board of
Directors
The Board of Directors is responsible for approving our risk
governance framework and providing capital and risk management
oversight. The Board exercises its oversight of credit risk,
market risk, operational risk and liquidity risk primarily
through the Boards Risk Policy and Capital Committee. The
responsibilities of the Risk Policy and Capital Committee
include:
|
|
|
|
|
evaluating and, where appropriate, recommending for Board
approval enterprise-wide risk management policies, metrics and
limits consistent with our mission and our safety and soundness;
|
|
|
|
reviewing policies and procedures designed to: (i) define,
measure, identify and report on credit, market, liquidity and
operational risk; and (ii) establish and communicate risk
management controls throughout the company;
|
|
|
|
overseeing compliance with all enterprise-wide risk management
policies;
|
|
|
|
overseeing the Chief Risk Office; and
|
|
|
|
reviewing the sufficiency of personnel, systems and other risk
management capabilities.
|
Chief
Risk Office
The Chief Risk Office is an independent risk oversight
organization with responsibility for oversight of credit risk,
market risk and operational risk. The Chief Risk Office is
headed by a Chief Risk Officer who reports directly to the Chief
Executive Officer and independently to the Risk Policy and
Capital Committee of the Board of Directors. The Chief Risk
Office and the position of Chief Risk Officer were established
in 2005. The Chief Risk Office is responsible for formulating
corporate risk policies and monitoring the companys
aggregate risk profile. The Chief Risk Office works closely with
our business units to ensure they have in place the structure
and information systems necessary to adequately measure, report,
monitor and control their key business risks, consistent with
corporate standards. The Chief Risk Office also is responsible
for validation of risk models and for developing and
implementing an economic risk capital framework.
The Chief Risk Officer is responsible for establishing our
overall risk governance structure and providing independent
evaluation and oversight of our risk management activities. In
addition to directing the Chief Risk Office, the Chief Risk
Officer oversees our management-level corporate risk committees.
The Chief Risk Officer reports on a regular basis to our Board
of Directors regarding our corporate risk profile, including our
aggregate risk exposure, the level of risk by type of risk,
performance relative to risk tolerance limits and any
significant risk management issues.
Risk
Management Committees
In 2006, we further enhanced our risk governance framework by
creating two management-level committees: (i) the Corporate
Risk Management Committee, which focuses on credit and market
risk and is a successor to our Portfolio and Capital Committee;
and (ii) the Operational Risk Committee, which focuses on
operational risk. Each committee is responsible for, among other
things:
|
|
|
|
|
monitoring aggregated risk exposure;
|
|
|
|
discussing emerging risk issues;
|
|
|
|
reviewing proposed risk limits;
|
|
|
|
approving the risk aspects of significant new business
initiatives; and
|
133
|
|
|
|
|
approving and managing risk policies with corporate-wide or
significant business unit implications.
|
The Management Executive Committee, which is chaired by the
Chief Executive Officer and composed of principal executive
officers of the company, has responsibility for reviewing and
approving our enterprise-wide risk tolerance policy and our
enterprise-wide risk framework, addressing issues referred to it
by the Corporate Risk Management Committee and the Operational
Risk Committee, addressing matters that involve multiple types
of risks and addressing other significant business risks. Where
appropriate, the Management Executive Committee brings
transactions of an extraordinary nature and significant
potential new business activities to the Risk Policy and Capital
Committee of the Board of Directors for review and approval.
Business
Units
Business unit managers execute company-wide risk policies set by
the Chief Risk Officer, develop risk management strategies for
their specific businesses, and establish and implement risk
management policies and practices within their businesses. Each
business unit is responsible for identifying, measuring and
managing key risks within its business. In addition, each
business unit has business unit risk managers who are
responsible for ensuring that there are clear delineations of
responsibility for managing risk, adequate systems for measuring
risk, appropriately structured limits on risk taking, effective
internal controls and a comprehensive risk reporting process. As
part of our risk governance structure, we intend to establish
within each business unit risk committees that will be
responsible for decisions relating to risk strategy, policies
and controls.
Internal
Audit
Our Internal Audit group, under the direction of the Chief Audit
Executive, provides an objective assessment of the design and
execution of our internal control system, including our
management systems, risk governance, and policies and
procedures. The Chief Audit Executive reports directly and
independently to the Audit Committee of the Board of Directors,
and audit personnel are compensated on objectives set for the
group by the Audit Committee rather than corporate financial
results or goals. Internal Audit activities are designed to
provide reasonable assurance that resources are safeguarded;
that significant financial, managerial and operating information
is complete, accurate and reliable; and that employee actions
comply with our policies and applicable laws and regulations.
Office
of Compliance and Ethics
Our Office of Compliance and Ethics, under the direction of the
Chief Compliance Officer, is responsible for developing and
carrying out corporate policies related to compliance, ethics
and investigations. The Office of Compliance and Ethics and the
position of Chief Compliance Officer were established in 2005.
The Chief Compliance Officer reports directly to the Chief
Executive Officer and independently to the Compliance Committee
of the Board of Directors. The Chief Compliance Officer operates
independently of management and may be removed only upon Board
approval. The Chief Compliance Officer is responsible for
overseeing our compliance activities; developing and promoting a
code of ethical conduct; evaluating and investigating any
allegations of misconduct; and overseeing and coordinating our
OFHEO and HUD regulatory reporting and examinations. Our newly
formed Compliance Coordination Committee, which is composed of
senior officers of the company, is responsible for coordinating
the legal and regulatory compliance risk governance functions
with other control functions, such as Legal, Internal Audit and
the Chief Risk Office.
Corporate
Risk Tolerance Principles
In September 2006, the Board of Directors adopted risk
principles that govern our risk activities. These principles
include taking risks in an informed and disciplined manner and
ensuring that we are adequately compensated for the risks we
take, consistent with our mission goals. Pursuant to our
corporate risk tolerance principles, we will accept certain
levels of
period-to-period
volatility in our financial performance due to changes in market
conditions and applicable accounting principles. Moreover, we
will determine the appropriate accounting treatment of
transactions as well as financial reporting, operations and
systems capability before introducing new products or making
significant revisions to existing products. The Chief
134
Risk Officer will report to the Board of Directors annually on
managements adherence to these risk principles.
Credit
Risk Management
We assess, price and assume mortgage credit risk as a basic
component of our business. We assume institutional counterparty
credit risk in a variety of our business transactions, including
transactions designed to mitigate mortgage credit risk and
interest rate risk. The degree of credit risk to which we are
exposed will vary based on many factors, including the risk
profile of the borrower or counterparty, the contractual terms
of the agreement, the amount of the transaction, repayment
sources, the availability and quality of collateral and other
factors relevant to current events, conditions and expectations.
We evaluate these factors and actively manage, on an aggregate
basis, the extent and nature of the credit risk we bear, with
the objective of ensuring that we are adequately compensated for
the credit risk we take, consistent with our mission goals.
Our Single-Family Credit Guaranty and HCD businesses are
responsible for identifying, measuring, monitoring and managing
credit risk subject to corporate risk policies and limits
approved by the Chief Risk Office, which provides corporate
oversight of the credit risk management process. The Corporate
Risk Management Committee, which focuses on credit and market
risk, meets at least monthly to review our aggregate credit risk
profile and monitor our exposure relative to risk limits.
Our credit-related losses during the period 2002 to 2004 reflect
the high credit quality of our mortgage credit book of business,
resulting from the effect of a combination of several factors,
including strong home price appreciation during the period, the
benefits we receive from credit enhancements and other
risk-sharing strategies, and our loss mitigation efforts. Our
credit-related losses during this period remained at what we
consider to be low levels, averaging approximately 0.01% of our
mortgage credit book of business.
Mortgage
Credit Risk Management
Mortgage credit risk is the risk that a borrower will fail to
make required mortgage payments. We are exposed to credit risk
on our mortgage credit book of business because we either hold
the mortgage assets or have issued a guaranty in connection with
the creation of Fannie Mae MBS backed by mortgage assets. Our
mortgage credit book of business consists of both on- and
off-balance sheet arrangements, including single-family and
multifamily mortgage loans held in our portfolio; Fannie Mae MBS
and non-Fannie Mae mortgage-related securities held in our
portfolio; Fannie Mae MBS held by third-party investors; and
credit enhancements that we provide on mortgage assets. We
provide additional information regarding our off-balance sheet
arrangements in Off-Balance Sheet Arrangements below.
Factors affecting credit risk on loans in our single-family
mortgage credit book of business include the borrowers
financial strength and credit profile; the type of mortgage; the
characteristics of the property securing the mortgage; and
economic conditions, such as changes in home prices. Factors
that affect credit risk on a multifamily loan include the
structure of the financing; the type and location of the
property; the condition and value of the property; the financial
strength of the borrower and lender; market and sub-market
trends and growth; and the current and anticipated cash flows
from the property. These and other factors affect both the
amount of expected credit loss on a given loan and the
sensitivity of that loss to changes in the economic environment.
Table 26 displays the composition of our mortgage credit book of
business as of December 31, 2004, 2003 and 2002. As
indicated in Table 26, our single-family mortgage credit
book of business accounted for approximately 95% of our
entire mortgage credit book of business as of December 31,
2004, 2003 and 2002.
135
Table
26: Composition of Mortgage Credit Book of
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
Single-Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(4)
|
|
$
|
345,575
|
|
|
$
|
10,112
|
|
|
$
|
43,396
|
|
|
$
|
1,074
|
|
|
$
|
388,971
|
|
|
$
|
11,186
|
|
Fannie Mae
MBS(4)
|
|
|
341,768
|
|
|
|
1,239
|
|
|
|
505
|
|
|
|
892
|
|
|
|
342,273
|
|
|
|
2,131
|
|
Agency mortgage-related
securities(4)(5)
|
|
|
37,422
|
|
|
|
4,273
|
|
|
|
|
|
|
|
68
|
|
|
|
37,422
|
|
|
|
4,341
|
|
Mortgage revenue bonds
|
|
|
6,344
|
|
|
|
4,951
|
|
|
|
8,037
|
|
|
|
2,744
|
|
|
|
14,381
|
|
|
|
7,695
|
|
Other mortgage-related
securities(6)
|
|
|
108,082
|
|
|
|
669
|
|
|
|
12
|
|
|
|
46
|
|
|
|
108,094
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
839,191
|
|
|
|
21,244
|
|
|
|
51,950
|
|
|
|
4,824
|
|
|
|
891,141
|
|
|
|
26,068
|
|
Fannie Mae MBS held by third
parties(7)
|
|
|
1,319,066
|
|
|
|
32,337
|
|
|
|
54,639
|
|
|
|
2,005
|
|
|
|
1,373,705
|
|
|
|
34,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of business
|
|
|
2,158,257
|
|
|
|
53,581
|
|
|
|
106,589
|
|
|
|
6,829
|
|
|
|
2,264,846
|
|
|
|
60,410
|
|
Other(8)
|
|
|
346
|
|
|
|
|
|
|
|
14,111
|
|
|
|
368
|
|
|
|
14,457
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage credit book of
business
|
|
$
|
2,158,603
|
|
|
$
|
53,581
|
|
|
$
|
120,700
|
|
|
$
|
7,197
|
|
|
$
|
2,279,303
|
|
|
$
|
60,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
|
|
|
|
Single-Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(4)
|
|
$
|
355,200
|
|
|
$
|
7,284
|
|
|
$
|
33,945
|
|
|
$
|
1,204
|
|
|
$
|
389,145
|
|
|
$
|
8,488
|
|
Fannie Mae
MBS(4)
|
|
|
402,079
|
|
|
|
1,933
|
|
|
|
412
|
|
|
|
1,498
|
|
|
|
402,491
|
|
|
|
3,431
|
|
Agency mortgage-related
securities(4)(5)
|
|
|
30,672
|
|
|
|
7,235
|
|
|
|
|
|
|
|
68
|
|
|
|
30,672
|
|
|
|
7,303
|
|
Mortgage revenue bonds
|
|
|
6,242
|
|
|
|
5,983
|
|
|
|
5,828
|
|
|
|
2,306
|
|
|
|
12,070
|
|
|
|
8,289
|
|
Other mortgage-related
securities(6)
|
|
|
46,714
|
|
|
|
169
|
|
|
|
42
|
|
|
|
54
|
|
|
|
46,756
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
840,907
|
|
|
|
22,604
|
|
|
|
40,227
|
|
|
|
5,130
|
|
|
|
881,134
|
|
|
|
27,734
|
|
Fannie Mae MBS held by third
parties(7)
|
|
|
1,200,222
|
|
|
|
38,487
|
|
|
|
59,403
|
|
|
|
2,408
|
|
|
|
1,259,625
|
|
|
|
40,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of business
|
|
|
2,041,129
|
|
|
|
61,091
|
|
|
|
99,630
|
|
|
|
7,538
|
|
|
|
2,140,759
|
|
|
|
68,629
|
|
Other(8)
|
|
|
330
|
|
|
|
|
|
|
|
12,346
|
|
|
|
492
|
|
|
|
12,676
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage credit book of
business
|
|
$
|
2,041,459
|
|
|
$
|
61,091
|
|
|
$
|
111,976
|
|
|
$
|
8,030
|
|
|
$
|
2,153,435
|
|
|
$
|
69,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2002
|
|
|
|
Single-Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(4)
|
|
$
|
295,457
|
|
|
$
|
6,404
|
|
|
$
|
19,485
|
|
|
$
|
1,898
|
|
|
$
|
314,942
|
|
|
$
|
8,302
|
|
Fannie Mae
MBS(4)
|
|
|
374,555
|
|
|
|
3,230
|
|
|
|
542
|
|
|
|
2,056
|
|
|
|
375,097
|
|
|
|
5,286
|
|
Agency mortgage-related
securities(4)(5)
|
|
|
32,218
|
|
|
|
16,042
|
|
|
|
|
|
|
|
85
|
|
|
|
32,218
|
|
|
|
16,127
|
|
Mortgage revenue bonds
|
|
|
6,378
|
|
|
|
7,614
|
|
|
|
3,728
|
|
|
|
1,930
|
|
|
|
10,106
|
|
|
|
9,544
|
|
Other mortgage-related
securities(6)
|
|
|
27,938
|
|
|
|
75
|
|
|
|
69
|
|
|
|
75
|
|
|
|
28,007
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
736,546
|
|
|
|
33,365
|
|
|
|
23,824
|
|
|
|
6,044
|
|
|
|
760,370
|
|
|
|
39,409
|
|
Fannie Mae MBS held by third
parties(7)
|
|
|
950,690
|
|
|
|
36,225
|
|
|
|
50,772
|
|
|
|
2,752
|
|
|
|
1,001,462
|
|
|
|
38,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of business
|
|
|
1,687,236
|
|
|
|
69,590
|
|
|
|
74,596
|
|
|
|
8,796
|
|
|
|
1,761,832
|
|
|
|
78,386
|
|
Other(8)
|
|
|
576
|
|
|
|
|
|
|
|
10,906
|
|
|
|
545
|
|
|
|
11,482
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage credit book of
business
|
|
$
|
1,687,812
|
|
|
$
|
69,590
|
|
|
$
|
85,502
|
|
|
$
|
9,341
|
|
|
$
|
1,773,314
|
|
|
$
|
78,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refers to mortgage loans and
mortgage-related securities that are not guaranteed or insured
by the U.S. government or any of its agencies.
|
|
(2) |
|
Refers to mortgage loans and
mortgage-related securities guaranteed or insured by the U.S.
government or one of its agencies.
|
|
(3) |
|
Mortgage portfolio data is reported
based on unpaid principal balance.
|
|
(4) |
|
Mortgage loan data includes
mortgage-related securities that were consolidated and reported
in our consolidated balance sheets as loans of
$152.7 billion, $162.5 billion and $135.8 billion
as of December 31, 2004, 2003 and 2002, respectively.
|
|
(5) |
|
Includes mortgage-related
securities issued by Freddie Mac and Ginnie Mae.
|
|
(6) |
|
Includes mortgage-related
securities issued by entities other than Fannie Mae, Freddie Mac
or Ginnie Mae.
|
|
(7) |
|
Includes Fannie Mae MBS held by
third-party investors. The principal balance of resecuritized
Fannie Mae MBS is included only once.
|
|
(8) |
|
Includes additional single-family
and multifamily credit enhancements that we provide not
otherwise reflected in the table.
|
Our strategy in managing mortgage credit risk consists of three
primary components: (1) acquisition policy and standards;
(2) portfolio diversification and monitoring; and
(3) credit loss management. We use various metrics to
evaluate credit performance in our mortgage credit book of
business. We estimate incurred credit losses inherent in our
mortgage credit book of business as of each balance sheet date
and maintain a combined balance of allowance for loan losses and
reserve for guaranty losses at a level we believe reflects these
losses.
Acquisition
Policy and Standards
Single-Family
Our Single-Family business is responsible for pricing and
managing credit risk relating to the portion of our
single-family mortgage credit book of business consisting of
whole single-family mortgage loans and Fannie Mae MBS backed by
single-family mortgage loans (whether held in our portfolio or
held by third parties). Accordingly, unless otherwise noted, the
credit statistics on our conventional single-family mortgage
credit book provided in this report relate only to this portion
of our conventional single-family mortgage credit book managed
by our Single-Family business, for which we have more detailed
loan-level information, which constituted approximately 92%, 95%
and 95% of our total conventional single-family mortgage credit
book of business as of December 31, 2004, 2003 and 2002,
respectively.
137
The remaining portion of our conventional single-family mortgage
credit book of business consists of non-Fannie Mae
mortgage-related securities backed by single-family mortgage
loans and credit enhancements that we provide on single-family
mortgage assets. Our Capital Markets business is responsible for
pricing and managing credit risk relating to that remaining
portion of our conventional single-family mortgage credit book.
These mortgage exposures generally consist of mortgage-related
assets where we may not have access to detailed loan level data
and may not manage the credit performance of individual loans.
The substantial majority of the non-Fannie Mae mortgage-related
securities in our portfolio benefit from substantial credit
enhancement, such as a guaranty from an entity such as Ginnie
Mae or Freddie Mac, an insurance policy, structured
subordination and similar sources of credit protection.
Non-Fannie Mae mortgage-related securities held in our portfolio
include Freddie Mac securities, Ginnie Mae securities,
private-label mortgage-related securities, Fannie Mae MBS backed
by private-label mortgage-related securities, and
housing-related municipal revenue bonds. Over 90% of non-Fannie
Mae mortgage-related securities held in our portfolio as of
September 30, 2006 were rated AAA/Aaa by Standard and
Poors and Moodys.
We have established underwriting guidelines for these loans that
are intended to provide a comprehensive analysis of borrowers
and mortgage loans based upon known risk characteristics. We
also have policies and various quality assurance efforts to
review a sample of loans to measure compliance with our
underwriting and eligibility criteria. We assess the
characteristics and quality of a lenders loans and
processes through a post-purchase loan review program,
on-site
reviews of lender operations and regular comparisons of actual
loan performance to expected performance.
Lenders generally represent and warrant compliance with our
asset acquisition requirements when they sell mortgage loans to
us or deliver mortgage loans in exchange for Fannie Mae MBS. We
may require the lender to repurchase a loan or we may seek
another remedy if we identify any deficiencies. We have
developed a proprietary automated underwriting system, Desktop
Underwriter®,
which measures default risk by assessing the primary risk
factors of a mortgage, including the
loan-to-value
ratio, the borrowers credit profile, the type of mortgage,
the loan purpose, and other mortgage and borrower
characteristics. Subject to our review and approval, we also
purchase and securitize mortgage loans that have been
underwritten using other automated underwriting systems, as well
as mortgage loans underwritten to agreed-upon standards that
differ from our standard underwriting criteria.
The use of credit enhancements is an important part of our
single-family acquisition policy and standards, although it also
exposes us to institutional counterparty risk. Based on our
current acquisition policy and standards, we may accept loans
originated with
loan-to-value
ratios of up to 100%; however, from time to time, we may make an
exception to these guidelines and acquire loans with a
loan-to-value
ratio greater than 100%. Our charter requires that conventional
single-family mortgage loans that we purchase or that back
Fannie Mae MBS with
loan-to-value
ratios above 80% at acquisition be covered by one or more of the
following:
|
|
|
|
|
primary mortgage insurance;
|
|
|
|
a sellers agreement to repurchase or replace any mortgage
loan in default (for such period and under such circumstances as
we may require); or
|
|
|
|
retention by the seller of at least a 10% participation interest
in the mortgage loans.
|
Primary mortgage insurance is the most common type of credit
enhancement in our mortgage credit book of business and is
typically provided on a loan-level basis. Primary mortgage
insurance transfers varying portions of the credit risk
associated with a mortgage loan to a third-party insurer. The
amount of insurance we obtain on any mortgage loan depends on
our requirements, which depend on our assessment of risk.
In addition to the credit enhancement required by our charter,
we require or obtain supplemental credit enhancement for some
mortgage loans, typically those with higher credit risk. Our use
of discretionary credit enhancements depends on our view of the
inherent credit risk, the price of the credit enhancement, and
our risk versus return objective.
138
The percentage of our conventional single-family mortgage credit
book of business with credit enhancement was 19%, 21% and 27% as
of December 31, 2004, 2003 and 2002, respectively. The
percentage of our conventional single-family mortgage credit
book of business with credit enhancement has not changed
significantly since the end of 2004.
Housing
and Community Development
Our HCD business is responsible for managing the credit risk on
whole multifamily mortgage loans we purchase and on Fannie Mae
MBS backed by multifamily loans (whether held in our portfolio
or held by third parties). HCD also makes equity investments in
LIHTC limited partnerships that own an interest in rental
housing that the partnerships have developed or rehabilitated.
On a much smaller scale, our HCD business also makes investments
in other rental or for-sale housing developments and provides
loans and credit support to public entities and local banks to
support affordable housing and community development. We have
established credit and underwriting guidelines for most of these
transactions. While the underwriting of single-family loans
primarily focuses on an evaluation of the borrowers
ability to repay the loan, the underwriting of multifamily loans
focuses primarily on an evaluation of expected cash flows from
the property for repayment. Our multifamily guidelines provide a
comprehensive analysis of the local market, the borrower and its
investment in the property, the propertys historical and
projected financial performance, the propertys physical
condition and third-party reports, including appraisals and
engineering and environmental reports. For multifamily equity
investments, we also evaluate the strength of our investment
sponsors and third-party asset managers.
Multifamily loans we purchase or that back Fannie Mae MBS are
either underwritten by a Fannie Mae-approved lender or subject
to our underwriting review prior to closing. Many of our
agreements delegate the underwriting decisions to the lender,
principally through our Delegated Underwriting and Servicing, or
DUSTM,
program. Approximately 89% of our multifamily mortgage credit
book of business as of December 31, 2004 consisted of loans
delivered by DUS lenders, compared with approximately 90% as of
December 31, 2003. Lenders represent and warrant compliance
with our underwriting requirements when they sell us mortgage
loans, when they request securitization of their loans into
Fannie Mae MBS or when they request that we provide credit
enhancement in connection with an affordable housing bond
transaction. In addition, we use proprietary models and
analytical tools to price and measure credit risk at
acquisition. After closing, we conduct a post-purchase review of
certain loans based on the product type or risk profile of the
loan, the lenders historical underwriting practices, the
market and submarket conditions. If non-compliance issues are
revealed during the review process, we may take a variety of
actions, including increasing the lender credit loss sharing or
requiring a lender to repurchase a loan, depending on the
severity of the issues identified.
The use of credit enhancements is also an important part of our
multifamily acquisition policy and standards. We use a variety
of credit enhancement vehicles including lender risk sharing,
lender repurchase agreements, pool insurance, subordinated
participations in mortgage loans or structured pools, cash and
letter of credit collateral agreements, and
cross-collateralization/cross-default provisions. The most
prevalent form of credit enhancement is lender risk sharing.
Lenders in the DUS program typically share in loan-level credit
losses in one of two ways. Generally, they either bear losses up
to the first 5% of unpaid principal balance of the loan and
share in remaining losses up to a prescribed limit, or they
agree to share with us up to one-third of the credit losses on
an equal basis. The percentage of our multifamily credit book of
business with credit enhancement was 95%, 95% and 92% as of
December 31, 2004, 2003 and 2002, respectively.
Portfolio
Diversification and Monitoring
Single-Family
Our single-family mortgage credit book of business is
diversified based on several factors that influence credit
quality and performance and help manage our credit risk. We
continually review the credit quality of our single-family
mortgage credit book of business with a focus on a variety of
mortgage loan risk factors that include
loan-to-value
ratios, loan product type, property type, occupancy type, credit
score, loan purpose, property location and age of loan. Table 27
presents our conventional single-family mortgage credit book of
business as of December 31, 2004, 2003 and 2002, based on
the key risk characteristics that we monitor
139
closely to assess the sensitivity of our credit losses to
economic changes. Table 28 presents our conventional
single-family business volumes (which refers to both
conventional single-family mortgage loans we purchase for our
mortgage portfolio and conventional single-family mortgage loans
we securitize into Fannie Mae MBS) for 2004, 2003 and 2002 based
on these risk characteristics. We typically obtain the data for
these statistics from the sellers or servicers of the mortgage
loans. We receive representations and warranties as to the
accuracy of the information from those providing it. Except for
quality assurance efforts, we do not independently verify the
reported information. As noted above, we generally collect
loan-level statistics only on conventional single-family
mortgage loans held in our portfolio and backing Fannie MBS
(whether held in our portfolio or held by third parties).
Table
27: Risk Characteristics of Conventional
Single-Family Mortgage Credit Book
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Book of
Business(1)
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Original
loan-to-value
ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 60.00
|
|
|
26
|
%
|
|
|
26
|
%
|
|
|
20
|
%
|
60.01% to 70.00%
|
|
|
17
|
|
|
|
17
|
|
|
|
15
|
|
70.01% to 80.00%
|
|
|
40
|
|
|
|
39
|
|
|
|
42
|
|
80.01% to 90.00%
|
|
|
9
|
|
|
|
10
|
|
|
|
13
|
|
90.01% to 100.0%
|
|
|
8
|
|
|
|
8
|
|
|
|
10
|
|
Greater than 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
73
|
%
|
Estimated
mark-to-market
loan-to-value
ratio:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 60.00
|
|
|
53
|
%
|
|
|
43
|
%
|
|
|
43
|
%
|
60.01% to 70.00%
|
|
|
20
|
|
|
|
22
|
|
|
|
20
|
|
70.01% to 80.00%
|
|
|
18
|
|
|
|
24
|
|
|
|
25
|
|
80.01% to 90.00%
|
|
|
6
|
|
|
|
8
|
|
|
|
9
|
|
90.01% to 100.0%
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
Greater than 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
57
|
%
|
|
|
60
|
%
|
|
|
61
|
%
|
Average loan amount
|
|
$
|
125,812
|
|
|
$
|
122,901
|
|
|
$
|
111,169
|
|
Product
type:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
64
|
%
|
|
|
64
|
%
|
|
|
70
|
%
|
Intermediate-term
|
|
|
24
|
|
|
|
27
|
|
|
|
23
|
|
Interest-only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate
|
|
|
88
|
|
|
|
91
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
Negative-amortizing
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Other ARMs
|
|
|
9
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable-rate
|
|
|
12
|
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Book of
Business(1)
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Number of property units:
|
|
|
|
|
|
|
|
|
|
|
|
|
1 unit
|
|
|
96
|
%
|
|
|
96
|
%
|
|
|
96
|
%
|
2-4 units
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family homes
|
|
|
93
|
%
|
|
|
93
|
%
|
|
|
94
|
%
|
Condo/Co-op
|
|
|
7
|
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
92
|
%
|
|
|
92
|
%
|
|
|
93
|
%
|
Second/vacation home
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
Investor
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit score:
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
620 to < 660
|
|
|
11
|
|
|
|
11
|
|
|
|
11
|
|
660 to < 700
|
|
|
18
|
|
|
|
18
|
|
|
|
18
|
|
700 to < 740
|
|
|
23
|
|
|
|
23
|
|
|
|
22
|
|
>= 740
|
|
|
41
|
|
|
|
40
|
|
|
|
36
|
|
Not available
|
|
|
2
|
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
719
|
|
|
|
717
|
|
|
|
714
|
|
Loan purpose:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
31
|
%
|
|
|
28
|
%
|
|
|
37
|
%
|
Cash-out refinance
|
|
|
30
|
|
|
|
30
|
|
|
|
27
|
|
Other refinance
|
|
|
39
|
|
|
|
42
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
concentration:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
17
|
%
|
|
|
17
|
%
|
|
|
18
|
%
|
Northeast
|
|
|
19
|
|
|
|
18
|
|
|
|
19
|
|
Southeast
|
|
|
22
|
|
|
|
22
|
|
|
|
21
|
|
Southwest
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
West
|
|
|
26
|
|
|
|
27
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Book of
Business(1)
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Origination year:
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 1994
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
8
|
%
|
1995
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
1996
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
1997
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
1998
|
|
|
2
|
|
|
|
3
|
|
|
|
11
|
|
1999
|
|
|
2
|
|
|
|
2
|
|
|
|
7
|
|
2000
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
2001
|
|
|
6
|
|
|
|
9
|
|
|
|
27
|
|
2002
|
|
|
17
|
|
|
|
25
|
|
|
|
38
|
|
2003
|
|
|
46
|
|
|
|
53
|
|
|
|
|
|
2004
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentages calculated based on
unpaid principal balance of loans as of the end of each period.
|
|
(2) |
|
The methodology used to estimate
the
mark-to-market
loan-to-value
ratio was implemented in 2004.
|
|
(3) |
|
Long-term fixed-rate consists of
mortgage loans with contractual maturities greater than
15 years. Intermediate-term fixed-rate consists of mortgage
loans with contractual maturities equal to or less than
15 years.
|
|
(4) |
|
Midwest includes IL, IN, IA, MI,
MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA,
NH, NJ, NY, PA, PR, RI, VT and VI. Southeast includes AL, DC,
FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest includes
AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West includes AK, CA,
GU, HI, ID, MT, NV, OR, WA and WY.
|
Table
28: Risk Characteristics of Conventional
Single-Family Mortgage Business Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Business
Volume(1)
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Original
loan-to-value
ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 60.00
|
|
|
23
|
%
|
|
|
29
|
%
|
|
|
23
|
%
|
60.01% to 70.00%
|
|
|
16
|
|
|
|
18
|
|
|
|
16
|
|
70.01% to 80.00%
|
|
|
43
|
|
|
|
38
|
|
|
|
42
|
|
80.01% to 90.00%
|
|
|
8
|
|
|
|
8
|
|
|
|
11
|
|
90.01% to 100.0%
|
|
|
10
|
|
|
|
7
|
|
|
|
8
|
|
Greater than 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
71
|
%
|
|
|
68
|
%
|
|
|
71
|
%
|
Average loan amount
|
|
$
|
158,759
|
|
|
$
|
153,461
|
|
|
$
|
145,566
|
|
Product
type:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
62
|
%
|
|
|
63
|
%
|
|
|
66
|
%
|
Intermediate-term
|
|
|
16
|
|
|
|
27
|
|
|
|
25
|
|
Interest-only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate
|
|
|
78
|
|
|
|
90
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Business
Volume(1)
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Adjustable-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
|
|
|
5
|
|
|
|
1
|
|
|
|
1
|
|
Negative-amortizing
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
Other ARMs
|
|
|
15
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable-rate
|
|
|
22
|
|
|
|
10
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of property units:
|
|
|
|
|
|
|
|
|
|
|
|
|
1 unit
|
|
|
96
|
%
|
|
|
96
|
%
|
|
|
96
|
%
|
2-4 units
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family detached
|
|
|
91
|
%
|
|
|
93
|
%
|
|
|
93
|
%
|
Condo/Co-op
|
|
|
9
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
91
|
%
|
|
|
93
|
%
|
|
|
92
|
%
|
Second/vacation home
|
|
|
4
|
|
|
|
3
|
|
|
|
3
|
|
Investor
|
|
|
5
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit score:
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
620 to < 660
|
|
|
12
|
|
|
|
10
|
|
|
|
11
|
|
660 to < 700
|
|
|
19
|
|
|
|
18
|
|
|
|
18
|
|
700 to < 740
|
|
|
24
|
|
|
|
24
|
|
|
|
23
|
|
>= 740
|
|
|
39
|
|
|
|
44
|
|
|
|
41
|
|
Not available
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
715
|
|
|
|
721
|
|
|
|
717
|
|
Loan purpose:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
43
|
%
|
|
|
22
|
%
|
|
|
30
|
%
|
Cash-out refinance
|
|
|
29
|
|
|
|
32
|
|
|
|
32
|
|
Other refinance
|
|
|
28
|
|
|
|
46
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
concentration:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
17
|
%
|
|
|
18
|
%
|
|
|
20
|
%
|
Northeast
|
|
|
19
|
|
|
|
18
|
|
|
|
18
|
|
Southeast
|
|
|
22
|
|
|
|
20
|
|
|
|
20
|
|
Southwest
|
|
|
14
|
|
|
|
14
|
|
|
|
15
|
|
West
|
|
|
28
|
|
|
|
30
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentages calculated based on
unpaid principal balance of loans at time of acquisition.
|
143
|
|
|
(2) |
|
Long-term fixed-rate consists of
mortgage loans with contractual maturities greater than
15 years. Intermediate-term fixed-rate consists of mortgage
loans with contractual maturities equal to or less than
15 years.
|
|
(3) |
|
See footnote 4 to Table 27 for
states included in each geographic region.
|
The key elements of the above risk characteristics are as
follows:
|
|
|
|
|
Loan-to-value
(LTV) ratio. The LTV ratio is the
ratio, at any point in time, of the unpaid principal balance of
a mortgage loan to the value of the property that serves as
collateral for the loan (expressed as a percentage). LTV ratio
is a strong predictor of credit performance. In most cases, the
original LTV is based on the appraised value reported to us at
the time of acquisition of the loan. The aggregate current or
estimated
mark-to-market
LTV is based on an internal valuation model we use to estimate
periodic changes in home values. Assuming all other factors are
equal, the likelihood of default and the gross severity of a
loss in the event of default are typically lower as the LTV
ratio decreases.
|
|
|
|
Product type. Product type is defined by the
nature of the interest rate applicable to the mortgage (fixed
for the duration of the loan or adjustable subject to
contractual terms) and by the maturity of the loan. We generally
divide our Single-Family business into three primary categories:
long-term, fixed-rate mortgages with original terms of greater
than 15 years; intermediate-term, fixed-rate mortgages with
original terms of 15 years or less; and ARMs of any term.
During 2004 and 2005, there was a proliferation of alternative
product types, including
negative-amortizing
loans and interest-only loans.
Negative-amortizing
loans allow the borrower to make monthly payments that are less
than the interest actually accrued for the period. The unpaid
interest is added to the principal balance of the loan, which
increases the outstanding loan balance.
Negative-amortizing
loans are typically adjustable-rate mortgage loans.
Interest-only loans allow the borrower to pay only the monthly
interest due, and none of the principal, for a fixed term. After
the end of that term, usually five to ten years, the borrower
can choose to refinance, pay the principal balance in a lump
sum, or begin paying the monthly scheduled principal due on the
loan, which results in a higher monthly payment at that time.
Interest-only loans can be adjustable-rate or fixed-rate
mortgage loans. While
negative-amortizing
and interest-only loans have been offered by lenders for some
time, we began separately reporting and more closely monitoring
them as their prevalence increased in 2004 and 2005.
|
Certain residential loan product types have features that may
result in increased credit risk when compared to residential
loans without those features. In general,
15-year
fixed-rate mortgages exhibit the lowest default rate among the
types of mortgage loans we securitize and purchase, due to the
accelerated rate of principal amortization on these mortgages
and the credit profiles of borrowers who use them. The next
lowest rate of default is associated with
30-year
fixed-rate mortgages. Balloon/reset mortgages and ARMs typically
default at a higher rate than fixed-rate mortgages, although
default rates for different types of ARMs may vary. While ARMs
are typically originated with interest rates that are initially
lower than those available for fixed-rate mortgages, the
interest rates on ARMs change over time based on changes in an
index or reference interest rate. As a result, the
borrowers payments may rise or fall, within limits, as
interest rates change. As payment amounts increase, the risk of
default also increases. In the low interest rate environment
experienced during 2005, 2004 and 2003, this industry trend was
reversed with ARMs exhibiting lower default rates than
fixed-rate mortgages. We expect loans that permit a borrower to
defer the payment of principal or interest, such as
negative-amortizing and interest-only loans, to default more
often than traditional mortgage loans. We consider the risk of
default in determining our guaranty fee and purchase price.
|
|
|
|
|
Number of units. We classify mortgages secured
by housing with four or fewer living units as single- family.
Mortgages on one-unit properties tend to have lower credit risk
than mortgages on multiple-unit properties, such as duplexes,
all other factors held equal. Over 95% of our single-family
mortgage credit book of business consists of loans secured by
one-unit properties.
|
|
|
|
Property type. We evaluate the underlying type
of property that secures a mortgage loan. Condominiums are
generally considered to have higher credit risk than
single-family detached properties. Condominiums are often more
difficult to resell than single-family detached properties, and
they historically have exhibited greater volatility in home
price trends.
|
144
|
|
|
|
|
Occupancy type. Borrowers may purchase a home
as a primary residence, a second or vacation home, or an
investment property. Assuming all other factors are equal,
mortgages on properties occupied by the borrower as a primary or
secondary residence tend to have lower credit risk than
mortgages on investment properties.
|
|
|
|
Credit score. Credit score is a measure often
used by the financial services industry, including our company,
to assess borrower credit quality. Credit scores are generated
by credit repositories and calculated based on proprietary
statistical models that evaluate many types of information on a
borrowers credit report and predict the likelihood that a
borrower will repay future obligations as expected.
FICO®
scores, developed by Fair Isaac Corporation, are commonly used
credit scores. FICO scores, as reported by the credit
repositories, may range from a low of 300 to a high of 850.
Based on Fair Isaac Corporation statistical information, a
higher FICO score typically indicates a lesser degree of credit
risk.
|
We obtain borrower credit scores on the majority of
single-family mortgage loans that we purchase or that back
Fannie Mae MBS. We believe the average credit score within our
single-family mortgage credit book of business is a strong
indicator of default risk.
|
|
|
|
|
Loan purpose. Loan purpose indicates how the
borrower intends to use the funds from a mortgage loan. We
designate the loan purpose as purchase, cash-out refinance or
other refinance. The funds in a purchase transaction are used to
acquire a property. In addition to paying off an existing first
mortgage lien, the funds in a cash-out refinance transaction
also may be used for other purposes, including paying off
subordinate mortgage liens and providing unrestricted cash
proceeds to the borrower. Cash-out refinancings have a higher
risk of default. All other refinance transactions are defined as
other re-financings. We also may disclose certain loans that
were modified prior to our acquisition as refinanced loans.
|
|
|
|
Geographic concentration. Local economic
conditions affect borrowers ability to repay loans and the
value of the collateral underlying a loan, if all other factors
are equal. We analyze geographic exposure at a variety of levels
of geographic aggregation, including at the regional level.
Geographic diversification reduces mortgage credit risk.
|
|
|
|
Loan age. We monitor year of origination and
loan age, which is defined as the number of years since
origination. Statistically, the peak ages for default are
currently from two to six years after origination.
|
The credit quality of the mortgage loans in our conventional
single-family mortgage credit book of business remained high as
of December 31, 2004 and 2003, as evidenced by weighted
average
loan-to-value
ratios and weighted average credit scores. The weighted average
original
loan-to-value
ratio was 70% as of December 31, 2004 and 2003. The
weighted average estimated
mark-to-market
loan-to-value
ratio for our conventional single-family mortgage credit book of
business decreased to 57% as of December 31, 2004 from 60%
as of December 31, 2003. The weighted average credit score
was 719 and 717 as of December 31, 2004 and 2003,
respectively. As of September 30, 2006, the weighted
average original
loan-to-value
ratio was an estimated 70% and the weighted average estimated
mark-to-market
loan-to-value
ratio was an estimated 54%. The weighted average credit score
was 721 as of September 30, 2006.
The most notable change in the overall risk profile of our
single-family mortgage credit book of business since the end of
2004 has been in product types. As a result of the rise in home
prices over the past several years, there has been a shift in
the primary mortgage market to mortgage loans with features that
make it easier for borrowers to qualify for a mortgage loan and
that offer lower initial monthly payments by allowing the
borrower to defer repayment of principal or interest. These
products include interest-only mortgage loans that are available
with both fixed-rate and adjustable-rate terms and ARMs that
have the potential for negative amortization.
Interest-only loans, which represented approximately 5% of our
conventional single-family business volumes (which refers to
both conventional single-family mortgage loans purchased for our
mortgage portfolio and conventional single-family mortgage loans
securitized into Fannie Mae MBS) in 2004, increased to
approximately 10% in 2005 and approximately 15% for the first
nine months of 2006. Most of the
interest-only
products we acquired during 2004 and 2005 had adjustable-rate
terms. Approximately 38% of the interest-only products we
acquired during the first nine months of 2006 had fixed-rate
terms.
145
Negative-amortizing
ARMs represented approximately 2% of our conventional
single-family business volumes in 2004 and approximately 3% in
2005 and approximately 4% for the first nine months of 2006. As
a result of the shift in the product profile of new business in
recent years, interest-only loans and
negative-amortizing
ARMs represented approximately 6% and 2%, respectively, of our
conventional single-family mortgage credit book of business as
of September 30, 2006, compared with approximately 2% and
1%, respectively, as of December 31, 2004.
In addition, there has been an increasing industry trend towards
streamlining the mortgage loan underwriting process by reducing
the documentation requirements for borrowers. Reduced
documentation loans in some cases present higher credit risk
than loans underwritten with full standard documentation.
In September 2006, the federal financial regulatory agencies
(The Board of Governors of the Federal Reserve System, the
Office of Comptroller of the Currency, the Office of Thrift
Supervision, the National Credit Union Administration, and the
Federal Deposit Insurance Corporation) jointly issued
Interagency Guidance on Nontraditional Mortgage Product
Risks to address risks posed by interest-only loans and
other mortgage products that allow borrowers to defer repayment
of principal or interest. The guidance also addresses the
layering of risks that results from combining these product
types with other features that may compound risk, such as
relying on reduced documentation to evaluate a borrowers
creditworthiness. The guidance directs federally regulated
financial institutions (which includes the bulk of our lender
customers) originating these loans to maintain underwriting
standards that are consistent with prudent lending practices,
including analysis of a borrowers capacity to repay the
full amount of credit that may be extended and to provide
borrowers with clear and balanced information about the relative
benefits and risks of these products sufficiently early in the
process to enable them to make informed decisions. It is too
early to determine what impact, if any, the new guidelines will
have on our business.
In addition to the shift in the product profile of new business
described above, we have made, and continue to make, significant
adjustments to our mortgage loan sourcing and purchase
strategies in an effort to meet HUDs increased housing
goals and new subgoals. These strategies include entering into
some purchase and securitization transactions with lower
expected economic returns than our typical transactions. We have
also relaxed some of our underwriting criteria to obtain
goals-qualifying mortgage loans and increased our investments in
higher-risk mortgage loan products that are more likely to serve
the borrowers targeted by HUDs goals and subgoals, which
could increase our credit losses. See
Item 1BusinessOur Charter and Regulation
of Our ActivitiesRegulation and Oversight of Our
ActivitiesHUD RegulationHousing Goals for a
description of our housing goals.
We use analytical tools to measure credit risk exposures, assess
performance of our mortgage credit book of business, and
evaluate risk management alternatives. We continually refine our
methods of measuring credit risk, setting risk and return
targets, and transferring risk to third parties. We use our
analytical models to establish forecasts and expectations for
the credit performance of loans in our mortgage credit book and
compare actual performance to those expectations. Comparison of
actual versus projected performance and changes in other key
trends are monitored to identify changes in risk or return
profiles and to provide the basis for revising policies,
standards, guidelines, credit enhancements or guaranty fees for
future business.
Housing
and Community Development
Diversification within our multifamily mortgage credit book of
business and LIHTC equity investments business by geographic
concentration,
term-to-maturity,
interest rate structure, borrower concentration and credit
enhancement arrangements is an important factor that influences
credit quality and performance and helps reduce our credit risk.
We monitor the performance and risk concentrations of
multifamily loans and properties on an ongoing basis throughout
the life cycle of the investment at the loan, property and
portfolio level. We closely track the physical condition and
financial performance of the property, the historical
performance of the loan or property, the relevant local market
economic conditions that may signal changing risk or return
profiles and other risk factors. For example, we closely monitor
rental payment trends and vacancy levels in local markets to
identify loans meriting closer attention or loss mitigation
actions. We also evaluate the servicers
146
submissions and may require the servicer to take certain actions
to mitigate the likelihood of delinquency or default. For our
investments in multifamily loans and properties, the primary
asset management responsibilities are performed by our DUS
lenders. For our LIHTC investments, the primary asset management
responsibilities are performed by our LIHTC syndicator partners
or third parties. These partners provide us with periodic
construction status updates and property operating information.
We compare the information received to our construction
schedules, tax delivery schedules and industry standards to
measure and grade project performance.
We use proprietary models and analytical tools to periodically
re-evaluate our multifamily mortgage credit book of business,
establish forecasts of credit performance and estimate future
potential credit losses. Information derived from our analyses
is used to identify changes in risks and provide the basis for
revising policies, standards, pricing and credit enhancements.
We also have data on and manage multifamily mortgage credit risk
at the loan level. We have data at the loan level on
approximately 90% of our multifamily mortgage credit book as of
December 31, 2004, 2003 and 2002. Unless otherwise noted,
the credit statistics provided for our multifamily mortgage
credit book generally include only mortgage loans in our
portfolio, outstanding Fannie Mae MBS (excluding Fannie Mae MBS
backed by non-Fannie Mae mortgage-related securities) and credit
enhancements that we provide, where we have more detailed
loan-level information.
Credit
Loss Management
Single-Family
We manage problem loans to mitigate credit losses. If a mortgage
loan does not perform, we work closely in partnership with the
servicers of our loans to minimize the frequency of foreclosure
as well as the severity of loss. We have developed detailed
servicing guidelines and work closely with the loan servicers to
ensure that they take appropriate loss mitigation steps on a
timely basis. Our loan management strategy begins with payment
collection and work-out guidelines designed to minimize the
number of borrowers who fall behind on their obligations and to
help borrowers who are delinquent from falling further behind on
their payments. We seek alternative resolutions of problem loans
to reduce the legal and management expenses associated with
foreclosing on a home.
In our experience, early intervention is critical to controlling
credit losses. We offer Risk
Profilersm,
an internally-developed default prediction model, to our
single-family servicers to monitor the performance and risk of
each loan and identify those loans that are most likely to
default and require the most attention. Risk Profiler uses
credit risk indicators such as mortgage payment records, updated
borrower credit data, current property values and mortgage
product characteristics to evaluate the risk of each loan. Most
of the lenders that service loans we buy or that back Fannie Mae
MBS use Risk Profiler or a similar default prediction model.
We require our single-family servicers to pursue various
resolutions of problem loans as an alternative to foreclosure,
including:
|
|
|
|
|
repayment plans in which borrowers repay past due principal and
interest over a reasonable period of time through a temporarily
higher monthly payment;
|
|
|
|
loan modifications in which past due interest amounts, net of
any borrower contributions, are added to the loan principal
amount and recovered over the remaining life of the loan, and
other loan adjustments;
|
|
|
|
accepting deeds in lieu of foreclosure whereby the borrower
signs over title to the property without the added expense of a
foreclosure proceeding; and
|
|
|
|
preforeclosure sales in which the borrower, working with the
servicer, sells the home and pays off all or part of the
outstanding loan, accrued interest and other expenses from the
sale proceeds.
|
The objective of the repayment plan and loan modification
strategies is to allow borrowers who have experienced temporary
financial distress to remain in their homes and to avoid the
losses associated with foreclosure. The objective of the deed in
lieu and preforeclosure sale strategies is to minimize the extra
costs associated with a traditional foreclosure by obtaining the
borrowers cooperation in resolving the default. We
147
use analytical models and work rules to determine which
alternative resolution, if any, may be appropriate for each
problem loan.
We track the ultimate performance of alternative resolutions in
absolute terms and in relation to estimated losses in the event
of a traditional single-family loan foreclosure. We adjust our
loss mitigation policies as appropriate to be consistent with
our risk management objectives. In the case of repayment plans
and loan modifications, we focus in particular on the
performance of the loans subsequent to our intervention. Of the
conventional loans that recover through modifications, long-term
forbearances and repayment plans, our performance experience
after 36 months following the inception of all such plans,
based on the period 1998 to 2002, has been that approximately
65% of these loans remain current or have been paid in full.
Approximately 11% have terminated through foreclosure. The
remaining loans once again reached a delinquent status.
In those cases when a foreclosure avoidance effort is not
successful, we foreclose and acquire the property. Our property
management and sale operation consists of several strategies
designed to shorten our holding time, minimize the impact on the
neighborhood, maximize our recovery and mitigate credit losses.
These strategies include prompt assessment of the property
condition, partnering with qualified local real estate brokers
and refurbishing the property to appeal to the broadest market
of homebuyers, particularly buyers who plan to live in the home.
The table below presents statistics on the resolution of
conventional single-family problem loans for the years ended
December 31, 2004, 2003 and 2002.
Table
29: Statistics on Conventional Single-Family Problem
Loan Workouts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Number of loans)
|
|
|
Modifications(1)
|
|
|
22,591
|
|
|
|
17,119
|
|
|
|
14,298
|
|
Repayment plans and long-term
forbearances
|
|
|
11,001
|
|
|
|
10,521
|
|
|
|
6,779
|
|
Pre-foreclosure sales
|
|
|
2,575
|
|
|
|
2,052
|
|
|
|
1,513
|
|
Deeds in lieu of foreclosure
|
|
|
330
|
|
|
|
320
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of problem loan
workouts(2)
|
|
|
36,497
|
|
|
|
30,012
|
|
|
|
22,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Modifications include troubled debt
restructurings, which result in concessions to borrowers, and
other modifications to the contractual terms of the loan that do
not result in concessions to the borrower.
|
|
(2) |
|
For each of the years ended
December 31, 2004, 2003 and 2002, represents approximately
0.2% of the total number of loans in our conventional
single-family mortgage credit book.
|
Housing
and Community Development
When a multifamily loan does not perform, we work closely with
our loan servicers to minimize the severity of loss by taking
appropriate loss mitigation steps. We permit our multifamily
servicers to pursue various options as an alternative to
foreclosure, including modifying the terms of the loan, selling
the loan, and preforeclosure sales. The resolution strategy
depends in part on the borrowers level of cooperation, the
performance of the market or submarket, the value of the
property, the condition of the property, any remaining equity in
the property and the borrowers ability to infuse
additional equity into the property. The unpaid principal
balance of multifamily loan modifications totaled
$224 million, $196 million and $184 million for
the years ended December 31, 2004, 2003 and 2002,
respectively, which represented 0.18%, 0.16% and 0.19% of our
multifamily mortgage credit book of business as of the end of
each respective period.
When a non-guaranteed LIHTC investment does not perform, we work
closely with our syndicator partner. The resolution strategy
depends on:
|
|
|
|
|
the local general partners ability to meet obligations;
|
|
|
|
the value of the property;
|
148
|
|
|
|
|
the ability to restructure the debt;
|
|
|
|
the financial and workout capacity of the syndicator
partner; and
|
|
|
|
the strength of the market or submarket.
|
If a guaranteed LIHTC investment does not perform, the guarantor
remits funds to us in an amount that provides us with the
contractual underwritten return. Our risk in this situation is
that the counterparty will not perform. Refer to
Institutional Counterparty Credit Risk Management
below for a discussion of how we manage the credit risk
associated with our counterparties.
Mortgage
Credit Book Performance
Key metrics used to measure credit risk in our mortgage credit
book of business and evaluate credit performance include the
serious delinquency rate, nonperforming loans and credit losses.
Serious
Delinquency
The serious delinquency rate is an indicator of potential future
foreclosures, although most loans that become seriously
delinquent do not result in foreclosure. The rate at which new
loans become seriously delinquent and the rate at which existing
seriously delinquent loans are resolved significantly affect the
level of future credit losses. Home price appreciation decreases
the risk of default. A borrower with enough equity in a home can
sell the home or draw on equity in the home to avoid
foreclosure. A decline in home prices increases the risk of
default. The presence of credit enhancements mitigates credit
losses caused by defaults.
We classify single-family loans as seriously delinquent when a
borrower has missed three or more consecutive monthly payments,
and the loan has not been brought current or extinguished
through foreclosure, payoff or other resolution. A loan referred
to foreclosure but not yet foreclosed is also considered
seriously delinquent. Loans that are subject to a repayment plan
are classified as seriously delinquent until the borrower has
missed fewer than three consecutive monthly payments. We
calculate the single-family serious delinquency rate by dividing
the number of seriously delinquent single-family loans by the
total number of single-family loans outstanding. We include all
of the conventional single-family loans that we own and that
back Fannie Mae MBS in our single-family delinquency rate,
including those with substantial credit enhancement. We
distinguish between loans on which we have some form of credit
enhancement and loans on which we do not have credit enhancement.
We classify multifamily loans as seriously delinquent when
payment is 60 days or more past due. We calculate the
multifamily serious delinquency rate by dividing the unpaid
principal balance of seriously delinquent multifamily loans by
the unpaid principal balance of all multifamily loans we own and
that back Fannie Mae MBS or housing authority bonds for which we
provide credit enhancement. The table below compares the serious
delinquency rates for all conventional single-family loans and
multifamily loans, in each case with credit enhancements and
without credit enhancements.
149
Table
30: Serious Delinquency Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
Serious
|
|
|
|
|
|
Serious
|
|
|
|
|
|
Serious
|
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
Conventional single-family loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
19
|
%
|
|
|
1.84
|
%
|
|
|
21
|
%
|
|
|
1.65
|
%
|
|
|
27
|
%
|
|
|
1.29
|
%
|
Non-credit enhanced
|
|
|
81
|
|
|
|
0.33
|
|
|
|
79
|
|
|
|
0.30
|
|
|
|
73
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family
loans
|
|
|
100
|
%
|
|
|
0.63
|
%
|
|
|
100
|
%
|
|
|
0.60
|
%
|
|
|
100
|
%
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
95
|
%
|
|
|
0.11
|
%
|
|
|
95
|
%
|
|
|
0.29
|
%
|
|
|
92
|
%
|
|
|
0.08
|
%
|
Non-credit enhanced
|
|
|
5
|
|
|
|
0.13
|
|
|
|
5
|
|
|
|
0.22
|
|
|
|
8
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily loans
|
|
|
100
|
%
|
|
|
0.11
|
%
|
|
|
100
|
%
|
|
|
0.29
|
%
|
|
|
100
|
%
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reported based on unpaid principal
balance.
|
|
(2) |
|
Reported based on number of loans
for single-family and unpaid principal balance for multifamily.
|
The increase in the multifamily serious delinquency rate to
0.29% as of December 31, 2003 was primarily attributable to
the addition of $137 million in seriously delinquent loans
from two borrowers with properties in weaker markets. All but
one of these loans were restructured or became current during
2004, resulting in a decline in the multifamily serious
delinquency rate to 0.11% as of December 31, 2004. The
impact of Hurricane Katrina during the fourth quarter of 2005
led to an increase in our multifamily serious delinquency rate
to 0.32% as of December 31, 2005, which subsequently
declined during 2006 from the resolution of loans secured by
property in the Gulf Coast region.
As a result of the sharp decline in the rate of home price
appreciation during 2006 and the possibility of modest home
price declines in 2007, we expect that serious delinquencies may
trend upward. As of September 30, 2006, approximately 8% of
our conventional single-family mortgage credit book had an
estimated
mark-to-market
loan-to-value
ratio greater than 80%. Over 80% of these loans were covered by
credit enhancement. In examining the geographic concentration of
these high LTV loans, there was no metropolitan statistical area
with more than 5% of this segment of our conventional
single-family mortgage credit book of business. The three
largest metropolitan statistical area concentrations were in
Atlanta, Detroit and Dallas.
Nonperforming
Loans
We classify conventional single-family loans, including
delinquent loans purchased from an MBS trust pursuant to the
terms of the trust indenture, as nonperforming and place them on
nonaccrual status at the earlier of when payment of principal
and interest becomes three months or more past due according to
the loans contractual terms or when, in our opinion,
collectibility of interest or principal is not reasonably
assured. We classify conventional multifamily loans as
nonperforming and place them on nonaccrual status at the earlier
of when payment of principal and interest is three months or
more past due according to the loans contractual terms or
when we determine that collectibility of all principal or
interest is not reasonably assured based on an individual loan
level assessment. We continue to accrue interest on
nonperforming loans that are federally insured or guaranteed by
the U.S. government. Table 31 provides statistics on
nonperforming single-family and multifamily loans as of
December 31, 2004, 2003, 2002 and 2001.
150
Table
31: Nonperforming Single-Family and Multifamily
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
7,987
|
|
|
$
|
7,742
|
|
|
$
|
6,303
|
|
|
$
|
4,664
|
|
Troubled debt
restructurings(1)
|
|
|
816
|
|
|
|
673
|
|
|
|
580
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
8,803
|
|
|
$
|
8,415
|
|
|
$
|
6,883
|
|
|
$
|
5,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
forgone(2)
|
|
$
|
188
|
|
|
$
|
192
|
|
|
$
|
149
|
|
|
$
|
102
|
|
Interest income recognized during
year(3)
|
|
|
381
|
|
|
|
376
|
|
|
|
331
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due
90 days or
more(4)
|
|
$
|
187
|
|
|
$
|
225
|
|
|
$
|
251
|
|
|
$
|
301
|
|
|
|
|
(1) |
|
Troubled debt restructurings
include loans whereby the contractual terms have been modified
that result in concessions to borrowers experiencing financial
difficulties.
|
|
(2) |
|
Forgone interest income represents
the amount of interest income that would have been recorded
during the year on nonperforming loans as of December 31
had the loans performed according to their contractual terms.
|
|
(3) |
|
Represents interest income
recognized during the year on loans classified as nonperforming
as of December 31.
|
|
(4) |
|
Recorded investment of loans as of
December 31 that are 90 days or more past due and
continuing to accrue interest include loans insured or
guaranteed by the government and loans where we have recourse
against the seller of the loan in the event of a default.
|
Credit
Losses
Credit loss performance is a significant indicator of the
effectiveness of our credit risk management strategies.
Credit-related losses include charge-offs plus foreclosed
property expense (income). Credit losses for the years ended
December 31, 2004, 2003 and 2002 are presented in Table 32.
Table
32: Single-Family and Multifamily Credit Loss
Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
Single-
|
|
|
|
|
|
|
|
|
Single-
|
|
|
|
|
|
|
|
|
Single-
|
|
|
|
|
|
|
|
|
|
Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Charge-offs, net of recoveries
|
|
$
|
189
|
|
|
$
|
21
|
|
|
$
|
210
|
|
|
$
|
196
|
|
|
$
|
5
|
|
|
$
|
201
|
|
|
$
|
133
|
|
|
$
|
18
|
|
|
$
|
151
|
|
Foreclosed property expense (income)
|
|
|
(17
|
)
|
|
|
28
|
|
|
|
11
|
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-related losses
|
|
$
|
172
|
|
|
$
|
49
|
|
|
$
|
221
|
|
|
$
|
186
|
|
|
$
|
3
|
|
|
$
|
189
|
|
|
$
|
123
|
|
|
$
|
17
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-off ratio (basis
points)(1)
|
|
|
0.9
|
bp
|
|
|
1.7
|
bp
|
|
|
0.9
|
bp
|
|
|
1.0
|
bp
|
|
|
0.5
|
bp
|
|
|
1.0
|
bp
|
|
|
0.8
|
bp
|
|
|
2.1
|
bp
|
|
|
0.9
|
bp
|
Credit loss ratio (basis
points)(2)
|
|
|
0.8
|
bp
|
|
|
4.0
|
bp
|
|
|
1.0
|
bp
|
|
|
1.0
|
bp
|
|
|
0.3
|
bp
|
|
|
0.9
|
bp
|
|
|
0.7
|
bp
|
|
|
1.9
|
bp
|
|
|
0.8
|
bp
|
|
|
|
(1) |
|
Represents charge-offs, net of
recoveries, divided by average mortgage credit book of business.
|
|
(2) |
|
Represents credit-related losses
divided by average mortgage credit book of business.
|
Interest forgone on nonperforming loans in our mortgage
portfolio, which is presented in Table 31, reduces our net
interest income but is not reflected in our credit loss total.
Other-than-temporary
impairment resulting from deterioration in credit quality of our
mortgage-related securities is not included in credit-related
losses. As shown in Table 32, our credit losses for the years
presented have averaged 1.0 basis point, or 0.01%, of our
average mortgage credit book of business over the periods
presented. The rapid acceleration in home prices during the
period from 1999 to 2005, combined with our use of credit
enhancements, helped to mitigate our credit losses. As a result
of the substantial slowdown in home price appreciation during
2006 and our belief that home prices may decline modestly in
2007, we expect our credit losses to increase.
151
Losses from the Gulf Coast Hurricanes Katrina and Rita increased
our provision for credit losses in 2005. Our exposure to losses
as a result of Hurricanes Katrina and Rita arose primarily from
Fannie Mae MBS backed by loans secured by properties in the
affected areas, our portfolio holdings of mortgage loans and
mortgage-related securities backed by loans secured by
properties in the affected areas, and real estate that we own in
the affected areas. We initially estimated that our after-tax
losses associated with the Gulf Coast Hurricanes would be in a
range of $250 million to $550 million, which included
both single-family and multifamily properties. As a result of
our ongoing assessment and loss mitigation activities, we
reduced and refined our estimated after-tax losses to a range of
$97 million to $160 million. The reduction in our
estimate is the result of several factors, including the
liquidation of a number of loans relating to flooded properties
from our mortgage portfolio, borrower receipts of more insurance
and disaster relief funds than previously expected on the
flooded properties and reduced delinquencies for affected loans
outside the flood-damaged areas. Our ongoing analysis has
resulted in a further reduction in our combined allowance for
loan losses and reserve for guaranty losses during the first
nine months of 2006 to reflect our revised estimate. Further
adjustments to this estimate are possible as we continue to
monitor this issue.
We use internally developed models to assess our sensitivity to
credit losses based on current data on home values, borrower
payment patterns, non-mortgage consumer credit history and
managements economic outlook. We closely examine a range
of potential economic scenarios to monitor the sensitivity of
credit losses. Our models indicate that home price movements are
an important predictor of credit performance. Pursuant to the
September 1, 2005 agreement with OFHEO, we agreed to
provide quarterly assessments of the impact on our expected
credit losses from an immediate 5% decline in single-family home
prices for the entire United States, which we believe is a
stressful scenario based on housing data from OFHEO. Historical
statistics from OFHEOs house price index reports indicate
the national average rate of home price appreciation over the
last 20 years has been about 5.3%, while the lowest
national average annual appreciation rate in any single year has
been 0.3%. However, we believe there is a possibility of modest
declines in home prices in 2007.
We develop a baseline scenario that estimates the present value
of future credit losses over a ten-year period. We then
calculate the present value of credit losses assuming an
immediate 5% decline in the value of single-family properties
securing mortgage loans we own or that back Fannie Mae MBS.
Following this decline, we assume home prices will follow a
statistically derived long-term path. The sensitivity of future
credit losses represents the dollar difference between credit
losses in the baseline scenario and credit losses assuming the
immediate 5% home price decline. The estimated sensitivity of
our expected future credit losses to an immediate 5% decline in
home values for single-family mortgage loans as of
December 31, 2004 and 2003 is disclosed in the following
table. We disclose both the gross credit loss sensitivity prior
to the receipt of private mortgage insurance claims or any other
credit enhancements and the net credit loss sensitivity after
consideration of these items.
Table
33: Single-Family Credit Loss
Sensitivity(1)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Gross credit loss
sensitivity(2)
|
|
$
|
2,266
|
|
|
$
|
2,189
|
|
Less: Projected credit risk sharing
proceeds
|
|
|
1,179
|
|
|
|
1,125
|
|
|
|
|
|
|
|
|
|
|
Net credit loss sensitivity
|
|
$
|
1,087
|
|
|
$
|
1,064
|
|
|
|
|
|
|
|
|
|
|
Single-family whole loans and
Fannie Mae MBS
|
|
$
|
1,980,789
|
|
|
$
|
1,940,849
|
|
Single-family net credit loss
sensitivity as a percentage of single-family whole loans and
Fannie Mae MBS
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
|
|
|
(1) |
|
Represents total economic credit
losses, which include net charge-offs/recoveries, foreclosed
property expenses, forgone interest and the cost of carrying
foreclosed properties.
|
152
|
|
|
(2) |
|
Measures the gross sensitivity of
our expected future credit losses to an immediate 5% decline in
home values for first lien single-family whole loans we own or
that back Fannie Mae MBS. After the initial shock, we estimate
home price growth rates return to the rate projected by our
credit pricing models.
|
The estimates in the preceding paragraphs are based on
approximately 90% and 92% of our total single-family mortgage
credit book of business as of December 31, 2004 and 2003,
respectively. The mortgage loans and mortgage-related securities
that are included in these estimates consist of single-family
single-class Fannie Mae MBS (whether held in our portfolio
or held by third parties) and single-family whole mortgage
loans, excluding mortgages secured only by second liens and
reverse mortgages. We expect the inclusion in our estimates of
these excluded products may impact the estimated sensitivities
set forth in the preceding paragraphs. The above estimated
credit loss sensitivities are generated using the same models
that we use to estimate fair value and impairment. We have made
certain modifications to our models from those used to report
previous credit loss sensitivities. We believe the model changes
have less than a 10% impact on our reported gross and net loss
sensitivities.
Foreclosure and REO activity affects the level of credit losses.
The table below shows foreclosure and REO activity for our
single-family mortgage credit book of business for the years
ended December 31, 2004, 2003 and 2002.
Table
34: Single-Family Foreclosed Property
Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Number of properties)
|
|
|
Beginning inventory of foreclosed
properties
(REO)(1)
|
|
|
13,749
|
|
|
|
9,975
|
|
|
|
7,073
|
|
Geographic analysis of
acquisitions:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
10,149
|
|
|
|
7,384
|
|
|
|
4,743
|
|
Northeast
|
|
|
2,318
|
|
|
|
1,997
|
|
|
|
2,053
|
|
Southeast
|
|
|
10,275
|
|
|
|
8,539
|
|
|
|
5,615
|
|
Southwest
|
|
|
8,422
|
|
|
|
6,640
|
|
|
|
4,462
|
|
West
|
|
|
1,739
|
|
|
|
2,235
|
|
|
|
2,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties acquired through
foreclosure
|
|
|
32,903
|
|
|
|
26,795
|
|
|
|
19,502
|
|
Dispositions of REO
|
|
|
28,291
|
|
|
|
23,021
|
|
|
|
16,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending inventory of foreclosed
properties
(REO)(1)
|
|
|
18,361
|
|
|
|
13,749
|
|
|
|
9,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes deeds in lieu of
foreclosure.
|
|
(2) |
|
See footnote 4 to Table 27 for
states included in each geographic region.
|
Our inventory of multifamily foreclosed properties consisted of
18, 20 and 3 properties as of December 31, 2004, 2003 and
2002, respectively, with a carrying value totaling
$131 million, $98 million and $9 million as of
the end of each respective period.
Allowance
for Loan Losses and Reserve for Guaranty Losses
We maintain a separate allowance for loan losses for
single-family and multifamily loans classified as held for
investment in our mortgage portfolio and a reserve for guaranty
losses for credit-related losses associated with certain
mortgage loans that back Fannie Mae MBS held in our portfolio
and held by other investors. The allowance for loan losses and
reserve for guaranty losses represent our estimate of incurred
credit losses inherent in our loans held for investment and
loans underlying Fannie Mae MBS, respectively, as of each
balance sheet date. We use the same methodology to determine our
allowance for loan losses and our reserve for guaranty losses
because the relevant factors affecting credit risk are the same.
We recognize credit losses and record a provision for credit
losses when available information indicates that it is probable
that a loss has been incurred and the amount of the loss can be
reasonably estimated in accordance with SFAS No. 5,
Accounting for Contingencies. We also evaluate certain
single-family and multifamily loans on an individual basis to
recognize and measure impairment and record an allowance for
incurred losses in accordance with the
153
provisions of SFAS 114. We provide additional information
on the methodology used in developing our allowance for loan
losses and reserve for guaranty losses in Notes to
Consolidated Financial StatementsNote 2, Summary of
Significant Accounting Policies. Because of the
significant degree of judgment involved in estimating the
allowance for loan losses and reserve for guaranty losses, we
identify it as a critical accounting policy and discuss the
assumptions involved in our estimation process in Critical
Accounting Policies and EstimatesAllowance for Loan Losses
and Reserve for Guaranty Losses.
We report the allowance for loan losses and reserve for guaranty
losses as separate line items in the consolidated balance
sheets. The provision for credit losses is reported in the
consolidated statements of income. Table 35 summarizes changes
in our allowance for loan losses and reserve for guaranty losses
for the years ended December 31, 2004, 2003 and 2002.
Table
35: Allowance for Loan Losses and Reserve for
Guaranty Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
290
|
|
|
$
|
216
|
|
|
$
|
168
|
|
Provision
|
|
|
174
|
|
|
|
187
|
|
|
|
128
|
|
Charge-offs(1)
|
|
|
(321
|
)
|
|
|
(270
|
)
|
|
|
(175
|
)
|
Recoveries
|
|
|
131
|
|
|
|
72
|
|
|
|
27
|
|
Increase from the reserve for
guaranty
losses(2)
|
|
|
75
|
|
|
|
85
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
349
|
|
|
$
|
290
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
313
|
|
|
$
|
223
|
|
|
$
|
138
|
|
Provision
|
|
|
178
|
|
|
|
178
|
|
|
|
156
|
|
Charge-offs
|
|
|
(24
|
)
|
|
|
(7
|
)
|
|
|
(11
|
)
|
Recoveries
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
Decrease to the allowance for loan
losses(2)
|
|
|
(75
|
)
|
|
|
(85
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
396
|
|
|
$
|
313
|
|
|
$
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined allowance for loan losses
and reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
603
|
|
|
$
|
439
|
|
|
$
|
306
|
|
Provision
|
|
|
352
|
|
|
|
365
|
|
|
|
284
|
|
Charge-offs(1)
|
|
|
(345
|
)
|
|
|
(277
|
)
|
|
|
(186
|
)
|
Recoveries
|
|
|
135
|
|
|
|
76
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
745
|
|
|
$
|
603
|
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of each period
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
644
|
|
|
$
|
516
|
|
|
$
|
374
|
|
Multifamily
|
|
|
101
|
|
|
|
87
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
745
|
|
|
$
|
603
|
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of combined allowance and
reserve in each category to related mortgage credit book of
business:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
0.03
|
%
|
|
|
0.02
|
%
|
|
|
0.02
|
%
|
Multifamily
|
|
|
0.08
|
|
|
|
0.07
|
|
|
|
0.07
|
|
Total
|
|
|
0.03
|
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
|
(1) |
|
Includes accrued interest of
$29 million, $29 million and $24 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
|
|
(2) |
|
Includes decrease in reserve for
guaranty losses and increase in allowance for loan losses due to
the purchase of
delinquent
loans from MBS pools.
|
|
(3) |
|
Represents ratio of combined
allowance and reserve balance by loan type to mortgage credit
book of business by loan type.
|
154
Our combined allowance for loan losses and reserve for guaranty
losses totaled $745 million as of December 31, 2004,
compared with $603 million and $439 million as of
December 31, 2003 and 2002, respectively. The amount of our
allowance for loan losses and reserve for guaranty losses
increased during this period primarily due to growth in our book
of business. However, the combined allowance for loan losses and
reserve for guaranty losses as a percentage of our mortgage
credit book of business remained relatively stable, averaging
between 0.02% and 0.03%. This trend reflects our historically
low average default rates and loss severity on foreclosed
properties. In the fourth quarter of 2004, we increased our
combined allowance for loan losses and reserve for guaranty
losses by $142 million due to an observed reduction in
subsequent recourse proceeds from lenders on certain charged-off
loans.
Institutional
Counterparty Credit Risk Management
Institutional counterparty risk is the risk that institutional
counterparties may be unable to fulfill their contractual
obligations to us. Our primary exposure to institutional
counterparty risk exists with our lending partners and
servicers, mortgage insurers, dealers who distribute our debt
securities or who commit to sell mortgage pools or loans,
issuers of investments included in our liquid investment
portfolio, and derivatives counterparties.
Our overall objective in managing institutional counterparty
credit risk is to maintain individual counterparty exposures
within acceptable ranges based on our rating system. We achieve
this objective through the following:
|
|
|
|
|
establishment and observance of counterparty eligibility
standards appropriate to each exposure type and level;
|
|
|
|
establishment of credit limits;
|
|
|
|
requiring collateralization of exposures where
appropriate; and
|
|
|
|
exposure monitoring and management.
|
Establishment and Observance of Counterparty Eligibility
Standards. The institutions with which we do
business vary in size and complexity from the largest
international financial institutions to small, local lenders.
Because of this, counterparty eligibility criteria vary
depending upon the type and magnitude of the risk exposure
incurred. We incorporate both the ratings provided by the rating
agencies as well as internal ratings in determining eligibility.
For significant exposures, we generally require that our
counterparties have at least the equivalent of an investment
grade rating (i.e., a rating of
BBB−/Baa3/BBB− or higher by Standard &
Poors, Moodys and Fitch, respectively.) Due to
factors such as the nature, type and scope of counterparty
exposure, requirements may be higher. For example, for mortgage
insurance counterparties, we have generally required a minimum
rating of AA−/Aa3/AA−, whereas we accept
comparatively lower ratings for our risk sharing, recourse and
mortgage servicing counterparties. In addition to ratings,
factors including corporate or third-party support or
guaranties, our knowledge of the counterparty, reputation,
quality of operations, and experience are also important in
determining the initial and continuing eligibility of a
counterparty. Specific eligibility criteria are communicated
through policies and procedures of the individual businesses or
products.
Establishment of Credit Limits. All
institutions are assigned a limit to ensure that the risk
exposure is maintained at a level appropriate for the
institutions rating and the time horizon for the exposure,
as well as to diversify exposure so that no single counterparty
exceeds a certain percentage of our regulatory capital. Limits
are established for the institution as a whole as well as for
individual subsidiaries or affiliates. A corporate limit is
first established for the aggregate of all activity and then is
divided among individual business units. Our businesses may
further subdivide limits among products or activities.
Requiring Collateralization of Exposures. We
may require collateral, letters of credit or investment
agreements as a condition to approving exposure to a
counterparty. We may also require that a counterparty post
collateral in the event of an adverse event such as a ratings
downgrade.
Exposure Monitoring and Management. The risk
management functions of the individual business units are
responsible for managing the counterparty exposures associated
with their activities within corporate limits.
155
An oversight team within the Chief Risk Office is responsible
for establishing and enforcing corporate policies and procedures
regarding counterparties, establishing corporate limits, and
aggregating and reporting institutional counterparty exposure.
We calculate exposures by using current exposure information and
applying stress scenarios to determine our loss exposure if a
default occurs. The stress scenarios incorporate assumptions on
shocks to interest rates, home prices or other variables
appropriate for the type of risk. We regularly update exposure
limits for individual institutions in our risk management system
to communicate to business and credit staff throughout the
company the capacity for further business activity. We regularly
report exposures with our largest counterparties to the Risk
Policy and Capital Committee of the Board of Directors.
Lenders
with Risk Sharing
The primary risk associated with lenders providing risk sharing
agreements is that they will fail to reimburse us for losses as
required under these agreements. We had recourse to lenders for
losses on single-family loans totaling an estimated
$54.2 billion and $51.0 billion as of
December 31, 2004 and 2003, respectively. The credit
quality of these counterparties is generally high. Investment
grade counterparties, based on the lower of Standard and
Poors and Moodys ratings, accounted for 60% and 59%
of lender recourse obligations as of December 31, 2004 and
2003, respectively. In addition, we require some lenders to
pledge collateral to secure their recourse obligations. We held
$66 million and $135 million in collateral as of
December 31, 2004 and 2003, respectively, to secure
single-family recourse transactions. A portion of servicing fees
on $2.2 trillion and $2.1 trillion of mortgage loans as of
December 31, 2004 and 2003, respectively, also effectively
served as collateral for these obligations.
We had full or partial recourse to lenders on multifamily loans
totaling $107.1 billion and $97.0 billion as of
December 31, 2004 and 2003, respectively. Our multifamily
recourse obligations generally were partially or fully secured
by reserves held in custodial accounts, insurance policies,
letters of credit from investment grade counterparties rated A
or better, or investment agreements.
Mortgage
Servicers
The primary risk associated with mortgage servicers is that they
will fail to fulfill their servicing obligations. Mortgage
servicers collect mortgage and escrow payments from borrowers,
pay taxes and insurance costs from escrow accounts, monitor and
report delinquencies, and perform other required activities on
our behalf. A servicing contract breach could result in credit
losses for us or could cause us to incur the cost of finding a
replacement servicer. For most servicers, we mitigate these
risks in several ways, including requiring servicers to maintain
a minimum servicing fee reserve to compensate a replacement
servicer in the event of a servicing contract breach; requiring
servicers to follow specific servicing guidelines; monitoring
the performance of each servicer using loan-level data;
conducting
on-site
reviews to confirm compliance with servicing guidelines and
mortgage servicing performance; and working
on-site with
nearly all of our major servicers to facilitate loan loss
mitigation efforts and continuously improve the default
management process.
Our ten largest single-family mortgage servicers serviced 71%
and 69% of our single-family mortgage credit book of business,
and the largest single-family mortgage servicer serviced 21% and
19% of our single-family mortgage credit book of business as of
December 31, 2004 and 2003, respectively. Our ten largest
multifamily servicers serviced 67% of our multifamily credit
book of business as of both December 31, 2004 and 2003. The
largest multifamily mortgage servicer serviced 11% and 13% of
our multifamily credit book of business as of December 31,
2004 and 2003, respectively.
Mortgage
Insurers
The primary risk associated with mortgage insurers is that they
will fail to fulfill their obligations to reimburse us for
claims under insurance policies. We manage this risk by
establishing eligibility requirements that an insurer must meet
to become and remain a qualified mortgage insurer. Qualified
mortgage insurers generally must obtain and maintain external
ratings of claims paying ability, with a minimum acceptable
level of Aa3 from Moodys and AA- from Standard &
Poors and Fitch. We regularly monitor our exposure to
individual mortgage insurers and mortgage insurer credit
ratings. We also perform periodic
on-site
reviews of mortgage insurers to confirm compliance with
eligibility requirements and to evaluate their management and
control practices.
156
We were the beneficiary of primary mortgage insurance coverage
on $285.4 billion of single-family loans in portfolio or
underlying Fannie Mae MBS as of December 31, 2004, which
represented approximately 13% of our single-family mortgage
credit book of business, compared with $308.8 billion, or
approximately 15%, of our single-family mortgage credit book of
business as of December 31, 2003. Seven mortgage insurance
companies, all rated AA (or its equivalent) or higher by
Standard & Poors, Moodys or Fitch, provided
approximately 99% of the total coverage as of both
December 31, 2004 and 2003.
Debt
Security and Mortgage Dealers
The primary credit risk associated with dealers who commit to
place our debt securities is that they will fail to honor their
contracts to take delivery of the debt, which could result in
delayed issuance of the debt through another dealer. The primary
credit risk associated with dealers who make forward commitments
to deliver mortgage pools to us is that they may fail to deliver
the agreed-upon loans to us at the agreed-upon date, which could
result in our having to replace the mortgage pools at higher
cost to meet a forward commitment to sell the MBS.
Mortgage
Originators and Investors
We are routinely exposed to pre-settlement risk through the
purchase, sale and financing of mortgage loans and
mortgage-related securities with mortgage originators and
mortgage investors. The risk is the possibility that the market
moves against us at the same time the counterparty is unable or
unwilling to either deliver mortgage assets or pay a pair-off
fee. On average, the time between trade and settlement is about
35 days. We manage this risk by determining position limits
with these counterparties, based upon our assessment of their
creditworthiness, and we monitor and manage these exposures.
Based upon this assessment, we may, in some cases, require
counterparties to post collateral.
Liquid
Investment Portfolio
The primary credit exposure associated with investments held in
our liquid investment portfolio is that issuers will not repay
principal and interest in accordance with the contractual terms.
We believe the risk of default is low because we restrict these
investments to high credit quality short- and medium-term
instruments, such as commercial paper, asset-backed securities
and corporate floating rate notes, which are broadly traded in
the financial markets. Our non-mortgage securities, which
account for the majority of our liquid assets, totaled
$43.9 billion and $46.8 billion as of
December 31, 2004 and 2003, respectively. Approximately 93%
and 88% of our non-mortgage securities as of December 31,
2004 and 2003, respectively, had a credit rating of A (or its
equivalent) or higher, based on the lowest of
Standard & Poors, Moodys or Fitch ratings.
We monitor the fair value of these securities and regularly
evaluate any impairment to assess whether the impairment is
required to be recognized in earnings because it is considered
other than temporary.
Derivatives
Counterparties
The primary credit exposure that we have on a derivative
transaction is that a counterparty will default on payments due,
which could result in us having to acquire a replacement
derivative from a different counterparty at a higher cost. Our
derivative credit exposure relates principally to interest rate
and foreign currency derivative contracts. Typically, we manage
this exposure by contracting with experienced counterparties
that are rated A (or its equivalent) or better. These
counterparties consist of large banks, broker-dealers and other
financial institutions that have a significant presence in the
derivatives market, most of which are based in the United
States. As an additional precaution, we have a conservative
collateral management policy with provisions for requiring
collateral on aggregate gain positions with each interest rate
and foreign currency derivative counterparty. Also, we enter
into master agreements that provide for netting of amounts due
to us and amounts due to counterparties under those agreements.
We monitor credit exposure on these derivative contracts daily
and make collateral calls daily based on the results of our
internal models and dealer quotes. To date, we have never
experienced a loss on a derivative transaction due to credit
default by a counterparty.
Counterparties use the notional amounts of derivative
instruments as the basis from which to calculate contractual
cash flows to be exchanged. However, the notional amount is
significantly greater than the potential market or credit loss
that could result from such transactions and therefore does not
represent our
157
actual risk. Rather, we estimate our exposure to credit loss on
derivative instruments by calculating the replacement cost, on a
present value basis, to settle at current market prices all
outstanding derivative contracts in a net gain position by
counterparty where the right of legal offset exists, such as
master netting agreements. Derivatives in a gain position are
reported in the consolidated balance sheet as Derivative
assets at fair value. Table 36 presents our assessment of
our credit loss exposure by counterparty credit rating on
outstanding risk management derivative contracts as of
December 31, 2004 and 2003. We show the outstanding
notional amount and activity for our risk management derivatives
in Table 37.
Table
36: Credit Loss Exposure of Derivative
Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
Credit
Rating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
Subtotal
|
|
|
Other(2)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Credit loss
exposure(3)
|
|
$
|
57
|
|
|
$
|
3,200
|
|
|
$
|
3,182
|
|
|
$
|
6,439
|
|
|
$
|
88
|
|
|
$
|
6,527
|
|
Collateral
held(4)
|
|
|
|
|
|
|
2,984
|
|
|
|
3,001
|
|
|
|
5,985
|
|
|
|
|
|
|
|
5,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure net of collateral
|
|
$
|
57
|
|
|
$
|
216
|
|
|
$
|
181
|
|
|
$
|
454
|
|
|
$
|
88
|
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
842
|
|
|
$
|
327,895
|
|
|
$
|
360,625
|
|
|
$
|
689,362
|
|
|
$
|
732
|
|
|
$
|
690,094
|
|
Number of counterparties
|
|
|
3
|
|
|
|
12
|
|
|
|
8
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
|
|
|
|
Credit
Rating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
Subtotal
|
|
|
Other(2)
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Credit loss
exposure(3)
|
|
$
|
18
|
|
|
$
|
3,422
|
|
|
$
|
3,515
|
|
|
$
|
6,955
|
|
|
$
|
103
|
|
|
$
|
7,058
|
|
Collateral
held(4)
|
|
|
|
|
|
|
3,126
|
|
|
|
3,437
|
|
|
|
6,563
|
|
|
|
|
|
|
|
6,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure net of collateral
|
|
$
|
18
|
|
|
$
|
296
|
|
|
$
|
78
|
|
|
$
|
392
|
|
|
$
|
103
|
|
|
$
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
1,829
|
|
|
$
|
489,714
|
|
|
$
|
547,086
|
|
|
$
|
1,038,629
|
|
|
$
|
379
|
|
|
$
|
1,039,008
|
|
Number of counterparties
|
|
|
3
|
|
|
|
12
|
|
|
|
8
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We manage collateral requirements
based on the lower credit rating of the legal entity as issued
by Standard & Poors and Moodys. The credit
rating reflects the equivalent Standard & Poors rating
for any ratings based on Moodys scale.
|
|
(2) |
|
Includes MBS options, mortgage
insurance contracts and swap credit enhancements accounted for
as derivatives.
|
|
(3) |
|
Represents the exposure to credit
loss on derivative instruments, which is estimated by
calculating the cost, on a present value basis, to replace all
outstanding contracts in a gain position. Derivative gains and
losses with the same counterparty are presented net where a
legal right of offset exists under an enforceable master
settlement agreement. This table excludes mortgage commitments
accounted for as derivatives.
|
|
(4) |
|
Represents the collateral held as
of December 31, 2004 and 2003, adjusted for the collateral
transferred subsequent to December 31 based on credit loss
exposure limits on derivative instruments as of
December 31, 2004 and 2003. Settlement dates vary by
counterparty and range from one to three business days following
the credit loss exposure valuation dates of December 31,
2004 and 2003. The value of the collateral is reduced in
accordance with counterparty agreements to help ensure recovery
of any loss through the disposition of the collateral. We posted
non-cash collateral of $56 million and $301 million
related to our counterparties credit exposure to us as of
December 31, 2004 and 2003, respectively.
|
Our credit exposure on risk management derivatives, after
consideration of the value of collateral held, was
$542 million and $495 million as of December 31,
2004 and 2003, respectively. We expect the credit exposure on
derivative contracts to fluctuate with changes in interest
rates, implied volatility and the collateral thresholds of the
counterparties. To reduce our credit risk concentration, we
diversify our derivative contracts among different
counterparties. We had 23 interest rate and foreign currency
derivatives counterparties as of December 31, 2004 and
2003. Of the 23 counterparties as of December 31, 2004,
eight counterparties accounted for approximately 83% of the
total outstanding notional amount, and each of these eight
158
counterparties accounted for between approximately 7% and 14% of
the total outstanding notional amount. Each of the remaining
counterparties accounted for less than 5% of the total
outstanding notional amount as of December 31, 2004. In
comparison, seven counterparties accounted for approximately 74%
of the total outstanding notional amount as of December 31,
2003. Each of these counterparties accounted for between
approximately 6% and 16% of the total outstanding notional
amount, with each of the remaining counterparties accounting for
less than 5% of the total outstanding notional amount.
Approximately 50% of our net derivatives exposure of
$542 million as of December 31, 2004 and 64% of our
net derivatives exposure of $495 million as of
December 31, 2003 was with 10 counterparties rated AA- or
better by Standard & Poors and Aa3 or better by
Moodys. The percentage of our net exposure with these
counterparties ranged from approximately 0.1% to 13%, or less
than $1 million to $70 million as of December 31,
2004, and from approximately 0.1% to 21%, or less than
$1 million to $102 million as of December 31,
2003.
We mitigate our net exposure on interest rate and foreign
currency derivative transactions through a collateral management
policy, which consists of four primary components.
|
|
|
|
|
Minimum Collateral Threshold. Our derivatives
counterparties are obligated to post collateral when exposure to
credit losses exceeds agreed-upon thresholds that are based on
credit ratings. The amount of collateral generally must equal
the excess of exposure over the threshold amount.
|
|
|
|
Collateral Valuation Percentages. We require
counterparties to post specific types of collateral to meet
their collateral requirements. The collateral posted by our
counterparties as of December 31, 2004 consisted of cash,
U.S. Treasury securities, agency debt and agency
mortgage-related securities. We assign each type of collateral a
specific valuation percentage based on its relative risk. In
cases where the valuation percentage for a certain type of
collateral is less than 100%, we require counterparties to post
an additional amount of collateral to meet their requirements.
|
|
|
|
Over-collateralization Based on Low Credit
Ratings. We further reduce our net exposure on
derivatives by generally requiring over-collateralization from
counterparties whose credit ratings have dropped below
predetermined levels. Counterparties with credit ratings falling
below these levels must post collateral beyond the amounts
previously noted to meet their overall requirements.
|
|
|
|
Daily Monitoring Procedures. On a daily basis,
we value our derivative collateral positions for each
counterparty using both internal and external pricing models,
compare the exposure to counterparty limits, and determine
whether additional collateral is required. We evaluate any
additional exposure to a counterparty beyond our model tolerance
level based on our corporate credit policy framework for
managing counterparty risk.
|
Interest
Rate Risk Management and Other Market Risks
Our most significant market risks are interest rate risk and
spread risk, which arise primarily from the prepayment
uncertainty associated with investing in mortgage-related assets
with prepayment options and from the changing supply and demand
for mortgage assets. The majority of our mortgage assets are
intermediate-term or long-term fixed-rate loans that borrowers
have the option to pay at any time before the scheduled maturity
date or continue paying until the stated maturity. An inverse
relationship exists between changes in interest rates and the
value of fixed-rate investments, including mortgages. As
interest rates decline, the value or price of fixed-rate
mortgages held in our portfolio will generally increase because
mortgage assets originated at the prevailing interest rates are
likely to have lower yields and prices than the assets we
currently hold in our portfolio. Conversely, an increase in
interest rates tends to result in a reduction in the value of
our assets. As interest rates decline prepayment rates tend to
increase because more favorable financing is available to the
borrower, which shortens the duration of our mortgage assets.
The opposite effect occurs as interest rates increase.
One way of reducing the interest rate risk associated with
investing in long-term, fixed-rate mortgages is to fund these
investments with long-term debt with similar offsetting
characteristics. This strategy is complicated by the fact that
most borrowers have the option of prepaying their mortgages at
any time, a factor that is
159
beyond our control and driven to a large extent by changes in
interest rates. In addition, funding mortgage investments with
debt results in
mortgage-to-debt
OAS risk, or basis risk, which is the risk that interest rates
in different market sectors will not move in the same direction
or amount at the same time.
Our Capital Markets group is responsible for managing interest
rate risk subject to corporate risk policies and limits approved
by the Board of Directors. In 2006, our Board of Directors
approved a policy that prescribes interest rate risk dollar
limits and requires escalation to senior management and the
Board of Directors if risk limits are exceeded. The Chief Risk
Officer provides corporate oversight of the interest rate risk
management process and is responsible for measuring and
monitoring interest rate risk and providing regular reports to
senior management and the Board of Directors. The Capital
Markets Investment Committee, a management-level committee that
includes senior officers in the Capital Markets group, meets
weekly to review our current interest rate risk position
relative to risk limits. The Capital Markets Investment
Committee develops and monitors near-term strategies that comply
with our risk objectives and policies. The Capital Markets
Investment Committee reports interest rate risk measures on a
weekly basis. As discussed in Supplemental Non-GAAP
InformationFair Value Balance Sheet, we do not
attempt to actively manage or hedge the impact of changes in
mortgage-to-debt
OAS after we purchase mortgage assets, other than through asset
monitoring and disposition. We accept
period-to-period
volatility in our financial performance due to
mortgage-to-debt
OAS consistent with our corporate risk principles.
Interest
Rate Risk Management Strategies
Our portfolio of interest rate-sensitive instruments includes
our investments in mortgage loans and securities, the debt
issued to fund those assets, and the derivatives we use to
manage interest rate risk. These assets and liabilities have a
variety of risk profiles and sensitivities. We employ an
integrated interest rate risk management strategy that includes
asset selection and structuring of our liabilities to match and
offset the interest rate characteristics of our balance sheet
assets and liabilities as much as possible. Our strategy
consists of:
|
|
|
|
|
issuing a broad range of both callable and non-callable debt
instruments to manage the duration and prepayment risk of
expected cash flows of the mortgage assets we own;
|
|
|
|
supplementing our issuance of debt with derivative instruments
to further reduce duration and prepayment risks; and
|
|
|
|
on-going monitoring of our risk positions and actively
rebalancing our portfolio of interest rate-sensitive financial
instruments to maintain a close match between the duration of
our assets and liabilities.
|
Debt
Instruments
The primary tool we use to manage the interest rate risk
implicit in our mortgage assets is the variety of debt
instruments we issue. Our ability to issue both short- and
long-term debt helps in managing the duration risk associated
with an investment in long-term fixed-rate assets. We issue
callable debt to help us manage the prepayment risk associated
with fixed-rate mortgage assets. The duration of callable debt
changes when interest rates change in a manner similar to
changes in the duration of mortgage assets. See
Item 1BusinessBusiness
SegmentsCapital MarketsFunding of Our
Investments for additional information on our various
types of debt securities and Liquidity and Capital
ManagementLiquidityDebt Funding.
Derivative
Instruments
Why We
Use Derivatives
Derivatives also are an integral part of our strategy in
managing interest rate risk. We use interest rate swaps and
interest rate options, in combination with our issuance of debt
securities, to better match both the duration and prepayment
risk of our mortgages. We are generally an end user of
derivatives and our principal purpose in using derivatives is to
manage our aggregate interest rate risk profile within
prescribed risk parameters. We generally only use derivatives
that are highly liquid and relatively straightforward to value.
We have derivative transaction policies and controls to minimize
our derivative counterparty risk that are described in
Credit Risk
160
ManagementInstitutional Counterparty Credit Risk
ManagementDerivatives Counterparties. We use
derivatives for three primary purposes:
(1) As a substitute for notes and bonds that we issue in
the debt markets.
When we purchase mortgages, we fund the purchase with a
combination of equity and debt. The debt we issue is a mix that
typically consists of short- and long-term, non-callable debt
and callable debt. The varied maturities and flexibility of
these debt combinations help us in reducing the mismatch of cash
flows between assets and liabilities.
We can use a mix of debt issuances and derivatives to achieve
the same duration matching that would be achieved by issuing
only debt securities. The primary types of derivatives used for
this purpose include pay-fixed and receive-fixed interest rate
swaps (used as substitutes for non-callable debt) and pay-fixed
and receive-fixed swaptions (used as substitutes for callable
debt).
Below is an example of equivalent funding alternatives for a
mortgage purchase with funding derived solely from debt
securities versus funding with a blend of debt securities and
derivatives. As illustrated below, we can achieve similar
economic results by funding our mortgage purchases with either
debt securities or a combination of debt securities and
derivatives, as follows:
|
|
|
|
|
Rather than issuing a
10-year
non-callable fixed-rate note, we could issue short-term debt and
enter into a
10-year
interest rate swap with a highly rated counterparty. The
derivative counterparty would pay a floating rate of interest to
us on the swap that we would use to pay the interest expense on
the short-term debt, which we would continue to reissue. We
would pay the counterparty a fixed rate of interest on the swap,
thus achieving the economics of a
10-year
fixed-rate note issue. The combination of the pay-fixed interest
rate swap and short-term debt serves as a substitute for
non-callable fixed-rate debt.
|
|
|
|
Similarly, instead of issuing a
10-year
fixed-rate note callable after three years, we could issue a
10-year
fixed-rate note and enter into a receive-fixed swaption that
would have the same economics as a
10-year
callable note. If we want to call the debt after three years,
the swaption would give us the option to enter into a swap
agreement where we would receive a fixed rate of interest from
the derivative counterparty over the remaining
7-year
period that would offset the fixed-rate interest payments on the
long-term debt. The combination of the receive-fixed swaption
and 10-year
non-callable note serves as a substitute for callable debt.
|
(2) To achieve risk management objectives not obtainable
with debt market securities.
We sometimes have risk management objectives that cannot be
fully accomplished by securities generally available in the debt
markets. For example, we can use the derivative markets to
purchase swaptions to add features to our debt not obtainable in
the debt markets. Some of the features of the option embedded in
a callable bond are dependent on the market environment at
issuance and the par issuance price of the bond. Thus, in a
callable bond we can not specify certain features, such as
specifying an
out-of-the-money
option, which could allow us to more closely match the interest
rate risk being hedged. We use option-based derivatives, such as
swaptions, because they provide the added flexibility to fully
specify the features of the option, thereby allowing us to more
closely match the interest rate risk being hedged.
(3) To quickly and efficiently rebalance our portfolio.
We seek to keep our assets and liabilities matched within a
duration tolerance of plus or minus six months. When interest
rates are volatile, we often need to lengthen or shorten the
average duration of our liabilities to keep them closely matched
with our mortgage durations, which change as expected mortgage
prepayments change.
While we have a number of rebalancing tools available to us, it
is often most efficient for us to rebalance our portfolio by
adding new derivatives or by terminating existing derivative
positions. For example, when interest rates fall and mortgage
durations shorten, we can shorten the duration of our debt by
entering into receive-fixed interest rate swaps that convert
longer-duration, fixed-term debt into shorter-duration,
floating-rate debt or by terminating existing pay-fixed interest
rate swaps. This use of derivatives helps increase our funding
161
flexibility while maintaining our low risk tolerance. The types
of derivative instruments we use most often to rebalance our
portfolio include pay-fixed and receive-fixed interest rate
swaps.
In addition to our three primary uses of derivatives, we may
also use derivatives for the following purpose:
(4) To hedge foreign currency exposure.
We occasionally issue debt in a foreign currency. Because all of
our assets are denominated in U.S. dollars, we enter into
currency swaps to effectively convert the foreign-denominated
debt into U.S. dollar-denominated debt. By swapping out of
foreign currencies completely at the time of the debt issue, we
minimize our exposure to any currency risk. Our
foreign-denominated debt represents less than 1% of our total
debt outstanding.
Types of
Derivatives We Use
Derivative instruments may be privately negotiated contracts,
which are often referred to as OTC derivatives, or they may be
listed and traded on an exchange. Our derivatives consist
primarily of OTC contracts that fall into three broad categories.
Interest rate swap contracts. An interest rate
swap is a transaction between two parties in which each agrees
to exchange payments tied to different interest rates or indices
for a specified period of time, generally based on a notional
amount of principal. The types of interest rate swaps we use
include:
|
|
|
|
|
Pay-fixed, receive variablean agreement whereby we
pay a predetermined fixed rate of interest based upon a set
notional 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.
|
|
|
|
Receive-fixed, pay variablean agreement whereby 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.
|
|
|
|
Basis swapan agreement that provides for the
exchange of variable interest payments, based on notional
amounts, tied to two different underlying interest rate indices.
|
Interest rate option contracts. These
contracts primarily include the following:
|
|
|
|
|
Pay-fixed swaptionsan option that allows us to
enter into a pay-fixed, receive variable interest rate swap at
some point in the future. These contracts generally increase in
value as interest rates rise.
|
|
|
|
Receive-fixed swaptionsan option that allows us to
enter into a receive-fixed, pay variable interest rate swap at
some point in the future. These contracts generally increase in
value as interest rates fall.
|
|
|
|
Interest rate capsalthough an interest rate cap is
not an option it has option-like characteristics. It is a
contract in which we receive money when a reference interest
rate, typically LIBOR, exceeds an agreed-upon referenced strike
price (cap). The value generally increases as
reference interest rates rise.
|
Foreign currency swaps. Swaps that convert
debt we issue in foreign-denominated currencies into
U.S. dollars. We enter into foreign currency swaps only to
the extent that we issue foreign currency debt.
Summary
of Derivative Activity
The decisions to reposition our derivative portfolio are based
upon current assessments of our interest rate risk profile and
economic conditions, including the composition of our
consolidated balance sheets and expected trends, the relative
mix of our debt and derivative positions, and the interest rate
environment. Table 37 presents our risk management derivative
activity by type for the year ended December 31, 2004,
along with the stated maturities of derivatives outstanding as
of December 31, 2004. Table 37 does not include mortgage
commitments that are accounted for as derivatives. We discuss
our mortgage commitments in Business Segment
ResultsCapital Markets Group.
162
Table
37: Activity and Maturity Data for Risk Management
Derivatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Interest Rate Swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
Receive-
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Pay-Fixed(2)
|
|
|
Fixed(3)
|
|
|
Basis
|
|
|
Currency
|
|
|
Pay-Fixed
|
|
|
Fixed
|
|
|
Rate Caps
|
|
|
Other(4)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of
December 31, 2002
|
|
$
|
176,712
|
|
|
$
|
50,870
|
|
|
$
|
25,425
|
|
|
$
|
3,932
|
|
|
$
|
129,425
|
|
|
$
|
146,200
|
|
|
$
|
122,419
|
|
|
$
|
204
|
|
|
$
|
655,187
|
|
Additions
|
|
|
269,190
|
|
|
|
228,551
|
|
|
|
37,290
|
|
|
|
5,760
|
|
|
|
75,705
|
|
|
|
63,101
|
|
|
|
63,350
|
|
|
|
6,731
|
|
|
|
749,678
|
|
Maturities(5)
|
|
|
(81,525
|
)
|
|
|
(78,192
|
)
|
|
|
(30,412
|
)
|
|
|
(4,497
|
)
|
|
|
(41,150
|
)
|
|
|
(68,106
|
)
|
|
|
(55,419
|
)
|
|
|
(6,556
|
)
|
|
|
(365,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of
December 31, 2003
|
|
$
|
364,377
|
|
|
$
|
201,229
|
|
|
$
|
32,303
|
|
|
$
|
5,195
|
|
|
$
|
163,980
|
|
|
$
|
141,195
|
|
|
$
|
130,350
|
|
|
$
|
379
|
|
|
$
|
1,039,008
|
|
Additions
|
|
|
138,442
|
|
|
|
207,269
|
|
|
|
33,700
|
|
|
|
13,650
|
|
|
|
31,575
|
|
|
|
49,145
|
|
|
|
17,800
|
|
|
|
5,243
|
|
|
|
496,824
|
|
Maturities(5)
|
|
|
(360,802
|
)
|
|
|
(327,305
|
)
|
|
|
(33,730
|
)
|
|
|
(7,392
|
)
|
|
|
(24,850
|
)
|
|
|
(42,770
|
)
|
|
|
(44,000
|
)
|
|
|
(4,889
|
)
|
|
|
(845,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of
December 31, 2004
|
|
$
|
142,017
|
|
|
$
|
81,193
|
|
|
$
|
32,273
|
|
|
$
|
11,453
|
|
|
$
|
170,705
|
|
|
$
|
147,570
|
|
|
$
|
104,150
|
|
|
$
|
733
|
|
|
$
|
690,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future maturities of notional
amounts:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1 year
|
|
$
|
5,105
|
|
|
$
|
51,195
|
|
|
$
|
29,250
|
|
|
$
|
6,641
|
|
|
$
|
18,225
|
|
|
$
|
9,975
|
|
|
$
|
71,150
|
|
|
$
|
512
|
|
|
$
|
192,053
|
|
1 year to 5 years
|
|
|
18,215
|
|
|
|
25,870
|
|
|
|
2,923
|
|
|
|
3,906
|
|
|
|
49,950
|
|
|
|
19,425
|
|
|
|
32,250
|
|
|
|
11
|
|
|
|
152,550
|
|
5 years to 10 years
|
|
|
80,335
|
|
|
|
2,538
|
|
|
|
|
|
|
|
92
|
|
|
|
92,680
|
|
|
|
100,120
|
|
|
|
750
|
|
|
|
210
|
|
|
|
276,725
|
|
Over 10 years
|
|
|
38,362
|
|
|
|
1,590
|
|
|
|
100
|
|
|
|
814
|
|
|
|
9,850
|
|
|
|
18,050
|
|
|
|
|
|
|
|
|
|
|
|
68,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142,017
|
|
|
$
|
81,193
|
|
|
$
|
32,273
|
|
|
$
|
11,453
|
|
|
$
|
170,705
|
|
|
$
|
147,570
|
|
|
$
|
104,150
|
|
|
$
|
733
|
|
|
$
|
690,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate as
of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay rate
|
|
|
5.23
|
%
|
|
|
2.13
|
%
|
|
|
2.14
|
%
|
|
|
|
|
|
|
5.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
2.39
|
|
|
|
2.84
|
|
|
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.30
|
%
|
|
|
|
|
|
|
|
|
Weighted-average interest rate as
of December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay rate
|
|
|
4.72
|
%
|
|
|
1.13
|
%
|
|
|
1.04
|
%
|
|
|
|
|
|
|
5.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
1.31
|
|
|
|
3.24
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes mortgage commitments
accounted for as derivatives. Dollars represent notional amounts
that indicate only the amount on which payments are being
calculated and do not represent the amount at risk of loss.
|
|
(2) |
|
Notional amounts include callable
swaps of $13.8 billion as of December 31, 2004.
|
|
(3) |
|
Notional amounts include putable
swaps of $22.8 billion as of December 31, 2004.
|
|
(4) |
|
Includes MBS options, forward
starting debt, forward purchase and sale agreements, swap credit
enhancements and exchange-traded futures.
|
|
(5) |
|
Includes matured, called,
exercised, assigned and terminated amounts. Also includes
changes due to exchange rate movements.
|
|
(6) |
|
Based on contractual maturities.
|
During 2003, we increased the outstanding notional balance of
derivatives by $383.8 billion to $1.0 trillion as of
December 31, 2003, primarily as a result of significant
rebalancing activity during the year in response to the effects
of extreme interest rate volatility and our adoption of tighter
risk tolerances. With record low interest rates during the early
part of 2003 triggering record prepayments, we reduced our
duration gap by actively rebalancing our portfolio, primarily by
terminating existing interest rate swaps and entering into new
receive-fixed interest rate swaps. As interest rates increased
during the second half of the year and expected prepayments
slowed, we began to extend the duration of our liabilities
primarily through the use of pay-fixed interest rate swaps. In
addition, as our portfolio expanded, we purchased more caps and
swaptions to help offset the increased prepayment option risk
resulting from our new mortgage purchases. During 2004, we
decreased the outstanding notional balance of our risk
management derivatives by $348.9 billion to
163
$690.1 billion as of December 31, 2004, primarily as a
result of terminated offsetting pay-fixed and receive-fixed
swaps. The outstanding notional balance of our risk management
derivatives totaled $644 billion as of December 31,
2005 and $703 billion as of September 30, 2006.
Monitoring
and Active Portfolio Rebalancing
Because single-family borrowers typically can prepay a mortgage
at any time prior to maturity, the borrowers mortgage is
economically similar to callable debt. By investing in mortgage
assets, we assume this prepayment risk. As described above, we
attempt to offset the prepayment risk and cover our short
position either by issuing callable debt that we can redeem at
our option or by purchasing option-based derivatives that we can
exercise at our option. We also manage the prepayment risk of
our assets relative to our funding through active portfolio
rebalancing. We develop rebalancing actions based on a number of
factors, including an assessment of key risk measures such as
our duration gap and net asset fair value sensitivity, as well
as analyses of additional risk measures and current market
conditions.
Monitoring
and Measuring Interest Rate Risk
Our Capital Markets group utilizes a wide range of risk measures
and analyses to manage the interest rate risk inherent in the
mortgage portfolio. We produce a series of daily, weekly,
monthly and quarterly analyses of interest rate risk measures.
Many of our projections of mortgage cash flows in our interest
rate risk measures depend on our internally developed
proprietary prepayment models. The models contain many
assumptions, including those regarding borrower behavior in
certain interest rate environments and borrower relocation
rates. Other market inputs, such as interest rates, mortgage
prices and interest rate volatility, are also critical
components to our interest rate risk measures. The historical
patterns that serve as inputs for our models may not continue in
the future. We maintain a research program to constantly
evaluate, update and enhance these assumptions, models and
analytical tools as appropriate to reflect our best assessment
of the environment.
Our primary interest rate risk measures include duration gap,
convexity and net asset fair value sensitivity measures. On a
daily basis, we calculate base duration and convexity gaps as
well as the expected change in the value of our investments for
relatively moderate changes in interest rates. On a weekly
basis, we also calculate the expected change in the value of our
investments for larger movements in interest rates and other
factors such as implied volatility of option prices. We also
perform other standard risk measures on our portfolio that are
based on historical changes in key variables, such as
value-at-risk
measures and sensitivities to non-parallel changes in the yield
curve.
Duration
Gap
The duration gap is a measure of the difference between the
estimated durations of our assets and liabilities (debt and risk
management derivatives). Duration gap summarizes the extent to
which estimated cash flows for assets and liabilities are
matched, on average, over time and across interest rate
scenarios. A positive duration gap signals a greater exposure to
rising interest rates because it indicates that the duration of
our assets exceeds the duration of our liabilities.
Because our duration gap does not incorporate projected future
business activity, it is considered a run-off
measure of interest rate risk. It reflects our existing mortgage
portfolio, including priced asset, debt and derivatives
commitments. We also include the interest rate risk impact of
derivative instruments in calculating the duration of
liabilities. Our reported duration gap for periods prior to
November 2005 excludes non-mortgage investments. We began
including non-mortgage investments in our duration gap
calculation in November 2005. These incremental assets are
primarily short-term, liquid investments included in our liquid
investment portfolio. Based on our historical experience, we
expect that the guaranty fee income generated from future
business activity will largely replace any guaranty fee income
lost as a result of mortgage prepayments. Accordingly, we do not
actively manage or hedge expected changes in the fair value of
our guaranty business related to changes in interest rates. The
fair values of our guaranty assets and guaranty obligations are
presented in Table 24 in Supplemental
Non-GAAP InformationFair Value Balance Sheet.
Pursuant to the September 1, 2005 agreement with OFHEO, we
agreed to provide periodic public disclosures regarding the
monthly averages of our duration gap. We disclose the duration
gap on a monthly basis in our
164
Monthly Summary Report, which is available on our Web site and
submitted to the SEC in a current report on
Form 8-K.
Our monthly duration gap, which is presented below for the
period January 1, 2002 to December 31, 2004 reflects
the estimate used contemporaneously by management as of the
reported date to manage the interest rate risk of our portfolio.
During 2005 and 2006, our monthly duration gap has not exceeded
plus or minus one month.
|
|
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
January
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
2
|
|
February
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
March
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
5
|
|
April
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
0
|
|
May
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
June
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
July
|
|
|
0
|
|
|
|
6
|
|
|
|
(9
|
)
|
August
|
|
|
(2
|
)
|
|
|
4
|
|
|
|
(14
|
)
|
September
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(10
|
)
|
October
|
|
|
0
|
|
|
|
1
|
|
|
|
(6
|
)
|
November
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
2
|
|
December
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
Convexity
Convexity reflects the degree to which the duration and price of
our mortgage assets change in response to a given change in
interest rates. Because of the prepayment option that exists in
mortgage assets, they tend to exhibit negative convexity.
Negative convexity refers to the tendency of fixed-rate mortgage
assets to fall in price faster in periods of rising interest
rates compared to the rate at which they appreciate in periods
of falling interest rates. We use convexity measures to provide
us with information on how quickly and by how much the
portfolios duration gap may change in different interest
rate environments. Our primary strategy for managing convexity
risk is to either issue callable debt or purchase option-based
derivatives.
Interest
Rate Sensitivity of Net Asset Fair Value
We perform various sensitivity analyses that quantify the
projected impact of changes in interest rates on our interest
rate sensitive assets and liabilities. Our analyses incorporate
assumed changes in the interest rate environment, including
selected hypothetical, instantaneous shifts in both the level
and slope of the yield curve. Table 38 discloses the estimated
fair value of our net assets as of December 31, 2004 and
2003, and the impact on the estimated fair value from a
hypothetical instantaneous shock in interest rates of a
50 basis points decrease and a 100 basis points
increase. We selected these interest rate changes because we
believe they reflect reasonably possible near-term outcomes. We
discuss how we derive the estimated fair value of our net
assets, which serves as the base case for our sensitivity
analysis, in Supplemental
Non-GAAP InformationFair Value Balance Sheet.
165
Table
38: Interest Rate Sensitivity of Net Asset Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
|
|
|
|
|
|
Effect on Estimated Fair Value
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
−50 Basis Points
|
|
|
+100 Basis Points
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Trading financial
instruments(1)
|
|
$
|
35,287
|
|
|
$
|
35,287
|
|
|
$
|
476
|
|
|
|
1.35
|
%
|
|
$
|
(1,417
|
)
|
|
|
(4.02
|
)%
|
Non-trading mortgage assets and
consolidated
debt(2)
|
|
|
928,104
|
|
|
|
936,530
|
|
|
|
9,930
|
|
|
|
1.06
|
|
|
|
(28,596
|
)
|
|
|
(3.05
|
)
|
Debt(2)
|
|
|
(943,017
|
)
|
|
|
(958,237
|
)
|
|
|
(9,215
|
)
|
|
|
0.96
|
|
|
|
19,181
|
|
|
|
(2.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal before derivatives
|
|
|
20,374
|
|
|
|
13,580
|
|
|
|
1,191
|
|
|
|
8.77
|
|
|
|
(10,832
|
)
|
|
|
(79.76
|
)
|
Derivative assets and liabilities,
net
|
|
|
5,444
|
|
|
|
5,444
|
|
|
|
(3,150
|
)
|
|
|
(57.86
|
)
|
|
|
8,525
|
|
|
|
156.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal after derivatives
|
|
|
25,818
|
|
|
|
19,024
|
|
|
|
(1,959
|
)
|
|
|
(10.30
|
)
|
|
|
(2,307
|
)
|
|
|
(12.13
|
)
|
Guaranty assets and guaranty
obligations,
net(2)
|
|
|
(1,826
|
)
|
|
|
6,450
|
|
|
|
(1,499
|
)
|
|
|
(23.24
|
)
|
|
|
1,498
|
|
|
|
23.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net market sensitive
assets(2)(3)
|
|
|
23,992
|
|
|
|
25,474
|
|
|
|
(3,458
|
)
|
|
|
(13.57
|
)
|
|
|
(809
|
)
|
|
|
(3.18
|
)
|
Other non-financial assets and
liabilities,
net(4)
|
|
|
14,910
|
|
|
|
14,620
|
|
|
|
1,210
|
|
|
|
8.28
|
|
|
|
283
|
|
|
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets(5)(6)
|
|
$
|
38,902
|
|
|
$
|
40,094
|
|
|
$
|
(2,248
|
)
|
|
|
(5.61
|
)%
|
|
$
|
(526
|
)
|
|
|
(1.31
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
|
|
|
|
|
|
|
|
|
|
Effect on Estimated Fair Value
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
−50 Basis Points
|
|
|
+100 Basis Points
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Trading financial
instruments(1)
|
|
$
|
43,798
|
|
|
$
|
43,798
|
|
|
$
|
815
|
|
|
|
1.86
|
%
|
|
$
|
(1,965
|
)
|
|
|
(4.49
|
)%
|
Non-trading mortgage assets and
consolidated
debt(2)
|
|
|
929,435
|
|
|
|
938,523
|
|
|
|
14,560
|
|
|
|
1.55
|
|
|
|
(33,962
|
)
|
|
|
(3.62
|
)
|
Debt
|
|
|
(954,990
|
)
|
|
|
(977,607
|
)
|
|
|
(10,123
|
)
|
|
|
1.04
|
|
|
|
20,542
|
|
|
|
(2.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal before derivatives
|
|
|
18,243
|
|
|
|
4,714
|
|
|
|
5,252
|
|
|
|
111.41
|
|
|
|
(15,385
|
)
|
|
|
(326.37
|
)
|
Derivative assets and liabilities,
net
|
|
|
3,993
|
|
|
|
3,993
|
|
|
|
(6,675
|
)
|
|
|
(167.17
|
)
|
|
|
14,211
|
|
|
|
355.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal after derivatives
|
|
|
22,236
|
|
|
|
8,707
|
|
|
|
(1,423
|
)
|
|
|
(16.34
|
)
|
|
|
(1,174
|
)
|
|
|
(13.48
|
)
|
Guaranty assets and guaranty
obligations,
net(2)
|
|
|
(1,578
|
)
|
|
|
5,702
|
|
|
|
(800
|
)
|
|
|
(14.03
|
)
|
|
|
1,089
|
|
|
|
19.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net market sensitive
assets(2)(3)
|
|
|
20,658
|
|
|
|
14,409
|
|
|
|
(2,223
|
)
|
|
|
(15.43
|
)
|
|
|
(85
|
)
|
|
|
(0.59
|
)
|
Other non-financial assets and
liabilities,
net(4)
|
|
|
11,610
|
|
|
|
13,984
|
|
|
|
788
|
|
|
|
5.64
|
|
|
|
37
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets(5)(6)
|
|
$
|
32,268
|
|
|
$
|
28,393
|
|
|
$
|
(1,435
|
)
|
|
|
(5.05
|
)%
|
|
$
|
(48
|
)
|
|
|
(0.17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of securities classified
in the consolidated balance sheets as trading and carried at
fair estimated value.
|
|
(2) |
|
Includes a reclassification of
consolidated debt with a carrying value of $12.5 billion
and estimated fair value of $12.2 billion as of
December 31, 2004, respectively, and a carrying value of
$10.0 billion and estimated fair value of
$10.3 billion as of December 31, 2003, respectively.
In addition, includes net guaranty asset amount of
$500 million and $425 million as of December 31,
2004 and 2003, respectively, reclassified from securities to
guaranty asset, guaranty obligations to reflect how the risk is
managed by the business.
|
|
(3) |
|
Includes net financial assets and
financial liabilities reported in Notes to Consolidated
Financial StatementsNote 19, Fair Value of Financial
Instruments and additional market sensitive instruments
that consist of master servicing assets, master servicing
liabilities and credit enhancements.
|
|
(4) |
|
The sensitivity changes related to
other non-financial assets and liabilities represent the tax
effect on net assets under these scenarios and do not include
any interest rate sensitivity related to these items.
|
|
(5) |
|
The carrying value for net assets
equals total stockholders equity as reported in the
consolidated balance sheets.
|
|
(6) |
|
The net asset sensitivities,
excluding the sensitivity of the Guaranty assets and
guaranty obligations, net, net of tax is (3.2)% for a
50 bp shock and (3.7)% for a +100 bp shock as of
December 31, 2004, and (3.2)% for a 50 bp shock
and (2.7)% for a +100 bp shock as of December 31, 2003.
|
166
As discussed above, we structure our debt and derivatives to
match and offset the interest rate risk of our mortgage
investments as much as possible. The interest rate sensitivities
presented in Table 38 convey the extent to which changes in the
estimated fair value of our mortgage assets are offset by
changes in the estimated fair value of our debt and derivatives.
Based on our sensitivity analyses, we estimate that a 50 basis
point instantaneous decrease in interest rates and a 100 basis
point instantaneous increase in interest rates would reduce the
estimated fair value of our net assets as of December 31,
2004 by approximately 5.6% and 1.3%, respectively. We estimate
that a 50 basis point instantaneous decrease in interest rates
and a 100 basis point instantaneous increase in interest rates
would reduce the estimated fair value of our net assets as of
December 31, 2003 by approximately 5.1% and 0.2%,
respectively. These sensitivities, which are relatively stable
from the end of 2003 to the end of 2004, indicate a relatively
low level of interest rate risk.
We also show in footnote 6 of Table 38 the sensitivity of
the estimated fair value of our net assets, excluding the
sensitivity of our guaranty assets and guaranty obligations, net
(net of tax). We evaluate the sensitivity of the fair value of
our net assets, excluding the sensitivity of our guaranty assets
and guaranty obligations, because, as previously discussed, we
do not actively manage the interest rate risk of our guaranty
business.
These sensitivity analyses are limited in that they contemplate
only certain movements in interest rates and are performed at a
particular point in time based on the estimated fair values of
our existing assets and liabilities. The sensitivity analyses do
not incorporate other factors that may have a significant
impact, most notably the value from expected future business
activities and strategic actions that management may take to
manage interest rate risk. Moreover, our sensitivity analyses
require numerous assumptions, including prepayment factors and
discount rates, which require management judgment. While we
believe the assumptions and methodology used in our sensitivity
analyses are reasonable, there is no standard methodology for
estimating the sensitivity of net asset fair value and different
assumptions could produce materially different sensitivity
estimates.
In October 2000 we made a voluntary commitment to publicly
disclose the results of interest rate risk sensitivity analyses
on a monthly basis and began a monthly disclosure of net
interest income at risk. Because our restatement affected net
interest income at risk, we suspended this disclosure beginning
in December 2004. Pursuant to our September 1, 2005
agreement with OFHEO, we will begin disclosing the estimated
impact on our financial condition of a 50-basis point shift in
rates and a 25-basis point change in the slope of the yield
curve when we have current financial statements.
Operational
Risk Management
Operational risk can manifest itself in many ways, including
accounting or operational errors, business disruptions, fraud,
technological failures and other operational challenges
resulting from failed or inadequate internal controls. These
events may potentially result in financial losses and other
damage to our business, including reputational harm.
We currently manage operational risk through an enterprise-wide
framework. In 2006, we established an independent Operational
Risk Oversight (ORO) function within the Chief Risk
Office with responsibility for oversight of the business
units operational risk management activities. In
accordance with our Policy on Operational Risk Management
established in October 2006, ORO regularly reports to senior
management and the Board of Directors on the quality of our
operational risk management and on identified operational risk
exposures. ORO is also responsible for the design and
implementation of operational risk management processes
pertaining to capturing loss and near miss event
data, risk and control assessments by the business units, key
risk indicators, and analysis of scenarios representing
significant potential losses to our business. To further
strengthen our existing operational risk programs, in 2006, we
centralized oversight of our business continuity efforts,
information security programs, fraud management and our
corporate insurance program under this new operational risk
oversight function. We continue to work on improving our
internal controls and procedures relating to the management of
operational risk.
Our individual business units have direct responsibility for the
identification, assessment, control and mitigation of the
operational risks associated with their business activities.
Senior officers within the business units have been designated
as division operational risk officers, with dedicated staff
responsible for the
167
implementation and monitoring of operational risk management
programs throughout the company. Corporate and business unit
operational risk teams work closely throughout the design and
implementation effort to ensure that roles and responsibilities
are properly identified and staffed, and that programs are
effectively integrated into standard business practices. In
addition, the ORO function works closely with our SOX Finance
Team and Chief Compliance Officer to coordinate implementation
efforts and reinforce new operational discipline frameworks
within the company.
OFHEOs September 2004 interim report on its special
examination concluded that we had experienced breakdowns in
operational controls that contributed to our accounting failures
and safety and soundness problems. Paul Weisss independent
investigation into the issues raised in OFHEOs interim
report affirmed this conclusion. In 2005, we engaged an
independent firm to assess our existing operational risk
management capabilities and identify gaps in skill sets,
processes and other elements. The results of this assessment
identified several deficiencies in our operational risk
management structure that we have been working to remediate. For
a description of the material weaknesses in our internal control
over financial reporting relating to our operational controls
and operational risk management, see
Item 9AControls and Procedures.
To remedy the deficiencies in our operational risk management
process, we have developed new policies for managing operational
risks and an overall operational risk management framework to
identify, measure, monitor and manage operational risks across
the company. We are in the initial stage of a multi-year program
to implement our new operational risk management framework. In
November 2006, we submitted a detailed three-year plan on the
design and implementation of this framework to OFHEO as required
by our consent order with OFHEO. Our operational risk management
framework is based on the Basel Committee guidance on sound
practices for the management of operational risk broadly adopted
by U.S. commercial banks comparable in size to Fannie Mae.
The framework incorporates elements such as the monitoring of
operational loss events, tracking of key risk indicators, use of
common terminology to describe risks and self-assessments of
risks and controls in place to mitigate operational risks. We
have recently hired several new senior officers with significant
expertise in operational risk management to implement this new
framework.
In addition to the corporate operational risk oversight
function, we also maintain programs for the management of our
exposure to mortgage fraud, breaches in information security and
external disruptions to business continuity, as outlined below.
Mortgage
Fraud
We implemented a mortgage fraud policy and program in 2005.
OFHEO issued a regulation in July 2005 on the detection and
reporting of mortgage fraud that required us to establish
adequate and efficient internal controls and procedures and an
operational training program to assure an effective system to
detect and report mortgage fraud or possible mortgage fraud. We
have operated in compliance with this regulation since its
effective date in August 2005.
As part of our mortgage fraud program, we assist our lender
customers in preventing the origination of fraudulent loans,
including through the use of a series of technology services
provided in conjunction with our automated underwriting
technology that alerts lenders to possible fraud at loan
origination. We maintain contracts with our lender customers
that require them to represent and warrant that loans being sold
meet the requirements of our selling and servicing guides, and
to repurchase loans sold or delivered to us when mortgage fraud
is identified. We also carry insurance to provide further
coverage in the event of failure of the lender to perform under
fraudulent circumstances. We continue to work to improve our
internal controls and procedures relating to the detection and
reporting of mortgage fraud.
Information
Security
Recognizing the importance and sensitivity of our information
assets, we have established an information security program
designed to protect the security and privacy of confidential
information, including non-public personal information and
sensitive business data. Our current information security
program was launched in late 2003 to address acknowledged
industry-wide security concerns in areas such as access
management, change management, secure application development
and system monitoring.
168
Our security infrastructure is designed for the protection of
sensitive information assets, and includes sophisticated network
defenses and software designed to prevent hackers, spam, virus,
phishing and other types of cyber attack, while our information
security practices are intended to minimize risks due to process
failure or misuse. We employ several firms specializing in
information security assessment to uncover control gaps and
risks to our information assets. We acknowledge the constant
need to update and improve our defenses in response to changes
in the threat environment.
We continue to work to improve our information security program,
with the implementation of additional controls to protect our
confidential data. These have included increased information
security and privacy assessment and monitoring within our
business units, a multi-year effort to improve access
management, encryption of data on our employees computers,
as well as improved tools to monitor and block information loss
from within our network, email and other communication systems.
Business
Continuity and Crisis Management
Our Operational Risk Oversight function has established business
continuity and crisis management policies and programs, with
execution of these programs implemented by our technology,
operations, human resources and facilities functions in concert
with the business units that are responsible for the affected
processes and business applications. These policies and programs
are designed to ensure that our critical business functions
continue to operate under emergency conditions.
We have installed redundant systems within each business
critical system, as well as redundant systems in two
geographically separate data centers. These redundant systems
are designed to provide continuity of operations for up to one
week without significant loss of service to constituents or
significant loss of revenue. We also have developed longer-term
recovery plans. In addition, we have implemented strategies for
access to critical business systems by employees and staff, such
as alternate work facilities in geographically diverse locations
for our back office and wire transfer functions. We have also
established redundant communications systems for external
partners and customers. For staff functions that are considered
most critical, such as cash wire operations and securities
settlements, we have instituted multi-site, simultaneous
operations from three separate locations. Dual-site market room
activities are conducted on a quarterly basis for front office
functions. We recently successfully completed a disaster
recovery test of critical operations using a recently
constructed alternate data center.
To enable recovery from large-scale, catastrophic events, we
copy all production data to backup media on a real-time or
nightly basis. The data is transported and stored in multiple
locations, including an offsite storage facility located out of
the region. In addition, a limited tertiary operating site is
available out of the region. The tertiary site complies with the
sound practices established by the Federal Reserve Board, Office
of the Comptroller of the Currency, and the SEC for resiliency
of key U.S. financial institutions, and is designed to
enable us to fulfill our critical obligations until automated
processing is able to resume.
Our business continuity program is subject to regulatory review
by OFHEO.
LIQUIDITY
AND CAPITAL MANAGEMENT
Liquidity is essential to our business. We actively manage our
liquidity and capital position with the objective of preserving
stable, reliable and cost-effective sources of cash to meet all
of our current and future operating financial commitments and
regulatory capital requirements. We obtain the funds we need to
operate our business primarily from the proceeds we receive from
the issuance of debt. We seek to maintain sufficient excess
liquidity in the event that factors, whether internal or
external to our business, temporarily prevent us from issuing
debt in the capital markets.
Liquidity
Liquidity
Risk Management
Liquidity risk is the risk to our earnings and capital that
would arise from an inability to meet our cash obligations in a
timely manner. Because liquidity is essential to our business,
we have adopted a comprehensive liquidity risk policy that is
designed to provide us with sufficient flexibility to address
both liquidity
169
events specific to our business and market-wide liquidity
events. Our liquidity risk policy governs our management of
liquidity risk and outlines our methods for measuring and
monitoring liquidity risk. Our liquidity risk policy, which has
been approved by our Board of Directors, outlines the roles and
responsibilities for managing liquidity risk within the company.
Our Capital Markets group is responsible for monitoring and
managing our liquidity risk, with oversight provided by the
Chief Risk Office, several management-level committees and the
Risk Policy and Capital Committee of the Board of Directors.
We conduct our daily liquidity management activities to achieve
the goals of our liquidity risk policy. The primary tools that
we employ for liquidity management include the following:
|
|
|
|
|
daily monitoring and reporting of our liquidity position;
|
|
|
|
daily forecasting of our ability to meet our liquidity needs
over a
90-day
period without relying upon the issuance of unsecured debt;
|
|
|
|
daily monitoring of market and economic factors that may impact
our liquidity;
|
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|
|
a defined escalation process for bringing any liquidity issues
or concerns that may arise to the attention of higher levels of
our management;
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|
|
routine testing of our ability to rely upon identified sources
of liquidity;
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|
|
periodic reporting to management and the Board of Directors
regarding our liquidity position;
|
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|
|
periodic review and testing of our liquidity management controls
by our Internal Audit department;
|
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|
|
maintaining unencumbered mortgage assets that are available as
collateral for secured borrowings pursuant to repurchase
agreements or for sale; and
|
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|
|
maintaining an investment portfolio of liquid non-mortgage
assets that are readily marketable or have short-term maturities
so that we can quickly and easily convert these assets into cash.
|
Sources
and Uses of Cash
We manage our cash position on a daily basis.
Our primary source of cash is proceeds from the issuance of our
debt. Our other sources of cash currently consist primarily of:
|
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|
|
|
principal and interest payments received on our mortgage
portfolio assets;
|
|
|
|
principal and interest payments received on our liquid
investments;
|
|
|
|
borrowings under secured and unsecured intraday funding lines of
credit we have established with several large financial
institutions;
|
|
|
|
sales of mortgage loans, mortgage-related securities and liquid
assets;
|
|
|
|
borrowings against mortgage-related securities and other
investment securities we hold pursuant to repurchase agreements
and loan agreements;
|
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|
|
guaranty fees earned on Fannie Mae MBS;
|
|
|
|
mortgage insurance counterparty payments; and
|
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|
|
net receipts on derivative instruments.
|
Our primary uses of cash currently consist primarily of:
|
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|
|
the repayment of matured, redeemed and repurchased debt;
|
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|
|
the purchase of mortgage loans, mortgage-related securities and
other investments;
|
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|
|
interest payments on outstanding debt;
|
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|
|
net payments on derivative counterparty agreements;
|
170
|
|
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|
|
the pledging of collateral under derivative instruments;
|
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|
|
administrative expenses;
|
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|
|
the payment of federal income taxes;
|
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|
|
losses incurred in connection with our Fannie Mae MBS guaranty
obligations; and
|
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|
|
the payment of dividends on our common and preferred stock.
|
Debt
Funding
Because our primary source of cash is proceeds from the issuance
of our debt, we depend on our continuing ability to issue debt
securities in the capital markets to meet our cash requirements.
We issue a variety of non-callable and callable debt securities
in the domestic and international capital markets in a wide
range of maturities to meet our large and continuous funding
needs. Our Capital Markets group is responsible for the issuance
of debt securities to meet our funding needs. Table 39 below
provides a summary of our debt activity for the years ended
December 31, 2004, 2003 and 2002. Table 40 below shows our
outstanding short-term borrowings for the years ended
December 31, 2004, 2003 and 2002.
Table
39: Debt Activity
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|
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|
|
|
|
|
For the Year Ended December 31,
|
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|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Issued during the
year:(1)
|
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|
|
|
|
|
|
|
|
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|
|
Short-term:(2)
|
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|
|
|
|
|
|
|
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|
|
Amount:(3)
|
|
$
|
2,055,759
|
|
|
$
|
2,234,000
|
|
|
$
|
1,631,471
|
|
Weighted average interest rate:
|
|
|
1.50
|
%
|
|
|
1.07
|
%
|
|
|
1.65
|
%
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount:(3)
|
|
$
|
252,658
|
|
|
$
|
348,112
|
|
|
$
|
238,808
|
|
Weighted average interest rate:
|
|
|
2.90
|
%
|
|
|
2.58
|
%
|
|
|
3.89
|
%
|
Total issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount:(3)
|
|
$
|
2,308,417
|
|
|
$
|
2,582,112
|
|
|
$
|
1,870,279
|
|
Weighted average interest rate:
|
|
|
1.66
|
%
|
|
|
1.28
|
%
|
|
|
1.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemed during the
year:(1)(4)
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|
|
|
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|
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|
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|
Short-term:(2)
|
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|
|
|
|
|
|
|
|
|
|
|
Amount:(3)
|
|
$
|
2,081,726
|
|
|
$
|
2,191,992
|
|
|
$
|
1,615,947
|
|
Weighted average interest rate:
|
|
|
1.34
|
%
|
|
|
1.12
|
%
|
|
|
1.82
|
%
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount:(3)
|
|
$
|
238,686
|
|
|
$
|
279,168
|
|
|
$
|
176,450
|
|
Weighted average interest rate:
|
|
|
3.26
|
%
|
|
|
3.66
|
%
|
|
|
5.03
|
%
|
Total redeemed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount:(3)
|
|
$
|
2,320,412
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|
|
$
|
2,471,160
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|
|
$
|
1,792,397
|
|
Weighted average interest rate:
|
|
|
1.54
|
%
|
|
|
1.41
|
%
|
|
|
2.13
|
%
|
|
|
|
(1) |
|
Excludes the activity of debt from
consolidations.
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(2) |
|
Includes the activity of Federal
funds purchased and securities sold under agreements to
repurchase.
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(3) |
|
Represents the face amount at
issuance or redemption and does not include the effect of
currency adjustments, debt basis adjustments or amortization of
discounts, premiums and other deferred price adjustments.
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(4) |
|
Represents all payments on debt,
including regularly scheduled principal payments, payments at
maturity, payments as the result of a call and payments for any
other repurchases.
|
171
Table
40: Outstanding Short-Term Borrowings
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|
2004
|
|
|
|
December 31,
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Average During the Year
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Weighted Average
|
|
|
|
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|
Weighted Average
|
|
|
Maximum
|
|
|
|
Outstanding
|
|
|
Interest
Rate(1)
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|
|
Outstanding(2)
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|
|
Interest
Rate(1)
|
|
|
Outstanding(3)
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|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
$
|
2,400
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|
|
|
1.90
|
%
|
|
$
|
2,704
|
|
|
|
0.80
|
%
|
|
$
|
10,455
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
Fixed short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. discount notes
|
|
$
|
299,728
|
|
|
|
2.14
|
%
|
|
$
|
306,539
|
|
|
|
1.42
|
%
|
|
$
|
323,289
|
|
Foreign exchange discount notes
|
|
|
6,591
|
|
|
|
0.84
|
|
|
|
3,064
|
|
|
|
1.10
|
|
|
|
7,089
|
|
Other fixed short-term debt
|
|
|
3,724
|
|
|
|
1.59
|
|
|
|
3,236
|
|
|
|
1.43
|
|
|
|
3,779
|
|
Floating short-term debt
|
|
|
6,250
|
|
|
|
2.19
|
|
|
|
7,548
|
|
|
|
1.41
|
|
|
|
9,135
|
|
Debt from consolidations
|
|
|
3,987
|
|
|
|
2.20
|
|
|
|
2,989
|
|
|
|
1.54
|
|
|
|
3,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
320,280
|
|
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
December 31,
|
|
|
Average During the Year
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
Maximum
|
|
|
|
Outstanding
|
|
|
Interest
Rate(1)
|
|
|
Outstanding(2)
|
|
|
Interest
Rate(1)
|
|
|
Outstanding(3)
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
$
|
3,673
|
|
|
|
1.03
|
%
|
|
$
|
7,276
|
|
|
|
0.58
|
%
|
|
$
|
21,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. discount notes
|
|
$
|
327,967
|
|
|
|
1.11
|
%
|
|
$
|
320,987
|
|
|
|
1.20
|
%
|
|
$
|
351,793
|
|
Foreign exchange discount notes
|
|
|
1,214
|
|
|
|
1.37
|
|
|
|
1,432
|
|
|
|
1.48
|
|
|
|
3,291
|
|
Other fixed short-term debt
|
|
|
1,863
|
|
|
|
1.53
|
|
|
|
726
|
|
|
|
1.13
|
|
|
|
2,250
|
|
Floating short-term debt
|
|
|
10,235
|
|
|
|
1.03
|
|
|
|
5,343
|
|
|
|
1.16
|
|
|
|
10,235
|
|
Debt from consolidations
|
|
|
2,383
|
|
|
|
1.14
|
|
|
|
1,360
|
|
|
|
1.23
|
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
343,662
|
|
|
|
1.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
December 31,
|
|
|
Average During the Year
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
Maximum
|
|
|
|
Outstanding
|
|
|
Interest
Rate(1)
|
|
|
Outstanding(2)
|
|
|
Interest
Rate(1)
|
|
|
Outstanding(3)
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
$
|
9,170
|
|
|
|
1.27
|
%
|
|
$
|
2,550
|
|
|
|
0.91
|
%
|
|
$
|
12,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. discount notes
|
|
$
|
290,098
|
|
|
|
1.53
|
%
|
|
$
|
252,858
|
|
|
|
1.96
|
%
|
|
$
|
290,098
|
|
Foreign exchange discount notes
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
0.27
|
|
|
|
25
|
|
Other fixed short-term debt
|
|
|
1,450
|
|
|
|
1.79
|
|
|
|
3,835
|
|
|
|
2.49
|
|
|
|
5,374
|
|
Floating short-term debt
|
|
|
1,990
|
|
|
|
1.27
|
|
|
|
11,772
|
|
|
|
1.69
|
|
|
|
18,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
293,538
|
|
|
|
1.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discounts, premiums and
other deferred price adjustments.
|
|
(2) |
|
Average amount outstanding during
the year has been calculated using month-end balances.
|
|
(3) |
|
Maximum outstanding represents the
highest month-end outstanding balance during the year.
|
172
For information regarding our outstanding long-term debt as of
December 31, 2004 and 2003, refer to Notes to
Consolidated Financial StatementsNote 9, Short-term
Borrowings and Long-term Debt.
We are one of the worlds largest issuers of unsecured debt
securities in terms of the amount of unsecured debt we issue. We
issue debt on a regular basis in significant amounts in the
capital markets and have a diversified funding base of domestic
and international investors. Purchasers of our debt securities
include fund managers, commercial banks, pension funds,
insurance companies, foreign central banks, state and local
governments, and retail investors. Purchasers of our debt
securities are also geographically diversified, with a
significant portion of our investors located in the United
States, Europe and Asia. The diversity of our debt investors
enhances our financial flexibility and limits our dependence on
any one source of funding. Our status as a GSE and our current
AAA (or its equivalent) senior long-term unsecured
debt credit ratings are critical to our ability to continuously
access the debt capital markets to borrow at attractive rates.
The U.S. government does not guarantee our debt, directly
or indirectly, and our debt does not constitute a debt or
obligation of the U.S. government.
Our sources of liquidity have remained adequate to meet both our
short-term and long-term funding needs, and we anticipate that
they will remain adequate in 2007. Due to the reduction in the
size of our mortgage portfolio subsequent to December 31,
2004 pursuant to our capital restoration plan, our debt funding
requirements have been lower in 2005 and 2006 than in 2002, 2003
and 2004. As of December 31, 2004, we had total debt
outstanding of $953.1 billion, as compared to total debt
outstanding of $753.2 billion as of September 30,
2006. However, we remain an active issuer of short-term and
long-term debt securities. Our short-term and long-term funding
needs during 2007 are generally expected to be consistent with
our needs during 2005 and 2006, and with the uses of cash
described above under Sources and Uses of Cash. As
described below under Capital ManagementCapital
ActivityOFHEO Oversight of Our Capital Activity,
pursuant to our May 2006 consent order with OFHEO, we are
currently not permitted to increase our net mortgage portfolio
assets above the amount shown in our minimum capital report to
OFHEO as of December 31, 2005 ($727.75 billion). We
expect that, over the long term, our funding needs and sources
of liquidity will remain relatively consistent with current
needs and sources. We may increase our issuance of debt in
future years if we decide to increase our purchase of mortgage
assets following the modification or expiration of the current
limitation on the size of our mortgage portfolio.
We have experienced no limitations on our ability to borrow
funds through the issuance of debt securities in the capital
markets and do not anticipate any change in our ability to do so
in the foreseeable future. Significant changes in our current
regulatory status, however, could adversely affect our access to
some or all debt investors and lead to a reduction in our credit
ratings, thereby potentially increasing our debt funding costs
and reducing the amount of debt that we can issue at any given
time. Other factors that could negatively impact our ability to
issue debt securities at attractive rates include significant
changes in interest rates, increased interest rate volatility, a
significant adverse change in our financial condition or
financial results, significant events relating to our business
or industry, a significant change in the publics
perception of the risks to and financial prospects of our
business or our industry, regulatory constraints, disruptions in
the capital markets and general economic conditions in the
United States or abroad. Refer to Item 1ARisk
Factors for a discussion of the risks relating to our
ability to issue debt in sufficient quantities and at attractive
rates, the risks associated with a reduction in our current
credit ratings and the risks associated with proposed changes in
the regulation of our business. On June 13, 2006, the
U.S. Department of the Treasury announced that it would
undertake a review of its process for approving our issuances of
debt, which could adversely impact our flexibility in issuing
debt securities in the future. We cannot predict whether the
outcome of this review will materially impact our current debt
issuance activities.
Change
in the Federal Reserve Boards Payments System Risk
Policy
On July 20, 2006, the Federal Reserve Banks implemented
changes to the Federal Reserve Boards Policy
Statement on Payments System Risk. The changes pertain to
the processing of principal and interest payments, via the
Fedwire system, for securities issued by GSEs and certain
international organizations, including us.
Prior to July 2006, the Federal Reserve Bank exempted us from
overdraft fees relating to the processing of interest and
redemption payments on our debt and Fannie Mae MBS. We were
permitted to overdraw our
173
account at the Federal Reserve Bank for these payments and would
make periodic payments throughout the business day until our
account balance was zero. Under the revised policy, we are now
required to fund interest and redemption payments on our debt
and Fannie Mae MBS before the Federal Reserve Banks, acting as
our fiscal agent, will execute the payments on our behalf. We
compensate the Federal Reserve Banks for this service.
Because we receive funds and make payments throughout each
business day, we have taken steps, including revising our
funding strategies, to ensure that we will have access to funds
in a timely manner to meet our payment obligations. We
established and periodically may use secured and unsecured
intraday funding lines of credit with several large financial
institutions. We are currently funding security holder payments
on a daily basis and are fully compliant with the revised
Federal Reserve policy.
Credit
Ratings and Risk Ratings
Our ability to borrow at attractive rates is highly dependent
upon our credit ratings. Our senior unsecured debt (both
long-term and short-term), qualifying benchmark subordinated
debt and preferred stock are rated and continuously monitored by
Standard & Poors, Moodys and Fitch, each of
which is a nationally recognized statistical rating
organization. Table 41 below sets forth the credit ratings
issued by each of these rating agencies of our long-term and
short-term senior unsecured debt, qualifying benchmark
subordinated debt and preferred stock as of December 5,
2006.
Table
41: Fannie Mae Debt Credit Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Long-Term
|
|
Senior Short-Term
|
|
Benchmark
|
|
|
|
|
|
|
Unsecured Debt
|
|
Unsecured Debt
|
|
Subordinated Debt
|
|
|
Preferred Stock
|
|
|
Standard & Poors
|
|
AAA
|
|
A−1+
|
|
|
AA−
|
(1)
|
|
|
AA−
|
(1)
|
Moodys Investors Service
|
|
Aaa
|
|
P−1
|
|
|
Aa2
|
(2)
|
|
|
Aa3
|
(2)
|
Fitch, Inc
|
|
AAA
|
|
F1+
|
|
|
AA−
|
(3)
|
|
|
A+
|
(4)
|
|
|
|
(1) |
|
On September 23, 2004,
Standard & Poors placed our preferred stock and
subordinated debt ratings on credit watch negative.
|
|
(2) |
|
On September 28, 2004,
Moodys placed our preferred stock and subordinated debt
ratings on a negative outlook. On December 15,
2005, Moodys confirmed our preferred stock and
subordinated debt ratings with a stable outlook.
|
|
(3) |
|
On September 29, 2004, Fitch
downgraded our subordinated debt rating from AA to
AA−. On December 23, 2004, Fitch placed
our subordinated debt rating on rating watch
negative.
|
|
(4) |
|
On September 29, 2004, Fitch
downgraded our preferred stock rating from AA to
AA−. On December 23, 2004, Fitch
downgraded our preferred stock rating from AA−
to A+ and placed our preferred stock rating on
rating watch negative.
|
Pursuant to our September 1, 2005 agreement with OFHEO, we
agreed to seek to obtain a rating, which will be continuously
monitored by at least one nationally recognized statistical
rating organization, that assesses, among other things, the
independent financial strength or risk to the
government of Fannie Mae operating under its authorizing
legislation but without assuming a cash infusion or
extraordinary support of the government in the event of a
financial crisis. We also agreed to provide periodic public
disclosure of this rating.
Standard & Poors risk to the
government rating for us as of December 5, 2006 was
AA− and this rating has been on credit watch negative
since September 23, 2004. Standard & Poors
continually monitors this rating.
Moodys Bank Financial Strength Rating for us
as of December 5, 2006 was B+ with a stable outlook. This
rating was downgraded from A− on March 28, 2005.
Moodys continually monitors this rating.
We do not have any covenants in our existing debt agreements
that would be violated by a downgrade in our credit ratings. To
date, we have not experienced any limitations in our ability to
access the capital markets due to a credit ratings downgrade.
See Item 1ARisk Factors for a discussion
of the risks associated with a reduction in our credit ratings.
174
Liquidity
Contingency Plan
Our Liquidity Risk Policy includes a contingency plan in the
event that factors, whether internal or external to our
business, temporarily compromise our ability to access capital
through normal channels. Our contingency plan provides for
alternative sources of liquidity that would allow us to meet all
of our cash obligations for 90 days without relying upon
the issuance of unsecured debt. If our access to the capital
markets becomes impaired, our contingency plan designates our
unencumbered mortgage portfolio as our primary source of
liquidity. Our unencumbered mortgage portfolio consists of
unencumbered mortgage loans and mortgage-related securities that
could be pledged as collateral for borrowing in the market for
mortgage repurchase agreements or sold to generate additional
funds. As of December 31, 2004 and 2003, substantially all
of our mortgage portfolio would have been eligible to be pledged
as collateral under repurchase agreements. As of
December 31, 2004 and 2003, $1.7 billion and
$5.1 billion, respectively, of the mortgage-related
securities held in our portfolio had been pledged as collateral
under repurchase agreements.
Our liquid investment portfolio is also a source of liquidity in
the event that we cannot access the capital markets. Our liquid
investment portfolio consists primarily of high-quality
non-mortgage investments that are readily marketable or have
short-term maturities. As of December 31, 2004 and 2003, we
had approximately $55.1 billion and $67.1 billion,
respectively, in liquid assets, net of any cash and cash
equivalents pledged as collateral. Our investments in
non-mortgage securities, which account for the majority of our
liquid assets, totaled $43.9 billion and $46.8 billion
as of December 31, 2004 and 2003, respectively.
Approximately 93% and 88% of our non-mortgage securities as of
December 31, 2004 and 2003, respectively, had a credit
rating of A (or its equivalent) or higher, based on the lowest
of Standard & Poors, Moodys or Fitch
ratings.
OFHEO
Supervision
Pursuant to its role as our safety and soundness regulator,
OFHEO monitors our liquidity management practices and audits our
liquidity position on a continuous basis. On September 1,
2005, we entered into an agreement with OFHEO that formalized
and updated the voluntary initiatives that we announced in
October 2000 to enhance market discipline, liquidity and
capital. Pursuant to this agreement, we agreed to certain
commitments pertaining to management of our liquidity, including:
|
|
|
|
|
complying with principles of sound liquidity management
consistent with industry practice;
|
|
|
|
maintenance of a portfolio of highly liquid assets;
|
|
|
|
maintenance of a functional contingency plan providing for at
least three months liquidity without relying upon the
issuance of unsecured debt; and
|
|
|
|
periodic testing of our contingency plan in consultation with an
OFHEO examiner.
|
Each of these commitments is addressed in our Liquidity Risk
Policy described above. We further agreed to periodic public
disclosure regarding our compliance with the plan for
maintaining three months liquidity and meeting the
commitment for periodic testing. We believe we were in
compliance with our commitment to maintain and test our
functional contingency plan as of September 30, 2006. We
expect that OFHEO will finalize its review of our implementation
of these commitments once revised policies have been completed
in early 2007.
175
Contractual
Obligations
Table 42 summarizes our expectation as to the effect of our
minimum debt payments and other material noncancelable
contractual obligations as of December 31, 2004 on our
liquidity and cash flows in future periods. Our current
contractual obligations as of the date of this report are
different than the contractual obligations as of
December 31, 2004 presented in the table below, primarily
with respect to our debt obligations. As of December 31,
2004, we had total debt outstanding of $953.1 billion, as
compared to total debt outstanding of $753.2 billion as of
September 30, 2006.
Table
42: Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period as of December 31, 2004
|
|
|
|
|
|
|
Less than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(Dollars in millions)
|
|
|
Long-term debt
obligations(1)
|
|
$
|
624,324
|
|
|
$
|
145,955
|
|
|
$
|
207,392
|
|
|
$
|
111,722
|
|
|
$
|
159,255
|
|
Contractual interest on long-term
debt
obligations(2)
|
|
|
137,514
|
|
|
|
23,638
|
|
|
|
36,040
|
|
|
|
23,466
|
|
|
|
54,370
|
|
Operating lease
obligations(3)
|
|
|
229
|
|
|
|
32
|
|
|
|
67
|
|
|
|
40
|
|
|
|
90
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
commitments(4)
|
|
|
24,826
|
|
|
|
24,824
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Other purchase
obligations(5)
|
|
|
33
|
|
|
|
16
|
|
|
|
16
|
|
|
|
1
|
|
|
|
|
|
Other long-term liabilities
reflected in the consolidated balance
sheet:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
penalty(7)
|
|
|
400
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
Other(8)
|
|
|
4,820
|
|
|
|
3,793
|
|
|
|
901
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
792,146
|
|
|
$
|
198,258
|
|
|
$
|
244,818
|
|
|
$
|
135,355
|
|
|
$
|
213,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the carrying amount of
our long-term debt assuming payments are made in full at
maturity. Amounts exclude approximately $8.5 billion in
long-term debt obligations attributable to consolidated VIEs.
Amounts include net premium and deferred price adjustments of
$11.2 billion.
|
|
(2) |
|
Excludes contractual interest on
long-term debt obligations attributable to consolidated VIEs.
|
|
(3) |
|
Includes certain premises and
equipment leases.
|
|
(4) |
|
Includes on- and off-balance sheet
commitments to purchase loans and mortgage-related securities.
|
|
(5) |
|
Includes only unconditional
purchase obligations that are subject to a cancellation penalty
for certain telecom services, software and computer services,
and agreements. Excludes arrangements that may be cancelled
without penalty.
|
|
(6) |
|
Excludes risk management derivative
transactions that may require cash settlement in future periods
and our obligations to stand ready to perform under our
guaranties relating to Fannie Mae MBS and other financial
guaranties, because the amount and timing of payments under
these arrangements are generally contingent upon the occurrence
of future events.
|
|
(7) |
|
Represents a $400 million
civil penalty to the U.S. government pursuant to
May 23, 2006 settlements with the SEC and OFHEO. This
penalty is included in the consolidated balance sheet under
Other Liabilities.
|
|
(8) |
|
Includes future cash payments due
under our contractual obligations to fund LIHTC
partnerships that are unconditional and legally binding, as well
as cash received as collateral from derivative counterparties,
both of which are included in the consolidated balance sheets
under Other liabilities.
|
Cash
Flows
Cash
Flows for the Year Ended December 31, 2004
During the year ended December 31, 2004, cash and cash
equivalents decreased by $740 million, or 22%, to
$2.7 billion as of December 31, 2004 as compared to
the prior year.
|
|
|
|
|
We generated net cash of $41.6 billion in operating
activities in 2004, primarily due to a net decrease in trading
securities and net income. Our cash generated by operating
activities was partially offset by purchases of HFS loans.
|
176
|
|
|
|
|
We used net cash of $16.8 billion in investing activities
in 2004, primarily due to advances to lenders and purchases of
AFS securities and HFI loans. The cash we used in investing
activities was partially offset by proceeds we received from
maturities of AFS securities and repayments of HFI loans.
|
|
|
|
We used net cash of $25.5 billion in financing activities
in 2004, primarily for the redemption of short-term and
long-term debt. The cash we used in financing activities was
offset primarily by issuances of our short-term and long-term
debt.
|
Cash
Flows for the Year Ended December 31, 2003
During the year ended December 31, 2003, our cash and cash
equivalents increased by $1.7 billion, or 97%, to
$3.4 billion as of December 31, 2003 as compared to
the prior year.
|
|
|
|
|
We generated net cash of $58.2 billion in operating
activities in 2003, primarily due to a net decrease in trading
securities and net income. Our cash generated by operating
activities was partially offset by purchases of HFS loans.
|
|
|
|
We used net cash of $152.7 billion in investing activities
in 2003, primarily due to advances to lenders and purchases of
AFS securities and HFI loans. Our cash used in investing
activities was partially offset by proceeds we received from
maturities and sales of AFS securities and repayments of HFI
loans.
|
|
|
|
We raised net cash of $96.2 billion in financing activities
in 2003, primarily by issuing short-term and long-term debt. Our
cash provided by financing activities was partially offset
primarily by redemption of short-term and long-term debt.
|
Cash
Flows for the Year Ended December 31, 2002
During the year ended December 31, 2002, our cash and cash
equivalents increased by $681 million, or 65%, to
$1.7 billion as of December 31, 2002 as compared to
the prior year.
|
|
|
|
|
We generated net cash of $43.6 billion in operating
activities, primarily due to a net decrease in trading
securities and net income. Our cash generated by operating
activities was partially offset by purchases of HFS loans.
|
|
|
|
We used net cash of $113.6 billion in investing activities
in 2002, primarily due to advances to lenders and purchases of
AFS securities and HFI loans. Our cash used in investing
activities was partially offset by proceeds we received from
maturities of AFS securities and repayments of HFI loans.
|
|
|
|
We raised net cash of $70.6 billion in financing activities
in 2002, primarily by issuing short-term and long-term debt. Our
cash provided by financing activities was partially offset
primarily by redemption of short-term and long-term debt.
|
Capital
Management
Our objective in managing capital is to maximize long-term
stockholder value through the pursuit of business opportunities
that provide attractive returns while maintaining capital at
levels sufficient to ensure compliance with both regulatory and
internal capital requirements.
Capital
Adequacy Requirements
We are subject to capital adequacy requirements established by
the 1992 Act. The statutory capital framework incorporates two
different quantitative assessments of capitalboth a
minimum capital requirement and a risk-based capital
requirement. While the minimum capital requirement is
ratio-based, the risk-based capital requirement is based on
simulated stress test performance. Pursuant to the 1992 Act, we
are required to maintain sufficient capital to meet both of
these requirements in order to be deemed adequately
capitalized. In addition, pursuant to our May 2006 consent
order with OFHEO, we are currently required to maintain a 30%
capital surplus over our statutory minimum capital requirement,
which is referred to as the OFHEO-directed minimum capital
requirement. We are subject to continuous examination by OFHEO
to ensure we meet these capital adequacy requirements.
177
Statutory
Minimum Capital Requirement
OFHEOs ratio-based minimum capital standard ties our
capital requirements to the size of our book of business. For
purposes of the minimum capital requirement, we are considered
adequately capitalized if our core capital equals or exceeds our
minimum capital requirement. Core capital is defined by OFHEO
and represents the sum of the stated value of our outstanding
common stock (common stock less treasury stock), the stated
value of our outstanding non-cumulative perpetual preferred
stock, our paid-in capital and our retained earnings, as
determined in accordance with GAAP. Our minimum capital
requirement is generally equal to the sum of:
|
|
|
|
|
2.50% of on-balance sheet assets;
|
|
|
|
0.45% of the unpaid principal balance of outstanding Fannie Mae
MBS held by third parties; and
|
|
|
|
up to 0.45% of other off-balance sheet obligations.
|
Each quarter, OFHEO publishes our standing relative to both the
statutory minimum capital requirement and, commencing for the
quarter ended September 30, 2005, the OFHEO-directed
minimum capital requirement as part of its capital
classification announcement. For a description of the amounts by
which our core capital exceeded or was less than our statutory
minimum capital requirement as of December 31, 2004, 2003
and 2002, see Table 43 under Capital Classification
Measures below.
Statutory
Risk-Based Capital Requirement
OFHEOs risk-based capital standard ties our capital
requirements to the risk in our book of business, as measured by
a stress test model. The stress test simulates our financial
performance over a ten-year period of severe economic conditions
characterized by both extreme interest rate movements and
mortgage default rates. Simulation results indicate the amount
of capital required to survive this prolonged period of economic
stress absent new business or active risk management action. In
addition to this amount determined by the stress test, the
risk-based capital requirement includes an additional 30%
surcharge to cover unspecified management and operations risks.
Each quarter, OFHEO runs a detailed profile of our book of
business through the stress test simulation model. The model
generates cash flows and financial statements to evaluate our
risk and measure our capital adequacy during the ten-year stress
horizon. Our total capital base is used to meet our risk-based
capital requirement. Total capital is defined by OFHEO as the
sum of core capital plus the total allowance for loan losses and
reserve for guaranty losses in connection with Fannie Mae MBS,
less the specific loss allowance (that is, the allowance
required on individually-impaired loans). As part of its
quarterly capital classification announcement, OFHEO makes these
stress test results publicly available. For a description of the
amounts by which our total capital exceeded our statutory
risk-based capital requirement as of December 31, 2004,
2003 and 2002, see Table 43 under Capital Classification
Measures below.
Capital
Restoration Plan and OFHEO-Directed Minimum Capital
Requirement
As noted in Restatement above, OFHEO concluded in
its September 2004 interim report on its special examination
that we had misapplied GAAP relating to hedge accounting and the
amortization of purchase premiums and discounts on securities
and loans and on other deferred charges. The SECs Office
of the Chief Accountant affirmed OFHEOs conclusion and, on
December 15, 2004, advised us that we should restate our
financial statements filed with the SEC to eliminate the use of
hedge accounting in order to be consistent with GAAP. At that
time, we estimated that the disallowed hedge accounting
treatments resulted in a $9 billion cumulative reduction in
our core capital as of September 30, 2004. As a result, on
December 21, 2004, OFHEO classified us as significantly
undercapitalized as of September 30, 2004 and directed us
to submit a capital restoration plan that would provide for
compliance with our statutory minimum capital requirement plus a
surplus of 30% over the statutory minimum capital requirement.
Pursuant to OFHEOs directive, we submitted a capital
restoration plan which indicated our intention to achieve a 30%
capital surplus over our minimum capital requirement by
September 30, 2005. The capital restoration plan was
accepted by OFHEO on February 17, 2005.
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OFHEO announced on November 1, 2005 that we had achieved a
30% surplus over minimum capital at September 30, 2005. In
addition to generating capital through retained earnings, we
achieved this capital surplus by taking the following actions
pursuant to our capital restoration plan:
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significantly reducing the size of our investment portfolio,
through both normal mortgage liquidations and selected sales of
mortgage assets, which reduced the amount of assets in the
consolidated balance sheets and thereby reduced our overall
minimum capital requirements;
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issuing $5.0 billion in non-cumulative preferred stock in
December 2004;
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reducing our quarterly dividend rate by 50% on January 18,
2005, from $0.52 per share of common stock to
$0.26 per share of common stock; and
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canceling our plans to build major new corporate facilities in
Southwest Washington, DC and undertaking other cost-cutting
efforts.
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Under our May 23, 2006 consent order with OFHEO, we agreed
to continue our commitment to maintain a 30% capital surplus
over our statutory minimum capital requirement until such time
as the Director of OFHEO determines that the requirement should
be modified or allowed to expire, considering factors such as
resolution of accounting and internal control issues. OFHEO
actively monitors our compliance with the capital restoration
plan. We believe that we continue to be in compliance with the
plan as of the date of this filing.
Statutory
Critical Capital Requirement
Our critical capital level is the amount of core capital below
which we would be classified as critically undercapitalized and
generally would be required to be placed in conservatorship. Our
critical capital requirement is generally equal to the sum of:
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1.25% of on-balance sheet assets;
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0.25% of the unpaid principal balance of outstanding Fannie Mae
MBS held by third parties; and
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up to 0.25% of other off-balance sheet obligations.
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For a description of the amounts by which our core capital
exceeded our statutory critical capital requirement as of
December 31, 2004, 2003 and 2002, see Table 43 under
Capital Classification Measures below.
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Capital
Classification Measures
The table below shows our core capital, total capital and other
capital classification measures as of December 31, 2004,
2003 and 2002.
Table
43: Regulatory Capital Surplus/Deficit
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As of December 31,
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2004(1)
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2003(1)
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2002(1)
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(Restated)
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(Restated)
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(Dollars in millions)
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Core
capital(2)
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$
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34,514
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$
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26,953
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$
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20,431
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Required minumum
capital(3)
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32,121
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31,816
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27,688
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Surplus (deficit) of core capital
over/under required minimum capital
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$
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2,393
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$
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(4,863
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)
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$
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(7,257
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Surplus (deficit) of core capital
percentage over/under required minimum
capital(4)
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7.4
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%
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(15.3
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)%
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(26.2
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)%
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Total
capital(5)
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$
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35,196
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$
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27,487
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$
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20,831
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Required risk-based
capital(6)
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10,039
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27,221
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17,434
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Surplus of total capital over
required risk-based capital
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$
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25,157
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$
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266
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$
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3,397
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Surplus of total capital percentage
over required risk-based
capital(7)
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250.6
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%
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1.0
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%
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19.5
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%
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Core
capital(2)
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$
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34,514
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$
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26,953
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$
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20,431
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Required critical
capital(8)
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16,435
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16,261
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14,126
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Surplus of core capital over
required critical capital
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$
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18,078
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$
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10,691
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$
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6,305
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Surplus of core capital percentage
over required critical
capital(9)
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110.0
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%
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65.7
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%
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44.6
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%
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(1) |
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Except for required risk-based
capital amounts, all amounts represent estimates which will be
resubmitted to OFHEO for their certification. Required
risk-based capital amounts represent previously announced
results by OFHEO. OFHEO may determine that results require
restatement in the future based upon analysis provided by us.
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The sum of (a) the stated
value of our outstanding common stock (common stock less
treasury stock); (b) the stated value of our outstanding
non-cumulative perpetual preferred stock; (c) our paid-in
capital; and (d) our retained earnings. Core capital
excludes AOCI.
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Generally, the sum of
(a) 2.50% of on-balance sheet assets; (b) 0.45% of the
unpaid principal balance of outstanding Fannie Mae MBS held by
third parties; and (c) up to 0.45% of other off-balance
sheet obligations, which may be adjusted by the Director of
OFHEO under certain circumstances (See 12 CFR 1750.4 for
existing adjustments made by the Director of OFHEO).
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(4) |
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Defined as the surplus (deficit) of
core capital over required minimum capital expressed as a
percentage of required minimum capital.
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The sum of (a) core capital
and (b) the total allowance for loan losses and reserve for
guaranty losses, less (c) the specific loss allowance (that
is, the allowance required on individually-impaired loans). The
specific loss allowance totaled $63 million,
$68 million and $40 million at December 31, 2004,
2003 and 2002, respectively.
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Defined as the amount of total
capital required to be held to absorb projected losses flowing
from future adverse interest rate and credit risk conditions
specified by statute (see 12 CFR 1750.13 for conditions),
plus 30% mandated by statute to cover management and operations
risk.
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Defined as the surplus of total
capital over required risk-based capital expressed as a
percentage of risk-based capital.
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(8) |
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Generally, the sum of
(a) 1.25% of on-balance sheet assets; (b) 0.25% of the
unpaid principal balance of outstanding Fannie Mae MBS held by
third parties; and (c) up to 0.25% of other off-balance
sheet obligations, which may be adjusted by the Director of
OFHEO under certain circumstances.
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(9) |
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Defined as the surplus of core
capital over critical capital expressed as a percentage of
critical capital.
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On May 19, 2005, OFHEO classified us as significantly
undercapitalized as of December 31, 2004 and adequately
capitalized as of March 31, 2005. For each subsequent
quarter through June 30, 2006 (the most recent quarter for
which OFHEO has published its capital classification), we have
been classified by OFHEO as adequately capitalized. On
September 29, 2006, OFHEO announced that we were classified
as adequately capitalized as of June 30, 2006. Our core
capital of $42.0 billion as of June 30, 2006 exceeded
our statutory minimum capital requirement by $12.6 billion,
or 42.9%, and our OFHEO-directed minimum capital
180
requirement by $3.8 billion, or 9.9%; and our total capital
of $42.9 billion as of June 30, 2006 exceeded our
statutory risk-based capital requirement by $16.6 billion,
or 62.9%. Because we have not yet prepared audited consolidated
financial statements for any periods after December 31,
2004, OFHEOs capital classifications for periods after
December 31, 2004 are based on our estimates of our
financial condition as of those periods and remain subject to
revision.
Capital
Management Framework
Our capital management practices are intended to ensure ongoing
compliance with not only our regulatory capital requirements,
but also internal economic capital requirements. Our internal
economic capital requirements represent managements view
of the capital required to support our risk posture and are used
to guide capital deployment decisions to maximize long-term
stockholder value. Our economic capital framework relies upon
both stress test and
value-at-risk
analyses that measure capital solvency across time and to
current market value exposures. We currently target a combined
corporate economic capital requirement that is less than our
regulatory capital requirements.
To ensure compliance with each of our regulatory capital
requirements, we maintain different levels of capital surplus
for each capital requirement. The optimal surplus amount for
each capital measure is directly tied to the volatility of the
capital requirement and related core capital base. Because it is
explicitly tied to risk, the statutory risk-based capital
requirement tends to be more volatile than the ratio-based
minimum capital requirement. Quarterly changes in economic
conditions (such as interest rates, spreads and home prices) can
materially impact the calculated risk-based capital requirement.
As a consequence, we generally strive to maintain a larger
surplus over the risk-based capital requirement to ensure
continued compliance.
We are able to reasonably estimate our minimum capital
requirement. However, because changes in the fair value of our
derivatives may result in significant fluctuations in our
capital holdings from period to period, the amount of our
reported capital holdings at each period end is difficult to
anticipate. Accordingly, we target a surplus above the statutory
minimum capital requirement and OFHEO-directed minimum capital
requirement to accommodate a wide range of possible valuation
changes that might adversely impact our core capital base.
Capital
Activity
OFHEO
Oversight of Our Capital Activity
Our capital requirements as set forth by the Charter Act and as
administered by OFHEO may restrict the ability of our Board of
Directors to pay dividends, repurchase our preferred or common
stock, or make any other capital distributions in the following
circumstances:
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if a capital distribution would decrease our total capital below
the risk-based capital requirement or our core capital below the
minimum capital requirement, we may not make the distribution
without the approval of OFHEO;
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if we do not meet the risk-based capital requirement but do meet
the minimum capital requirement, we may not make any capital
distribution that would cause us to fail to meet the minimum
capital requirement; and
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if we meet neither the risk-based capital requirement nor the
minimum capital requirement, but do meet the critical capital
requirement established under the 1992 Act, we may make a
capital distribution only if, immediately after making the
distribution, we would still meet the critical capital
requirement and the Director of OFHEO approves the distribution
after determining that specified statutory conditions are
satisfied.
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In addition, in the May 2006 OFHEO consent order, we agreed to
the following additional restrictions relating to our capital
activity:
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We must continue our commitment to maintain a 30% capital
surplus over our statutory minimum capital requirement until
such time as the Director of OFHEO determines that the
requirement should be modified or allowed to expire, taking into
account factors such as the resolution of accounting and
internal control issues.
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While the capital restoration plan is in effect, we must seek
the approval of the Director of OFHEO before engaging in any
transaction that could have the effect of reducing our capital
surplus below an amount equal to 30% more than our statutory
minimum capital requirement.
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We must submit a written report to OFHEO detailing the rationale
and process for any proposed capital distribution before making
the distribution.
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We are not permitted to increase our net mortgage portfolio
assets above the amount shown in our minimum capital report to
OFHEO as of December 31, 2005 ($727.75 billion),
except in limited circumstances at the discretion of OFHEO. We
will be subject to this limitation on portfolio growth until the
Director of OFHEO has determined that expiration of the
limitation is appropriate in light of information regarding: our
capital; market liquidity issues; housing goals; risk management
improvements; outside auditors opinion that our
consolidated financial statements present fairly in all material
respects our financial condition; receipt of an unqualified
opinion from an outside audit firm that our internal controls
are effective pursuant to section 404 of the Sarbanes-Oxley
Act of 2002; or other relevant information.
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Pursuant to the capital restoration plan, we provide a quarterly
capital report to OFHEO.
Common
Stock
Shares of common stock outstanding, net of shares held in
treasury, totaled approximately 971 million,
969 million and 970 million as of December 31,
2005, 2004 and 2003, respectively. During 2005, 2004 and 2003,
we issued 1.5 million, 5.8 million and
2.8 million shares of common stock, respectively, from
treasury for our employee benefit plans. We have not issued any
common stock during 2003, 2004, 2005 and 2006 other than in
connection with these plans. Our ability to issue common stock
will be limited until we have returned to timely financial
reporting.
In January 2003, our Board of Directors approved a share
repurchase program (the General Repurchase
Authority) authorizing us to repurchase up to 5% of our
shares of common stock outstanding as of December 31, 2002,
as well as additional shares to offset stock issued, or expected
to be issued, under our employee benefit plans. Under this
General Repurchase Authority, which does not have a specified
expiration date, we repurchased 7.2 million shares of
common stock at a weighted average cost per share of $73.67 in
2004 and 21.3 million shares of common stock at a weighted
average cost per share of $65.28 in 2003. We have not
repurchased any shares from the open market pursuant to this
General Repurchase Authority since July 2004.
In November 2004, OFHEO agreed that our September 27, 2004
agreement with OFHEO did not impair our ability to repurchase
shares from employees under certain employee benefit plan
transactions, including reacquiring shares for: payment of
withholding taxes on the vesting of restricted stock; payment of
withholding taxes due upon the exercise of employee stock
options; and payment of the exercise price on stock options.
OFHEO also approved our request to repurchase shares from
employees in limited circumstances relating to financial
hardship.
Since April 2005, we have prohibited all of our employees from
engaging in purchases or sales of our securities except in
limited circumstances relating to financial hardship. In
November 2005, our Board of Directors authorized the creation of
a stock repurchase program that permits us to repurchase up to
$100 million of our shares from our non-officer employees,
who are employees below the level of vice president. Under the
program, we may repurchase shares weekly at fair market value
only during the 30-trading day period following our quarterly
filings on
Form 12b-25
with the SEC. Officers and members of our Board of Directors are
not permitted to participate in the program. On March 22,
2006, OFHEO advised us that it had no objection to our
proceeding with the program on the terms described to OFHEO. We
implemented the program in May 2006. From May 31, 2006 to
October 31, 2006, we have purchased an aggregate of
38,202 shares of common stock from our employees under the
program. The employee stock repurchase program does not have a
specified expiration date.
Non-Cumulative
Preferred Stock
In December 2004, we sold two issues of non-cumulative preferred
stock to institutional investors for aggregate proceeds of
$5.0 billion, which included $2.5 billion in
convertible preferred stock. These preferred stock
182
issuances represent the largest capital placement we have ever
undertaken and were a key component of our capital restoration
plan. We obtained net proceeds of $1.4 billion in 2003
through non-cumulative preferred stock issuances. We did not
redeem any preferred stock during 2005, 2004 or 2003 and to date
have not redeemed any preferred stock in 2006. Our ability to
issue preferred stock in the public market will be limited until
we return to timely financial reporting. We have not issued
preferred stock since December 31, 2004.
Subordinated
Debt
On September 1, 2005, we agreed with OFHEO to make specific
commitments relating to the issuance of qualifying subordinated
debt. These commitments replaced our October 2000 voluntary
initiatives relating to the maintenance of qualifying
subordinated debt. We agreed to issue qualifying subordinated
debt, rated by at least two nationally recognized statistical
rating organizations, in a quantity such that the sum of our
total capital plus the outstanding balance of our qualifying
subordinated debt equals or exceeds the sum of
(1) outstanding Fannie Mae MBS held by third parties times
0.45% and (2) total on-balance sheet assets times 4%. We
must also take reasonable steps to maintain sufficient
outstanding subordinated debt to promote liquidity and reliable
market quotes on market values. We also agreed to provide
periodic public disclosure of our compliance with these
commitments, including a comparison of the quantities of
subordinated debt and total capital to the levels required by
our agreement with OFHEO.
Every six months, commencing January 1, 2006, we are
required to submit to OFHEO a subordinated debt management plan
that includes any issuance plans for the upcoming six months.
Although it is not a component of core capital, subordinated
debt supplements our equity capital. It is designed to provide a
risk-absorbing layer to supplement core capital for the benefit
of senior debt holders. In addition, the spread between the
trading prices of our subordinated debt and our senior debt
serves as a market indicator to investors of the relative credit
risk of our debt. A narrow spread between the trading prices of
our subordinated debt and senior debt implies that the market
perceives the credit risk of our debt to be relatively low. A
wider spread between these prices implies that the market
perceives our debt to have a higher relative credit risk.
The sum of our total capital plus the outstanding balance of our
qualifying subordinated debt exceeded the sum of
(1) outstanding Fannie Mae MBS held by third parties times
0.45% and (2) total on-balance sheet assets times 4% by
$8.4 billion, or 19.9%, as of June 30, 2006, and by
$6.9 billion, or 16.8%, as of December 31, 2005.
Qualifying subordinated debt with a remaining maturity of less
than five years receives only partial credit in this
calculation. One-fifth of the outstanding amount is excluded
each year during the instruments last five years before
maturity and, when the remaining maturity is less than one year,
the instrument is entirely excluded.
Qualifying subordinated debt is defined as subordinated debt
that contains an interest deferral feature that requires us to
defer the payment of interest for up to five years if either:
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our core capital is below 125% of our critical capital
requirement; or
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our core capital is below our minimum capital requirement, and
the U.S. Secretary of the Treasury, acting on our request,
exercises his or her discretionary authority pursuant to
Section 304(c) of the Charter Act to purchase our debt
obligations.
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Core capital is defined by OFHEO and represents the sum of the
stated value of our outstanding common stock (common stock less
treasury stock), the stated value of our outstanding
non-cumulative perpetual preferred stock, our paid-in capital
and our retained earnings, as determined in accordance with GAAP.
During any period in which we defer payment of interest on
qualifying subordinated debt, we may not declare or pay
dividends on, or redeem, purchase or acquire, our common stock
or preferred stock. To date, no triggering events have occurred
that would require us to defer interest payments on our
qualifying subordinated debt.
Prior to our September 1, 2005 agreement with OFHEO,
pursuant to our voluntary initiatives, we sought to maintain
sufficient subordinated debt to bring the sum of total capital
and outstanding subordinated debt to at least 4% of on-balance
sheet assets, after providing adequate capital to support Fannie
Mae MBS held by third parties that is not included in the
consolidated balance sheets. We had qualifying subordinated debt
with a carrying amount of $12.5 billion, $12.5 billion
and $8.5 billion as of December 31, 2004, 2003 and
2002,
183
respectively, which, together with our total capital,
constituted 4.0%, 3.3% and 2.7% of our on-balance sheet assets
as of December 31, 2004, 2003 and 2002, respectively.
Qualified subordinated debt with a remaining maturity of less
than five years did not receive a partial credit in this
calculation.
We issued $4.0 billion and $3.5 billion of qualifying
subordinated debt securities in 2003 and 2002, respectively. We
have not issued any subordinated debt securities since 2003.
Under our agreement with OFHEO, we intend to resume the issuance
of subordinated debt once we return to timely financial
reporting. In May 2006, $1.6 billion of our qualifying
subordinated debt matured. As of the date of this filing, we
have $11.0 billion in outstanding qualifying subordinated
debt.
Dividends
In January 2005, our Board of Directors reduced our quarterly
dividend rate by 50%, from $0.52 per share of common stock
to $0.26 per share of common stock. We reduced our common
stock dividend rate in order to increase our capital surplus,
which was a component of our capital restoration plan.
We have paid quarterly common stock dividends of:
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$0.39 per share for the first and second quarters of 2003;
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$0.45 per share for the third and fourth quarters of 2003;
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$0.52 per share for each quarter of 2004;
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$0.26 per share for each quarter of 2005; and
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$0.26 per share for the first, second and third quarters of 2006.
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On October 17, 2006, the Board of Directors declared common
stock dividends of $0.26 per share for the fourth quarter of
2006, which was paid on November 27, 2006. On
December 6, 2006, the Board of Directors increased the
quarterly common stock dividend to $0.40 per share. The Board
determined that the increased dividend would be effective
beginning in the fourth quarter of 2006, and therefore declared
a special common stock dividend of $0.14 per share, payable on
December 29, 2006, to stockholders of record on
December 15, 2006. This special dividend of $0.14, combined
with our previously declared dividend of $0.26 paid on November
27, 2006, will result in a total common stock dividend of $0.40
per share for the fourth quarter of 2006.
Our Board of Directors has also approved preferred stock
dividends for the period commencing December 31, 2003, up
to but excluding December 31, 2006. See Notes to
Consolidated Financial StatementsNote 17, Preferred
Stock for detailed information on our preferred stock
dividends.
OFF-BALANCE
SHEET ARRANGEMENTS
We enter into certain business arrangements to facilitate our
statutory purpose of providing liquidity to the secondary
mortgage market and to reduce our exposure to interest rate
fluctuations. We form arrangements to meet the financial needs
of our customers and manage our credit, market or liquidity
risks. Some of these arrangements are not recorded in the
consolidated balance sheets or may be recorded in amounts
different from the full contract or notional amount of the
transaction, depending on the nature or structure of, and
accounting required to be applied to, the arrangement. These
arrangements are commonly referred to as off-balance sheet
arrangements, and expose us to potential losses in excess
of the amounts recorded in the consolidated balance sheets.
The most significant off-balance sheet arrangements that we
engage in result from the mortgage loan securitization and
resecuritization transactions that we routinely enter into as
part of the normal course of our business operations. Our
Single-Family Credit Guaranty business generates most of its
revenues through the guaranty fees earned from these
securitization transactions. In addition, our HCD business
generates a significant amount of its revenues through the
guaranty fees earned from these securitization transactions. We
also enter into other guaranty transactions and hold LIHTC
partnership interests that are considered off-balance sheet
arrangements.
184
Fannie
Mae MBS Transactions and Other Financial Guaranties
As described in Item 1Business, both our
Single-Family Credit Guaranty business and our HCD business
generate revenue through guaranty fees earned in connection with
the issuance of Fannie Mae MBS. In a typical Fannie Mae MBS
transaction, we receive mortgage loans or mortgage-related
securities from lenders and transfer the assets to a trust or
special purpose entity. Upon creation of the trust, we deliver
back beneficial interests in the trust to investors in the form
of Fannie Mae MBS. In holding Fannie Mae MBS created from a pool
of whole loans, an investor has securities that are generally
more liquid than whole loans, which provides the investor with
greater financial flexibility. In particular, by holding readily
marketable Fannie Mae MBS, lenders increase their ability to
replenish their funds for use in making additional loans.
We guarantee to each MBS trust that we will supplement mortgage
loan collections as required to permit timely payments of
principal and interest on the related Fannie Mae MBS,
irrespective of the cash flows received from borrowers. In
connection with our guaranties issued or modified on or after
January 1, 2003, we record in the consolidated balance
sheets a guaranty obligation based on an estimate of our
non-contingent obligation to stand ready to perform under these
guaranties. We also record in the consolidated balance sheets a
reserve for guaranty losses based on an estimate of our incurred
credit losses on all of our guaranties, irrespective of the
issuance date.
While we hold some Fannie Mae MBS in our mortgage portfolio, the
substantial majority of outstanding Fannie Mae MBS is held by
third parties and therefore is generally not reflected in the
consolidated balance sheets. Of the $1.9 trillion in total
Fannie Mae MBS outstanding as of December 31, 2004,
$344.4 billion was held in our portfolio and $1.4 trillion
was held by third-party investors. The $344.4 billion in
Fannie Mae MBS held in our portfolio is reflected in the
consolidated balance sheets as Investments in
securities. We consolidate certain Fannie Mae MBS trusts
depending on the significance of our interest in those MBS
trusts. Upon consolidation, we recognize the assets of the
consolidated trust. As of December 31, 2004, we had
recognized $150.1 billion of assets as Mortgage
loans in the consolidated balance sheets as a result of
consolidating MBS trusts. Accordingly, as of December 31,
2004, there was approximately $1.4 trillion in outstanding and
unconsolidated Fannie Mae MBS held by third parties, which is
not included in the consolidated balance sheets.
While our guaranties relating to Fannie Mae MBS represent the
substantial majority of our guaranty activity, we also provide
other financial guaranties. Our HCD business provides credit
enhancements primarily for taxable and tax-exempt bonds issued
by state and local governmental entities to finance multifamily
housing for low- and moderate-income families. Under these
credit enhancement arrangements, we guarantee to the trust that
we will supplement proceeds as required to permit timely payment
on the related bonds, which improves the bond ratings and
thereby results in lower-cost financing for multifamily housing.
Our HCD business generates revenue from the fees earned on these
transactions. These transactions also contribute to our housing
goals and help us meet other mission-related objectives.
Our maximum potential exposure to credit losses relating to our
outstanding and unconsolidated Fannie Mae MBS held by third
parties and our other financial guaranties is significantly
higher than the carrying amount of the guaranty obligations and
reserve for guaranty losses that are reflected in the
consolidated balance sheets. In the case of outstanding and
unconsolidated Fannie Mae MBS held by third parties, our maximum
potential exposure arising from these guaranties is primarily
represented by the unpaid principal balance of the mortgage
loans underlying these Fannie Mae MBS, which was
$1.4 trillion as of December 31, 2004. In the case of
our other financial guaranties, our maximum potential exposure
is primarily represented by the unpaid principal balance of the
underlying bonds and loans, which was $14.8 billion as of
December 31, 2004.
Based on our historical credit losses, which have averaged
approximately 0.01% of our mortgage credit book of business
during the period 2002 to 2004, we do not believe that the
maximum exposure on our Fannie Mae MBS and other credit-related
guaranties is representative of our actual credit exposure
relating to these guaranties. In the event that we were required
to make payments under these guaranties, we would pursue
recovery of these payments by exercising our rights to the
collateral backing the underlying loans or through available
credit enhancements (which includes all recourse with third
parties and mortgage insurance).
185
The table below presents a summary of our on- and off-balance
sheet Fannie Mae MBS and other guaranty obligations as of
December 31, 2004 and 2003.
Table
44: On- and Off-Balance Sheet Arrangements
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae MBS and other guaranties
outstanding(1)
|
|
$
|
1,917,384
|
|
|
$
|
1,880,238
|
|
Less: Fannie Mae MBS held in
portfolio(2)
|
|
|
344,404
|
|
|
|
405,922
|
|
Less: Consolidated Fannie Mae
MBS(3)
|
|
|
150,108
|
|
|
|
160,627
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS held by third
parties and other guaranties
|
|
$
|
1,422,872
|
|
|
$
|
1,313,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents $1.9 trillion in unpaid
principal balance of Fannie Mae MBS outstanding as of both
December 31, 2004 and 2003 and $14.8 billion and
$13.2 billion in unpaid principal balance of other
guaranties as of December 31, 2004 and 2003, respectively.
|
|
(2) |
|
Recorded as Investments in
Securities in the consolidated balance sheets.
|
|
(3) |
|
Represents consolidated Fannie Mae
MBS, which are recorded as Mortgage loans in the
consolidated balance sheets.
|
For more information on our securitization transactions,
including the interests we retain in these transactions, cash
flows from these transactions, and our accounting for these
transactions, see Notes to Consolidated Financial
StatementsNote 7, Portfolio Securitizations,
Notes to Consolidated Financial
StatementsNote 8, Financial Guaranties and Master
Servicing and Notes to Consolidated Financial
StatementsNote 18, Concentrations of Credit
Risk. For information on the revenues and expenses
associated with our Single-Family Credit Guaranty and HCD
businesses, refer to Business Segment Results.
LIHTC
Partnership Interests
Our HCD businesss Community Investment Group makes equity
investments in numerous limited partnerships that sponsor
affordable housing projects utilizing the low-income housing tax
credit pursuant to Section 42 of the Internal Revenue Code.
We invest in LIHTC partnerships in order to increase the supply
of affordable housing in the United States and to serve
communities in need. In addition, our investments in LIHTC
partnerships generate both tax credits and net operating losses
that reduce our federal income tax liability. The tax benefits
associated with these LIHTC partnerships were the primary
reasons for our effective tax rate in 2004 being 17% versus the
federal statutory rate of 35%.
LIHTC partnerships own interests in rental housing that the
partnerships have developed or rehabilitated. By renting a
specified portion of the housing units to qualified low-income
tenants over a
15-year
period, the partnerships become eligible for the federal
low-income housing tax credit. To qualify for this tax credit,
among other requirements, the project owner must irrevocably
elect that either (1) a minimum of 20% of the residential
units will be rent-restricted and occupied by tenants whose
income does not exceed 50% of the area median gross income, or
(2) a minimum of 40% of the residential units will be
rent-restricted and occupied by tenants whose income does not
exceed 60% of the area median gross income. Failure to qualify
as an affordable housing project over the entire
15-year
period may result in the recapture of a portion of the tax
credits. The LIHTC partnerships are generally organized by fund
manager sponsors who seek out investments with third-party
developers who in turn develop or rehabilitate the properties,
and subsequently manage them. We invest in these partnerships as
a limited partner with the fund manager acting as the general
partner. In making investments in these LIHTC partnerships, our
HCD businesss Community Investment Group identifies
qualified sponsors and structures the terms of our investment.
In certain instances, we have been determined to be the primary
beneficiary of these LIHTC partnership investments, and
therefore all of the partnership assets and liabilities have
been recorded in the consolidated balance sheets, and the
portion of these investments owned by third parties is recorded
in the consolidated balance sheets as an offsetting minority
interest. In most instances, we are not the primary beneficiary
of the investments, and therefore our consolidated balance
sheets reflect only our investment in the partnership, rather
186
than the full amount of the partnerships assets and
liabilities. Our investments in LIHTC partnerships are recorded
in the consolidated balance sheets as Partnership
investments.
In cases where we are not the primary beneficiary of these
investments, we account for our investments in LIHTC
partnerships by using the equity method of accounting or the
effective yield method of accounting, as appropriate. In each
case, we record in the consolidated financial statements our
share of the income and losses of the partnerships, as well as
our share of the tax credits and tax benefits of the
partnerships. Our share of the operating losses generated by our
LIHTC partnerships is recorded in the consolidated statements of
income under Loss from partnership investments. The
tax credits and benefits associated with any operating losses
incurred by these LIHTC partnerships are recorded in the
consolidated statements of income within our Provision for
federal income taxes.
As of December 31, 2004, we had a recorded investment in
these LIHTC partnerships of $6.8 billion. Our risk exposure
relating to these LIHTC partnerships is limited to the amount of
our investment and the possible recapture of the tax benefits we
have received from the partnership. Neither creditors of, nor
equity investors in, these partnerships have any recourse to our
general credit. To manage the risks associated with a
partnership, we track compliance with the LIHTC requirements, as
well as the property condition and financial performance of the
underlying investment throughout the life of the investment. In
addition, we evaluate the strength of the partnerships
sponsor through periodic financial and operating assessments.
Further, in some of our LIHTC partnership investments, our
exposure to loss is further mitigated by our having a guaranteed
economic return from an investment grade counterparty.
The table below provides information regarding our LIHTC
partnership investments as of and for the year ended
December 31, 2004:
Table
45: LIHTC Partnership Investments
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Consolidated
|
|
|
Non-Consolidated
|
|
|
|
(Dollars in millions)
|
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
Obligation to fund LIHTC
partnerships
|
|
$
|
562
|
|
|
$
|
1,512
|
|
For the year ended December 31:
|
|
|
|
|
|
|
|
|
Tax credits from investments in
LIHTC partnerships
|
|
$
|
325
|
|
|
$
|
386
|
|
Losses from investments in LIHTC
partnerships
|
|
|
178
|
|
|
|
508
|
|
Tax benefits on credits and losses
from investments in LIHTC partnerships
|
|
|
387
|
|
|
|
563
|
|
Contributions to LIHTC partnerships
|
|
|
600
|
|
|
|
791
|
|
Distributions from LIHTC
partnerships
|
|
|
1
|
|
|
|
|
|
For more information on our off-balance sheet transactions, see
Notes to Consolidated Financial
StatementsNote 18, Concentrations of Credit
Risk.
IMPACT OF
FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS
SOP 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
In December 2003, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued
SOP 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
(SOP 03-3).
SOP 03-3
applies to acquired loans, debt securities and beneficial
interests where there has been evidence of deterioration in
credit quality since origination and for which it is probable at
the purchase date that the investor will not be able to collect
all contractually required payments receivable. It addresses the
accounting for differences between the contractual cash flows of
acquired loans and the cash flows expected to be collected from
an investors initial investment in loans acquired in a
transfer if those differences are attributable, at least in
part, to credit quality.
SOP 03-3
requires purchased loans, debt securities and beneficial
interests within its scope to be initially recorded at fair
value and prohibits the creation or carry over of a valuation
allowance at the date of purchase.
187
It limits the yield that may be accreted as interest income on
such loans to the excess of an investors estimate of
undiscounted expected principal, interest, and other cash flows
from the loan over the investors initial investment in the
loan. The amount of yield to be accreted is not displayed in the
consolidated balance sheets. Subsequent increases in estimated
future cash flows to be collected are recognized prospectively
in interest income through a yield adjustment over the remaining
life of the loan. Decreases in estimated future cash flows to be
collected are recognized as an impairment expense through a
valuation allowance.
SOP 03-3
applies prospectively to loans acquired in fiscal years
beginning after December 15, 2004. Loans carried at fair
value or mortgage loans held for sale are excluded from the
scope of
SOP 03-3.
SOP 03-3
will apply primarily to delinquent loans that we purchase from
MBS trusts in connection with our guaranty as well as to
delinquent loans in MBS trusts or private-label trusts that we
consolidate pursuant to FIN 46R. We are evaluating the
effect of the adoption of
SOP 03-3
to the consolidated financial statements.
SFAS 123R,
Share-Based Payment and SAB No. 107
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment (SFAS 123R), which
revises SFAS No. 123 and supersedes APB Opinion
No. 25, and its related implementation guidance.
SFAS 123R eliminates the alternative of applying the
intrinsic value measurement provisions of APB 25 to stock
compensation awards issued to employees. Rather, SFAS 123R
requires measurement of the cost of employee services received
in exchange for an award of equity instruments based on the
grant-date fair value of the award. With respect to options,
SFAS 123R requires that they be measured at fair value
using an option-pricing model that takes into account the
options unique characteristics and recognition of the cost
as expense over the period the employee provides services to
earn the award, which is generally the vesting period. Also,
SFAS 123R requires that cash flows resulting from tax
deductions in excess of the compensation cost recognized for
those stock incentive awards, also referred to as excess tax
benefits, to be classified as financing activities in the
consolidated statements of cash flows.
This standard includes measurement requirements for employee
stock options that are similar to those under the
fair-value-based
method of SFAS 123; however, SFAS 123R requires
initial and ongoing estimates of the amount of shares that will
vest while SFAS 123 provided entities the option of
assuming that all shares would vest and then recognize actual
forfeitures as they occur and distinguishment of awards between
equity and liabilities based on guidance in
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity.
Additionally, SEC Staff Accounting Bulletin No. 107,
Share-Based Payment, provides guidance related to the
interaction between SFAS 123R and certain SEC rules and
regulations, as well as the staffs views regarding the
valuation of share-based payment arrangements.
SFAS 123R is effective for annual periods beginning after
June 15, 2005 and requires use of the modified prospective
application method to be applied to new awards, unvested awards
and to awards modified, repurchased, or cancelled after the
effective date. We prospectively adopted the fair value expense
recognition provisions of SFAS 123 effective
January 1, 2003, using a model to estimate the fair value
of the majority of our stock awards. We adopted SFAS 123R
effective January 1, 2006 with no material impact to the
consolidated financial statements.
SFAS 154,
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which replaces
APB Opinion No. 20, Accounting Changes
(APB 20) and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle and changes required
by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
APB 20 requires that the cumulative effect of most
voluntary changes in accounting principles be included in net
income in the period of adoption. The new statement requires
retrospective application to prior periods financial
statements of a voluntary change in accounting principle, unless
it is impracticable to determine either period-specific effects
or the cumulative effect of the change. In addition,
SFAS 154 requires that we
188
account for a change in method of depreciation, amortization, or
depletion for long-lived, non-financial assets as a change in
accounting estimate that is affected by a change in accounting
principle. APB 20 previously required that we report such a
change as a change in accounting principle.
SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The adoption of SFAS 154 effective
January 1, 2006 had no impact on the consolidated financial
statements.
SFAS 155,
Accounting for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(an amendment of SFAS 133 and SFAS 140)
(SFAS 155). This statement: (i) clarifies
which interest-only strips and principal-only strips are not
subject to SFAS 133; (ii) establishes a requirement to
evaluate interests in securitized financial instruments that
contain an embedded derivative requiring bifurcation;
(iii) clarifies that concentration of credit risks in the
form of subordination are not embedded derivatives; and
(iv) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation.
SFAS 155 also amends Derivatives Implementation Group
(DIG) Issue No. B39 relating to the application
of call options that are exercisable only by a debtor. In
November 2006, DIG Issue No. B40 was proposed by the FASB.
The objective of the proposed guidance is to provide a narrow
scope exception to certain provisions of SFAS 133 for
securitized interests that contain only an embedded derivative
that is tied to the prepayment risk of the underlying financial
assets. Final guidance is expected to be issued in early 2007
with an effective date that coincides with that of
SFAS 155. SFAS 155 is effective for all financial
instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. We intend
to adopt SFAS 155 effective January 1, 2007 and are
evaluating the impact of its adoption on the consolidated
financial statements.
SFAS 156,
Accounting for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, an
amendment of FASB Statement No. 140
(SFAS 156). SFAS 156 modifies
SFAS 140 by requiring that mortgage servicing rights
(MSRs) be initially recognized at fair value and by
providing the option to either (i) carry MSRs at fair value
with changes in fair value recognized in earnings or
(ii) continue recognizing periodic amortization expense and
assess the MSRs for impairment as was originally required by
SFAS 140. This option is available by class of servicing
asset or liability. This statement also changes the calculation
of the gain from the sale of financial assets by requiring that
the fair value of servicing rights be considered part of the
proceeds received in exchange for the sale of the assets.
SFAS 156 is effective for all separately recognized
servicing assets and liabilities acquired or issued after the
beginning of a fiscal year that begins after September 15,
2006, with early adoption permitted. We intend to adopt
SFAS 156 effective January 1, 2007. We do not believe
the adoption of SFAS 156 will have a material effect on the
consolidated financial statements.
FIN 48,
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 supplements SFAS 109
by defining a threshold for recognizing tax benefits in the
consolidated financial statements.
FIN 48 provides a two-step approach to recognizing and
measuring tax benefits when a benefits realization is uncertain.
First, we must determine whether the benefit is to be recognized
and then the amount to be recognized. Income tax benefits should
be recognized when, based on the technical merits of a tax
position, we believe that if upon examination, including
resolution of any appeals or litigation process, it is more
likely than not (a probability of greater than 50%) that the tax
position would be sustained as filed. The benefit recognized for
a tax position that meets the more-likely-than-not criterion is
measured based on the largest amount of tax benefit that is more
than 50% likely to be realized upon ultimate settlement with the
taxing authority, taking into consideration the amounts and
probabilities of the outcomes upon settlement.
189
FIN 48 is effective for consolidated financial statements
beginning in the first quarter of 2007. The cumulative effect of
applying the provisions of FIN 48 upon adoption will be
reported as an adjustment to beginning retained earnings. We are
evaluating the impact of its adoption on the consolidated
financial statements.
SFAS 157,
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement (SFAS 157).
SFAS 157 provides enhanced guidance for using fair value to
measure assets and liabilities and requires companies to provide
expanded information about assets and liabilities measured at
fair value, including the effect of fair value measurements on
earnings. This statement applies whenever other standards
require (or permit) assets or liabilities to be measured at fair
value, but does not expand the use of fair value in any new
circumstances.
Under SFAS 157, fair value refers to the price that would
be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants in the market
in which the reporting entity transacts. This statement
clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing the asset
or liability. In support of this principle, this standard
establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data (for
example, a companys own data). Under this statement, fair
value measurements would be separately disclosed by level within
the fair value hierarchy.
SFAS 157 is effective for consolidated financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We intend to
adopt SFAS 157 effective January 1, 2008 and are
evaluating the impact of its adoption on the consolidated
financial statements.
SFAS 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires the
recognition of a plans over-funded or under-funded status
as an asset or liability and an adjustment to AOCI.
Additionally, it requires determination of benefit obligations
and the fair values of a plans assets at a companys
year-end and recognition of actuarial gains and losses, and
prior service costs and credits, as a component of AOCI. For
employers with publicly-traded securities, SFAS 158 is
effective as of the end of the fiscal year ending after
December 15, 2006. We intend to adopt SFAS 158
effective December 31, 2006 and are evaluating the impact
of its adoption on the consolidated financial statements.
2004
QUARTERLY REVIEW
We provide certain selected unaudited quarterly financial
statement information for the year ended December 31, 2004
in Notes to Consolidated Financial
StatementsNote 21, Selected Quarterly Financial
Information (Unaudited). The selected financial
information includes the following:
|
|
|
|
|
Condensed consolidated statements of income for the quarters
ended March 31, 2004, June 30, 2004,
September 30, 2004 and December 31, 2004.
|
|
|
|
Condensed consolidated balance sheets as of March 31, 2004,
June 30, 2004, September 30, 2004 and
December 31, 2004.
|
|
|
|
Condensed business segment results of operations for the
quarters ended March 31, 2004, June 30, 2004,
September 30, 2004 and December 31, 2004.
|
The results for the quarters ended March 31, 2004 and
June 30, 2004 have been restated from previously reported
results. See Restatement for more information
about our restatement. Since the results for the quarters ended
September 30, 2004 and December 31, 2004 were not
previously reported, they are not being restated.
190
Table
46: 2004 Quarterly Condensed Consolidated Statements
of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
March 31, 2004
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
As
|
|
|
As Previously
|
|
|
As
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
2004
|
|
|
2004
|
|
|
|
(Dollars and shares in millions, except per share amounts)
|
|
|
Net interest income
|
|
$
|
3,196
|
|
|
$
|
5,062
|
|
|
$
|
3,113
|
|
|
$
|
4,836
|
|
|
$
|
4,000
|
|
|
$
|
4,183
|
|
Guaranty fee income
|
|
|
737
|
|
|
|
891
|
|
|
|
657
|
|
|
|
727
|
|
|
|
1,067
|
|
|
|
919
|
|
Investment gains (losses), net
|
|
|
(8
|
)
|
|
|
525
|
|
|
|
(273
|
)
|
|
|
(1,518
|
)
|
|
|
887
|
|
|
|
(256
|
)
|
Derivatives fair value gains
(losses), net
|
|
|
(972
|
)
|
|
|
(6,446
|
)
|
|
|
(1,958
|
)
|
|
|
2,269
|
|
|
|
(7,136
|
)
|
|
|
(943
|
)
|
Debt extinguishment gains (losses),
net
|
|
|
(27
|
)
|
|
|
(78
|
)
|
|
|
24
|
|
|
|
(7
|
)
|
|
|
(21
|
)
|
|
|
(46
|
)
|
Loss from partnership investments
|
|
|
(92
|
)
|
|
|
(145
|
)
|
|
|
(86
|
)
|
|
|
(177
|
)
|
|
|
(177
|
)
|
|
|
(203
|
)
|
Fee and other income
|
|
|
158
|
|
|
|
56
|
|
|
|
208
|
|
|
|
413
|
|
|
|
103
|
|
|
|
(168
|
)
|
Provision for credit losses
|
|
|
(32
|
)
|
|
|
(13
|
)
|
|
|
12
|
|
|
|
(55
|
)
|
|
|
(65
|
)
|
|
|
(219
|
)
|
Other expenses
|
|
|
(402
|
)
|
|
|
(456
|
)
|
|
|
(416
|
)
|
|
|
(415
|
)
|
|
|
(417
|
)
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
2,558
|
|
|
|
(604
|
)
|
|
|
1,281
|
|
|
|
6,073
|
|
|
|
(1,759
|
)
|
|
|
2,289
|
|
Provision (benefit) for federal
income taxes
|
|
|
659
|
|
|
|
(529
|
)
|
|
|
169
|
|
|
|
1,753
|
|
|
|
(910
|
)
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary
gains (losses)
|
|
|
1,899
|
|
|
|
(75
|
)
|
|
|
1,112
|
|
|
|
4,320
|
|
|
|
(849
|
)
|
|
|
1,579
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(18
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,899
|
|
|
$
|
(65
|
)
|
|
$
|
1,112
|
|
|
$
|
4,317
|
|
|
$
|
(867
|
)
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
(40
|
)
|
|
|
(40
|
)
|
|
|
(41
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders
|
|
$
|
1,856
|
|
|
$
|
(108
|
)
|
|
$
|
1,072
|
|
|
$
|
4,277
|
|
|
$
|
(908
|
)
|
|
$
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses)
|
|
$
|
1.91
|
|
|
$
|
(0.12
|
)
|
|
$
|
1.11
|
|
|
$
|
4.41
|
|
|
$
|
(0.92
|
)
|
|
$
|
1.59
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
1.91
|
|
|
$
|
(0.11
|
)
|
|
$
|
1.11
|
|
|
$
|
4.41
|
|
|
$
|
(0.94
|
)
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses)
|
|
$
|
1.90
|
|
|
$
|
(0.12
|
)
|
|
$
|
1.10
|
|
|
$
|
4.40
|
|
|
$
|
(0.92
|
)
|
|
$
|
1.59
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
1.90
|
|
|
$
|
(0.11
|
)
|
|
$
|
1.10
|
|
|
$
|
4.40
|
|
|
$
|
(0.94
|
)
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
972
|
|
|
|
972
|
|
|
|
969
|
|
|
|
969
|
|
|
|
968
|
|
|
|
969
|
|
Diluted
|
|
|
975
|
|
|
|
972
|
|
|
|
970
|
|
|
|
973
|
|
|
|
968
|
|
|
|
972
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current condensed consolidated
statement of income presentation.
|
191
Table
47: 2004 Quarterly Condensed Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2004
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
As
|
|
|
As Previously
|
|
|
As
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
2004
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,214
|
|
|
$
|
5,205
|
|
|
$
|
340
|
|
|
$
|
3,479
|
|
|
$
|
3,857
|
|
|
$
|
2,655
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading, at fair value
|
|
|
6
|
|
|
|
42,552
|
|
|
|
11
|
|
|
|
38,323
|
|
|
|
37,223
|
|
|
|
35,287
|
|
Available-for-sale,
at fair value
|
|
|
225,853
|
|
|
|
517,106
|
|
|
|
240,475
|
|
|
|
515,067
|
|
|
|
535,826
|
|
|
|
532,095
|
|
Held-to-maturity,
at fair value
|
|
|
468,863
|
|
|
|
|
|
|
|
458,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
694,722
|
|
|
|
559,658
|
|
|
|
698,743
|
|
|
|
553,390
|
|
|
|
573,049
|
|
|
|
567,382
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of
cost or market
|
|
|
6,655
|
|
|
|
13,318
|
|
|
|
2,637
|
|
|
|
11,363
|
|
|
|
11,280
|
|
|
|
11,721
|
|
Loans held for investment, at
amortized cost
|
|
|
236,054
|
|
|
|
380,115
|
|
|
|
239,982
|
|
|
|
385,253
|
|
|
|
389,766
|
|
|
|
390,000
|
|
Allowance for loan losses
|
|
|
(85
|
)
|
|
|
(288
|
)
|
|
|
(80
|
)
|
|
|
(296
|
)
|
|
|
(288
|
)
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
242,624
|
|
|
|
393,145
|
|
|
|
242,539
|
|
|
|
396,320
|
|
|
|
400,758
|
|
|
|
401,372
|
|
Derivative assets at fair value
|
|
|
7,464
|
|
|
|
7,223
|
|
|
|
11,300
|
|
|
|
9,736
|
|
|
|
8,729
|
|
|
|
6,589
|
|
Guaranty assets
|
|
|
5,100
|
|
|
|
4,798
|
|
|
|
5,810
|
|
|
|
5,602
|
|
|
|
5,652
|
|
|
|
5,924
|
|
Deferred tax assets
|
|
|
11,622
|
|
|
|
4,767
|
|
|
|
8,934
|
|
|
|
7,043
|
|
|
|
6,508
|
|
|
|
6,074
|
|
Other assets
|
|
|
30,522
|
|
|
|
36,281
|
|
|
|
21,675
|
|
|
|
26,480
|
|
|
|
28,496
|
|
|
|
30,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
995,268
|
|
|
$
|
1,011,077
|
|
|
$
|
989,341
|
|
|
$
|
1,002,050
|
|
|
$
|
1,027,049
|
|
|
$
|
1,020,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
468,999
|
|
|
$
|
337,312
|
|
|
$
|
422,899
|
|
|
$
|
312,247
|
|
|
$
|
336,321
|
|
|
$
|
320,280
|
|
Long-term debt
|
|
|
474,091
|
|
|
|
606,340
|
|
|
|
515,296
|
|
|
|
632,076
|
|
|
|
630,585
|
|
|
|
632,831
|
|
Derivative liabilities at fair value
|
|
|
4,146
|
|
|
|
5,357
|
|
|
|
318
|
|
|
|
558
|
|
|
|
1,885
|
|
|
|
1,145
|
|
Reserve for guaranty losses
|
|
|
710
|
|
|
|
271
|
|
|
|
677
|
|
|
|
271
|
|
|
|
299
|
|
|
|
396
|
|
Guaranty obligations
|
|
|
5,100
|
|
|
|
7,084
|
|
|
|
5,810
|
|
|
|
8,208
|
|
|
|
8,396
|
|
|
|
8,784
|
|
Other liabilities
|
|
|
21,370
|
|
|
|
20,731
|
|
|
|
18,176
|
|
|
|
18,395
|
|
|
|
16,549
|
|
|
|
18,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
974,416
|
|
|
|
977,095
|
|
|
|
963,176
|
|
|
|
971,755
|
|
|
|
994,035
|
|
|
|
981,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated
subsidiaries
|
|
|
47
|
|
|
|
52
|
|
|
|
44
|
|
|
|
50
|
|
|
|
47
|
|
|
|
76
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
36,845
|
|
|
|
27,307
|
|
|
|
37,414
|
|
|
|
31,079
|
|
|
|
29,668
|
|
|
|
30,705
|
|
Accumulated other comprehensive
income
|
|
|
(14,896
|
)
|
|
|
7,686
|
|
|
|
(9,994
|
)
|
|
|
374
|
|
|
|
4,462
|
|
|
|
4,387
|
|
Other stockholders equity
|
|
|
(1,144
|
)
|
|
|
(1,063
|
)
|
|
|
(1,299
|
)
|
|
|
(1,208
|
)
|
|
|
(1,163
|
)
|
|
|
3,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
20,805
|
|
|
|
33,930
|
|
|
|
26,121
|
|
|
|
30,245
|
|
|
|
32,967
|
|
|
|
38,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
995,268
|
|
|
$
|
1,011,077
|
|
|
$
|
989,341
|
|
|
$
|
1,002,050
|
|
|
$
|
1,027,049
|
|
|
$
|
1,020,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current condensed consolidated
balance sheet presentation.
|
192
Table
48: 2004 Quarterly Condensed Business Segment
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
93
|
|
|
$
|
(37
|
)
|
|
$
|
5,006
|
|
|
$
|
5,062
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,096
|
|
|
|
98
|
|
|
|
(303
|
)
|
|
|
891
|
|
Investment gains, net
|
|
|
32
|
|
|
|
|
|
|
|
493
|
|
|
|
525
|
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(6,446
|
)
|
|
|
(6,446
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
|
|
(78
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
(145
|
)
|
Fee and other income (expense)
|
|
|
49
|
|
|
|
48
|
|
|
|
(41
|
)
|
|
|
56
|
|
Provision for credit losses
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
(13
|
)
|
Other expenses
|
|
|
(236
|
)
|
|
|
(84
|
)
|
|
|
(136
|
)
|
|
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
1,031
|
|
|
|
(130
|
)
|
|
|
(1,505
|
)
|
|
|
(604
|
)
|
Provision (benefit) for federal
income taxes
|
|
|
359
|
|
|
|
(226
|
)
|
|
|
(662
|
)
|
|
|
(529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary
gains (losses)
|
|
|
672
|
|
|
|
96
|
|
|
|
(843
|
)
|
|
|
(75
|
)
|
Extraordinary gain, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
672
|
|
|
$
|
96
|
|
|
$
|
(833
|
)
|
|
$
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) of $254 million allocated to Single-Family
Credit Guaranty and HCD from Capital Markets for absorbing the
credit risk on mortgage loans and Fannie Mae MBS held in our
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended June 30, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
118
|
|
|
$
|
(34
|
)
|
|
$
|
4,752
|
|
|
$
|
4,836
|
|
Guaranty fee income
(expense)(2)
|
|
|
954
|
|
|
|
77
|
|
|
|
(304
|
)
|
|
|
727
|
|
Investment gains (losses), net
|
|
|
29
|
|
|
|
|
|
|
|
(1,547
|
)
|
|
|
(1,518
|
)
|
Derivatives fair value gains, net
|
|
|
|
|
|
|
|
|
|
|
2,269
|
|
|
|
2,269
|
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
(177
|
)
|
Fee and other income
|
|
|
77
|
|
|
|
72
|
|
|
|
264
|
|
|
|
413
|
|
Provision for credit losses
|
|
|
(34
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
(55
|
)
|
Other expenses
|
|
|
(212
|
)
|
|
|
(86
|
)
|
|
|
(117
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
932
|
|
|
|
(169
|
)
|
|
|
5,310
|
|
|
|
6,073
|
|
Provision (benefit) for federal
income taxes
|
|
|
326
|
|
|
|
(243
|
)
|
|
|
1,670
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses)
|
|
|
606
|
|
|
|
74
|
|
|
|
3,640
|
|
|
|
4,320
|
|
Extraordinary losses, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
606
|
|
|
$
|
74
|
|
|
$
|
3,637
|
|
|
$
|
4,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) of $257 million allocated to Single-Family
Credit Guaranty and HCD from Capital Markets for absorbing the
credit risk on mortgage loans and Fannie Mae MBS held in our
portfolio.
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended September 30, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
125
|
|
|
$
|
(36
|
)
|
|
$
|
3,911
|
|
|
$
|
4,000
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,278
|
|
|
|
100
|
|
|
|
(311
|
)
|
|
|
1,067
|
|
Investment gains, net
|
|
|
8
|
|
|
|
|
|
|
|
879
|
|
|
|
887
|
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(7,136
|
)
|
|
|
(7,136
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
(177
|
)
|
Fee and other income (expense)
|
|
|
41
|
|
|
|
87
|
|
|
|
(25
|
)
|
|
|
103
|
|
Provision for credit losses
|
|
|
(74
|
)
|
|
|
9
|
|
|
|
|
|
|
|
(65
|
)
|
Other expenses
|
|
|
(215
|
)
|
|
|
(93
|
)
|
|
|
(109
|
)
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
1,163
|
|
|
|
(110
|
)
|
|
|
(2,812
|
)
|
|
|
(1,759
|
)
|
Provision (benefit) for federal
income taxes
|
|
|
406
|
|
|
|
(220
|
)
|
|
|
(1,096
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary
gains (losses)
|
|
|
757
|
|
|
|
110
|
|
|
|
(1,716
|
)
|
|
|
(849
|
)
|
Extraordinary losses, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
757
|
|
|
$
|
110
|
|
|
$
|
(1,734
|
)
|
|
$
|
(867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) of $260 million allocated to Single-Family
Credit Guaranty and HCD from Capital Markets for absorbing the
credit risk on mortgage loans and Fannie Mae MBS held in our
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended December 31, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
142
|
|
|
$
|
(37
|
)
|
|
$
|
4,078
|
|
|
$
|
4,183
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,127
|
|
|
|
104
|
|
|
|
(312
|
)
|
|
|
919
|
|
Investment gains (losses), net
|
|
|
15
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
(256
|
)
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(943
|
)
|
|
|
(943
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
(46
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(203
|
)
|
|
|
|
|
|
|
(203
|
)
|
Fee and other income (expense)
|
|
|
53
|
|
|
|
105
|
|
|
|
(326
|
)
|
|
|
(168
|
)
|
Provision for credit losses
|
|
|
(201
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
(219
|
)
|
Other expenses
|
|
|
(360
|
)
|
|
|
(132
|
)
|
|
|
(486
|
)
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
776
|
|
|
|
(181
|
)
|
|
|
1,694
|
|
|
|
2,289
|
|
Provision (benefit) for federal
income taxes
|
|
|
297
|
|
|
|
(238
|
)
|
|
|
651
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
|
|
|
479
|
|
|
|
57
|
|
|
|
1,043
|
|
|
|
1,579
|
|
Extraordinary gain, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
479
|
|
|
$
|
57
|
|
|
$
|
1,046
|
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) of $260 million allocated to Single-Family
Credit Guaranty and HCD from Capital Markets for absorbing the
credit risk on mortgage loans and Fannie Mae MBS held in our
portfolio.
|
During the year ended December 31, 2004, our earnings
fluctuated from a net loss of $65 million for the quarter
ended March 31, 2004, to net income of $4.3 billion
for the quarter ended June 30, 2004, to a net loss of
$867 million for the quarter ended September 30, 2004
and to net income of $1.6 billion for the quarter
194
ended December 31, 2004. As discussed in Consolidated
Results of Operations above, we expect that our annual and
quarterly results will be volatile, primarily due to changes in
market conditions that result in periodic fluctuations in the
estimated fair value of our derivative instruments, reflected in
the consolidated statements of income as Derivatives fair
value gains (losses), net. The following is a quarterly
review of our results for the interim periods during 2004.
Quarter
Ended March 31, 2004
For the quarter ended March 31, 2004, we recorded a net
loss of $65 million, primarily from derivatives fair value
losses of $6.4 billion and other losses that more than
offset our net interest income, guaranty fee income, investment
gains and tax benefit for the quarter.
Net interest income totaled $5.1 billion for the quarter
ended March 31, 2004. The average yield on our investment
balance in the first quarter of 2004 was affected by purchases
of lower-coupon mortgages and continued liquidations of
higher-coupon mortgages.
Guaranty fee income for the quarter ended March 31, 2004
was $891 million, which was driven by average outstanding
Fannie Mae MBS for the first quarter of 2004 at an effective
guaranty fee rate that remained consistent with our effective
guaranty fee rate for 2003.
Investment gains, net for the quarter ended March 31, 2004
were primarily comprised of unrealized gains on trading
securities driven by a decline in interest rates during the
first quarter of 2004 and realized gains on securities sold
during the first quarter. These gains were slightly offset by
impairments of securities.
We recorded derivatives fair value losses of $6.4 billion
for the quarter ended March 31, 2004, which were primarily
due to losses of $1.6 billion, $790 million and
$4.0 billion in net periodic contractual interest expense,
losses in the fair value of terminated derivatives from the
beginning of the quarter to the date of termination and losses
in the fair value of open derivative positions as of
March 31, 2004, primarily due to declines in interest rates
during the first quarter of 2004 as compared to 2003 levels.
We recorded a benefit for federal income taxes of
$529 million for the quarter ended March 31, 2004. The
benefit for federal income taxes includes taxes at the federal
statutory rate of 35% adjusted for tax credits recognized for
our LIHTC partnership investments and other tax credits.
Quarter
Ended June 30, 2004
For the quarter ended June 30, 2004, we recorded net income
of $4.3 billion, primarily from derivatives fair value
gains of $2.3 billion in addition to net interest income
and guaranty fee income, which was offset by $1.5 billion
in investment losses and the quarterly tax provision.
Net interest income decreased to $4.8 billion for the
quarter ended June 30, 2004 from $5.1 billion for the
quarter ended March 31, 2004, due to a decline in our net
interest yield on a quarter-to-quarter basis and an
approximately 2% decrease in average interest-earning assets for
the second quarter of 2004. The decline in net interest yield
was primarily driven by an increase in our portfolio of
floating-rate and ARM products, which tend to earn lower initial
yields than fixed-rate mortgage assets, and increasing
short-term debt rates as short-term interest rates rose.
Guaranty fee income decreased to $727 million for the
quarter ended June 30, 2004 from $891 million for the
quarter ended March 31, 2004, due to a decrease in our
effective guaranty fee rate that was partially offset by growth
in our average MBS outstanding balances. The decrease in our
effective guaranty fee rate was primarily due to slower
recognition of deferred fee amounts, resulting from an
increasing interest rate environment during the second quarter.
Investment losses, net totaled $1.5 billion for the quarter
ended June 30, 2004, primarily due to losses from the
mark-to-market
of trading securities and LOCOM adjustments on HFS loans as
interest rates increased significantly in the second quarter of
2004. Investment losses, net for the quarter were also impacted
by realized losses on sales of investment securities.
195
We recorded derivatives fair value gains of $2.3 billion
for the quarter ended June 30, 2004, primarily due a
$4.1 billion gain in the fair value of open derivative
positions at quarter-end caused by a rise in interest rates.
This gain was reduced by a $1.4 billion loss from net
periodic contractual interest expense, a $139 million loss
in the fair value of terminated derivatives from the beginning
of the quarter to the date of termination, and a
$273 million loss on commitments.
Fee and other income increased to $413 million for the
quarter ended June 30, 2004 from $56 million for the
quarter ended March 31, 2004, primarily due to the
recognition of foreign currency transaction gains on our foreign
currency-denominated debt caused by changes in foreign currency
exchange rates during the period.
We recorded a provision for federal income taxes for the quarter
ended June 30, 2004 of $1.8 billion. The provision for
federal income taxes includes taxes at the federal statutory
rate of 35% adjusted for tax credits recognized for our LIHTC
partnership investments and other tax credits.
Quarter
Ended September 30, 2004
For the quarter ended September 30, 2004, we recorded a net
loss of $867 million, primarily from a derivatives fair
value loss, net, of $7.1 billion that more than offset our
net interest income, guaranty fee income, investment gains and
the quarterly tax benefit for the quarter.
Net interest income decreased to $4.0 billion for the
quarter ended September 30, 2004 from $4.8 billion for
the quarter ended June 30, 2004, due to a decrease in the
net interest yield caused by a continued shift in the mix of
assets to floating-rate and ARM products, which tend to earn
lower initial yields than fixed-rate mortgage assets. Net
interest income was also impacted by continued increases in
short-term debt rates during the third quarter of 2004.
Guaranty fee income increased to $1.1 billion for the
quarter ended September 30, 2004 from $727 million for
the quarter ended June 30, 2004, due to an increase in the
effective guaranty fee rate. The increase in the effective
guaranty fee rate was driven by a decrease in interest rates
during the third quarter of 2004 that had the effect of
accelerating the recognition of deferred amounts.
Investment gains, net for the quarter ended September 30,
2004 mainly consisted of unrealized gains on trading securities
driven by a decline in interest rates during the third quarter
of 2004.
We recorded derivatives fair value losses of $7.1 billion
for the quarter ended September 30, 2004, primarily due to
a loss of $4.7 billion in the fair value of open derivative
positions at quarter-end caused by declines in interest rates
and a $1.2 billion and $1.4 billion loss in net
periodic contractual interest expense and a loss on the fair
value of terminated derivatives from the beginning of the
quarter to the date of termination, respectively. These
decreases were slightly mitigated by a $163 million gain on
commitments.
Fee and other income decreased to $103 million for the
quarter ended September 30, 2004 from $413 million for
the quarter ended June 30, 2004, primarily due to the
recognition of foreign currency transaction losses on our
foreign currency-denominated debt caused by changes in foreign
currency exchange rates during the period.
We recorded a benefit for federal income taxes for the quarter
ended September 30, 2004 of $910 million. The benefit
for federal income taxes includes taxes at the federal statutory
rate of 35% adjusted for tax credits recognized for our LIHTC
partnership investments and other tax credits.
Quarter
Ended December 31, 2004
For the quarter ended December 31, 2004, we recorded net
income of $1.6 billion, primarily from net interest income
and guaranty fee income, partially offset by derivatives fair
value losses of $943 million for the quarter, other
expenses of $978 million and the quarterly tax provision.
Net interest income increased to $4.2 billion for the
quarter ended December 31, 2004 from $4.0 billion for
the quarter ended September 30, 2004, due to an increase in
our net interest yield, partially offset by a slight decrease in
average interest-earning assets for the quarter. The improvement
in the net interest yield was largely driven by lower premium
amortization, as interest rates increased slightly during the
fourth quarter of 2004.
196
Guaranty fee income decreased to $919 million for the
quarter ended December 31, 2004 from $1.1 billion for
the quarter ended September 30, 2004, due to a decline in
the effective guaranty fee rate. The decline in the effective
guaranty fee rate was driven by a slight increase in interest
rates during the fourth quarter that had the effect of slowing
the recognition of deferred amounts.
Investment losses, net for the quarter ended December 31,
2004 mainly consisted of unrealized gains on trading securities
driven by relatively flat interest rates during the fourth
quarter of 2004 and higher recorded impairments.
We recorded derivatives fair value losses of $943 million
for the quarter ended December 31, 2004, primarily due to a
loss of $791 million in net periodic contractual interest
expense and a $134 million loss in the fair value of open
derivative positions at quarter-end caused by minor movements in
interest rates.
Fee and other income (expense) decreased to a loss of
$168 million for the quarter ended December 31, 2004
from income of $103 million for the quarter ended
September 30, 2004, primarily due to the recognition of
foreign currency transaction losses on our foreign
currency-denominated debt caused by changes in foreign currency
exchange rates during the period.
The provision for credit losses increased for the quarter ended
December 31, 2004 to $219 million from
$65 million for the quarter ended September 30, 2004.
In the fourth quarter of 2004, we increased our combined
allowance for loan losses and reserve for guaranty losses by
approximately $142 million due to an observed trend of
reduced levels of recourse proceeds from lenders on charged-off
loans.
Other expenses for the quarter ended December 31, 2004
increased to $978 million from $417 million for the
quarter ended September 30, 2004, primarily due to
recording a $400 million charge for the civil penalty from
our settlement agreements with OFHEO and the SEC. In addition,
we recorded a $116 million charge for the write off of
previously capitalized software, as well as a higher level of
legal and professional services costs related to regulatory
reviews.
We recorded a provision for federal income taxes for the quarter
ended December 31, 2004 of $710 million. The provision
for federal income taxes includes taxes at the federal statutory
rate of 35% adjusted for tax credits recognized for our LIHTC
partnership investments and other tax credits.
Consolidated
Balance Sheet
The consolidated balance sheet as of December 31, 2004 did
not change significantly from 2003 or throughout the year. Our
assets as of December 31, 2004 totaled $1.0 trillion,
a decrease of $1.3 billion from December 31, 2003,
primarily due to decreases in federal funds sold and securities
purchased under agreements to resell. Liabilities as of
December 31, 2004 totaled $982.0 billion, a decrease
of $8.0 billion from December 31, 2003. We experienced
fluctuations in our short-term and long-term debt during 2004 as
we continued to change the types and durations of our
outstanding debt to better align with our portfolio of mortgage
assets. Stockholders equity as of December 31, 2004
was $38.9 billion, an increase of $6.6 billion from
December 31, 2003. The increase was primarily a result of
our $5 billion preferred stock issuance in December 2004.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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Quantitative and qualitative disclosure about market risk is set
forth on pages 159 through 167 of this Annual Report on
Form 10-K
under the caption Item 7MD&ARisk
ManagementInterest Rate Risk Management and Other Market
Risks.
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Item 8.
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Financial
Statements and Supplementary Data
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Our consolidated financial statements and notes thereto are
included elsewhere in this Annual Report on
Form 10-K
as described below in Item 15Exhibits,
Financial Statement Schedules.
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
197
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Item 9A.
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Controls
and Procedures
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EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
As required by
Rule 13a-15
under the Securities Exchange Act of 1934, or the Exchange Act,
management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness
of our disclosure controls and procedures as of the end of the
period covered by this report. In addition, management has
performed this same evaluation as of the date of filing this
report. Disclosure controls and procedures refer to controls and
other procedures designed to ensure that information required to
be disclosed in the reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding our required disclosure. In designing and evaluating
our disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management was required to
apply its judgment in evaluating and implementing possible
controls and procedures.
Management conducted its evaluation of disclosure controls and
procedures under the supervision of the Chief Executive Officer
and the Chief Financial Officer. Pursuant to its evaluation,
management determined that we did not maintain effective
disclosure controls and procedures as of December 31, 2004.
We failed to maintain an effective Disclosure Committee and we
have not filed periodic reports on a timely basis, as required
by the rules of the SEC and the NYSE, since June 30, 2004.
Our review of our accounting policies and practices in 2005 and
2006, and the restatement of our consolidated financial
statements for the years ended December 31, 2003 and 2002,
resulted in an inability to timely file our Annual Reports on
Form 10-K
for the years ended December 31, 2004 and 2005, and our
Quarterly Reports on
Form 10-Q
for the quarters ended September 30, 2004, March 31,
2005, June 30, 2005, September 30, 2005,
March 31, 2006, June 30, 2006 and September 30,
2006.
In addition, as described below, management identified numerous
material weaknesses in our internal control over financial
reporting, which management considers an integral component of
our disclosure controls and procedures. The Public Company
Accounting Oversight Boards Auditing Standard No. 2
defines a material weakness as a significant deficiency, or
combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. As a result of these material weaknesses, as well as
the reasons noted above, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls
and procedures were not effective as of December 31, 2004
or as of the date of filing this report.
We have made progress in improving our disclosure controls and
procedures. We have taken, and are taking, the actions described
below under Remediation Activities and Changes in Internal
Control Over Financial Reporting to remediate the material
weaknesses in our internal control over financial reporting. In
addition, we have enhanced the procedures followed by our
Disclosure Committee. These enhancements include:
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revision and adoption of a new charter by the Disclosure
Committee;
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an annual review of the Disclosure Committee charter;
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clarification of authority and role of the Disclosure Committee;
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formal training for Disclosure Committee members;
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maintenance of agendas; and
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implementation of a formalized voting process.
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198
We continue to strive to improve our processes to enable us to
provide complete and accurate public disclosure on a timely
basis. Management believes that this material weakness relating
to our disclosure controls will not be remediated until we are
able to file required reports with the SEC and the NYSE on a
timely basis.
To address the material weaknesses described in this
Item 9A, management performed additional analyses and other
post-closing procedures designed to ensure that our consolidated
financial statements were prepared in accordance with GAAP.
These procedures included data validation and certification
procedures from the source systems to the general ledger, pre-
and post-closing analytics, model validation procedures for
financial models supporting the consolidated financial
statements, and independent third-party reviews of selected
accounting systems and accounting conclusions. As a result,
management believes that the consolidated financial statements
included in this report fairly present in all material respects
the companys financial position, results of operations and
cash flows for the periods presented.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Overview
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting, as defined in rules
promulgated under the Exchange Act, is a process designed by, or
under the supervision of, our Chief Executive Officer and Chief
Financial Officer and effected by our Board of Directors,
management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with GAAP. Internal control over financial reporting
includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and members of
our Board of Directors; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
our assets that could have a material effect on our financial
statements.
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Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on
a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the
financial reporting process, and it is possible to design into
the process safeguards to reduce, though not eliminate, this
risk.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2004.
In making its assessment, management used the criteria
established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Management also
undertook a separate review of our financial reporting process
and application of GAAP. In addition, the Special Review
Committee of the Board of Directors engaged former Senator
Warren B. Rudman and the law firm of Paul Weiss to conduct an
independent investigation of our historical accounting
practices, internal controls, and corporate governance and
structure prior to 2005. Furthermore, OFHEO, our safety and
soundness regulator, conducted a special examination of our
accounting policies, internal controls, financial reporting,
corporate governance, and other safety and soundness matters.
Some of the findings resulting from OFHEOs examination
relate to our internal control over financial reporting.
Management has considered the results of each of these
activities in developing its conclusions concerning our internal
control over financial reporting.
199
As a result of its assessment of our internal control over
financial reporting, management identified the material
weaknesses discussed below. Because of the material weaknesses
identified in the following paragraphs, management has concluded
that our internal control over financial reporting was not
effective as of December 31, 2004.
Managements assessment of our internal control over
financial reporting as of December 31, 2004 identified
numerous material weaknesses in our control environment, our
application of GAAP, our financial reporting process, and our
information technology applications and infrastructure as of
December 31, 2004. A description of the material weaknesses
relating to each of these areas is included below. Further, we
identified additional material weaknesses in the independent
model review process, treasury and trading operations, pricing
and independent price verification processes, and wire transfer
controls.
Description
of Material Weaknesses
Control
Environment
We did not maintain an effective control environment related to
internal control over financial reporting. Specifically, we
identified the following material weaknesses in our control
environment as of December 31, 2004:
We did not establish and maintain a consistent and proper tone
as to the importance of internal control over financial
reporting.
We lacked a written, comprehensive set of GAAP-compliant
financial accounting policies and a formalized process for
determining, monitoring, disseminating, implementing and
updating our accounting policies and procedures.
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Board of Directors and Executive Roles
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Roles and responsibilities were not clearly defined and
documented between our executive management team and our Board
of Directors. Our Chief Executive Officer served as the Chairman
of the Board of Directors and our Chief Financial Officer and
Chief Operating Officer each served as a vice chair of the Board
of Directors. As a result, these two corporate governance
structures lacked sufficient checks and balances, which
adversely affected the flow of information to, and the
effectiveness of, the Board of Directors.
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Enterprise-Wide Risk Oversight
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We did not maintain a properly staffed, comprehensive and
independent risk oversight function. Specifically, our risk
oversight function lacked enterprise-wide coordination,
dedicated senior leadership and sufficient staffing.
Comprehensive risk policies did not exist, and existing policies
applicable to each business unit required enhancement.
We did not maintain an effective and independent Internal Audit
function. Internal Audit did not maintain a sufficient
complement of personnel with an appropriate level of accounting
and auditing knowledge, experience and training to effectively
execute an appropriate audit plan. In addition, the Internal
Audit department did not functionally report to the Audit
Committee of the Board of Directors, but reported to the Chief
Financial Officer, which created inadequate independence and
objectivity. Further, our Internal Audit function lacked clarity
regarding its risk assessment process, communications and audit
plans. Our ineffective Internal Audit function adversely
affected our ability to adequately identify our control
weaknesses.
200
Our human resources function did not have clear enterprise-wide
coordination, which resulted in ineffective definition and
communication of employee roles and responsibilities. In
addition, training and performance evaluations were not always
effective. As a result, we did not have a sufficient number of
qualified staff, clear job descriptions, and appropriate
policies and procedures relating to human resources. Lines of
delegated authority were not always clear.
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Fraud Risk Management Program
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We did not maintain a comprehensive, centrally coordinated
enterprise-wide fraud risk management program. Furthermore, we
did not have a specific, comprehensive fraud risk management
program related to internal control over financial reporting.
We lacked effective internal control over financial reporting
relating to our whistleblower program that would ensure the
anonymity, confidentiality and physical security of the
information provided, as well as periodic reporting of that
information. Although an enterprise-wide whistleblower program
was in effect during 2004, regular reporting to a committee of
the Board of Directors did not occur, and we believe the program
was not trusted by company personnel.
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Accounting/Finance Staffing Levels
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We did not maintain a sufficient complement of personnel with an
appropriate level of accounting knowledge, experience and
training in the application of GAAP commensurate with our
financial reporting requirements. Further, the process we used
to ensure that employees were assigned appropriate
responsibilities based upon their credentials and experience was
inadequate.
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Information Technology Policy
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We did not maintain and clearly communicate information
technology policies and procedures. This weakness contributed to
our inadequate internal control over financial reporting systems.
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Policies and Procedures
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We did not maintain adequate policies and procedures related to
initiating, authorizing, recording, processing and reporting
transactions. This lack of documentation led to
(a) inconsistent execution of business practices,
(b) inability to ensure practices were in accordance with
management standards and (c) ambiguity in delegation of
authority.
Application
of GAAP
We did not maintain effective internal control over financial
reporting relating to our process and information technology
applications for determining, monitoring, disseminating,
implementing and updating accounting policies that complied with
GAAP. We identified numerous material and immaterial
misapplications of GAAP that indicate that a material weakness
in our application of GAAP existed as of December 31, 2004.
As described in
Item 7MD&ARestatement, we have
identified misapplications of GAAP in the following primary
categories:
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our accounting for debt and derivatives;
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our accounting for commitments;
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our accounting for investments in securities;
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our accounting for MBS trust consolidations and sale accounting;
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our accounting for financial guaranties and master servicing;
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our amortization of cost basis adjustments; and
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other adjustments, including accounting for income taxes.
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201
Many of these misapplications of GAAP resulted in material
modifications to our financial statements and many of the other
misapplications of GAAP that did not result in a material
modification could have resulted in a material misstatement in
the financial statements.
Financial
Reporting Process
We did not maintain an effective, timely and accurate financial
reporting process. Specifically, we identified the following
material weaknesses in our financial reporting process as of
December 31, 2004:
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Financial Statement Preparation and Reporting
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We did not perform timely and complete reviews of the
consolidated financial statements by personnel with knowledge
sufficient to reach appropriate accounting conclusions.
Specifically, our systems and processes were not designed and in
operation to enable us to prepare accurate consolidated
financial statements in accordance with GAAP. These systems and
processes, coupled with our human resources and other material
weaknesses, resulted in our inability to prepare and complete
accurate financial information.
We did not maintain effective disclosure controls and
procedures, including an effective Disclosure Committee,
designed to ensure complete and accurate disclosure as required
by GAAP. In addition, we have not filed periodic reports on a
timely basis as required by the rules of the SEC and the NYSE.
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General Ledger Controls
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We did not maintain effective internal control over financial
reporting relating to the general ledger and the periodic
closing of the general ledger. Specifically, the design and
operation of this control was inadequate for managing the
addition or deletion of specific balance sheet or consolidated
statements of income accounts. In addition, personnel were not
granted access to the general ledger that was appropriate to
their scope of responsibility and we lacked a formalized process
with adequate controls designed to ensure that the general
ledger was closed properly at the end of each period.
We did not maintain effective internal control over financial
reporting relating to the recording of journal entries, both
recurring and non-recurring. Specifically, the design and
operation of this control was inadequate for ensuring that
journal entries were prepared by personnel with adequate
knowledge of the activity being posted. The entries were not
supported by appropriate documentation and were not reviewed at
the appropriate level to ensure the accuracy and completeness of
the entries recorded.
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Reconciliation Controls
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We did not maintain effective internal control over financial
reporting relating to the reconciliation of many of our
financial statement accounts and other data records that served
as inputs to those accounts. Specifically, the design and
operation of this control was inadequate for ensuring that our
accounts were complete, accurate and in agreement with detailed
supporting documentation. In addition, this control did not
ensure proper review and approval of reconciliations by
appropriate personnel.
Information
Technology Applications and Infrastructure
We did not maintain effective internal control over financial
reporting related to information technology applications and
infrastructure, and the references in this section to
controls refer to our internal control over
financial reporting. Specifically, we identified the following
material weaknesses relating to our information technology
applications and infrastructure as of December 31, 2004:
We did not maintain effective design of controls over access to
financial reporting applications and data. Specifically,
ineffective controls included unrestricted access to programs
and data, lack of periodic review and monitoring of such access,
and lack of clearly communicated policies and procedures
202
governing information technology security and access.
Furthermore, we did not maintain effective logging and
monitoring of servers and databases to ensure that access was
both appropriate and authorized.
We did not maintain effective controls designed to ensure that
information technology program and data changes were authorized
and that the program and data changes were adequately tested for
accuracy and appropriate implementation.
We did not maintain effective controls over end user computing
(EUC) applications, such as spreadsheets.
Specifically, controls were not designed and in operation to
ensure that access to these applications was restricted to
appropriate personnel and that changes to data or formulas were
authorized.
Independent
Model Review Process
We identified a material weakness as of December 31, 2004
related to the design of our internal control over financial
reporting related to our independent model review process.
Specifically, we did not independently review that: (i) the
models and assumptions used to produce our financial statements
were appropriate; and (ii) that outputs used to produce our
financial statements were calculated accurately according to the
model specifications. Our loan loss allowance, amortization,
guaranty and financial instrument valuation processes each used
models and, as discussed in
Item 7MD&ARestatement, we
incorrectly valued our derivatives, mortgage loan and security
commitments, security investments, guaranties and other
instruments.
Treasury
and Trading Operations
We identified a material weakness as of December 31, 2004
related to the design of our internal control over financial
reporting related to our treasury and trading operations.
Specifically, our internal control over financial reporting was
inadequate with respect to the process of authorizing,
approving, validating and settling trades, including inadequate
segregation of duties among trading, settlement and valuation
activities within both our treasury and trading operations.
Pricing
and Independent Price Verification Processes
We identified a material weakness as of December 31, 2004
related to the design of our internal control over financial
reporting related to our pricing and independent price
verification processes. Specifically, our internal control over
financial reporting was inadequate with respect to the process
used to price assets and liabilities, and did not maintain
appropriate segregation of duties between the pricing function
and the function responsible for independently verifying such
prices.
Wire
Transfer Controls
We identified a material weakness as of December 31, 2004
related to the design of our internal control over financial
reporting related to our wire transfer function. Specifically,
the design of our internal control over financial reporting was
insufficient with respect to the initiation, authorization,
segregation of duties and anti-fraud measures related to wire
transfer transactions and with respect to the reconciliation of
cash balances and wire transfer activity. In addition, approvals
were not consistent with approval policies and funds movements
lacked verifications.
Report of
Independent Registered Public Accounting Firm
In January 2005, we engaged Deloitte & Touche LLP (the
independent registered public accounting firm that audited the
consolidated financial statements included in this Annual Report
on
Form 10-K
for the year ended December 31, 2004) to audit
managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004. Deloitte & Touches report
disclaimed an opinion on managements assessment of the
effectiveness of our internal control over financial reporting
as of December 31, 2004 because:
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we did not engage Deloitte & Touche until after
December 31, 2004;
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203
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we made significant changes in the personnel responsible for
internal control over financial reporting prior to the
commencement of their work; and
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we made extensive changes to our internal control over financial
reporting that had been in place as of December 31, 2004
prior to the commencement of their field work.
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Deloitte & Touches report disclaimed an opinion
on managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 because of a scope limitation and
expressed an adverse opinion on the effectiveness of our
internal control over financial reporting as of
December 31, 2004 because of material weaknesses and the
effects of a scope limitation. The report is included on
page 211.
REMEDIATION
ACTIVITIES AND CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
Overview
Management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that
occurred during the period from July 1, 2004 through the
date of this filing (including the quarter ended
December 31, 2004) have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting. Based on the evaluation we conducted,
management has implemented substantial changes during the period
from July 1, 2004 through the date of this filing to
remediate our material weaknesses in internal control over
financial reporting.
We believe that, as of the date of this filing, we have fully
remediated the following four material weaknesses relating to
our control environment described above:
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Tone at the Top;
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Board of Directors and Executive Roles;
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Whistleblower Program; and
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Accounting/Finance Staff Levels.
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With respect to the remaining material weaknesses described
above, we are implementing new internal controls and are
currently in the process of testing to assess their
effectiveness. Management will not make a final determination
that we have completed our remediation of these remaining
material weaknesses until we have completed testing of our newly
implemented internal controls. We currently estimate that we
will not complete implementation and testing of most of these
new controls until the filing of our Annual Report on
Form 10-K
for the year ended December 31, 2006, which we will not
file on a timely basis; however, we anticipate that we may
complete testing with respect to some of our remaining material
weaknesses prior to that time. Further, we believe that we will
not have remediated the material weakness relating to our
disclosure controls and procedures until we are able to file
required reports with the SEC and the NYSE on a timely basis.
Deloitte & Touche will independently assess the
effectiveness of our internal control over financial reporting,
but will make that assessment only in connection with its audit
of our consolidated financial statements for the year ended
December 31, 2006. In addition, our internal control
environment will continue to be modified and enhanced in order
to enable us to file periodic reports with the SEC on a current
basis in the future.
The discussion below describes the actions that management has
taken, or is taking, to remediate the material weaknesses
described above and to improve our internal control over
financial reporting and disclosure controls and procedures.
Management believes the measures that we have implemented to
remediate the material weaknesses in internal control over
financial reporting have had a material impact on our internal
control over financial reporting since June 30, 2004, and
anticipates that these changes and other ongoing enhancements
and remediation activities will continue to have a material
impact on our internal control over financial reporting in
future periods.
204
Description
of Remediation Actions
Control
Environment
We believe that we remediated this material weakness prior to
the date of this filing. We have made significant changes to our
Board of Directors, our management team and our corporate
structure since December 31, 2004 in order to establish and
maintain a consistent and proper tone as to the importance of
internal control over financial reporting. The Board and
management have emphasized the importance of internal control
over financial reporting through communication and action. After
an extensive recruitment process, our Board of Directors
appointed a new Chief Executive Officer from within the company
and a new Chief Financial Officer from outside the company. Over
35% of our senior officers, including our Chief Financial
Officer, Controller, Chief Audit Executive, Chief Risk Officer,
General Counsel and all senior officers in our Controllers
and Accounting Policy functions, joined the company after
December 2004. In addition, with the assistance of an
independent consulting firm, we have assessed the organizational
design of our finance, risk, audit, compliance, operations and
technology functions. New organizational structures and
frameworks for each of these areas have been developed, and we
are currently implementing these designs in many areas.
We have also initiated a comprehensive plan to transform our
corporate culture into one focused on service, open and honest
engagement, accountability and effective management practices.
Additionally, based on recommendations made by independent
consultants, we modified our compensation practices to include
metrics in addition to earnings per share, including
non-financial metrics relating to our controls, culture and
mission goals.
In addition to these personnel, organizational and compensation
changes, our new management team has encouraged an environment
that fosters frequent, open and direct communications. This
environment includes weekly CEO newsletters, open question lines
to executive management, frequent company-wide town hall
meetings, training on how to further foster open communication,
and open feedback solicitation through management forums,
surveys and roundtables. Management has continuously reinforced
that enhancement of the understanding and execution of internal
control over financial reporting is a top priority for the
company.
We have completed a full assessment of all our accounting
policies to ensure their compliance with GAAP, which required us
to revise substantially all of these accounting policies. We
currently maintain a written, comprehensive set of
GAAP-compliant financial accounting policies. All of these
accounting policies have been documented and communicated to the
appropriate accounting functions.
Staff in the accounting policy function has worked closely with
each of the business units and financial reporting to ensure
accurate accounting policy interpretation and to address new or
emerging accounting policy issues. In addition, accounting
standard-setting developments are actively monitored, with
implementation impacts researched in coordination with the
Controllers department, business unit personnel and other
divisions that would be impacted. Additionally, accounting
policy is actively engaged in new product and process approval
to ensure that the correct accounting policy decisions are
reached and implemented.
In addition, in order to provide a segregation of duties between
those who develop our accounting policies and those who
implement them, as part of our organizational redesign,
reporting responsibility for the accounting policy function was
moved from the Controller to the CFO. In May 2005, we announced
the hiring of a new senior officer to oversee the accounting
policy function.
205
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Board of Directors and Executive Roles
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We believe that we remediated this material weakness prior to
the date of this filing. We have made significant changes to the
Board of Directors since our receipt of OFHEOs interim
report in September 2004. These changes include:
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amending our bylaws to separate the functions of the Chief
Executive Officer and Chairman of the Board;
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appointing Stephen B. Ashley as non-executive Chairman of the
Board;
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creating a Risk Policy and Capital Committee of the Board in
February 2005, which replaced the role of the former
Assets & Liabilities Policy Committee in assisting the
Board in overseeing capital management and risk management;
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creating a Technology and Operations Committee of the Board with
responsibility for assisting the Board in overseeing these
functions;
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re-designating a new Compliance Committee of the Board, composed
entirely of independent directors, in October 2004, that now has
responsibility for monitoring compliance with our May 2006
consent order with OFHEO. In November 2005, the Board of
Directors commissioned the Compliance Committee as a permanent
committee of the Board with responsibility for providing legal
and regulatory oversight;
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revising the charters of six standing committees of our Board of
Directors (Audit Committee, Nominating and Corporate Governance
Committee, Compensation Committee, Compliance Committee, Risk
Policy and Capital Committee, and Housing and Community Finance
Committee);
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changing the composition of the Board by eliminating two of the
three management Board seats;
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adding six new Board members who enhance the substantive
business operations, accounting and finance knowledge of the
Board; and
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naming a new Chairman of the Audit Committee and appointing
three other new members to the Audit Committee.
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In addition, the Board of Directors appointed a new Chief
Executive Officer.
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Enterprise-Wide Risk Oversight
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We have established an enterprise-wide risk organization with
oversight of credit risk, market risk and operational risk, as
well as model review. In May 2006, we announced the hiring of a
Chief Risk Officer, and new senior officers responsible for
credit risk oversight and operational risk oversight reporting
to the new Chief Risk Officer. In 2006, we also hired a senior
officer responsible for market risk oversight, capital
methodology and model review. We have developed and communicated
corporate-wide risk policies and are enhancing our business unit
risk management processes. We have implemented a new
organizational risk structure that includes risk management
personnel within each business unit. Those individuals report to
business unit leadership and have responsibility for
implementing the corporate-wide risk policies in their
respective business units. We have enhanced Board monitoring and
communication regarding credit risk and market risk by
establishing the Risk Policy and Capital Committee of the Board
of Directors. The Chief Risk Officer reports independently to
the Risk Policy and Capital Committee, and also reports directly
to the Chief Executive Officer.
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In June 2005, management and the Audit Committee of the Board
appointed a new Chief Audit Executive from outside the company.
The Chief Audit Executive reports directly to the Audit
Committee with indirect reporting to the CEO. The Chief Audit
Executive has enhanced the level of communication with the Audit
Committee, which includes increased communication with the
Chairman of the Audit Committee and enhanced detail within the
formal reports to the Audit Committee. Additionally, the
Internal Audit function has completed a comprehensive review and
analysis of its organizational design and audit processes,
including organizational structure, staffing levels, skill
assessments, audit planning, audit execution and reporting.
Internal Audit has filled its key management positions and
continues to reassess and enhance its staffing. The Internal
Audit management team was expanded from one officer to four,
three of whom are external hires. All officers in the Internal
Audit department hold one or more of the following professional
credentials: certified public accountant, certified internal
auditor, certified fraud examiner, certified information systems
auditor or certified bank auditor. Internal Audit has developed
and communicated a risk-based audit plan, which it reports upon
regularly to the Audit Committee.
As part of our organizational redesign, we have repositioned and
redefined the role of our human resources function. This has
included rollout of a new performance assessment process,
enhancement of job descriptions, and clearly communicated
policies and procedures regarding human resources. Additionally,
we have hired additional personnel into HR functions to assist
in strengthening the role of human resources within the company.
We have also completed a comprehensive corporate review of
delegations of authority.
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Fraud Risk Management Program
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We have designed a comprehensive, centrally coordinated
enterprise-wide fraud risk management program. We adopted a
fraud risk management policy and developed a formal fraud
assessment process, which was initially implemented for those
business areas identified as having high potential for fraud
risk. A fraud risk management training program has been designed
and rolled out to risk-prioritized business units. The Audit
Committee of the Board of Directors has also successfully
completed fraud risk management training.
We have also established the Operational Risk Oversight unit
(ORO) reporting directly to the Chief Risk Officer. Management
and monitoring of the fraud risk management program is the
responsibility of the ORO.
We believe that we remediated this material weakness prior to
the date of this filing. We have enhanced our whistleblower
program with a new corporate ethics line that offers full
anonymity to callers, if desired, regular reporting of cases to
the Chief Compliance Officer, and regular formal reporting of
cases to the Compliance and Audit Committees of the Board of
Directors.
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Accounting/Finance Staffing Levels
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We believe that we remediated this material weakness prior to
the date of this filing. As part of our organizational redesign,
we have performed a thorough staffing assessment of our
accounting and finance organizations. We have replaced
substantially all senior finance and accounting employees,
including hiring a new Chief Financial Officer who joined the
organization in January 2006. Additionally, management has
increased the number of full-time employees in our accounting
function and supplemented the function with outside contractors
having the appropriate level of accounting experience and
expertise to assist us in our restatement efforts. We have made
progress in, and continue to execute upon, a hiring plan to
replace such contractors with full-time employees.
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Information Technology Policy
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We have developed an information technology standard setting
board that governs the development and communication of
information technology policies, corporate technology standards
and detailed technology operating procedures throughout the
company.
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Policies and Procedures
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We have developed corporate-wide standards for policies and
procedures for use throughout our business to support a uniform
approach to the documentation of current policies, procedures
and delegated authority in most areas of the company. Concurrent
with our corporate policy and procedures initiative, each of our
business units has identified and corrected deficient policies
and procedures for processes relevant to internal control over
financial reporting.
Application
of GAAP
For each misapplication of GAAP described in
Item 7MD&ARestatement, we have
assessed the applicable accounting policy and implemented new
processes
and/or
technology to ensure the appropriate application of GAAP. In
addition, as described above in our discussion of remediation
activities relating to our accounting policy function under
Control EnvironmentAccounting Policy, we have
completed a full assessment of all of our accounting policies
and have revised these accounting policies to ensure their
compliance with GAAP. We now maintain a written set of
GAAP-compliant financial accounting policies. All of these
accounting policies have been documented and communicated to the
appropriate accounting functions. Staff in the accounting policy
function has worked closely with each of the business units and
financial reporting to ensure accurate accounting policy
interpretation and to address new or emerging accounting policy
issues. In addition, accounting standard-setting developments
are actively monitored, with implementation impacts researched
in coordination with the Controllers department, business
unit personnel and other divisions that would be impacted.
Additionally, accounting policy is actively engaged in new
product and process approval to ensure that the correct
accounting policy decisions are reached and implemented.
Further, as described above in our discussion of remediation
activities relating to our accounting/finance staffing levels
under Control EnvironmentAccounting/Finance Staffing
Levels, we have increased the number of full time
employees in our accounting function. This staffing increase and
the related separation of duties have improved the controls
relating to our process for determining, monitoring,
disseminating, implementing and updating GAAP. Additionally, we
have enhanced our technology processes to ensure that our
systems are operating in a manner consistent with our accounting
policies.
Financial
Reporting Process
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Financial Statement Preparation and Reporting
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As discussed above, we have completed an assessment of our
organizational structure and staffing needs. We hired a new
Controller from outside the company to oversee the financial
statement preparation and reporting process. We have redesigned
our financial reporting processes and, where necessary,
technology, resulting in the successful generation of the
consolidated financial statements included in this Annual Report
on
Form 10-K.
This redesigned process also includes requirements for
appropriate review and approval of the consolidated financial
statements by qualified accounting personnel.
To further enhance our internal controls relating to financial
statement preparation and reporting, we created a new financial
controls and systems group within our Controllers
department focused solely on improving our accounting systems
and internal control framework in order to ensure that our
accounting function properly supports our internal control over
financial reporting. The financial controls and systems group
has responsibility for designing, implementing and monitoring
controls within the Controllers department. Additionally,
the group is responsible for managing the development, testing
and deployment of new accounting systems and ensuring those
systems have adequate controls and documentation.
208
As discussed under Evaluation of Disclosure Controls and
Procedures above, we have made progress in improving our
disclosure controls and procedures. However, we believe that
this material weakness will not be remediated until we are able
to file required reports with the SEC and the NYSE on a timely
basis.
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General Ledger Controls
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We have implemented review and approval controls to manage the
addition and deletion of general ledger accounts. We have
strengthened supervisory review controls over account management
and the periodic close process.
We have redesigned our journal entry creation and approval
process. The new process includes additional training on the
creation of journal entries, required journal entry support and
the requirements for the review and approval of journal entries.
Additional controls were added to specify thresholds for journal
entry approval and ongoing monitoring of journal entry
generation and compliance.
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Reconciliation Controls
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We have implemented a redesigned process to ensure that all of
our general ledger accounts are reconciled on a timely basis. We
have assigned primary and supervisory account management
responsibility for all of our general ledger accounts.
Reconciliation completion, review and issue management is
monitored each month to ensure compliance with our policies. We
have also identified all other corporate data reconciliations
for processes related to internal control over financial
reporting. For those reconciliations, we have assigned primary
and supervisory responsibility and are tracking completion,
review and issue management.
Information
Technology Applications and Infrastructure
We have designed and implemented procedures and technology to
control access to all of the applications that are material to
our financial reporting process. Such procedures include
standard request, approval and review controls over any addition
or deletion to system access. In addition, we perform regular,
periodic monitoring of authorized users to ensure that only
authorized users have access to systems and that such access is
commensurate with current job responsibilities. We also log and
monitor all user activity to ensure that only authorized users
are accessing the system and only authorized changes are being
made.
We have designed and implemented procedures to control changes
to all of the applications that are material to our financial
reporting process. Such procedures include standard request,
approval and review controls over any system or data change.
Significant changes are managed through a governance committee
of corporate representatives from technology and business unit
management. In addition, we have implemented reconciliation or
user controls to ensure that the desired change was implemented
as intended. As discussed above, we also log and monitor all
user activity to ensure that only authorized users are accessing
the system and only authorized changes are being made.
We have designed and implemented procedures to control access
and changes to our EUCs. These procedures have included:
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identification of all EUCs that could be material to our
financial reporting;
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protecting EUCs through maintenance on a controlled platform
within our IT infrastructure where EUC access can be controlled
using a process similar to the corporate application access
process;
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EUC version control; and
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data change control.
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Independent
Model Review Process
A corporate model policy was approved in September 2005 that
established an independent model review process that assesses on
a regular basis whether the models and assumptions were
appropriate and whether outputs were calculated accurately
according to the model specifications. We have established an
independent model review function that reports directly to the
Chief Risk Officer. Many of the models that resulted in errors
in the past are no longer being used to generate financial data.
As of the date of this filing, we have reviewed our most
critical financial models pursuant to our new independent model
review process.
Treasury
and Trading Operations
We have redesigned our process for authorizing, approving,
validating and settling trades, including segregating duties
among trading, settlement and valuation activities within both
our treasury and trading operations. In addition, with the
assistance of an independent consulting firm, we have assessed
the organizational design of our treasury and trading
operations, and we are in the process of implementing changes in
those functions.
Pricing
and Independent Price Verification
We have redesigned our process for pricing our financial
instruments. The process includes supervisory review over data
inputs, model outputs and computational accuracy. In addition,
we have implemented independent validation controls over
methodologies and verification of pricing using risk-based
statistical sampling techniques.
Wire
Transfer Controls
We have redesigned our process and controls over financial
reporting related to our wire transfer activity. Specifically,
we implemented system changes, developed multiple department
policies and created a cross functional team to develop
enhancements to our wire transfer process and controls. As a
result, we have enhanced our access controls by segregating the
wire initiation and wire system access functions, implemented a
periodic access review process and strengthened our access
approval procedures. We have eliminated manual wires from our
standard procedures and have reduced our list of approved wire
counterparties. We have also increased business unit staffing
levels and hired an external consultant to provide best practice
and industry standards guidance.
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fannie Mae:
We were engaged to audit managements assessment regarding
the effectiveness of internal control over financial reporting
of Fannie Mae (the Company) as of December 31,
2004. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting.
As described in the accompanying Managements Report on
Internal Control over Financial Reporting, the Company:
(1) did not engage us until after December 31, 2004;
(2) made significant changes in personnel responsible for
internal control over financial reporting prior to the
commencement of our work, and (3) made extensive changes to
internal control over financial reporting that had been in place
as of December 31, 2004 prior to the commencement of our
fieldwork. Accordingly, we are unable to perform sufficient
auditing procedures necessary to form an opinion on
managements assessment.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and affected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. Numerous
pervasive material weaknesses have been identified and included
in the accompanying Managements Report on Internal
Control over Financial Reporting. The nature of these
weaknesses is described below:
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Control EnvironmentThe Company did not
maintain an effective control environment related to internal
control over financial reporting. Specifically, the control
environment lacked the following controls which represent
material weaknesses: a consistent and proper tone at the top, a
comprehensive set of financial accounting policies, clearly
defined roles and responsibilities of executive management and
the board of directors, a comprehensive and independent risk
oversight function, an effective and independent Internal Audit
function, a human resources function with clear enterprise-wide
coordination, a comprehensive and centrally coordinated
enterprise-wide fraud risk management program, a trusted
whistleblower program, appropriate accounting/finance staffing
levels, clearly communicated information technology policies and
procedures, and adequate transactional policies and procedures.
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Application of Accounting Principles Generally Accepted in
the United States of AmericaThe Company did not
maintain effective internal control relating to its process and
information technology applications
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for determining, monitoring, disseminating, implementing and
updating accounting policies that complied with accounting
principles generally accepted in the United States of America.
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Financial Reporting ProcessThe Company did
not maintain an effective, timely and accurate financial
reporting process, including a lack of timely and complete
financial statement reviews, effective disclosure controls and
procedures, general ledger and journal entry controls, and
appropriate reconciliation processes.
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Information Technology Applications and
InfrastructureThe Company did not maintain
effective internal control related to information technology
applications and infrastructure, including access controls,
change management controls, and controls over end user computing
including spreadsheets.
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Independent Model Review ProcessThe design
of internal control did not provide for independent review that
accounting related models and assumptions were appropriate and
that outputs were calculated accurately according to model
specifications.
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Treasury and Trading OperationsThe design of
internal control was inadequate with respect to the process of
authorizing, approving, validating, and settling trades,
including inadequate segregation of duties among trading,
settlement, and valuation activities within both the treasury
and trading operations.
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Pricing and Independent Price Verification
ProcessesThe design of internal control was
inadequate with respect to the process used to price assets and
liabilities, and did not maintain appropriate segregation of
duties between the pricing function and the function responsible
for independently verifying such prices.
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Wire Transfer ControlsThe design of internal
control was insufficient with respect to the initiation,
authorization, segregation of duties and anti-fraud measures
related to wire transfer transactions and with respect to the
reconciliation of cash balances and wire transfer activity.
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Due to the nature of these weaknesses: the consolidated
financial statements for the years ended December 31, 2003
and 2002 were restated to correct numerous significant
misstatements related to debt and derivatives, commitments,
investments in securities, trust consolidation and sale
accounting, financial guaranties and master servicing,
amortization of cost basis adjustments, and other items; the
consolidated financial statements for the year ended
December 31, 2004 and the quarter ended September 30,
2004 were not filed timely; and, there is more than a remote
likelihood that a material misstatement to the Companys
financial statements might not be detected and prevented by the
Companys internal controls over financial reporting. These
material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the
consolidated financial statements as of and for the year ended
December 31, 2004, of the Company and this report does not
affect our report on such consolidated financial statements.
Because of the limitation on the scope of our audit described in
the second paragraph of this report, the scope of our work was
not sufficient to enable us to express, and we do not express,
an opinion on managements assessment referred to above. In
our opinion, because of the effect of the material weaknesses,
summarized above and described in Managements Report on
Internal Control over Financial Reporting, on the
achievement of the objectives of the control criteria and the
effects of any other material weaknesses, if any, that we might
have identified if we had been able to perform sufficient
auditing procedures necessary to form an opinion on
managements assessment, the Company has not maintained
effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2004, of the Company and have issued our
report dated December 6, 2006 that expressed an unqualified
opinion on those financial statements and included an
explanatory paragraph relating to the restatement of the
Companys 2002 and 2003 consolidated financial statements.
/s/ Deloitte & Touche LLP
Washington, DC
December 6, 2006
212
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Item 9B.
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Other
Information
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None.
PART III
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Item 10.
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Directors
and Executive Officers of the Registrant
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Directors
Our current directors are listed below. They have provided the
following information about their principal occupation, business
experience and other matters.
Stephen B. Ashley, 66, has been Chairman and Chief
Executive Officer of The Ashley Group, a group of commercial and
multifamily real estate, brokerage and investment companies,
since 1995. The Ashley Group is comprised of S.B. Ashley
Management Corporation, S.B. Ashley Brokerage Corporation and
S.B. Ashley & Associates Venture Company, LLC. From
1991 to 1995, Mr. Ashley served as Chairman and Chief
Executive Officer of Sibley Mortgage Corporation, a commercial,
multifamily and single-family mortgage banking firm, and Sibley
Real Estate Services, Inc. Mr. Ashley is a past President
of the Mortgage Bankers Association of America and has over
40 years of experience in the real estate and real estate
financing industries. Mr. Ashley also serves as a director
of The Genesee Corporation and Exeter Fund, Inc. In addition,
Mr. Ashley serves as a trustee of Cornell University.
Mr. Ashley has been a Fannie Mae director since May 1995
and Chairman of Fannie Maes Board since December 2004.
Dennis R. Beresford, 68, has served as Ernst &
Young Executive Professor of Accounting at the J.M. Tull School
of Accounting, Terry College of Business, University of Georgia
since 1997. From 1987 to 1997, Mr. Beresford served as
Chairman of the Financial Accounting Standards Board, or FASB,
the designated organization in the private sector for
establishing standards of financial accounting and reporting in
the United States. From 1961 to 1986, Mr. Beresford was
with Ernst & Young LLP, including ten years as a Senior
Partner and National Director of Accounting. Mr. Beresford
is a member of the Board of Directors and Chairman of the Audit
Committee of Kimberly-Clark Corporation and Legg Mason, Inc.
Mr. Beresford is a certified public accountant.
Mr. Beresford has been a Fannie Mae director since May 2006.
Kenneth M. Duberstein, 62, has been Chairman and Chief
Executive Officer of The Duberstein Group, Inc., an independent
strategic planning and consulting company, since 1989. He served
as Chief of Staff to the President of the United States from
1988 to 1989. Mr. Duberstein also serves as a director of
The Boeing Company, ConocoPhillips, Inc., Mack-Cali Realty
Corporation and The St. Paul Travelers Companies, Inc.
Mr. Duberstein has been a Fannie Mae director since May
1998.
Brenda J. Gaines, 57, served as President and Chief
Executive Officer of Diners Club North America, a subsidiary of
Citigroup, from October 2002 until her retirement in April 2004.
She served as President, Diners Club North America, from
February 1999 to September 2002. From 1988 until her appointment
as President, she held various positions within Diners Club
North America, Citigroup and Citigroups predecessor
corporations. She also served as Deputy Chief of Staff for the
Mayor of the City of Chicago from 1985 to 1987 and as Chicago
Commissioner of Housing from 1983 to 1985. In addition,
Ms. Gaines serves as a director of CNA Financial
Corporation, Office Depot, NICOR, Inc. and Tenet Healthcare
Corporation. Ms. Gaines has been a Fannie Mae director
since September 2006.
Thomas P. Gerrity, 65, has been Professor of Management
since 1990, and was Dean from June 1990 to July 1999, of The
Wharton School of the University of Pennsylvania. He was
President of CSC Consulting and Vice President of Computer
Sciences Corporation from May 1989 to June 1990 and Chairman and
Chief Executive Officer of Index Group, Inc., from 1969 to 1989.
Mr. Gerrity also serves as a director of
CVS Corporation, Internet Capital Group, Inc., Sunoco, Inc.
and Hercules, Inc. Mr. Gerrity has been a Fannie Mae
director since September 1991.
Karen N. Horn, Ph.D., 63, is a Senior Managing
Director of Brock Capital Group LLC, an advisory and investment
firm, a position she has held since 2003. She served as Managing
Director, Private Client Services
213
of Marsh Inc., a subsidiary of Marsh & McLennan
Companies, Inc., from 1999 until her retirement in 2003. She
served as Senior Managing Director and Head of International
Private Banking at Bankers Trust Company from 1996 to 1999, as
Chairman and Chief Executive Officer, Bank One, Cleveland, from
1987 to 1996 and as President of the Federal Reserve Bank of
Cleveland from 1982 to 1987. Ms. Horn is a director of Eli
Lilly and Company and Simon Property Group, Inc. and a director
or trustee of all T. Rowe Price funds and trusts. She also
serves as a vice-chairman of the U.S. Russia Investment
Fund, a presidential appointment. Ms. Horn has been a
Fannie Mae director since September 2006.
Bridget A. Macaskill, 58, is the Principal of BAM
Consulting LLC, an independent financial services consulting
firm, which she founded in 2003. Ms. Macaskill has been
providing consulting services to the financial services industry
since 2001. Ms. Macaskill previously held several positions
at Oppenheimer Funds, Inc. including serving as Chairman of the
Board from 2000 to 2001, Chief Executive Officer from 1995 to
2001 and President from 1991 to 2000. Ms. Macaskill is a
director of Prudential plc. She also serves on the Board of
Trustees of the College Retirement Equities Fund (CREF) and the
TIAA-CREF Funds. Ms. Macaskill has been a Fannie Mae
director since December 2005.
Daniel H. Mudd, 48, has served as President and Chief
Executive Officer of Fannie Mae since June 2005. Mr. Mudd
previously served as Vice Chairman of Fannie Maes Board of
Directors and interim Chief Executive Officer, from December
2004 to June 2005, and as Vice Chairman and Chief Operating
Officer from February 2000 to December 2004. Prior to his
employment with Fannie Mae, Mr. Mudd was President and
Chief Executive Officer of GE Capital, Japan, a diversified
financial services company and a wholly-owned subsidiary of the
General Electric Company, from April 1999 to February 2000. He
also served as President of GE Capital, Asia Pacific, from May
1996 to June 1999. Mr. Mudd also serves as a director of
Ryder System, Inc. Mr. Mudd has been a Fannie Mae director
since February 2000.
Joe K. Pickett, 61, retired from HomeSide International,
Inc. in 2001, where he had served as Chairman since 1996. He
also served as Chief Executive Officer of HomeSide
International, Inc. from 1996 to 2001. HomeSide International
was the parent of HomeSide Lending, Inc., a mortgage banking
company that was previously known as BancBoston Mortgage
Corporation. Mr. Pickett also served as Chairman and Chief
Executive Officer of HomeSide Lending from 1990 to 1999.
Mr. Pickett is a past President of the Mortgage Bankers
Association of America. Mr. Pickett has been a Fannie Mae
director since May 1996.
Leslie Rahl, 56, is the founder of and has been President
of Capital Market Risk Advisors, Inc., a financial advisory firm
specializing in risk management, hedge funds and capital market
strategy, since 1994. Previously, Ms. Rahl spent
19 years at Citibank, including nine years as Vice
President and Division Head, Derivatives GroupNorth
America. She is currently a director of the International
Association of Financial Engineers, the Fischer Black Memorial
Foundation, MIT Investment Management Company, New York State
Common Investment Advisory Committee and High Water Women. She
is a former director of the International Swaps Dealers
Association. Ms. Rahl has been a Fannie Mae director since
February 2004.
Greg C. Smith, 55, retired March 1, 2006 from Ford
Motor Company, or Ford, where he had served as Vice Chairman
since October 2005. Mr. Smith held several positions at
Ford including serving as the Executive Vice President and
President, The Americas, from 2004 to 2005. He was Group Vice
President of Ford and Chairman and Chief Executive Officer of
Ford Motor Credit Company, or Ford Credit, an indirect,
wholly-owned subsidiary of Ford, from 2002 to 2004. He also
served as the Chief Operating Officer of Ford Credit from 2001
to 2002, and President, Ford Credit North America from 1997 to
2001. Mr. Smith is a former Chairman of the American
Financial Services Association. He has been a Fannie Mae
director since April 2005.
H. Patrick Swygert, 63, has been President of Howard
University since 1995. He also serves as a director of Hartford
Financial Services Group, Inc. and United Technologies
Corporation. In addition, Mr. Swygert is a member of the
Brown v. Board of Education
50th Anniversary
Commission and a member of the Central Intelligence Agency
External Advisory Board. Mr. Swygert has been a Fannie Mae
director since January 2000.
214
John K. Wulff, 58, has been the non-executive Chairman of
the Board of Hercules Incorporated, a manufacturer and supplier
of specialty chemical products, since December 2003.
Mr. Wulff was first elected as a director of Hercules in
July 2003, and served as interim Chairman from October 2003 to
December 2003. Mr. Wulff also served as a member of the
FASB from July 2001 until June 2003. From 1996 until 2001,
Mr. Wulff was Chief Financial Officer of Union Carbide
Corporation, a chemicals and polymers company. In addition to
serving as a director of Hercules Incorporated, Mr. Wulff
is a director of Sunoco, Inc., Celanese Corporation and
Moodys Corporation. Mr. Wulff has been a Fannie Mae
director since December 2004.
Corporate
Governance
Under the Charter Act, our Board of Directors consists of
18 directors, 5 of whom are appointed by the President of
the United States. The terms of the most recent Presidential
appointees to Fannie Maes Board expired on May 25,
2004 and the President declined to reappoint or replace them.
Pursuant to the Charter Act, those five Board positions will
remain open unless and until the President names new appointees.
Fannie Maes bylaws provide that each director holds office
for the term to which he or she was elected or appointed and
until his or her successor is chosen and qualified or until he
or she dies, resigns, retires or is removed from office in
accordance with the law, whichever occurs first. Under the
Charter Act, each director is elected or appointed for a term
ending on the date of our next stockholders meeting.
Director
Independence
Our Board of Directors, with the assistance of the Nominating
and Corporate Governance Committee, has reviewed the
independence of all current board members under the listing
standards of the New York Stock Exchange, or NYSE, and the
standards of independence adopted by the Board, as set forth in
our Corporate Governance Guidelines and outlined below. It is
the policy of our Board of Directors that a substantial majority
of our seated directors will be independent in accordance with
these standards.
Our Board of Directors has affirmatively determined that the
following current Board members are independent: Stephen Ashley,
the non-executive Chairman, Dennis Beresford, Brenda Gaines,
Thomas Gerrity, Karen Horn, Bridget Macaskill, Joe Pickett,
Leslie Rahl, Greg Smith, Patrick Swygert and John Wulff. Board
members Daniel Mudd, our President and Chief Executive Officer,
and Kenneth Duberstein are not independent.
Under the standards of independence adopted by our board, which
meet and in some respects exceed the definition of independence
adopted by the NYSE, an independent director must be
determined to have no material relationship with us, either
directly or through an organization that has a material
relationship with us. A relationship is material if,
in the judgment of the Board, it would interfere with the
directors independent judgment. In addition, under the
NYSEs listing requirements for audit committees, members
of a companys audit committee must meet additional,
heightened independence criteria, although our own independence
standards require all independent directors to meet these
criteria.
To assist it in determining whether a director is independent,
our Board has adopted the standards set forth below:
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A director will not be considered independent if, within the
preceding five years:
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the director was our employee; or
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an immediate family member of the director was employed by us as
an executive officer.
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A director will not be considered independent if:
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the director is a current partner or employee of our outside
auditor, or within the preceding five years, was (but is no
longer) a partner or employee of our outside auditor and
personally worked on our audit within that time; or
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an immediate family member of the director is a current partner
of our outside auditor, or is a current employee of our outside
auditor participating in the firms audit, assurance or tax
compliance (but not
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215
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tax planning) practice, or within the preceding five years, was
(but is no longer) a partner or employee of our outside auditor
and personally worked on our audit within that time.
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A director will not be considered independent if, within the
preceding five years:
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the director was employed by a company at a time when one of our
current executive officers sat on that companys
compensation committee; or
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an immediate family member of the director was employed as an
officer by a company at a time when one of our current executive
officers sat on that companys compensation committee.
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A director will not be considered independent if, within the
preceding five years:
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the director received any compensation from us, directly or
indirectly, other than fees for service as a director; or
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an immediate family member of the director received any
compensation from us, directly or indirectly, other than
compensation received for service as our employee (other than an
executive officer).
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A director will not be considered independent if:
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the director is a current executive officer, employee,
controlling stockholder or partner of a corporation or other
entity that does or did business with us and to which we made,
or from which we received, payments within the preceding five
years that, in any single fiscal year, were in excess of
$1 million or 2% of the entitys consolidated gross
annual revenues, whichever is greater; or
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an immediate family member of the director is a current
executive officer of a corporation or other entity that does or
did business with us and to which we made, or from which we
received, payments within the preceding five years that, in any
single fiscal year, were in excess of $1 million or 2% of
the entitys consolidated gross annual revenues, whichever
is greater.
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A director will not be considered independent if the director or
the directors spouse is an executive officer, employee,
director or trustee of a nonprofit organization to which we or
the Fannie Mae Foundation makes contributions in any year in
excess of 5% of the organizations consolidated gross
annual revenues, or $100,000, whichever is less (amounts that
the Fannie Mae Foundation contributes under our matching gifts
program are not included in the contributions calculated for
purposes of this standard). The Nominating and Corporate
Governance Committee also will administer standards concerning
any charitable contribution to organizations otherwise
associated with a director or any spouse of a director. We are
guided by our interests and that of our stockholders in
determining whether and the extent to which we make charitable
contributions.
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After considering all the facts and circumstances, our Board may
determine in its judgment that a director is independent (in
other words, the director has no relationship with us that would
interfere with the directors independent judgment), even
though the director does not meet the standards listed above, so
long as the determination of independence is consistent with the
NYSE definition of independence.
Where the guidelines above do not address a particular
relationship, the determination of whether the relationship is
material, and whether a director is independent, will be made by
our Board, based upon the recommendation of the Nominating and
Corporate Governance Committee.
The Board has determined that all of our independent directors
meet the director independence standards of our Corporate
Governance Guidelines and the NYSE.
Our Board has an Audit Committee consisting of Dennis Beresford,
who is the Chair, Stephen Ashley, Karen Horn, Greg Smith and
John Wulff. The Board has determined that Messrs. Beresford
and Wulff and Ms. Horn have the requisite experience to
qualify as audit committee financial experts under
the rules and regulations of the SEC and has designated them as
such.
216
Corporate
Governance Information, Committee Charters and Codes of
Conduct
Our Corporate Governance Guidelines, as well as the charters for
standing Board committees, including our Boards Audit
Committee, Compensation Committee, Compliance Committee and
Nominating and Corporate Governance Committee, are posted on our
Web site, www.fanniemae.com, under Corporate
Governance.
We have a Code of Conduct that is applicable to all officers and
employees and a Code of Conduct and Conflict of Interests Policy
for Members of the Board of Directors. Our Code of Conduct also
serves as the code of ethics for our Chief Executive Officer and
senior financial officers required by the Sarbanes-Oxley Act of
2002 and implementing regulations of the SEC. These codes have
been posted on our Web site, www.fanniemae.com, under
Corporate Governance. We will make disclosures by
posting on our Web site any change to or waiver from these codes
for any of our executive officers or directors.
Copies of these documents are also available in print to any
stockholder who requests them.
Annual
Certifications
The NYSE listing standards require each listed companys
chief executive officer to certify annually that he or she is
not aware of any violation by the company of the NYSEs
corporate governance listing standards, qualifying the
certification to the extent necessary. Our Chief Executive
Officer certification for 2005 contained qualifications relating
to our failure to provide disclosure about our corporate
governance in a proxy statement or annual report. We made these
disclosures in a
Form 8-K
filed May 25, 2006, and with that filing came into
compliance with the NYSE corporate governance listing standards.
We have not yet filed annual consolidated financial statements
for 2005, nor have we filed any related certifications by our
Chief Executive Officer or Chief Financial Officer required by
the Sarbanes-Oxley Act of 2002. With the filing of this Annual
Report on
Form 10-K
for the year ended 2004, we are filing our annual consolidated
financial statements for 2004 and related certifications by our
Chief Executive Officer and Chief Financial Officer required by
the Sarbanes-Oxley Act of 2002.
Executive
Sessions
Our non-management directors meet regularly in executive session
without management present. Time for an executive session is
reserved at every regularly scheduled board meeting. The
non-executive Chairman of the Board, Mr. Ashley, typically
presides over these sessions.
Communications
with Directors
Interested parties wishing to communicate any concerns or
questions about us to the non-executive Chairman of the Board or
to our non-management directors as a group may do so by
electronic mail addressed to board@fanniemae.com, or
by U.S. mail addressed to Fannie Mae Directors,
c/o Office of the Secretary, Fannie Mae, Mail Stop
1H-2S/05, 3900 Wisconsin Avenue NW, Washington, DC
20016-2892.
Communications may be addressed to a specific director or
directors, including Mr. Ashley, the Chairman of the Board,
or to groups of directors, such as the independent or
non-management directors.
As approved by the Board, including the non-management
directors, the Office of the Secretary is responsible for
processing all communications received through these procedures
and for forwarding communications to the appropriate director or
directors. All communications addressed to Board members will be
forwarded directly to Board members.
Any stockholder who wishes to submit a candidate for director
for consideration by the Nominating and Corporate Governance
Committee should submit a written notice to Fannie Mae Director
Nominees, c/o Office of the Secretary, Fannie Mae, Mail
Stop 1H-2S/05, 3900 Wisconsin Avenue, NW, Washington, DC
20016-2892.
Executive
Officers
Our current executive officers who are not also members of the
Board of Directors are listed below. They have provided the
following information about their principal occupation, business
experience and other matters.
217
Kenneth J. Bacon, 52, has been Executive Vice
PresidentHousing and Community Development since July
2005. He was interim head of Housing and Community Development
from January 2005 to July 2005. He was Senior Vice
PresidentMultifamily Lending and Investment from May 2000
to January 2005, and Senior Vice PresidentAmerican
Communities Fund from October 1999 to May 2000. From August 1998
to October 1999 he was Senior Vice President of the Community
Development Capital Corporation. He was Senior Vice President of
Fannie Maes Northeastern Regional Office in Philadelphia
from May 1993 to August 1998. Mr. Bacon is a director of
Comcast Corporation, Fannie Mae Foundation, Corporation for
Supportive Housing, Maret School and Communities In School. He
is a member of the Executive Leadership Council and the Real
Estate Round Table.
Robert T. Blakely, 64, has been Executive Vice President
and Chief Financial Officer since January 2006. Prior to joining
Fannie Mae, Mr. Blakely was Executive Vice President, Chief
Financial Officer and Chief Accounting Officer of MCI, Inc.
since April 2005, and Executive Vice President and Chief
Financial Officer of MCI from April 2003 to April 2005. Prior to
that date, he was President of Performance Enhancement Group,
Inc., a business development services firm, from July 2002 to
April 2003; Executive Vice President and Chief Financial Officer
of Lyondell Chemical Company from November 1999 to June 2002 and
Executive Vice President of Tenneco, Inc. from 1996 to November
1999 and Chief Financial Officer from 1981 to November 1999.
Mr. Blakely was also a Member of the Financial Accounting
Standards Advisory Council from 1999 to November 2003.
Mr. Blakely is a director of Natural Resources Partners
L.P. and Westlake Chemicals Corporation. Mr. Blakely joined
Fannie Mae in January 2006.
Enrico Dallavecchia, 44, has been Executive Vice
President and Chief Risk Officer since June 2006. Prior to
joining Fannie Mae, Mr. Dallavecchia was with JP Morgan
Chase, where he served as Head of Market Risk for Retail
Financial Services, Chief Investment Office and Asset Wealth
Management from April 2005 to May 2006 and as Market Risk
Officer for Global Treasury, Retail Financial Services, Credit
Cards and Proprietary Positioning Division and Co-head of Market
Risk Technology, the group responsible for developing,
implementing and maintaining the firm-wide market risk
measurement systems, from December 1998 to March 2005.
Linda K. Knight, 56, has been Executive Vice
PresidentCapital Markets since March 2006. Prior to her
present appointment, Ms. Knight served as Senior Vice
President and Treasurer from February 1993 to March 2006, and
Vice President and Assistant Treasurer from November 1986 to
February 1993. Ms. Knight held the position of Director,
Treasurers Office from November 1984 to November 1986.
Ms. Knight joined Fannie Mae in August 1982 as a senior
market analyst.
Robert J. Levin, 51, has been Executive Vice President
and Chief Business Officer since November 2005. Mr. Levin
was Fannie Maes interim Chief Financial Officer from
December 2004 to January 2006. Prior to that position,
Mr. Levin was the Executive Vice President of Housing and
Community Development from June 1998 to December 2004. From June
1990 to June 1998, he was Executive Vice
PresidentMarketing. Mr. Levin joined Fannie Mae in
1981.
Thomas A. Lund, 48, has been Executive Vice
PresidentSingle-Family Mortgage Business since July 2005.
He was interim head of Single-Family Mortgage Business from
January 2005 to July 2005 and Senior Vice PresidentChief
Acquisitions Office from January 2004 to January 2005.
Mr. Lund has served as Senior Vice PresidentInvestor
Channel from August 2000 to January 2004; Senior Vice
PresidentSouthwestern Regional Office, Dallas, Texas from
July 1996 to July 2000; and Vice President for marketing from
January 1995 to July 1996.
Rahul N. Merchant, 50, has been Executive Vice President
and Chief Information Officer since November 2006. Prior to
joining Fannie Mae, Mr. Merchant was with Merrill
Lynch & Co., where he served as Head of Global Business
Technology from 2004 to 2006 and as Head of Global Business
Technology for Merrill Lynchs Global Markets and
Investment Banking division from 2000 to 2004. Before joining
Merrill, he served as Executive Vice President at Dresdner,
Kleinwort and Benson, a global investment bank, from 1998 to
2000. He also previously served as Senior Vice President at
Sanwa Financial Products and First Vice President at Lehman
Brothers, Inc. Mr. Merchant serves on the board of advisors
of the American India Foundation.
218
Peter S. Niculescu, 47, has been Executive Vice
PresidentCapital Markets (previously Mortgage Portfolio)
since November 2002. Mr. Niculescu joined Fannie Mae in
March 1999 as Senior Vice PresidentPortfolio Strategy and
served in that position until November 2002.
William B. Senhauser, 44, has been Senior Vice President
and Chief Compliance Officer since December 2005. Prior to his
present appointment, Mr. Senhauser was Vice President for
Regulatory Agreements and Restatement from October 2004 to
December 2005 and Vice President for Operating Initiatives,
responsible for oversight of critical company-wide initiatives
and management of special projects for the chief operating
officer from January 2003 to September 2004. Mr. Senhauser
joined Fannie Mae in 2000 as Vice President for Fair Lending.
Julie St. John, 55, has been Executive Vice President
since July 2000. She served as Chief Information Officer from
March 2004 to November 2006 and as Chief Technology Officer from
July 2000 to March 2004. She served as Senior Vice
PresidentMortgage Business Technology from November 1999
to July 2000. She was Senior Vice PresidentGuaranty and
Franchise Technologies from November 1993 to November 1999.
Ms. St. John joined Fannie Mae in 1990 as Vice President of
Systems Development. Ms. St. John advised us in July 2006
of her intention to retire from Fannie Mae. She has informed us
that she intends to retire on December 15, 2006.
Beth A. Wilkinson, 44, has been Executive Vice
PresidentGeneral Counsel and Corporate Secretary since
February 2006. Prior to joining Fannie Mae, Ms. Wilkinson
was a partner and co-chair, White Collar Practice Group for
Latham & Watkins LLP, from 1998 to 2006. Before joining
Latham, she served as a prosecutor and special counsel for
U.S. v. McVeigh and Nichols from 1996 to 1998.
During her tenure at the Department of Justice,
Ms. Wilkinson was appointed principal deputy of the
Terrorism & Violent Crime Section in 1995, and served
as Special Counsel to the Deputy Attorney General from 1995 to
1996. Ms. Wilkinson also served as an Assistant
U.S. Attorney in the Eastern District of New York from 1991
to 1995. Prior to that time, Ms. Wilkinson was a Captain in
the United States Army serving as an assistant to the general
counsel of the Army for Intelligence & Special
Operations from 1987 to 1991.
Michael J. Williams, 49, has been Executive Vice
President and Chief Operating Officer since November 2005.
Mr. Williams was Fannie Maes Executive Vice President
for Regulatory Agreements and Restatement from February 2005 to
November 2005. He has been responsible for managing our overall
effort to restate and reaudit Fannie Maes financial
statements since January 2005 and for fulfilling Fannie
Maes obligations under Fannie Maes agreements with
OFHEO since October 2004. Mr. Williams also served as
PresidentFannie Mae eBusiness from July 2000 to February
2005 and as Senior Vice
Presidente-commerce
from July 1999 to July 2000. Prior to this, Mr. Williams
served in various roles in the Single-Family and Corporate
Information Systems divisions of the company. Mr. Williams
joined Fannie Mae in 1991.
Under our bylaws, each executive officer holds office until his
or her successor is chosen and qualified or until he or she
resigns, retires or is removed from office.
Section 16(a)
Beneficial Ownership Reporting Compliance
Our directors and officers file with the SEC reports on their
ownership of our stock and on changes in their stock ownership.
Based on a review of forms filed during 2004 or with respect to
2004 and on representations from our directors and officers, we
believe that all of our directors and officers filed all
required reports and reported all holdings and transactions
reportable during 2004 except as described below. In November
and December 2006, each of the persons listed below filed an
amended Form 4 or a Form 5 to report transactions that
occurred prior to our initial registration with the SEC in March
2003: Mr. Mudd and Mr. Pickettone transaction;
Mr. Donilonfive transactions; Mr. Adolfo Marzol,
Ms. St. John and Mr. Williamsseven transactions.
In addition, the following persons did not report transactions
occurring prior to our initial SEC registration:
Ms. Spencerfour transactions and
Mr. Howardeight transactions. These transactions were
inadvertently omitted from the officer or directors
initial Form 4 filing. All of these transactions were
reported on Statements of Changes in Beneficial
Ownership that were posted on our Web site shortly after
they took place. Mr. Williams Form 5 also
reported a holding that was inadvertently omitted from his
Form 3.
219
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Item 11.
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Executive
Compensation
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Executive
Compensation Information
The following tables provide, for the periods stated,
compensation information for those individuals who served as
Chief Executive Officer during 2004 and our four other most
highly compensated executive officers during 2004. We refer to
these individuals below as the covered executives. Much of the
information in the tables below has been previously provided in
Form 8-Ks
we have filed. Information regarding 2004 salary, restricted
stock awards and long-term incentive plan payouts for the
covered executives other than Mr. Raines appeared in
Form 8-Ks
we filed on January 21, 2005 and March 11, 2005.
Mr. Raines salary remained unchanged in 2004 from
prior years, and he received no restricted stock award for 2004.
Our
Form 8-K
filed on January 21, 2005 also disclosed that our Board of
Directors and its Compensation Committee determined that no cash
bonuses would be paid for officers at the level of senior vice
president or above for 2004.
We have provided compensation information for our Chief
Executive Officer and our four other most highly compensated
executive officers during 2005 in a
Form 8-K
we are filing with the SEC today. Information in that
Form 8-K
under the heading Executive Compensation is
incorporated by reference into this
Form 10-K.
Summary
Compensation Table
The following table shows summary compensation information for
the covered executives for 2004, 2003 and 2002.
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Long Term Compensation
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Awards
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Payouts
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Annual
Compensation(2)
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Restricted
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Securities
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Other Annual
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Stock
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Underlying
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LTIP
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All Other
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Name and
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Salary
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Bonus
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Compensation
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Awards
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Options /
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Payouts
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Compensation
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Principal
Position(1)
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Year
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($)
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($)
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($)(3)
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($)(4)
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SARs(#)
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($)(5)
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($)(6)
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Daniel Mudd
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2004
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743,895
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20,615
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5,524,381
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43,200
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President and
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2003
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714,063
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1,288,189
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125,822
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105,749
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4,674,015
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10,167
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Chief Executive Officer
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2002
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689,124
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911,250
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54,885
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82,918
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2,339,702
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9,569
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Robert Levin
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2004
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590,923
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17,288
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3,125,480
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39,015
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Executive Vice President
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2003
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567,706
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801,237
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851
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227,789
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100,613
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2,706,381
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10,024
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Chief Business Officer
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2002
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480,092
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575,000
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950
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72,445
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1,947,368
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9,811
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Julie St. John
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2004
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495,169
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22,853
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1,994,111
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47,221
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Executive Vice President
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2003
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471,415
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661,891
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846
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73,880
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1,884,314
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9,164
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2002
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428,195
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570,000
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1,064
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63,836
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1,008,334
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8,981
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Michael Williams
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2004
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495,169
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12,823
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2,194,110
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30,604
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Executive Vice President
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2003
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471,415
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663,129
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717
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73,880
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1,274,349
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8,302
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Chief Operating Officer
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2002
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428,195
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520,000
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865
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63,836
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443,137
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8,134
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Thomas
Donilon(7)
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2004
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632,923
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21,943
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2,576,967
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45,586
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Former Executive Vice
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2003
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494,492
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727,020
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903
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834,628
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89,268
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1,915,304
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9,189
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|
PresidentLaw and Policy
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2002
|
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428,195
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600,000
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990
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75,595
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913,274
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8,539
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Franklin
Raines(8)
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2004
|
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992,250
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406,989
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152,398
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Former Chairman of the Board
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2003
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992,250
|
|
|
|
4,180,365
|
|
|
|
272,241
|
|
|
|
|
|
|
|
135,020
|
|
|
|
11,621,206
|
|
|
|
25,501
|
|
and Chief Executive Officer
|
|
|
2002
|
|
|
|
992,250
|
|
|
|
3,300,000
|
|
|
|
206,378
|
|
|
|
|
|
|
|
311,731
|
|
|
|
7,233,679
|
|
|
|
24,248
|
|
|
|
|
(1) |
|
Positions indicated are the current
position or, for departed executives, the most recently held
position.
|
|
(2) |
|
Our executive compensation program
is designed to tie a large portion of each officers total
compensation to performance. An executive officers bonus
generally is designed to reflect corporate and individual
performance for the previous year. See also footnote
(5) for information about long-term compensation.
Salary includes annual salary deferred to later
years. Bonus includes amounts earned during the year
under the Annual Incentive Plan.
|
|
(3) |
|
Other Annual
Compensation in 2004 includes $186,452 for the personal
use of company transportation for Mr. Raines, which does
not include an increase of approximately $5,600 in our federal
income tax liability attributable to Mr. Raines
personal use of company airplane transportation. Other
Annual Compensation for 2004 also includes a
gross-up for
taxable income on insurance coverage provided by the company for
the covered executives in the following amounts:
Mr. Mudd$20,615; Mr. Levin$17,288;
Ms. St. John$22,853; Mr. Williams$12,823;
Mr. Donilon$21,943; and Mr. Raines$81,375.
Other Annual Compensation in 2003 includes $196,852
for the personal use of company transportation for
Mr. Raines, and, for Mr. Mudd, $80,400 for club membership
fees agreed to by us in connection with recruiting him from his
prior employment. It also includes $32,093 for residential
security services
|
220
|
|
|
|
|
for each of Mr. Raines and
Mr. Mudd and a
gross-up for
taxable income on insurance coverage provided by the company for
the covered executives in the following amounts:
Mr. Mudd$1,066; Mr. Levin$851;
Ms. St. John$846; Mr. Williams$717;
Mr. Donilon$903; and Mr. Raines$2,503.
Other Annual Compensation in 2002 includes $123,539
for personal use of company transportation for Mr. Raines,
$39,525 for residential security services for Mr. Raines
and Mr. Mudd and a
gross-up for
taxable income on insurance coverage provided by the company for
the covered executives in the following amounts:
Mr. Mudd$1,358; Mr. Levin$950;
Ms. St. John$1,064; Mr. Williams$865;
Mr. Donilon$990; and Mr. Raines$3,160.
|
|
(4) |
|
Restricted stock awards and, in the
case of Mr. Mudd, restricted stock unit awards made in
March 2005 are reported as compensation for 2004. The shares and
units vest over three years in equal annual installments.
Dividends are paid on restricted common stock and dividend
equivalents are paid on restricted stock units at the same rate
as dividends on unrestricted common stock. As of
December 31, 2004, the covered executives held a number of
shares of unvested restricted common stock with an aggregate
value based on closing price as follows:
Mr. Mudd5,000 shares, $356,050;
Mr. Levin2,920 shares, $207,933; Ms. St.
John1,000 shares, $71,210;
Mr. Williams1,000 shares, $71,210;
Mr. Donilon14,677 shares, $1,045,149;
Mr. Raines held no shares. As of December 31, 2004,
Mr. Mudd held no restricted stock units. The four covered
executives who were employed by us as of December 31, 2005
held shares of unvested restricted common stock and restricted
stock units with an aggregate value based on the closing price
on December 31, 2005 as follows:
Mr. Mudd127,476 shares, $6,222,104;
Mr. Levin56,339 shares, $2,749,907; Ms. St.
John34,548 shares, $1,686,288; and
Mr. Williams38,013 shares, $1,855,415.
|
|
(5) |
|
LTIP Payouts relate to
annual awards entitling executives to receive shares of common
stock based upon and subject to our meeting corporate
performance objectives over three-year periods. Generally, the
Compensation Committee of our Board of Directors determines in
January our achievement against the goals for the performance
share cycle that just ended. That achievement determines the
payout of the performance shares and the shares are paid out to
current executives in two annual installments. Because we did
not have reliable financial data for years within the award
cycles, the Compensation Committee and the Board decided to
postpone the determination of the amount of the awards under the
performance share program for the three-year performance share
cycles that ended in 2004 and 2005 and to postpone payment of
the second installment of shares for the three-year performance
share cycle that ended in 2003, the first installment of which
was paid in January 2004. In the future, the Compensation
Committee and the Board of Directors will review the performance
share program and determine the appropriate approach for
settling our obligations with respect to the existing unpaid
performance share cycles.
|
|
(6) |
|
All Other Compensation
for each covered executive in 2004 includes a $6,150 employer
matching contribution under the Retirement Savings Plan for
Employees and premiums of $1,150 paid on behalf of each covered
executive in 2004 for excess liability insurance coverage.
All Other Compensation for 2004 also includes
premiums paid on behalf of each covered executive for universal
life insurance coverage in the following amounts:
Mr. Mudd$35,900; Mr. Levin$31,715;
Ms. St. John$39,921; Mr. Williams$23,304;
Mr. Donilon$38,286; and Mr. Raines$145,098.
|
|
(7) |
|
Mr. Donilon left Fannie Mae in
April 2005.
|
|
(8) |
|
Mr. Raines ceased serving as
an executive officer of Fannie Mae in December 2004, although
under his employment agreement his retirement was not effective
until June 2005.
|
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table shows the aggregate number of shares
underlying options exercised in 2004 and the value as of
December 31, 2004 of
in-the-money
outstanding options, whether or not exercisable.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Underlying
|
|
|
Value of Unexercised
In-the-
|
|
|
|
Acquired
|
|
|
|
|
|
Unexercised Options
|
|
|
Money Options
|
|
|
|
on Exercise
|
|
|
Value Realized
|
|
|
at December 31, 2004
|
|
|
at December 31, 2004
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
Exercisable/Unexercisable (#)
|
|
|
Exercisable/Unexercisable
($)(2)
|
|
|
Daniel Mudd
|
|
|
|
|
|
$
|
|
|
|
|
407,419/189,737
|
|
|
$
|
4,304,340/$110,696
|
|
Robert Levin
|
|
|
92,800
|
|
|
|
5,181,679
|
|
|
|
372,924/166,131
|
|
|
|
4,840,754/96,715
|
|
Julie St. John
|
|
|
|
|
|
|
|
|
|
|
171,883/132,941
|
|
|
|
1,005,850/85,221
|
|
Michael Williams
|
|
|
21,600
|
|
|
|
1,211,208
|
|
|
|
192,944/132,941
|
|
|
|
2,017,075/85,221
|
|
Thomas Donilon
|
|
|
|
|
|
|
|
|
|
|
145,556/157,149
|
|
|
|
256,160/100,921
|
|
Franklin Raines
|
|
|
|
|
|
|
|
|
|
|
1,628,071/438,153
|
|
|
|
6,266,561/416,162
|
|
|
|
|
(1) |
|
Value Realized is the
difference between the exercise price and the market price on
the exercise date, multiplied by the number of options
exercised. Value Realized numbers do not necessarily
reflect what the executive might receive when he or she sells
the shares acquired by the option exercise, since the market
price of the shares at the time of sale may be higher or lower
than the price on the exercise date of the option.
|
221
|
|
|
(2) |
|
Value of Unexercised
In-the-Money
Options is the aggregate, calculated on a
grant-by-grant
basis, of the product of the number of unexercised options at
the end of 2004 multiplied by the difference between the
exercise price for the grant and the December 31, 2004
closing price per share of Fannie Mae common stock of $71.21,
excluding grants for which the exercise price equaled or
exceeded $71.21. As of November 30, 2006, the closing price
per share of Fannie Mae common stock was $57.03.
|
Retirement
Plans
Fannie
Mae Retirement Plan
The Federal National Mortgage Association Retirement Plan for
Employees Not Covered Under Civil Service Retirement Law, which
we refer to as the Retirement Plan, provides benefits for those
eligible employees who are not covered by the federal Civil
Service retirement law. Normal retirement benefits are computed
on a single life basis using a formula based on final average
annual earnings and years of credited service. Participants are
fully vested when they complete five years of credited service.
Since 1989, provisions of the Internal Revenue Code of 1986, as
amended, have limited the amount of annual compensation that may
be used for calculating pension benefits and the annual benefit
that may be paid. For 2004, the statutory compensation and
benefit caps were $205,000 and $165,000, respectively. Before
1989, some employees accrued benefits based on higher income
levels. For employees who retire before age 65, benefits
are reduced by stated percentages for each year that they are
younger than 65.
The covered executives had approximately the following years of
credited service as of December 31, 2004: Mr. Levin,
24 years; Mr. Mudd, 5 years; Ms. St. John,
14 years; Mr. Williams, 14 years. At the
effective time of his retirement, Mr. Raines had
approximately 13 years of credited service. Upon his
resignation, Mr. Donilon had approximately 5 years of
credited service.
Because the Retirement Plan is coordinated with Social Security
Covered Compensation as defined in Internal Revenue Service
regulations, the benefits under the Retirement Plan are not
subject to deductions for social security benefits or other
offset amounts.
Supplemental
Pension Plans
We adopted the Supplemental Pension Plan to provide supplemental
retirement benefits to employees who do not participate in or
are not fully vested in the Executive Pension Plan and whose
salary exceeds the statutory compensation cap applicable to the
Retirement Plan or whose benefit under the Retirement Plan is
limited by the statutory benefit cap applicable to the
Retirement Plan. Separately, we adopted the 2003 Supplemental
Pension Plan to provide additional benefits to our officers
based on the annual cash bonuses received by our officers. For
purposes of determining benefits under the 2003 Supplemental
Pension Plan, the amount of an officers annual cash bonus
taken into account is limited to 50% of the officers
salary.
The benefits under the Fannie Mae supplemental pension plans are
not subject to deductions for social security benefits or other
offset amounts.
222
The following table shows the estimated annual benefits that
would have been payable under the Retirement Plan and, if
applicable, the supplemental pension plans to an employee who
did not participate in or was not fully vested in the Executive
Pension Plan and who turned 65 and retired on January 1,
2005, using years of service accrued through January 1,
2005.
Fannie
Mae Retirement Plan and Supplemental Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final Average
|
|
Estimated Annual Pension for Representative Years of
Service
|
|
Annual Earnings
|
|
10
|
|
|
15
|
|
|
20
|
|
|
25
|
|
|
30
|
|
|
35
|
|
|
$ 50,000
|
|
$
|
7,683
|
|
|
$
|
11,524
|
|
|
$
|
16,136
|
|
|
$
|
20,941
|
|
|
$
|
25,746
|
|
|
$
|
30,551
|
|
100,000
|
|
|
17,683
|
|
|
|
26,524
|
|
|
|
36,136
|
|
|
|
45,941
|
|
|
|
55,746
|
|
|
|
65,551
|
|
150,000
|
|
|
27,683
|
|
|
|
41,524
|
|
|
|
56,136
|
|
|
|
70,941
|
|
|
|
85,746
|
|
|
|
100,551
|
|
200,000
|
|
|
37,683
|
|
|
|
56,524
|
|
|
|
76,136
|
|
|
|
95,941
|
|
|
|
115,746
|
|
|
|
135,551
|
|
250,000
|
|
|
47,683
|
|
|
|
71,524
|
|
|
|
96,136
|
|
|
|
120,941
|
|
|
|
145,746
|
|
|
|
170,551
|
|
300,000
|
|
|
57,683
|
|
|
|
86,524
|
|
|
|
116,136
|
|
|
|
145,941
|
|
|
|
175,746
|
|
|
|
205,551
|
|
350,000
|
|
|
67,683
|
|
|
|
101,524
|
|
|
|
136,136
|
|
|
|
170,941
|
|
|
|
205,746
|
|
|
|
240,551
|
|
400,000
|
|
|
77,683
|
|
|
|
116,524
|
|
|
|
156,136
|
|
|
|
195,941
|
|
|
|
235,746
|
|
|
|
275,551
|
|
450,000
|
|
|
87,683
|
|
|
|
131,524
|
|
|
|
176,136
|
|
|
|
220,941
|
|
|
|
265,746
|
|
|
|
310,551
|
|
500,000
|
|
|
97,683
|
|
|
|
146,524
|
|
|
|
196,136
|
|
|
|
245,941
|
|
|
|
295,746
|
|
|
|
345,551
|
|
550,000
|
|
|
107,683
|
|
|
|
161,524
|
|
|
|
216,136
|
|
|
|
270,941
|
|
|
|
325,746
|
|
|
|
380,551
|
|
600,000
|
|
|
117,683
|
|
|
|
176,524
|
|
|
|
236,136
|
|
|
|
295,941
|
|
|
|
355,746
|
|
|
|
415,551
|
|
650,000
|
|
|
127,683
|
|
|
|
191,524
|
|
|
|
256,136
|
|
|
|
320,941
|
|
|
|
385,746
|
|
|
|
450,551
|
|
700,000
|
|
|
137,683
|
|
|
|
206,524
|
|
|
|
276,136
|
|
|
|
345,941
|
|
|
|
415,746
|
|
|
|
485,551
|
|
1,970,600
|
|
|
391,803
|
|
|
|
587,704
|
|
|
|
784,376
|
|
|
|
981,241
|
|
|
|
1,178,106
|
|
|
|
1,374,971
|
|
Executive
Pension Plan
We adopted the Executive Pension Plan to supplement the benefits
payable to key officers under the Retirement Plan. The
Compensation Committee selects the participants in the Executive
Pension Plan. Active participants in the Executive Pension Plan
are Executive Vice Presidents. The Board of Directors sets their
pension goal, which is part of the formula that determines the
pension benefits for each participant. Mr. Mudd is also an
active participant in the Executive Pension Plan. His pension
goal was approved by the independent members of the Board of
Directors. Payments are reduced by any amounts payable under the
Retirement Plan and any amounts payable under the Civil Service
retirement system attributable to our contributions for service
with it.
Participants pension benefits generally range from 30% to
60% of the average total compensation for the 36 consecutive
months of the participants last 120 months of
employment when total compensation was the highest. Total
compensation generally is a participants average annual
base salary, including deferred compensation, plus the
participants other taxable compensation (excluding income
or gain in connection with the exercise of stock options) earned
for the relevant year, in an amount up to 50% of annual base
salary for that year. However, under his current employment
agreement, Mr. Mudds total compensation for a given
year includes other taxable compensation up to 100%, not 50%, of
his annual base salary for that year.
Participants who retire before age 60 generally receive a
reduced benefit. Participants typically vest fully in their
pension benefit after ten years of service as a participant in
the Executive Pension Plan, with partial vesting usually
beginning after five years. The benefit payment typically is a
monthly amount equal to 1/12th of the participants annual
retirement benefit payable during the lives of the participant
and the participants surviving spouse. If a participant
dies before receiving benefits under the Executive Pension Plan,
generally his or her surviving spouse will be entitled to a
death benefit that begins when the spouse reaches age 55,
based on the participants pension benefit at the date of
death.
223
Estimated
Annual Pension Benefits
Estimated annual benefits payable under our combined plans upon
retirement for the covered executives, assuming full vesting at
age 60 and that our corporate performance caused the
participants non-salary taxable compensation to equal or
exceed 50% of annual base salary, were as follows as of
December 31, 2004: Mr. Mudd (50% pension benefit),
$637,500; Mr. Levin (40% pension benefit), $355,350;
Ms. St. John (40% pension benefit), $298,110;
Mr. Williams (40% pension benefit), $298,110. Under his
current employment agreement, which did not go into effect until
2005, Mr. Mudds benefits under the Executive Pension
Plan will take into account his non-salary taxable compensation
in an amount up to 100% of his annual base salary, rather than
50%. As of December 31, 2005, Mr. Mudds
estimated annual benefits payable upon retirement under our
combined retirement plans, assuming full vesting at age 60
and that our corporate performance caused his non-taxable
compensation to equal or exceed 100% of his annual base salary,
was $950,000. Mr. Raines actual annual benefit upon
retirement was $1,313,722. Mr. Donilons annual
benefit upon reaching age 55 will be $140,023. As discussed
below under Employment Agreement with Franklin Raines,
Former Chairman and Chief Executive Officer, our Board of
Directors has not made a final determination about the amounts
to be paid, if any, to participants in certain PSP cycles, which
may result in a related adjustment to Mr. Raines
annual pension benefits.
Employment
Arrangements
The employment contracts, termination of employment and
change-in-control
arrangements that are currently in place for our covered
executives are described below.
Severance
Program
On March 10, 2005, our Board of Directors approved a
severance program that provides guidelines regarding the
severance benefits that management level employees, including
executive officers, may receive if their employment with us is
terminated as a result of corporate restructuring,
reorganization, consolidation, staff reduction, or other similar
circumstances, and only where there are no performance related
issues, and the termination has not been for cause. Eligible
participants in the program receive a severance payment of one
years salary plus two to four weeks salary (three to
four weeks salary in the case of executive officers) for
each year of service with us up to a maximum of one and a half
years salary. Participants terminated after the first
quarter of the fiscal year receive a pro rata payout of their
annual cash incentive award target for that year, adjusted for
corporate performance. Consistent with the terms of our stock
compensation plans, the vesting of options scheduled to vest
within 12 months of termination is accelerated and the
post-termination exercise period of options is extended to the
earlier of the option expiration date or 12 months
following the termination of employment. Restricted stock and
restricted stock unit awards granted under the Stock
Compensation Plan of 2003 and vesting within 12 months of
termination are subject to accelerated vesting, and unpaid
performance shares for completed cycles are paid out. As
provided under the terms of our stock compensation plans,
participants in the severance program who have attained a
certain age and service will receive additional accelerated
vesting of their restricted stock and restricted stock units and
options, in addition to the full option exercise period.
Participants are required to execute a separation agreement to
receive these benefits containing, where permitted, a one-year
non-compete clause. The program also provides for outplacement
services and continued access to our medical and dental plans
for up to five years, with the first 18 months
premiums to remain at a level no higher than they would be if
the participant were still an active employee. Employee
eligibility for the program is determined by the Chairman of the
Board, our highest ranking officer, or a designee of either. In
addition, OFHEOs approval must be received prior to the
program being offered to any OFHEO-designated executive officer.
The program, which we described in a
Form 8-K
filed on March 11, 2005, is scheduled to expire on
December 31, 2006 and will be replaced with a program that
will not apply to our executive officers.
224
Employment
Agreement with Daniel Mudd, President and Chief Executive
Officer
On November 15, 2005, we entered into a new employment
agreement with Mr. Mudd, effective June 1, 2005 when
he was appointed our President and Chief Executive Officer. We
described this agreement in a
Form 8-K
filed on November 15, 2005. The major terms of the
agreement are as follows:
|
|
|
|
|
Employment Term. Through December 31,
2009.
|
|
|
|
Base Salary. Mr. Mudds annual base
salary will be no lower than $950,000. This base salary is
subject to periodic review and possible increases, but not
decreases, by the Board of Directors. Compensation arrangements
for Mr. Mudd are determined annually by the Board of
Directors (excluding Mr. Mudd and any other non-independent
members of the Board) upon the recommendation of the
Compensation Committee of the Board of Directors.
Mr. Mudds annual salary from June 1, 2005 was
$950,000 and his 2006 salary remains the same.
|
|
|
|
Annual Bonus. The amount of any cash bonus
Mr. Mudd receives may be less than, equal to, or greater
than his target amount, depending on corporate and individual
performance, and subject to prior approval from OFHEO while the
company is subject to its capital restoration plan.
Mr. Mudds annual cash bonus target award from
June 1, 2005 was 275% of his base salary, and his bonus
target award for 2006 remains the same.
|
|
|
|
Executive Pension Plan. Mr. Mudd is
entitled to participate in our Executive Pension Plan and our
Supplemental Pension Plans described above. The Executive
Pension Plan supplements the benefits payable to key officers
under the Fannie Mae Retirement Plan. Mr. Mudds
employment agreement provides that his pension goal will be at
least 50% of the average total compensation for the 36
consecutive months of his last 120 months of employment
when total compensation was the highest. Mr. Mudds
pension goal is currently set at 50%. Mr. Mudds total
compensation for a given year includes other taxable
compensation up to 100%, not 50%, of his annual base salary for
that year. If he retires before reaching age 60, his
pension goal will be reduced by 3 percentage points, rather
than the 2 percentage points reduction generally applicable
to participants in the plan, for each year in which he receives
benefits prior to age 60. In addition, if his benefit
payment is in the form of a joint and 100% survivor annuity, it
will be actuarially reduced to reflect the joint life expectancy
of Mr. Mudd and his spouse.
|
|
|
|
Equity and Incentive Awards. During the
employment term, Mr. Mudd is eligible to be considered for
awards under our stock option, restricted stock, annual
incentive and performance share programs, all in accordance with
our compensation philosophy and programs that are in effect from
time to time. Under our capital restoration plan, we must obtain
the approval of OFHEO prior to providing Mr. Mudd with any
non-salary compensation awards.
|
|
|
|
Life Insurance. During the employment term,
Mr. Mudd is eligible to receive life insurance benefits in
accordance with our life insurance policies and programs that
are in effect from time to time.
|
|
|
|
Fringe Benefits. Mr. Mudd is eligible to
receive certain fringe benefits in accordance with our policies,
including legal expenses incurred in negotiating his employment
agreement and reimbursement for a complete annual physical
examination. He is also eligible to participate generally in
company benefit programs that are from time to time in effect
and in which our other senior officers generally are entitled to
participate.
|
|
|
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Clawback. Mr. Mudds bonus and other
incentive-based or equity-based compensation will be subject to
reimbursement to us if required by Section 304 of the
Sarbanes-Oxley Act of 2002 or provisions of our compensation
plans and arrangements, notwithstanding any provisions of the
agreement to the contrary.
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Mr. Mudds employment agreement provides for certain
benefits upon the termination of his employment with us
depending on the reason for his termination:
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Termination without Cause, for Good Reason or upon expiration
of the agreement. Mr. Mudds employment
agreement provides that if we terminate him without
Cause, or if Mr. Mudd terminates his
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employment for any of the specified Good Reason
events described below, or if Mr. Mudds employment is
terminated due to the expiration of the agreement term on
December 31, 2009, he would be entitled to receive his
accrued but unpaid base salary, base salary for the period
through the second anniversary of the termination of his
employment (subject to offset for income from other employment
or self-employment, other than board service), all amounts
payable (but unpaid) under our annual incentive plan with
respect to any year ended on or prior to the date of termination
of his employment, a prorated annual incentive plan payment for
the year of termination, all amounts payable (but unpaid) under
any performance share award with respect to a performance cycle
that had ended as of the date of termination of his employment,
a prorated performance share program payment for any performance
cycle as to which at least 18 months had elapsed as of the
date of termination, full vesting of any unvested restricted
stock and stock options, for his stock options granted on or
after the date of the employment agreement an exercise period of
three years (or, if earlier, until the expiration date of the
stock options), and, only in the cases of termination by us
without Cause and termination by Mr. Mudd for a
Good Reason, medical and dental coverage for
Mr. Mudd and his spouse and coverage for his dependents (so
long as they remain his dependents or, if later, until they
reach the age of 21), at no cost to Mr. Mudd, until the
earlier of the second anniversary of the termination of his
employment and the date on which Mr. Mudd obtains
comparable coverage through another employer.
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Termination due to serious illness or
disability. With the exception of the continued
medical and dental coverage, the same benefits described above
would be payable in the event Mr. Mudds employment
were to terminate by reason of serious illness or disability,
subject to an offset against salary continuation for any
employer-provided disability benefits.
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Termination due to acceptance of senior position in
U.S. federal government. If Mr. Mudd
terminates his employment by reason of his acceptance of an
appointment to a senior position in the U.S. federal
government, he will receive his accrued but unpaid base salary,
all amounts payable (but unpaid) under our annual incentive plan
with respect to any year ended on or prior to the date of
termination of his employment, a prorated annual incentive plan
payment for the year of termination, all amounts payable (but
unpaid) under any performance share award with respect to a
performance cycle that had ended as of the date of termination
of his employment, a prorated performance share program payment
for any performance cycle as to which at least 18 months
had elapsed as of the date of termination, and full vesting of
any unvested restricted stock.
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Termination due to death. In the event of
Mr. Mudds death during the employment term, his
estate or beneficiary, as applicable, would be entitled to his
accrued but unpaid base salary, all amounts payable (but unpaid)
under the annual incentive plan for any year ended on or prior
to his death, a prorated annual incentive plan payment for the
year of death, all amounts payable (but unpaid) under any
performance share award with respect to a performance cycle that
had ended on or prior to the date of death, a prorated
performance share program payment for any performance cycle as
to which at least 18 months had elapsed prior to the date
of death, full vesting of any unvested restricted stock and
stock options, and for his stock options granted on or after the
date of the employment agreement an exercise period of three
years (or, if earlier, until the expiration date of the stock
options).
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Termination due to retirement. In the event
Mr. Mudd retires at or after age 65, or at an earlier
age in certain situations, he would be entitled to receive his
accrued but unpaid base salary, all amounts payable (but unpaid)
under any performance share award with respect to a performance
cycle that had ended as of the date of his retirement, a
prorated performance share program payment for any performance
cycle as to which at least 18 months had elapsed as of the
date of his retirement, full vesting of any unvested stock
options, for his stock options granted on or after the date of
the employment agreement an exercise period of three years (or,
if earlier, until the expiration date of the stock options),
and, in the case of retirement at or after age 65, full
vesting of any unvested restricted stock and, in the case of
retirement at an earlier age, the Board may, in its discretion,
fully vest any unvested restricted stock.
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Voluntary termination and termination for
Cause. If Mr. Mudd is terminated for
Cause or if Mr. Mudd terminates his employment
voluntarily (other than a voluntary termination with Good
Reason as defined
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in his agreement or a voluntary termination to accept an
appointment to a senior position in the U.S. federal
government), he would be entitled only to accrued but unpaid
base salary plus such vested benefits or awards, if any, which
have vested prior to such date; provided, however, that if he is
terminated for Cause, he would not be entitled to
any amounts payable (but unpaid) of any bonus or under any
performance share award with respect to a performance cycle if
the reason for such termination for Cause is
substantially related to the earning of such bonus or to the
performance over the performance cycle upon which the payment
was based.
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Mr. Mudds employment agreement defines Good
Reason as any of the following circumstances that remains
uncured after 30 days notice: (a) a material reduction
of his authority or a material change in his functions, duties
or responsibilities that in any material way would cause his
position to become less important, (b) a reduction in his
base salary, (c) a requirement that he report to anyone
other than the Chairman of the Board of Directors, (d) a
requirement that he relocate his office outside of the
Washington, DC area, or (e) our breach of any material
obligation we have under the agreement. Under the agreement, we
would have Cause if Mr. Mudd
(A) materially harmed us by, in connection with his service
under his employment agreement, engaging in dishonest or
fraudulent actions or willful misconduct, or performing his
duties in a grossly negligent manner, or (B) were convicted
of, or pleaded nolo contendere with respect to, a felony.
The agreement further provides that no act or failure to act
will be considered willful unless it is done, or
omitted to be done, in bad faith or without reasonable belief
that the action or omission was in our best interests.
Mr. Mudds employment agreement also obligates him not
to compete with us in the United States, solicit any officer or
employee of ours or our affiliates to terminate his or her
relationship with us or to engage in prohibited competition, or
to assist others to engage in activities in which Mr. Mudd
would be prohibited from engaging, in each case for two years
following termination. Mr. Mudds employment agreement
provides us with the right to seek and obtain injunctive relief
from a court of competent jurisdiction to restrain Mr. Mudd
from any actual or threatened breach of the obligations
described in the preceding sentence. Disputes arising under the
employment agreement are to be resolved through arbitration, and
we bear Mr. Mudds legal expenses unless he does not
prevail.
Agreement
with Robert Levin, Executive Vice President and Chief Business
Officer
We have a letter agreement with Mr. Levin, dated
June 19, 1990. That agreement provides that if he is
terminated for reasons other than for cause, he will
continue to receive his base salary for a period of
12 months from the date of termination and will continue to
be covered by our life, medical, and long-term disability
insurance plans for a
12-month
period, or until re-employment that provides certain coverage
for benefits, whichever occurs first. For the purpose of this
agreement, cause means a termination based upon
reasonable evidence that Mr. Levin has breached his duties
as an officer by engaging in dishonest or fraudulent actions or
willful misconduct. Any disability benefits that he receives
during the
12-month
period will reduce the amount otherwise payable by us, but only
to the extent the benefits are attributable to payments made by
us. A description of this letter agreement was included in a
Form 8-K
we filed on December 27, 2004.
Employment
Agreement with Franklin Raines, Former Chairman and Chief
Executive Officer
In May 2004, we entered into a new employment agreement with
Franklin Raines, our former Chairman and Chief Executive
Officer, as amended in June and again in September 2004. OFHEO
approved the termination benefits in Mr. Raines
agreement and notified us of this approval on November 17,
2004.
On December 21, 2004, Mr. Raines tendered his
resignation and ceased performing his duties as Chairman and
Chief Executive Officer. We described Mr. Raines
agreement and his compensation upon termination in our
December 27, 2005
Form 8-K
and in a Form 8-K we filed on November 14, 2006. On
December 23, 2004, we received a letter from OFHEO
informing us that OFHEO would review Mr. Raines
termination benefits and requesting information regarding those
benefits. OFHEO indicated that, among other matters, it was
concerned with whether, at the time of termination, there had
been enhancements or modifications to benefits since the
termination package was agreed upon. OFHEO also stated in the
December 23 letter that we should not pay any termination
benefits to Mr. Raines until OFHEO completed its review of
the termination
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benefits. To the extent certain payments have become legally due
to Mr. Raines, we have informed OFHEO of the payments.
Although Mr. Raines ceased acting as our Chairman and Chief
Executive Officer as of December 21, 2004, he asserted that
pursuant to his employment agreement his retirement was not
effective until June 22, 2005, entitling him to an
additional six months of service. Under his employment
agreement, any dispute regarding the terms of the agreement is
resolved through arbitration, with our bearing
Mr. Raines legal expenses unless he does not prevail.
On September 19, 2005, Mr. Raines initiated
arbitration proceedings against us before the American
Arbitration Association. The principal issue before the
arbitrator was whether we were permitted to waive the
requirement contained in Mr. Raines employment
agreement that he provide six months notice prior to
retiring. On April 24, 2006, the arbitrator issued a
decision finding that we could not unilaterally waive the notice
period, and that the effective date of Mr. Rainess
retirement was June 22, 2005. Because the Board of
Directors has not made a final determination about the amounts
to be paid, if any, to participants in certain PSP cycles, the
parties cannot yet determine if there remain any disputes
related to PSP payments. On November 7, 2006, the parties
proposed to the arbitrator a partial consent award providing for
a cash payment to Mr. Raines of approximately
$2.6 million, reflecting a disbursement from his deferred
compensation balance plus certain other sums, less certain
offsetting items. The arbitrator approved the award on
November 12, 2006. The parties have not yet reached an
agreement on certain other calculations related to the change in
the effective date of his retirement, as ordered by the
arbitrator. These include whether Mr. Raines is entitled to
as much as $140,000 in additional cash compensation over the
six-month period preceeding his June 22, 2005 retirement
date, and whether Mr. Raines is entitled to any additional
bonus compensation and options by virtue of the change in
retirement date. If we cannot reach an agreement, additional
arbitration proceedings may ensue.
Pursuant to his employment agreement, in accordance with the
arbitrators conclusions and in accordance with our
employee benefit plans, we have determined that Mr. Raines
is entitled to receive the following:
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Immediately prior to his retirement, Mr. Raines held vested
and exercisable options to purchase a total of
1,739,759 shares of common stock at exercise prices ranging
from $60.3125 to $80.95 per share. Upon his retirement, he
vested in options to purchase an additional 257,131 shares
of common stock at exercise prices ranging from $69.43 to
$78.315. Under our stock compensation plans, all options held at
the time of retirement by any option holder who is at least
55 years old and who has at least 5 years of service
with us remain exercisable until their initial expiration date,
which is generally 10 years after grant. As a result,
Mr. Raines vested options, including those vesting by
reason of his retirement, will expire between May 2008 and
January 2014.
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Under our Performance Share program, for the performance cycle
completed in 2003, Mr. Raines was determined in January
2004 to be entitled to receive 139,155 shares, of which he
was paid 69,577 shares in January 2004 in accordance with
the program. For the cycles concluding in 2004 through 2006,
Mr. Raines was granted awards with the target, threshold
and maximum share amounts listed in the table below, based on
the achievement of the specified performance goals. However, as
previously announced, because we did not have reliable financial
data for years within the award cycles, the Compensation
Committee and the Board of Directors decided to postpone the
determination of the amount of the awards under the performance
share program for the three-year performance share cycles that
ended in 2004 and 2005 and to postpone payment of the second
installment of shares for the three-year performance share cycle
that ended in 2003 (the first installment of which was paid in
January 2004). In the future, the Compensation Committee and the
Board of Directors will review the performance share program and
determine the amounts to be paid, if any, to participants in
these PSP cycles.
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Range of Potential
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Performance Share Payments
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Award Cycle
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Threshold
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Target
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Maximum
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2004 to 2006
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39,987
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99,967
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149,951
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2003 to 2005
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43,002
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107,505
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161,258
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2002 to 2004
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48,185
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120,462
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180,693
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If shares are paid out under the program for a given period, the
number of shares Mr. Raines will receive will be reduced on
a pro rata basis depending on the length of his service during
the applicable award cycle.
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Under our executive pension plan, estimated monthly payments of
approximately $107,051 will be payable during the lives of
Mr. Raines and his surviving spouse.
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Under our qualified pension plan, Mr. Raines will receive
approximately $2,640 per month during his life. After his
death, Mr. Raines wife will receive approximately
$1,320 per month during her life.
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Under our plans, Mr. Raines elected to defer the receipt of
earned salary and other compensation. As of August 31,
2006, Mr. Raines deferred balance was approximately
$8.5 million. As mentioned above, our Board of Directors
has not made a final determination about the amounts to be paid,
if any, to participants in certain PSP cycles, which may result
in a related adjustment to Mr. Raines deferred
amounts. Pending payout, deferred amounts will be allocated by
Mr. Raines among the hypothetical investment options in
accordance with the plans and will receive a corresponding rate
of return.
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Mr. Raines is entitled to lifetime medical and dental
coverage for himself and his spouse, and coverage for his
dependents until they reach the age of 21 or so long as they
remain his dependents, at no cost to Mr. Raines.
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Consistent with our executive life insurance program, we will
pay the premiums on a life insurance policy for Mr. Raines
with a benefit of $5,000,000 until he reaches age 60, and a
benefit of $2,500,000 thereafter.
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Mr. Raines will receive retirement savings he has
accumulated in our retirement savings plan (a 401(k) plan) in
accordance with the terms of that plan.
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Pursuant to his agreement, Mr. Raines is entitled to
receive administrative services to support the provision of an
office and related secretarial and administrative services
during such time as he is not employed on a full-time basis.
Mr. Raines must reimburse us for the fair market value of
this benefit, including our cost of administration. He has not
requested these services.
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Separation
Agreement with Julie St. John, Executive Vice
President
On July 7, 2006, we entered into a separation agreement
with Ms. St. John. Ms. St. John has been engaged in
the ongoing restructuring of our Enterprise Systems and
Operations division. To allow us to obtain Ms. St.
Johns continued assistance with the restructuring and
permit a smooth transition, Ms. St. John agreed to defer
her departure. Ms. St. John has informed us that she
intends to retire on December 15, 2006. The provisions of
the separation relating to the terms of Ms. St. Johns
separation from Fannie Mae were approved by the Director of
OFHEO, conditioned on our retention of any existing rights with
respect to restitution, disgorgement, or other remedial action
relating to matters contained in OFHEOs Report of the
Special Examination of Fannie Mae, May 2006. We described this
agreement in a
Form 8-K
filed on July 7, 2006.
Under the separation agreement, and in accordance with the terms
of the severance program for management level employees,
Ms. St. John will be entitled to receive the compensation
and benefits described below upon her separation.
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Severance Payment. For her 16 years of
service, Ms. St. John will be entitled to 78 weeks of
her current base pay, totaling $794,463.
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Stock Options. Ms. St. John will be
entitled to accelerated vesting of options to purchase
34,429 shares of common stock, at exercise prices ranging
from $69.43 to $78.315 per share, that are scheduled to
vest within 12 months of her termination date. Options she
holds to purchase 18,470 shares of common stock at
$78.315 per share will be cancelled. Under our stock
compensation plans, all options held and vested at the time of
retirement by any option holder who is at least 55 years
old and who has at least 5 years of service with us remain
exercisable until their original expiration date, which is
generally 10 years after grant. As a result,
Ms. St. Johns vested options will expire between
November 2007 and January 2014.
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Restricted Stock. Ms. St. John will be
entitled to accelerated vesting of 16,935 shares of
restricted stock that are scheduled to vest within
12 months of her termination date.
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Deferred Cash. In February 2006, Ms. St.
John was awarded a variable long-term incentive award for the
2005 performance year, payable partly in cash and at a rate of
25% per year beginning in January 2007. Ms. St. John
will be entitled to a lump sum payment of $145,695, which
represents the cash payment she would have received within
12 months of her termination date.
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Annual Cash Bonus. If we pay bonuses under our
Annual Incentive Plan for 2006, Ms. St. John will be
entitled to a lump sum prorated bonus for 2006. The total amount
of bonuses that may be paid under the Annual Incentive Plan to
all eligible employees is typically determined based on the
achievement of corporate goals.
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Performance Share Payouts. As a member of our
senior management, Ms. St. John has received annual awards
entitling her to receive shares of common stock based upon and
subject to our meeting corporate performance objectives over
three-year periods. Generally, the Compensation Committee of our
Board determines in January our achievement against the goals
for the three-year performance share cycle that just ended. That
achievement determines the payout of the performance shares and
the shares are paid out to current executives in two annual
installments.
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For the performance share cycle completed in 2003, Ms. St.
John was determined in January 2004 to be entitled to receive
23,850 shares of common stock, of which she has been paid
11,925 shares in accordance with the program.
For the performance share cycles ending in 2004 through 2006,
Ms. St. John has been granted awards with the target,
threshold and maximum share amounts listed in the table below,
based on the achievement of the specified performance goals.
However, because we did not have reliable financial data for
years within the award cycles, the Compensation Committee and
the Board decided to postpone the determination of the amount of
the awards under the performance share program for the
three-year performance share cycles that ended in 2004 and 2005
and to postpone payment of the second installment of shares for
the three-year performance share cycle that ended in 2003 (the
first installment of which was paid in January 2004). In the
future, the Compensation Committee and the Board will review the
performance shares program and determine the appropriate
approach for settling our obligations with respect to the
existing unpaid performance share cycles.
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Range of Potential
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Performance Share Payments
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Award Cycle
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Threshold
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Target
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Maximum
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2004 to 2006
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7,772
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19,431
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29,147
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2003 to 2005
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8,806
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22,015
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33,023
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2002 to 2004
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9,389
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23,473
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35,210
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To the extent the Compensation Committee determines that
performance share awards or any alternative payment in lieu of
performance share awards are payable to any other Executive Vice
President, Ms. St. John is entitled to receive payouts of
any unpaid performance shares for cycles that have been
completed on or before the date on which she ceases to be an
employee. As a retiree, Ms. St. John also will be entitled
to a payment for the performance share cycle ending in 2006,
reduced on a pro rata basis based on the length of her service
during the cycle ending in 2006.
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Medical Coverage. Ms. St. John will be
entitled to continued access to our medical and dental plans for
up to five years, and Fannie Mae will pay a portion of the
premiums necessary to continue her existing medical
and/or
dental coverage under the Consolidated Omnibus Budget
Reconciliation Act, or COBRA, for up to 18 months after her
termination. Ms. St. John also will be entitled to participate
in the medical coverage plan available to our retirees having
the required number of years of service at a reduced cost
offered to such retirees.
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The separation agreement provides that Ms. St. John may not
solicit or accept employment with or act in any way, directly or
indirectly, to solicit or obtain employment or work for Freddie
Mac, any one of the Federal
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Home Loan Banks or the Office of Finance, whether such
employment is to be as a Freddie Mac, Federal Home
Loan Bank or Office of Finance employee, consultant or
advisor, for a period of 12 months following termination.
Under the separation agreement, Ms. St. John agreed to a
general release of the company from any and all claims arising
from her employment with or termination from the company. She
also agreed to cooperate with any investigation relating to us
conducted by us, our auditor, OFHEO or any federal, state or
local government authority.
The separation agreement will not terminate or limit the
protections provided under the indemnification agreement between
us and Ms. St. John, the form of which was filed as
Exhibit 10.7 to the Form 10 we filed on March 31,
2003, nor any director and officer insurance that is in effect
during her employment. Consistent with our severance program for
management level employees, Ms. St. John also will be
entitled to certain outplacement services to be used within
12 months after she ceases to be an employee.
Separation
Agreement with Ann Kappler, Former Executive Vice President and
General Counsel
On August 23, 2005, we entered into a separation agreement with
Ms. Kappler, our former Executive Vice President and General
Counsel. Under the separation agreement and upon her separation
from Fannie Mae on January 3, 2006, Ms. Kappler received
accelerated vesting of all unvested options she held, options to
purchase a total of 44,286 shares of our common stock at prices
ranging from $69.43 to $78.315 per share. In addition, the
exercise period of all 130,281 options held by Ms. Kappler at
prices ranging from $62.50 to $80.95 per share was extended to
the option expiration dates, which range from January 2009 to
January 2014. Ms. Kappler also received accelerated vesting
of all 32,813 shares of unvested restricted stock she held. The
remaining terms of Ms. Kapplers separation agreement
were generally in accordance with the provisions of our
severance program for management level employees discussed under
Employment ArrangementsSeverance Program.
Director
Compensation Information
Cash
Compensation
Our non-management directors, with the exception of the
non-executive Chairman of our Board, are paid a retainer at an
annual rate of $35,000, plus $1,500 for attending each Board or
Board committee meeting in person or by telephone. Committee
chairpersons received an additional retainer at an annual rate
of $10,000, plus an additional $500 for each committee meeting
chaired and $300 for each telephone committee meeting chaired.
As we described in a Form 8-K filed on January 21, 2005, in
January 2005, our Board approved a compensation arrangement for
the non-executive Chairman of the Board, Mr. Ashley, in
recognition of the substantial amount of time and effort
necessary to fulfill the duties of the position. Under this
arrangement, Mr. Ashley receives an annual fee of $500,000.
Restricted
Stock Awards
We have a restricted stock award program for non-management
directors established under the Fannie Mae Stock Compensation
Plan of 2003. The award program provides for consecutive
four-year cycles of awards of restricted common stock. Awards
vest in four equal annual installments after each annual
meeting, provided the participant continues to serve on the
Board of Directors. If a director joins the Board of Directors
during a four-year cycle, he or she receives a pro rata portion
of the grant for the cycle, based on the time remaining in the
cycle. These grants vest on the same schedule as those of
directors who participate in the full four-year cycle. Vesting
generally accelerates upon departure from the Board due to
death, disability, or for elected directors, not being
renominated after reaching age 70. No restricted stock has
vested since May 2004 and no awards have yet been made in the
four-year cycle scheduled to begin with the 2006 annual meeting.
Each director has an outstanding grant of restricted common
stock pursuant to the restricted stock award program established
under the Fannie Mae Stock Compensation Plan of 2003. In October
2003, we granted 2,600 shares of restricted common stock to
each non-management director who was a member of the Board at
that time. We subsequently made pro rata grants of restricted
common stock to non-management directors who joined the Board
after October 2003.
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Each director who served on the Board between the 2001 Annual
Meeting and May 2006 received a grant of restricted common stock
under the Fannie Mae Stock Compensation Plan of 1993. In May
2001, we granted 871 shares of restricted common stock for
the
2001-2006
cycle to each non-management director who was a member of the
Board at that time. These shares of restricted common stock vest
over a five-year period at the rate of 20% per year. Each
director who joined the Board during the cycle received a pro
rata portion of the grant for the cycle, based on the time
remaining in the cycle.
Stock
Option Awards
Each non-management director is granted an annual nonqualified
stock option to purchase 4,000 shares of common stock
immediately following the annual meeting of stockholders at the
fair market value on the date of grant. A non-management
director appointed or elected as a mid-term replacement receives
a nonqualified stock option to purchase at the fair market value
on the date of grant a pro rata number of shares equal to the
fraction of the remainder of the term. Each option will expire
ten years after the date of grant and vests in four equal annual
installments beginning on the first anniversary of the grant.
Non-management directors will have one year to exercise the
options when they leave the Board. No annual stock option awards
have yet been made with respect to annual meetings that would
have been held in 2005 or 2006.
Fannie
Mae Directors Charitable Award Program
In 1992, we established our Directors Charitable Award
Program. The purpose of the program is to acknowledge the
service of our directors, recognize our own interest and that of
our directors in supporting worthy institutions, and enhance our
director benefit program to enable us to continue to attract and
retain directors of the highest caliber. Under the program, we
make donations upon the death of a director to up to five
charitable organizations or educational institutions of the
directors choice. We donate $100,000 for every year of
service by a director up to a maximum of $1,000,000. To be
eligible to receive a donation, a recommended organization must
be an educational institution or charitable organization and
must qualify to receive tax-deductible donations under the
Internal Revenue Code of 1986. The program is generally funded
by life insurance contracts on the lives of participating
directors. The Board of Directors may elect to amend, suspend or
terminate the program at any time.
Matching
Gifts
To further our support for charitable giving, non-employee
directors are able to participate in the Matching Gifts Program
of the Fannie Mae Foundation on the same terms as our employees.
Under this program, the Fannie Mae Foundation will match gifts
made by employees and directors to 501(c)(3) charities, up to an
aggregate total of $10,000 in any calendar year, including up to
$500 which may be matched on a
2-for-1
basis.
Deferred
Compensation
We have a deferred compensation plan in which non-management
directors can participate. Non-management directors may
irrevocably elect to defer up to 100% of their annual retainer
and all fees payable to them in their capacity as a member of
the Board in any calendar year into the deferred compensation
plan. Plan participants receive an investment return on the
deferred funds as if the funds were invested in a hypothetical
portfolio chosen by the participant from among the investment
options our chief financial officer designates as available
under the plan. Prior to the deferral, plan participants must
elect to receive the deferred funds either in a lump sum, in
approximately equal annual installments, or in an initial
payment followed by approximately equal annual installments,
with a maximum of 15 installments. Deferral elections generally
must be made prior to the year in which the compensation
otherwise would have been paid, and payments will be made as
specified in the deferral election. Participants in the plan
will be unsecured creditors of the company and will be paid from
our general assets.
On November 16, 2004, our Board of Directors authorized a
new deferred compensation plan to ensure that our plans comply
with new requirements under the Internal Revenue Code of 1986,
specifically Section 409A and we disclosed the plan in a
Form 8-K
filed on November 22, 2004. The new elective deferred
compensation plan applies to compensation that is deferred after
December 31, 2004. The terms described under the prior
232
plan above are not expected to change. The prior deferred
compensation plan will continue to operate for compensation
deferred under that plan on or prior to December 31, 2004.
Other
Expenses
We also pay for or reimburse directors for
out-of-pocket
expenses incurred in connection with their service on the Board,
including travel to and from our meetings, accommodations, and
meals.
Any director who is our employee does not receive compensation
for his or her service as a director.
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
Our Board has a Compensation Committee consisting of Bridget
Macaskill, who is the Chair, Stephen Ashley, Dennis Beresford,
Brenda Gaines and Greg Smith. Since January 1, 2004, the
following current and former directors have also served on the
Compensation Committee: Ann Korologos, Donald Marron, Anne
Mulcahy, Joe Pickett, Taylor Segue, III, and John Wulff. As
discussed below in Item 13Certain Relationships
and Related TransactionsLegal Fees, pursuant to the
provisions of our bylaws and indemnification agreements, our
directors have a right to have us pay their legal fees and
expenses reasonably incurred in connection with any
investigation, claim, action, suit or proceeding by reason of
the fact that such person is or was serving as our director.
From January 2004 through September 2006, we advanced the
expenses of members of our Compensation Committee for the
reasonable costs and fees incurred by them relating to certain
examinations and lawsuits as follows: Mr. Ashley, $378,882;
Ms. Korologos, $214,703; Mr. Marron, $124,656;
Ms. Mulcahy, $112,010, Mr. Pickett, $163,360 and
Mr. Wulff, $117,426.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The following table provides information as of December 31,
2004 with respect to shares of common stock that may be issued
under our existing equity compensation plans. We have provided
equity compensation plan information as of December 31,
2005 in a
Form 8-K
we are filing with the SEC today. Information in that
Form 8-K
under the heading Equity Compensation Plan
Information is incorporated by reference into this
Form 10-K.
Equity
Compensation Plan Information
(As of December 31, 2004)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
|
|
|
|
|
|
Under Equity
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
(Excluding Securities
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Reflected in First
|
|
Plan Category
|
|
Warrants and Rights (#)
|
|
|
Warrants and Rights ($)
|
|
|
Column) (#)
|
|
|
Equity compensation plans approved
by stockholders
|
|
|
29,058,859
|
(1)
|
|
$
|
67.10
|
(2)
|
|
|
45,853,986
|
(3)
|
Equity compensation plans not
approved by stockholders
|
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|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,058,859
|
|
|
$
|
67.10
|
|
|
|
45,853,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount includes outstanding
stock options; restricted stock units; the maximum number of
shares issuable to eligible employees pursuant to our
stock-based performance award; shares issuable upon the payout
of deferred stock balances; the maximum number of shares that
may be issued pursuant to performance share awards that have
been made to members of senior management but for which no
determination has yet been made regarding the final number of
shares payable; and the maximum number of shares that may be
issued pursuant to performance share awards that have been made
to members of senior management for which a payout determination
has been made but for which the shares were not paid out as of
December 31, 2004. Performance share awards entitle the
recipient to receive shares of common stock based upon and
subject to our meeting corporate performance objectives over
three-year periods. Outstanding awards, options and rights
include grants under the Fannie Mae Stock Compensation Plan of
1993, the Stock
|
233
|
|
|
|
|
Compensation Plan of 2003, the 1985
Employee Stock Purchase Plan and the payout of shares deferred
upon the settlement of awards made under the 1993 plan and a
prior plan.
|
|
(2) |
|
The weighted average exercise price
is calculated for the outstanding options and does not take into
account restricted stock units, stock-based performance awards,
deferred shares or the performance shares described in footnote
(1).
|
|
(3) |
|
This number of shares consists of
10,418,495 shares available under the 1985 Employee Stock
Purchase Plan and 35,435,491 shares available under the
Stock Compensation Plan of 2003 that may be issued as restricted
stock, stock bonuses, stock options, or in settlement of
restricted stock units, performance share awards, stock
appreciation rights or other stock-based awards. No more than
1,820,369 of the shares issuable under the Stock Compensation
Plan of 2003 may be issued as restricted stock or restricted
stock units vesting in full in fewer than three years,
performance shares with a performance period of less than one
year, or bonus shares subject to similar vesting provisions or
performance periods.
|
Stock
Ownership
We encourage our directors, officers and employees to own our
stock in order to align their interests with the interests of
stockholders. Our compensation programs are structured so that a
significant portion of the compensation paid to officers is in
the form of common stock or rights to acquire common stock. Our
employees also have the opportunity to own Fannie Mae common
stock through bonus stock opportunities and our Employee Stock
Ownership Program.
Stock
Ownership Guidelines
In April 2003, the Board of Directors adopted formal stock
ownership requirements for executive officers. In November 2005,
the Board also adopted stock ownership guidelines for
non-management members of the Board. These requirements and
guidelines are contained in our Corporate Governance Guidelines.
Stock Ownership Guidelines for Non-Management Members of the
Board:
|
|
|
|
|
Each non-management director is expected to own Fannie Mae
common stock with a value equal to at least five times the
directors annual cash retainer (currently, five times
$35,000, or $175,000).
|
|
|
|
Each non-management director has three years from the time of
election or appointment to reach the expected ownership level,
excluding trading blackout periods imposed by the company.
|
Stock Ownership Requirements for Senior Executives:
|
|
|
|
|
Senior executives are officers holding positions at or above the
level of Executive Vice President.
|
|
|
|
Each Fannie Mae senior executive is required to hold shares of
Fannie Mae common stock as a multiple of the executives
base salary, as follows:
|
|
|
|
|
|
|
|
Job Level
|
|
Multiple of Base
Salary
|
|
|
Chief Executive Officer
|
|
five times
|
|
|
Executive Vice President
|
|
two times
|
|
|
|
|
|
Each senior executive has three years from the time of
appointment to reach the expected ownership level.
|
234
Beneficial
Ownership
The following table shows the beneficial ownership of Fannie Mae
common stock by each of our current directors and the covered
executives, and all current directors and executive officers as
a group, as of October 1, 2006, or as otherwise noted. As
of October 1, 2006, no director or covered executive, nor
all directors and executive officers as a group, owned as much
as 1% of our outstanding common stock.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of Beneficial
Ownership(1)
|
|
|
|
Common Stock
|
|
|
Stock Options
|
|
|
Total
|
|
|
|
Beneficially Owned
|
|
|
Exercisable Within 60 Days
|
|
|
Common Stock
|
|
Name and Position
|
|
Excluding Stock Options
|
|
|
of October 1, 2006
|
|
|
Beneficially Owned
|
|
|
Stephen
Ashley(2)
|
|
|
20,747
|
|
|
|
24,000
|
|
|
|
44,747
|
|
Chairman of the Board of Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
Beresford(3)
|
|
|
719
|
|
|
|
|
|
|
|
719
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Donilon(4)
|
|
|
8,243
|
|
|
|
|
|
|
|
8,243
|
|
Former Executive Vice
|
|
|
|
|
|
|
|
|
|
|
|
|
PresidentLaw and Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
Duberstein(5)
|
|
|
6,111
|
|
|
|
26,000
|
|
|
|
32,111
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Brenda
Gaines(6)
|
|
|
487
|
|
|
|
|
|
|
|
487
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Gerrity(7)
|
|
|
19,851
|
|
|
|
26,000
|
|
|
|
45,851
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Karen
Horn(8)
|
|
|
487
|
|
|
|
|
|
|
|
487
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Levin(9)
|
|
|
340,917
|
|
|
|
417,116
|
|
|
|
758,033
|
|
Executive Vice President and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridget
Macaskill(10)
|
|
|
1,062
|
|
|
|
|
|
|
|
1,062
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Mudd(11)
|
|
|
236,624
|
|
|
|
523,551
|
|
|
|
760,175
|
|
President and
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Joe
Pickett(12)
|
|
|
11,739
|
|
|
|
32,000
|
|
|
|
43,739
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Leslie
Rahl(13)
|
|
|
3,281
|
|
|
|
3,333
|
|
|
|
6,614
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin Raines
|
|
|
|
|
|
|
1,996,890
|
|
|
|
1,996,890
|
|
Former Chairman of the Board and
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Julie St.
John(14)
|
|
|
78,226
|
|
|
|
247,965
|
|
|
|
326,191
|
|
Executive Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
Greg
Smith(15)
|
|
|
1,612
|
|
|
|
166
|
|
|
|
1,778
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
Swygert(16)
|
|
|
3,520
|
|
|
|
9,833
|
|
|
|
13,353
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Williams(17)
|
|
|
147,019
|
|
|
|
247,186
|
|
|
|
395,476
|
|
Executive Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Wulff(18)
|
|
|
1,887
|
|
|
|
500
|
|
|
|
2,387
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive
|
|
|
|
|
|
|
|
|
|
|
|
|
officers as a group
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
persons)(19)
|
|
|
1,224,999
|
|
|
|
2,086,924
|
|
|
|
3,313,194
|
|
|
|
|
(1) |
|
Beneficial ownership is determined
in accordance with the rules of the SEC for computing the number
of shares of common stock beneficially owned by each person and
the percentage owned. Holders of restricted stock have no
investment power but have sole voting power over the shares and,
accordingly, these shares are included in this table. Holders of
shares through our Employee Stock Ownership Plan, or ESOP,
generally have no investment power but have sole voting power
over the shares so these shares are also included in this table.
Participants in our ESOP who
|
235
|
|
|
|
|
are at least 55 years of age
and have at least 10 years of participation in the ESOP may
elect to diversify out of shares of our common stock by rolling
their assets into the investments in our 401(k) Plan.
Additionally, although holders of shares through our ESOP have
sole voting power through the power the direct the trustee of
the plan to vote their shares, to the extent some holders do not
provide any direction as to how to vote their shares, the plan
trustee may vote those shares in the same proportion as the
trustee votes the shares for which the trustee has received
direction. Holders of stock options have no investment or voting
power over the shares issuable upon the exercise of the options
until the options are exercised.
|
|
(2) |
|
Mr. Ashleys shares
include 1,200 shares held by his spouse and
2,299 shares of restricted stock.
|
|
(3) |
|
Mr. Beresfords holdings
consist of restricted stock.
|
|
(4) |
|
Mr. Donilons shares
include 100 shares held by his spouse and 37 shares
held through our ESOP. Mr. Donilon left Fannie Mae in April
2005. The information presented is based on a Form 4 filed
by Mr. Donilon on May 3, 2005.
|
|
(5) |
|
Mr. Dubersteins shares
include 2,299 shares of restricted stock.
|
|
(6) |
|
Ms. Gaines holdings
consist of restricted stock.
|
|
(7) |
|
Mr. Gerritys shares
include 17,552 shares held jointly with his spouse and
2,299 shares of restricted stock.
|
|
(8) |
|
Ms. Horns holdings
consist of restricted stock.
|
|
(9) |
|
Mr. Levins shares
consist of 225,101 shares held jointly with his spouse and
115,816 shares of restricted stock.
|
|
(10) |
|
Ms. Macaskills holdings
consist of restricted stock.
|
|
(11) |
|
Mr. Mudds shares include
167,752 shares of restricted stock, and do not include
63,806 restricted stock units held by Mr. Mudd over which
he will obtain voting rights and investment power when the
restrictions lapse.
|
|
(12) |
|
Mr. Picketts shares
include 2,299 shares of restricted stock.
|
|
(13) |
|
Ms. Rahls shares include
200 shares held by her spouse and 2,299 shares of
restricted stock.
|
|
(14) |
|
Ms. St. Johns shares
include 44,711 shares of restricted stock and
851 shares held through our ESOP.
|
|
(15) |
|
Mr. Smiths shares
consist of restricted stock.
|
|
(16) |
|
Mr. Swygerts shares
include 2,299 shares of restricted stock.
|
|
(17) |
|
Mr. Williams shares
include 6,000 shares held jointly with his spouse,
700 shares held by his daughter, 86,953 shares of
restricted stock and 851 shares held through our ESOP. His
beneficially owned total includes 1,271 shares of deferred
stock that he could obtain within 60 days in certain
circumstances.
|
|
(18) |
|
Mr. Wulffs shares
consist of restricted stock.
|
|
(19) |
|
The amount of shares held by all
directors and executive officers as a group includes
688,523 shares of restricted stock held by our directors
and executive officers, 5,142 held by them through our ESOP,
6,550 shares of stock held by their family members,
14,922 shares of restricted stock held by an executive
officers spouse and 614 shares held through our ESOP
by an executive officers spouse. The stock options column
includes options to purchase 62,238 shares held by an
officers spouse. The beneficially owned total includes
1,271 shares of deferred stock. The shares in this table do
not include 135,417 shares of restricted stock units over
which the holders will not obtain voting rights or investment
power until the restrictions lapse.
|
The following table shows the beneficial ownership of Fannie Mae
common stock by each holder of more than 5% of our common stock
as of December 31, 2005, or as otherwise noted, which is
the most recent information provided.
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
5% Holders
|
|
Beneficially Owned
|
|
|
Percent of Class
|
|
|
Capital Research and Management
Company(1)
|
|
|
134,670,800
|
|
|
|
13.9
|
%
|
333 South Hope Street
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90071
|
|
|
|
|
|
|
|
|
AXA Financial
Inc.(2)
|
|
|
66,300,303
|
|
|
|
6.8
|
%
|
1290 Avenue of the Americas
|
|
|
|
|
|
|
|
|
New York, NY 10104
|
|
|
|
|
|
|
|
|
Citigroup
Inc.(3)
|
|
|
53,716,795
|
|
|
|
5.5
|
%
|
399 Park Avenue
|
|
|
|
|
|
|
|
|
New York, NY 10043
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This information is based solely on
information contained on a Schedule 13G/A filed with the SEC on
February 10, 2006 by Capital Research and Management
Company. According to the Schedule 13G/A, Capital Research
and Management Company beneficially owns 134,670,800 shares
of our common stock as of December 30, 2005, with sole
voting power for 40,382,960 shares and sole dispositive
power for all shares.
|
236
|
|
|
(2) |
|
This information is based solely on
information contained in a Schedule 13G filed with the SEC on
February 14, 2006 by AXA Financial, Inc. Alliance Capital
Management L.P. is a majority-owned subsidiary of AXA Financial,
Inc. According to the Schedule 13G, AXA Financial
beneficially owns 66,300,303 shares of our common stock,
with sole voting power for 48,275,448 shares, shared voting
power for 3,999,763 shares, sole dispositive power for
66,275,977 shares and shared dispositive power for
24,326 shares.
|
|
(3) |
|
This information is based solely on
information contained in a Schedule 13G/A filed with the SEC on
February 13, 2006 by Citigroup Inc.. According to the
Schedule 13G/A, Citigroup Inc. beneficially owns
53,716,795 shares of our common stock, with shared voting
and dispositive power for all such shares.
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Described below are certain business transactions, employment
and compensation arrangements and charitable donations that we
have engaged in since January 1, 2004 with parties who are,
or who are related in some way to, our officers, directors or
holders of more than 5% of our common stock.
Transactions
with 5% Shareholders
Citigroup Inc. (Citigroup) beneficially owned more
than 5% of the outstanding shares of our common stock as of
December 31, 2005, and Barclays PLC and its affiliates
(Barclays) beneficially owned more than 5% of the
outstanding shares of our common stock as of December 31,
2003. Since January 1, 2004, we have engaged in securities
and other financial instrument transactions in the ordinary
course of business with each of Citigroup and Barclays and their
respective affiliates. We have extensive, multi-billion dollar
relationships with Citigroup and Barclays. Each of Citigroup and
Barclays, or their affiliates, have acted as dealers who
distribute our debt securities, dealers who commit to sell or
buy mortgage securities or loans, issuers of investments in our
liquid investment portfolio, derivatives counterparties and
counterparties who have been involved in other financial
instrument transactions with us. These transactions were on
substantially the same terms as those prevailing at the time for
comparable transactions with unrelated third parties.
Transactions
with The Duberstein Group
Mr. Duberstein is Chairman and Chief Executive Officer of
The Duberstein Group, Inc., an independent strategic planning
and consulting company. Our contract with The Duberstein Group
provides that The Duberstein Group shall provide consulting
services related to legislative and regulatory issues, and
associated matters. The firm has provided services to us since
1991. During 2004, 2005 and 2006 the firm provided services on
an annual fixed-fee basis of $375,000. Mr. Duberstein is a
non-independent Fannie Mae director.
Employment
Relationships
Patrick Swygert Jr., the son of our director, Mr. Swygert,
was a non-officer employee in our eBusiness Marketing area.
Mr. Swygerts son was paid approximately $59,000 in
2004 in salary and cash bonus. He also received benefits under
our compensation and benefit plans that are generally available
to our employees, including our employee stock purchase plan and
employee stock ownership plan. Mr. Swygerts son left
our employment in 2004.
Barbara Spector, the sister of our Chief Business Officer,
Mr. Levin, is a non-officer employee in our Enterprise
Systems Operations division. From January 1, 2004 through
November 1, 2006, we paid or awarded Ms. Spector
approximately $329,000 in salary and cash bonuses, including
amounts that she will receive in full only if she remains
employed by us until early 2010. For 2004 and 2005, she has also
received an aggregate of 394 shares of our common stock in
the form of restricted stock that vests over four years. She
also receives benefits under our compensation and benefit plans
that are generally available to our employees, including our
retirement plan, employee stock purchase plan and employee stock
ownership plan. The Enterprise Systems Operations division does
not report, nor has it ever reported, to Mr. Levin.
Rebecca Senhauser, the wife of William Senhauser, our Chief
Compliance Officer, is a Senior Vice President in our Housing
and Community Development division. From January 1, 2004
through November 1, 2006, we paid or awarded
Ms. Senhauser approximately $1,717,000 in salary and cash
bonuses, including some amounts that Ms. Senhauser will
receive in full only if she remains employed by us until early
2010. For 2004 and 2005, she has also received an aggregate of
18,973 shares of our common stock in the form of restricted
stock that vests over three or four years. Ms. Senhauser
also receives benefits under our compensation and benefit
237
plans that are generally available to our employees, including
our retirement plan and our employee stock ownership plan. As a
member of senior management, she also receives benefits under
our compensation and benefit plans available to senior officers,
including reimbursement for tax and financial planning service,
participation in the Supplemental Pension Plan and 2003
Supplemental Pension Plan, and participation in the Performance
Share Program. For the three-year performance cycle completed in
2003, it was determined in January 2004 that she was entitled to
receive 5,730 shares, of which she received
2,865 shares in accordance with the program and the balance
was scheduled to be received in January 2005. Because our Board
of Directors and Compensation Committee determined to defer
payment of the unpaid performance shares, the balance of these
shares has not been issued to Ms. Senhauser. The Housing
and Community Development division does not report, nor has it
ever reported, to Mr. Senhauser. Mr. and Ms. Senhauser
recuse themselves from any matters that may directly and
significantly affect the other, including matters that may
affect each others compensation and evaluation.
Legal
Fees
Pursuant to the provisions of our bylaws and indemnification
agreements, directors and officers have a right to have us pay
their legal fees and expenses reasonably incurred in connection
with any investigation, claim, action, suit or proceeding, to
the fullest extent permitted by applicable law, by reason of the
fact that such person is or was serving as a director or officer
of Fannie Mae. Until such time as an indemnification
determination is made, we are under an obligation to advance
those fees and expenses. During 2004 and 2005, we advanced the
expenses of certain current and former officers, directors and
other employees for the reasonable costs and fees incurred by
them, as they relate to the OFHEO special examination and
consent order, the Paul Weiss and SEC investigations, and
several shareholder and derivative lawsuits. The amounts we paid
on behalf of current and former executive officers and directors
from January 2004 through September 2006 were as follows:
Ms. Bordonaro, $74,767; Mr. Donilon, $173,710;
Ms. Gorelick, $268,427; Mr. Howard, $3,233,645;
Ms. Kappler, $481,719; Ms. Korologos, $214,703;
Mr. Marron, $124,656; Mr. Marzol, $560,043;
Ms. Mulcahy, $112,010; Mr. Raines, $3,890,114;
Mr. Ashley, $378,882; Mr. Gerrity, $302,804;
Ms. Knight, $117,572; Mr. Levin, $236,713;
Mr. Mudd, $1,313,039; Mr. Niculescu, $335,632;
Mr. Pickett, $163,360; Ms. Rahl, $135,511; and
Mr. Wulff, $117,426.
Engagement
of Former Vice Chairs Law Firm
Jamie S. Gorelick, who served as an executive officer and as
Vice Chair of our Board of Directors from 1997 to 2003, left
Fannie Mae in 2003 and became a partner in the law firm of
Wilmer, Cutler & Pickering (now Wilmer Cutler Pickering
Hale and Dorr LLP) in July 2003. Wilmer rendered legal services
to us prior to 2003 and has continued to render legal services
to us since then.
Certain
Arrangements with Retired Chief Executive Officers
James Johnson. In February 2000, we entered
into a consulting agreement with our former CEO, James Johnson,
under which Mr. Johnson provides certain advisory services
to us on issues such as corporate strategy and finance, industry
relations, public policy and international securities
distribution. This consulting agreement became effective
following Mr. Johnsons departure from our Board. The
agreement was amended in April 2005 to temporarily reduce the
consulting fee and to eliminate our obligation to provide
administrative support services to Mr. Johnson. Under the
amended agreement, we pay Mr. Johnson an annual consulting
fee of $300,000. Once we have filed our restated financial
statements with the SEC, we will pay Mr. Johnson an annual
fee in an amount equal to approximately $415,000 increased by
the percentage increase in the consumer price index each year
since 2004. As amended, the agreement will continue until two
years after we provide written notice to Mr. Johnson or
until he provides us written notice of termination, and may be
terminated immediately for Cause. We have paid
Mr. Johnson a consulting fee of approximately $388,000 in
2001, $395,000 in 2002, $405,000 in 2003, $415,000 in 2004,
$349,000 in 2005 and $275,000 from January 2, 2006 through
November 1, 2006 for his services. Prior to the 2005
amendment of the agreement, we also provided certain support
services in connection with the agreement, including secretarial
support, access to a car and driver and the use thereof on a
part-time basis and some telecommunications support. As provided
in the agreement, Mr. Johnson reimbursed us for his use of these
support services to the extent he used them for matters
unrelated to his services under the agreement. The cost to us
for the services of support staff, certain
238
telecommunications services and a car and driver on a part-time
basis, less reimbursements from Mr. Johnson, was
approximately $233,000 in 2001, $218,000 in 2002, $193,000 in
2003, $304,000 in 2004, $140,000 in 2005 and $0 in 2006.
David Maxwell. Pursuant to his employment
agreement, our former CEO, David Maxwell, is eligible to
participate in our employee welfare benefit plans, including our
health and medical plans, and is entitled to have us pay all
medical, dental and hospitalization expenses for
Mr. Maxwell and his spouse that are not covered by our
plans. Pursuant to his agreement, we provide Mr. Maxwell
with an office and secretary, as well as excess personal
liability insurance, financial planning assistance and an annual
physical exam. We anticipate paying these benefits to
Mr. Maxwell until such time as he no longer requests them.
The following table sets forth our estimated costs of providing
certain of these benefits.
|
|
|
|
|
|
|
|
|
|
|
Office and Secretarial Benefit
|
|
|
Financial Planning Assistance
|
|
|
2001
|
|
$
|
165,000
|
|
|
$
|
105,000
|
|
2002
|
|
$
|
183,000
|
|
|
$
|
120,000
|
|
2003
|
|
$
|
195,000
|
|
|
$
|
113,000
|
|
2004
|
|
$
|
201,000
|
|
|
$
|
115,000
|
|
2005
|
|
$
|
203,000
|
|
|
$
|
74,000
|
|
2006 (through October 6)
|
|
$
|
168,000
|
|
|
$
|
112,000
|
|
Franklin Raines. We provide our former CEO
Franklin Raines with certain employee benefits as described
above under Employment Agreement with Franklin Raines,
Former Chairman and Chief Executive Officer.
Charitable
Contributions
We have a corporate charitable donations program and are the
sole provider of support for the Fannie Mae Foundation for
similar activity. We encourage our employees to volunteer their
time to charitable organizations, including the Foundation, and
actively support these volunteer activities. Our charitable
activities, and those of the Foundation, generally focus on
creating affordable homeownership and housing opportunities
nationally and improving the quality of life for people of our
hometown, Washington, D.C., through partnerships and
initiatives and by funding and promoting research and education
on housing-related issues. In 2004, we donated approximately
$1.4 million of securities to the Foundation. In 2006, we
made a contribution to the Foundation of $14 million. Our
President and CEO, Daniel Mudd, is the Chairman of the Board of
the Foundation. In addition, the Board of Directors of the
Foundation includes four additional members who are current
officers of Fannie Mae and two members who are former officers
of Fannie Mae. Effective as of January 1, 2004, directors
of the Foundation who are current Fannie Mae employees do not
receive any additional compensation for serving on the
Foundations Board of Directors.
Under its Matching Gifts Program, the Fannie Mae Foundation will
match gifts made by employees to 501(c)(3) public charities, up
to an aggregate total of $10,000 per employee in any
calendar year, including up to $500 which may be matched on a
2-for-1
basis. Directors and executive officers are eligible to
participate in this matching program on the same terms as our
other employees.
We made charitable contributions to Howard University totaling
approximately $76,300 during the period from 2004 through 2006.
These contributions were in support of our commitment to
community development and affordable housing, and in particular
in furtherance of our commitment to revitalize the LeDroit Park
neighborhood. One of our directors, Mr. Swygert, is the
president of Howard University.
The Fannie Mae Foundation made charitable contributions to the
University of Pennsylvania of $91,667 in each of 2004 and 2005
to support training for mid-career professionals in real estate
financing and to support research on housing policy. One of our
directors, Mr. Gerrity, is a professor at the University of
Pennsylvania. Mr. Gerrity had no involvement in the
Foundations grant-making decision.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The Audit Committee of our Board of Directors is directly
responsible for the appointment, oversight and evaluation of our
independent registered public accounting firm. In accordance
with the Audit Committees charter, it must approve, in
advance of the service, all audit and permissible non-audit
services to be provided
239
by our independent registered public accounting firm and
establish policies and procedures for the engagement of the
outside auditor to provide audit and permissible non-audit
services. Our independent registered public accounting firm may
not be retained to perform non-audit services specified in
Section 10A(g) of the Exchange Act.
The Audit Committee appointed Deloitte & Touche LLP as
our independent registered public accounting firm in January
2005. The Audit Committee dismissed KPMG LLP as our independent
registered public accounting firm in December 2004, after
concluding that Fannie Maes previously filed interim and
audited financial statements and the independent auditors
reports thereon for the periods from January 2001 through the
second quarter of 2004 should no longer be relied upon because
such financial statements were prepared applying accounting
practices that did not comply with generally accepted accounting
principles. Accordingly, we were required to restate our
previously reported audited consolidated financial statements
for the years ended December 31, 2003 and 2002. We also
restated our previously reported December 31, 2001
consolidated balance sheet to reflect corrected items that
relate to prior periods. Deloitte & Touche audited
these restated consolidated financial statements, as well as our
consolidated financial statements for the year ended
December 31, 2004.
The following table sets forth the fees paid or accrued for
services provided by our independent registered public
accounting firm Deloitte & Touche for 2004 and the fees
paid or accrued for services provided by our independent
registered public accounting firm KPMG LLP for 2003. During
2004, KPMG LLP reviewed our interim financial statements for the
quarters ended March 31, 2004 and June 30, 2004. KPMG
LLP did not report on our financial statements for the year
ended December 31, 2004, but was in the process of auditing
the 2004 information. The fees for services provided by KPMG LLP
in 2004 are not reflected in the table below.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
Description of Fees
|
|
2004
|
|
|
2003
|
|
|
Audit
fees(1)
|
|
$
|
201,560,000
|
|
|
$
|
2,721,300
|
|
Audit-related
fees(2)
|
|
|
|
|
|
|
4,557,850
|
|
Tax
fees(3)
|
|
|
|
|
|
|
3,696,957
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
201,560,000
|
|
|
$
|
10,976,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2004, excludes fees paid or
accrued for services provided by KPMG LLP totaling $6,010,604
for preliminary 2004 audit work. For 2004, amount includes fees
paid to Deloitte & Touche LLP for the audit of our
consolidated financial statements for the years 2002 to 2004 as
the audits occurred contemporaneously.
|
|
(2) |
|
For 2004, excludes fees paid or
accrued for services provided by KPMG LLP totaling $4,721,399
related to the OFHEO special examination, $3,113,725 for REMIC
pricing and closing letter fees, and $317,503 for REMIC payment
data validation fees. For 2003, includes fees paid or accrued
for services provided by KPMG LLP totaling $4,249,600 for REMIC
pricing and closing letter fees and $308,250 for REMIC payment
data validation fees.
|
|
(3) |
|
For 2004, excludes fees paid or
accrued for services provided by KPMG LLP totaling $735,000 for
review of tax accounts, $3,862,254 for REMIC tax return
services, and $23,500 for reimbursable financial advisory fees
paid directly to KPMG LLP by Fannie Mae on behalf of
certain of our officers. For 2003, includes fees paid or accrued
for services provided by KPMG LLP totaling $3,666,957 for REMIC
tax preparation and $30,000 for buy-up pool processing, and
excludes $20,900 for reimbursable financial advisory fees paid
directly to KPMG LLP by Fannie Mae on behalf of certain of our
officers.
|
240
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
|
|
(a)
|
Documents
filed as part of this report
|
|
|
|
|
|
|
|
|
1.
|
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
F-2
|
|
|
|
|
Consolidated Balance Sheets as of
December 31, 2004 and 2003
|
|
F-3
|
|
|
|
|
Consolidated Statements of Income
for the years ended December 31, 2004, 2003 and 2002
|
|
F-4
|
|
|
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2004, 2003 and 2002
|
|
F-5
|
|
|
|
|
Consolidated Statements of Changes
in Stockholders Equity for the years ended
December 31, 2004, 2003 and 2002
|
|
F-6
|
|
|
|
|
Notes to Consolidated Financial
Statements
|
|
F-7
|
|
2.
|
|
|
Financial Statement
Schedules
|
|
|
|
|
|
|
None.
|
|
3.
|
|
|
Exhibits
|
|
|
|
|
|
|
An index to exhibits has been
filed as part of this report beginning on
page E-1
and is incorporated herein by reference.
|
241
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Stephen B.
Ashley, Daniel H. Mudd and Robert T. Blakely, and each of them
severally, his or her true and lawful
attorney-in-fact
with power of substitution and resubstitution to sign in his or
her name, place and stead, in any and all capacities, to do any
and all things and execute any and all instruments that such
attorney may deem necessary or advisable under the Securities
Exchange Act of 1934 and any rules, regulations and requirements
of the U.S. Securities and Exchange Commission in
connection with the Annual Report on
Form 10-K
and any and all amendments hereto, as fully for all intents and
purposes as he or she might or could do in person, and hereby
ratifies and confirms all said
attorneys-in-fact
and agents, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Federal National Mortgage Association
Daniel H. Mudd
President and Chief Executive Officer
Date: December 6, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Stephen
B. Ashley
Stephen
B. Ashley
|
|
Chairman of the Board of Directors
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Daniel
H. Mudd
Daniel
H. Mudd
|
|
President and Chief Executive
Officer and Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Robert
T. Blakely
Robert
T. Blakely
|
|
Executive Vice President and Chief
Financial Officer
|
|
December 6, 2006
|
|
|
|
|
|
/s/ David
C. Hisey
David
C. Hisey
|
|
Senior Vice President and
Controller
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Dennis
R.
Beresford
Dennis
R. Beresford
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Kenneth
M.
Duberstein
Kenneth
M. Duberstein
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Brenda
J. Gaines
Brenda
J. Gaines
|
|
Director
|
|
December 6, 2006
|
242
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Thomas
P. Gerrity
Thomas
P. Gerrity
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Karen
N. Horn,
PhD.
Karen
N. Horn, PhD.
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Bridget
A.
Macaskill
Bridget
A. Macaskill
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Joe
K. Pickett
Joe
K. Pickett
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Leslie
Rahl
Leslie
Rahl
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ Greg
C. Smith
Greg
C. Smith
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ H.
Patrick
Swygert
H.
Patrick Swygert
|
|
Director
|
|
December 6, 2006
|
|
|
|
|
|
/s/ John
K. Wulff
John
K. Wulff
|
|
Director
|
|
December 6, 2006
|
243
INDEX TO
EXHIBITS
|
|
|
|
|
Item
|
|
Description
|
|
|
3
|
.1
|
|
Fannie Mae Charter Act
(12 U.S.C. § 1716 et seq.) (Incorporated by
reference to Exhibit 3.1 to Fannie Maes registration
statement on Form 10, filed March 31, 2003.)
|
|
3
|
.2
|
|
Fannie Mae Bylaws, amended as on
September 19, 2006 (Incorporated by reference to
Exhibit 3.1 to Fannie Maes Current Report on
Form 8-K,
filed September 25, 2006.)
|
|
4
|
.1
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series D (Incorporated
by reference to Exhibit 4.1 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.2
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series E (Incorporated
by reference to Exhibit 4.2 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.3
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series F (Incorporated
by reference to Exhibit 4.3 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.4
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series G (Incorporated
by reference to Exhibit 4.4 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.5
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series H (Incorporated
by reference to Exhibit 4.5 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.6
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series I (Incorporated
by reference to Exhibit 4.6 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.7
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series J (Incorporated
by reference to Exhibit 4.7 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.8
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series K (Incorporated
by reference to Exhibit 4.8 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
4
|
.9
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series L (Incorporated
by reference to Exhibit 4.2 to Fannie Maes Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2003.)
|
|
4
|
.10
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series M (Incorporated
by reference to Exhibit 4.2 to Fannie Maes Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2003.)
|
|
4
|
.11
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series N (Incorporated
by reference to Exhibit 4.1 to Fannie Maes Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2003.)
|
|
4
|
.12
|
|
Certificate of Designation of
Terms of Fannie Mae Non-Cumulative Convertible Preferred Stock,
Series 2004-1
(Incorporated by reference to Exhibit 4.1 to Fannie
Maes Current Report on
Form 8-K,
filed January 4, 2005.)
|
|
4
|
.13
|
|
Certificate of Designation of
Terms of Fannie Mae Preferred Stock, Series O (Incorporated
by reference to Exhibit 4.2 to Fannie Maes Current
Report on
Form 8-K,
filed January 4, 2005.)
|
|
10
|
.1
|
|
Employment Agreement between
Fannie Mae and Franklin D. Raines, as amended on June 30,
2004 (Incorporated by reference to Exhibit 10.1 to
Fannie Maes Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004.)
|
|
10
|
.2
|
|
Letter Agreement between Fannie
Mae and Franklin D. Raines, dated September 17, 2004
(Incorporated by reference to Exhibit 10.1 to Fannie
Maes Current Report on
Form 8-K,
filed September 23, 2004.)
|
|
10
|
.3
|
|
Employment Agreement between
Fannie Mae and Daniel H. Mudd, as amended on June 30,
2004 (Incorporated by reference to Exhibit 10.2 to
Fannie Maes Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004.)
|
|
10
|
.4
|
|
Letter Agreement between Fannie
Mae and Daniel H. Mudd, dated September 18, 2004
(Incorporated by reference to Exhibit 10.2 to Fannie
Maes Current Report on
Form 8-K,
filed September 23, 2004.)
|
|
10
|
.5
|
|
Employment Agreement between
Fannie Mae and J. Timothy Howard, as amended on June 30,
2004 (Incorporated by reference to Exhibit 10.3 to
Fannie Maes Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004.)
|
|
10
|
.6
|
|
Letter Agreement between Fannie
Mae and Timothy Howard, dated September 20, 2004
(Incorporated by reference to Exhibit 10.3 to Fannie
Maes Current Report on
Form 8-K,
filed September 23, 2004.)
|
|
10
|
.7
|
|
Letter Agreement between Fannie
Mae and Robert J. Levin, dated June 19, 1990
(Incorporated by reference to Exhibit 10.5 to Fannie
Maes registration statement on Form 10, filed
March 31, 2003.)
|
|
10
|
.8
|
|
Letter Agreement between Fannie
Mae and Adolfo Marzol, dated October 24, 1998
(Incorporated by reference to Exhibit 10.6 to Fannie
Maes registration statement on Form 10, filed
March 31, 2003.)
|
E-1
|
|
|
|
|
Item
|
|
Description
|
|
|
10
|
.9
|
|
Description of Fannie Maes
Elective Deferred Compensation Plan II
|
|
10
|
.10
|
|
Description of Fannie Maes
compensatory arrangements with its named executive officers for
the year ended December 31, 2004 (Incorporated by
reference to Executive Compensation Information
under Item 11 of Fannie Maes Annual Report on
Form 10-K
for the year ended December 31, 2004.)
|
|
10
|
.11
|
|
Description of Fannie Maes
compensatory arrangements with its non-employee directors for
the year ended December 31, 2004 (Incorporated by
reference to Director Compensation Information under
Item 11 of Fannie Maes Annual Report on
Form 10-K
for the year ended December 31, 2004.)
|
|
10
|
.12
|
|
Form of Indemnification Agreement
for Non-Management Directors of Fannie Mae (Incorporated by
reference to Exhibit 10.7 to Fannie Maes registration
statement on Form 10, filed March 31, 2003.)
|
|
10
|
.13
|
|
Form of Indemnification Agreement
for Officers of Fannie Mae (Incorporated by reference to
Exhibit 10.7 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
|
|
10
|
.14
|
|
Federal National Mortgage
Association Supplemental Pension Plan (Incorporated by
reference to Exhibit 10.9 to Fannie Maes registration
statement on Form 10, filed March 31, 2003.)
|
|
10
|
.15
|
|
Executive Pension Plan of the
Federal National Mortgage Association (Incorporated by
reference to Exhibit 10.10 to Fannie Maes
registration statement on Form 10, filed March 31,
2003.)
|
|
10
|
.16
|
|
Fannie Mae Annual Incentive
Plan (Incorporated by reference to Exhibit 10.11 to
Fannie Maes registration statement on Form 10, filed
March 31, 2003.)
|
|
10
|
.17
|
|
Fannie Mae Stock Compensation Plan
of 2003 (Incorporated by reference to Exhibit 10.12
to Fannie Maes Annual Report on Form 10-K for the
year ended December 31, 2003.)
|
|
10
|
.18
|
|
Fannie Mae Stock Compensation Plan
of 1993
|
|
10
|
.19
|
|
Fannie Mae Procedures for Deferral
and Diversification of Awards (Incorporated by reference
to Exhibit 10.14 to Fannie Maes registration
statement on Form 10, filed March 31, 2003.)
|
|
10
|
.20
|
|
Fannie Mae Stock Option Gain
Deferral Plan (Incorporated by reference to
Exhibit 10.15 to Fannie Maes registration statement
on Form 10, filed March 31, 2003.)
|
|
10
|
.21
|
|
Fannie Mae Supplemental Pension
Plan of 2003 (Incorporated by reference to
Exhibit 10.1 to Fannie Maes Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2003.)
|
|
10
|
.22
|
|
Directors Charitable Award
Program (Incorporated by reference to Exhibit 10.17
to Fannie Maes registration statement on Form 10,
filed March 31, 2003.)
|
|
10
|
.23
|
|
Professional Services Agreement
between Fannie Mae and James A. Johnson, effective
January 1, 2000; Amendment dated April 18, 2005 to the
Professional Services Agreement between James Johnson and Fannie
Mae.
|
|
10
|
.24
|
|
Employment Agreement between
Fannie Mae and David O. Maxwell, effective November 21,
1989
|
|
10
|
.25
|
|
Letter Agreement between The
Duberstein Group and Fannie Mae, dated as of March 28,
2001, with Modification #1, dated February 3, 2002;
Modification #2, dated March 1, 2003; and
Modification #3, dated April 27, 2005
|
|
10
|
.26
|
|
Form of Nonqualified Stock Option
Grant Award Document (Incorporated by reference to
Exhibit 10.3 to Fannie Maes Current Report on
Form 8-K,
filed December 9, 2004.)
|
|
10
|
.27
|
|
Form of Restricted Stock Award
Document (Incorporated by reference to Exhibit 10.4
to Fannie Maes Current Report on
Form 8-K,
filed December 9, 2004.)
|
|
10
|
.28
|
|
Form of Restricted Stock Units
Award Document (Incorporated by reference to
Exhibit 10.5 to Fannie Maes Current Report on
Form 8-K,
filed December 9, 2004.)
|
|
10
|
.29
|
|
Form of Performance Share Plan
Information Sheet (Incorporated by reference to
Exhibit 10.6 to Fannie Maes Current Report on
Form 8-K,
filed December 9, 2004.)
|
|
10
|
.30
|
|
Form of Nonqualified Stock Option
Grant Award Document for Non-Management Directors
(Incorporated by reference to Exhibit 10.7 to Fannie
Maes Current Report on
Form 8-K,
filed December 9, 2004.)
|
|
10
|
.31
|
|
Form of Restricted Stock Award
Document under Fannie Mae Stock Compensation Plan of 2003 for
Non-Management Directors (Incorporated by reference to
Exhibit 10.8 to Fannie Maes Current Report on
Form 8-K,
filed December 9, 2004.)
|
|
10
|
.32
|
|
Form of Restricted Stock Award
Document under Fannie Mae Stock Compensation Plan of 1993 for
Non-Management Directors (Incorporated by reference to
Exhibit 10.9 to Fannie Maes Current Report on
Form 8-K,
filed December 9, 2004.)
|
E-2
|
|
|
|
|
Item
|
|
Description
|
|
|
10
|
.33
|
|
Form of Election under Fannie
Maes Elective Deferred Compensation Plan II
(Incorporated by reference to Exhibit 10.1 to Fannie
Maes Current Report on
Form 8-K,
filed November 22, 2004.)
|
|
10
|
.34
|
|
Fannie Maes Elective
Deferred Compensation Plan (Incorporated by reference to
exhibit 10.13 to Fannie Maes registration statement
on Form 10, filed March 31, 2003.)
|
|
10
|
.35
|
|
Agreement between OFHEO and Fannie
Mae, September 27, 2004 (Incorporated by reference to
Exhibit 10.1 to Fannie Maes Current Report on
Form 8-K,
filed September 29, 2004.)
|
|
12
|
.1
|
|
Statement re: computation of
ratios of earnings to fixed charges
|
|
12
|
.2
|
|
Statement re: computation of
ratios of earnings to combined fixed charges and preferred stock
dividends
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Securities Exchange Act
Rule 13a-14(a)
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Securities Exchange Act
Rule 13a-14(a)
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350
|
|
99
|
.1
|
|
Description of Fannie Maes
Severance Program for 2005 and 2006 (Incorporated by reference
to Executive Compensation Information under
Item 11 of Fannie Maes Annual Report on
Form 10-K
for the year ended December 31, 2004.)
|
|
99
|
.2
|
|
Letter Agreement between Fannie
Mae and Daniel Mudd, dated March 10, 2005
(Incorporated by reference to Exhibit 10.2 to Fannie
Maes Current Report on
Form 8-K,
filed March 11, 2005.)
|
|
99
|
.3
|
|
Separation Letter Agreement
between Fannie Mae and Ann Kappler, dated August 23, 2005
|
|
99
|
.4
|
|
Employment Agreement, dated
November 15, 2005, between Fannie Mae and Daniel H. Mudd
(Incorporated by reference to Exhibit 10.1 to Fannie
Maes Current Report on
Form 8-K,
filed November 15, 2005.)
|
|
99
|
.5
|
|
Description of Fannie Maes
compensatory arrangements with its named executive officers for
the year ended December 31, 2005 (Incorporated by
reference to Fannie Maes Current Report on
Form 8-K,
filed December 6, 2006.)
|
|
99
|
.6
|
|
Description of Fannie Maes
compensatory arrangements with its non-employee directors for
the year ended December 31, 2005 (Incorporated by
reference to Director Compensation Information under
Item 11 of Fannie Maes Annual Report on
Form 10-K
for the year ended December 31, 2004.)
|
|
99
|
.7
|
|
Supplement to the Agreement of
September 27, 2004 between Fannie Mae and OFHEO, dated
March 7, 2005 (Incorporated by reference to
Exhibit 10.1 to Fannie Maes Current Report on
Form 8-K,
filed March 11, 2005.)
|
|
99
|
.8
|
|
Letters, dated September 1,
2005, setting forth an agreement between Fannie Mae and Office
of Federal Housing Enterprise Oversight (OFHEO) (Incorporated by
reference to Exhibit 10.1 to Fannie Maes Current
Report on
Form 8-K,
filed September 8, 2005.)
|
|
99
|
.9
|
|
Stipulation and Consent to the
Issuance of a Consent Order, dated May 23, 2006, between
Officer of Federal Housing Enterprise Oversight (OFHEO) and
Fannie Mae, including Consent Order (Incorporated by reference
to Exhibit 10.1 to Fannie Maes Current Report on
Form 8-K,
filed May 30, 2006.)
|
|
99
|
.10
|
|
Consent of Defendant Fannie Mae
with Securities and Exchange Commission (SEC), dated
May 23, 2006 (Incorporated by reference to
Exhibit 10.2 to Fannie Maes Current Report on
Form 8-K,
filed May 30, 2006.)
|
|
99
|
.11
|
|
Separation Letter Agreement
between Fannie Mae and Julie St. John, dated July 7,
2006 (Incorporated by reference to Exhibit 99.1 to
Fannie Maes Current Report on
Form 8-K,
filed July 7, 2006.)
|
|
99
|
.12
|
|
Consent Award Partially Resolving
Damages and Deferring Further Proceedings, dated
November 7, 2006, by and between Plaintiff Franklin D.
Raines and Fannie Mae (Incorporated by reference to
Exhibit 10.1 to Fannie Maes Current Report on
Form 8-K, filed November 14, 2006.)
|
|
99
|
.13
|
|
Guide to Fannie Maes 2004
Annual Report on SEC
Form 10-K
|
|
|
|
|
|
This exhibit is a management contract or compensatory plan or
arrangement. |
E-3
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Fannie Mae:
We have audited the accompanying consolidated balance sheets of
Fannie Mae (the Company) as of December 31,
2004 and 2003, and the related consolidated statements of
income, changes in stockholders equity, and cash flows for
each of the three years in the period ended December 31,
2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Fannie Mae as of December 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the
United States of America.
We were engaged to audit, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the effectiveness of the Companys internal control over
financial reporting as of December 31, 2004, and our report
dated December 6, 2006 disclaimed an opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting because
of a scope limitation and expressed an adverse opinion on the
effectiveness of the Companys internal control over
financial reporting because of material weaknesses and the
effects of a scope limitation.
As discussed in Note 1 to the consolidated financial
statements, the Company has restated the accompanying 2002 and
2003 consolidated financial statements.
/s/ Deloitte &
Touche LLP
Washington, DC
December 6, 2006
F-2
FANNIE
MAE
(Dollars in millions, except
share amounts)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
ASSETS
|
Cash and cash equivalents (includes
cash equivalents that may be repledged of $242 and $487 as of
December 31, 2004 and 2003, respectively)
|
|
$
|
2,655
|
|
|
$
|
3,395
|
|
Restricted cash
|
|
|
1,046
|
|
|
|
1,409
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
3,930
|
|
|
|
12,686
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
Trading, at fair value (includes
Fannie Mae MBS of $34,350 and $42,728 as of December 31,
2004 and 2003, respectively)
|
|
|
35,287
|
|
|
|
43,798
|
|
Available-for-sale,
at fair value (includes Fannie Mae MBS of $315,195 and $370,905
as of December 31, 2004 and 2003, respectively)
|
|
|
532,095
|
|
|
|
523,272
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
567,382
|
|
|
|
567,070
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of
cost or market
|
|
|
11,721
|
|
|
|
13,596
|
|
Loans held for investment, at
amortized cost
|
|
|
390,000
|
|
|
|
385,755
|
|
Allowance for loan losses
|
|
|
(349
|
)
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
Total loans held for investment,
net of allowance
|
|
|
389,651
|
|
|
|
385,465
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
401,372
|
|
|
|
399,061
|
|
Advances to lenders
|
|
|
4,850
|
|
|
|
4,696
|
|
Accrued interest receivable
|
|
|
4,237
|
|
|
|
4,450
|
|
Acquired property, net
|
|
|
1,704
|
|
|
|
1,320
|
|
Derivative assets at fair value
|
|
|
6,589
|
|
|
|
7,218
|
|
Guaranty assets
|
|
|
5,924
|
|
|
|
4,282
|
|
Deferred tax assets
|
|
|
6,074
|
|
|
|
4,082
|
|
Partnership investments
|
|
|
8,061
|
|
|
|
6,421
|
|
Other assets
|
|
|
7,110
|
|
|
|
6,185
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,020,934
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
6,212
|
|
|
$
|
6,315
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
|
2,400
|
|
|
|
3,673
|
|
Short-term debt
|
|
|
320,280
|
|
|
|
343,662
|
|
Long-term debt
|
|
|
632,831
|
|
|
|
617,618
|
|
Derivative liabilities at fair value
|
|
|
1,145
|
|
|
|
3,225
|
|
Reserve for guaranty losses
(includes $113 and $83 as of December 31, 2004 and 2003,
respectively, related to Fannie Mae MBS included in Investments
in securities)
|
|
|
396
|
|
|
|
313
|
|
Guaranty obligations (includes $814
and $863 as of December 31, 2004 and 2003, respectively,
related to Fannie Mae MBS included in Investments in securities)
|
|
|
8,784
|
|
|
|
6,401
|
|
Partnership liabilities
|
|
|
2,662
|
|
|
|
1,792
|
|
Other liabilities
|
|
|
7,246
|
|
|
|
7,003
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
981,956
|
|
|
|
990,002
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated
subsidiaries
|
|
|
76
|
|
|
|
5
|
|
Commitments and contingencies (see
Note 20)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock,
200,000,000 shares authorized132,175,000 shares
issued and outstanding as of December 31, 2004 and
82,150,000 shares issued and outstanding as of
December 31, 2003
|
|
|
9,108
|
|
|
|
4,108
|
|
Common stock, no par value, no
maximum authorization1,129,090,420 shares issued as
of December 31, 2004 and 2003; 969,075,573 shares and
970,358,844 shares outstanding as of December 31, 2004
and 2003, respectively
|
|
|
593
|
|
|
|
593
|
|
Additional paid-in capital
|
|
|
1,982
|
|
|
|
1,985
|
|
Retained earnings
|
|
|
30,705
|
|
|
|
27,923
|
|
Accumulated other comprehensive
income
|
|
|
4,387
|
|
|
|
5,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,775
|
|
|
|
39,924
|
|
Less: Treasury stock, at cost,
160,014,847 shares and 158,731,576 shares as of
December 31, 2004 and 2003, respectively
|
|
|
7,873
|
|
|
|
7,656
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
38,902
|
|
|
|
32,268
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,020,934
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
FANNIE
MAE
(Dollars and shares in
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
26,428
|
|
|
$
|
27,694
|
|
|
$
|
31,054
|
|
Mortgage loans
|
|
|
21,390
|
|
|
|
21,370
|
|
|
|
19,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
47,818
|
|
|
|
49,064
|
|
|
|
50,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
4,399
|
|
|
|
4,012
|
|
|
|
5,399
|
|
Long-term debt
|
|
|
25,338
|
|
|
|
25,575
|
|
|
|
27,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
29,737
|
|
|
|
29,587
|
|
|
|
32,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
18,081
|
|
|
|
19,477
|
|
|
|
18,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income (includes
imputed interest of $833, $314 and $107 for 2004, 2003 and 2002,
respectively)
|
|
|
3,604
|
|
|
|
3,281
|
|
|
|
2,516
|
|
Investment losses, net
|
|
|
(362
|
)
|
|
|
(1,231
|
)
|
|
|
(501
|
)
|
Derivatives fair value losses, net
|
|
|
(12,256
|
)
|
|
|
(6,289
|
)
|
|
|
(12,919
|
)
|
Debt extinguishment losses, net
|
|
|
(152
|
)
|
|
|
(2,692
|
)
|
|
|
(814
|
)
|
Loss from partnership investments
|
|
|
(702
|
)
|
|
|
(637
|
)
|
|
|
(509
|
)
|
Fee and other income
|
|
|
404
|
|
|
|
340
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest loss
|
|
|
(9,464
|
)
|
|
|
(7,228
|
)
|
|
|
(12,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
892
|
|
|
|
849
|
|
|
|
679
|
|
Professional services
|
|
|
435
|
|
|
|
238
|
|
|
|
218
|
|
Occupancy expenses
|
|
|
185
|
|
|
|
166
|
|
|
|
165
|
|
Other administrative expenses
|
|
|
144
|
|
|
|
201
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
1,656
|
|
|
|
1,454
|
|
|
|
1,156
|
|
Minority interest in earnings of
consolidated subsidiaries
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
352
|
|
|
|
365
|
|
|
|
284
|
|
Foreclosed property expense (income)
|
|
|
11
|
|
|
|
(12
|
)
|
|
|
(11
|
)
|
Other expenses
|
|
|
607
|
|
|
|
156
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,618
|
|
|
|
1,963
|
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes,
extraordinary gains (losses), and cumulative effect of change in
accounting principle
|
|
|
5,999
|
|
|
|
10,286
|
|
|
|
4,754
|
|
Provision for federal income taxes
|
|
|
1,024
|
|
|
|
2,434
|
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
|
4,975
|
|
|
|
7,852
|
|
|
|
3,914
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
(8
|
)
|
|
|
195
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,967
|
|
|
$
|
8,081
|
|
|
$
|
3,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(165
|
)
|
|
|
(150
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
4,802
|
|
|
$
|
7,931
|
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
$
|
4.96
|
|
|
$
|
7.88
|
|
|
$
|
3.83
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
(0.01
|
)
|
|
|
0.20
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.95
|
|
|
$
|
8.12
|
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
$
|
4.94
|
|
|
$
|
7.85
|
|
|
$
|
3.81
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
0.20
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.94
|
|
|
$
|
8.08
|
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$
|
2.08
|
|
|
$
|
1.68
|
|
|
$
|
1.32
|
|
Weighted-average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
970
|
|
|
|
977
|
|
|
|
992
|
|
Diluted
|
|
|
973
|
|
|
|
981
|
|
|
|
998
|
|
See Notes to Consolidated Financial Statements.
F-4
FANNIE
MAE
(Dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Cash flows provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,967
|
|
|
$
|
8,081
|
|
|
$
|
3,914
|
|
Reconciliation of net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of mortgage loans and
security cost basis adjustments
|
|
|
1,249
|
|
|
|
1,852
|
|
|
|
(107
|
)
|
Amortization of debt deferred price
adjustments
|
|
|
4,908
|
|
|
|
4,517
|
|
|
|
5,661
|
|
Provision for credit losses
|
|
|
352
|
|
|
|
365
|
|
|
|
284
|
|
Valuation losses
|
|
|
433
|
|
|
|
1,433
|
|
|
|
261
|
|
Debt extinguishment losses, net
|
|
|
152
|
|
|
|
2,692
|
|
|
|
814
|
|
Debt foreign currency transaction
losses, net
|
|
|
304
|
|
|
|
707
|
|
|
|
492
|
|
Loss from partnership investments
|
|
|
702
|
|
|
|
637
|
|
|
|
509
|
|
Current and deferred federal income
taxes
|
|
|
(1,435
|
)
|
|
|
(1,083
|
)
|
|
|
(2,186
|
)
|
Extraordinary (gains) losses, net
of tax effect
|
|
|
8
|
|
|
|
(195
|
)
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
Derivatives fair value adjustments
|
|
|
(1,395
|
)
|
|
|
(5,811
|
)
|
|
|
(7,973
|
)
|
Purchases of loans held for sale
|
|
|
(30,198
|
)
|
|
|
(72,519
|
)
|
|
|
(50,708
|
)
|
Proceeds from repayments of loans
held for sale
|
|
|
2,493
|
|
|
|
9,703
|
|
|
|
4,781
|
|
Proceeds from sales of loans held
for sale
|
|
|
66
|
|
|
|
8
|
|
|
|
44
|
|
Net decrease in trading securities,
excluding non-cash transfers
|
|
|
58,396
|
|
|
|
106,679
|
|
|
|
86,768
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty assets
|
|
|
(2,033
|
)
|
|
|
(5,018
|
)
|
|
|
(17
|
)
|
Guaranty obligations
|
|
|
2,926
|
|
|
|
7,745
|
|
|
|
2
|
|
Other, net
|
|
|
(339
|
)
|
|
|
(1,536
|
)
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
41,556
|
|
|
|
58,223
|
|
|
|
43,631
|
|
Cash flows used in investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of
available-for-sale
securities
|
|
|
(234,081
|
)
|
|
|
(503,313
|
)
|
|
|
(347,101
|
)
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
196,606
|
|
|
|
339,878
|
|
|
|
279,631
|
|
Proceeds from sales of
available-for-sale
securities
|
|
|
18,503
|
|
|
|
129,487
|
|
|
|
40,061
|
|
Purchases of loans held for
investment
|
|
|
(55,996
|
)
|
|
|
(92,668
|
)
|
|
|
(51,674
|
)
|
Proceeds from repayments of loans
held for investment
|
|
|
100,727
|
|
|
|
164,822
|
|
|
|
101,322
|
|
Advances to lenders
|
|
|
(53,865
|
)
|
|
|
(180,338
|
)
|
|
|
(141,869
|
)
|
Net proceeds from disposition of
foreclosed properties
|
|
|
4,284
|
|
|
|
3,355
|
|
|
|
2,472
|
|
Contributions to partnership
investments
|
|
|
(1,934
|
)
|
|
|
(1,675
|
)
|
|
|
(1,755
|
)
|
Proceeds from partnership
investments
|
|
|
208
|
|
|
|
60
|
|
|
|
44
|
|
Net change in federal funds sold
and securities purchased under agreements to resell
|
|
|
8,756
|
|
|
|
(12,355
|
)
|
|
|
5,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(16,792
|
)
|
|
|
(152,747
|
)
|
|
|
(113,588
|
)
|
Cash flows (used in) provided by
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
short-term debt
|
|
|
1,925,159
|
|
|
|
1,944,544
|
|
|
|
1,530,204
|
|
Payments to redeem short-term debt
|
|
|
(1,965,693
|
)
|
|
|
(1,904,640
|
)
|
|
|
(1,522,576
|
)
|
Proceeds from issuance of long-term
debt
|
|
|
253,880
|
|
|
|
349,356
|
|
|
|
240,657
|
|
Payments to redeem long-term debt
|
|
|
(240,031
|
)
|
|
|
(285,872
|
)
|
|
|
(178,933
|
)
|
Repurchase of common and redemption
of preferred stock
|
|
|
(523
|
)
|
|
|
(1,390
|
)
|
|
|
(1,792
|
)
|
Proceeds from issuance of common
and preferred stock
|
|
|
5,162
|
|
|
|
1,488
|
|
|
|
1,119
|
|
Payment of cash dividends on common
and preferred stock
|
|
|
(2,185
|
)
|
|
|
(1,796
|
)
|
|
|
(1,410
|
)
|
Net change in federal funds
purchased and securities sold under agreements to repurchase
|
|
|
(1,273
|
)
|
|
|
(5,497
|
)
|
|
|
3,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(25,504
|
)
|
|
|
96,193
|
|
|
|
70,638
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(740
|
)
|
|
|
1,669
|
|
|
|
681
|
|
Cash and cash equivalents at
beginning of period
|
|
|
3,395
|
|
|
|
1,726
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
2,655
|
|
|
$
|
3,395
|
|
|
$
|
1,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
29,777
|
|
|
$
|
30,322
|
|
|
$
|
33,302
|
|
Income taxes
|
|
|
2,470
|
|
|
|
3,516
|
|
|
|
3,032
|
|
Non-cash transfers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers between investments
in securities to mortgage loans
|
|
$
|
17,750
|
|
|
$
|
71,560
|
|
|
$
|
68,815
|
|
Transfers from advances to lenders
to investments in securities
|
|
|
53,705
|
|
|
|
195,964
|
|
|
|
130,651
|
|
Mortgage loans acquired by assuming
debt
|
|
|
13,372
|
|
|
|
9,274
|
|
|
|
1
|
|
Transfers of loans held for sale to
loans held for investment
|
|
|
15,543
|
|
|
|
51,855
|
|
|
|
32,764
|
|
Transfers from mortgage loans to
acquired property, net
|
|
|
4,307
|
|
|
|
3,580
|
|
|
|
2,407
|
|
Issuance of common stock from
treasury stock for stock option and benefit plans
|
|
|
306
|
|
|
|
149
|
|
|
|
127
|
|
See Notes to Consolidated Financial Statements.
F-5
FANNIE
MAE
(Dollars and shares in
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Shares Outstanding
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance as of December 31,
2001, as previously reported
|
|
|
46
|
|
|
|
997
|
|
|
$
|
2,303
|
|
|
$
|
593
|
|
|
$
|
1,651
|
|
|
$
|
26,175
|
|
|
$
|
(7,065
|
)
|
|
$
|
(5,539
|
)
|
|
$
|
18,118
|
|
Cumulative effect of restatement
adjustments (net of tax of $3.0 billion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
(7,041
|
)
|
|
|
12,087
|
|
|
|
|
|
|
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2001 (Restated)
|
|
|
46
|
|
|
|
997
|
|
|
|
2,303
|
|
|
|
593
|
|
|
|
1,743
|
|
|
|
19,134
|
|
|
|
5,022
|
|
|
|
(5,539
|
)
|
|
|
23,256
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,914
|
|
|
|
|
|
|
|
|
|
|
|
3,914
|
|
Other comprehensive income, net of
tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
available-for-sale
securities (net of tax of $3.6 billion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,647
|
|
|
|
|
|
|
|
6,647
|
|
Reclassification adjustment for
gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
Unrealized losses on guaranty
assets and guaranty fee buy-ups (net of tax of $83 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
|
|
|
|
|
|
(154
|
)
|
Net cash flow hedging losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
Minimum pension liability (net of
tax of $1 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,360
|
|
Common stock dividends
($1.32 per share in 2002)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,312
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,312
|
)
|
Preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
Preferred stock issued
|
|
|
20
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
991
|
|
Preferred stock redeemed
|
|
|
(13
|
)
|
|
|
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(625
|
)
|
Treasury stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,167
|
)
|
|
|
(1,167
|
)
|
Treasury stock issued for stock
options and benefit plans
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
|
|
194
|
|
Treasury stock issued to Fannie Mae
Foundation
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
164
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2002 (Restated)
|
|
|
53
|
|
|
|
989
|
|
|
|
2,678
|
|
|
|
593
|
|
|
|
1,937
|
|
|
|
21,638
|
|
|
|
11,468
|
|
|
|
(6,415
|
)
|
|
|
31,899
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
|
8,081
|
|
Other comprehensive income, net of
tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on
available-for-sale
securities (net of tax of $3.4 billion )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,278
|
)
|
|
|
|
|
|
|
(6,278
|
)
|
Reclassification adjustment for
losses included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
57
|
|
Unrealized gains on guaranty assets
and guaranty fee buy-ups (net of tax of $47 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
88
|
|
Net cash flow hedging losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
(18
|
)
|
Minimum pension liability (net of
tax of $1 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,928
|
|
Common stock dividends
($1.68 per share in 2003)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,646
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,646
|
)
|
Preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
Preferred stock issued
|
|
|
29
|
|
|
|
|
|
|
|
1,430
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,417
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,390
|
)
|
|
|
(1,390
|
)
|
Treasury stock issued for stock
options and benefit plans
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2003 (Restated)
|
|
|
82
|
|
|
|
970
|
|
|
|
4,108
|
|
|
|
593
|
|
|
|
1,985
|
|
|
|
27,923
|
|
|
|
5,315
|
|
|
|
(7,656
|
)
|
|
|
32,268
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,967
|
|
|
|
|
|
|
|
|
|
|
|
4,967
|
|
Other comprehensive income, net of
tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on
available-for-sale
securities (net of tax of $483 million )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(897
|
)
|
|
|
|
|
|
|
(897
|
)
|
Reclassification adjustment for
gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
(17
|
)
|
Unrealized losses on guaranty
assets and guaranty fee buy-ups (net of tax of $4 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
Net cash flow hedging losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
Minimum pension liability (net of
tax of $2 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,039
|
|
Common stock dividends
($2.08 per share in 2004)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,020
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,020
|
)
|
Preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
Preferred stock issued
|
|
|
50
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,925
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(523
|
)
|
|
|
(523
|
)
|
Treasury stock issued for stock
options and benefit plans
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
132
|
|
|
|
969
|
|
|
$
|
9,108
|
|
|
$
|
593
|
|
|
$
|
1,982
|
|
|
$
|
30,705
|
|
|
$
|
4,387
|
|
|
$
|
(7,873
|
)
|
|
$
|
38,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
FANNIE
MAE
|
|
1.
|
Restatement
of Previously Issued Financial Statements
|
Overview
As a result of an investigation by the Office of Federal Housing
Enterprise Oversight (OFHEO) and a review of our
accounting practices by the staff of the Securities and Exchange
Commission (SEC), we filed a
Form 8-K
with the SEC in December 2004 stating that our previously filed
interim and audited financial statements and the independent
auditors reports thereon for the periods from January 2001
through the second quarter of 2004 should no longer be relied
upon because such financial statements were prepared applying
accounting practices that did not comply with generally accepted
accounting principles (GAAP).
On May 23, 2006, OFHEO issued a report on its special
examination of our business practices. On that date, we entered
into settlements resolving matters with OFHEO and the SEC and
agreed to pay a civil penalty of $400 million, which is
recorded in Other expenses in the consolidated
statement of income for the year ended December 31, 2004.
In 2006, we completed a comprehensive review of our accounting
policies and practices to ensure that they are in compliance
with GAAP. This review included an examination of accounting
issues identified by OFHEO and other third parties, as well as
issues identified by our management. As a result, we have
restated our previously reported audited consolidated financial
statements for the years ended December 31, 2003 and 2002.
We have also restated our previously reported December 31,
2001 consolidated balance sheet to recognize corrected items
that relate to periods prior to January 1, 2002. In these
notes to the consolidated financial statements, we refer to
those periods as the restatement periods.
Except as otherwise noted, all financial information presented
in the consolidated financial statements for the years ended
December 31, 2003 and 2002 and related notes are presented
as restated. This note describes the accounting
errors identified and corrected in our restatement adjustments.
For a description of our significant accounting policies, see
Note 2, Summary of Significant Accounting
Policies.
Summary
of Restatement Adjustments
We have classified our restatement adjustments into the seven
primary categories as set forth below. These categories involve
subjective judgments by management regarding classification of
amounts and particular accounting errors that may fall within
more than one category. While such classifications are not
required under GAAP, management believes these classifications
may assist investors in understanding the nature and impact of
the corrections made in completing the restatement.
F-7
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the impact of the restatement
adjustments on net income available to common stockholders and
basic and diluted earnings per share for the years ended
December 31, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Net income available to common
stockholders, as previously reported
|
|
$
|
7,755
|
|
|
$
|
4,508
|
|
Restatement adjustments for:
|
|
|
|
|
|
|
|
|
Debt and derivatives
|
|
|
4,356
|
|
|
|
(5,877
|
)
|
Commitments
|
|
|
(1,826
|
)
|
|
|
5,387
|
|
Investments in securities
|
|
|
(332
|
)
|
|
|
(715
|
)
|
MBS trust consolidation and sale
accounting
|
|
|
(226
|
)
|
|
|
(59
|
)
|
Financial guaranties and master
servicing
|
|
|
175
|
|
|
|
178
|
|
Amortization of cost basis
adjustments
|
|
|
(1,348
|
)
|
|
|
135
|
|
Other adjustments
|
|
|
(926
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
Total impact of restatement
adjustments before federal income taxes, extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
|
(127
|
)
|
|
|
(1,294
|
)
|
Benefit for federal income taxes
|
|
|
(259
|
)
|
|
|
(589
|
)
|
Extraordinary gains, net of tax
effect
|
|
|
195
|
|
|
|
|
|
Cumulative effect of a change in
accounting principle, net of tax effect
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of restatement
adjustments
|
|
|
176
|
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders, as restated
|
|
$
|
7,931
|
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
7.93
|
|
|
$
|
4.54
|
|
Total impact of restatement
adjustments
|
|
|
0.19
|
|
|
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
8.12
|
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$
|
7.91
|
|
|
$
|
4.52
|
|
Total impact of restatement
adjustments
|
|
|
0.17
|
|
|
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
As restated
|
|
$
|
8.08
|
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
|
See the Financial Statement Impact section below for
further details on the impact of the restatement adjustments in
the consolidated financial statements for the restatement
periods.
Debt
and Derivatives
We identified five errors associated with our debt and
derivatives. The most significant error was that we incorrectly
designated derivatives as cash flow or fair value hedges for
accounting and reporting purposes. For derivatives designated as
cash flow hedges, this error resulted in the recognition of
changes in the fair value of these derivatives in
Accumulated other comprehensive income
(AOCI) in the consolidated balance sheets instead of
in the consolidated statements of income. For derivatives
designated as fair value hedges, this error resulted in the
recognition of changes in the fair value of the hedged items as
fair value adjustments in the consolidated balance sheets and as
gain or loss in the consolidated statements of income. In
conjunction with the review of these transactions, we identified
the following additional errors associated with our debt and
derivatives: we incorrectly excluded foreign exchange
derivatives from netting adjustments for transactions executed
with the same counterparty; we did not record a small number of
financial instruments as derivatives;
F-8
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
we incorrectly valued certain option-based and foreign exchange
derivatives; and we incorrectly calculated interest expense by
using inappropriate estimates in our amortization of debt cost
basis adjustments.
The restatement adjustments associated with these errors
resulted in a pre-tax increase in net income of
$4.4 billion and a pre-tax decrease in net income of
$5.9 billion for the years ended December 31, 2003 and
2002, respectively. In addition, we recorded a reduction in
retained earnings of $10.6 billion as of December 31,
2001, which reflects derivative restatement adjustments for all
periods prior to and including December 31, 2001. As such,
the accumulation of all derivative adjustments through 2003
resulted in a cumulative reduction in retained earnings of
$12.1 billion. This reduction in retained earnings, in
combination with an incremental loss reflected in the 2004
consolidated financial statements of $729 million, resulted
in a cumulative reduction in pre-tax net income of
$12.9 billion, or $8.4 billion after tax, as of
December 31, 2004. These restatement adjustments also impacted
the consolidated balance sheets, resulting in a decrease in
total assets of $5.0 billion and $3.7 billion as of
December 31, 2003 and 2002, respectively, primarily from a
reduction in Deferred tax assets as a result of no
longer applying hedge accounting and deferring losses.
Additionally, we decreased total liabilities by
$9.1 billion and $9.0 billion as of December 31,
2003 and 2002, respectively, primarily from no longer recording
debt at fair value due to the loss of hedge accounting as well
as correcting the amortization of debt cost basis adjustments.
The effect from the change in debt cost basis adjustments, in
turn, had the effect of increasing the amount of Debt
extinguishment losses, net recognized in the consolidated
statements of income. Each of the errors that resulted in these
adjustments is described below.
We incorrectly classified derivatives as cash flow or fair value
hedges for accounting and reporting purposes, even though they
did not qualify for hedge accounting treatment pursuant to
Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). The primary
reasons for the loss of hedge accounting treatment were the
improper use of the shortcut method as defined by
SFAS 133 and inadequate assessments of hedge effectiveness
and ineffectiveness measurement, both at hedge inception and at
each reporting period thereafter. In other instances, hedging
relationships were not properly documented at the inception of
the hedge. Under cash flow hedge accounting, we initially
recorded unrealized gains or losses on derivatives in AOCI in
the consolidated balance sheets to be recognized into income in
subsequent periods. Under fair value hedge accounting, we
recorded unrealized gains or losses on derivatives in the
consolidated statements of income offset by unrealized gains or
losses on the asset or liability being hedged. The impact of
correcting errors on derivatives that were previously classified
as cash flow hedges resulted in the reversal of all previously
recorded fair value adjustments in AOCI and the recognition of
these fair value adjustments in Derivatives fair value
losses, net in the consolidated statements of income. The
impact of correcting errors on derivatives that were previously
classified as fair value hedges resulted in the reversal of
previously recorded fair value adjustments recorded on the
hedged items. As the majority of these derivatives were
designated as hedges against debt, the reversal of fair value
adjustments resulted in a reduction of Short-term
debt and Long-term debt in the consolidated
balance sheets and changes in Interest expense in
the consolidated statements of income. This error impacted all
previously reported results and varied substantially from period
to period based on the portfolio size and prevailing interest
rates.
We incorrectly excluded foreign exchange derivatives from
netting adjustments for transactions executed with the same
counterparty where we had the legal right and intent to offset
pursuant to Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 39,
Offsetting of Amounts Related to Certain Contracts (an
interpretation of APB Opinion No. 10 and FASB Statement
No. 105) (FIN 39). As a result, the
amounts of derivative assets and liabilities in the consolidated
balance sheets were misstated. The impact of correcting this
error changed the reported amount of derivative assets and
liabilities in the consolidated balance sheets.
We did not record a small number of financial instruments that
met the definition of a derivative pursuant to SFAS 133,
which resulted in a misstatement of derivative assets and
liabilities at fair value in the consolidated balance sheets.
The correction of this error resulted in the recognition of
derivative assets and liabilities at fair
F-9
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
value with subsequent changes in the fair value of these
derivatives recognized in the consolidated statements of income.
We incorrectly valued certain option-based and foreign exchange
derivatives. We incorrectly valued certain option-based
derivatives by using inaccurate volatility measures, which
resulted in incorrect fair value adjustments to the previously
reported consolidated financial statements. To correct this
error, we revalued option-based derivatives with new volatility
measures supported by market analysis and revalued foreign
exchange derivatives. We also incorrectly recorded fair value
adjustments on foreign exchange derivatives previously accounted
for as fair value hedges. We recorded adjustments on these
derivatives equal to foreign currency translation adjustments of
our foreign denominated debt. These foreign exchange derivatives
should have been independently recorded at fair value. The
impact of correcting this error resulted in changes in the fair
value gain or loss associated with these derivatives, which was
recognized in the consolidated statements of income.
We incorrectly calculated interest expense by using
inappropriate estimates in our amortization of debt cost basis
adjustments. We amortized discounts, premiums and other deferred
price adjustments by amortizing these amounts through the
expected call date of the borrowings as opposed to amortizing
these amounts through the contractual maturity date of the
borrowings. Additionally, we utilized a convention in the
calculation that was based on the average number of days of
interest in a month regardless of the days contractually agreed
upon. We corrected these errors by recalculating amortization of
these costs through the contractual maturity date of the
respective borrowings and using the contractual number of days
in the month. The correction of these errors resulted in changes
in the recognition of Interest expense and
Debt extinguishment losses, net in the consolidated
statements of income.
Commitments
We identified five errors associated with mortgage loan and
security commitments. The most significant errors were that we
did not record certain mortgage loan and security commitments as
derivatives under SFAS 133 and we incorrectly classified
mortgage loan and security commitments as cash flow hedges,
which resulted in changes in fair value not being reflected in
earnings. We also incorrectly interpreted
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS 149), and therefore we incorrectly
recorded a transition adjustment in 2003. In conjunction with
the review of these transactions, we identified the following
additional errors associated with mortgage loan and security
commitments: we did not record certain security commitments as
securities and we incorrectly valued mortgage loan and security
commitments.
The restatement adjustments associated with these errors
resulted in a pre-tax decrease in net income of
$1.8 billion and a pre-tax increase in net income of
$5.4 billion for the years ended December 31, 2003 and
2002, respectively for a cumulative
pre-tax
increase in retained earnings of $4.0 billion as of
December 31, 2003. This pre-tax increase, combined with a
commitments-related gain of $135 million reflected in the
2004 consolidated financial statements, resulted in a cumulative
pre-tax increase in retained earnings of $4.1 billion, as
of December 31, 2004. The net impact on retained earnings,
including tax effects and the $185 million after-tax charge
to Cumulative effect of change in accounting
principle as described below, was $2.5 billion as of
December 31, 2004. After considering the increased
amortization recognized in restatement attributable to the
commitments adjustment, the total net impact of these commitment
adjustments was an increase in retained earnings of
$535 million, net of tax, as of December 31, 2004.
Each of the errors that resulted in these adjustments is
described below.
Prior to July 1, 2003, we did not record as derivatives
mortgage loan and security commitments that were derivatives
pursuant to SFAS 133, which resulted in a misstatement of
our derivative assets and liabilities in the consolidated
balance sheets. The impact of correcting this error resulted in
the recognition of these commitments as derivatives at fair
value in the consolidated balance sheets, with changes in the
fair value of these commitments recorded in the consolidated
statements of income. This error impacted previously reported
results and varied substantially from period to period based on
volume, prevailing interest rates and the market price of the
underlying collateral. The correction of this error also
resulted in recording cost basis adjustments
F-10
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to the acquired assets for the value of these derivatives as of
their settlement date. These cost basis adjustments are
amortized into interest income over the life of the acquired
assets. The impact of this amortization is reflected in the
Amortization of Cost Basis Adjustments section below.
We incorrectly classified mortgage loan and security commitments
as cash flow hedges. The primary reasons we did not qualify for
hedge accounting treatment were the lack of assessment of the
effectiveness of the hedging relationship and the failure to
adequately identify and document the forecasted transactions. As
discussed above, under cash flow hedge accounting, we deferred
unrealized gains or losses on derivatives in AOCI in the
consolidated balance sheets. The impact of correcting this error
resulted in the recognition of derivatives at fair value in the
consolidated balance sheets, with changes in the fair value of
these derivatives recognized in the consolidated statements of
income. This error impacted previously reported results and
varied substantially from period to period based on volume,
prevailing interest rates and the market price of the underlying
collateral.
As part of the adoption of SFAS 149 in 2003, we
incorrectly recorded a SFAS 149 transition adjustment that
was not required because the commitments for which the
transition adjustment was recorded should previously have been
accounted for as derivatives under SFAS 133 or as
securities under Emerging Issues Task Force (EITF)
Issue
No. 96-11,
Accounting for Forward Contracts and Purchased Options to
Acquire Securities Covered by FASB Statement No. 115
(EITF 96-11). We also incorrectly recorded
as derivatives certain multifamily mortgage loan commitments
that did not qualify as derivatives. The transition adjustment
originally recorded was an after-tax charge of $185 million
in the consolidated statement of income for the year ended
December 31, 2003 as a Cumulative effect of change in
accounting principle. The impact of correcting these
errors resulted in the removal of the fair value adjustments
related to multifamily loan commitments and the reversal of the
entire transition adjustment in the consolidated statement of
income for the year ended December 31, 2003.
Prior to July 1, 2003, the effective date of SFAS 149,
we did not account for certain qualifying security purchase
commitments in the consolidated balance sheets pursuant to
EITF 96-11, which resulted in a misstatement of
Investments in securities and AOCI in the
consolidated balance sheets and related Investment losses,
net in the consolidated statements of income associated
with these commitments. The impact of correcting this error
resulted in the recognition of these commitments as either
trading or
available-for-sale
(AFS) securities, and the recognition of changes in
the fair value of the securities in Investment losses,
net in the consolidated statements of income for trading
securities or in AOCI in the consolidated balance sheets for AFS
securities.
We incorrectly valued mortgage loan and security commitments
that we recorded as derivatives by utilizing inconsistent or
inaccurate pricing. We corrected this error by revaluing
mortgage loan and security commitment derivatives. The impact of
correcting this error resulted in changes in unrealized gains or
losses associated with these commitments in the consolidated
statements of income and corresponding changes in derivatives at
fair value in the consolidated balance sheets.
Investments
in Securities
We identified the accounting errors described below related to
our investments in securities that resulted in a pre-tax
decrease in net income of $332 million and
$715 million for the years ended December 31, 2003 and
2002, respectively.
Classification
and Valuation of Securities
We identified three errors associated with the classification
and valuation of securities. The most significant error was that
we incorrectly classified securities at acquisition as
held-to-maturity
(HTM) that we did not intend to hold to maturity,
which resulted in not recognizing changes in the fair value of
these securities in AOCI or earnings. As a result of our review
of acquired securities, we derecognized all previously recorded
HTM securities recorded at amortized cost and recognized at fair
value $419.5 billion and $69.5 billion of AFS and
trading securities, respectively, in 2003. Our holding of
investments in trading securities is a
F-11
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
significant change from our previously reported consolidated
financial statements, as the majority of our investments in
securities were historically classified as HTM. As a part of our
review of these transactions, we identified the following
additional errors: we incorrectly valued securities and we
incorrectly classified certain dollar roll repurchase
transactions as short-term borrowings instead of purchases and
sales of securities.
The restatement adjustments associated with these errors
resulted in a pre-tax increase in net income of
$148 million and a decrease of $90 million for the
years ended December 31, 2003 and 2002, respectively. These
restatement adjustments also impacted the consolidated balance
sheets, resulting in an increase of $2.4 billion and
$6.1 billion in total assets and an increase of
$37 million and decrease of $324 million in total
liabilities as of December 31, 2003 and 2002, respectively.
Each of the errors that resulted in these adjustments is
described below.
We incorrectly classified securities as HTM pursuant to
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115).
SFAS 115 requires that securities be classified based on
managements investment intent on the date of acquisition
and that securities originally designated as HTM can only be
reclassified if specified criteria are met. Previously, we
selected HTM as a default designation on the date we acquired
the security. Subsequently, we would select classification as
either HTM or AFS, at the end of the month in which the security
was acquired. The effect of this error was that securities were
incorrectly reclassified from HTM to AFS and the
reclassification did not meet the criteria of SFAS 115 for
such reclassification. The impact of correcting this error
resulted in the classification of all securities previously
classified as HTM securities as either AFS or trading
securities, with changes in the fair value of securities
classified as AFS recorded in AOCI and changes in the fair value
of securities classified as trading recognized in
Investment losses, net in the consolidated
statements of income. We discontinued the use of the HTM
designation during the restatement period. In our restatement
process, we corrected this error using information contained
within the historical trade system to determine the original
investment intent for each security and the appropriate
classification. Fair value adjustments related to
Investments in securities resulted in an increase in
AOCI of $2.3 billion and $6.4 billion for AFS
securities as of December 31, 2003 and 2002, respectively,
in the consolidated balance sheets and an additional loss of
$100 million and a gain of $209 million for trading
securities for the years ended December 31, 2003 and 2002,
respectively, in Investment losses, net in the
consolidated statements of income.
We had valuation errors associated with securities. We
incorrectly recorded the cost basis for certain securities in
connection with implementing a new settlement system in 2002. We
also incorrectly accounted for certain securities on a
settlement date basis rather than a trade date basis pursuant to
Statement of Position (SOP)
No. 01-6,
Accounting by Certain Entities (Including Entities with Trade
Receivables) That Lend to or Finance the Activities of Others
(SOP 01-6).
In addition, we incorrectly valued our previously reported AFS
securities. To correct these errors, we revalued securities and
corrected the cost basis of the impacted securities. The impact
of correcting these errors resulted in a change in the realized
and unrealized gains or losses associated with these securities
as well as amortization of the cost basis adjustments in
Interest income in the consolidated statements of
income. The impact of the amortization of the revised cost basis
adjustments is reflected in the Amortization of Cost Basis
Adjustments section below.
We enter into agreements referred to as dollar roll
repurchase transactions, where we transfer mortgage-backed
securities (MBS) in exchange for funds and agree to
repurchase substantially the same securities at a future date.
We incorrectly classified some dollar roll repurchase
transactions as secured borrowings as these repurchase
transactions did not qualify for secured borrowing treatment
under SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS 125) and
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(a replacement of FASB Statement No. 125)
(SFAS 140). For transactions that did not
qualify for secured borrowing treatment, the impact of
correcting the errors resulted in the reversal of
Short-term debt in the consolidated balance sheets
and the recognition of a sale or purchase of a security for each
transaction, resulting in the recognition of gains and losses in
Investment losses, net in the consolidated
statements of income.
F-12
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Impairment
of Securities
We identified the following errors associated with the
impairment of securities: we did not assess certain types of
securities for impairment and we did not assess interest-only
securities and lower credit quality investments for impairment.
The restatement adjustments associated with these errors
resulted in a pre-tax decrease in net income of
$480 million and $625 million and a decrease in total
assets of $1.2 billion and $872 million for the years
ended December 31, 2003 and 2002, respectively. Each of the
errors that resulted in these adjustments is described below.
We did not appropriately assess certain securities for
impairment due to deteriorated credit quality of the
securities underlying collateral and, in some cases,
deteriorated credit quality of the securities issuer
during the restatement period. Included in this population of
securities were investments in manufactured housing bonds.
Additionally, when we recorded impairment, in certain
circumstances we did not use contemporaneous market prices where
available. To correct these errors, we remeasured securities and
assessed them for credit-related impairments. The impact of
correcting these errors resulted in a change in the carrying
amount of these securities in the consolidated balance sheets
and a reduction in net income recorded in Investment
losses, net in the consolidated statements of income.
We did not assess interest-only securities and lower credit
quality investments for impairment pursuant to EITF Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets
(EITF 99-20). In certain instances, we
incorrectly combined interest-only and principal-only
certificates issued from securitization trusts for impairment
evaluation purposes even though the interest-only certificates
could not be, or had not been, legally combined into a single
security. To correct this error, we assessed these securities
separately for impairment. The impact of correcting this error
resulted in a decrease in the carrying amount of these
securities in the consolidated balance sheets and a reduction in
net income recorded in Investment losses, net in the
consolidated statements of income.
MBS
Trust Consolidation and Sale Accounting
We identified three errors associated with MBS trust
consolidation and sale accounting: we incorrectly recorded asset
sales that did not meet sale accounting criteria; we did not
consolidate certain MBS trusts that were not considered
qualifying special purpose entities (QSPE) and for
which we were deemed to be the primary beneficiary or sponsor of
the trust; and we did not consolidate certain MBS trusts in
which we owned 100% of the securities issued by the trust and
had the ability to unilaterally cause the trust to liquidate.
The restatement adjustments associated with these errors
resulted in a pre-tax decrease in net income of
$226 million and $59 million for the years ended
December 31, 2003 and 2002, respectively. This was the
result of the net change in the value of the assets and
liabilities that were recognized and derecognized in conjunction
with consolidation or sale activity. These restatement
adjustments also affected the consolidated balance sheets,
resulting in an increase of $8.9 billion and
$7.7 billion in total assets and an increase in total
liabilities of $8.6 billion and $7.1 billion as of
December 31, 2003 and 2002, respectively. Each of the
errors that resulted in these adjustments is described below.
We incorrectly recorded asset sales that did not meet the sale
accounting criteria set forth in SFAS 125 and
SFAS 140, primarily because the assets were transferred to
an MBS trust that did not meet the QSPE criteria. To correct
this error, we reviewed our MBS trusts and accounted for the
transfers of assets that did not meet the sale accounting
criteria as secured borrowings. The impact of correcting this
error resulted in the derecognition of retained interest and
recourse obligations recorded upon transfer of the assets, the
re-recognition
of the transferred assets and the recognition of
Short-term debt or Long-term debt in the
consolidated balance sheets to the extent of any proceeds
received in connection with the transfer of assets. Correcting
this error also resulted in the reversal of any gains or losses
related to these failed asset sales recorded in Investment
losses, net in the consolidated statements of income.
F-13
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We failed to consolidate MBS trusts that were not considered
QSPEs and for which we were deemed to be the primary beneficiary
or sponsor of the trust. These entities included those to which
we transferred assets in a transaction that initially qualified
as a sale and for QSPE status, but where the trust subsequently
failed to meet the criteria to be a QSPE, primarily because our
ownership interests in the trust exceeded the threshold
permitted for a QSPE. Additionally, these entities included
those where we were not the transferor of assets to the trust,
but where the trust is not considered a QSPE and our investments
or guaranty contracts provide us with the majority of the
expected losses or residual returns, as defined by
FIN No. 46 (revised December 2003), Consolidation
of Variable Interest Entities (an interpretation of ARB
No. 51) (FIN 46R). To correct this
error, we consolidated these trusts, then deconsolidated trusts
when they no longer required consolidation.
We incorrectly did not consolidate MBS trusts in which we owned
or acquired over time 100% of the related securities issued by
the trust and had the ability to unilaterally liquidate the
trust. To correct this error, we consolidated those MBS trusts
in which we had the unilateral ability to liquidate and
deconsolidated these trusts when we no longer had the unilateral
ability to liquidate.
Correcting these errors related to MBS trust consolidation and
sale accounting resulted in a decrease in Investments in
securities of $154.0 billion and $128.8 billion,
an increase in Mortgage loans of $162.8 billion
and $136.1 billion and an increase in debt of
$9.9 billion and $7.5 billion as of December 31,
2003 and 2002, respectively.
In situations where we were required to consolidate an MBS
trust, we derecognized the MBS recorded in the consolidated
balance sheets as Investments in securities and
recognized the underlying assets held by the trust, either as
mortgage loans or mortgage-related securities. Loans that were
consolidated from trusts in which we were the transferor have
been classified as held for sale (HFS) and are
recorded at the lower of cost or market, whereas loans that were
consolidated from trusts in which we were not the transferor
have been classified as held for investment (HFI)
and recorded at amortized cost. Mortgage-related securities that
were consolidated from trusts have been classified as AFS
securities. We also derecognized assets and liabilities
associated with our guaranty and master servicing arrangements
associated with the consolidated MBS trusts and recognized these
amounts as cost basis adjustments to Mortgage loans
in the consolidated balance sheets, where applicable. The impact
of the amortization of this cost basis adjustment is reflected
in the Amortization of Cost Basis Adjustments
section below. For consolidated MBS trusts in which we owned
less than 100% of the related securities, we recorded short-term
or long-term debt in the consolidated balance sheets for the
portion of the security position due to third parties.
Correcting these errors related to MBS trust consolidation and
sale accounting also impacted the consolidated statements of
income. We recorded an additional loss of $230 million and
$26 million in Investments losses, net in the
consolidated statements of income for the years ended
December 31, 2003 and 2002, respectively, primarily due to
reversing previously recorded asset sales. As a result of
adopting FIN 46R, we consolidated certain MBS trusts
created prior to February 1, 2003 and recorded a
$34 million gain in Cumulative effect of change in
accounting principle, net of tax effect in the
consolidated statement of income for the year ended
December 31, 2003. For MBS trusts created after
January 31, 2003 and that were consolidated due to the
application of FIN 46R, we recorded a $195 million
gain in Extraordinary gains (losses), net of tax
effect in the consolidated statement of income for the
year ended December 31, 2003, reflecting the difference
between the fair value of the consolidated assets and
liabilities and the carrying amount of our interest in the MBS
trust. In addition, we recorded a decrease in Guaranty fee
income of $247 million and $198 million and an
increase in Interest income of $594 million and
$710 million for the years ended December 31, 2003 and
2002, respectively, as a result of derecognizing our guaranty
assets and obligations and recognizing cost basis adjustments to
the consolidated mortgage loans and mortgage-related securities.
Additionally, two real estate mortgage investment conduit
(REMIC) transactions were specifically identified
and questioned by OFHEO regarding our intent for entering into
the transactions and the timing of income recognition. Our
review concluded that the historical treatment of accounting for
these transfers was appropriate and consistently applied.
F-14
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Financial
Guaranties and Master Servicing
We identified the accounting errors described below related to
our financial guaranties and master servicing that resulted in a
pre-tax increase in net income of $175 million and
$178 million for the years ended December 31, 2003 and
2002, respectively.
Recognition,
Valuation and Amortization of Guaranties and Master
Servicing
We identified seven errors associated with the recognition,
valuation and amortization of our guaranty and master servicing
contracts. The most significant errors were that we incorrectly
amortized guaranty fee buy-downs and risk-based pricing
adjustments; we incorrectly valued our guaranty assets and
guaranty obligations; we incorrectly accounted for buy-ups; we
did not record credit enhancements associated with our
guaranties as separate assets; and we incorrectly recorded
adjustments to guaranty assets and guaranty obligations based on
the amount of Fannie Mae mortgage-backed securities
(Fannie Mae MBS) held in the consolidated balance
sheets. In conjunction with the review of these issues, we
identified the following additional errors: we did not record
guaranty assets and guaranty obligations associated with our
guaranties to MBS trusts in which we were the transferor of the
trusts underlying loans and we did not recognize master
servicing assets and related deferred profit, where applicable.
The restatement adjustments associated with these errors
resulted in a pre-tax increase in net income of
$1.0 billion and $491 million for the years ended
December 31, 2003 and 2002, respectively. These restatement
adjustments also impacted the consolidated balance sheets,
resulting in an increase of $144 million and
$246 million in total assets and a decrease in total
liabilities of $1.6 billion and $1.2 billion as of
December 31, 2003 and 2002, respectively. Each of the
errors that resulted in these adjustments is described below.
For guaranties entered into before January 1, 2003, the
effective date of FIN No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation
of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No.
34) (FIN 45), we made errors in
applying amortization to up-front cash receipts associated with
our guaranties, known as buy-downs and risk-based pricing
adjustments, pursuant to SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases (an amendment
of FASB Statements No. 13, 60, and 65 and rescission of
FASB Statement No. 17) (SFAS 91). The
errors in amortization of these items are described in the
Amortization of Cost Basis Adjustments section
below. The impact of correcting these errors resulted in changes
in the periodic recognition of Guaranty fee income
in the consolidated statements of income. For guaranties entered
into or modified after the adoption of FIN 45, buy-downs
and risk-based pricing adjustments should have been recorded as
an additional component of Guaranty obligations and
amortized in proportion to the reduction to Guaranty
assets. The impact of correcting this error resulted in
changes in the carrying amount of Other liabilities
and Guaranty obligations in the consolidated balance
sheets and changes in the periodic recognition of Guaranty
fee income in the consolidated statements of income.
We had valuation errors associated with our guaranty assets and
guaranty obligations. We incorrectly included up-front cash
payments associated with our guaranties, known as buy-ups, in
the basis of our guaranty assets while also recording these
buy-ups as a separate asset included in Other assets
in the consolidated balance sheets. We recorded guaranty
obligations equal to the recorded guaranty assets, including any
buy-ups, when we should have independently measured guaranty
obligations at fair value based on estimates of expected credit
losses and recorded deferred profit associated with these
arrangements. The impact of correcting these errors resulted in
decreases in Other assets and Guaranty
obligations in the consolidated balance sheets.
We did not correctly account for buy-ups. Historically, we
accounted for buy-ups at amortized cost under the retrospective
effective interest method pursuant to SFAS 91. However,
since the recognition of income on a
buy-up is
subject to the risk that we may not substantially recover our
investment due to prepayments, we should have subsequently
measured the fair value of the buy-ups as if they were debt
securities pursuant to
F-15
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
SFAS 140 and recorded imputed interest as a component of
Guaranty fee income in the consolidated statements
of income under the prospective interest method pursuant to
EITF 99-20. The impact of correcting this error resulted in
recording buy-ups at fair value as a component of Other
assets in the consolidated balance sheets with changes in
the fair value recorded in AOCI in the consolidated balance
sheets.
In some transactions, we receive the benefit of lender-provided
credit enhancements, such as lender recourse, in lieu of
receiving a higher guaranty fee. Previously, we did not record
these credit enhancements as assets in the consolidated balance
sheets. The impact of correcting this error resulted in the
recognition of credit enhancements as a component of Other
assets, an offsetting increase to Guaranty
obligations, and subsequent amortization of the credit
enhancement as a component of Other expenses in the
consolidated statements of income.
Historically, when we acquired a Fannie Mae MBS, we reduced the
recorded guaranty asset and guaranty obligation by an amount
equal to the pro rata portion of Fannie Mae MBS held in the
consolidated balance sheets relative to the total amount of
gross outstanding Fannie Mae MBS. In addition, we reclassified a
pro rata portion of recorded guaranty fee income to interest
income in an amount equal to the ratio of the Fannie Mae MBS
held in the consolidated balance sheets relative to the total
amount of gross outstanding Fannie Mae MBS. Because each Fannie
Mae MBS trust to which we have a guaranty obligation, and from
which we have the right to receive guaranty fees, is separate
from us, we should not have reduced the recorded guaranty asset
and guaranty obligation or reclassified guaranty fee income with
respect to Fannie Mae MBS held in the consolidated balance
sheets unless we had consolidated the related MBS trust.
Correcting this error increased Guaranty assets and
Guaranty obligations in the consolidated balance
sheets, and resulted in a decrease in Net interest
income of $948 million and $768 million and a
corresponding increase in Guaranty fee income in the
consolidated statements of income for the years ended
December 31, 2003 and 2002, respectively.
We did not record certain retained interests as guaranty assets
and certain recourse obligations as guaranty obligations in
connection with the transfer of loans to MBS trusts for which we
were the transferor pursuant to SFAS 125 and SFAS 140.
To correct this error, we examined all of our guaranty
arrangements in these transactions and recorded guaranty assets
and guaranty obligations as applicable. The impact of correcting
this error resulted in an increase in Guaranty
assets and Guaranty obligations in the
consolidated balance sheets with any remaining difference being
recorded as a component of Investment losses, net in
the consolidated statements of income.
We assume an obligation to perform certain limited master
servicing activities in connection with securitizations and are
compensated for assuming this obligation. We did not previously
recognize master servicing assets and related deferred profit
associated with our role as master servicer pursuant to
SFAS 125 and SFAS 140. To correct this error, we
reviewed our trust agreements to determine when we had master
servicing responsibilities. The impact of correcting this error
generally resulted in the recognition of master servicing assets
as a component of Other assets and the recognition
of a corresponding amount of deferred profit as a component of
Other liabilities, with subsequent amortization and
impairment recorded to Fee and other income in the
consolidated statements of income.
Impairment
of Guaranty Assets and Buy-ups
We identified the following errors associated with the
impairment of guaranties: we did not assess guaranty assets or
buy-ups for impairment in accordance with EITF 99-20 and
SFAS 115, as appropriate.
The restatement adjustments related to impairments resulted in a
pre-tax decrease in net income of $869 million and
$313 million and a decrease in total assets of
$1.8 billion and $1.1 billion for the years ended
December 31, 2003 and 2002, respectively. Each of the
errors that resulted in these adjustments is described below.
We did not assess guaranty assets for impairment. As a result,
guaranty assets were overstated in previously issued financial
statements. The impact of correcting this error resulted in a
reduction to Guaranty assets
F-16
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
with a proportional reduction to Guaranty
obligations in the consolidated balance sheets. The
impairment of the guaranty asset was fully offset by
amortization of the guaranty obligation. While the impairment of
the guaranty asset is categorized in this section, the
proportionate reduction of the guaranty obligation is
categorized in the Recognition, Valuation and Amortization
of Guaranties and Master Servicing section above.
We did not assess buy-ups for impairment. As a result,
Other assets and Guaranty fee income
were overstated in previously issued financial statements. The
impact of correcting this error resulted in a decrease in
Other assets in the consolidated balance sheets and
a decrease in Guaranty fee income in the
consolidated statements of income.
Amortization
of Cost Basis Adjustments
We identified multiple errors in amortization of mortgage loan
and securities premiums, discounts and other cost basis
adjustments. The most significant errors were that we applied
incorrect prepayment speeds to cost basis adjustments; we
aggregated dissimilar assets in computing amortization; and we
incorrectly recorded cumulative amortization adjustments.
Additionally, the correction of cost basis adjustments in other
error categories, primarily settled mortgage loan and security
commitments, resulted in the recognition of additional
amortization. The errors that led to these corrected cost basis
adjustments are described in the Commitments,
Investments in Securities and MBS Trust
Consolidation and Sale Accounting sections above.
The restatement adjustments relating to these amortization
errors resulted in a pre-tax decrease in net income of
$1.3 billion and a pre-tax increase in net income of
$135 million for the years ended December 31, 2003 and
2002, respectively. Each of the errors that resulted in these
adjustments is described below.
SFAS 91 requires the recognition of cost basis adjustments
as an adjustment to interest income over the life of a loan or
security by using the interest method and applying a constant
effective yield (level yield). In calculating a
level yield, we calculate amortization factors, based on
prepayment and interest rate assumptions. Our method for
estimating prepayment rates applied incorrect assumptions to
certain assets.
In addition, we incorrectly aggregated dissimilar assets in
computing amortization. Our amortization calculation aggregated
loans with a wide range of coupon rates, which in some cases led
to amortization results that did not produce an appropriate
level yield over the life of the loans. To correct this error,
we recalculated amortization of loans and securities factoring
in prepayment and interest rate assumptions that were applied to
the appropriate asset types. The impact of correcting these
errors resulted in changes in the periodic recognition of
interest income in the consolidated statements of income.
The manner in which we calculated and recorded the cumulative
catch-up adjustment was inconsistent with the
provisions of SFAS 91. The impact of correcting this error
resulted in changes in the periodic recognition of interest
income in the consolidated statements of income.
Other
Adjustments
In addition to the previously noted errors, we identified and
recorded other restatement adjustments related to accounting,
presentation, classification and other errors that did not fall
within the six categories described above.
The accumulation of the other restatement adjustments listed
below resulted in a pre-tax decrease in net income of
$926 million and $343 million for the years ended
December 31, 2003 and 2002, respectively. Also, the other
restatement adjustments impacted the consolidated balance
sheets, resulting in an increase of $5.0 billion and
$4.5 billion in total assets and an increase of
$5.2 billion and $4.3 billion in total liabilities as
of December 31, 2003 and 2002, respectively.
The following categories summarize the most significant other
adjustments recorded as part of the restatement:
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Accounting for partnership investments. We
incorrectly accounted for a portion of our low-income housing
tax credit (LIHTC) and other partnership investments
using the effective yield method instead
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F-17
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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of using the equity method of accounting. The correction of this
error resulted in changes in the carrying amount of these
investments in the consolidated balance sheets, the recognition
of our obligations to fund the partnerships, and changes in the
income recognition on these investments in the consolidated
statements of income. Additionally, we failed to consolidate a
portion of the LIHTC and other partnership investments in which
we were deemed to be the primary beneficiary pursuant to
FIN 46R, which resulted in the reversal of any previously
recorded investment and recognition of the underlying assets and
liabilities of the entity in the consolidated balance sheets
and, at the same time, we incorrectly consolidated some
partnership investments which had the reverse effect. We also
made errors in the capitalization of interest expense,
measurement of impairment, and the recognition of our
obligations to fund our partnership investments. The correction
of these errors resulted in changes in the amount of interest
expense and impairment recognized in the consolidated statements
of income. Lastly, we made errors in the computation of net
operating losses and tax credits allocated to us from these
partnerships. The correction of these errors resulted in changes
in Deferred tax assets in the consolidated balance
sheets and changes in the Provision for federal income
taxes in the consolidated statements of income. These
restatement adjustments resulted in a pre-tax decrease in net
income of $293 million and $199 million for the years
ended December 31, 2003 and 2002, respectively. In addition
to the tax provision recorded for the partnership investments
restatement adjustments, we also recorded a decrease in federal
income tax expense of $138 million and $206 million
due to changes in the recognition and classification of related
tax credits and net operating losses for the years ended
December 31, 2003 and 2002, respectively. These restatement
adjustments also impacted the consolidated balance sheets,
resulting in an increase of $791 million and
$1.2 billion in total assets and an increase of
$878 million and $1.3 billion in total liabilities as
of December 31, 2003 and 2002, respectively.
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Classification of loans held for sale. We
incorrectly classified loans held for securitization at a future
date as HFI loans rather than HFS loans pursuant to
SFAS No. 65, Accounting for Certain Mortgage
Banking Activities (SFAS 65). Accordingly,
we did not record lower of cost or market (LOCOM)
adjustments on these loans. To correct this error, we recorded
an adjustment to reclassify such loans from HFI to HFS and
recorded an associated LOCOM adjustment. These restatement
adjustments resulted in a pre-tax decrease in net income of
$303 million and $40 million for the years ended
December 31, 2003 and 2002, respectively.
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Provision for credit losses. We incorrectly
recorded the Provision for credit losses due to
errors associated with the Allowance for loan
losses, Reserve for guaranty losses, real
estate owned (REO) and troubled debt restructurings
(TDR).
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We made errors in developing our estimates of the
Allowance for loan losses and the Reserve for
guaranty losses, which resulted in an understatement of
the provision for credit losses. These errors were primarily
related to the use of inappropriate data in the calculation of
the allowance and reserve, such as incorrect loan populations,
inaccurate default statistics and inaccurate loss severity in
the event that loans default. We also made judgmental
adjustments to the calculated allowance without adequate support
and incorrectly included an estimate of credit enhancement
collections in the estimate of the Allowance for loan
losses. Estimates of recoveries from credit enhancements
that were not entered into contemporaneously or in contemplation
of a guaranty or loan purchase should not have been included in
the overall estimate of the allowance or the reserve. As a
result of misclassifying certain loans as HFI, we incorrectly
recorded an Allowance for loan losses on these
loans. Finally, we did not properly allocate the reserve between
the Allowance for loan losses and the Reserve
for guaranty losses. To correct these errors, we
recalculated the allowance and reserve with updated information
and supportable data, reviewed and documented any judgmental
adjustments and appropriately applied estimates of recoveries
from credit enhancements to the loan population.
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We made errors in calculating loan charge-off amounts. These
errors were related to REO and foreclosed property expense,
including making inappropriate determinations of the initial
cost basis of
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F-18
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
REO assets at foreclosure, as well as not expensing costs
related to foreclosure activities in the proper periods. To
correct these errors, we reviewed REO and foreclosed property
expense to determine and record the appropriate cost basis and
timing of charge-offs and expense recognition. We also
incorrectly recognized insurance proceeds in excess of estimated
charge-off at foreclosure and fair value gains above the
recorded investment of REO properties as recoveries to the
allowance and the reserve. To correct this error, we
recalculated the allowance and reserve.
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We historically did not recognize modifications that granted
concessions to borrowers as TDRs pursuant to
SFAS No. 114, Accounting by Creditors for
Impairment of a Loan (an amendment of FASB Statement No. 5
and 15) (SFAS 114). To correct this
error, we recognized these modifications as TDRs and recorded an
adjustment to the Allowance for loan losses and the
Provision for credit losses in the consolidated
balance sheets and consolidated statements of income,
respectively.
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The restatement adjustments associated with these errors
resulted in a pre-tax decrease in net income of
$278 million and $201 million as well as an increase
in the provision for credit losses of $273 million and
$164 million for the years ended December 31, 2003 and
2002, respectively.
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Early funding. We offer early funding options
to lenders that allow them to receive cash payments for mortgage
loans that will be securitized into Fannie Mae MBS at a future
date. A corresponding forward commitment to sell the security
that will be backed by the mortgage loans is required to be
delivered with the mortgage loans and is executed on the
settlement date of the commitment. We incorrectly recorded these
transactions as HFS loans prior to the actual creation of the
Fannie Mae MBS when we were the intended purchaser of the MBS.
The impact of correcting this error was to remove any previous
HFS loans from these transactions and record the transactions as
Advances to lenders, carried at amortized cost, in
the consolidated balance sheets, resulting in a decrease of
$4.7 billion and $20.5 billion in Mortgage
loans with a corresponding increase in Advances to
lenders as of December 31, 2003 and 2002,
respectively.
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Collateral associated with derivatives
contracts. We did not record cash collateral we
received associated with some derivatives contracts. The impact
of correcting this error was to record additional Cash and
cash equivalents and Restricted cash of
$3.4 billion and $1.1 billion and a corresponding
liability to our derivative counterparties in Other
liabilities as of December 31, 2003 and 2002,
respectively.
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The following items, while restatement errors, were not
individually significant to the consolidated financial
statements for the restatement period:
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Accounting for reverse mortgages. We made
errors in accounting for reverse mortgages. When computing
interest income on reverse mortgages we did not use the expected
life of the borrower and house price expectations in the
interest income calculations and did not apply the retrospective
level yield method. To correct this error, we recalculated
interest income for these mortgages and recorded the change in
Interest income in the consolidated statements of
income. We also incorrectly recorded loan loss reserves on these
mortgages. To correct this error, we adjusted the
Allowance for loan losses and the Provision
for credit losses in the consolidated balance sheets and
consolidated statements of income, respectively.
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Accrued interest on delinquent loans. We
incorrectly included a recovery rate, which was based on
historic trends of loans that subsequently changed to current
payment status, in calculating accrued interest on delinquent
loans. The effect of this error was to record interest income on
loans that should have been on nonaccrual status. The correction
of this error resulted in the reversal of interest income
recorded in the periods when loans should have been on
nonaccrual status.
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Amortization of prepaid mortgage insurance. We
amortized prepaid mortgage insurance over a period that is not
representative of the period in which we received the benefits
of the mortgage insurance. To correct this error, we
recalculated amortization of this mortgage insurance and
recorded the difference in Other expenses in the
consolidated statements of income.
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F-19
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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Computation of interest income. We incorrectly
calculated interest income on certain investments. The
calculations utilized a convention that was based on the average
number of days of interest in a month regardless of the actual
number of days in the month. We corrected the calculation of
interest using the actual number of days in the month and
adjusted the timing of interest income recognition.
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Mortgage insurance contract. We entered into a
mortgage insurance contract that did not transfer sufficient
underlying risk of economic loss to the insurer and therefore
did not qualify as mortgage insurance for accounting purposes.
We incorrectly amortized the premiums paid as an expense. To
correct this error, we recorded premiums paid on the policy as a
deposit, reducing such deposit as recoveries from the policy
were received.
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Stock-based compensation. We made errors in
the computation and classification of stock-based compensation,
including the misclassification of some awards as
non-compensatory when they were compensatory. The impact of
correcting these errors resulted in the recognition of
additional Salaries and employee benefits expense in
the consolidated statements of income, a decrease in Other
liabilities and an increase in Additional paid-in
capital in the consolidated balance sheets. None of these
errors related to awards that were not properly authorized and
priced.
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In addition to the specified errors listed and described above,
we recognized other restatement adjustments related to our
revised accounting policies and practices. These adjustments,
both individually and in the aggregate, did not have a
significant impact on the consolidated financial statements.
As a result of our restatement adjustments, our effective tax
rate decreased from the previously reported 26% to 24% for the
year ended December 31, 2003 and from the previously
reported 24% to 18% for the year ended December 31, 2002.
These decreases resulted from errors in our tax provision
relating primarily to the recognition of higher levels of tax
credits from our investment in affordable housing projects and
changes to deferred tax balances. As a result, the change in the
provision for federal taxes as a percentage of the change in
pre-tax income was higher than the statutory federal rate or our
effective tax rate. See Note 11, Income Taxes
for our restated tax rate reconciliation. In addition, the tax
effects were applied to each of the categories identified above
to display each error category net of tax and with the earnings
per share impact.
In addition to the consolidated financial statement errors
discussed above, we incorrectly applied the treasury stock
method in computing the weighted average shares pursuant to
SFAS No. 128, Earnings per
Share. This resulted in a different number of
weighted average dilutive shares outstanding being utilized in
the earnings per share calculation. While common stock
outstanding has not been restated, diluted EPS has been
recalculated using the revised weighted average diluted shares.
We also identified errors in the presentation of business
segments that were not in conformity with the requirements of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information
(SFAS 131). For further information on this
error, see Note 15, Segment Reporting.
We made errors in the fair value disclosure of financial
instruments pursuant to SFAS No. 107, Disclosures about
Fair Value of Financial Instruments
(SFAS 107), by incorrectly calculating the
fair value of our derivatives, commitments and AFS securities,
as described above. In addition, we incorrectly calculated the
fair value of our guaranty assets and guaranty obligations,
which affected the fair value of our whole loans. We also
incorrectly calculated the fair value of our HTM securities and
debt. For our guaranty obligations we did not appropriately
consider an estimate of the return on capital required by a
third party to assume our liability. Correcting this error
resulted in an increase in our guaranty obligations of
approximately $1.2 billion (net of tax) and a decrease in the
fair value of our whole loans of approximately $200 million
(net of tax). This increase in the fair value of our guaranty
obligations, coupled with other fair value changes made in
re-estimating
the guaranty components, resulted in a decrease in the fair
value of our net guaranty assets of approximately
$1.7 billion (net of tax) as of December 31, 2003. For
our HTM securities, we did not appropriately consider security
characteristics and aggregation in developing our estimate of
fair value. Correcting these errors resulted in a reduction in
the fair value of these assets of approximately
$800 million
F-20
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(net of tax) as of December 31, 2003, which was primarily
due to changes in the estimated fair values of mortgage revenue
bonds and REMICs. For our debt, we did not appropriately exclude
certain commission costs associated with the issuance of new
debt securities in creating the yield curve we used for
estimating fair value. Correcting this error resulted in an
increase in the estimated fair value of our debt of
approximately $300 million (net of tax) as of
December 31, 2003. For our out-of-the-money derivative
options, we did not fully incorporate available market
information that differentiates at-the-money volatilities from
out-of-the-money volatilities in estimating fair value.
Correcting the error resulted in a decrease in the estimated
fair value of our derivatives of approximately $200 million
(net of tax) as of December 31, 2003. To correct these
errors, we recalculated the fair value of these items using new
assumptions, observable data and appropriate levels of
specificity. The impact of recalculating the estimated fair
value of these items is reflected in Note 19, Fair
Value of Financial Instruments.
Financial
Statement Impact
The following tables display the net impact of restatement
adjustments in the previously issued consolidated balance
sheets, consolidated statements of income, consolidated
statements of cash flows and regulatory capital for 2003 and
2002. In addition, we have included tables displaying the net
impact of restatement adjustments on stockholders equity
and in the consolidated balance sheet as of December 31,
2001. The following consolidated financial statements are
presented in a condensed format.
F-21
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Balance
Sheet Impact
The following table displays the cumulative impact of the
restatement on the condensed consolidated balance sheet through
and as of December 31, 2003.
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|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS Trust
|
|
|
Guaranties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
and
|
|
|
Amortization
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Debt and
|
|
|
|
|
|
Investments
|
|
|
and Sale
|
|
|
Master
|
|
|
of Cost Basis
|
|
|
Other
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
712,763
|
|
|
$
|
|
|
|
$
|
3,479
|
|
|
$
|
5,458
|
|
|
$
|
(153,971
|
)
|
|
$
|
|
|
|
$
|
(401
|
)
|
|
$
|
(258
|
)
|
|
$
|
(145,693
|
)(b)
|
|
$
|
567,070
|
|
Mortgage loans
|
|
|
240,844
|
|
|
|
|
|
|
|
874
|
|
|
|
115
|
|
|
|
162,780
|
|
|
|
|
|
|
|
(519
|
)
|
|
|
(5,033
|
)
|
|
|
158,217
|
(c)
|
|
|
399,061
|
|
Derivative assets at fair value
|
|
|
8,191
|
|
|
|
(1,014
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
(973
|
)(d)
|
|
|
7,218
|
|
Guaranty assets
|
|
|
5,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
(1,184
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,384
|
)(e)
|
|
|
4,282
|
|
Deferred tax assets
|
|
|
9,142
|
|
|
|
(2,221
|
)
|
|
|
(2,613
|
)
|
|
|
(646
|
)
|
|
|
(175
|
)
|
|
|
(106
|
)
|
|
|
332
|
|
|
|
369
|
|
|
|
(5,060
|
)(f)
|
|
|
4,082
|
|
Other assets
|
|
|
32,963
|
|
|
|
(1,760
|
)
|
|
|
3,097
|
|
|
|
(3,685
|
)
|
|
|
487
|
|
|
|
(411
|
)
|
|
|
10
|
|
|
|
9,861
|
|
|
|
7,599
|
(g)
|
|
|
40,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,009,569
|
|
|
$
|
(4,995
|
)
|
|
$
|
4,845
|
|
|
$
|
1,242
|
|
|
$
|
8,921
|
|
|
$
|
(1,701
|
)
|
|
$
|
(578
|
)
|
|
$
|
4,972
|
|
|
$
|
12,706
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
958,064
|
|
|
$
|
(6,748
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,906
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
58
|
|
|
$
|
3,216
|
(h)
|
|
$
|
961,280
|
|
Derivative liabilities at fair value
|
|
|
1,600
|
|
|
|
1,632
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625
|
(d)
|
|
|
3,225
|
|
Guaranty obligations
|
|
|
5,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(796
|
)
|
|
|
1,531
|
|
|
|
|
|
|
|
|
|
|
|
735
|
(i)
|
|
|
6,401
|
|
Other liabilities
|
|
|
21,815
|
|
|
|
(4,002
|
)
|
|
|
(1
|
)
|
|
|
37
|
|
|
|
(507
|
)
|
|
|
(3,442
|
)
|
|
|
39
|
|
|
|
5,157
|
|
|
|
(2,719
|
)(j)
|
|
|
19,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
987,145
|
|
|
|
(9,118
|
)
|
|
|
(8
|
)
|
|
|
37
|
|
|
|
8,603
|
|
|
|
(1,911
|
)
|
|
|
39
|
|
|
|
5,215
|
|
|
|
2,857
|
|
|
|
990,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated
subsidiaries
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
(46
|
)
|
|
|
5
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
35,496
|
|
|
|
(8,079
|
)
|
|
|
2,399
|
|
|
|
(1,106
|
)
|
|
|
118
|
|
|
|
101
|
|
|
|
(688
|
)
|
|
|
(318
|
)
|
|
|
(7,573
|
)(k)
|
|
|
27,923
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(12,032
|
)
|
|
|
12,202
|
|
|
|
2,454
|
|
|
|
2,311
|
|
|
|
200
|
|
|
|
109
|
|
|
|
71
|
|
|
|
|
|
|
|
17,347
|
(l)
|
|
|
5,315
|
|
Other stockholders equity
|
|
|
(1,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
121
|
|
|
|
(970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
22,373
|
|
|
|
4,123
|
|
|
|
4,853
|
|
|
|
1,205
|
|
|
|
318
|
|
|
|
210
|
|
|
|
(617
|
)
|
|
|
(197
|
)
|
|
|
9,895
|
|
|
|
32,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,009,569
|
|
|
$
|
(4,995
|
)
|
|
$
|
4,845
|
|
|
$
|
1,242
|
|
|
$
|
8,921
|
|
|
$
|
(1,701
|
)
|
|
$
|
(578
|
)
|
|
$
|
4,972
|
|
|
$
|
12,706
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain previously reported
balances have been reclassified to conform to the current
condensed consolidated balance sheet presentation, as described
in Note 2, Summary of Significant Accounting
Policies.
|
|
(b) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the derecognition of HTM
securities at amortized cost and recognition of AFS and trading
securities at fair value; the reversal of the SFAS 149
transition adjustment and recognition of revised securities
commitment basis adjustments; the recognition of revised
amortization on securities cost basis adjustments; and the
derecognition of securities related to failed dollar roll
repurchase transactions that did not meet the criteria for
secured borrowing accounting.
|
|
(c) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the reclassification of
Mortgage loans to Advances to lenders;
the recognition of revised mortgage loan commitment basis
adjustments; the recognition of the LOCOM adjustment for loans
classified as HFS; and the recognition of revised amortization
on mortgage loan cost basis adjustments.
|
|
(d) |
|
Reflects the reclassification of
interest rate swap accruals from accrued interest and
recognition of derivative fair value adjustments.
|
|
(e) |
|
Reflects the impairment of guaranty
assets; the reversal of
buy-up
amounts included in the basis of the guaranty assets; and the
derecognition of guaranty arrangements upon consolidation.
|
|
(f) |
|
Reflects the impact of restatement
adjustments on deferred taxes and the correction of tax
credit-related errors associated with partnership investments.
|
|
(g) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative assets at fair
value; the reclassification of Advances to
lenders from Mortgage loans; the impairment of
buy-ups; the recognition of Restricted cash and
|
F-22
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
Cash and cash
equivalents related to collateral received from
derivatives counterparties; and the impact of cost basis
transfers between error categories.
|
|
(h) |
|
Reflects the reversal of previously
recorded unrealized gains and losses on the hedged items
associated with fair value hedges; the recognition of revised
amortization of debt basis adjustments; and the recognition of
short-term and long-term debt upon consolidation of MBS trusts
in which we own less than 100% of the related securities.
|
|
(i) |
|
Reflects the valuation adjustment
related to the guaranty obligations; the reclassification of
buy-downs and risk-based pricing adjustments from Other
liabilities; and the derecognition of guaranty
arrangements upon consolidation.
|
|
(j) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative liabilities at
fair value; the reversal of short-term debt associated
with failed dollar roll repurchase transactions; the
reclassification of buy-downs and risk-based pricing adjustments
to Guaranty obligations; and the recognition of
liabilities to derivative counterparties associated with
restricted cash.
|
|
(k) |
|
Reflects the recognition of
derivative fair value adjustments to the consolidated statements
of income and other income or expense related adjustments.
|
|
(l) |
|
Reflects the reversal of previously
recorded derivatives fair value adjustments and the recognition
of unrealized gains (losses) on AFS securities and buy-ups.
|
The following table displays the cumulative impact of the
restatement on the condensed consolidated balance sheet through
and as of December 31, 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS Trust
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
Guaranties
|
|
|
Amortization
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Debt and
|
|
|
|
|
|
Investments
|
|
|
and Sale
|
|
|
and Master
|
|
|
of Cost Basis
|
|
|
Other
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
650,616
|
|
|
$
|
|
|
|
$
|
230
|
|
|
$
|
33,278
|
|
|
$
|
(128,809
|
)
|
|
$
|
|
|
|
$
|
558
|
|
|
$
|
(20,788
|
)
|
|
$
|
(115,531
|
)(b)
|
|
$
|
535,085
|
|
Mortgage loans
|
|
|
206,905
|
|
|
|
|
|
|
|
683
|
|
|
|
(20,576
|
)
|
|
|
136,097
|
|
|
|
|
|
|
|
(291
|
)
|
|
|
1,552
|
|
|
|
117,465
|
(c)
|
|
|
324,370
|
|
Derivative assets at fair value
|
|
|
3,666
|
|
|
|
(297
|
)
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,257
|
(d)
|
|
|
4,923
|
|
Deferred tax assets
|
|
|
8,053
|
|
|
|
(2,885
|
)
|
|
|
(2,035
|
)
|
|
|
(2,969
|
)
|
|
|
(309
|
)
|
|
|
(23
|
)
|
|
|
(111
|
)
|
|
|
279
|
|
|
|
(8,053
|
)(e)
|
|
|
|
|
Other assets
|
|
|
18,275
|
|
|
|
(501
|
)
|
|
|
3,737
|
|
|
|
(4,539
|
)
|
|
|
674
|
|
|
|
(864
|
)
|
|
|
108
|
|
|
|
23,471
|
|
|
|
22,086
|
(f)
|
|
|
40,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
887,515
|
|
|
$
|
(3,683
|
)
|
|
$
|
4,169
|
|
|
$
|
5,194
|
|
|
$
|
7,653
|
|
|
$
|
(887
|
)
|
|
$
|
264
|
|
|
$
|
4,514
|
|
|
$
|
17,224
|
|
|
$
|
904,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
841,899
|
|
|
$
|
(8,237
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,516
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
115
|
|
|
$
|
(606
|
)(g)
|
|
$
|
841,293
|
|
Derivative liabilities at fair value
|
|
|
5,697
|
|
|
|
1,036
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,205
|
(d)
|
|
|
6,902
|
|
Other liabilities
|
|
|
23,631
|
|
|
|
(1,840
|
)
|
|
|
220
|
|
|
|
(324
|
)
|
|
|
(438
|
)
|
|
|
(890
|
)
|
|
|
58
|
|
|
|
4,228
|
|
|
|
1,014
|
(h)
|
|
|
24,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
871,227
|
|
|
|
(9,041
|
)
|
|
|
389
|
|
|
|
(324
|
)
|
|
|
7,078
|
|
|
|
(890
|
)
|
|
|
58
|
|
|
|
4,343
|
|
|
|
1,613
|
|
|
|
872,840
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
29,385
|
|
|
|
(10,909
|
)
|
|
|
3,771
|
|
|
|
(891
|
)
|
|
|
39
|
|
|
|
(18
|
)
|
|
|
188
|
|
|
|
73
|
|
|
|
(7,747
|
)(i)
|
|
|
21,638
|
|
Accumulated other comprehensive
(loss) income
|
|
|
(11,792
|
)
|
|
|
16,267
|
|
|
|
9
|
|
|
|
6,409
|
|
|
|
536
|
|
|
|
21
|
|
|
|
18
|
|
|
|
|
|
|
|
23,260
|
(j)
|
|
|
11,468
|
|
Other stockholders equity
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
98
|
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
16,288
|
|
|
|
5,358
|
|
|
|
3,780
|
|
|
|
5,518
|
|
|
|
575
|
|
|
|
3
|
|
|
|
206
|
|
|
|
171
|
|
|
|
15,611
|
|
|
|
31,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
887,515
|
|
|
$
|
(3,683
|
)
|
|
$
|
4,169
|
|
|
$
|
5,194
|
|
|
$
|
7,653
|
|
|
$
|
(887
|
)
|
|
$
|
264
|
|
|
$
|
4,514
|
|
|
$
|
17,224
|
|
|
$
|
904,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain previously reported
balances have been reclassified to conform to the current
condensed consolidated balance sheet presentation, as described
in Note 2, Summary of Significant Accounting
Policies.
|
|
(b) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the derecognition of HTM
securities at amortized cost and recognition of AFS and trading
securities at fair value, including commitments accounted for
under
EITF 96-11;
the recognition of revised securities commitment basis
adjustments; the recognition of revised amortization on
securities cost basis adjustments; and the derecognition of
securities related to failed dollar roll repurchase transactions
that did not meet the criteria for secured borrowing accounting.
|
F-23
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
(c) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the reclassification of
Mortgage loans to Advances to lenders;
the recognition of mortgage loan commitment basis adjustments;
the recognition of the LOCOM adjustment for loans classified as
HFS; and the recognition of revised amortization on mortgage
loan cost basis adjustments.
|
|
(d) |
|
Reflects the reclassification of
interest rate swap accruals from accrued interest and
recognition of derivative fair value adjustments.
|
|
(e) |
|
Reflects the impact of restatement
adjustments on deferred taxes and the correction of tax
credit-related errors associated with partnership investments.
|
|
(f) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative assets at fair
value; the reclassification of Advances to
lenders from Mortgage loans; the impairment of
buy-ups; the recognition of Restricted cash and
Cash and cash equivalents related to collateral
received from derivatives counterparties; and the impact of cost
basis transfers between error categories.
|
|
(g) |
|
Reflects the reversal of previously
recorded unrealized gains and losses on hedged items associated
with fair value hedges; the recognition of revised amortization
of debt basis adjustments; and the recognition of short-term and
long-term debt upon consolidation of MBS trusts in which we own
less than 100% of the related securities.
|
|
(h) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative liabilities at
fair value; the reversal of short-term debt associated
with failed dollar roll repurchase transactions; the correction
of amortization of buy-downs and risk-based pricing adjustments;
and the recognition of liabilities to derivative counterparties
associated with restricted cash.
|
|
(i) |
|
Reflects the recognition of
derivative fair value adjustments to the consolidated statements
of income and other income or expense related adjustments.
|
|
(j) |
|
Reflects the reversal of previously
recorded derivatives fair value adjustments and the recognition
of unrealized gains (losses) on AFS securities and buy-ups.
|
The following table displays the cumulative impact of the
restatement on the condensed consolidated balance sheet for all
periods through and as of December 31, 2001.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
$
|
602,429
|
|
|
$
|
(99,093
|
)(b)
|
|
$
|
503,336
|
|
Mortgage loans
|
|
|
172,127
|
|
|
|
106,710
|
(c)
|
|
|
278,837
|
|
Derivative assets at fair value
|
|
|
954
|
|
|
|
(130
|
)(d)
|
|
|
824
|
|
Deferred tax assets
|
|
|
3,821
|
|
|
|
(2,634
|
)(e)
|
|
|
1,187
|
|
Other assets
|
|
|
20,617
|
|
|
|
9,760
|
(f)
|
|
|
30,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
799,948
|
|
|
$
|
14,613
|
|
|
$
|
814,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
757,510
|
|
|
$
|
7,520
|
(g)
|
|
$
|
765,030
|
|
Derivative liabilities at fair value
|
|
|
5,069
|
|
|
|
2,508
|
(d)
|
|
|
7,577
|
|
Other liabilities
|
|
|
19,251
|
|
|
|
(553
|
)(h)
|
|
|
18,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
781,830
|
|
|
|
9,475
|
|
|
|
791,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
26,175
|
|
|
|
(7,041
|
)(i)
|
|
|
19,134
|
|
Accumulated other comprehensive
(loss) income
|
|
|
(7,065
|
)
|
|
|
12,087
|
(j)
|
|
|
5,022
|
|
Other stockholders equity
|
|
|
(992
|
)
|
|
|
92
|
|
|
|
(900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
18,118
|
|
|
|
5,138
|
|
|
|
23,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
799,948
|
|
|
$
|
14,613
|
|
|
$
|
814,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
(a) |
|
Certain previously reported
balances have been reclassified to conform to the current
condensed consolidated balance sheet presentation, as described
in Note 2, Summary of Significant Accounting
Policies.
|
|
(b) |
|
Reflects the impact of MBS trust
consolidation and sale accounting; the derecognition of HTM
securities at amortized cost and recognition of AFS and trading
securities at fair value, including commitments accounted for
under
EITF 96-11;
the recognition of revised securities commitment basis
adjustments; the recognition of revised amortization on
securities cost basis adjustments; and the derecognition of
securities related to failed dollar roll repurchase transactions
that did not meet the criteria for secured borrowing accounting.
|
|
(c) |
|
Reflects impact of MBS trust
consolidation and sale accounting; the reclassification of
Mortgage loans to Advances to lenders;
the recognition of mortgage loan commitment basis adjustments;
the recognition of the LOCOM adjustment for loans classified as
HFS; and the recognition of revised amortization on mortgage
loan cost basis adjustments.
|
|
(d) |
|
Reflects the reclassification of
interest rate swap accruals from accrued interest and
recognition of derivative fair value adjustments.
|
|
(e) |
|
Reflects the impact of restatement
adjustments on deferred taxes and the correction of tax-credit
related errors associated with partnership investments.
|
|
(f) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative assets at fair
value; the reclassification of Advances to
lenders from Mortgage loans; the impairment of
buy-ups; the recognition of Restricted cash and
Cash and cash equivalents related to collateral
received from derivatives counterparties; and the impact of cost
basis transfers between error categories.
|
|
(g) |
|
Reflects the reversal of previously
recorded unrealized gains and losses on hedged items associated
with fair value hedges; the recognition of revised amortization
of debt basis adjustments; and the recognition of short-term and
long-term debt upon consolidation of MBS trusts in which we own
less than 100% of the related securities.
|
|
(h) |
|
Reflects the reclassification of
interest rate swap accruals to Derivative liabilities at
fair value; the reversal of short-term debt associated
with failed dollar roll repurchase transactions; the correction
of amortization of buy-downs and risk-based pricing adjustments;
and the recognition of liabilities to derivative counterparties
associated with restricted cash.
|
|
(i) |
|
Reflects the recognition of
derivative fair value adjustments to the consolidated statements
of income and other income or expense related adjustments.
|
|
(j) |
|
Reflects the reversal of previously
recorded derivatives fair value adjustments and the recognition
of unrealized gains (losses) on AFS securities and buy-ups.
|
The following table displays the cumulative impact of the
restatement on consolidated stockholders equity in the
condensed consolidated balance sheet through and as of
December 31, 2001.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Other
|
|
|
Total
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Stockholders
|
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Equity
|
|
|
|
(Dollars in millions)
|
|
|
December 31, 2001 balance, as
previously reported
|
|
$
|
26,175
|
|
|
$
|
(7,065
|
)
|
|
$
|
(992
|
)
|
|
$
|
18,118
|
|
Restatement adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and derivatives
|
|
|
(10,622
|
)(a)
|
|
|
11,363
|
(b)
|
|
|
|
|
|
|
741
|
|
Commitments
|
|
|
413
|
|
|
|
1
|
|
|
|
|
|
|
|
414
|
|
Investments in securities
|
|
|
(660
|
)
|
|
|
6,880
|
(c)
|
|
|
|
|
|
|
6,220
|
|
MBS trust consolidation and sale
accounting
|
|
|
119
|
|
|
|
81
|
|
|
|
|
|
|
|
200
|
|
Financial guaranties and master
servicing
|
|
|
(206
|
)
|
|
|
268
|
|
|
|
|
|
|
|
62
|
|
Amortization of cost basis
adjustments
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
Other adjustments
|
|
|
296
|
|
|
|
|
|
|
|
92
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax total impact of restatement
adjustments
|
|
|
(10,506
|
)
|
|
|
18,593
|
|
|
|
92
|
|
|
|
8,179
|
|
Tax impact (benefit) of restatement
adjustments
|
|
|
(3,465
|
)
|
|
|
6,506
|
|
|
|
|
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact of restatement
adjustments
|
|
|
(7,041
|
)
|
|
|
12,087
|
|
|
|
92
|
|
|
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001 balance, as
restated
|
|
$
|
19,134
|
|
|
$
|
5,022
|
|
|
$
|
(900
|
)
|
|
$
|
23,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the recognition of
derivative fair value gains (losses) and revised amortization of
debt cost basis adjustments.
|
F-25
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
(b) |
|
Reflects the reversal of previously
recorded derivative fair value losses.
|
|
(c) |
|
Reflects the recognition of net
unrealized gains on AFS securities.
|
Statement
of Income Impact
The following table displays the impact of the restatement on
the December 31, 2003 condensed consolidated statement of
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS Trust
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
Guaranties
|
|
|
Amortization
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Debt and
|
|
|
|
|
|
Investments
|
|
|
and Sale
|
|
|
and Master
|
|
|
of Cost Basis
|
|
|
Other
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Net interest income
|
|
$
|
13,569
|
|
|
$
|
8,098
|
|
|
$
|
|
|
|
$
|
(162
|
)
|
|
$
|
251
|
|
|
$
|
(948
|
)
|
|
$
|
(1,355
|
)
|
|
$
|
24
|
|
|
$
|
5,908
|
|
|
$
|
19,477
|
|
Guaranty fee income
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(247
|
)
|
|
|
1,126
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
870
|
|
|
|
3,281
|
|
Investment losses, net
|
|
|
(123
|
)
|
|
|
(53
|
)
|
|
|
(280
|
)
|
|
|
(241
|
)
|
|
|
(230
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(303
|
)
|
|
|
(1,108
|
)
|
|
|
(1,231
|
)
|
Derivatives fair value losses, net
|
|
|
(2,180
|
)
|
|
|
(2,567
|
)
|
|
|
(1,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(4,109
|
)
|
|
|
(6,289
|
)
|
Debt extinguishment losses, net
|
|
|
(2,261
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(431
|
)
|
|
|
(2,692
|
)
|
Loss from partnership investments
|
|
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
(301
|
)
|
|
|
(637
|
)
|
Fee and other income
|
|
|
1,076
|
|
|
|
(692
|
)
|
|
|
(3
|
)
|
|
|
72
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(736
|
)
|
|
|
340
|
|
Expenses
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
(8
|
)
|
|
|
211
|
|
|
|
220
|
|
|
|
1,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes,
extraordinary gains (losses), and cumulative effect of change in
accounting principle
|
|
|
10,413
|
|
|
|
4,356
|
|
|
|
(1,826
|
)
|
|
|
(332
|
)
|
|
|
(226
|
)
|
|
|
175
|
|
|
|
(1,348
|
)
|
|
|
(926
|
)
|
|
|
(127
|
)
|
|
|
10,286
|
|
Provision (benefit) for federal
income taxes
|
|
|
2,693
|
|
|
|
1,525
|
|
|
|
(639
|
)
|
|
|
(116
|
)
|
|
|
(77
|
)
|
|
|
56
|
|
|
|
(472
|
)
|
|
|
(536
|
)
|
|
|
(259
|
)
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
|
7,720
|
|
|
|
2,831
|
|
|
|
(1,187
|
)
|
|
|
(216
|
)
|
|
|
(149
|
)
|
|
|
119
|
|
|
|
(876
|
)
|
|
|
(390
|
)
|
|
|
132
|
|
|
|
7,852
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
195
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
185
|
|
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,905
|
|
|
|
2,831
|
|
|
|
(1,372
|
)
|
|
|
(216
|
)
|
|
|
80
|
|
|
|
119
|
|
|
|
(876
|
)
|
|
|
(390
|
)
|
|
|
176
|
|
|
|
8,081
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
7,755
|
|
|
$
|
2,831
|
|
|
$
|
(1,372
|
)
|
|
$
|
(216
|
)
|
|
$
|
80
|
|
|
$
|
119
|
|
|
$
|
(876
|
)
|
|
$
|
(390
|
)
|
|
$
|
176
|
|
|
$
|
7,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
7.93
|
|
|
$
|
2.90
|
|
|
$
|
(1.40
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.19
|
|
|
$
|
8.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
7.91
|
|
|
$
|
2.89
|
|
|
$
|
(1.40
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
|
$
|
(0.89
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.17
|
|
|
$
|
8.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain amounts have been
reclassified to conform to the current condensed income
statements presentation, as described in Note 2,
Summary of Significant Accounting Policies.
|
F-26
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays the impact of the restatement on
the December 31, 2002 condensed consolidated statement of
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS Trust
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
Guaranties
|
|
|
Amortization
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Debt and
|
|
|
|
|
|
Investments
|
|
|
and Sale
|
|
|
and Master
|
|
|
of Cost Basis
|
|
|
Other
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported(a)
|
|
|
Derivatives
|
|
|
Commitments
|
|
|
in Securities
|
|
|
Accounting
|
|
|
Servicing
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Net interest income
|
|
$
|
10,566
|
|
|
$
|
8,317
|
|
|
$
|
|
|
|
$
|
(81
|
)
|
|
$
|
165
|
|
|
$
|
(768
|
)
|
|
$
|
144
|
|
|
$
|
83
|
|
|
$
|
7,860
|
|
|
$
|
18,426
|
|
Guaranty fee income
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(198
|
)
|
|
|
908
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
700
|
|
|
|
2,516
|
|
Investment gains (losses), net
|
|
|
24
|
|
|
|
(13
|
)
|
|
|
189
|
|
|
|
(638
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
2
|
|
|
|
(39
|
)
|
|
|
(525
|
)
|
|
|
(501
|
)
|
Derivatives fair value losses, net
|
|
|
(4,545
|
)
|
|
|
(13,572
|
)
|
|
|
5,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,374
|
)
|
|
|
(12,919
|
)
|
Debt extinguishment losses, net
|
|
|
(710
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104
|
)
|
|
|
(814
|
)
|
Loss from partnership investments
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203
|
)
|
|
|
(203
|
)
|
|
|
(509
|
)
|
Fee and other income
|
|
|
637
|
|
|
|
(505
|
)
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
38
|
|
|
|
(19
|
)
|
|
|
(67
|
)
|
|
|
(548
|
)
|
|
|
89
|
|
Expenses
|
|
|
1,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
108
|
|
|
|
100
|
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes
|
|
|
6,048
|
|
|
|
(5,877
|
)
|
|
|
5,387
|
|
|
|
(715
|
)
|
|
|
(59
|
)
|
|
|
178
|
|
|
|
135
|
|
|
|
(343
|
)
|
|
|
(1,294
|
)
|
|
|
4,754
|
|
Provision (benefit) for federal
income taxes
|
|
|
1,429
|
|
|
|
(2,057
|
)
|
|
|
1,886
|
|
|
|
(251
|
)
|
|
|
(21
|
)
|
|
|
63
|
|
|
|
47
|
|
|
|
(256
|
)
|
|
|
(589
|
)
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,619
|
|
|
|
(3,820
|
)
|
|
|
3,501
|
|
|
|
(464
|
)
|
|
|
(38
|
)
|
|
|
115
|
|
|
|
88
|
|
|
|
(87
|
)
|
|
|
(705
|
)
|
|
|
3,914
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
4,508
|
|
|
$
|
(3,820
|
)
|
|
$
|
3,501
|
|
|
$
|
(464
|
)
|
|
$
|
(38
|
)
|
|
$
|
115
|
|
|
$
|
88
|
|
|
$
|
(87
|
)
|
|
$
|
(705
|
)
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.54
|
|
|
$
|
(3.85
|
)
|
|
$
|
3.53
|
|
|
$
|
(0.47
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.52
|
|
|
$
|
(3.83
|
)
|
|
$
|
3.51
|
|
|
$
|
(0.47
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain amounts have been
reclassified to conform to the current condensed income
statements presentation, as described below in
Note 2, Summary of Significant Accounting
Policies.
|
See the Summary of Restatement Adjustments section
above for further details on the impact of the restatement
errors on the consolidated statements of income.
Statement
of Cash Flows Impact
The following table displays the impact of the restatement on
the December 31, 2003 and 2002 consolidated statements of
cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2003
|
|
|
For the Year Ended December 31, 2002
|
|
|
|
As
|
|
|
Total
|
|
|
|
|
|
As
|
|
|
Total
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
(Dollars in millions)
|
|
Net cash provided by operating
activities
|
|
$
|
19,519
|
|
|
$
|
38,704
|
|
|
$
|
58,223
|
|
|
$
|
12,848
|
|
|
$
|
30,783
|
|
|
$
|
43,631
|
|
Net cash used in investing
activities
|
|
|
(115,801
|
)
|
|
|
(36,946
|
)
|
|
|
(152,747
|
)
|
|
|
(71,426
|
)
|
|
|
(42,162
|
)
|
|
|
(113,588
|
)
|
Net cash provided by financing
activities
|
|
|
95,987
|
|
|
|
206
|
|
|
|
96,193
|
|
|
|
58,770
|
|
|
|
11,868
|
|
|
|
70,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
$
|
(295
|
)
|
|
$
|
1,964
|
|
|
$
|
1,669
|
|
|
$
|
192
|
|
|
$
|
489
|
|
|
$
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of the period
|
|
|
1,710
|
|
|
|
16
|
|
|
|
1,726
|
|
|
|
1,518
|
|
|
|
(473
|
)
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
the period
|
|
$
|
1,415
|
|
|
$
|
1,980
|
|
|
$
|
3,395
|
|
|
$
|
1,710
|
|
|
$
|
16
|
|
|
$
|
1,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restatement adjustments resulted in a net increase in
Cash and cash equivalents of $2.0 billion and
$489 million during the years ended December 31, 2003
and 2002, respectively. The restatement adjustment to increase
cash and cash equivalents was the result of recognizing cash
collateral associated with certain derivatives contracts, which
was partially offset by classifying cash due to certain MBS
trusts as restricted cash.
F-27
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
These restatement adjustments and errors in the prior cash flow
presentation resulted in a net increase of $38.7 billion
and $30.8 billion in cash flows from operating activities,
a net decrease of $36.9 billion and $42.2 billion in
cash flows from investing activities and a net increase of
$206 million and $11.9 billion in cash flows from
financing activities for the years ended December 31, 2003
and 2002, respectively. The primary causes of these changes were
misclassifications of cash flows related to derivatives, trading
securities and HFS loans, and an overstatement of cash flows
from the sale of mortgage loans. In connection with the
misapplication of hedge accounting, we incorrectly classified
derivatives cash flows as investing and financing activities
instead of as operating activities. We determined that we
misapplied SFAS No. 102, Statement of Cash
FlowsExemption of Certain Enterprises and Classification
of Cash Flows from Certain Securities Acquired for Resale (an
amendment to FASB Statement No. 95), which requires
cash flows from trading securities and HFS loans to be
classified as operating cash flows. As previously discussed, we
incorrectly recorded sales of mortgage loans to MBS trusts that
did not meet the definition of a QSPE under SFAS 140, which
resulted in a net overall increase in cash flows from investing
activities.
Regulatory
Capital Impact
The following table displays the impact of the restatement on
regulatory capital as of December 31, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in millions)
|
|
|
Core capital, as previously reported
|
|
$
|
34,405
|
|
|
$
|
28,079
|
|
Total restatement adjustments
|
|
|
(7,452
|
)
|
|
|
(7,648
|
)
|
|
|
|
|
|
|
|
|
|
Core capital, as restated
|
|
$
|
26,953
|
|
|
$
|
20,431
|
|
|
|
|
|
|
|
|
|
|
Required minimum capital, as
previously reported
|
|
$
|
31,520
|
|
|
$
|
27,203
|
|
Total restatement adjustments
|
|
|
296
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
Required minimum capital, as
restated
|
|
$
|
31,816
|
|
|
$
|
27,688
|
|
|
|
|
|
|
|
|
|
|
Surplus of required minimum
capital, as previously reported
|
|
$
|
2,885
|
|
|
$
|
877
|
|
Total restatement adjustments
|
|
|
(7,748
|
)
|
|
|
(8,134
|
)
|
|
|
|
|
|
|
|
|
|
Surplus (deficit) of required
minimum capital, as restated
|
|
$
|
(4,863
|
)
|
|
$
|
(7,257
|
)
|
|
|
|
|
|
|
|
|
|
Required critical capital, as
previously reported
|
|
$
|
16,113
|
|
|
$
|
13,880
|
|
Total restatement adjustments
|
|
|
148
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
Required critical capital, as
restated
|
|
$
|
16,261
|
|
|
$
|
14,126
|
|
|
|
|
|
|
|
|
|
|
Surplus of required critical
capital, as previously reported
|
|
$
|
18,292
|
|
|
$
|
14,199
|
|
Total restatement adjustments
|
|
|
(7,601
|
)
|
|
|
(7,894
|
)
|
|
|
|
|
|
|
|
|
|
Surplus of required critical
capital, as restated
|
|
$
|
10,691
|
|
|
$
|
6,305
|
|
|
|
|
|
|
|
|
|
|
The restatement adjustments resulted in a net decrease in
regulatory core capital of $7.5 billion and
$7.6 billion as of December 31, 2003 and 2002,
respectively. Additionally, the restatement adjustments of
$7.7 billion and $8.1 billion as of December 31,
2003 and 2002, respectively, caused the previously reported
surplus of required minimum capital to become a deficit.
Although we had a deficit of required minimum capital and the
restatement adjustments decreased required critical capital by
$7.6 billion and $7.9 billion as of December 31,
2003 and 2002, we maintained a surplus of required critical
capital.
These changes in our regulatory capital measures were primarily
the result of errors relating to our accounting for derivative
instruments. As AOCI is not included in the calculation of
required minimum or critical capital,
F-28
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the reclassification of net derivative losses from AOCI into net
income had a significant negative impact on required minimum and
critical capital, despite an increase in stockholders
equity.
|
|
2.
|
Summary
of Significant Accounting Policies
|
We are an entirely stockholder-owned corporation organized and
existing under the Federal National Mortgage Association Charter
Act, which we refer to as the Charter Act or our
charter (the Federal National Mortgage Association
Charter Act, 12 U.S.C. §1716 et seq.). We were
established in 1938 as a U.S. government entity. We became
a mixed-ownership corporation by legislation enacted in 1954,
with our preferred stock owned by the federal government and our
common stock held by private investors. We became a fully
privately-owned corporation by legislation enacted in 1968. The
U.S. government does not guarantee, directly or indirectly,
our securities or other obligations. Our regulators include
OFHEO, the Department of Housing and Urban Development
(HUD), the SEC and the Department of Treasury.
We operate in the secondary mortgage market by purchasing
mortgage loans and mortgage-related securities, including
mortgage-related securities guaranteed by us, from primary
market institutions, such as commercial banks, savings and loan
associations, mortgage banking companies, securities dealers and
other investors. We do not lend money directly to consumers. We
provide additional liquidity in the secondary mortgage market by
issuing guaranteed mortgage-related securities.
We operate under three business segments: Single-Family Credit
Guaranty, Housing and Community Development (HCD)
and Capital Markets. Our Single-Family Credit Guaranty segment
generates revenue primarily from the guaranty fees we charge to
compensate us for assuming the credit risk on the mortgage loans
underlying guaranteed Single-Family Fannie Mae MBS. Our HCD
segment generates revenue from a variety of sources including
multifamily guaranty and transaction fees, bond credit
enhancement fees, and investments in LIHTC and other housing
partnerships. In addition, our HCD segment provides capital for
housing projects that, among other things, generate tax credits.
Our Capital Markets segment invests in mortgage loans,
mortgage-related securities and liquid investments and generates
interest income from those assets.
Use of
Estimates
The preparation of consolidated financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the consolidated financial statements and the
amounts of revenues and expenses during the reporting period.
Management has made significant estimates in a variety of areas,
including but not limited to, valuation of certain financial
instruments and other assets and liabilities, amortization of
deferred price adjustments, the allowance for loan losses and
reserve for guaranty losses, and assumptions used in the
calculation of expected losses
and/or
expected residual returns in certain variable interest entities
for consolidation determinations. Actual results could be
different from these estimates.
Principles
of Consolidation
The consolidated financial statements include our accounts as
well as other entities in which we have a controlling financial
interest. All significant intercompany balances and transactions
have been eliminated.
In addition to voting interests in an entity, a controlling
financial interest may also exist in entities through
arrangements that do not involve voting interests. Beginning in
2003, we began evaluating entities deemed to be variable
interest entities (VIE) under FIN 46R to
determine when we must consolidate the assets, liabilities and
non-controlling interests of a VIE. A VIE is an entity
(i) that has total equity at risk that is not sufficient to
finance its activities without additional subordinated financial
support from other entities, (ii) where the group of equity
holders does not have the ability to make significant decisions
about the entitys activities, or the obligation to absorb
the entitys expected losses or the right to receive the
entitys expected residual returns, or both, or
(iii) where the voting rights of some investors are not
proportional to their obligations to absorb the expected losses
of the entity, their rights to receive the expected residual
returns of the entity, or both, and substantially all of the
entitys activities either involve or are conducted on
behalf of an
F-29
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
investor that has disproportionately few voting rights. The
primary types of entities we evaluate under FIN 46R include
those special purpose entities (SPEs) established to
facilitate the securitization of mortgage assets in which we
have the unilateral ability to liquidate the trust, those SPEs
that do not meet the QSPE criteria, our LIHTC partnerships,
other tax partnerships and other entities that meet the VIE
criteria.
If an entity is a VIE, we determine if our variable interest
causes us to be considered the primary beneficiary. We are the
primary beneficiary and would consolidate the entity if we
absorbed the majority of expected losses or expected residual
returns, or both. In making the determination as to whether we
are the primary beneficiary, we evaluate the design of the
entity, including the risks that cause variability, the purpose
for which the entity was created, and the variability that the
entity was designed to create and pass along to its interest
holders. When the primary beneficiary cannot be identified
through a qualitative analysis, we use internal cash flow
models, which may include Monte Carlo simulations, to compute
and allocate expected losses or residual returns to each
variable interest holder. The allocation of expected cash flows
is based upon the relative contractual rights and preferences of
each interest holder in the VIEs capital structure. When
it is determined that we are the primary beneficiary of a VIE,
we initially record the assets and liabilities of the VIE in the
consolidated financial statements at the current fair value. For
entities that hold only financial assets, any difference between
the current fair value and the previous carrying amount of our
interests in the VIE is recorded as Extraordinary gains
(losses), net of tax effect in the consolidated statements
of income. If we are determined to be the primary beneficiary
when the VIE is created, we initially record the assets and
liabilities of the VIE in the consolidated financial statements
by carrying over our investment in the VIE to the consolidated
assets and liabilities and no gain or loss is recorded.
If a consolidated VIE subsequently should not be consolidated
because we cease to be deemed the primary beneficiary or we
qualify for one of the scope exceptions of FIN 46R (for
example, the entity is a QSPE in which we no longer have the
unilateral ability to liquidate), we deconsolidate the VIE by
carrying over our net basis in the consolidated assets and
liabilities to our investment in the VIE.
As a result of our adoption of FIN 46R in 2003, we recorded
a cumulative effect of a change in accounting principle of
$34 million, net of taxes, related to the difference
between the net amount added to the consolidated balance sheet
and the amount of previously recognized interest in the newly
consolidated entity.
Prior to our adoption of FIN 46R, the decision of whether
to consolidate SPEs for which we did not have the unilateral
ability to liquidate or that did not meet the criteria to be a
QSPE primarily included consideration of whether a third party
had made a substantive equity investment in an SPE, which party
had voting rights, if any, which party made decisions about the
assets in an SPE, which party was at risk of loss and whether we
were the sponsor of an SPE. We consolidated an SPE if we
retained or acquired control over the risks and rewards of the
assets in the SPE of which we were the sponsor. We also
consolidated an SPE if we had the unilateral ability to
liquidate. We consolidated the SPE by carrying over our basis in
the investment in the SPE to the consolidated assets and
liabilities of the SPE. No gain or loss was recorded in
connection with the consolidation of SPEs prior to the effective
date of FIN 46R.
Investments in LIHTC partnerships were evaluated for
consolidation, prior to the adoption of FIN 46R, in
accordance with
SOP 78-9,
Accounting for Investments in Real Estate Ventures
(SOP 78-9).
We generally were not required to consolidate these partnerships
because our limited partnership interest did not provide us with
voting rights or control of the partnership.
Portfolio
Securitizations
Portfolio securitizations involve the transfer of mortgage loans
or mortgage-related securities from the consolidated balance
sheets to a trust (an SPE) to create Fannie Mae MBS, REMICs or
other types of beneficial interests. We account for portfolio
securitizations in accordance with SFAS 140, which requires
that we evaluate a transfer of financial assets to determine if
such transfer qualifies as a sale. Transfers of financial assets
for which we surrender control and receive compensation other
than beneficial interests are recorded as sales. Upon completion
of a transfer that qualifies as a sale, we derecognize all
assets transferred. The
F-30
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
previous carrying amount of the transferred assets is allocated
between the assets sold and the retained interests, if any, in
proportion to their relative fair values at the date of
transfer. A gain or loss is recorded as a component of
Investment losses, net in the consolidated
statements of income, which represents the difference between
the allocated carrying amount of the assets sold and the
proceeds from the sale, net of any liabilities incurred, which
may include a recourse obligation for our financial guaranty.
Retained interests are primarily in the form of Fannie Mae MBS,
REMIC certificates, guaranty assets and master servicing assets
(MSA).
Our retained interests in the form of Fannie Mae MBS, REMICs, or
other types of beneficial interests are included in
Investments in securities in the consolidated
balance sheets. Our retained interests related to our guaranty
are included in Guaranty assets in the consolidated
balance sheets and a description of our subsequent accounting
for these retained interests, as well as how we determine fair
value for the guaranty assets, is included in the Guaranty
Accounting section of this note. Our retained interests in
the form of MSA are included as a component of Other
assets in the consolidated balance sheets and a
description of our subsequent accounting for these retained
interests, as well as how we determine fair value for MSA, is
included in the Master Servicing section of this
note.
If a portfolio securitization does not meet the criteria for
sale treatment, the transferred assets remain on the
consolidated balance sheets and we record a liability to the
extent of any proceeds we received in connection with such
transfer.
Cash
and Cash Equivalents and Statements of Cash Flows
Short-term highly liquid instruments with a maturity of three
months or less that are readily convertible to cash are
considered cash and cash equivalents. Cash and cash equivalents
are carried at cost, which approximates fair value.
Additionally, we may pledge cash equivalent securities as
collateral as discussed below. We record items that are
specifically purchased as part of the liquid investment
portfolio as Investments in securities in the
consolidated balance sheets in accordance with
SFAS No. 95, Statement of Cash Flows
(SFAS 95).
We classify short-term U.S. Treasury Bills as Cash
and cash equivalents in the consolidated balance sheets.
The carrying value of these securities, which approximates fair
value, was $507 million and $849 million as of
December 31, 2004 and 2003, respectively.
The consolidated statements of cash flows are prepared in
accordance with SFAS 95. In the presentation of the
consolidated statements of cash flows, cash flows from
derivatives that do not contain financing elements, mortgage
loans held for sale, trading securities and guaranty fees,
including
buy-up and
buy-down payments, are included as operating activities. Federal
funds sold and securities purchased under agreements to resell
are presented as investing activities, while federal funds
purchased and securities sold under agreements to repurchase are
presented as financing activities. Cash flows related to dollar
roll repurchase transactions that do not meet the SFAS 140
requirements to be classified as secured borrowings are recorded
as purchases and sales of securities in investing activities,
whereas cash flows related to dollar roll repurchase
transactions qualifying as secured borrowings pursuant to
SFAS 140 are considered proceeds and repayments of
short-term debt in financing activities.
Restricted
Cash
When we collect cash that is due to certain MBS trusts in
advance of our requirement to remit these amounts to the trust,
we record the collected cash amount as Restricted
cash in the consolidated balance sheets. As of
December 31, 2004 and 2003, we had Restricted
cash of $445 million and $284 million,
respectively, related to such activity. We also have restricted
cash related to certain collateral arrangements as described in
the Collateral section of this note.
F-31
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Securities
Purchased under Agreements to Resell and Securities Sold under
Agreements to Repurchase
We treat securities purchased under agreements to resell and
securities sold under agreements to repurchase as secured
financing transactions when the transactions meet all of the
conditions of a secured financing in SFAS 140. We record
these transactions at the amounts at which the securities will
be subsequently reacquired or resold, including accrued
interest. When securities purchased under agreements to resell
or securities sold under agreements to repurchase do not meet
all of the conditions of a secured financing, we account for the
transactions as purchases or sales, respectively.
Investments
in Securities
Securities
Classified as
Available-for-Sale
or Trading
We classify and account for our securities as either AFS or
trading in accordance with SFAS 115. Currently, we do not
have any securities classified as HTM, although we may elect to
do so in the future, but not earlier than December 31,
2006. AFS securities are measured at fair value in the
consolidated balance sheets, with unrealized gains and losses
included in AOCI. Trading securities are measured at fair value
in the consolidated balance sheets with unrealized gains and
losses included in Investment losses, net in the
consolidated statements of income. Realized gains and losses on
AFS and trading securities are recognized when securities are
sold; are calculated based upon the specific cost of each
security; and are recorded in Investment losses, net
in the consolidated statements of income. Interest and dividends
on securities, including amortization of the premium and
discount at acquisition, are included in the consolidated
statements of income. A description of our amortization policy
is included in the Amortization of Cost Basis and Guaranty
Price Adjustments section of this note. When we receive
multiple deliveries of securities on the same day that are
backed by the same pools of loans, we calculate the specific
cost of each security as the average price of the trades that
delivered those securities.
Fair value is determined using quoted market prices in active
markets, when available. If quoted market prices are not
available for particular securities, we use quoted market prices
for similar securities that we adjust for directly observable or
corroborated (i.e., information purchased from third-party
service providers) market information. In the absence of
observable or corroborated market data, we use internally
developed estimates, incorporating market-based assumptions
wherever such information is available. For securities whose
quoted market prices in active markets are available, we use bid
prices when there is a spread between the bid and ask prices.
Securities
Accounted for Under EITF 99-20
We account for purchased and retained beneficial interests in
securitizations in accordance with EITF Issue
No. 99-20
when such beneficial interests carry a significant premium or
are not of high credit quality (i.e., they have a rating below
AA) at inception. We recognize the excess of all cash flows
attributable to our beneficial interests estimated at the
acquisition date over the initial investment amount (i.e., the
accretable yield) as interest income over the life of those
beneficial interests using the prospective interest method. We
continue to estimate the projected cash flows over the life of
those beneficial interests for the purposes of both recognizing
interest income and evaluating impairment. We recognize an
other-than-temporary
impairment in the period in which the fair value of those
beneficial interests has declined below their respective
previous carrying amounts and an adverse change in our estimated
cash flows has occurred. To the extent that there is not an
adverse change in expected cash flows related to our beneficial
interests, but the fair values of such beneficial interests have
declined below their respective previous carrying amounts, we
qualitatively assess them for
other-than-temporary
impairment pursuant to SFAS 115.
Other-Than-Temporary
Impairment
We evaluate our investments for
other-than-temporary
impairment at least quarterly in accordance with SFAS 115
and other related guidance, including SEC Staff Accounting
Bulletin Topic 5M, Other Than Temporary Impairment of
Certain Investments in Debt and Equity Securities, and EITF
Topic
No. D-44,
F-32
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Recognition of
Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value. We consider an investment to be
other-than-temporarily
impaired if its estimated fair value is less than its amortized
cost and we have determined that it is probable that we will be
unable to collect all of the contractual principal and interest
payments or we will not hold such securities until they recover
to their previous carrying amount. For equity investments that
do not have contractual payments, we primarily consider whether
their fair value has declined below their carrying amount. For
all
other-than-temporary
impairment assessments, we consider many factors, including the
severity and duration of the impairment, recent events specific
to the issuer
and/or the
industry to which the issuer belongs, external credit ratings
and recent downgrades, as well as our ability and intent to hold
such securities until recovery.
We consider guaranties, insurance contracts or other credit
enhancements (such as collateral) in determining whether it is
probable that we will be unable to collect all amounts due
according to the contractual terms of the debt security only if
(i) such guaranties, insurance contracts or other credit
enhancements provide for payments to be made solely to reimburse
us for failure of the issuer to satisfy its required payment
obligations, and (ii) such guaranties, insurance contracts
or other credit enhancements are contractually attached to that
security. Guaranties, insurance contracts or other credit
enhancements are considered contractually attached if they are
part of and trade with the security upon transfer of the
security to a third party.
When we decide to sell an impaired investment and do not expect
the fair value of the security to fully recover prior to the
expected time of sale, we identify the security as
other-than-temporarily
impaired in the period the decision to sell is made.
Beginning in the second quarter of 2004, we agreed with OFHEO to
a revised method of assessing securities backed by manufactured
housing loans and by aircraft leases for
other-than-temporary
impairment. This revision was accounted for previously as a
change in estimate. Using this revised method, we recognized
other-than-temporary
impairment when: (i) our estimate of cash flows projected a
loss of principal or interest; (ii) a security was rated BB
or lower; (iii) a security was rated BBB or lower and
trading below 90% of net carrying amount; or (iv) a
security was rated A or better but trading below 80% of net
carrying amount. This method has not resulted in any impairment
incremental to that determined pursuant to our overall
SFAS 115
other-than-temporary
impairment policy.
When we determine an investment is
other-than-temporarily
impaired, we write down the cost basis of the investment to its
fair value and include the loss in Investment losses,
net in the consolidated statements of income. The fair
value of the investment then becomes its new cost basis. We do
not increase the investments cost basis for subsequent
recoveries in fair value.
In periods after we recognize an
other-than-temporary
impairment on debt securities, we use the prospective interest
method to recognize interest income. Under the prospective
interest method, we use the new cost basis and the expected cash
flows from the security to calculate the effective yield.
Mortgage
Loans
Upon acquisition, mortgage loans acquired that we intend to sell
or securitize are classified as HFS while loans acquired that we
have the ability and the intent to hold for the foreseeable
future or until maturity are classified as HFI pursuant to
SFAS 65. If the underlying assets of a consolidated VIE are
mortgage loans, they are classified as HFS if we were initially
the transferor of such loans; otherwise, such mortgage loans are
classified as HFI.
Loans
Held for Sale
Loans held for sale are reported at the lower of cost or market
and typically only include single-family loans, because we do
not generally sell or securitize multifamily loans from our own
portfolio. Any excess of an HFS loans cost over its fair
value is recognized as a valuation allowance, with changes in
the valuation allowance recognized as Investments losses,
net in the consolidated statements of income. Purchase
premiums, discounts
and/or other
loan basis adjustments on HFS loans are deferred upon loan
acquisition,
F-33
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
included in the cost basis of the loan, and are not amortized.
We determine any LOCOM adjustment on HFS loans on a pool basis
by aggregating those loans based on similar risks and
characteristics, such as product types and interest rates.
In the event that HFS loans are reclassified to HFI, the loans
are transferred at LOCOM on the date of transfer forming the new
cost basis of such loans. Any LOCOM adjustment recognized upon
transfer is recognized as a basis adjustment to the HFI loan.
Loans
Held for Investment
HFI loans are reported at their outstanding unpaid principal
balance adjusted for any deferred and unamortized basis
adjustments, including purchase premiums, discounts
and/or other
cost basis adjustments. We recognize interest income on mortgage
loans on an accrual basis using the interest method, unless we
determine the ultimate collection of contractual principal or
interest payments in full is not reasonably assured. When the
collection of principal or interest payments in full is not
reasonably assured, the loan is placed on nonaccrual status as
discussed in the Allowance for Loan Losses and Reserve for
Guaranty Losses section of this note.
Allowance
for Loan Losses and Reserve for Guaranty Losses
The allowance for loan losses is a valuation allowance that
reflects an estimate of incurred credit losses related to our
recorded investment in HFI loans. The reserve for guaranty
losses is a liability account in the consolidated balance sheets
that reflects an estimate of incurred credit losses related to
our guaranty to each MBS trust that we will supplement mortgage
loan collections as required to permit timely payment of
principal and interest due on the related Fannie Mae MBS. We
recognize incurred losses by recording a charge to the provision
for credit losses in the consolidated statements of income.
Credit losses related to groups of similar single-family and
multifamily loans held for investment that are not individually
impaired, or those that are collateral for Fannie Mae MBS, are
recognized when (i) available information as of each
balance sheet date indicates that it is probable a loss has
occurred and (ii) the amount of the loss can be reasonably
estimated in accordance with SFAS No. 5, Accounting
for Contingencies (SFAS 5). Single-family
and multifamily loans that we evaluate for individual impairment
are measured in accordance with the provisions of SFAS 114.
We record charge-offs as a reduction to the allowance for loan
losses and reserve for guaranty losses when losses are confirmed
through the receipt of assets such as cash or the underlying
collateral in full satisfaction of our recorded investment in
the mortgage loan.
Single-family
Loans
We aggregate single-family loans (except for those that are
deemed to be individually impaired pursuant to
SFAS 114) based on similar risk characteristics for
purposes of estimating incurred credit losses. Those
characteristics include but are not limited to:
(i) origination year; (ii) loan product type; and
(iii) loan-to-value
(LTV) ratio. By aggregating loans, there is not a
single, distinct event that would result in an individual loan
or pool of loans being impaired. Accordingly, to determine an
estimate of incurred credit losses, we base our allowance and
reserve methodology on the accumulation of a series of
historical events and trends, such as loan severity, default
rates and recoveries from mortgage insurance contracts that are
contractually attached to a loan or other credit enhancements
that were entered into contemporaneous with and in contemplation
of a guaranty or loan purchase transaction. Our allowance
calculation also incorporates a loss confirmation period (the
anticipated time lag between a credit loss event and the
confirmation of the credit loss resulting from that event) to
ensure our allowance estimate captures credit losses that have
been incurred as of the balance sheet date but have not been
confirmed. In addition, management performs a review of the
observable data used in its estimate to ensure it is
representative of current economic conditions and other events
existing at the balance sheet date. We consider certain factors
when determining whether adjustments to the observable data used
in our allowance methodology are necessary. These factors
include, but are not limited to, levels of and trends in
delinquencies; levels of and trends in charge-offs and
recoveries; and terms of loans.
F-34
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For both single-family and multifamily loans, the primary
components of observable data used to support our allowance and
reserve methodology include historical severity (the amount of
charge-off loss recognized by us upon full satisfaction of a
loan at foreclosure or upon receipt of cash in a pre-foreclosure
sale) and historical loan default experience. The excess of our
recorded investment in a loan, including recorded accrued
interest, over the fair value of the assets received in full
satisfaction of the loan is treated as a charge-off loss that is
deducted from the allowance for loan losses or reserve for
guaranty losses. Any excess of the fair value of the assets
received in full satisfaction over our recorded investment in a
loan at charge-off is applied first to recover any forgone, yet
contractually past due, interest, then to Foreclosed
property expense (income) in the consolidated statements
of income. We also apply estimated proceeds from primary
mortgage insurance that is contractually attached to a loan and
other credit enhancements entered into contemporaneous with and
in contemplation of a guaranty or loan purchase transaction as a
recovery of our recorded investment in a charged-off loan, up to
the amount of loss recognized as a charge-off. Proceeds from
credit enhancements in excess of our recorded investment in
charged-off loans are recorded in Foreclosed property
expense (income) in the consolidated statements of income
when received.
Multifamily
Loans
Multifamily loans are identified for evaluation for impairment
through a credit risk classification process and are
individually assigned a risk rating. Based on this evaluation,
we determine whether or not a loan is individually impaired
pursuant to SFAS 114. If we deem a multifamily loan to be
individually impaired, we measure impairment on that loan based
on the fair value of the underlying collateral as such loans are
considered to be collateral-dependent. If we determine that an
individual loan that was specifically evaluated for impairment
is not individually impaired, we include the loan as part of a
pool of loans with similar characteristics evaluated
collectively for impairment pursuant to SFAS 5.
We stratify loans into different risk rating categories based on
the credit risk inherent in each individual loan. Credit risk is
categorized based on relevant observable data about a
borrowers ability to pay, including reviews of current
borrower financial information, operating statements on the
underlying collateral, historical payment experience, collateral
values when appropriate, and other related credit documentation.
Multifamily loans that are categorized into pools based on their
relative credit risk ratings are assigned certain default and
severity factors representative of the credit risk inherent in
each risk category. These factors are applied against our
recorded investment in the loans, including recorded accrued
interest associated with such loans, to determine an appropriate
allowance. As part of our allowance process for multifamily
loans, we also consider other factors based on observable data
such as historical charge-off experience, loan size and trends
in delinquency.
Nonaccrual
Loans
We discontinue accruing interest on single-family loans when it
is probable that we will not collect principal or interest on a
loan, which we have determined to be the earlier of either:
(i) payment of principal and interest becomes three months
or more past due according to the loans contractual terms
or (ii) in managements opinion, collectibility of
principal or interest is not reasonably assured. We place a
multifamily loan on nonaccrual status using the same criteria;
however, multifamily loans are assessed on an individual loan
basis.
When a loan is placed on nonaccrual status, interest previously
accrued but not collected becomes part of our recorded
investment in the loan, and is collectively reviewed for
impairment. We return a loan to accrual status when we determine
that the collectibility of principal and interest is reasonably
assured.
Restructured
Loans
A modification to the contractual terms of a loan that results
in a concession to a borrower experiencing financial
difficulties is considered a TDR. A concession, due to credit
deterioration, has been granted to a borrower when we determine
that the effective yield based on the restructured loan term is
less than the effective yield prior to the modification pursuant
to
EITF 02-4,
Determining Whether a Debtors Modification
F-35
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
or Exchange of Debt Instruments is within the Scope of FASB
Statement No. 15. Impairment of a loan restructured in
a TDR is based on the excess of the recorded investment in the
loan over the present value of the expected future cash inflows
discounted at the loans original effective interest rate.
Loans modified that result in terms at least as favorable to us
or those that are modified not as a result of a borrower
experiencing financial difficulties are further evaluated to
determine whether the modification is considered more than minor
pursuant to SFAS 91 and
EITF 01-7,
Creditors Accounting for a Modification or Exchange of
Debt Instruments. If the modification is considered more
than minor, we treat the modification as an extinguishment of
the previously recorded loan and recognition of a new loan and
any unamortized basis adjustments on the previously recorded
loan are recognized in the consolidated statements of income.
Modifications that are not more than minor are accounted for as
a continuation of the previously recorded loan.
Individually
Impaired Loans
A loan is considered to be impaired when, based on current
information, it is probable that we will not receive all amounts
due, including interest, in accordance with the contractual
terms of the loan agreement. When making our assessment as to
whether a loan is impaired, we also take into account
insignificant delays in payment. We consider loans with payment
delays in excess of three consecutive months as more than
insignificant and therefore impaired.
Individually impaired loans include those restructured in a TDR
and certain multifamily loans. Our measurement of impairment on
an individually impaired loan follows the method that is most
consistent with our expectations of recovery of our recorded
investment in the loan. When a loan has been restructured, we
measure impairment using a discounted cash flow analysis using
the loans original effective interest rate, as our
expectation is that the loan will continue to perform under the
restructured terms. When it is determined that the only source
to recover our recorded investment in an individually impaired
loan is through probable foreclosure of the underlying
collateral, we measure impairment based on the fair value of the
collateral, reduced by estimated disposal costs. Impairment
recognized on individually impaired loans is part of our
allowance for loan losses and reserve for guaranty losses.
Loans
Purchased or Eligible to be Purchased from Trusts
For securitization trusts that include a Fannie Mae guaranty, we
have the option to purchase from those trusts, at par plus
accrued interest, loans that have been past due for three or
more consecutive months. We record loans that we acquire from
trusts to which we were not the transferor at the time of
securitization at their acquisition price, or par value plus
interest advanced on behalf of the borrower by the servicer
while the loan was nonperforming in the trust and a portion of
the Reserve for guaranty losses is reclassified to
the Allowance for loan losses in the consolidated
balance sheets.
For trusts where we were the transferror prior to April 2,
2003, we recorded loans eligible to be purchased from trusts at
their acquisition price, or par value plus accrued interest and
a portion of the Reserve for guaranty losses was
reclassified to the Allowance for loan losses in the
consolidated balance sheets. On or after April 2, 2003,
when a loan becomes three or more months past due we record the
loan in the consolidated balance sheets at fair value and a
corresponding repurchase liability to the trust, pursuant to
EITF 02-9,
Accounting for Changes That Result in a Transferor Regaining
Control of Financial Assets Sold
(EITF 02-9).
Acquired
Property, Net
Acquired property, net includes foreclosed property
received in full satisfaction of a loan. We recognize foreclosed
property upon the earlier of the loan foreclosure event or when
we take physical possession of the property (i.e., through a
deed in lieu of foreclosure transaction). Foreclosed property is
initially measured at its fair value less estimated costs to
sell. We treat any excess of our recorded investment in the loan
over the fair value less estimated costs to sell the property as
a charge-off to the Allowance for loan losses. Any
excess of
F-36
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the fair value less estimated costs to sell the property over
our recorded investment in the loan is recognized first to
recover any forgone, contractually due interest, then to
Foreclosed property expense (income) in the
consolidated statements of income.
Properties that we do not intend to sell or that are not ready
for immediate sale in their current condition are classified
separately as held for use, and are depreciated and recorded in
Other assets in the consolidated balance sheets. We
report foreclosed properties that we intend to sell, we are
actively marketing and are available for immediate sale in their
current condition as held for sale. These properties are
reported at the lower of their carrying amount or fair value
less estimated selling costs, and are not depreciated. The fair
value of our foreclosed properties is determined by third party
appraisals, when available. When third party appraisals are not
available, we estimate fair value based on factors such as
prices for similar properties in similar geographical areas
and/or
assessment through observation of such properties. We recognize
a loss for any subsequent write-down of the property to its fair
value less estimated costs to sell through a valuation allowance
with an offsetting charge to Foreclosed property expense
(income) in the consolidated statements of income. A
recovery is recognized for any subsequent increase in fair value
less estimated costs to sell up to the cumulative loss
previously recognized through the valuation allowance. Gains or
losses on sales of foreclosed property are recognized through
Foreclosed property expense (income) in the
consolidated statements of income.
Guaranty
Accounting
Our primary guaranty transactions result from mortgage loan
securitizations in which we issue Fannie Mae MBS. The majority
of our Fannie Mae MBS issuances fall within two broad
categories: (i) lender swap transactions, where a lender
delivers mortgage loans to us to deposit into a trust in
exchange for our guaranteed Fannie Mae MBS backed by those
mortgage loans and (ii) portfolio securitizations, where we
securitize loans that were previously included in the
consolidated balance sheets, and create guaranteed Fannie Mae
MBS backed by those loans. As guarantor, we guarantee to each
MBS trust that we will supplement mortgage loan collections as
required to permit timely payments of principal and interest due
on the related Fannie Mae MBS. This obligation represents an
obligation to stand ready to perform over the term of the
guaranty. Therefore, our guaranty exposes us to credit losses on
the loans underlying Fannie Mae MBS.
Guaranties
Issued in Connection with Lender Swap Transactions
The majority of our guaranty obligations arise from lender swap
transactions. In a lender swap transaction, we receive a
guaranty fee for our unconditional guaranty to the Fannie Mae
MBS trust. We negotiate a contractual guaranty fee with the
lender and collect the fee on a monthly basis based on the
contractual rate multiplied by the unpaid principal balance of
loans underlying a Fannie Mae MBS issuance. The guaranty fee we
receive varies depending on factors such as the risk profile of
the securitized loans and the level of credit risk we assume. In
lieu of charging a higher guaranty fee for loans with greater
credit risk, we may require that the lender pay an upfront fee
to compensate us for assuming the additional credit risk. We
refer to this payment as a risk-based pricing adjustment.
Risk-based pricing adjustments do not affect the pass-through
coupon remitted to Fannie Mae MBS certificate holders. In
addition, we may charge a lower guaranty fee if the lender
assumes a portion of the credit risk through recourse or other
risk-sharing arrangements. We refer to these arrangements as
credit enhancements. We also adjust the monthly guaranty fee so
that the pass-through coupon rates on Fannie Mae MBS are in more
easily tradable increments of a whole or half percent by making
an upfront payment to the lender (buy-up) or
receiving an upfront payment from the lender
(buy-down).
FIN 45 requires a guarantor, at inception of a guaranty to
an unconsolidated entity, to recognize a non-contingent
liability for the fair value of its obligation to stand ready to
perform over the term of the guaranty in the event that
specified triggering events or conditions occur. We record this
amount on the consolidated balance sheets as a component of
Guaranty obligations. We also record a guaranty
asset that represents the present value of cash flows expected
to be received as compensation over the life of the guaranty. If
the fair value of the guaranty obligation is less than the
present value of the consideration we expect to receive,
F-37
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
including the fair value of the guaranty asset and any upfront
assets exchanged, we defer the excess as deferred profit, which
is recorded as an additional component of Guaranty
obligations. If the fair value of the guaranty obligation
exceeds the compensation received, we recognize a loss in
Guaranty fee income in the consolidated statements
of income at inception of the guaranty fee contract. We
recognize a liability for estimable and probable losses for the
credit risk we assume on loans underlying Fannie Mae MBS based
on managements estimate of probable losses incurred on
those loans at each balance sheet date. We record this
contingent liability in the consolidated balance sheets as
Reserve for guaranty losses.
As we collect monthly guaranty fees, we reduce guaranty assets
to reflect cash payments received and recognize imputed interest
income on guaranty assets as a component of Guaranty fee
income under the prospective interest method pursuant to
EITF 99-20. We reduce the corresponding guaranty obligation,
including the deferred profit, in proportion to the reduction in
guaranty assets and recognize this reduction in the consolidated
statements of income as an additional component of
Guaranty fee income. We assess guaranty assets for
other-than-temporary
impairment based on changes in our estimate of the cash flows to
be received. When we determine a guaranty asset is
other-than-temporarily
impaired, we write down the cost basis of the guaranty asset to
its fair value and include the amount of the write-down in
Guaranty fee income in the consolidated statements
of income. Any
other-than-temporary
impairment recorded on guaranty assets results in a
proportionate reduction in the corresponding guaranty
obligations, including the deferred profit.
We account for buy-ups in the same manner as AFS securities.
Accordingly, we record buy-ups in the consolidated balance
sheets at fair value in Other assets, with any
changes in fair value recorded in AOCI, net of tax. We assess
buy-ups for
other-than-temporary
impairment based on the provisions of EITF 99-20 and
SFAS 115. When we determine a
buy-up is
other-than-temporarily
impaired, we write down the cost basis of the
buy-up to
its fair value and include the amount of the write-down in
Guaranty fee income in the consolidated statements
of income. Upfront cash receipts for buy-downs and risk-based
price adjustments on and after January 1, 2003 are a
component of the compensation received for issuing the guaranty
and are recorded upon issuing a guaranty as an additional
component of Guaranty obligations, for contracts
with deferred profit, or a reduction of the loss recorded as a
component of Guaranty fee income, for contracts
where the compensation received is less than the guaranty
obligation.
The fair value of the guaranty asset at inception is based on
the present value of expected cash flows using managements
best estimates of certain key assumptions, which include
prepayment speeds, forward yield curves, and discount rates
commensurate with the risks involved. These cash flows are
projected using proprietary prepayment, interest rate, and
credit risk models. Because the guaranty assets are like an
interest-only income stream, the projected cash flows from our
guaranty assets are discounted using interest spreads from a
representative sample of interest-only trust securities. We then
adjust the discounted cash flows for the less liquid nature of
the guaranty asset as compared to the interest-only trust
securities. The fair value of the obligation to stand ready to
perform over the term of the guaranty represents
managements estimate of the amount that we would be
required to pay a third-party of similar credit standing to
assume our obligation. This amount is based on the present value
of expected cash flows using managements best estimates of
certain key assumptions, which include default and severity
rates and a market rate of return.
The initial recognition and measurement provisions of
FIN 45 apply on a prospective basis to our guaranties
issued or modified after December 31, 2002. For lender swap
transactions entered into prior to the effective date of
FIN 45, we recognized guaranty fees in the consolidated
statements of income as Guaranty fee income on an
accrual basis over the term of the unconsolidated Fannie Mae
MBS. We recognized a contingent liability under SFAS 5
based on managements estimate of probable losses incurred
on those loans at each balance sheet date. Upfront cash payments
received in the form of risk-based pricing adjustments or
buy-downs were deferred as a component of Other
liabilities in the consolidated balance sheets and
amortized into Guaranty fee income in the
consolidated statements of income over the life of the guaranty
F-38
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
using the interest method prescribed in SFAS 91. The
accounting for buy-ups was not changed when FIN 45 became
effective.
Guaranties
Issued in Connection with Portfolio Securitizations
In addition to retained interests in the form of Fannie Mae MBS,
REMICs, and master servicing assets, we retain an interest in
securitized loans in a portfolio securitization, which
represents our right to future cash flows associated primarily
with providing our guaranty. We account for the retained
guaranty interest in a portfolio securitization in the same
manner as AFS securities and record it in the consolidated
balance sheets as a component of Guaranty assets.
The fair value of the guaranty asset is determined in the same
manner as the fair value of the guaranty asset in a lender swap
transaction. We assume a recourse obligation in connection with
our guaranty of the timely payment of principal and interest to
the MBS trust that we measure and record in the consolidated
balance sheets under Guaranty obligations based on
the fair value of the recourse obligation at inception. Any
difference between the guaranty asset and the guaranty
obligation in a portfolio securitization is recognized as a
component of the gain or loss on the sale of mortgage-related
assets and is recorded as Investment losses, net in
the consolidated statements of income.
We evaluate the component of the Guaranty assets
that represents the retained interest in securitized loans for
other-than-temporary
impairment under EITF 99-20. We amortize and account for
the guaranty obligations subsequent to the initial recognition
in the same manner that we account for the guaranty obligations
that arise under lender swap transactions and record a
Reserve for guaranty losses for estimable and
probable losses incurred on the underlying loans at each balance
sheet date.
Fannie
Mae MBS included in Investments in
securities
When we own Fannie Mae MBS, we do not derecognize any components
of the Guaranty assets, Guaranty
obligations, Reserve for guaranty losses, or
any other outstanding recorded amounts associated with the
guaranty transaction because our contractual obligation to the
unconsolidated MBS trust remains in force until the trust is
liquidated, unless the trust is consolidated. We value Fannie
Mae MBS based on their legal terms, which includes the Fannie
Mae guaranty to the MBS trust, and continue to reflect the
unamortized obligation to stand ready to perform over the term
of our guaranty and any incurred credit losses in our
Guaranty obligations and Reserve for guaranty
losses, respectively. We disclose the aggregate amount of
Fannie Mae MBS held as Investments in securities in
the consolidated balance sheets as well as the amount of our
Reserve for guaranty losses and Guaranty
obligations that relates to Fannie Mae MBS held as
Investments in securities.
Upon subsequent sale of a Fannie Mae MBS, we continue to account
for any outstanding recorded amounts associated with the
guaranty transaction on the same basis of accounting as prior to
the sale of Fannie Mae MBS as no new assets were retained and no
new liabilities have been assumed upon the subsequent sale.
Amortization
of Cost Basis and Guaranty Price Adjustments
Cost
Basis Adjustments
We account for cost basis adjustments, including premiums and
discounts on mortgage loans and securities, in accordance with
SFAS 91, which generally requires deferred fees and
costs to be recognized as an adjustment to yield using the
interest method over the contractual or estimated life of the
loan or security. We amortize these cost basis adjustments into
interest income for debt securities and loans held for
investment. We do not amortize cost basis adjustments for loans
that we classify as HFS but include them in the calculation of
gain or loss on the sale of those loans.
We hold a large number of similar mortgage loans and
mortgage-related securities backed by a large number of similar
mortgage loans for which prepayments are probable and for which
we can reasonably estimate the timing of such prepayments. We
use prepayment estimates in determining periodic amortization of
cost basis adjustments on substantially all mortgage loans and
mortgage-related securities in our portfolio under the interest
method using a constant effective yield. We include this
amortization in Interest income in each
F-39
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
period. For the purpose of amortizing cost basis adjustments, we
aggregate similar mortgage loans or mortgage-related securities
with similar prepayment characteristics. We consider Fannie Mae
MBS to be aggregations of similar loans for the purpose of
estimating prepayments. We aggregate individual mortgage loans
based upon coupon rate, product type and origination year for
the purpose of estimating prepayments. For each reporting
period, we recalculate the constant effective yield to reflect
the actual payments and prepayments we have received to date and
our new estimate of future prepayments. We adjust the net
investment of our mortgage loans and mortgage-related securities
to the amount at which they would have been stated if the
recalculated constant effective yield had been applied since
their acquisition.
We use the contractual terms to determine amortization if
prepayments are not probable, we cannot reasonably estimate
prepayments, or we do not hold a large enough number of similar
loans or there is not a large number of similar loans underlying
a security. For these loans, we cease amortization of cost basis
adjustments during periods in which interest income on the loan
is not being recognized because the collection of the principal
and interest payments are not reasonably assured (that is, when
a loan is placed on nonaccrual status).
Deferred
Guaranty Price Adjustments
We applied the interest method using a constant effective yield
to amortize all risk-based price adjustments and buy-downs in
connection with our Fannie Mae MBS issued prior to
January 1, 2003. We calculated the constant effective yield
for deferred guaranty price adjustments based upon our estimate
of the cash flows of the mortgage loans underlying the related
Fannie Mae MBS, which includes an estimate of prepayments. For
each reporting period, we recalculate the constant effective
yield to reflect the actual payments and our new estimate of
future prepayments. We adjust the carrying amount of deferred
guaranty price adjustments to the amount at which they would
have been stated if the recalculated constant effective yield
had been applied since their inception.
For risk-based pricing adjustments and buy-downs that arose on
Fannie Mae MBS issued after December 31, 2002, we record
the cash received and increase Guaranty obligations
by a similar amount.
Master
Servicing
Upon a transfer of loans to us, either in connection with a
portfolio purchase or a lender swap transaction, we enter into
an agreement with the lender, or its designee, to continue to
perform the
day-to-day
servicing of the mortgage loans, herein referred to as primary
servicing. We assume an obligation to perform certain limited
master servicing activities when these loans are securitized.
These activities include assuming the ultimate obligation for
the
day-to-day
servicing in the event of default by the primary servicer and
certain ongoing administrative functions associated with the
securitization. As compensation for performing these master
servicing activities, we receive the right to the interest
earned on cash flows from the date of remittance by the servicer
to us until the date of distribution of such cash flows to MBS
certificate holders.
We record an MSA as a component of Other assets when
the present value of the estimated compensation for master
servicing activities exceeds adequate compensation for such
servicing activities. Conversely, we record a master servicing
liability (MSL) as a component of Other
liabilities when the present value of the estimated
compensation for master servicing activities is less than
adequate compensation. Adequate compensation is the amount of
compensation that would be required by a substitute master
servicer should one be required and is determined based on
market information for such services.
An MSA is carried at LOCOM and amortized in proportion to net
servicing income for each period. We record impairment of the
MSA through a valuation allowance. When we determine an MSA is
other-than-temporarily
impaired, we write down the cost basis of the MSA to its fair
value. We individually assess our MSA for impairment by
reviewing changes in historical interest rates and the impact of
those changes on the historical fair values of the MSA. We then
determine our expectation of the likelihood of a range of
interest rate changes over an appropriate recovery period using
historical interest rate movements. We record an
other-than-temporary
impairment when we do not expect to recover the valuation
allowance based on our expectation of the interest rate changes
and their impact on the fair value of the MSA during the
recovery
F-40
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
period. Amortization and impairment of the MSA are recorded as
components of Fee and other income in the
consolidated statements of income.
An MSL is carried at amortized cost and amortized in proportion
to net servicing loss for each period. The carrying amount of
the MSL is increased to fair value when the fair value exceeds
the carrying amount. Amortization and valuation adjustments of
the MSL are recorded as components of Fee and other
income in the consolidated statement of income.
When we receive an MSA in connection with a lender swap
transaction, we record a corresponding amount of deferred profit
as a component of Other liabilities in the
consolidated balance sheets. This deferred profit is amortized
in proportion to the amortization of the MSA. We also record a
reduction or recovery of the recorded deferred profit amount
based on any changes to the valuation allowance associated with
the MSA. Changes in the deferred profit amount, including
amortization and reductions or recoveries to the valuation
allowance, are recorded as a component of Fee and other
income in the consolidated statements of income. When we
incur an MSL in connection with a lender swap transaction, we
record a corresponding loss as Fee and other income
in the consolidated statements of income.
MSA and MSL recorded in connection with portfolio
securitizations are recorded in the same manner as retained
interests and liabilities incurred in a securitization,
respectively. Accordingly, these amounts are a component of the
calculation of gain or loss on the sale of assets.
The fair values of the MSA and MSL are based on the present
value of expected cash flows using managements best
estimates of certain key assumptions, which include prepayment
speeds, forward yield curves, adequate compensation, and
discount rates commensurate with the risks involved. Changes in
anticipated prepayment speeds, in particular, result in
fluctuations in the estimated fair values of the MSA and MSL. If
actual prepayment experience differs from the anticipated rates
used in our model, this difference may result in a material
change in the MSA and MSL fair values.
Other
Investments
Unconsolidated investments in limited partnerships are primarily
accounted for under the equity method of accounting pursuant to
SOP 78-9.
These investments include our LIHTC and other partnership
investments. Under the equity method, our investment is
increased (decreased) for our share of the investees net
income (loss) reflected in Income from partnership
investments in the consolidated statements of income, as
well as increased for contributions made and reduced by
distributions received.
For other unconsolidated investments, we apply the equity or
cost method of accounting. Investments in entities where our
ownership is between 20% and 50%, or which provide us the
ability to exercise significant influence over the entitys
operations and management functions, are accounted for using the
equity method. Investments in entities where our ownership is
less than 20% and we have no ability to exercise significant
influence over an entitys operations are accounted for
using the cost method. These investments are included as
Other assets in the consolidated balance sheets.
We periodically review our investments to determine if a loss in
value that is
other-than-temporary
has occurred. In these reviews, we consider all available
information, including the recoverability of our investment, the
earnings and near-term prospects of the entity, factors related
to the industry, financial and operating conditions of the
entity and our ability, if any, to influence the management of
the entity.
Internally
Developed Software
We incur costs to develop software for internal use. Certain
direct development costs and software enhancements associated
with internal-use software are capitalized, including external
direct costs of materials and services, and internal labor costs
directly devoted to these software projects under Statement of
Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use. Costs incurred
during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. Such capitalized costs
were $40 million, $85 million and $49 million for
the years ended December 31, 2004, 2003
F-41
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
and 2002, respectively. We recognize an impairment charge of
these capitalized costs when, during the development stage of
the project, we determine that the project is no longer probable
of completion. For the years ended December 31, 2004 and
2002, we recognized impairment charges of $159 million and
$3 million, respectively. No impairment charge was deemed
necessary for 2003. Capitalized costs are included as
Other assets in the consolidated balance sheets.
Commitments
to Purchase and Sell Mortgage Loans and Securities
We enter into commitments to purchase and sell mortgage-related
securities and to purchase single-family and multifamily
mortgage loans. Commitments to purchase or sell some
mortgage-related securities and to purchase single-family
mortgage loans are derivatives under SFAS 133, as amended
and interpreted. Our commitments to purchase multifamily loans
are not derivatives under SFAS 133 because they do not
provide for net settlement.
For those commitments that we account for as derivatives, we
report them in the consolidated balance sheets at fair value in
Derivative assets at fair value or Derivative
liabilities at fair value and include changes in their
fair value in Derivatives fair value gains (losses),
net in the consolidated statements of income. When these
commitments settle, we include their fair value on the
settlement date in the cost basis of the security or loan that
we purchase.
Regular-way securities trades provide for delivery of securities
within the time generally established by regulations or
conventions in the market in which the trade occurs and are
exempt from SFAS 133. Commitments to purchase or sell
To-Be-Announced (TBA) eligible Fannie Mae MBS that
settle on the earliest regularly-scheduled settlement date are
regular-way securities trades; therefore, we did not account for
them as derivatives prior to July 1, 2003. Commitments to
purchase securities that have not yet been issued, such as
REMICs, are regular-way securities trades if their settlement
date is the date the securities are issued. Each REMIC
transaction is individually negotiated; therefore, the period
between trade date and issuance date is the shortest period
possible for these commitments and they are regular-way
securities trades. On July 1, 2003, SFAS 149 amended
the regular-way securities trade exception for commitments for
securities that have not yet been issued and TBA-eligible
mortgage-related securities. That amendment required companies
to provide documentation that they expected commitments to
physically settle. We did not provide such documentation;
therefore, beginning July 1, 2003, we account for all
commitments for securities not yet issued or TBA securities as
derivatives unless such securities are recorded on the trade
date.
Commitments to purchase securities that we do not account for as
derivatives, such as those that qualified as regular-way
securities trades, are accounted for as forward contracts to
purchase securities under the guidance of EITF 96-11. These
commitments are designated as AFS or trading at inception and
accounted for in a manner consistent with SFAS 115 for that
category of securities. For commitments to sell mortgage-related
securities in trading activities that we do not account for as
derivatives, we account for them at fair value and include them
in Other assets or Other Liabilities in
the consolidated balance sheets with unrealized gains and losses
included in Investment losses, net in the
consolidated statements of income.
Beginning January 1, 2002, we applied trade date accounting
to commitments to purchase or sell existing securities when
these commitments settle within the period of time that is
customary in the market in which those trades take place.
F-42
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the accounting standards that
apply to our mortgage loan and securities commitments through
December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
January 1, 2001
|
|
July 1, 2003
|
|
|
|
|
to
|
|
to
|
Commitment Type
|
|
Prior to 2001
|
|
June 30, 2003
|
|
December 31, 2004
|
|
Mortgage Loans
|
|
N/A
|
|
SFAS 133
|
|
SFAS 133
|
|
|
|
|
|
|
|
Securities
|
|
EITF 96-11
|
|
SFAS 133
|
|
SFAS 133
|
|
|
|
|
EITF 96-11
|
|
SFAS 149
EITF 96-11
|
Derivative
Instruments
We account for our derivatives pursuant to SFAS 133, as
amended and interpreted, and recognize all derivatives as either
assets or liabilities in the consolidated balance sheets at
their fair value on a trade date basis. Derivatives in a gain
position are reported in Derivative assets at fair
value and derivatives in a loss position are recorded in
Derivative liabilities at fair value in the
consolidated balance sheets. We do not apply hedge accounting
pursuant to SFAS 133; therefore, all fair value gains and
losses on derivatives as well as interest accruals are recorded
in Derivatives fair value gains (losses), net in the
consolidated statements of income.
We offset the carrying amounts of derivatives in gain positions
and loss positions with the same counterparty in accordance with
FIN 39. We offset these amounts because the derivative
contracts have determinable amounts, we have the legal right to
offset amounts with each counterparty, that right is enforceable
by law, and we intend to offset the amounts to settle the
contracts.
Fair value is determined using quoted market prices in active
markets, when available. If quoted market prices are not
available for particular derivatives, we use quoted market
prices for similar derivatives that we adjust for directly
observable or corroborated (i.e., information purchased from
third-party service providers) market information. In the
absence of observable or corroborated market data, we use
internally developed estimates, incorporating market-based
assumptions wherever such information is available. For
derivatives, we use a mid price when there is spread between a
bid and ask price.
We evaluate financial instruments that we purchase or issue and
other financial and non-financial contracts for embedded
derivatives. To identify embedded derivatives that we must
account for separately, we determine if: (i) the economic
characteristics of the embedded derivative are not clearly and
closely related to the economic characteristics of the financial
instrument or other contract; (ii) the financial instrument
or other contract (i.e., the hybrid contract) itself is not
already measured at fair value with changes in fair value
included in earnings; and (iii) whether a separate
instrument with the same terms as the embedded derivative would
meet the definition of a derivative. If the embedded derivative
meets all three of these conditions, we separate it from the
financial instrument or other contracts and carry it at fair
value with changes in fair value included in the consolidated
statements of income.
Collateral
We enter into various transactions where we pledge and accept
collateral, the most common of which are our derivative
transactions. Required collateral levels vary depending on the
credit risk rating and type of counterparty. We also pledge and
receive collateral under our repurchase and reverse repurchase
agreements. The fair value of the collateral received from our
counterparties is monitored, and we may require additional
collateral from those counterparties, as deemed appropriate.
Collateral received under early funding agreements with lenders
must meet our standard underwriting guidelines for the purchase
or guarantee of mortgage loans.
Cash
Collateral
To the extent that we pledge cash collateral to a counterparty,
we remove it from the consolidated balance sheets. We had not
pledged any cash collateral as of December 31, 2004 or
2003. Cash collateral accepted from a counterparty that we have
the right to use is recorded as Cash and cash
equivalents in the
F-43
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
consolidated balance sheets. Cash collateral accepted from a
counterparty that we do not have the right to use is restricted
cash and is included as Restricted cash in the
consolidated balance sheets. We accepted cash collateral of
$2.7 billion and $3.4 billion as of December 31,
2004 and 2003, respectively, of which $601 million and
$1.1 billion, respectively, was restricted.
Non-Cash
Collateral
Securities pledged to counterparties are included as either
Investments in securities or Cash and cash
equivalents in the consolidated balance sheets. As of
December 31, 2004 and 2003, we pledged trading securities
of $187 million and $201 million, respectively and AFS
securities of $1.5 billion and $4.6 billion,
respectively, which the counterparty does not have the right to
sell or repledge. As of December 31, 2004 and 2003, we
pledged $242 million and $487 million, respectively, of cash
equivalents, and as of December 31, 2003, we pledged $265
million of AFS securities, which the counterparty had the right
to sell or repledge.
The fair value of non-cash collateral accepted that we were
permitted to sell or repledge was $3.5 billion and
$3.1 billion as of December 31, 2004 and 2003,
respectively, of which none was sold or repledged. The fair
value of collateral accepted that we were not permitted to sell
or repledge was $393 million and $42 million as of
December 31, 2004 and 2003, respectively.
Our liability to third party holders of Fannie Mae MBS that
arises as the result of a consolidation of a securitization
trust is fully collateralized by the underlying loans
and/or
mortgage-related securities. When securities sold under
agreements to repurchase meet all of the conditions of a secured
financing, the collateral of the transferred securities are
reported at the amounts at which the securities will be
reacquired including accrued interest.
Debt
Our outstanding debt is classified as either short-term or
long-term based on the initial contractual maturity. Deferred
items, including premiums, discounts and other deferred price
adjustments are reported as basis adjustments to
Short-term debt or Long-term debt in the
consolidated balance sheets. The carrying amount, accrued
interest and basis adjustments of debt denominated in a foreign
currency are re-measured into U.S. dollars using foreign
exchange spot rates at the balance sheet date and any associated
gains or losses are reported in Fee and other income
in the consolidated statements of income.
The classification of interest expense as either short-term or
long-term is based on the contractual maturity of the related
debt. Premiums, discounts and other deferred price adjustments
are amortized and reported through interest expense using the
effective interest method over the contractual term of the debt.
Amortization of premiums, discounts and other deferred price
adjustments begins at the time of debt issuance. Interest
expense for debt denominated in a foreign currency is
re-measured into U.S. dollars using the weighted average
spot rate for the month since the interest expense is incurred
over the reporting period. The difference in rates arising from
the month-end spot exchange rate used to calculate the interest
accruals and the weighted-average exchange rate used to record
the interest expense is a foreign currency transaction gain or
loss for the period and is included in Short-term and
long-term debt interest expense in the consolidated
statements of income.
Fees
Received on the Structuring of Transactions
We offer certain re-securitization services to customers in
exchange for fees. Such services include, but are not limited
to, the issuance, guarantee and administration of Fannie Mae
REMICs, Stripped Mortgage-Backed Securities (SMBS),
Grantor Trusts, and Mega Securities issued (collectively, the
Structured Securities). We receive a one-time
conversion fee upon issuance of a Structured Security that
varies based on the value of securities issued and the
transaction structure. The conversion fee compensates us for all
services we provide in connection with the Structured Security,
including services provided at and prior to security issuance
and over the life of the Structured Securities. Except for
Structured Securities where the underlying collateral is whole
loans or private-label securities, we generally do not receive a
guaranty fee as compensation in
F-44
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
connection with the issuance of a Structured Security because
the transferred mortgage-related securities have previously been
guaranteed by us or another party.
We defer a portion of the fee received upon issuance of a
Structured Security based on our estimate of the fair value of
our future administration services in accordance with EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables. The
deferred revenue is amortized on a straight-line basis over the
expected life of the Structured Security. The excess of the
total fee over the fair value of the future services is
recognized in the consolidated statements of income upon
issuance of a Structured Security. However, when we acquire a
portion of a Structured Security contemporaneous with our
structuring of the transaction, we defer and amortize a portion
of this upfront fee as an adjustment to the yield of the
purchased security pursuant to SFAS 91. Fees received and
costs incurred related to our structuring of securities are
presented on a gross basis as Fee and other income
in the consolidated statements of income.
Income
Taxes
We recognize deferred income tax assets and liabilities for the
difference in the basis of assets and liabilities for financial
accounting and tax purposes pursuant to SFAS No. 109,
Accounting for Income Taxes (SFAS 109).
Deferred tax assets and liabilities are measured using enacted
tax rates that are expected to be applicable to the taxable
income or deductions in the period(s) the assets are realized or
the liabilities are settled. Deferred income tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment. We recognize investment and
other tax credits through our effective tax rate calculation
assuming that we will be able to realize the full benefit of the
credits. SFAS 109 also requires that a deferred tax asset
be reserved by an allowance if, based on the weight of available
positive and negative evidence, it is more likely than not that
some portion, or all, of the deferred tax asset will not be
realized. For the periods presented in the accompanying
consolidated financial statements, we determined that, based on
available evidence, a valuation allowance against our tax assets
was not necessary.
Our tax reserves are based on significant estimates and
assumptions as to the relative filing positions and potential
audit and litigation exposures related thereto. We establish
these reserves based upon managements assessment of
exposure associated with permanent tax differences, tax credits
and interest expense applied to temporary differences when a
potential loss is probable and reasonably estimated. We
continually analyze tax reserves and record adjustments as
events occur that warrant adjustment to the reserves.
Stock-Based
Compensation
Effective January 1, 2003, we adopted the expense
recognition provisions of the fair value method of accounting
for employee stock compensation pursuant to
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). In accordance with
the transitional guidance of SFAS No. 148,
Accounting for Stock-Based CompensationTransition and
Disclosure, an amendment of FASB Statement No. 123, and
SFAS 123, we elected to prospectively apply the fair value
method of accounting for stock-based awards granted on or after
January 1, 2003. For such awards, compensation expense is
measured at fair value and recognized in Salaries and
employee benefits expense in the consolidated statements
of income over the required service period. Prior to adoption of
SFAS 123, we applied the intrinsic value method of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25) and did not recognize compensation
expense on our stock-based compensation, except for options
deemed to be variable awards and stock awards. We continue to
account for stock-based compensation awarded prior to
January 1, 2003 under APB 25, unless such awards were
modified subsequent to that date.
Had compensation costs for our stock-based compensation plans
been determined using the fair value method required by
SFAS 123 for all periods presented, our net income
available to common stockholders and earnings per share would
have been reduced to the pro forma amounts displayed in the
table below.
F-45
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
|
Net income available to common
stockholders, as reported
|
|
$
|
4,802
|
|
|
$
|
7,931
|
|
|
$
|
3,803
|
|
Plus: Stock-based employee
compensation expense included in reported net income, net of
related tax effects
|
|
|
68
|
|
|
|
74
|
|
|
|
27
|
|
Less: Stock-based employee
compensation expense determined under fair value based method,
net of related tax effects
|
|
|
(97
|
)
|
|
|
(123
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available to
common stockholders
|
|
$
|
4,773
|
|
|
$
|
7,882
|
|
|
$
|
3,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basicas reported
|
|
$
|
4.95
|
|
|
$
|
8.12
|
|
|
$
|
3.83
|
|
Basicpro forma
|
|
|
4.92
|
|
|
|
8.07
|
|
|
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutedas reported
|
|
$
|
4.94
|
|
|
$
|
8.08
|
|
|
$
|
3.81
|
|
Dilutedpro forma
|
|
|
4.91
|
|
|
|
8.03
|
|
|
|
3.72
|
|
The fair value of the options granted under our stock-based
compensation plans are estimated on the date of the grant using
a Black-Scholes model with the following weighted average
assumptions displayed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Risk-free rate
|
|
|
2.52
|
%
|
|
|
2.63
|
%
|
|
|
3.06
|
%
|
Volatility
|
|
|
28.19
|
%
|
|
|
29.37
|
%
|
|
|
27.00
|
%
|
Dividend
|
|
$
|
2.08
|
|
|
$
|
1.56
|
|
|
$
|
1.32
|
|
Average expected life
|
|
|
4 yrs
|
|
|
|
4 yrs
|
|
|
|
3 yrs
|
|
Pensions
and Other Postretirement Benefits
We provide pension and postretirement benefits and account for
these benefit costs on an accrual basis. Pension and
postretirement benefit amounts recognized in the consolidated
financial statements are determined on an actuarial basis using
several different assumptions. The two most significant
assumptions used in the valuation are the discount rate and
long-term rate of return on assets. In determining our net
periodic benefit expense, we apply a discount rate in the
actuarial valuation of our pension and postretirement benefit
obligations. In determining the discount rate as of each balance
sheet date, we consider the current yields on high-quality,
corporate fixed-income debt instruments with maturities
corresponding to the expected duration of our benefit
obligations. Additionally, the net periodic benefit expense
recognized in the consolidated financial statements for our
qualified pension plan is impacted by the long-term rate of
return on plan assets. We base our assumption of the long-term
rate of return on the current investment portfolio mix, actual
long-term historical return information and the estimated future
long-term investment returns for each class of assets. We
measure plan assets and obligations as of the date of the
consolidated financial statements.
Earnings
per Share
Earnings per share (EPS) are presented for both
basic EPS and diluted EPS. Basic EPS is computed by dividing net
income available to common stockholders by the weighted average
number of shares of common stock outstanding during the year.
Diluted EPS is computed by dividing net income available to
common stockholders by the weighted average number of shares of
common stock outstanding during the year, plus the dilutive
effect of common stock equivalents such as convertible
securities, stock options and other performance awards. These
common stock equivalents are excluded from the calculation of
diluted EPS when the effect of inclusion, assessed individually,
would be anti-dilutive.
F-46
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other
Comprehensive Income
Other comprehensive income is the change in equity, net of tax,
resulting from transactions recorded in the consolidated
statements of income, plus certain transactions that are
recorded directly to stockholders equity. These other
transactions include unrealized gains and losses on AFS
securities and commitments accounted for under EITF 96-11
whose underlying securities are classified as AFS, unrealized
gains and losses on guaranty assets resulting from portfolio
transactions and buy-ups resulting from lender swap
transactions, deferred hedging gains and losses from cash flow
hedges entered into prior to 2001 and changes in our minimum
pension liability.
Fair
Value Measurements
We estimate fair value as the amount at which an asset could be
bought or sold, or a liability could be incurred or settled, in
a current transaction between willing parties (i.e., other than
in a forced or liquidation sale). If a quoted market price is
available, the fair value is the product of the number of
trading units multiplied by that market price. If a quoted
market price is not available, the estimate of fair value
considers prices for similar assets or similar liabilities and
the results of valuation techniques to the extent available in
the circumstances. Valuation techniques incorporate assumptions
that market participants would use in their estimates of values.
Financial
Statement Reclassifications
Certain amounts reflected in the consolidated financial
statements for the years ended December 31, 2003 and 2002
have been reclassified to conform to the presentation for the
year ended December 31, 2004. In the consolidated
statements of income, reclassifications include, but are not
limited to, a separate caption for interest income on mortgage
loans that was previously reported as mortgage portfolio
interest income, as well as additional categories for other
expenses previously classified as administrative expenses. In
the consolidated balance sheets, reclassifications include, but
are not limited to, the creation of a new caption for mortgage
loans that were previously included in our mortgage portfolio,
reclassification of debentures, notes and bonds into short-term
and long-term debt categories and federal funds sold and
securities purchased under agreements to resell, advances to
lenders and deferred tax assets were reclassified from other
assets.
New
Accounting Pronouncements
SOP 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
In December 2003, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued
SOP 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
(SOP 03-3).
SOP 03-3
applies to acquired loans, debt securities and beneficial
interests where there has been evidence of deterioration in
credit quality since origination and for which it is probable at
the purchase date that the investor will not be able to collect
all contractually required payments receivable. It addresses the
accounting for differences between the contractual cash flows of
acquired loans and the cash flows expected to be collected from
an investors initial investment in loans acquired in a
transfer if those differences are attributable, at least in
part, to credit quality.
SOP 03-3
requires purchased loans, debt securities and beneficial
interests within its scope to be initially recorded at fair
value and prohibits the creation or carry over of a valuation
allowance at the date of purchase. It limits the yield that may
be accreted as interest income on such loans to the excess of an
investors estimate of undiscounted expected principal,
interest and other cash flows from the loan over the
investors initial investment in the loan. The amount of
yield to be accreted is not displayed in the consolidated
balance sheets. Subsequent increases in estimated future cash
flows to be collected are recognized prospectively in interest
income through a yield adjustment over the remaining life of the
loan. Decreases in estimated future cash flows to be collected
are recognized as an impairment expense through a valuation
allowance.
SOP 03-3
applies prospectively to loans acquired in fiscal years
beginning after December 15, 2004. Loans carried at fair
value or mortgage loans held for sale are excluded from the
scope of
SOP 03-3.
SOP 03-3
will apply primarily
F-47
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to delinquent loans that we purchase from MBS trusts in
connection with our guaranty as well as to delinquent loans in
MBS trusts or private-label trusts that we consolidate pursuant
to FIN 46R. We are evaluating the effect of the adoption of
SOP 03-3
to the consolidated financial statements.
SFAS 123R,
Share-Based Payment and SAB No. 107
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment (SFAS 123R), which
revises SFAS 123 and supersedes APB 25 and its related
implementation guidance. SFAS 123R eliminates the
alternative of applying the intrinsic value measurement
provisions of APB 25 to stock compensation awards issued to
employees. Rather, SFAS 123R requires measurement of the
cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the
award. With respect to options, SFAS 123R requires that
they be measured at fair value using an option-pricing model
that takes into account the options unique characteristics
and recognition of the cost as expense over the period the
employee provides services to earn the award, which is generally
the vesting period. Also, SFAS 123R requires that cash
flows resulting from tax deductions in excess of the
compensation cost recognized for those stock incentive awards,
also referred to as excess tax benefits, to be classified as
financing activities in the consolidated statements of cash
flows.
This standard includes measurement requirements for employee
stock options that are similar to those under the
fair-value-based
method of SFAS 123; however, SFAS 123R requires
initial and ongoing estimates of the amount of shares that will
vest while SFAS 123 provided entities the option of
assuming that all shares would vest and then recognize actual
forfeitures as they occur and distinguishment of awards between
equity and liabilities based on guidance in
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity.
Additionally, SEC Staff Accounting Bulletin 107,
Share-Based Payment, provides guidance related to the
interaction between SFAS 123R and certain SEC rules and
regulations, as well as the staffs views regarding the
valuation of share-based payment arrangements.
SFAS 123R is effective for annual periods beginning after
June 15, 2005 and requires use of the modified prospective
application method to be applied to new awards, unvested awards
and to awards modified, repurchased or cancelled after the
effective date. We prospectively adopted the fair value expense
recognition provisions of SFAS 123 effective
January 1, 2003, using a model to estimate the fair value
of the majority of our stock awards. We adopted SFAS 123R
effective January 1, 2006 with no material impact to the
consolidated financial statements.
SFAS 154,
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), which replaces APB Opinion
No. 20, Accounting Changes (APB 20)
and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements
for the accounting for and reporting of a change in accounting
principle. SFAS 154 applies to all voluntary changes in
accounting principle and changes required by an accounting
pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions.
APB 20 requires that the cumulative effect of most
voluntary changes in accounting principles be included in net
income in the period of adoption. The new statement requires
retrospective application to prior periods financial
statements of a voluntary change in accounting principle, unless
it is impracticable to determine either period-specific effects
or the cumulative effect of the change. In addition,
SFAS 154 requires that we account for a change in method of
depreciation, amortization, or depletion for long-lived,
non-financial assets as a change in accounting estimate that is
affected by a change in accounting principle. APB 20
previously required that we report such a change as a change in
accounting principle.
F-48
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The adoption of SFAS 154 effective
January 1, 2006 had no impact on the consolidated financial
statements.
SFAS 155,
Accounting for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(SFAS 155), an amendment of SFAS 133
and SFAS 140. This statement: (i) clarifies which
interest-only strips and principal-only strips are not subject
to SFAS 133; (ii) establishes a requirement to
evaluate interests in securitized financial instruments that
contain an embedded derivative requiring bifurcation;
(iii) clarifies that concentration of credit risks in the
form of subordination are not embedded derivatives; and
(iv) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation.
SFAS 155 also amends Derivatives Implementation Group
(DIG) Issue No. B39 relating to the application
of call options that are exercisable only by a debtor. In
November 2006, DIG Issue No. B40 was proposed by the FASB.
The objective of the proposed guidance is to provide a narrow
scope exception to certain provisions of SFAS 133 for
securitized interests that contain only an embedded derivative
that is tied to the prepayment risk of the underlying financial
assets. Final guidance is expected to be issued in early 2007
with an effective date that coincides with that of
SFAS 155. SFAS 155 is effective for all financial
instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. We intend
to adopt SFAS 155 effective January 1, 2007 and are
evaluating the impact of its adoption on the consolidated
financial statements.
SFAS 156,
Accounting for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, an amendment of
FASB Statement No. 133 and 140
(SFAS 156). SFAS 156 modifies
SFAS 140 by requiring that mortgage servicing rights
(MSRs) be initially recognized at fair value and by
providing the option to either (i) carry MSRs at fair value
with changes in fair value recognized in earnings or
(ii) continue recognizing periodic amortization expense and
assess the MSRs for impairment as was originally required by
SFAS 140. This option is available by class of servicing
asset or liability. This statement also changes the calculation
of the gain from the sale of financial assets by requiring that
the fair value of servicing rights be considered part of the
proceeds received in exchange for the sale of the assets.
SFAS 156 is effective for all separately recognized
servicing assets and liabilities acquired or issued after the
beginning of a fiscal year that begins after September 15,
2006, with early adoption permitted. We intend to adopt
SFAS 156 effective January 1, 2007. We do not believe
the adoption of SFAS 156 will have a material effect on the
consolidated financial statements.
FIN 48,
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 supplements
SFAS 109 by defining a threshold for recognizing tax
benefits in the consolidated financial statements. FIN 48
provides a two-step approach to recognizing and measuring tax
benefits when a benefits realization is uncertain. First,
we must determine whether the benefit is to be recognized and
then the amount to be recognized. Income tax benefits should be
recognized when, based on the technical merits of a tax
position, we believe that if upon examination, including
resolution of any appeals or litigation process, it is more
likely than not (a probability of greater than 50%) that the tax
position would be sustained as filed. The benefit recognized for
a tax position that meets the more-likely-than-not criterion is
measured based on the largest amount of tax benefit that is more
than 50% likely to be realized upon ultimate settlement with the
taxing authority, taking into consideration the amounts and
probabilities of the outcomes upon settlement.
F-49
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FIN 48 is effective for consolidated financial statements
beginning in the first quarter of 2007. The cumulative effect of
applying the provisions of FIN 48 upon adoption will be
reported as an adjustment to beginning retained earnings. We are
evaluating the impact of its adoption on the consolidated
financial statements.
SFAS 157,
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement (SFAS 157).
SFAS 157 provides enhanced guidance for using fair value to
measure assets and liabilities and requires companies to provide
expanded information about assets and liabilities measured at
fair value, including the effect of fair value measurements on
earnings. This statement applies whenever other standards
require (or permit) assets or liabilities to be measured at fair
value, but does not expand the use of fair value in any new
circumstances.
Under SFAS 157, fair value refers to the price that would
be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants in the market
in which the reporting entity transacts. This statement
clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing the asset
or liability. In support of this principle, this standard
establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data (for
example, a companys own data). Under this statement, fair
value measurements would be separately disclosed by level within
the fair value hierarchy.
SFAS 157 is effective for consolidated financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We intend to
adopt SFAS 157 effective January 1, 2008 and are
evaluating the impact of its adoption on the consolidated
financial statements.
SFAS 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires the
recognition of a plans over-funded or under-funded status
as an asset or liability and an adjustment to AOCI.
Additionally, it requires determination of benefit obligations
and the fair values of a plans assets at a companys
year-end and recognition of actuarial gains and losses, and
prior service costs and credits, as a component of AOCI. For
employers with publicly traded securities, SFAS 158 is
effective as of the end of the fiscal year ending after
December 15, 2006. We intend to adopt SFAS 158
effective December 31, 2006 and are evaluating the impact
of its adoption on the consolidated financial statements.
We have interests in various entities that are considered to be
VIEs, as defined by FIN 46R. These interests include
investments in securities issued by VIEs, such as Fannie Mae MBS
created pursuant to our securitization transactions, mortgage-
and asset-backed trusts that were not created by us, limited
partnership interests in LIHTC partnerships that are established
to finance the construction or development of low-income
affordable multifamily housing and other limited partnerships.
These interests may also include our guaranty to the entity.
Types
of VIEs
Securitization
Trusts
Under our lender swap and portfolio securitization transactions,
mortgage loans are transferred to a trust specifically for the
purpose of issuing a single class of guaranteed securities that
are collateralized by the underlying mortgage loans. The
trusts permitted activities include the receipt of the
transferred assets, issuance of beneficial interests,
establishment of the guaranty, and the servicing of mortgage
loans. In our capacity as issuer, master servicer, trustee and
guarantor, we earn fees for our obligations to each trust.
Additionally, we may retain or purchase a portion of the
securities that have been issued by each trust. However, the
substantial majority of Fannie Mae MBS is held by third parties
and therefore is generally not reflected in the consolidated
balance sheets. We have securitized mortgage loans since 1981.
Refer to Note 7,
F-50
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Portfolio Securitizations for additional information
regarding the securitizations for which we are the transferor.
In our structured securitization transactions, we earn
transaction fees for assisting lenders and dealers with the
design and issuance of structured mortgage-related securities.
The trusts created pursuant to these transactions have permitted
activities that are similar to those for our lender swap and
portfolio securitization transactions. The assets of these
trusts may include mortgage-related securities
and/or
mortgage loans as collateral. The trusts created for Mega
securities issue single-class securities while the trusts
created for REMIC, Grantor Trust and SMBS securities issue
single-class as well as multi-class securities, the latter of
which separate the cash flows from underlying assets into
separately tradable interests. Our obligations and continued
involvement in these trusts are similar to that described for
lender swap and portfolio securitization transactions. We have
securitized mortgage assets in structured transactions since
1986.
We also invest in highly rated mortgage-backed and asset-backed
securities that have been issued via private-label trusts. These
trusts are structured to provide the investor with a beneficial
interest in a pool of receivables or other financial assets,
typically mortgage loans, credit card receivables, auto loans or
student loans. The trusts act as vehicles to allow loan
originators to securitize assets. The originators of the
financial assets or the underwriters of the transaction create
the trusts and typically own the residual interest in the
trusts assets. Our involvement in these entities is
typically limited to our recorded investment in the beneficial
interests that we have purchased. Securities are structured from
the underlying pool of assets to provide for varying degrees of
risk. We have made investments in these vehicles since 1987.
Limited
Partnerships
We make equity investments in various limited partnerships that
sponsor affordable housing projects utilizing the low-income
housing tax credit pursuant to Section 42 of the Internal
Revenue Code. The purpose of these investments is to increase
the supply of affordable housing in the United States and to
serve communities in need. In addition, our investments in LIHTC
partnerships generate both tax credits and net operating losses
that reduce our federal income tax liability. Our LIHTC
investments primarily represent limited partnership interests in
entities that have been organized by a fund manager who acts as
the general partner. These fund investments seek out equity
investments in LIHTC operating partnerships that have been
established to identify, develop and operate multifamily housing
that is leased to qualifying residential tenants.
We also invest in other limited partnerships designed to
acquire, develop and hold for sale or lease single-family
(includes townhomes and condominiums), multifamily, retail or
commercial real estate, as well as, in some cases, generate a
combination of historic restoration, new markets, or low-income
housing tax credits. We invest in these partnerships in order to
increase the supply of affordable housing in the United States
and to serve communities in need. We also earn a return on these
investments, which in certain cases is generated through
reductions in our federal income tax liability as a result of
the use of tax credits for which the partnerships qualify, as
well as the deductibility of the partnerships, net operating
losses.
Additionally, we have five investments in limited partnerships
relating to alternative energy sources. The purpose of these
investments is to facilitate the development of alternative
domestic energy sources and to achieve a satisfactory return on
capital via a reduction in our federal income tax liability as a
result of the use of the tax credits for which the partnerships
qualify, as well as the deductibility of the partnerships
net operating losses.
Other
VIEs
The management and marketing of our foreclosed multifamily
properties is performed by an independent third-party. To
facilitate this arrangement, we transfer foreclosed properties
to a VIE that is established by the counterparty responsible for
managing and marketing the properties. We are the primary
beneficiary of the entity. However, the only assets of the VIE
are those foreclosed properties transferred by us. Because our
transfer of the foreclosed properties does not qualify as a
sale, the foreclosed properties are recorded in Acquired
property, net in the consolidated balance sheets.
F-51
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Consolidated
VIEs
We consolidate in our financial statements Fannie Mae MBS trusts
when we own 100% of the trust, which gives us the unilateral
ability to liquidate the trust. We also consolidate MBS trusts
that do not meet the definition of a QSPE when we are deemed to
be the primary beneficiary. This includes certain private-label
and Fannie Mae securitization trusts that met the VIE criteria.
As an active participant in the secondary mortgage market, our
ownership percentage in any given mortgage-related security will
vary over time. We consolidated $147.8 billion and
$153.3 billion of assets from MBS trusts in the
consolidated balance sheets as of December 31, 2004 and
2003, respectively. Third-party ownership in the consolidated
MBS trusts was $9.7 billion and $8.1 billion as of
December 31, 2004 and 2003, respectively, and is recorded
as a component of either Short-term debt or
Long-term debt in the consolidated balance sheets.
We consolidate in our financial statements the assets and
liabilities of limited partnerships that are VIEs if we are
deemed to be the primary beneficiary. Accordingly, we have
consolidated the upper-tier partnerships for all of our LIHTC
investments in private-label funds and certain investments in
multi-investor funds. As of December 31, 2004 and 2003, we
consolidated $3.8 billion and $223 million,
respectively, of assets of limited partnerships in the
consolidated balance sheets. Third-party ownership in the
consolidated limited partnerships is recorded in Minority
interests in consolidated subsidiaries in the consolidated
balance sheets.
The following table displays the carrying amount and
classification of consolidated assets of VIEs as of
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Loans
|
|
$
|
143,800
|
|
|
$
|
151,731
|
|
Securities(1)
|
|
|
4,139
|
|
|
|
1,693
|
|
Other assets
|
|
|
3,795
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
Total assets of consolidated VIEs
|
|
$
|
151,734
|
|
|
$
|
153,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes consolidated MBS trusts
and consolidated mortgage revenue bond trusts.
|
In general, the investors in the obligations of consolidated
VIEs have recourse only to the assets of those VIEs and do not
have recourse to us, except where we are the counterparty to a
guaranty transaction involving the VIE.
Non-consolidated
VIEs
We also have investments in VIEs that we did not consolidate
because we were not deemed to be the primary beneficiary. These
VIEs include the securitization trusts and LIHTC partnerships
described above where our ownership represents a significant
variable interest in the entity. This includes our investments
in certain Fannie Mae securitization trusts, private-label
trusts, LIHTC partnerships, other tax partnerships and other
entities that meet the VIE criteria.
In the year ended December 31, 2004, we consolidated our
investments in certain LIHTC funds that were structured as
limited partnerships. The consolidated funds invest in LIHTC
operating partnerships that did not require consolidation under
the requirements of FIN 46R and are therefore accounted for
using the equity method. Such investments, which are generally
funded through a combination of debt and equity, with equity
typically comprising 30% to 60% of the total project capital,
have a recorded investment of $2.7 billion at
December 31, 2004. The funds that were consolidated own a
majority of the limited partnership interests in the LIHTC
operating partnerships.
The total assets of unconsolidated VIEs where we have
significant involvement was $33.8 billion and
$39.3 billion as of December 31, 2004 and 2003,
respectively, including $25.0 billion and
$28.5 billion in
F-52
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
mortgage-backed trust transactions, $3.7 billion and
$3.8 billion in asset-backed trust transactions, and
$5.1 billion and $7.0 billion in limited partnership
investments, respectively.
In the aggregate, as of December 31, 2004, these VIEs have
assets approximating $33.8 billion and our maximum exposure
to loss from these entities approximated $24.1 billion,
which represents the greater of our recorded investment in the
entity or the unpaid principal balance of the assets that are
covered by our guaranty. If a payment was required for
certificates that received the benefit of the guarantee, our
maximum loss would also include the interest that was accrued
but had not been paid.
Other
Consolidation Matters
We own mortgage-backed securities as of December 31, 2004
that are not traded on the book entry system and were issued by
two trusts exempt from FIN 46R because, after making an
exhaustive effort, we were unable to obtain the information to
determine whether we are the primary beneficiary. As of
December 31, 2004, our maximum exposure to loss for these
entities was approximately $50 million. During the years
ended December 31, 2004 and 2003, we received principal and
interest payments on these investments of $13 million and
$18 million, respectively.
We have mortgage loans that are both HFI and HFS. These mortgage
loans consist of single-family loans, which are secured by four
or fewer residential dwelling units, and multifamily loans,
which are secured by five or more residential dwelling units.
HFI loans are reported at the unpaid principal amount
outstanding, net of unamortized premiums and discounts, deferred
price adjustments, and an allowance for loan losses. HFS loans
are reported at the lower of cost or market determined on a
pooled basis, with valuation changes recorded in the
consolidated statements of income.
The table below displays the product characteristics of both HFI
and HFS loans in our mortgage portfolio as of December 31,
2004 and 2003, and does not include loans underlying a security
that is not consolidated, since in those instances the mortgage
loans are not included in the consolidated balance sheets. Refer
to Note 7, Portfolio Securitizations for
additional information on mortgage loans underlying our
securities.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Single-family:(1)
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
$
|
10,112
|
|
|
$
|
7,284
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term fixed-rate
|
|
|
230,585
|
|
|
|
250,915
|
|
Intermediate-term
fixed-rate(2)
|
|
|
76,640
|
|
|
|
85,130
|
|
Adjustable-rate
|
|
|
38,350
|
|
|
|
19,155
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family
|
|
|
345,575
|
|
|
|
355,200
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
355,687
|
|
|
|
362,484
|
|
|
|
|
|
|
|
|
|
|
Multifamily:(1)
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
|
1,074
|
|
|
|
1,204
|
|
Conventional
|
|
|
43,396
|
|
|
|
33,945
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
44,470
|
|
|
|
35,149
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums (discounts)
and deferred price adjustments, net
|
|
|
1,647
|
|
|
|
1,768
|
|
Lower of cost or market adjustments
on loans held for sale
|
|
|
(83
|
)
|
|
|
(50
|
)
|
Allowance for loan losses for loans
held for investment
|
|
|
(349
|
)
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
401,372
|
|
|
$
|
399,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loan data is shown at the unpaid
principal balance and includes $152.7 billion and
$162.5 billion of mortgage-related securities that were
consolidated as loans as of December 31, 2004 and 2003,
respectively.
|
|
(2) |
|
Intermediate-term fixed-rate
consists of mortgage loans with contractual maturities at
purchase equal to or less than 15 years.
|
F-53
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004 and 2003, we
redesignated $15.5 billion and $51.9 billion,
respectively, of HFS loans to HFI. We did not redesignate any
HFI loans to HFS during the two-year period ended
December 31, 2004.
Interest income is recognized on an accrual basis. Included in
our portfolio as of December 31, 2004 and 2003 were 76,310
and 74,092 of nonaccrual loans respectively, which totaled
$8.0 billion and $7.7 billion as of December 31,
2004 and 2003, respectively. Accrued interest relating to these
loans that we recorded prior to their placement on nonaccrual
status totaled $192 million and $199 million as of
December 31, 2004 and 2003, respectively. Forgone interest
on nonaccrual loans, which represents the amount of income
contractually due that we would have reported had the loans
performed according to their contractual terms, was
$178 million, $183 million and $141 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. Accruing loans 90 days or more past due
totaled $187 million and $225 million as of
December 31, 2004 and 2003, respectively.
If a borrower of a loan underlying a Fannie Mae MBS is three or
more months past due, we have the right to purchase the loan out
of the related Fannie Mae MBS trust. Typically, we purchase
these loans when the cost of advancing interest to the MBS trust
at the security coupon rate exceeds the cost of holding the
nonperforming loan in our mortgage portfolio. We purchased
$9.4 billion, $10.1 billion and $8.4 billion of
delinquent loans out of MBS pools for the years ended
December 31, 2004, 2003 and 2002, respectively.
At times, we modify loans and categorize the modification either
as minor, more than minor, or as a TDR. Single-family and
multifamily loans that have not been modified as a TDR are
collectively evaluated for incurred losses in accordance with
our allowance for loan losses policy. Refer to
Note 5, Allowance for Loan Losses and Reserve for
Guaranty Losses for additional information. Loans
restructured in a TDR are individually evaluated for impairment.
Our impaired loans include single-family and multifamily TDRs,
as well as multifamily individually impaired loans. The amount
of interest income recognized on impaired loans was
$47 million, $44 million and $37 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
Our average recorded investment in all of these loans throughout
the year was $1.0 billion, $812 million and
$560 million for the years ended December 31, 2004,
2003 and 2002, respectively.
The following table displays the total recorded investment in
impaired loans and the corresponding specific loss allowances as
of December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Impaired loans with an allowance
|
|
$
|
826
|
|
|
$
|
720
|
|
Impaired loans without an
allowance(1)
|
|
|
225
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
Total impaired
loans(2)
|
|
$
|
1,051
|
|
|
$
|
1,037
|
|
|
|
|
|
|
|
|
|
|
Allowance for impaired
loans(3)
|
|
$
|
63
|
|
|
$
|
68
|
|
|
|
|
(1) |
|
The discounted cash flows,
collateral value or market price equals or exceeds the carrying
value of the loan, and as such, no allowance is required.
|
|
(2) |
|
Amount includes single-family and
multifamily loans restructured in a TDR of $833 million and
$697 million and multifamily loans individually impaired of
$218 million and $340 million as of December 31,
2004 and 2003, respectively.
|
|
(3) |
|
Amount is included in the
Allowance for loan losses.
|
F-54
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
5.
|
Allowance
for Loan Losses and Reserve for Guaranty Losses
|
We maintain an allowance for loan losses for loans in our
mortgage portfolio and a reserve for guaranty losses related to
loans backing Fannie Mae MBS. The allowance and reserve are
calculated based on our estimate of incurred losses. Refer to
Note 2, Summary of Significant Accounting
Policies for additional information regarding aggregation
of loans by risk characteristics and our methodology used to
estimate the allowance and the reserve.
The following table displays changes in the allowance for loan
losses and reserve for guaranty losses for the years ended
December 31, 2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
290
|
|
|
$
|
216
|
|
|
$
|
168
|
|
Provision
|
|
|
174
|
|
|
|
187
|
|
|
|
128
|
|
Charge-offs(1)
|
|
|
(321
|
)
|
|
|
(270
|
)
|
|
|
(175
|
)
|
Recoveries
|
|
|
131
|
|
|
|
72
|
|
|
|
27
|
|
Increase from the reserve for
guaranty
losses(2)
|
|
|
75
|
|
|
|
85
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
349
|
|
|
$
|
290
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
313
|
|
|
$
|
223
|
|
|
$
|
138
|
|
Provision
|
|
|
178
|
|
|
|
178
|
|
|
|
156
|
|
Charge-offs
|
|
|
(24
|
)
|
|
|
(7
|
)
|
|
|
(11
|
)
|
Recoveries
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
Decrease to the allowance for loan
losses(2)
|
|
|
(75
|
)
|
|
|
(85
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
396
|
|
|
$
|
313
|
|
|
$
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes accrued interest of
$29 million, $29 million and $24 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
|
|
(2) |
|
Includes reduction in reserve for
guaranty losses and increase in allowance for loan losses due to
the purchase of delinquent loans from MBS pools.
|
The amount of the reserve for guaranty losses attributable to
Fannie Mae MBS held in our portfolio was $113 million,
$83 million and $61 million as of December 31,
2004, 2003 and 2002, respectively.
F-55
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
6.
|
Investments
in Securities
|
Our securities portfolio contains mortgage-related and
non-mortgage-related securities. The following table displays
our investments in securities, which are presented at fair value
as of December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Fannie Mae
single-class MBS(1)
|
|
$
|
276,178
|
|
|
$
|
343,174
|
|
Non-Fannie Mae single-class
mortgage-related
securities(1)
|
|
|
36,105
|
|
|
|
34,066
|
|
Fannie Mae structured MBS
|
|
|
73,367
|
|
|
|
70,459
|
|
Non-Fannie Mae structured
mortgage-related securities
|
|
|
109,820
|
|
|
|
45,570
|
|
Mortgage revenue bonds
|
|
|
22,657
|
|
|
|
20,798
|
|
Other mortgage-related
securities(2)
|
|
|
5,346
|
|
|
|
6,171
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
$
|
523,473
|
|
|
$
|
520,238
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
$
|
25,645
|
|
|
$
|
26,862
|
|
Corporate debt securities
|
|
|
15,098
|
|
|
|
16,432
|
|
Municipal bonds
|
|
|
863
|
|
|
|
1,203
|
|
Other non-mortgage-related
securities
|
|
|
2,303
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-related
securities
|
|
|
43,909
|
|
|
|
46,832
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
567,382
|
|
|
$
|
567,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $1.3 billion and
$268 million of Fannie Mae structured MBS and non-Fannie
Mae structured mortgage-related securities and $180 million
and $136 million of mortgage revenue bonds that were
consolidated to Fannie Mae single-class MBS and non-Fannie
Mae single-class mortgage-related securities as of
December 31, 2004 and 2003, respectively.
|
|
(2) |
|
Includes commitments related to
mortgage-related securities that are accounted for as securities.
|
Trading
Securities
Trading securities are initially measured at fair value with
changes in fair value recorded in Investment losses,
net in the consolidated statements of income. Trading
securities include Fannie Mae single-class MBS of
$34.4 billion and $42.7 billion and non-Fannie Mae
single-class mortgage-related securities of $937 million
and $1.1 billion as of December 31, 2004 and 2003,
respectively. Unrealized gains on trading securities held as of
the end of the year totaled $133 million, $109 million
and $209 million for the years ended December 31,
2004, 2003 and 2002, respectively.
Available-for-Sale
Securities
AFS securities are initially measured at fair value and
subsequent unrealized gains and losses are recorded as a
component of AOCI, net of deferred taxes, in
Stockholders equity. The following table
displays the gross realized gains, losses and proceeds on sales
of AFS securities for the years ended December 31, 2004,
2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Gross realized gains
|
|
$
|
332
|
|
|
$
|
781
|
|
|
$
|
150
|
|
Gross realized losses
|
|
|
157
|
|
|
|
896
|
|
|
|
197
|
|
Total proceeds
|
|
|
6,256
|
|
|
|
122,262
|
|
|
|
37,032
|
|
F-56
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays the amortized cost, estimated fair
values corresponding to unrealized gains and losses, and
additional information regarding unrealized losses by major
security type for AFS securities held as of December 31,
2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12
|
|
|
12 Consecutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consecutive Months
|
|
|
Months or Longer
|
|
|
|
Total
|
|
|
Gross
|
|
|
Gross
|
|
|
Total
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae single-class MBS
|
|
$
|
238,386
|
|
|
$
|
4,119
|
|
|
$
|
(677
|
)
|
|
$
|
241,828
|
|
|
$
|
(346
|
)
|
|
$
|
51,263
|
|
|
$
|
(331
|
)
|
|
$
|
18,556
|
|
Non-Fannie Mae single-class
mortgage-related securities
|
|
|
34,429
|
|
|
|
808
|
|
|
|
(69
|
)
|
|
|
35,168
|
|
|
|
(28
|
)
|
|
|
5,638
|
|
|
|
(41
|
)
|
|
|
2,182
|
|
Fannie Mae structured MBS
|
|
|
72,093
|
|
|
|
1,535
|
|
|
|
(261
|
)
|
|
|
73,367
|
|
|
|
(157
|
)
|
|
|
15,828
|
|
|
|
(104
|
)
|
|
|
5,936
|
|
Non-Fannie Mae structured
mortgage-related securities
|
|
|
109,564
|
|
|
|
444
|
|
|
|
(188
|
)
|
|
|
109,820
|
|
|
|
(154
|
)
|
|
|
25,387
|
|
|
|
(34
|
)
|
|
|
2,860
|
|
Mortgage revenue bonds
|
|
|
22,124
|
|
|
|
677
|
|
|
|
(144
|
)
|
|
|
22,657
|
|
|
|
(69
|
)
|
|
|
3,270
|
|
|
|
(75
|
)
|
|
|
2,127
|
|
Other mortgage-related
securities(2)
|
|
|
5,043
|
|
|
|
313
|
|
|
|
(10
|
)
|
|
|
5,346
|
|
|
|
(5
|
)
|
|
|
156
|
|
|
|
(5
|
)
|
|
|
366
|
|
Asset-backed securities
|
|
|
25,632
|
|
|
|
50
|
|
|
|
(37
|
)
|
|
|
25,645
|
|
|
|
(30
|
)
|
|
|
8,376
|
|
|
|
(7
|
)
|
|
|
1,662
|
|
Corporate debt securities
|
|
|
15,102
|
|
|
|
11
|
|
|
|
(15
|
)
|
|
|
15,098
|
|
|
|
(10
|
)
|
|
|
4,227
|
|
|
|
(5
|
)
|
|
|
422
|
|
Municipal bonds
|
|
|
865
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
863
|
|
|
|
(2
|
)
|
|
|
854
|
|
|
|
|
|
|
|
|
|
Other non-mortgage-related
securities
|
|
|
2,302
|
|
|
|
1
|
|
|
|
|
|
|
|
2,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525,540
|
|
|
$
|
7,958
|
|
|
$
|
(1,403
|
)
|
|
$
|
532,095
|
|
|
$
|
(801
|
)
|
|
$
|
114,999
|
|
|
$
|
(602
|
)
|
|
$
|
34,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12
|
|
|
12 Consecutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consecutive Months
|
|
|
Months or Longer
|
|
|
|
Total
|
|
|
Gross
|
|
|
Gross
|
|
|
Total
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae single-class MBS
|
|
$
|
295,970
|
|
|
$
|
5,313
|
|
|
$
|
(837
|
)
|
|
$
|
300,446
|
|
|
$
|
(837
|
)
|
|
$
|
76,953
|
|
|
$
|
|
|
|
$
|
|
|
Non-Fannie Mae single-class
mortgage-related securities
|
|
|
32,030
|
|
|
|
1,025
|
|
|
|
(59
|
)
|
|
|
32,996
|
|
|
|
(59
|
)
|
|
|
4,399
|
|
|
|
|
|
|
|
|
|
Fannie Mae structured MBS
|
|
|
68,903
|
|
|
|
1,930
|
|
|
|
(374
|
)
|
|
|
70,459
|
|
|
|
(372
|
)
|
|
|
22,522
|
|
|
|
(2
|
)
|
|
|
590
|
|
Non-Fannie Mae structured
mortgage-related securities
|
|
|
45,130
|
|
|
|
487
|
|
|
|
(47
|
)
|
|
|
45,570
|
|
|
|
(46
|
)
|
|
|
12,288
|
|
|
|
(1
|
)
|
|
|
1,070
|
|
Mortgage revenue bonds
|
|
|
20,414
|
|
|
|
499
|
|
|
|
(115
|
)
|
|
|
20,798
|
|
|
|
(83
|
)
|
|
|
2,741
|
|
|
|
(32
|
)
|
|
|
1,068
|
|
Other mortgage-related
securities(2)
|
|
|
6,128
|
|
|
|
89
|
|
|
|
(46
|
)
|
|
|
6,171
|
|
|
|
(41
|
)
|
|
|
1,225
|
|
|
|
(5
|
)
|
|
|
355
|
|
Asset-backed securities
|
|
|
26,803
|
|
|
|
72
|
|
|
|
(13
|
)
|
|
|
26,862
|
|
|
|
(9
|
)
|
|
|
4,959
|
|
|
|
(4
|
)
|
|
|
1,899
|
|
Corporate debt securities
|
|
|
16,386
|
|
|
|
50
|
|
|
|
(4
|
)
|
|
|
16,432
|
|
|
|
(4
|
)
|
|
|
1,221
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-mortgage-related
securities
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
515,302
|
|
|
$
|
9,465
|
|
|
$
|
(1,495
|
)
|
|
$
|
523,272
|
|
|
$
|
(1,451
|
)
|
|
$
|
126,308
|
|
|
$
|
(44
|
)
|
|
$
|
4,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
(1) |
|
Amortized cost includes unamortized
premiums, discounts and other deferred price adjustments, as
well as
other-than-temporary
impairment write-downs.
|
|
(2) |
|
Includes commitments related to
mortgage securities that are accounted for as securities.
|
The fair value of securities varies from period to period due to
changes in interest rates and changes in credit performance of
the underlying issuer, among other factors. We recorded
other-than-temporary
impairment related to investments in securities of
$389 million, $733 million and $676 million for
the years ended December 31, 2004, 2003 and 2002,
respectively.
Included in the $1.4 billion of gross unrealized losses on
AFS securities for 2004 was $602 million of unrealized
losses that have existed for a period of 12 consecutive months
or longer. These securities are predominately rated AAA and the
unrealized losses are due to overall increases in market
interest rates and not due to any underlying credit
deterioration of the issuers. Substantially all of the
securities with unrealized losses aged greater than
12 months have a market value as of December 31, 2004
that is within 98% of their amortized cost basis. All aged
unrealized losses are recoverable within a reasonable period of
time by way of changes in market interest rates. Accordingly, we
have concluded that none of the unrealized losses on securities
in our investment portfolio represent
other-than-temporary
impairment as of December 31, 2004.
The following table displays the amortized cost and fair value
of our AFS securities by investment classification and remaining
maturity as of December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One Year
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
One Year or Less
|
|
|
through Five Years
|
|
|
through Ten Years
|
|
|
After Ten Years
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
single-class MBS(2)
|
|
$
|
238,386
|
|
|
$
|
241,828
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
701
|
|
|
$
|
746
|
|
|
$
|
3,163
|
|
|
$
|
3,338
|
|
|
$
|
234,522
|
|
|
$
|
237,744
|
|
Non-Fannie Mae single-class
mortgage-related
securities(2)
|
|
|
34,429
|
|
|
|
35,168
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
61
|
|
|
|
420
|
|
|
|
435
|
|
|
|
33,951
|
|
|
|
34,672
|
|
Fannie Mae structured
MBS(2)
|
|
|
72,093
|
|
|
|
73,367
|
|
|
|
188
|
|
|
|
239
|
|
|
|
78
|
|
|
|
79
|
|
|
|
426
|
|
|
|
444
|
|
|
|
71,401
|
|
|
|
72,605
|
|
Non-Fannie Mae structured
mortgage-related
securities(2)
|
|
|
109,564
|
|
|
|
109,820
|
|
|
|
4
|
|
|
|
4
|
|
|
|
10
|
|
|
|
10
|
|
|
|
56
|
|
|
|
57
|
|
|
|
109,494
|
|
|
|
109,749
|
|
Mortgage revenue bonds
|
|
|
22,124
|
|
|
|
22,657
|
|
|
|
180
|
|
|
|
179
|
|
|
|
687
|
|
|
|
686
|
|
|
|
658
|
|
|
|
674
|
|
|
|
20,599
|
|
|
|
21,118
|
|
Other mortgage-related
securities(3)
|
|
|
5,043
|
|
|
|
5,346
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,043
|
|
|
|
5,349
|
|
Asset-backed
securities(2)
|
|
|
25,632
|
|
|
|
25,645
|
|
|
|
5,094
|
|
|
|
5,094
|
|
|
|
17,532
|
|
|
|
17,521
|
|
|
|
1,552
|
|
|
|
1,554
|
|
|
|
1,454
|
|
|
|
1,476
|
|
Corporate debt securities
|
|
|
15,102
|
|
|
|
15,098
|
|
|
|
5,302
|
|
|
|
5,305
|
|
|
|
9,700
|
|
|
|
9,693
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
865
|
|
|
|
863
|
|
|
|
865
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-mortgage-related
securities
|
|
|
2,302
|
|
|
|
2,303
|
|
|
|
1,782
|
|
|
|
1,783
|
|
|
|
520
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525,540
|
|
|
$
|
532,095
|
|
|
$
|
13,415
|
|
|
$
|
13,464
|
|
|
$
|
29,286
|
|
|
$
|
29,316
|
|
|
$
|
6,375
|
|
|
$
|
6,602
|
|
|
$
|
476,464
|
|
|
$
|
482,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortized cost includes unamortized
premiums, discounts and other deferred price adjustments, as
well as
other-than-temporary
impairment write-downs.
|
|
(2) |
|
Asset-backed securities, including
mortgage-backed securities, are reported based on contractual
maturities assuming no prepayments.
|
|
(3) |
|
Includes commitments related to
mortgage securities that are accounted for as securities.
|
F-58
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
7.
|
Portfolio
Securitizations
|
We issue Fannie Mae MBS through securitization transactions by
transferring pools of mortgage loans or mortgage-related
securities to one or more trusts or SPEs. We are considered to
be the transferor when we transfer assets from our own portfolio
in a portfolio securitization. For the years ended
December 31, 2004 and 2003, portfolio securitizations were
$28.1 billion and $55.6 billion, respectively.
For the transfers that were recorded as sales, we may retain an
interest in the assets transferred to a trust. Our retained
interests in the form of Fannie Mae MBS were approximately
$11.1 billion and $15.0 billion. Our retained
interests in the form of a guaranty asset were $182 million
and $106 million; and our retained interests in the form of
an MSA were not material as of December 31, 2004 and 2003,
respectively. See Note 2, Summary of Significant
Accounting Policies for additional information.
Our retained interests in portfolio securitizations, including
single-class MBS, Megas, REMICs and SMBS, are exposed to
minimal credit losses as they represent undivided interests in
the highest-rated tranches of the rated securities and are
priced assuming no losses. In addition, our exposure to credit
losses on the loans underlying our Fannie Mae MBS resulting from
our guaranty has been recorded in the consolidated balance
sheets in Guaranty obligations, as it relates to our
obligation to stand ready to perform on our guaranty, and
Reserve for guaranty losses, as it relates to
incurred losses.
Since the retained interest that results from our guaranty does
not trade in active financial markets, we estimate its fair
value by using internally developed models and market inputs for
securities with similar characteristics. The key assumptions are
discount rate, or yield, derived using a projected interest rate
path consistent with the observed yield curve at the valuation
date (forward rates), and the prepayment speed based on our
proprietary models that are consistent with the projected
interest rate path and expressed as a 12 month constant
prepayment rate (CPR).
Our retained interests in single-class MBS, Megas, REMICs
and SMBS are interests in securities with active liquid markets.
We primarily rely on third party prices to estimate the fair
value of these retained interests. For the purpose of this
disclosure, we aggregate similar securities in order to measure
the key assumptions associated with the fair values of our
retained interests, which are approximated by solving for the
estimated discount rate, or yield, using a projected interest
rate path consistent with the observed yield curve at the
valuation date (forward rates), and the prepayment speed based
on either our proprietary models that are consistent with the
projected interest rate path, the pricing speed for newly issued
REMICs, or lagging 12 month actual prepayment speed. All
prepayment speeds are expressed as a 12 month CPR.
The following table displays the key assumptions used in
measuring the fair value of our retained interests at the time
of portfolio securitization for the years ended
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-class
|
|
|
REMICs &
|
|
|
Guaranty
|
|
|
|
MBS & Megas
|
|
|
SMBS
|
|
|
Assets
|
|
|
For the year ended
December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
life(1)
|
|
|
9.0 years
|
|
|
|
7.4 years
|
|
|
|
8.6 years
|
|
Average 12-month
CPR(2)
|
|
|
6.22
|
%
|
|
|
5.36
|
%
|
|
|
7.8
|
%
|
Average discount rate assumption
|
|
|
5.25
|
|
|
|
4.93
|
|
|
|
8.9
|
|
For the year ended
December 31, 2003
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
life(1)
|
|
|
8.3 years
|
|
|
|
6.6 years
|
|
|
|
7.6 years
|
|
Average 12-month
CPR(2)
|
|
|
6.96
|
%
|
|
|
3.44
|
%
|
|
|
13.0
|
%
|
Average discount rate assumption
|
|
|
5.01
|
|
|
|
4.85
|
|
|
|
10.3
|
|
|
|
|
(1) |
|
The average number of years for
which each dollar of unpaid principal on a loan or
mortgage-related security remains outstanding.
|
|
(2) |
|
Represents the expected lifetime
average payment rate, which is based on the constant annualized
prepayment rate for mortgage-related loans.
|
F-59
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays the key assumptions used in
measuring the fair value of our retained interests related to
portfolio securitization transactions as of December 31,
2004 and 2003 and a sensitivity analysis showing the impact of
changes in both prepayment speed assumptions and discount rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-class
|
|
|
REMICs &
|
|
|
|
|
|
|
MBS & Megas
|
|
|
SMBS
|
|
|
Guaranty Assets
|
|
|
As of December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained interest valuation at
period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value (dollars in millions)
|
|
$
|
5,215
|
|
|
$
|
5,853
|
|
|
$
|
182
|
|
Weighted-average
life(1)
|
|
|
6.8
|
years
|
|
|
4.5
|
years
|
|
|
7.3
|
years
|
Prepayment speed assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average 12-month
CPR prepayment speed
assumption(2)
|
|
|
27
|
%
|
|
|
48
|
%
|
|
|
12
|
%
|
Impact on value from a 10% adverse
change
|
|
$
|
(6
|
)
|
|
$
|
(15
|
)
|
|
$
|
(7
|
)
|
Impact on value from a 20% adverse
change
|
|
$
|
(13
|
)
|
|
$
|
(28
|
)
|
|
$
|
(14
|
)
|
Discount rate assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average discount rate
assumption(3)
|
|
|
4.75
|
%
|
|
|
4.64
|
%
|
|
|
8.5
|
%
|
Impact on value from a 10% adverse
change
|
|
$
|
(121
|
)
|
|
$
|
(92
|
)
|
|
$
|
(6
|
)
|
Impact on value from a 20% adverse
change
|
|
$
|
(236
|
)
|
|
$
|
(181
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained interest valuation at
period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value (dollars in millions)
|
|
$
|
4,205
|
|
|
$
|
10,754
|
|
|
$
|
106
|
|
Weighted-average
life(1)
|
|
|
7.1
|
years
|
|
|
5.7
|
years
|
|
|
7.6
|
years
|
Prepayment speed assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average 12-month
CPR prepayment speed
assumption(2)
|
|
|
11
|
%
|
|
|
31
|
%
|
|
|
11
|
%
|
Impact on value from a 10% adverse
change
|
|
$
|
(8
|
)
|
|
$
|
(5
|
)
|
|
$
|
(4
|
)
|
Impact on value from a 20% adverse
change
|
|
$
|
(16
|
)
|
|
$
|
(10
|
)
|
|
$
|
(7
|
)
|
Discount rate assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average discount rate
assumption(3)
|
|
|
4.81
|
%
|
|
|
4.93
|
%
|
|
|
11.6
|
%
|
Impact on value from a 10% adverse
change
|
|
$
|
(103
|
)
|
|
$
|
(211
|
)
|
|
$
|
(5
|
)
|
Impact on value from a 20% adverse
change
|
|
$
|
(201
|
)
|
|
$
|
(414
|
)
|
|
$
|
(9
|
)
|
|
|
|
(1) |
|
The average number of years for
which each dollar of unpaid principal on a loan or
mortgage-related security remains outstanding.
|
|
(2) |
|
Represents the expected lifetime
average payment rate, which is based on the constant annualized
prepayment rate for mortgage related loans.
|
|
(3) |
|
The interest rate used in
determining the present value of future cash flows.
|
The preceding sensitivity analysis is hypothetical and may not
be indicative of actual results. The effect of a variation in a
particular assumption on the fair value of the retained interest
is calculated independent of changes in any other assumption.
Changes in one factor may result in changes in another, which
might magnify or counteract the sensitivities. Further, changes
in fair value based on a 10% or 20% variation in an assumption
or parameter generally cannot be extrapolated because the
relationship of the change in the assumption to the change in
fair value may not be linear.
The gain or loss on portfolio securitizations that qualify as
sales depends, in part, on the carrying amount of the financial
assets sold. The carrying amount of the financial assets sold is
allocated between the assets sold and the retained interests, if
any, based on their relative fair values at the date of sale.
Further, our recourse obligations are recognized at their full
fair value at the date of sale, which serves as a reduction of
sale proceeds in the gain or loss calculation. We recorded net
losses on portfolio securitizations of $34 million and
$13 million for the years ended December 31, 2004 and
2003, respectively, and a net gain of $13 million for
F-60
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the year ended December 31, 2002. These losses are
recognized as Investment losses, net in the
consolidated statements of income.
The following table displays cash flows to us and (from us) on
our securitization trusts related to portfolio securitizations
accounted for as sales for the years ended December 31,
2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Proceeds from new securitizations
|
|
$
|
12,335
|
|
|
$
|
7,226
|
|
|
$
|
3,154
|
|
Guaranty fees
|
|
|
47
|
|
|
|
37
|
|
|
|
27
|
|
Principal and interest received on
retained interests
|
|
|
5,206
|
|
|
|
16,396
|
|
|
|
7,244
|
|
Purchases of delinquent or
foreclosed assets
|
|
|
(50
|
)
|
|
|
(65
|
)
|
|
|
(61
|
)
|
Managed loans are defined as on-balance sheet mortgage loans as
well as mortgage loans which were securitized in a portfolio
securitization. The following table displays combined
information on the unpaid principal balances and principal
amounts on non-accrual loans related to managed loans as of
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
Principal Amount on
|
|
|
|
Balance
|
|
|
Non-accrual
Loans(1)
|
|
|
|
(Dollars in millions)
|
|
|
As of December 31,
2004
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
388,523
|
|
|
$
|
7,790
|
|
Loans held for sale
|
|
|
11,634
|
|
|
|
12
|
|
Securitized loans
|
|
|
27,339
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total loans managed
|
|
$
|
427,496
|
|
|
$
|
7,811
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
(Restated)
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
384,143
|
|
|
$
|
7,536
|
|
Loans held for sale
|
|
|
13,490
|
|
|
|
14
|
|
Securitized loans
|
|
|
18,361
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total loans managed
|
|
$
|
415,994
|
|
|
$
|
7,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for which interest is no
longer being accrued. In general, we prospectively discontinue
accruing interest when payment of principal and interest becomes
three or more months past due.
|
Net credit losses incurred during the years ended
December 31, 2004, 2003 and 2002 related to loans held in
our portfolio and underlying Fannie Mae MBS were
$204 million, $214 million and $162 million,
respectively.
|
|
8.
|
Financial
Guaranties and Master Servicing
|
Financial
Guaranties
We generate revenue by absorbing the credit risk of mortgage
loans and mortgage-related securities backing our Fannie Mae MBS
in exchange for a guaranty fee. We primarily issue single-class
and multi-class Fannie Mae MBS and guarantee to the
respective MBS trusts that we will supplement mortgage loan
collections as required to permit timely payment of principal
and interest due on the related Fannie Mae MBS, irrespective of
the cash flows received from borrowers. We also provide credit
enhancements on taxable or tax-exempt mortgage revenue bonds
issued by state and local governmental entities to finance
multifamily housing for low- and moderate- income families.
Additionally, we issue long-term standby commitments that
require us to purchase loans from lenders if the loans meet
certain delinquency criteria.
F-61
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We record a guaranty obligation for (i) guaranties on
lender swap transactions issued or modified on or after
January 1, 2003, pursuant to FIN 45, and
(ii) guaranties on portfolio securitization transactions.
Our guaranty obligation represents our estimated obligation to
stand ready to perform on these guaranties. Our guaranty
obligation is recorded at fair value at inception. The carrying
amount of the guaranty obligation, excluding deferred profit,
was $4.1 billion and $2.8 billion as of
December 31, 2004 and 2003, respectively. We also record an
estimate of incurred credit losses on these guaranties in
Reserve for guaranty losses in the consolidated
balance sheets, as discussed further in Note 5,
Allowance for Loan Losses and Reserve for Guaranty Losses.
These guaranties expose us to credit losses on the mortgage
loans or, in the case of mortgage-related securities, the
underlying mortgage loans of the related securities. The
contractual terms of our guaranties range from 30 days to
30 years. However, the actual term of each guaranty may be
significantly less than the contractual term based on the
prepayment characteristics of the related mortgage loans. For
those guaranties recorded in the consolidated balance sheets,
our maximum potential exposure under these guaranties is
primarily comprised of the unpaid principal balance of the
underlying mortgage loans, which was $1.3 trillion and $1.0
trillion as of December 31, 2004 and 2003, respectively. In
addition, we had exposure of $444.5 billion and
$683.9 billion for other guaranties not recorded in the
consolidated balance sheets as of December 31, 2004 and
2003, respectively. See Note 18, Concentrations of
Credit Risk for further details on these guaranties. Our
maximum potential interest payments associated with these
guaranties are not expected to exceed 120 days of interest
at the certificate rate, since we typically purchase delinquent
mortgage loans when the cost of advancing interest under the
guaranties exceeds the cost of holding the nonperforming loans
in our mortgage portfolio.
The maximum exposure from our guaranties is not representative
of the actual loss we are likely to incur, based on our
historical loss experience. In the event we were required to
make payments under our guaranties, we would pursue recovery of
these payments by exercising our rights to the collateral
backing the underlying loans or through available credit
enhancements, which includes all recourse with third parties and
mortgage insurance. The maximum amount we could recover through
available credit enhancements was $83.7 billion and
$63.5 billion as of December 31, 2004 and 2003,
respectively.
Guaranty
Obligations
The following table displays changes in Guaranty
obligations for the years ended December 31, 2004 and
2003.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Beginning balance, as of January 1
|
|
$
|
6,401
|
|
|
$
|
7
|
|
Additions to guaranty
obligations(1)
|
|
|
5,050
|
|
|
|
9,314
|
|
Amortization of guaranty obligation
into guaranty fee income
|
|
|
(2,173
|
)
|
|
|
(1,678
|
)
|
Impact of consolidation
activity(2)
|
|
|
(494
|
)
|
|
|
(1,242
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance, as of
December 31
|
|
$
|
8,784
|
|
|
$
|
6,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the fair value of the
contractual obligation and deferred profit at issuance of new
guaranties.
|
|
(2) |
|
Upon consolidation of MBS trusts,
we derecognize our guaranty obligation to the respective trust.
See Note 2, Summary of Significant Accounting
Policies for further details on MBS trust consolidation.
|
Deferred profit is a component of Guaranty
obligations in the consolidated balance sheets and is
included in the table above. We record deferred profit on
guaranties issued or modified on or after the January 1,
2003 adoption date of FIN 45 if the consideration we expect
to receive for our guaranty exceeds the estimated fair value of
the guaranty obligation. Deferred profit had a carrying amount
of $4.7 billion and $3.6 billion as of
December 31, 2004 and 2003, respectively. We recognized
deferred profit amortization of $1.3 billion and
F-62
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
$1.0 billion for the years ended December 31, 2004 and
2003, respectively. Prior to the adoption of FIN 45, we did
not separately recognize deferred profit or related amortization.
Fannie
Mae MBS Included in Investments in Securities
For Fannie Mae MBS included in Investments in
securities, we do not eliminate or extinguish the guaranty
arrangement because it is a contractual arrangement with the
unconsolidated MBS trusts. The fair value of Fannie Mae MBS is
determined based on observable market prices because most Fannie
Mae MBS are actively traded. Fannie Mae MBS receive high credit
quality ratings primarily because of our guaranty. Absent our
guaranty, Fannie Mae MBS would be subject to the credit risk on
the underlying loans. We continue to recognize a guaranty
obligation and a reserve for guaranty losses associated with
these securities because we carry these securities in the
consolidated financial statements as guaranteed Fannie Mae MBS.
The fair value of the guaranty obligation, net of deferred
profit, associated with Fannie Mae MBS included in
Investments in securities approximates the fair
value of the credit risk that exists on these Fannie Mae MBS
absent our guaranty. The fair value of the guaranty obligation,
net of deferred profit, associated with the Fannie Mae MBS
included in Investments in securities was
$256 million and $364 million as of December 31,
2004 and 2003, respectively.
Master
Servicing
We do not perform the
day-to-day
servicing of mortgage loans in an MBS trust in a Fannie Mae
securitization transaction; however, we are compensated to carry
out administrative functions for the trust and oversee the
primary servicers performance of the
day-to-day
servicing of the trusts mortgage assets. This arrangement
gives rise to either an MSA or an MSL.
Our MSA, net of a valuation allowance, was $580 million and
$368 million as of December 31, 2004 and 2003,
respectively. We recognized additions to MSA of
$212 million and $299 million for the years ended
December 31, 2004 and 2003, respectively. For the years
ended December 31, 2004, 2003 and 2002, we recognized MSA
amortization of $22 million, $76 million and
$53 million, respectively, with a proportionate reduction
of related deferred profit, where applicable. The MSA fair value
was $808 million and $431 million as of
December 31, 2004 and 2003, respectively.
We record LOCOM adjustments to the MSA through a valuation
allowance. The MSA valuation allowance was $19 million,
$74 million and $81 million as of December, 31,
2004, 2003 and 2002, respectively. We recognized LOCOM
adjustments (recoveries) to the MSA of $(56) million,
$(7) million and $57 million for the years ended
December 31, 2004, 2003 and 2002, respectively. In
addition, we recognized
other-than-temporary
impairment of $23 million, $148 million and
$187 million for the years ended December 31, 2004,
2003 and 2002, respectively, which directly reduced the value of
the MSA as well the valuation allowance for any amount
previously recorded as a LOCOM adjustment.
|
|
9.
|
Short-term
Borrowings and Long-term Debt
|
We obtain the funds to finance our mortgage purchases and other
business activities by selling debt securities in both the
domestic and international capital markets. We issue a variety
of debt securities to fulfill our ongoing funding needs.
Short-term
Borrowings
Our short-term borrowings consist of both Federal funds
purchased and securities sold under agreements to
repurchase and Short-term debt in the
consolidated balance sheets. These are defined as borrowings
with an original contractual maturity of one year or less. The
following table displays our short-term borrowings as of
December 31, 2004 and 2003.
F-63
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
$
|
2,400
|
|
|
|
1.90
|
%
|
|
$
|
3,673
|
|
|
|
1.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. discount notes
|
|
$
|
299,728
|
|
|
|
2.14
|
%
|
|
$
|
327,967
|
|
|
|
1.11
|
%
|
Foreign exchange discount notes
|
|
|
6,591
|
|
|
|
0.84
|
|
|
|
1,214
|
|
|
|
1.37
|
|
Other short-term debt
|
|
|
3,724
|
|
|
|
1.59
|
|
|
|
1,863
|
|
|
|
1.53
|
|
Floating short-term debt
|
|
|
6,250
|
|
|
|
2.19
|
|
|
|
10,235
|
|
|
|
1.03
|
|
Debt from consolidations
|
|
|
3,987
|
|
|
|
2.20
|
|
|
|
2,383
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
320,280
|
|
|
|
2.11
|
%
|
|
$
|
343,662
|
|
|
|
1.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discounts, premiums and
other deferred price adjustments.
|
Our federal funds purchased and securities sold under agreements
to repurchase represent agreements to repurchase securities from
banks with excess reserves on a particular day for a specified
price, with the repayment generally occurring on the following
day. Our short-term debt includes U.S. discount notes and
foreign exchange discount notes, as well as other short-term
debt. Our U.S. discount notes are unsecured general
obligations and have maturities ranging from overnight to
360 days from the date of issuance. Additionally, we issue
foreign exchange discount notes in the Euro money market
enabling investors to hold short-term investments in different
currencies. We have the ability to issue foreign exchange
discount notes in all tradable currencies in maturities from
5 days to 360 days. Both of these types of debt
securities are issued with interest rates that are either fixed
or floating. Additionally, we have short-term debt from
consolidations, which is described below.
F-64
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Long-term
Debt
Long-term debt represents borrowings with an original
contractual maturity of greater than one year. The following
table displays our long-term debt as of December 31, 2004
and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Senior fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2005-2014
|
|
|
$
|
197,729
|
|
|
|
3.18
|
%
|
|
|
2004-2013
|
|
|
$
|
179,815
|
|
|
|
2.88
|
%
|
Benchmark notes & bonds
|
|
|
2005-2030
|
|
|
|
298,234
|
|
|
|
4.79
|
|
|
|
2004-2030
|
|
|
|
326,762
|
|
|
|
4.99
|
|
Foreign exchange notes &
bonds
|
|
|
2005-2028
|
|
|
|
4,792
|
|
|
|
3.68
|
|
|
|
2005-2028
|
|
|
|
3,907
|
|
|
|
3.89
|
|
Other long-term debt
|
|
|
2005-2038
|
|
|
|
39,125
|
|
|
|
6.13
|
|
|
|
2004-2038
|
|
|
|
34,609
|
|
|
|
6.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
539,880
|
|
|
|
4.29
|
|
|
|
|
|
|
|
545,093
|
|
|
|
4.36
|
|
Senior floating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2005-2009
|
|
|
|
69,949
|
|
|
|
2.28
|
|
|
|
2004-2013
|
|
|
|
50,345
|
|
|
|
1.08
|
|
Other long-term debt
|
|
|
2018-2018
|
|
|
|
300
|
|
|
|
2.74
|
|
|
|
2018-2022
|
|
|
|
554
|
|
|
|
2.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,249
|
|
|
|
2.28
|
|
|
|
|
|
|
|
50,899
|
|
|
|
1.09
|
|
Subordinated fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2006-2011
|
|
|
|
6,988
|
|
|
|
5.44
|
|
|
|
2006-2011
|
|
|
|
6,982
|
|
|
|
5.44
|
|
Other subordinated debt
|
|
|
2012-2019
|
|
|
|
7,207
|
|
|
|
6.23
|
|
|
|
2012-2019
|
|
|
|
7,064
|
|
|
|
6.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,195
|
|
|
|
5.84
|
|
|
|
|
|
|
|
14,046
|
|
|
|
5.80
|
|
Debt from consolidations
|
|
|
2005-2039
|
|
|
|
8,507
|
|
|
|
5.76
|
|
|
|
2004-2039
|
|
|
|
7,580
|
|
|
|
6.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
debt(2)
|
|
|
|
|
|
$
|
632,831
|
|
|
|
4.13
|
%
|
|
|
|
|
|
$
|
617,618
|
|
|
|
4.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discounts, premiums and
other deferred price adjustments.
|
|
(2) |
|
Reported amounts include a net
premium and deferred price adjustments of $11.2 billion and
$11.5 billion as of December 31, 2004 and 2003,
respectively.
|
Our long-term debt includes a variety of debt types. We issue
both fixed and floating medium-term notes, which range in
maturity from one to ten years and are issued through dealer
banks. We also offer both senior and subordinated benchmark
notes and bonds in large, regularly-scheduled issuances that
provide increased efficiency, liquidity and tradability to the
market. We did not issue subordinated benchmark debt during
2004, but issued subordinated notes and bonds with a face value
of $4.0 billion in 2003. Our outstanding subordinated
benchmark debt, net of discounts, premiums and other deferred
price adjustments, was $14.2 billion and $14.0 billion
for the years ended December 31, 2004 and 2003,
respectively. Additionally, we have issued notes and bonds
denominated in several foreign currencies and are prepared to
issue debt in numerous other currencies. All foreign currency
denominated transactions are swapped back into U.S. dollars
through the use of cross currency interest rate swaps for the
purpose of funding our mortgage assets.
Our other long-term debt includes callable and non-callable
securities, which include all long-term non-benchmark
securities, such as zero-coupons, fixed and other long-term
securities, and are generally negotiated underwritings with one
or more dealers or dealer banks.
Debt
from Consolidations
Debt from consolidations includes debt from both MBS trust
consolidations and certain secured borrowings. Debt from MBS
trust consolidations represents our liability to third-party
beneficial interest holders when the
F-65
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
assets of corresponding trust have been included in the
consolidated balance sheets and we do not own all of the
beneficial interests in the trust. Long-term debt from these
transactions in the consolidated balance sheets as of
December 31, 2004 and 2003 was $5.8 billion and
$5.7 billion, respectively.
Additionally, we record a secured borrowing, to the extent of
proceeds received, upon the transfer of financial assets from
the consolidated balance sheets that does not qualify as a sale.
Long-term debt from these transactions in the consolidated
balance sheets as of December 31, 2004 and 2003 was
$2.7 billion and $1.9 billion, respectively.
Characteristics
of Debt
As of December 31, 2004 and 2003, we had zero-coupon debt
with a face amount of $325.4 billion and
$347.1 billion, respectively, which had an effective
interest rate of 2.2% and 1.2%, respectively.
We issue callable debt instruments to manage the duration and
prepayment risk of expected cash flows of the mortgage assets we
own. Our outstanding debt as of December 31, 2004 included
$212.2 billion of callable debt that could be redeemed in
whole or in part at our option any time on or after a specified
date.
The table below displays the amount of our long-term debt as of
December 31, 2004 by year of maturity for each of the years
2005-2009
and thereafter. The first column assumes that we pay off this
debt at maturity, while the second column assumes that we redeem
our callable debt at the next available call date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming Callable Debt
|
|
|
|
Long-Term Debt by
|
|
|
Redeemed at Next
|
|
|
|
Year of Maturity
|
|
|
Available Call Date
|
|
|
|
(Dollars in millions)
|
|
|
2005
|
|
$
|
145,955
|
|
|
$
|
301,896
|
|
2006
|
|
|
107,168
|
|
|
|
92,883
|
|
2007
|
|
|
100,224
|
|
|
|
62,437
|
|
2008
|
|
|
58,742
|
|
|
|
39,071
|
|
2009
|
|
|
52,980
|
|
|
|
30,878
|
|
Thereafter
|
|
|
159,255
|
|
|
|
97,159
|
|
Debt from
consolidations(1)
|
|
|
8,507
|
|
|
|
8,507
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
$
|
632,831
|
|
|
$
|
632,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contractual maturity of debt from
consolidations is not a reliable indicator of expected maturity
because borrowers of the underlying loans generally have the
right to prepay their obligations at any time.
|
|
(2) |
|
Reported amount includes a net
premium and deferred price adjustments of $11.2 billion.
|
During the year ended December 31, 2004, we called
$155.6 billion of debt with a weighted average interest
rate of 2.8% and repurchased $4.3 billion of debt with a
weighted average interest rate of 3.5%. During the year ended
December 31, 2003, we called $188.7 billion of debt
with a weighted average interest rate of 3.3% and repurchased
$19.8 billion of debt with a weighted average interest rate
of 5.6%. During the year ended December 31, 2002, we called
$121.0 billion of debt with a weighted average interest
rate of 5.0% and repurchased $7.9 billion of debt with a
weighted average interest rate of 6.2%. We recorded losses from
these debt extinguishments of $152 million,
$2.7 billion and $814 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
|
|
10.
|
Derivative
Instruments
|
We use derivative instruments, in combination with our debt
issuances, to reduce the duration and prepayment risk relating
to the mortgage assets we own. We also enter into commitments to
purchase and sell securities and purchase loans. We account for
some of these commitments as derivatives. Typically, we settle
the notional amount of our mortgage commitments; however, we do
not settle the notional amount of our derivative instruments.
Notional amounts, therefore, simply provide the basis for
calculating actual payments or settlement amounts.
F-66
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Although derivative instruments are critical to our interest
rate risk management strategy, we did not apply hedge accounting
to instruments entered into during the three-year period ended
December 31, 2004. As such, all fair value changes and
gains and losses on these derivatives, including accrued
interest, were recognized as Derivatives fair value
losses, net in the consolidated statements of income.
Prior to our adoption of SFAS 133, certain of our
derivative instruments met the criteria for hedge accounting
under the accounting standards at that time. Accordingly,
effective with our adoption of SFAS 133, we deferred gains
of approximately $230 million from fair value-type hedges
as basis adjustments to the related debt and $75 million
for cash flow-type hedges in AOCI. We recorded amortization
related to the fair value-type hedges of $31 million,
$42 million and $37 million for the years ended
December 31, 2004, 2003 and 2002, respectively, as a
reduction of Interest expense in the consolidated
statements of income. We recorded amortization related to the
cash flow-type hedges of $7 million, $8 million and
$17 million for the years ended December 31, 2004,
2003 and 2002, respectively, as a reduction of Interest
expense in the consolidated statements of income.
Derivatives
We issue various types of debt to finance the acquisition of
mortgages and mortgage-related securities. We use interest rate
swaps and interest rate options, in combination with our debt
issuances, to better match both the duration and prepayment risk
of our mortgages and mortgage-related securities, which we would
not be able to accomplish solely through the issuance of debt.
These instruments primarily include interest rate swaps,
swaptions and caps. Interest rate swaps provide for the exchange
of fixed and variable interest payments based on contractual
notional principal amounts. These may include callable swaps,
which give counterparties or us the right to terminate interest
rate swaps before their stated maturities. Swaptions provide us
with an option to enter into interest rate swaps at a future
date. Caps provide ceilings on the interest rates of our
variable-rate debt. We also use basis swaps, which provide for
the exchange of variable payments based on different interest
rate indices, such as the Treasury Bill rate, the Prime rate, or
the London Inter-Bank Offered Rate. Although our
foreign-denominated debt represents approximately 1% of total
debt outstanding as of December 31, 2004 and 2003, we enter
into foreign currency swaps to effectively convert our
foreign-denominated debt into U.S. dollars.
F-67
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays the outstanding notional balances
and fair value of our derivative instruments as of
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Notional
|
|
|
Value(1)
|
|
|
Notional
|
|
|
Value(1)
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
142,017
|
|
|
$
|
(6,687
|
)
|
|
$
|
364,377
|
|
|
$
|
(12,197
|
)
|
Receive-fixed
|
|
|
81,193
|
|
|
|
479
|
|
|
|
201,229
|
|
|
|
3,393
|
|
Basis
|
|
|
32,273
|
|
|
|
7
|
|
|
|
32,303
|
|
|
|
(8
|
)
|
Foreign currency
|
|
|
11,453
|
|
|
|
686
|
|
|
|
5,195
|
|
|
|
335
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
170,705
|
|
|
|
3,370
|
|
|
|
163,980
|
|
|
|
5,693
|
|
Receive-fixed
|
|
|
147,570
|
|
|
|
7,711
|
|
|
|
141,195
|
|
|
|
8,468
|
|
Interest rate caps
|
|
|
104,150
|
|
|
|
638
|
|
|
|
130,350
|
|
|
|
607
|
|
Other(2)
|
|
|
733
|
|
|
|
84
|
|
|
|
379
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690,094
|
|
|
|
6,288
|
|
|
|
1,039,008
|
|
|
|
6,389
|
|
Accrued interest
|
|
|
|
|
|
|
(856
|
)
|
|
|
|
|
|
|
(2,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
690,094
|
|
|
$
|
5,432
|
|
|
$
|
1,039,008
|
|
|
$
|
3,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the net of
Derivative assets at fair value and Derivative
liabilities at fair value for derivatives excluding
mortgage commitment derivatives.
|
|
(2) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts that are accounted
for as derivatives. The mortgage insurance contracts have
payment provisions that are not based on a notional amount.
|
Mortgage
Commitment Derivatives
We enter into forward purchase and sale commitments that lock in
the future delivery of mortgage loans and mortgage-related
securities at a fixed price or yield. Certain commitments to
purchase mortgage loans and purchase or sell mortgage-related
securities meet the criteria of a derivative and these
commitments are recorded in the consolidated balance sheets at
fair value as either Derivative assets at fair value
or Derivative liabilities at fair value. The
following table displays the outstanding notional balance and
fair value for our mortgage commitment derivatives as of
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Notional
|
|
|
Value(1)
|
|
|
Notional
|
|
|
Value(1)
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage commitments to purchase
whole loans
|
|
$
|
2,118
|
|
|
$
|
4
|
|
|
$
|
2,709
|
|
|
$
|
10
|
|
Forward contracts to purchase
mortgage-related securities
|
|
|
20,059
|
|
|
|
43
|
|
|
|
19,882
|
|
|
|
142
|
|
Forward contracts to sell
mortgage-related securities
|
|
|
18,423
|
|
|
|
(35
|
)
|
|
|
20,969
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,600
|
|
|
$
|
12
|
|
|
$
|
43,560
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the net of
Derivative assets at fair value and Derivative
liabilities at fair value for mortgage commitment
derivatives.
|
F-68
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We operate as a government-sponsored enterprise. We are subject
to federal income tax, but we are exempt from state and local
income taxes. The following table displays the components of our
provision for federal income taxes for the years ended
December 31, 2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Current income tax expense
|
|
$
|
2,651
|
|
|
$
|
3,216
|
|
|
$
|
2,935
|
|
Deferred income tax benefit
|
|
|
(1,627
|
)
|
|
|
(782
|
)
|
|
|
(2,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for federal income taxes
|
|
$
|
1,024
|
|
|
$
|
2,434
|
|
|
$
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above excludes the income tax effect of our minimum
pension liability, unrealized gains and losses of AFS securities
and guaranty assets and buy-ups, since the tax effect of those
items is recognized directly in Stockholders
equity. Stockholders equity increased by
$500 million and $3.3 billion for the years ended
December 31, 2004 and 2003, respectively, and decreased by
$3.5 billion for the year ended December 31, 2002, as
a result of these tax effects. Additionally, the table above
does not reflect the tax impact of extraordinary gains (losses)
or cumulative effect of change in accounting principle as these
amounts are recorded in the consolidated statements of income,
net of tax effect. We recorded a tax benefit of $4 million
for the year ended December 31, 2004 and tax expense of
$103 million for the year ended December 31, 2003
related to extraordinary gains (losses). In addition, for the
year ended December 31, 2003, we recorded tax expense of
$20 million related to the cumulative effect of change in
accounting principle.
The following table displays the difference between our
effective tax rates and the statutory federal tax rates for the
years ended December 31, 2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Statutory corporate tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Tax-exempt interest and dividends
received deductions
|
|
|
(5.4
|
)
|
|
|
(3.0
|
)
|
|
|
(6.9
|
)
|
Equity investments in affordable
housing projects
|
|
|
(14.5
|
)
|
|
|
(7.4
|
)
|
|
|
(11.8
|
)
|
Penalty
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.3
|
)
|
|
|
(0.9
|
)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
17.2
|
%
|
|
|
23.7
|
%
|
|
|
17.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate is the provision for federal income
taxes, excluding the tax effect of extraordinary items and
cumulative effect of change in accounting principle, expressed
as a percentage of income before federal income taxes. The
effective tax rate for the years ended December 31, 2004,
2003 and 2002 is different from the federal statutory rate of
35% primarily due to the benefits of our holdings of tax-exempt
investments as well as our investments in housing projects
eligible for the low-income housing tax credit and other equity
investments that provide tax credits. In 2004, offsetting these
decreases to the effective tax rate was the tax impact of the
$400 million civil penalty agreed to with OFHEO and the SEC
that is non-deductible for tax purposes. The higher effective
rate in 2003 as compared to 2004 and 2002 relates to our higher
earnings in 2003.
F-69
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays our deferred tax assets and
deferred tax liabilities as of December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Debt and derivative instruments
|
|
$
|
5,619
|
|
|
$
|
4,428
|
|
Net guaranty assets and obligations
and related items
|
|
|
793
|
|
|
|
576
|
|
Cash fees and other upfront payments
|
|
|
601
|
|
|
|
549
|
|
Allowance for loan losses and basis
in REO properties
|
|
|
545
|
|
|
|
412
|
|
Employee compensation and benefits
|
|
|
143
|
|
|
|
150
|
|
Other, net
|
|
|
216
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
7,917
|
|
|
$
|
6,251
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Mortgage and mortgage-related assets
|
|
|
1,764
|
|
|
|
2,107
|
|
Partnership and equity investments
and related credits
|
|
|
79
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
1,843
|
|
|
|
2,169
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
6,074
|
|
|
$
|
4,082
|
|
|
|
|
|
|
|
|
|
|
We are subject to examination by the Internal Revenue Service
(IRS). The IRS is currently examining our
2002-2004
tax returns. We have issues before the IRS Appeals Division
related to tax years
1999-2001.
We and the IRS have resolved all issues raised by the IRS for
the years prior to 1999.
F-70
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays the computation of basic and
diluted earnings per share of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars and shares in millions,
|
|
|
|
except per share amounts)
|
|
|
Income before extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
$
|
4,975
|
|
|
$
|
7,852
|
|
|
$
|
3,914
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
(8
|
)
|
|
|
195
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,967
|
|
|
|
8,081
|
|
|
|
3,914
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(165
|
)
|
|
|
(150
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
4,802
|
|
|
$
|
7,931
|
|
|
$
|
3,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstandingbasic
|
|
|
970
|
|
|
|
977
|
|
|
|
992
|
|
Dilutive potential common
shares(1)
|
|
|
3
|
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstandingdiluted
|
|
|
973
|
|
|
|
981
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses) and cumulative effect of change in accounting
principle(2)
|
|
$
|
4.96
|
|
|
$
|
7.88
|
|
|
$
|
3.83
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
(0.01
|
)
|
|
|
0.20
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.95
|
|
|
$
|
8.12
|
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses) and cumulative effect of change in accounting
principle(2)
|
|
$
|
4.94
|
|
|
$
|
7.85
|
|
|
$
|
3.81
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
0.20
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.94
|
|
|
$
|
8.08
|
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Dilutive potential common shares
consist primarily of the dilutive effect from our nonqualified
stock options.
|
|
(2) |
|
Amount is net of preferred stock
dividends and issuance costs at redemption.
|
|
|
13.
|
Stock-Based
Compensation Plans
|
We have two stock-based compensation plans, the 1985 Employee
Stock Purchase Plan and the Stock Compensation Plan of 2003.
Under these plans, we offer various stock-based compensation
programs where we provide employees an opportunity to purchase
Fannie Mae common stock or we periodically make stock awards to
certain employees in the form of nonqualified stock options,
performance share awards, restricted stock awards, restricted
stock units or stock bonus awards. In connection with current
and predecessor stock-based compensation plans, we recorded
compensation expense of $105 million, $113 million and
$42 million for the years ended December 31, 2004,
2003 and 2002, respectively.
Stock-Based
Compensation Plans
The 1985 Employee Stock Purchase Plan (the 1985 Purchase
Plan) provides employees an opportunity to purchase shares
of Fannie Mae common stock at a discount to the fair market
value of the stock during specified purchase periods. Our Board
of Directors sets the terms and conditions of offerings under
the 1985 Purchase Plan, including the number of available shares
and the size of the discount. In 2004, our shareholders
F-71
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
approved the Board of Directors recommendation to increase
the aggregate maximum number of shares of common stock available
for employee purchase to 50 million from 41 million.
Since its inception in 1985, we have made available
39,581,505 shares under the 1985 Purchase Plan. In any
purchase period, the maximum number of shares available for
purchase by an eligible employee is the largest number of whole
shares having an aggregate fair market value on the first day of
the purchase period that does not exceed $25,000. The shares
offered under the 1985 Purchase Plan are authorized and unissued
shares of common stock or treasury shares.
The Stock Compensation Plan of 2003 (the 2003 Plan)
is the successor to the Stock Compensation Plan of 1993 (the
1993 Plan). By its terms, no new awards were
permitted to be made under the 1993 Plan after May 20, 2003
other than automatic grants of restricted stock to directors
joining our Board of Directors on or prior to May 22, 2006.
The 2003 Plan, like the 1993 Plan, enables us to make stock
awards in various forms and combinations. Under the 2003 Plan,
these include stock options, stock appreciation rights,
restricted stock, restricted stock units, performance share
awards and stock bonus awards. The aggregate maximum number of
shares of common stock available for award to employees and
non-management directors under the 2003 Plan is 40 million.
Since its inception in 2003 and after the effects of
cancellations, we have awarded 4,028,732 shares under this
plan. The shares awarded under the 2003 Plan may be authorized
and unissued shares, treasury shares or shares purchased on the
open market.
Stock-Based
Compensation Programs
Nonqualified
Stock Options
Under the 2003 Plan, we may grant stock options to eligible
employees and non-management members of the Board of Directors.
Generally, employees and non-management directors cannot
exercise their options until at least one year subsequent to the
grant date, and they expire ten years from the date of grant.
Typically options vest 25% per year beginning on the first
anniversary of the date of grant. The exercise price of each
option was equal to the fair market value of our common stock on
the date we granted the option. Since 2003, we have recorded
compensation expense for grants under this plan under
SFAS 123. We recorded compensation expense related to
nonqualified stock options of $34 million and
$20 million for the years ended December 31, 2004 and
2003, respectively. Prior to our adoption of SFAS 123, we
did not recognize compensation expense for this program.
Under the 1993 Plan, our Board of Directors approved the EPS
Challenge Option Grant in January 2000 for all regular full-time
and part-time employees. At that time, all employees, other than
management group employees, received a one-time grant of 350
options at a price of $62.50 per share, the fair market
value of the stock on the grant date. Management group employees
received option grants equivalent to a set percentage of their
November 1999 stock grants. Subsequent grants were made to new
or promoted employees. EPS Challenge Option Grants were
scheduled to vest over a stated time period with accelerated
vesting if we met target financial performance goals in 2003
based on a pre-determined earnings per share amount set by the
Board of Directors. The Board of Directors determined that we
exceeded the target goal in December 2003 and the EPS Challenge
options vested in January 2004.
F-72
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays nonqualified stock option activity
for the years ended December 31, 2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
|
|
|
Exercise
|
|
|
Fair Value
|
|
|
|
Options(1)
|
|
|
Price
|
|
|
at Grant Date
|
|
|
Options(1)
|
|
|
Price
|
|
|
at Grant Date
|
|
|
Options(1)
|
|
|
Price
|
|
|
at Grant Date
|
|
|
Balance, January 1
|
|
|
26,077
|
|
|
$
|
62.78
|
|
|
$
|
20.71
|
|
|
|
25,131
|
|
|
$
|
59.16
|
|
|
$
|
19.94
|
|
|
|
26,234
|
|
|
$
|
57.05
|
|
|
$
|
19.22
|
|
Granted
|
|
|
2,595
|
|
|
|
78.04
|
|
|
|
20.83
|
|
|
|
3,747
|
|
|
|
68.40
|
|
|
|
19.42
|
|
|
|
869
|
|
|
|
78.39
|
|
|
|
26.24
|
|
Exercised
|
|
|
(3,263
|
)
|
|
|
39.63
|
|
|
|
12.52
|
|
|
|
(2,302
|
)
|
|
|
30.52
|
|
|
|
9.28
|
|
|
|
(1,484
|
)
|
|
|
29.58
|
|
|
|
9.37
|
|
Forfeited
and/or
expired
|
|
|
(560
|
)
|
|
|
76.53
|
|
|
|
25.54
|
|
|
|
(499
|
)
|
|
|
71.60
|
|
|
|
24.74
|
|
|
|
(488
|
)
|
|
|
69.97
|
|
|
|
24.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
|
24,849
|
|
|
$
|
67.10
|
|
|
$
|
21.65
|
|
|
|
26,077
|
|
|
$
|
62.78
|
|
|
$
|
20.71
|
|
|
|
25,131
|
|
|
$
|
59.16
|
|
|
$
|
19.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable,
December 31
|
|
|
18,760
|
|
|
$
|
64.73
|
|
|
$
|
21.74
|
|
|
|
15,867
|
|
|
$
|
58.27
|
|
|
$
|
19.32
|
|
|
|
15,619
|
|
|
$
|
51.48
|
|
|
$
|
16.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options in thousands.
|
The following table displays information about our nonqualified
stock options outstanding as of December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Options(1)
|
|
|
Life
|
|
|
Price
|
|
|
Options(1)
|
|
|
Price
|
|
|
$18.00 - $35.00
|
|
|
1,173
|
|
|
|
0.9
|
|
|
$
|
27.45
|
|
|
|
1,173
|
|
|
$
|
27.45
|
|
35.01 - 53.00
|
|
|
3,034
|
|
|
|
2.5
|
|
|
|
46.48
|
|
|
|
3,033
|
|
|
|
46.48
|
|
53.01 - 70.00
|
|
|
9,029
|
|
|
|
5.2
|
|
|
|
65.84
|
|
|
|
6,511
|
|
|
|
64.91
|
|
70.01 - 87.00
|
|
|
11,613
|
|
|
|
5.8
|
|
|
|
77.47
|
|
|
|
8,043
|
|
|
|
76.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,849
|
|
|
|
5.0
|
|
|
$
|
67.10
|
|
|
|
18,760
|
|
|
$
|
64.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options in thousands.
|
Employee
Stock Purchase Program Plus
Prior to 2003, the Board of Directors established offerings to
eligible employees under the 1985 Purchase Plan. Beginning with
the 2003 offering, the program was redesigned as a two-part
program known as the Employee Stock Purchase Program Plus. The
new program consisted of two parts: (i) an opportunity to
receive the right to purchase shares of common stock pursuant to
the 1985 Purchase Plan (the ESPP Component); and
(ii) a contingent stock bonus award pursuant to the
provisions of the 1993 Plan for the 2003 offering and the 2003
Plan for the 2004 offering (the Plus Component). In
2004 and 2003, under the ESPP Component, employees could
purchase shares at 95% of the stock price on the grant date. In
contrast, prior offerings, including the 2002 offering,
permitted eligible employees to purchase shares at 85% of the
stock price on the date of grant. Under the Plus Component,
employees were granted a stock bonus contingent upon meeting our
predetermined corporate thresholds.
Under the 2004 offering of the ESPP Component of the plan, we
issued 2,568 shares of common stock in 2004, all of which
were purchased by employees who retired during the year.
Additionally, eligible employees purchased 1,764,983 shares
of common stock in 2004 at $61.28 per share under the 2003
offering. In 2003, employees purchased 5,580 shares of
common stock in 2003 at $68.46 per share under the 2002
offering. All shares vest immediately upon purchase by the
employee.
F-73
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Under the Plus Component of the plan, we did not award any stock
grants for the 2004 offering because we were unable to determine
whether the performance criteria had been met because we did not
have financial data on which we could rely to make the
determination. Instead, the Compensation Committee of the Board
of Directors replaced the Plus Component of the offering with a
cash payment of $2,500 to each eligible employee. Under the Plus
Component for the 2003 offering, employees received
177,475 shares in 2004. The Plus Component was not part of
the 2002 offering.
The ESPP Component under the program is considered to be
compensatory under SFAS 123 due to certain option features.
Therefore, we recognized compensation expense for grants of
$13 million and $12 million in 2004 and 2003,
respectively. Prior to our adoption of SFAS 123, we did not
recognize compensation expense related to the ESPP. The Plus
Component of the program is also compensatory. As such, we
recorded compensation expense of $1 million and
$11 million related to the stock grants in 2004 and 2003,
respectively. The 2004 amount was lower than the 2003 amount due
to $12 million of expense recorded for the cash payments
made as a replacement of the stock grants, as discussed above.
There were no grants under this component of the program in 2002.
Performance
Share Program
Under the 1993 and 2003 Plans, certain eligible employees may be
awarded performance shares. This program has only been made
available to Senior Vice Presidents and above. Under the plans,
the terms and conditions of the awards are established by the
Compensation Committee for the 2003 Plan and by the
non-management members of the Board of Directors for the 1993
Plan. Performance shares become actual awards of common stock if
the goals set for the multi-year performance cycle are attained.
At the end of the performance period, we distribute common stock
in two or three installments over a period not longer than three
years as long as the participant remains employed by Fannie Mae.
Generally, dividend equivalents are earned on unpaid
installments of completed cycles and are paid at the same time
the shares are delivered to participants. The aggregate market
value of performance shares awarded is capped at three times the
stock price on the date of grant. The Board authorized and
granted 517,373 shares, 466,216 shares and
505,588 shares for the three-year performance periods
beginning in January of 2004, 2003 and 2002, respectively.
Performance shares had a weighted average grant date fair value
of $71.83, $64.24 and $75.56 in 2004, 2003 and 2002,
respectively.
Outstanding contingent grants of common stock under the
Performance Share Program as of December 31, 2004 totaled
381,920, 423,251, 585,341 and 286,549 for the
2004-2006,
2003-2005,
2002-2004
and
2001-2003
performance periods, respectively. We recorded compensation
expense for these grants of $24 million, $55 million
and $34 million in 2004, 2003 and 2002, respectively. These
shares have not been issued because the Compensation Committee
has not yet determined if we achieved our goals for each period
due to the restatement. A determination as to payment for this
program will be made by the Board of Directors after reviewing
the restated consolidated financial results and assessing its
impact on the quantitative measures as well as considerations of
qualitative measures.
Restricted
Stock Program
Under the 1993 and 2003 Plans, employees may be awarded grants
as restricted stock awards (RSA) and, under the 2003
Plan, also as restricted stock units (RSU),
depending on years of service and age at the time of grant. Each
RSU represents the right to receive a share of common stock at
the time of vesting. As a result, RSUs are generally similar to
restricted stock, except that RSUs do not confer voting rights
on their holders. By contrast, the RSAs do have voting rights.
Vesting of the grants is based on continued employment. In
general, grants vest in equal annual installments over three or
four years beginning on the first anniversary of the date of
grant. The compensation expense related to restricted stock is
based on the grant date fair value of our common stock.
In 2004, we awarded 668 shares of restricted stock under
the 1993 Plan and 1,035,891 shares of restricted stock
under the 2003 Plan. We released 244,535 shares in 2004 as
awards vested. In 2003, we awarded 506,625 shares of
restricted stock under the 1993 Plan and 65,624 shares of
restricted stock under the 2003
F-74
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Plan. We released 116,119 shares in 2003 as awards vested.
Unvested shares totaled 1,522,859 and 806,274 as of
December 31, 2004 and 2003, respectively, at a weighted
average fair value at grant date of $75.32 and $70.98,
respectively.
We recorded compensation expense for these grants of
$32 million, $16 million and $8 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
Stock
Appreciation Rights
Under the 2003 Plan, we are permitted to grant to employees
Stock Appreciation Rights (SARs), an award of common
stock or an amount of cash, or a combination of shares of common
stock and cash, the aggregate amount or value of which is
determined by reference to a change in the fair value of the
common stock. As of December 31, 2004, no SARs had been
granted.
Shares Available
for Future Issuance
The 1985 Purchase Plan and the 2003 Plan allow us to issue up to
90 million shares of common stock to eligible employees for
all programs. As of December 31, 2004, 10,418,495 and
35,971,268 shares remained available for grant under the
1985 Purchase Plan and the 2003 Plan, respectively.
|
|
14.
|
Employee
Retirement Benefits
|
We sponsor both defined benefit plans and defined contribution
plans for our employees, as well as a healthcare plan that
provides certain health benefits for retired employees and their
dependents.
Defined
Benefit Pension Plans and Postretirement Health Care
Plan
Our defined benefit pension plans include qualified and
nonqualified noncontributory plans. Pension plan benefits are
based on years of credited service and a percentage of eligible
compensation. All regular full-time employees and regular
part-time employees regularly scheduled to work at least
1,000 hours per year are eligible to participate in the
qualified defined benefit pension plan. We fund our qualified
pension plan through employer contributions to an irrevocable
trust that is maintained for the sole benefit of plan
participants. Contributions to our qualified pension plan are
subject to a minimum funding requirement and a maximum funding
limit under the Employee Retirement Income Security Act of 1974
(ERISA) and IRS regulations. Although we were not
required to make any contributions to the qualified plan in
2004, 2003 or 2002, we did elect to make discretionary
contributions in each of these years.
Our nonqualified pension plans include an Executive Pension
Plan, Supplemental Pension Plan and the 2003 Supplemental
Pension Plan, which is a bonus-based plan. These plans cover
certain executive-level employees and supplement the benefits
payable under the qualified pension plan. The Compensation
Committee of the Board of Directors selects those who can
participate in the Executive Pension Plan. The Board of
Directors approves the pension goals under the Executive Pension
Plan for participants who are at the level of Executive Vice
President and above and payments are reduced by any amounts
payable under the qualified plan. Participants typically vest in
their pension benefits after ten years of service as a
participant, with partial vesting usually beginning after five
years. Benefits under the Executive Pension Plan are paid
through a rabbi trust.
The Supplemental Pension Plan provides retirement benefits to
employees who do not receive a benefit from the Executive
Pension Plan and whose salary exceeds the statutory compensation
cap applicable to the qualified plan or whose benefit is limited
by the statutory benefit cap. Similarly, the 2003 Supplemental
Pension Plan provides additional benefits to our officers based
on the annual cash bonus received by an officer, but the amount
of bonus considered is limited to 50% of the officers
salary. We pay benefits for our unfunded Supplemental Pension
Plans from our cash and cash equivalents.
We also sponsor a contributory postretirement Health Care Plan
that covers substantially all regular full-time employees who
meet the applicable service requirements. We accrue and pay the
benefits for our unfunded postretirement Health Care Plan from
our cash and cash equivalents.
F-75
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Net periodic benefit costs are determined on an actuarial basis
and are included in Salaries and employee benefits
expense in the consolidated statements of income. The
following table displays components of our net periodic benefit
costs for our qualified and nonqualified pension plans and our
post-retirement Health Care Plan for the years ended
December 31, 2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
Pension Plans
|
|
|
|
|
|
Pension Plans
|
|
|
|
|
|
Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
qualified
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Service cost
|
|
$
|
38
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
31
|
|
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
25
|
|
|
$
|
3
|
|
|
$
|
7
|
|
Interest cost
|
|
|
32
|
|
|
|
7
|
|
|
|
8
|
|
|
|
29
|
|
|
|
7
|
|
|
|
7
|
|
|
|
24
|
|
|
|
3
|
|
|
|
6
|
|
Expected return on plan assets
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
Amortization of initial transition
obligation
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
2
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
3
|
|
|
|
4
|
|
|
|
2
|
|
|
|
5
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
45
|
|
|
$
|
21
|
|
|
$
|
21
|
|
|
$
|
46
|
|
|
$
|
16
|
|
|
$
|
18
|
|
|
$
|
27
|
|
|
$
|
7
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs, which are changes in benefit obligations
due to plan amendments, are amortized over the average remaining
service period for active employees for our pension plans and
prior to the full eligibility date for the other postretirement
Health Care Plan. Amortization of prior service costs and
unrecognized gains or losses are included in the net periodic
benefit costs in Salaries and employee benefits
expense in the consolidated statements of income.
Contributions to the qualified pension plan increase the plan
assets while contributions to the unfunded plans are made to
fund current period benefit payments. We were not required to
make minimum contributions to our qualified pension plan for the
years ended December 31, 2004 and 2003 since we met the
minimum funding requirements as prescribed by ERISA. However, we
made discretionary contributions to our qualified pension plan
of $121 million and $80 million for the years ended
December 31, 2004 and 2003, respectively. We also made a
discretionary contribution to our qualified pension plan of
$37 million in 2005.
F-76
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays the status of our pension and
post-retirement plans as of December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
Pension Plans
|
|
|
|
|
|
Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Change in Benefit
Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
472
|
|
|
$
|
115
|
|
|
$
|
126
|
|
|
$
|
391
|
|
|
$
|
95
|
|
|
$
|
101
|
|
Service cost
|
|
|
38
|
|
|
|
8
|
|
|
|
10
|
|
|
|
31
|
|
|
|
6
|
|
|
|
8
|
|
Interest cost
|
|
|
32
|
|
|
|
7
|
|
|
|
8
|
|
|
|
29
|
|
|
|
7
|
|
|
|
7
|
|
Plan participants
contributions
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Plan amendments
|
|
|
|
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Net actuarial loss
|
|
|
63
|
|
|
|
13
|
|
|
|
2
|
|
|
|
27
|
|
|
|
9
|
|
|
|
18
|
|
Benefits paid
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
598
|
|
|
$
|
146
|
|
|
$
|
139
|
|
|
$
|
472
|
|
|
$
|
115
|
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
376
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
234
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
121
|
|
|
|
2
|
|
|
|
4
|
|
|
|
80
|
|
|
|
2
|
|
|
|
3
|
|
Plan participants
contributions
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of
year
|
|
$
|
537
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
376
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Funded Status
to Net Amount Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of period
|
|
$
|
(61
|
)
|
|
$
|
(146
|
)
|
|
$
|
(139
|
)
|
|
$
|
(96
|
)
|
|
$
|
(115
|
)
|
|
$
|
(126
|
)
|
Unrecognized net actuarial loss
|
|
|
119
|
|
|
|
37
|
|
|
|
36
|
|
|
|
78
|
|
|
|
27
|
|
|
|
35
|
|
Unrecognized prior service cost
(benefit)
|
|
|
1
|
|
|
|
21
|
|
|
|
(8
|
)
|
|
|
1
|
|
|
|
17
|
|
|
|
(6
|
)
|
Unrecognized net transition
obligation
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
59
|
|
|
$
|
(88
|
)
|
|
$
|
(96
|
)
|
|
$
|
(17
|
)
|
|
$
|
(71
|
)
|
|
$
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
59
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Intangible and other assets
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
|
|
|
|
|
(88
|
)
|
|
|
(96
|
)
|
|
|
(17
|
)
|
|
|
(71
|
)
|
|
|
(80
|
)
|
Additional minimum pension liability
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
59
|
|
|
$
|
(88
|
)
|
|
$
|
(96
|
)
|
|
$
|
(17
|
)
|
|
$
|
(71
|
)
|
|
$
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-77
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Actuarial gains or losses are annual changes in the amount of
either the benefit obligation or the market-related value of
plan assets resulting from experience different from that
assumed or from changes in assumptions.
The following table displays information pertaining to the
projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for our pension plans as of
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Non-
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Qualified
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Projected benefit obligation
|
|
$
|
598
|
|
|
$
|
146
|
|
|
$
|
472
|
|
|
$
|
115
|
|
Accumulated benefit obligation
|
|
|
434
|
|
|
|
105
|
|
|
|
348
|
|
|
|
80
|
|
Fair value of plan assets
|
|
|
537
|
|
|
|
|
|
|
|
376
|
|
|
|
|
|
Our current funding policy is to contribute an amount at least
equal to the minimum required contribution under ERISA as well
as to maintain a 105% current liability funded status as of
January 1 of every year. The plan assets of our funded qualified
pension plan were greater than our accumulated benefit
obligation by $103 million and $28 million as of
December 31, 2004 and 2003, respectively.
The pension and postretirement benefit amounts recognized in the
consolidated financial statements are determined on an actuarial
basis using several different assumptions that are measured at
December 31, 2004, 2003 and 2002. The following table
displays the actuarial assumptions for our principal plans used
in determining the net periodic benefit expense in the
consolidated statements of income for the years ended
December 31, 2004, 2003 and 2002 and the net prepaid
(liability) in the consolidated balance sheets as of
December 31, 2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Weighted average assumptions
used to determine net periodic benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
|
|
7.25
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
|
|
7.25
|
%
|
Average rate of increase in future
compensation
|
|
|
5.75
|
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected long-term weighted average
rate of return on plan assets
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
8.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions
used to determine benefit obligation at year-end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
Average rate of increase in future
compensation
|
|
|
5.75
|
|
|
|
5.75
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate
assumed for next year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.00
|
%
|
|
|
9.00
|
%
|
|
|
11.50
|
%
|
Post-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.00
|
|
|
|
11.00
|
|
|
|
13.00
|
|
Rate that cost trend rate gradually
declines to and remains at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00
|
|
|
|
4.50
|
|
|
|
4.50
|
|
Year that rate reaches the ultimate
trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
2007
|
|
|
|
2007
|
|
As of December 31, 2004, the effect of a 1% increase in the
assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation by
$4 million, while a 1% decrease would decrease the
accumulated postretirement benefit obligation by a comparable
$4 million. There would be no change on the net periodic
postretirement benefit cost from a 1% change in either direction.
We review our pension and postretirement benefit plan
assumptions on an annual basis. We calculate the net periodic
benefit expense each year based on assumptions established at
the end of the previous calendar year.
F-78
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In determining our net periodic benefit costs, we assess the
discount rate to be used in the annual actuarial valuation of
our pension and postretirement benefit obligations at year-end.
We consider the current yields on high-quality, corporate
fixed-income debt instruments with maturities corresponding to
the expected duration of our benefit obligations and supported
by cash flow matching analysis based on expected cash flows
specific to the characteristics of our plan participants, such
as age and gender. As of December 31, 2004, we reduced the
discount rate used to determine our accumulated projected
benefit obligation by 50 basis points to 5.75% to reflect a
corresponding rate reduction in corporate-fixed income debt
instruments. We also assess the long-term rate of return on plan
assets for our qualified pension plan. The return on asset
assumption reflects our expectations for plan-level returns over
a term of approximately seven to ten years. Given the
longer-term nature of the assumption and a stable investment
policy, it may or may not change from year to year. However, if
longer-term market cycles or other economic developments impact
the global investment environment, or asset allocation changes
are made, we may adjust our assumption accordingly. The expected
long-term rate of return on plan assets for 2004 remained
unchanged from the 2003 rate of 7.5% because of the stability of
the investment market and our asset allocations. We used an
estimated long-term rate of return of 8.5% in 2002. Changes in
assumptions used in determining pension and postretirement
benefit plan expense did not have a material effect in the
consolidated statements of income for the years ended
December 31, 2004, 2003 or 2002.
The fair value allocation of our qualified pension plan assets
on a weighted-average basis as of December 31, 2004 and
2003, and the target allocation, by asset category, are
displayed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Allocation
|
|
|
|
Target
|
|
|
As of December 31,
|
|
Investment Type
|
|
Allocation
|
|
|
2004
|
|
|
2003
|
|
|
Equity securities
|
|
|
75-85
|
%
|
|
|
84
|
%
|
|
|
86
|
%
|
Fixed income securities
|
|
|
12-20
|
%
|
|
|
15
|
|
|
|
14
|
|
Other
|
|
|
0-2
|
%
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Given the diversity of our average employee age, gender and
other characteristics, our investment strategy is to diversify
our plan assets across a number of investments to reduce our
concentration risk and maintain an asset allocation that allows
us to meet current and future benefit obligations. With the goal
of diversification, the assets of the qualified pension plan
consist primarily of exchange-listed stocks, the majority of
which are held in a passively managed index fund. We also invest
in actively managed equity portfolios, which are restricted from
investing in shares of our common or preferred stock, and an
enhanced-index intermediate duration fixed income account. In
addition, the plan holds liquid short-term investments that
provide for monthly pension payments, plan expenses and, from
time to time, may represent uninvested contributions or
reallocation of plan assets. Our asset allocation policy
provides for a larger equity weighting than many companies
because our active employee base is relatively young, and we
have a relatively small number of retirees currently receiving
benefits, both of which suggest a longer investment horizon and
consequently a higher risk tolerance level. Management
periodically assesses our asset allocation to assure it is
consistent with our plan objectives.
The table below displays the benefits we expect to pay in each
of the next five years and subsequent five years for our pension
plans and postretirement plan. The expected benefits are based
on the same assumptions used to measure our benefit obligation
as of December 31, 2004. In December 2003, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare
Part D) as well as a federal subsidy to sponsors of
retiree health care plans that provides a benefit that is at
least actuarially equivalent to Medicare Part D. We are
entitled to a subsidy under the Act, which reduces the
accumulated postretirement benefit obligation attributed
F-79
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to past service and the net periodic postretirement benefit cost
for the current period. We adopted FASB Staff Position
No. 106-2,
Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 (FSP 106-2) prospectively as of
July 1, 2004. The expected subsidy reduced the accumulated
postretirement benefit obligation by $24 million and net
periodic cost by $3 million as compared with the amount
calculated without considering the effects of the subsidy. The
Acts impact on expected benefit payments under FSP 106-2
is also displayed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Retirement Plan Benefit Payments
|
|
|
|
Pension Benefits
|
|
|
Other Post Retirement Benefits
|
|
|
|
|
|
|
|
|
|
Before Medicare
|
|
|
Medicare Part D
|
|
|
|
Qualified
|
|
|
Nonqualified
|
|
|
Part D Subsidy
|
|
|
Subsidy
|
|
|
|
(Dollars in millions)
|
|
|
2005
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
|
|
2006
|
|
|
10
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
2007
|
|
|
12
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
2008
|
|
|
14
|
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
2009
|
|
|
17
|
|
|
|
5
|
|
|
|
7
|
|
|
|
1
|
|
2010-2014
|
|
|
136
|
|
|
|
34
|
|
|
|
48
|
|
|
|
4
|
|
Defined
Contribution Plans
Retirement
Savings Plan
The Retirement Savings Plan is a defined contribution plan that
includes both a 401(k) before-tax feature and a regular
after-tax feature. Under the plan, eligible employees may
allocate investment balances to a variety of investment options.
We match employee contributions up to 3% of base salary in cash
(maximum of $6,150 for 2004, $6,000 for 2003 and $6,000 for
2002). For the years ended December 31, 2004, 2003 and
2002, the maximum employee contribution as established by the
IRS was $13,000, $12,000 and $11,000, respectively, with
additional catch-up contributions permitted for
participants aged 50 and older of $3,000, $2,000 and $1,000,
respectively. Participants vest in our contributions beginning
at two years of participation and become fully vested after five
years of participation. There was no option to invest directly
in our common stock for the years ended December 31, 2004,
2003 and 2002. We recorded expense of $13 million,
$11 million and $11 million for the years ended
December 31, 2004, 2003 and 2002, respectively, as
Salaries and employee benefits expense in the
consolidated statements of income.
Employee
Stock Ownership Plan
We have an Employee Stock Ownership Plan (ESOP) for
eligible employees who are regularly scheduled to work at least
1,000 hours in a calendar year. Participation is not
available to participants in the Executive Pension Plan. Under
the plan, we may contribute annually to the ESOP an amount up to
4% of the aggregate eligible salary for all participants at the
discretion of the Board or based on achievement of defined
corporate goals as determined by the Board of Directors. We may
contribute either shares of Fannie Mae common stock or cash to
purchase Fannie Mae common stock. When contributions are made in
stock, the per share price is determined using the average high
and low market prices on the day preceding the contribution.
Compensation cost is measured as the fair value of the shares or
cash contributed to, or to be contributed to, the ESOP. We
record these contributions as salaries and employee benefits
expense in the consolidated statements of income. Expense
recorded in connection with the ESOP was $9 million,
$9 million and $8 million for the years ended
December 31, 2004, 2003 and 2002, respectively, based on
actual contributions of 2% of salary for each of the reported
years. The fair value of unearned ESOP shares, which represents
the fair value of common shares issued or treasury shares sold
to the ESOP, was $2 million as of both December 31,
2004 and 2003.
Participants are 100% vested in their ESOP accounts either upon
attainment of age 65 or five years of service. Employees
who are at least 55 years of age, and have at least
10 years of participation in the ESOP, may qualify to
diversify vested ESOP shares by rolling over all or a portion of
the value of their ESOP account
F-80
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
into investment funds available under the Retirement Savings
Plan without losing the tax-deferred status of the value of the
ESOP.
Participants are immediately vested in all dividends paid on the
shares of Fannie Mae common stock allocated to their account.
Unless employees elect to receive the dividend in cash, ESOP
dividends are automatically reinvested in Fannie Mae common
stock within the ESOP. If the employee does elect to receive the
dividend in cash, the dividends are accrued upon declaration and
are distributed in February for the four previous quarters
pursuant to the employees election. Shares held but not
allocated to participants who forfeited their shares prior to
vesting are used to reduce our future contributions. ESOP shares
are a component of our weighted shares outstanding for purposes
of our EPS calculations, except unallocated shares which are not
treated as outstanding until they are committed to be released
for allocation to employee accounts. All cash contributions are
held in a trust managed by the plan trustee and are invested in
Fannie Mae common stock.
The following table displays the ESOP activity for the years
ended December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
Common shares allocated to employees
|
|
|
1,582,653
|
|
|
|
1,530,161
|
|
Common shares committed to be
released to employees
|
|
|
140,692
|
|
|
|
104,886
|
|
Unallocated common shares
|
|
|
2,482
|
|
|
|
1,862
|
|
Through the second quarter of 2004, we disclosed only two
segments, Portfolio Investment and Credit Guaranty. Previously,
we aggregated the Single-Family Credit Guaranty and the HCD
operating segments into a single Credit Guaranty reportable
business segment. SFAS No. 131 requires segmentation
based on the structure of the organization as evidenced by the
review of operating results by the chief operating decision
maker. We have determined that these operating segments should
not have been aggregated because our chief operating decision
maker did not review the operating results on a combined basis.
These segments also did not meet certain other criteria
necessary for aggregation, such as a similar nature of products
and services and economic characteristics.
Additionally, management reviewed operating results on a basis
(referred to as Core) that was not consistent with
GAAP. Core financial statements were prepared by replacing
certain derivative expenses based upon changes in fair value,
with amortization expenses related to the initial cost of the
derivatives. Our segment allocation methodologies were also
based upon Core-based financial statements. As a result of the
impact of restating the consolidated financial statements and
the elimination of hedge accounting (see Note 1),
Core-based financial statements are no longer meaningful, as
there are no longer any adjustments needed to account for the
effects of hedge accounting, and Core financials are no longer
used by management to operate the business. Therefore, our
segment reporting is prepared and presented in accordance with
GAAP and consistent with the consolidated statements of income.
As such, prior period segment information has been restated for
the years ended December 31, 2003 and 2002 and
disaggregated into three segments. These three reportable
segments are: Single-Family Credit Guaranty, HCD and Capital
Markets (formerly named the Portfolio Investment
segment). We use these three segments to generate revenue and
manage business risk and each segment is based on the type of
business activities it performs. These activities are discussed
below.
Single-Family Credit Guaranty. Our
Single-Family Credit Guaranty segment works with our lender
customers to securitize single-family mortgage loans into Fannie
Mae MBS and to facilitate the purchase of single-family mortgage
loans for our mortgage portfolio. Our Single-Family Credit
Guaranty segment has responsibility for managing our credit risk
exposure relating to the single-family Fannie Mae MBS held by
third parties (such as lenders, depositories and global
investors), as well as the single-family mortgage loans and
single-family Fannie Mae MBS held in our mortgage portfolio. Our
Single-Family Credit Guaranty segment also has
F-81
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
responsibility for pricing the credit risk of the single-family
mortgage loans we purchase for our mortgage portfolio. Revenues
in the segment are derived primarily from the guaranty fees the
segment receives as compensation for assuming the credit risk on
the mortgage loans underlying single-family Fannie Mae MBS and
on the single-family mortgage loans held in our portfolio. The
primary source of profits (losses) for the Single-Family Credit
Guaranty segment is the difference between the guaranty fees
earned and the costs of providing this service, including
credit-related losses.
Housing and Community Development. Our HCD
segment helps to expand the supply of affordable and market-rate
rental housing in the United States primarily by:
(i) working with our lender customers to securitize
multifamily mortgage loans into Fannie Mae MBS and to facilitate
the purchase of multifamily mortgage loans for our mortgage
portfolio; and (ii) making investments in rental and
for-sale housing projects, including investments in rental
housing that qualify for federal low-income housing tax credits.
Our HCD segment has responsibility for managing our credit risk
exposure relating to the multifamily Fannie Mae MBS held by
third parties, as well as the multifamily mortgage loans and
multifamily Fannie Mae MBS held in our mortgage portfolio.
Revenues in the segment are derived from a variety of sources,
including the guaranty fees the segment receives as compensation
for assuming the credit risk on the mortgage loans underlying
multifamily Fannie Mae MBS and on the multifamily mortgage loans
held in our portfolio, transaction fees associated with the
multifamily business and bond credit enhancement fees. In
addition, HCDs investments in housing projects eligible
for the low-income housing tax credit and other investments
generate both tax credits and net operating losses that reduce
our federal income tax liability. While the Multifamily Credit
Guaranty business is similar to our Single-Family Credit
Guaranty business, neither the economic return nor the nature of
the credit risk are similar to those of Single-Family Credit
Guaranty.
Capital Markets. Our Capital Markets segment
manages our investment activity in mortgage loans and
mortgage-related securities, and has responsibility for managing
our assets and liabilities and our liquidity and capital
positions. We fund mortgage loan and mortgage-related securities
purchases by issuing debt in the global capital markets. The
Capital Markets segment also has responsibility for managing our
interest rate risk. The Capital Markets segment generates income
primarily from the difference, or spread, between the yield on
the mortgage assets we own and the cost of the debt we issue in
the global capital markets to fund these assets.
Our segment financials include directly attributable revenues
and expenses and estimations of apportioned overhead. We
allocate capital to our segments using OFHEO minimum capital
requirements for each segment adjusted for over- or
under-capitalization. The Single-Family Credit Guaranty and HCD
segments charge the Capital Markets segment a guaranty fee for
managing the credit risk on most mortgage assets held by the
Capital Markets segment. All inter-segment revenue and expense
items are eliminated and, therefore, reconciling adjustments to
the consolidated results are not required.
F-82
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table displays our segment results for the years
ended December 31, 2004, 2003 and 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2004
|
|
|
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Net interest income
(expense)(1)
|
|
$
|
478
|
|
|
$
|
(144
|
)
|
|
$
|
17,747
|
|
|
$
|
18,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
(expense)(2)
|
|
|
4,455
|
|
|
|
379
|
|
|
|
(1,230
|
)
|
|
|
3,604
|
|
|
|
|
|
Investment gains (losses), net
|
|
|
84
|
|
|
|
|
|
|
|
(446
|
)
|
|
|
(362
|
)
|
|
|
|
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(12,256
|
)
|
|
|
(12,256
|
)
|
|
|
|
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(152
|
)
|
|
|
(152
|
)
|
|
|
|
|
Losses from partnership investments
|
|
|
|
|
|
|
(702
|
)
|
|
|
|
|
|
|
(702
|
)
|
|
|
|
|
Fee and other income (expense)
|
|
|
220
|
|
|
|
312
|
|
|
|
(128
|
)
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
4,759
|
|
|
|
(11
|
)
|
|
|
(14,212
|
)
|
|
|
(9,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
312
|
|
|
|
40
|
|
|
|
|
|
|
|
352
|
|
|
|
|
|
Other expenses
|
|
|
1,023
|
|
|
|
395
|
|
|
|
848
|
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
3,902
|
|
|
|
(590
|
)
|
|
|
2,687
|
|
|
|
5,999
|
|
|
|
|
|
Provision (benefit) for federal
income taxes
|
|
|
1,388
|
|
|
|
(927
|
)
|
|
|
563
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses)
|
|
|
2,514
|
|
|
|
337
|
|
|
|
2,124
|
|
|
|
4,975
|
|
|
|
|
|
Extraordinary losses, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,514
|
|
|
$
|
337
|
|
|
$
|
2,116
|
|
|
$
|
4,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
revenue (expense) of $1.0 billion allocated to
Single-Family Credit Guaranty and HCD from Capital Markets for
absorbing the credit risk on mortgage loans and Fannie Mae MBS
held in our portfolio.
|
F-83
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2003
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
495
|
|
|
$
|
(99
|
)
|
|
$
|
19,081
|
|
|
$
|
19,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
(expense)(2)
|
|
|
4,222
|
|
|
|
303
|
|
|
|
(1,244
|
)
|
|
|
3,281
|
|
Investment gains (losses), net
|
|
|
76
|
|
|
|
|
|
|
|
(1,307
|
)
|
|
|
(1,231
|
)
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(6,289
|
)
|
|
|
(6,289
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(2,692
|
)
|
|
|
(2,692
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(637
|
)
|
|
|
|
|
|
|
(637
|
)
|
Fee and other income (expense)
|
|
|
277
|
|
|
|
209
|
|
|
|
(146
|
)
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
4,575
|
|
|
|
(125
|
)
|
|
|
(11,678
|
)
|
|
|
(7,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
331
|
|
|
|
34
|
|
|
|
|
|
|
|
365
|
|
Other expenses
|
|
|
925
|
|
|
|
238
|
|
|
|
435
|
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes, extraordinary gains (losses) and cumulative effect of
change in accounting principle
|
|
|
3,814
|
|
|
|
(496
|
)
|
|
|
6,968
|
|
|
|
10,286
|
|
Provision (benefit) for federal
income taxes
|
|
|
1,333
|
|
|
|
(782
|
)
|
|
|
1,883
|
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses) and cumulative effect of change in accounting principle
|
|
|
2,481
|
|
|
|
286
|
|
|
|
5,085
|
|
|
|
7,852
|
|
Extraordinary gain, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
195
|
|
Cumulative effect of change in
accounting principle, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,481
|
|
|
$
|
286
|
|
|
$
|
5,314
|
|
|
$
|
8,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
revenue (expense) of $1.0 billion allocated to
Single-Family Credit Guaranty and HCD from Capital Markets for
absorbing the credit risk on mortgage loans and Fannie Mae MBS
held in our portfolio.
|
F-84
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2002
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
487
|
|
|
$
|
(100
|
)
|
|
$
|
18,039
|
|
|
$
|
18,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
(expense)(2)
|
|
|
3,264
|
|
|
|
271
|
|
|
|
(1,019
|
)
|
|
|
2,516
|
|
Investment gains (losses), net
|
|
|
41
|
|
|
|
|
|
|
|
(542
|
)
|
|
|
(501
|
)
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(12,919
|
)
|
|
|
(12,919
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(814
|
)
|
|
|
(814
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(509
|
)
|
|
|
|
|
|
|
(509
|
)
|
Fee and other income (expense)
|
|
|
206
|
|
|
|
149
|
|
|
|
(266
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
3,511
|
|
|
|
(89
|
)
|
|
|
(15,560
|
)
|
|
|
(12,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
237
|
|
|
|
47
|
|
|
|
|
|
|
|
284
|
|
Other expenses
|
|
|
754
|
|
|
|
188
|
|
|
|
308
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes
|
|
|
3,007
|
|
|
|
(424
|
)
|
|
|
2,171
|
|
|
|
4,754
|
|
Provision (benefit) for federal
income taxes
|
|
|
1,049
|
|
|
|
(608
|
)
|
|
|
399
|
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,958
|
|
|
$
|
184
|
|
|
$
|
1,772
|
|
|
$
|
3,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
revenue (expense) of $829 million allocated to
Single-Family Credit Guaranty and HCD from Capital Markets for
absorbing the credit risk on mortgage loans and Fannie Mae MBS
held in our portfolio.
|
The following table displays total assets by segment as of
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Single-Family Credit Guaranty
|
|
$
|
11,543
|
|
|
$
|
8,724
|
|
HCD
|
|
|
10,166
|
|
|
|
7,853
|
|
Capital Markets
|
|
|
999,225
|
|
|
|
1,005,698
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,020,934
|
|
|
$
|
1,022,275
|
|
|
|
|
|
|
|
|
|
|
We operate our business solely in the United States and
accordingly, we do not generate any revenue from or have assets
in geographic locations other than the United States.
|
|
16.
|
Regulatory
Capital Requirements
|
The Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 (the 1992 Act) established minimum
capital, critical capital and risk-based capital requirements
for us. Based upon these requirements, OFHEO classifies us as
either adequately capitalized, undercapitalized, significantly
undercapitalized or critically undercapitalized. We are required
by federal statute to meet the minimum, critical and risk-based
capital standards to be classified as adequately capitalized.
The minimum capital and critical capital standards are
calculated by determining whether our core capital equals or
exceeds the minimum capital requirement or the lower critical
capital requirement, respectively. Core capital is defined by
OFHEO and represents the sum of the stated value of our
outstanding common stock (common stock less treasury stock), the
stated value of our outstanding non-cumulative perpetual
preferred stock, our
paid-in-capital
and our retained earnings, as determined in accordance with
GAAP. The minimum capital standard is generally equal to the sum
of: (i) 2.50% of on-balance sheet assets; (ii) 0.45%
of the unpaid principal balance of outstanding Fannie Mae MBS
held by third parties; and (iii) up to 0.45% of other off-
F-85
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
balance sheet obligations, which may be adjusted by the Director
of OFHEO under certain circumstances (see 12 CFR 1750.4 for
existing adjustments made by the Director of OFHEO). The
critical capital standard is generally equal to the sum of:
(i) 1.25% of on-balance sheet assets; (ii) 0.25% of
the unpaid principal balance of outstanding Fannie Mae MBS held
by third parties; and (iii) up to 0.25% of other
off-balance sheet obligations, which may be adjusted by the
Director of OFHEO under certain circumstances.
OFHEOs risk-based capital standard ties our capital
requirements to the risk in our book of business, as measured by
a stress test model. The stress test simulates our financial
performance over a ten-year period of severe economic conditions
characterized by both extreme interest rate movements and
mortgage default rates. Simulation results indicate the amount
of capital required to survive this prolonged period of economic
stress absent new business or active risk management action. In
addition to this amount determined by the stress test, the
risk-based capital requirement includes an additional 30%
surcharge to cover unspecified management and operations risks.
OFHEO sets this threshold quarterly and it is measured against
total capital, defined in the table below.
The following table displays our regulatory capital
classification measures as of December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004(1)
|
|
|
2003(1)
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Core
capital(2)
|
|
$
|
34,514
|
|
|
$
|
26,953
|
|
Required minimum
capital(3)
|
|
|
32,121
|
|
|
|
31,816
|
|
|
|
|
|
|
|
|
|
|
Surplus (deficit) of core capital
over/under required minimum capital
|
|
$
|
2,393
|
|
|
$
|
(4,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surplus (deficit) of core capital
percentage over/under required minimum
capital(4)
|
|
|
7.4
|
%
|
|
|
(15.3
|
)%
|
|
|
|
|
|
|
|
|
|
Total
capital(5)
|
|
$
|
35,196
|
|
|
$
|
27,487
|
|
Required risk-based
capital(6)
|
|
|
10,039
|
|
|
|
27,221
|
|
|
|
|
|
|
|
|
|
|
Surplus of total capital over
required risk-based capital
|
|
$
|
25,157
|
|
|
$
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
capital(2)
|
|
$
|
34,514
|
|
|
$
|
26,953
|
|
Required critical
capital(7)
|
|
|
16,435
|
|
|
|
16,261
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital over
required critical capital
|
|
$
|
18,078
|
|
|
$
|
10,691
|
|
|
|
|
|
|
|
|
|
|
Surplus of core capital percentage
over required critical
capital(8)
|
|
|
110.0
|
%
|
|
|
65.7
|
%
|
|
|
|
(1) |
|
Except for required risk-based
capital amounts, all amounts represent estimates which will be
resubmitted to OFHEO for their certification. Required
risk-based capital amounts represent previously announced
results by OFHEO. OFHEO may determine that results require
restatement in the future based upon analysis provided by us.
|
|
(2) |
|
The sum of (a) the stated
value of our outstanding common stock (common stock less
treasury stock); (b) the stated value of our outstanding
non-cumulative perpetual preferred stock; (c) our paid-in
capital; and (d) our retained earnings. Core capital
excludes AOCI.
|
|
(3) |
|
Generally, the sum of
(a) 2.50% of on-balance sheet assets; (b) 0.45% of the
unpaid principal balance of outstanding Fannie Mae MBS held by
third parties; and (c) up to 0.45% of other off-balance
sheet obligations, which may be adjusted by the Director of
OFHEO under certain circumstances (See 12 CFR 1750.4 for
existing adjustments made by the Director of OFHEO).
|
|
(4) |
|
Defined as the surplus (deficit) of
core capital over required minimum capital expressed as a
percentage of required minimum capital.
|
|
(5) |
|
The sum of (a) core capital
and (b) the total allowance for loan losses and reserve for
guaranty losses, less (c) the specific loss allowance (that
is, the allowance required on individually-impaired loans). The
specific loss allowance totaled $63 million and
$68 million as of December 31, 2004 and 2003,
respectively.
|
F-86
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
(6) |
|
Defined as the amount of total
capital required to be held to absorb projected losses flowing
from future adverse interest rate and credit risk conditions
specified by statute (see 12 CFR 1750.13 for conditions),
plus 30% mandated by statute to cover management and operations
risk.
|
|
(7) |
|
Generally, the sum of
(a) 1.25% of on-balance sheet assets; (b) 0.25% of the
unpaid principal balance of outstanding Fannie Mae MBS held by
third parties and (c) up to 0.25% of other off-balance
sheet obligations, which may be adjusted by the Director of
OFHEO under certain circumstances.
|
|
(8) |
|
Defined as the surplus of core
capital over critical capital expressed as a percentage of
critical capital.
|
Factors that may result in potentially volatile components of
capital include changes in net income primarily due to changes
in fair values of derivatives and the size of our balance sheet
assets, which may vary by marking to market AFS and trading
securities.
Capital
Classification
The 1992 Act requires the Director of OFHEO to determine the
capital level and classification at least quarterly and to
report the results to Congress. If OFHEO finds that we fail to
meet these regulatory capital standards, we become subject to
certain restrictions and requirements. OFHEO classified us as
adequately capitalized as of December 31, 2003 and
significantly undercapitalized as of September 30, 2004 and
December 31, 2004.
In response to the initial findings from OFHEOs September
2004 special examination interim report, we entered into the
September 27, 2004 agreement with OFHEO (the OFHEO
Agreement), which required us to take a series of steps
with respect to our internal controls, organization and
staffing, governance, accounting and capital. In accordance with
the OFHEO Agreement, which, as described below, has since been
terminated, we were required to obtain prior written approval
from the Director of OFHEO before engaging in certain capital
transactions, including any payment made to repurchase, redeem,
retire or otherwise acquire any of our shares, including share
repurchases; the calling of any preferred stock; as well as the
restrictions on dividend payments described below.
As part of the OFHEO Agreement, we pledged to maintain the
computed minimum capital surplus percentage of 18.5% that we
reported as of August 31, 2004, and to achieve a targeted
capital surplus equal to 30% over the statutory required minimum
capital requirement within 270 days of the agreement. In
November 2004, pursuant to the OFHEO Agreement, we submitted a
capital plan to OFHEO for the Directors approval detailing
how management intended to achieve the 30% surplus requirement,
including alternative strategies that might be employed in
response to various market developments.
On December 21, 2004, following the SECs
determination that we should restate our financial statements,
OFHEO classified us as significantly undercapitalized as of
September 30, 2004 and directed us to submit a capital
restoration plan that would provide for compliance with our
statutory minimum capital requirement plus a surplus of 30% over
the statutory minimum capital requirement. Pursuant to
OFHEOs directive, we submitted a capital restoration plan
within 10 days of receiving OFHEOs directive. The
final form of the capital restoration plan was approved by OFHEO
in February 2005 and required us to achieve the 30% surplus by
September 30, 2005. Under the plan, we intended to achieve
the 30% capital surplus through (i) managing total balance
sheet asset size by reducing the portfolio principally through
normal mortgage liquidations in order to limit overall minimum
capital requirements; and (ii) increasing core capital
through increasing retained earnings, the December 2004 issuance
of $5.0 billion of preferred stock, reducing the common
stock dividend by 50%, and cost-cutting efforts to augment
capital accumulation. As OFHEO directed, the plan also
incorporated a formal process of monitoring and reporting to the
agency on our progress in carrying out the plan.
Dividend
Restrictions
During the period that we were considered adequately capitalized
by OFHEO, approval by the Director of OFHEO was required for any
dividend payment that would cause our capital to fall below
specified capital levels. We exceeded the applicable capital
standard for every quarter since the adoption of these
requirements in 1992 until OFHEO classified us as significantly
undercapitalized as of September 30, 2004.
F-87
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During the period that we were subject to the OFHEO Agreement
(September 27, 2004 to May 22, 2006), we were required
to obtain prior written approval from the Director of OFHEO
before the payment of preferred stock dividends above stated
contractual rates or, until we reached the targeted capital
surplus, the payment of common stock dividends in excess of the
prior quarters dividends. We must submit a written report
to the Director of OFHEO after the declaration, but before the
payment, of any dividend on our common stock. The report shall
contain specific information on the amount of the dividend, the
rationale for the payment and the impact on the required capital
surplus.
During any period in which we defer payment of interest on
qualifying subordinated debt, we may not declare or pay
dividends on, or redeem, purchase or acquire, our common stock
or preferred stock. Our qualifying subordinated debt requires us
to defer the payment of interest for up to five years if either:
(i) our core capital is below 125% of our critical capital
requirement; or (ii) our core capital is below our minimum
capital requirement, and the U.S. Secretary of the
Treasury, acting on our request, exercises his or her
discretionary authority pursuant to Section 304(c) of the
Charter Act to purchase our debt obligations. To date, no
triggering events have occurred that would require us to defer
interest payments on our qualifying subordinated debt.
Compliance
with Agreements
OFHEO has classified us as adequately capitalized as of
March 31, 2005 and for all quarterly periods thereafter
through June 30, 2006. In addition, OFHEO announced on
November 1, 2005 that we achieved the 30% surplus over
minimum capital as of September 30, 2005, as required by
OFHEO. Because we have not yet prepared audited financial
statements for any period after December 31, 2004,
OFHEOs capital classifications for periods after
December 31, 2004 are based on our estimates of our
financial condition as of such periods and remain subject to
revision.
On September 1, 2005, we entered into an agreement with
OFHEO under which it regulates certain financial risk management
and disclosure commitments designed to enhance market
discipline, liquidity and capital. Pursuant to this agreement
with OFHEO, we agreed to issue qualifying subordinated debt,
rated by at least two nationally recognized statistical rating
organizations, in a quantity such that the sum of our total
capital plus the outstanding balance of our qualifying
subordinated debt equals or exceeds the sum of:
(i) outstanding Fannie Mae MBS held by third parties times
0.45%; and (ii) total on-balance sheet assets times 4%. We
must also take reasonable steps to maintain sufficient
outstanding subordinated debt to promote liquidity and reliable
market quotes on market values. Every six months, commencing
January 1, 2006, we are required to submit, and have
submitted, to OFHEO a subordinated debt management plan that
includes any issuance plans for the upcoming six months, which
is subject to OFHEOs approval and is required to comply
with our commitment regarding qualifying subordinated debt
issuance requirements. In addition, we are required to provide
periodic public disclosures on our risks and risk management
practices and will inform OFHEO of the disclosures. These
disclosures include: subordinated debt disclosures, liquidity
management disclosures, interest rate risk disclosures, credit
risk disclosures and risk rating disclosures.
On May 23, 2006, we agreed to the issuance of a consent
order by OFHEO (the OFHEO Consent Order), which
superseded and terminated the OFHEO Agreement and resolved all
matters addressed by OFHEOs interim and final reports of
its special examination. According to the OFHEO Consent Order,
we agreed to the following restrictions relating to our capital
activity in addition to the restrictions set forth in the
Charter Act:
|
|
|
|
|
We must continue our commitment to maintain a 30% capital
surplus over our statutory minimum capital requirement until
such time as the Director of OFHEO determines that the
requirement should be modified or expire, considering factors
such as resolution of accounting and internal control issues.
|
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|
While the capital restoration plan is in effect, we must seek
the approval of the Director of OFHEO before engaging in any
transaction that could have the effect of reducing our capital
surplus below an amount equal to 30% more than our statutory
minimum capital requirement.
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We must submit a written report to OFHEO detailing the rationale
and process for any proposed capital distribution before making
the distribution.
|
F-88
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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We are not permitted to increase our net mortgage portfolio
assets above the amount shown in the minimum capital report to
OFHEO as of December 31, 2005 ($727.75 billion),
except under limited circumstances at the discretion of OFHEO.
Net mortgage portfolio assets are defined as mortgage loans and
securities net of
mark-to-market
adjustments for
available-for-sale
securities, allowance for loan losses, and unamortized premiums
and discounts. We will be subject to this limitation on
portfolio growth until the Director of OFHEO has determined that
expiration of the limitation is appropriate in light of
information regarding: capital; market liquidity issues; housing
goals; risk management improvements; outside auditors
opinion that the consolidated financial statements present
fairly in all material respects the financial condition of the
company; receipt of an unqualified opinion from an outside audit
firm that our internal controls are effective pursuant to
section 404 of the Sarbanes-Oxley Act of 2002; or other
relevant information.
|
We are in compliance with the OFHEO Consent Order as of the date
of this filing.
The following table displays preferred stock outstanding as of
December 31, 2004 and 2003.
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Annual
|
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|
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|
|
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|
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Dividend Rate
|
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|
|
|
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|
|
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Issued and Outstanding as of December 31,
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Stated
|
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as of
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Issue
|
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2004
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|
|
2003
|
|
|
Value
|
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December 31,
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Redeemable on
|
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Title
|
|
Date
|
|
|
Shares
|
|
|
Amount
|
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Shares
|
|
|
Amount
|
|
|
per Share
|
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2004
|
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or After
|
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|
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|
|
|
|
|
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(Restated)
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|
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|
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|
|
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Series D
|
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|
September 30, 1998
|
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|
3,000,000
|
|
|
$
|
150,000,000
|
|
|
|
3,000,000
|
|
|
$
|
150,000,000
|
|
|
$
|
50
|
|
|
|
5.250
|
%
|
|
|
September 30, 1999
|
|
Series E
|
|
|
April 15, 1999
|
|
|
|
3,000,000
|
|
|
|
150,000,000
|
|
|
|
3,000,000
|
|
|
|
150,000,000
|
|
|
|
50
|
|
|
|
5.100
|
|
|
|
April 15, 2004
|
|
Series F
|
|
|
March 20, 2000
|
|
|
|
13,800,000
|
|
|
|
690,000,000
|
|
|
|
13,800,000
|
|
|
|
690,000,000
|
|
|
|
50
|
|
|
|
1.370
|
(1)
|
|
|
March 31, 2002
|
(3)
|
Series G
|
|
|
August 8, 2000
|
|
|
|
5,750,000
|
|
|
|
287,500,000
|
|
|
|
5,750,000
|
|
|
|
287,500,000
|
|
|
|
50
|
|
|
|
2.350
|
(2)
|
|
|
September 30, 2002
|
(3)
|
Series H
|
|
|
April 6, 2001
|
|
|
|
8,000,000
|
|
|
|
400,000,000
|
|
|
|
8,000,000
|
|
|
|
400,000,000
|
|
|
|
50
|
|
|
|
5.810
|
|
|
|
April 6, 2006
|
|
Series I
|
|
|
October 28, 2002
|
|
|
|
6,000,000
|
|
|
|
300,000,000
|
|
|
|
6,000,000
|
|
|
|
300,000,000
|
|
|
|
50
|
|
|
|
5.375
|
|
|
|
October 28, 2007
|
|
Series J
|
|
|
November 26, 2002
|
|
|
|
14,000,000
|
|
|
|
700,000,000
|
|
|
|
14,000,000
|
|
|
|
700,000,000
|
|
|
|
50
|
|
|
|
4.716
|
(4)
|
|
|
November 26, 2004
|
|
Series K
|
|
|
March 18, 2003
|
|
|
|
8,000,000
|
|
|
|
400,000,000
|
|
|
|
8,000,000
|
|
|
|
400,000,000
|
|
|
|
50
|
|
|
|
3.000
|
(5)
|
|
|
March 18, 2005
|
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Series L
|
|
|
April 29, 2003
|
|
|
|
6,900,000
|
|
|
|
345,000,000
|
|
|
|
6,900,000
|
|
|
|
345,000,000
|
|
|
|
50
|
|
|
|
5.125
|
|
|
|
April 29, 2008
|
|
Series M
|
|
|
June 10, 2003
|
|
|
|
9,200,000
|
|
|
|
460,000,000
|
|
|
|
9,200,000
|
|
|
|
460,000,000
|
|
|
|
50
|
|
|
|
4.750
|
|
|
|
June 10, 2008
|
|
Series N
|
|
|
September 25, 2003
|
|
|
|
4,500,000
|
|
|
|
225,000,000
|
|
|
|
4,500,000
|
|
|
|
225,000,000
|
|
|
|
50
|
|
|
|
5.500
|
|
|
|
September 25, 2008
|
|
Series O
|
|
|
December 30, 2004
|
|
|
|
50,000,000
|
|
|
|
2,500,000,000
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
7.000
|
(6)
|
|
|
December 31, 2007
|
|
Convertible
Series 2004-1
|
|
|
December 30, 2004
|
|
|
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25,000
|
|
|
|
2,500,000,000
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
5.375
|
|
|
|
January 5, 2008
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Total
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|
|
|
|
|
132,175,000
|
|
|
$
|
9,107,500,000
|
|
|
|
82,150,000
|
|
|
$
|
4,107,500,000
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
|
Rate effective March 31, 2004.
Variable dividend rate resets every two years at the two-year
Constant Maturity U.S. Treasury Rate (CMT)
minus 0.16% with a cap of 11% per year. As of
December 31, 2003, the annual dividend rate was 3.54%. As
of March 31, 2006, the annual dividend rate reset to 4.56%.
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(2) |
|
Rate effective September 30,
2004. Variable dividend rate resets every two years at the
two-year CMT rate minus 0.18% with a cap of 11% per year.
As of December 31, 2003, the annual dividend rate was
1.83%. As of September 30, 2006, the annual dividend rate
reset to 4.59%.
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(3) |
|
Represents initial call date.
Redeemable every two years thereafter.
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(4) |
|
Rate effective November 26,
2004. Variable dividend rate resets every two years at the
two-year U.S. Dollar Swap Rate plus 1.38% with a cap of
8% per year. As of December 31, 2003, the annual
dividend rate was 3.78%. As of November 26, 2006, the
annual dividend rate reset to 6.453%.
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(5) |
|
Initial rate. Variable dividend
rate that resets every two years thereafter at the
2-year
U.S. Dollar Swap Rate plus 1.33% with a cap of 8% per
year. As of March 18, 2005, the annual dividend rate was
5.396%.
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(6) |
|
Initial rate. Variable dividend
rate that resets quarterly thereafter at the greater of 7.00% or
the 10-year
CMT rate plus 2.375%. As of September 30, 2006, the
quarterly dividend rate reset to 7.085%.
|
F-89
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We are authorized to issue up to 200 million shares of
preferred stock, in one or more series. Each series of our
preferred stock has no par value, is non-participating, is
nonvoting and has a liquidation preference equal to the stated
value per share. Each series has an equal liquidation preference
to each other, with the exception of the Convertible
Series 2004-1 Preferred Stock, which has a liquidation
preference of $100,000 per share. None of our preferred stock is
convertible into or exchangeable for any of our other stock or
obligations, with the exception of the Convertible
Series 2004-1
issued in December 2004.
Shares of the Convertible
Series 2004-1
Preferred Stock are convertible at any time, at the option of
the holders, into shares of Fannie Mae common stock at a
conversion price of $94.31 per share of common stock
(equivalent to a conversion rate of 1,060.3329 shares of
common stock for each share of
Series 2004-1
Preferred Stock). The conversion price is adjustable, as
necessary, to maintain the stated conversion rate into common
stock.
Holders of preferred stock are entitled to receive
non-cumulative, quarterly dividends when, and if, declared by
our Board of Directors, but have no right to require redemption
of any shares of preferred stock. Payment of dividends on
preferred stock is not mandatory, but has priority over payment
of dividends on common stock, which are also declared by the
Board of Directors. If dividends on the preferred stock are not
paid or set aside for payment for a given dividend period,
dividends may not be paid on our common stock for that period.
For the years ended December 31, 2004, 2003 and 2002,
dividends paid on preferred stock were $165 million,
$150 million and $98 million, respectively. Excluding
Series J for which the Board of Directors declared a
dividend on December 4, 2006 payable on December 31,
2006, from January 1, 2005 through December 5, 2006,
all declared quarterly dividend payments on outstanding series
of preferred stock have been paid.
After a specified period, we have the option to redeem preferred
stock at its redemption price plus the dividend (whether or not
declared) for the then-current period accrued to, but excluding,
the date of redemption. The redemption price is equal to the
stated value for all issues of preferred stock except
Series O, which has a redemption price of $50 to $52.50
depending on the year of redemption, and Convertible
Series 2004-1,
which has a redemption price of $105,000 per share. We
redeemed all 7.5 million shares of our outstanding
Series B preferred stock on February 28, 2002 and all
5 million shares of our outstanding Series C preferred
stock on July 31, 2002. From January 1, 2005 through
December 5, 2006, we made no redemptions of any outstanding
series of preferred stock.
All of our preferred stock, except those of Series D, E, O
and the Convertible
Series 2004-1,
are listed on the New York Stock Exchange.
|
|
18.
|
Concentrations
of Credit Risk
|
Concentrations of credit risk arise when a number of customers
and counterparties engage in similar activities or have similar
economic characteristics that make them susceptible to similar
changes in industry conditions, which could affect their ability
to meet their contractual obligations. Concentrations of credit
risk exist among single-family and multifamily borrowers,
mortgage insurers, mortgage servicers, derivative counterparties
and parties associated with our off-balance sheet transactions.
Concentrations for each of these groups are discussed below.
Single-Family Loan Borrowers. Regional
economic conditions affect a borrowers ability to repay
his or her mortgage loan and the property value underlying the
loan. Geographic concentrations increase the exposure of our
portfolio to changes in credit risk. Single-family borrowers are
primarily affected by home price appreciation and low interest
rates. The geographic dispersion of our Single-Family Credit
Guaranty business has been consistently diversified over the
three years ended December 31, 2004, with our largest
exposure in the Western region of the United States, which
represented 26% of our single-family conventional mortgage
credit book of business. No region or state experienced negative
home price growth over this three-year period. Except for
California, where 18% and 19% of the gross unpaid principal
balance of our conventional single-family mortgage loans held or
securitized in Fannie Mae MBS as of December 31, 2004 and
2003, respectively, were located, no other significant
concentrations existed in any state.
F-90
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
To manage credit risk and comply with legal requirements, we
typically require primary mortgage insurance or other credit
enhancements if the current LTV ratio (i.e., the ratio of the
unpaid principal balance of a loan to the current value of the
property that serves as collateral) of a single-family
conventional mortgage loan is greater than 80% when the loan is
delivered to us. We may also require credit enhancements if the
original LTV ratio of a single-family conventional mortgage loan
is less than 80% when the loan is delivered to us.
Multifamily Loan Borrowers. Numerous
factors affect a multifamily borrowers ability to repay
his or her loan and the property value underlying the loan. The
most significant factor affecting credit risk is rental vacancy
rates for the mortgaged property. Vacancy rates vary among
geographic regions of the United States. The average mortgage
values for multifamily loans are significantly larger than that
for single-family borrowers and therefore individual defaults
for multifamily borrowers can be more significant to us.
However, these loans, while individually large, represent a
small percentage of our total loan portfolio. Our multifamily
geographic concentrations have been consistently diversified
over the three years ended December 31, 2004, with our
largest exposure in the Western region of the United States,
which represented 35% of our multifamily mortgage credit book of
business. Except for California, where $32.3 billion and
$33.3 billion, or 28% and 31%, of the gross unpaid
principal balance of our multifamily mortgage loans held or
securitized in Fannie Mae MBS as of December 31, 2004 and
2003, respectively, were located, no other significant
concentrations existed in any state.
As part of our multifamily risk management activities, we
perform detailed loss reviews that evaluate borrower and
geographic concentrations, lender qualifications, counterparty
risk, property performance and contract compliance. We generally
require servicers to submit periodic property operating
information and condition reviews so that we may monitor the
performance of individual loans. We use this information to
evaluate the credit quality of our portfolio, identify potential
problem loans and initiate appropriate loss mitigation
activities.
The following table displays the regional geographic
distribution of single-family and multifamily loans in portfolio
and those loans held or securitized in Fannie Mae MBS as of
December 31, 2004 and 2003.
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|
|
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|
|
|
|
|
|
|
Geographic
Distribution(1)
|
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|
Single-family Conventional
|
|
|
Multifamily
|
|
|
|
Mortgage Credit
Book(2)
|
|
|
Mortgage Credit
Book(3)
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
2004
|
|
|
2003
|
|
|
Midwest
|
|
|
17
|
%
|
|
|
17
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
Northeast
|
|
|
19
|
|
|
|
18
|
|
|
|
19
|
|
|
|
18
|
|
Southeast
|
|
|
22
|
|
|
|
22
|
|
|
|
24
|
|
|
|
21
|
|
Southwest
|
|
|
16
|
|
|
|
16
|
|
|
|
13
|
|
|
|
14
|
|
West
|
|
|
26
|
|
|
|
27
|
|
|
|
35
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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(1) |
|
Midwest includes IL, IN, IA, MI,
MN, NE, ND, OH, SD and WI; Northeast includes CT, DE, ME, MA,
NH, NJ, NY, PA, PR, RI, VT and VI; Southeast includes AL, DC,
FL, GA, KY, MD, NC, MS, SC, TN, VA and WV; Southwest includes
AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT; West includes AK, CA,
GU, HI, ID, MT, NV, OR, WA and WY.
|
|
(2) |
|
Includes the portion of our
conventional single-family mortgage credit book for which we
have more detailed loan-level information. Excludes non-Fannie
Mae mortgage-related securities backed by single-family mortgage
loans and credit enhancements on single-family mortgage loans.
|
|
(3) |
|
Includes mortgage loans in our
portfolio, credit enhancements and outstanding Fannie Mae MBS
(excluding Fannie Mae MBS backed by non-Fannie Mae
mortgage-related securities) where we have more detailed
loan-level information.
|
F-91
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Mortgage Insurers. The primary credit risk
associated with mortgage insurers is that they will fail to
fulfill their obligations to reimburse us for claims under
insurance policies. We were the beneficiary of primary mortgage
insurance coverage on $285.4 billion and
$308.8 billion of single-family loans held or securitized
in Fannie Mae MBS as of December 31, 2004 and 2003,
respectively. Seven mortgage insurance companies, all rated AA
(or its equivalent) or higher by Standard &
Poors, Moodys or Fitch, provided approximately 99%
of the total coverage as of December 31, 2004 and 2003.
Mortgage Servicers. The primary risk
associated with mortgage servicers is that they will fail to
fulfill their servicing obligations. Mortgage servicers collect
mortgage and escrow payments from borrowers, pay taxes and
insurance costs from escrow accounts, monitor and report
delinquencies, and perform other required activities on our
behalf. A servicing contract breach could result in credit
losses for us, and we could incur the cost of finding a
replacement servicer, which could be substantial for loans that
require a special servicer. Our ten largest single-family
mortgage servicers serviced 71% and 69% of our single-family
mortgage credit book of business as of December 31, 2004
and 2003, respectively. Our ten largest multifamily mortgage
servicers serviced 67% of our multifamily mortgage credit book
of business as of both December 31, 2004 and 2003.
Derivative Counterparties. The primary credit
exposure we have on a derivative transaction is that a
counterparty might default on payments due. Additionally, we may
need to replace the derivative counterparty with a different
counterparty at a higher cost.
We typically manage credit risk by contracting with experienced
counterparties that are rated A (or its equivalent) or better,
spreading the credit risk among many counterparties and placing
contractual limits on the amount of unsecured credit extended to
any single counterparty. We enter into master netting
arrangements that provide for netting of amounts due to us and
amounts due to counterparties under those agreements, which
reduces our exposure to a single counterparty in the event of
default.
Additionally, we require collateral in specified instances to
limit our counterparty credit risk exposure. We have a
collateral management policy with provisions for requiring
collateral on interest rate and foreign currency derivative
contracts in net gain positions based upon the
counterpartys credit rating. The collateral includes cash,
U.S. Treasury securities, agency debt and agency
mortgage-related securities. A third-party custodian holds for
us all of the collateral posted to us and monitors the value on
a daily basis. We monitor credit exposure on our derivatives
daily by valuing them using internal pricing models and dealer
quotes and make collateral calls daily, as necessary. The table
below displays the credit exposure on outstanding risk
management derivatives by counterparty credit ratings and
notional amount by counterparty as of December 31, 2004 and
2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004
|
|
|
|
Credit
Rating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
Subtotal
|
|
|
Other(2)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Credit loss
exposure(3)
|
|
$
|
57
|
|
|
$
|
3,200
|
|
|
$
|
3,182
|
|
|
$
|
6,439
|
|
|
$
|
88
|
|
|
$
|
6,527
|
|
Collateral
held(4)
|
|
|
|
|
|
|
2,984
|
|
|
|
3,001
|
|
|
|
5,985
|
|
|
|
|
|
|
|
5,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure net of collateral
|
|
$
|
57
|
|
|
$
|
216
|
|
|
$
|
181
|
|
|
$
|
454
|
|
|
$
|
88
|
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
842
|
|
|
$
|
327,895
|
|
|
$
|
360,625
|
|
|
$
|
689,362
|
|
|
$
|
732
|
|
|
$
|
690,094
|
|
Number of counterparties
|
|
|
3
|
|
|
|
12
|
|
|
|
8
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
F-92
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2003
|
|
|
|
Credit
Rating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
Subtotal
|
|
|
Other(2)
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Credit loss
exposure(3)
|
|
$
|
18
|
|
|
$
|
3,422
|
|
|
$
|
3,515
|
|
|
$
|
6,955
|
|
|
$
|
103
|
|
|
$
|
7,058
|
|
Collateral
held(4)
|
|
|
|
|
|
|
3,126
|
|
|
|
3,437
|
|
|
|
6,563
|
|
|
|
|
|
|
|
6,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure net of collateral
|
|
$
|
18
|
|
|
$
|
296
|
|
|
$
|
78
|
|
|
$
|
392
|
|
|
$
|
103
|
|
|
$
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
1,829
|
|
|
$
|
489,714
|
|
|
$
|
547,086
|
|
|
$
|
1,038,629
|
|
|
$
|
379
|
|
|
$
|
1,039,008
|
|
Number of counterparties
|
|
|
3
|
|
|
|
12
|
|
|
|
8
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We manage collateral requirements
based on the lower credit rating of the legal entity as issued
by Standard & Poors (S&P) and
Moodys. The credit rating reflects the equivalent S&P
rating for any ratings based on Moodys scale.
|
|
(2) |
|
Includes MBS options, mortgage
insurance contracts and swap credit enhancements accounted for
as derivatives.
|
|
(3) |
|
Represents the exposure to credit
loss on derivative instruments, which is estimated by
calculating the cost, on a present value basis, to replace all
outstanding contracts in a gain position. Derivative gains and
losses with the same counterparty are presented net where a
legal right of offset exists under an enforceable master netting
agreement. This table excludes mortgage commitments accounted
for as derivatives.
|
|
(4) |
|
Represents the collateral held as
of December 31, 2004 and 2003 adjusted for the collateral
transferred subsequent to December 31 based on credit loss
exposure limits on derivative instruments as of
December 31, 2004 and 2003. Settlement dates vary by
counterparty and range from one to three business days following
the credit loss exposure valuation dates of December 31,
2004 and 2003. The value of the collateral is reduced in
accordance with counterparty agreements to help ensure recovery
of any loss through the disposition of the collateral. We posted
non-cash collateral of $56 million and $301 million
related to our counterparties credit exposure to us as of
December 31, 2004 and 2003, respectively.
|
As of December 31, 2004, all of our interest rate and
foreign currency derivative transactions, consisting of
$454 million net collateral exposure and
$689.4 billion notional amount, were with counterparties
rated A or better by S&P and Moodys. To reduce our
credit risk concentrations, our interest rate and foreign
currency derivative instruments were diversified among 23
counterparties as of December 31, 2004. Of the
$88 million in other derivatives as of December 31,
2004, approximately 98% of the net exposure consisted of
mortgage insurance contracts, which were all with counterparties
rated better than A by any of S&P, Moodys or Fitch. As
of December 31, 2004, the largest net exposure to a single
interest rate and foreign currency counterparty was with a
counterparty rated AA, that represented approximately
$70 million, or 13%, of our total net exposure of
$542 million.
As of December 31, 2003, all of our interest rate and
foreign currency derivative transactions, consisting of
$392 million of our net collateral exposure and
$1.0 trillion notional amount, were with counterparties
rated A or better by S&P and Moodys. To reduce our
credit risk concentrations, our interest rate and foreign
currency derivative instruments were diversified among 23
counterparties as of December 31, 2003. Of the
$103 million in other derivatives as of December 31,
2003, over 99% of the net exposure consisted of mortgage
insurance contracts, which were all with counterparties rated
better than A by any of S&P, Moodys or Fitch. As of
December 31, 2003, the largest net exposure to a single
interest rate and foreign currency counterparty was with a
counterparty rated AA, that represented approximately
$102 million, or 21%, of our total net exposure of
$495 million.
Parties Associated with our Off-Balance Sheet
Transactions. We enter into financial instrument
transactions that create off-balance sheet credit risk in the
normal course of our business. These transactions are designed
to meet the financial needs of our customers, and manage our
credit, market or liquidity risks.
We have entered into guaranties that are not recognized in the
consolidated balance sheets. Our maximum potential exposure
under these guaranties is $444.5 billion and
$683.9 billion as of December 31, 2004 and
F-93
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2003, respectively. In the event that we would be required to
make payments under these guaranties, we would pursue recovery
through our right to the collateral backing the underlying loans
and available credit enhancements that provide a maximum
coverage of $42.6 billion and $65.6 billion for the
years ended December 31, 2004 and 2003, respectively.
The following table displays the contractual amount of
off-balance sheet financial instruments as of December 31,
2004 and 2003. Contractual or notional amounts do not
necessarily represent the credit risk of the positions.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae MBS and other
guaranties(1)
|
|
$
|
444,526
|
|
|
$
|
683,860
|
|
Loan purchase commitments
|
|
|
2,410
|
|
|
|
1,486
|
|
|
|
|
(1) |
|
Represents maximum exposure on
guaranties not reflected in the consolidated balance sheets. See
Note 8, Financial Guaranties and Master
Servicing for maximum exposure associated with guaranties
reflected in the consolidated balance sheets.
|
We do not require collateral from our counterparties to secure
their obligations to us for loan purchase commitments.
|
|
19.
|
Fair
Value of Financial Instruments
|
We carry financial instruments at fair value, amortized cost or
lower of cost or market. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation
sale. When available, the fair value of our financial
instruments is based on observable market prices, or market
prices that we obtain from third parties. Pricing information we
obtain from third parties is internally validated for
reasonableness prior to use in the consolidated financial
statements.
When observable market prices are not readily available, we
estimate the fair value using market data and model-based
interpolation using standard models that are widely accepted
within the industry. Market data includes prices of financial
instruments with similar maturities and characteristics,
duration, interest rate yield curves, measures of volatility and
prepayment rates. If market data needed to estimate fair value
is not available, we estimate fair value using internally
developed models that employ a discounted cash flow approach.
These estimates are based on pertinent information available to
us at the time of the applicable reporting periods. In certain
cases, fair values are not subject to precise quantification or
verification and may fluctuate as economic and market factors
vary, and our evaluation of those factors changes. Although we
use our best judgment in estimating the fair value of these
financial instruments, there are inherent limitations in any
estimation technique. In these cases, any minor change in an
assumption could result in a significant change in our estimate
of fair value thereby increasing or decreasing the value of the
consolidated assets, liabilities, stockholders equity and
net income.
The disclosure included herein excludes certain financial
instruments, such as plan obligations for pension and other
post-retirement benefits, employee stock option and stock
purchase plans, and also excludes all non-financial instruments.
In addition, the disclosure includes off-balance sheet financial
instruments, including most credit enhancements and commitments
to purchase multifamily mortgage loans, which are not recorded
in the consolidated balance sheets. As a result, the following
presentation of the fair value of our financial assets and
liabilities does not represent the underlying fair value of the
total consolidated assets or liabilities.
F-94
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
|
|
Estimated Fair
|
|
|
|
Carrying Value
|
|
|
Value
|
|
|
Carrying Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,701
|
|
|
$
|
3,701
|
|
|
$
|
4,804
|
|
|
$
|
4,804
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
3,930
|
|
|
|
3,930
|
|
|
|
12,686
|
|
|
|
12,686
|
|
Trading securities
|
|
|
35,287
|
|
|
|
35,287
|
|
|
|
43,798
|
|
|
|
43,798
|
|
Available-for-sale
securities
|
|
|
532,095
|
|
|
|
532,095
|
|
|
|
523,272
|
|
|
|
523,272
|
|
Mortgage loans held for sale
|
|
|
11,721
|
|
|
|
11,852
|
|
|
|
13,596
|
|
|
|
13,750
|
|
Mortgage loans held for investment,
net of allowance for loan losses
|
|
|
389,651
|
|
|
|
397,603
|
|
|
|
385,465
|
|
|
|
394,734
|
|
Derivative assets
|
|
|
6,589
|
|
|
|
6,589
|
|
|
|
7,218
|
|
|
|
7,218
|
|
Guaranty assets and buy-ups
|
|
|
6,616
|
|
|
|
9,263
|
|
|
|
4,998
|
|
|
|
8,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
989,590
|
|
|
$
|
1,000,320
|
|
|
$
|
995,837
|
|
|
$
|
1,008,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
securities sold under agreements to repurchase
|
|
$
|
2,400
|
|
|
$
|
2,399
|
|
|
$
|
3,673
|
|
|
$
|
3,668
|
|
Short-term debt
|
|
|
320,280
|
|
|
|
319,713
|
|
|
|
343,662
|
|
|
|
343,566
|
|
Long-term debt
|
|
|
632,831
|
|
|
|
648,276
|
|
|
|
617,618
|
|
|
|
640,671
|
|
Derivative liabilities
|
|
|
1,145
|
|
|
|
1,145
|
|
|
|
3,225
|
|
|
|
3,225
|
|
Guaranty obligations
|
|
|
8,784
|
|
|
|
5,272
|
|
|
|
6,401
|
|
|
|
5,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
965,440
|
|
|
$
|
976,805
|
|
|
$
|
974,579
|
|
|
$
|
996,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Fair Value of Financial Instruments
The following discussion summarizes the significant
methodologies and assumptions we use to estimate the fair values
of our financial instruments in the preceding table.
Cash and Cash EquivalentsThe carrying value of cash
and cash equivalents is a reasonable estimate of their
approximate fair value.
Federal Funds Sold and Securities Purchased Under Agreements
to ResellThe carrying value of our federal funds sold
and securities purchased under agreements to resell approximates
the fair value of these instruments due to the short-term nature
of these assets.
Trading Securities and Available- for-Sale
SecuritiesOur investments in securities are recognized
at fair value in the consolidated financial statements. Fair
values of securities are based on observable market prices or
prices obtained from third parties. Details of these estimated
fair values by type are displayed in Note 6,
Investments in Securities.
Mortgage Loans Held for SaleHFS loans are reported
at LOCOM in the consolidated balance sheets. We determine the
fair value of our mortgage loans based on comparisons to Fannie
Mae MBS with similar characteristics. Specifically, we use the
observable market value of our MBS as a base value, from which
we subtract or add the fair value of the associated guaranty
asset, guaranty obligation and master servicing arrangements.
Mortgage Loans Held for Investment, net of allowance for loan
lossesHFI loans are recorded in the consolidated
balance sheets at the principal amount outstanding, net of
unamortized premiums and discounts, deferred price adjustments
and an allowance for loan losses. We determine the fair value of
our mortgage
F-95
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
loans based on comparisons to Fannie Mae MBS with similar
characteristics. Specifically, we use the observable market
value of our MBS as a base value, from which we subtract or add
the fair value of the associated guaranty asset, guaranty
obligation and master servicing arrangements.
Derivatives Assets and Liabilities (collectively,
Derivatives)Our derivatives and mortgage
commitment derivatives are recognized in the consolidated
balance sheets at fair value, taking into consideration the
effects of any legally enforceable master netting agreements
that allow us to settle derivative asset and liability positions
with the same counterparty on a net basis. We use observable
market prices or market prices obtained from third parties for
our exchange-traded derivatives. For derivative instruments
where market prices are not readily available, we estimate fair
value using model-based interpolation based on direct market
inputs. Direct market inputs include prices of instruments with
similar maturities and characteristics, interest rate yield
curves and measures of interest rate volatility. Details of
these estimated fair values by type are displayed in
Note 10, Derivative Instruments.
Guaranty Assets and Buy-upsWe estimate the fair
value of guaranty assets based on the present value of expected
future cash flows of the underlying mortgage assets using
managements best estimate of certain key assumptions,
which include prepayment speeds, forward yield curves, and
discount rates commensurate with the risks involved. These cash
flows are projected using proprietary prepayment, interest rate,
and credit risk models. Because the guaranty assets are like an
interest-only income stream, the projected cash flows from our
guaranty assets are discounted using interest spreads from a
representative sample of interest-only trust securities. We
reduce the spreads on interest-only trusts to adjust for the
less liquid nature of the guaranty asset. The fair value of the
guaranty asset as presented in the table above includes the fair
value of any associated buy-ups, which is estimated in the same
manner as guaranty assets but are recorded separately as a
component of Other assets in the consolidated
balance sheets. While the fair value of the guaranty asset
reflects all guaranty arrangements, the carrying value primarily
reflects only those arrangements entered into subsequent to our
adoption of FIN 45 on January 1, 2003.
Federal Funds Purchased and Securities Sold Under Agreements
to RepurchaseThe carrying value of our federal funds
purchased and securities sold under agreements to repurchase
approximate the fair value of these instruments due to the
short-term nature of these liabilities, exclusive of dollar roll
transactions.
Short-Term Debt and Long-Term DebtWe estimate the
fair value of our non-callable debt using the discounted cash
flow approach based on the Fannie Mae yield curve with an
adjustment to reflect fair values at the offer side of the
market. We estimate the fair value of our callable bonds using
an option adjusted spread (OAS) approach using the
Fannie Mae yield curve and market calibrated volatility. The OAS
applied to callable bonds approximates market levels where we
have executed secondary market transactions. For subordinated
debt, we use third party prices.
Guaranty ObligationsOur estimate of the fair value
of the guaranty obligation is based on managements
estimate of the amount that we would be required to pay a third
party of similar credit standing to assume our obligation. This
amount is based on the present value of expected cash flows
using managements best estimates of certain key
assumptions, which include default and severity rates and a
market rate of return. While the fair value of the guaranty
obligation reflects all guaranty arrangements, the carrying
value primarily reflects only those arrangements entered into
subsequent to our adoption of FIN 45 on January 1,
2003.
|
|
20.
|
Commitments
and Contingencies
|
We are party to various types of legal proceedings that are
subject to many uncertain factors as well as certain future
lease commitments that are not recorded in the consolidated
financial statements. Each of these is described below.
Legal
Contingencies
Litigation, claims and proceedings of all types are subject to
many uncertain factors that generally cannot be predicted with
assurance. This following describes the material legal
proceedings, examinations and other
F-96
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
matters that: (1) were pending as of December 31, 2004; (2)
were terminated during the period from the beginning of the
third quarter of 2004 through the filing of this report; or (3)
are pending as of the filing of this report. An unfavorable
outcome in any of these legal proceedings could have a material
adverse effect on our business, financial condition and results
of operations. However, excluding the SEC and OFHEO settlements
described below, we are unable to reasonably estimate a range of
possible losses at this time. Accordingly, we have not recorded
a reserve for any litigation exposures discussed herein. We
believe we have defenses to the claims in these lawsuits
described below and intend to defend these lawsuits vigorously.
We are involved in a number of legal and regulatory proceedings
that arise in the ordinary course of business related to our
operations, relationships with our sellers and servicers, or
administrative functions, which include contractual disputes and
employment-related claims. These cases include legal proceedings
that arise in connection with properties acquired either through
foreclosure on properties securing delinquent mortgage loans we
own or through our receipt of deeds to those properties in lieu
of foreclosure as well as claims related to possible tort
liability. In addition, these cases include litigation resulting
from disputes with lenders concerning their loan origination or
servicing obligations to us, or can result from disputes
concerning termination by us (for a variety of reasons) of a
lenders authority to do business with us as a seller
and/or
servicer.
Pursuant to the provisions of our bylaws and indemnification
agreements, directors and officers have a right to have their
reasonable legal fees and expenses incurred in connection with
any investigation, claim, action, suit or proceeding,
indemnified to the fullest extent permitted by applicable law,
by reason of the fact that such person is or was serving as a
director or officer of Fannie Mae. Until such time as an
indemnification determination is made, we are under an
obligation to advance those fees and expenses. During and
subsequent to 2004, we advanced the expenses of certain current
and former officers and directors for the reasonable costs and
fees incurred by them, as they relate to the OFHEO special
examination, the Paul Weiss, the U.S. Attorneys Office and
SEC investigations, and several shareholder and derivative
lawsuits. None of these amounts were material.
Restatement-Related
Matters
In Re
Fannie Mae Securities Litigation
Beginning on September 23, 2004, 13 separate complaints
were filed by holders of our securities against us, as well as
certain of our former officers, in the U.S. District Court
for the District of Columbia, the U.S. District Court for
the Southern District of New York and other courts. The
complaints in these lawsuits purport to have been made on behalf
of a class of plaintiffs consisting of purchasers of Fannie Mae
securities between April 17, 2001 and September 21,
2004. The complaints alleged that we and certain of our
officers, including Franklin D. Raines, J. Timothy Howard and
Leanne Spencer, made material misrepresentations
and/or
omissions of material fact in violation of the federal
securities laws. Plaintiffs claims were based on findings
contained in OFHEOs September 2004 interim report
regarding its findings to that date in its special examination
of our accounting policies, practices and controls.
All of the cases were consolidated
and/or
transferred to the U.S. District Court for the District of
Columbia. A consolidated complaint was filed on March 4,
2005 against us and former officers Franklin D. Raines, J.
Timothy Howard and Leanne Spencer. The court entered an order
naming the Ohio Public Employees Retirement System and State
Teachers Retirement System of Ohio as lead plaintiffs. The
consolidated complaint generally made the same allegations as
the individually-filed complaints, which is that we and certain
former officers made false and misleading statements in
violation of the federal securities laws in connection with
certain accounting policies and practices. More specifically,
the consolidated complaint alleged that the defendants made
materially false and misleading statements in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and SEC
Rule 10b-5
promulgated thereunder, largely with respect to accounting
statements that were inconsistent with the GAAP requirements
relating to hedge accounting and the amortization of premiums
and discounts. Plaintiffs contend that the alleged fraud
resulted
F-97
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
in artificially inflated prices for our common stock. Plaintiffs
seek compensatory damages, attorneys fees, and other fees
and costs. Discovery commenced in this action following the
denial of the defendants motions to dismiss on
February 10, 2006.
On April 17, 2006, the plaintiffs in the consolidated class
action filed an amended consolidated complaint against us and
former officers Franklin D. Raines, J. Timothy Howard and Leanne
Spencer, that added purchasers of publicly traded call options
and sellers of publicly traded put options to the putative class
and sought to extend the end of the putative class period from
September 21, 2004 to September 27, 2005. We and the
individual defendants filed motions to dismiss addressing the
extended class period and the deficiency of the additional
accounting allegations. On August 14, 2006, while those
motions were still pending, the plaintiffs filed a second
amended complaint adding KPMG LLP and Goldman, Sachs &
Co., Inc. as additional defendants and adding allegations based
on the May 2006 report issued by OFHEO and the February 2006
report issued by Paul Weiss. Our answer to the second amended
complaint is due to be filed on January 8, 2007. Plaintiffs
filed a motion for class certification on May 17, 2006 that
is still pending.
In addition, two individual securities cases have been filed by
institutional investor shareholders in the U.S. District
Court for the District of Columbia. The first case was filed on
January 17, 2006 by Evergreen Equity Trust, Evergreen
Select Equity Trust, Evergreen Variable Annuity Trust and
Evergreen International Trust against us and the following
current and former officers and directors: Franklin D. Raines,
J. Timothy Howard, Leanne Spencer, Thomas P. Gerrity, Anne M.
Mulcahy, Frederick Malek, Taylor Segue, III, William
Harvey, Joe K. Pickett, Victor Ashe, Stephen Ashley, Molly
Bordonaro, Kenneth M. Duberstein, Jamie Gorelick, Manuel Justiz,
Ann McLaughlin Korologos, Donald Marron, Daniel H. Mudd, H.
Patrick Swygert and Leslie Rahl.
The second individual securities case was filed on
January 25, 2006 by 25 affiliates of Franklin Templeton
Investments against us, KPMG LLP, and all of the following
current and former officers and directors: Franklin D. Raines,
J. Timothy Howard, Leanne Spencer, Thomas P. Gerrity, Anne M.
Mulcahy, Frederick Malek, Taylor Segue, III, William
Harvey, Joe K. Pickett, Victor Ashe, Stephen Ashley, Molly
Bordonaro, Kenneth M. Duberstein, Jamie Gorelick, Manuel Justiz,
Ann McLaughlin Korologos, Donald Marron, Daniel H. Mudd, H.
Patrick Swygert and Leslie Rahl.
The two related individual securities actions assert various
federal and state securities law and common law claims against
us and certain of our current and former officers and directors
based upon essentially the same alleged conduct as that at issue
in the consolidated shareholder class action, and also assert
insider trading claims against certain former officers. Both
cases seek compensatory and punitive damages, attorneys
fees, and other fees and costs. In addition, the Evergreen
plaintiffs seek an award of treble damages under state law.
On June 29, 2006 and then again on August 14 and 15,
2006, the individual securities plaintiffs filed first amended
complaints and then second amended complaints seeking to address
certain of the arguments made by the defendants in their
original motions to dismiss and adding additional allegations
regarding improper accounting practices. On August 17,
2006, we filed motions to dismiss certain claims and allegations
of the individual securities plaintiffs second amended
complaints. The individual plaintiffs seek to proceed
independently of the potential class of shareholders in the
consolidated shareholder class action, but the court has
consolidated these cases as part of the consolidated shareholder
class action for pretrial purposes and possibly through final
judgment.
In Re
Fannie Mae Shareholder Derivative Litigation
Beginning on September 28, 2004, ten plaintiffs filed
twelve shareholder derivative actions in three different federal
district courts and the Superior Court of the District of
Columbia on behalf of the company against us (as a nominal
defendant), and certain of our current and former officers and
directors. Plaintiffs contend that the defendants purposefully
misapplied GAAP, maintained poor internal controls, issued a
false and misleading proxy statement and falsified documents to
cause our financial performance to appear smooth and stable, and
that Fannie Mae was harmed as a result. The claims are for
breaches of the duty of care, breach of fiduciary
F-98
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
duty, waste, insider trading, fraud, gross mismanagement,
violations of the Sarbanes-Oxley Act and unjust enrichment.
Plaintiffs seek compensatory damages, punitive damages,
attorneys fees, and other fees, as well as injunctive
relief related to the adoption by us of certain proposed
corporate governance policies and internal controls.
All of these individual actions have been consolidated into the
U.S. District Court for the District of Columbia and the
court entered an order naming Pirelli Armstrong Tire Corporation
and Wayne County Employees Retirement System as co-lead
plaintiffs. A consolidated complaint was filed on
September 26, 2005. The consolidated complaint named the
following current and former officers and directors as
defendants: Franklin Raines, J. Timothy Howard, Thomas P.
Gerrity, Frederick V. Malek, Joe K. Pickett, Anne M. Mulcahy,
Daniel H. Mudd, Kenneth M. Duberstein, Stephen B. Ashley, Ann
Korologos, Donald B. Marron, Leslie Rahl, H. Patrick Swygert and
John K. Wulff.
When document production commenced in In Re Fannie Mae
Securities Litigation, we agreed to simultaneously provide
our document production from that action to the plaintiffs in
the shareholder derivative action.
All of the defendants filed motions to dismiss the action on
December 14, 2005. These motions were fully briefed but not
ruled upon. In the interim, the plaintiffs filed an amended
complaint on September 1, 2006, thus mooting the previously
filed motions to dismiss. Among other things, the amended
complaint adds Goldman Sachs Group Inc., Goldman,
Sachs & Co., Inc., Lehman Brothers Inc. and Radian
Insurance Inc. as defendants, adds allegations concerning the
nature of certain transactions between these entities and Fannie
Mae, adds additional allegations from OFHEOs May 2006
report on its special examination, the Paul Weiss report and
other additional details. We filed motions to dismiss the first
amended complaint on October 20, 2006.
In Re
Fannie Mae ERISA Litigation (formerly David Gwyer v. Fannie
Mae)
Three ERISA-based cases have been filed against us, our Board of
Directors Compensation Committee, and against the
following former and current officers and directors: Franklin D.
Raines, J. Timothy Howard, Daniel H. Mudd, Vincent A. Mai,
Stephen Friedman, Anne Mulcahy, Ann McLaughlin Korologos, Joe K.
Pickett, Donald B. Marron, Kathy Gallo and Leanne Spencer.
On October 15, 2004, David Gwyer filed a class action
complaint in the U.S. District Court for the District of
Columbia. Two additional class action complaints were filed by
other plaintiffs on May 6, 2005 and May 10, 2005. All
of these cases were consolidated on May 24, 2005 in the
U.S. District Court for the District of Columbia. A
consolidated complaint was filed on June 15, 2005. The
plaintiffs in the consolidated ERISA-based lawsuit purport to
represent a class of participants in our ESOP between
January 1, 2001 and the present. Their claims are based on
alleged breaches of fiduciary duty relating to accounting
matters discussed in our SEC filings and in OFHEOs interim
report. Plaintiffs seek unspecified damages, attorneys
fees, and costs, and other injunctive and equitable relief. We
filed a motion to dismiss the consolidated complaint on
June 29, 2005. Our motion and all of the other
defendants motions to dismiss were fully briefed and
argued on January 13, 2006. As of the date of this filing,
these motions are still pending.
Department
of Labor ESOP Investigation
In November 2003, the Department of Labor commenced a review of
our ESOP and Retirement Savings Plan. The Department of Labor
has concluded its investigation of our Retirement Savings Plan,
but continues to review the ESOP. We continue to cooperate fully
in this investigation.
Restatement-Related
Investigations by U.S. Attorneys Office, OFHEO and
SEC
U.S. Attorneys
Office Investigation
In October 2004, we were told by the U.S. Attorneys
Office for the District of Columbia that it was conducting an
investigation of our accounting policies and practices. In
August 2006, we were advised by the U.S. Attorneys
Office for the District of Columbia that it was discontinuing
its investigation of us and does not plan to file charges
against us.
F-99
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
OFHEO and
SEC Settlements
OFHEO
Special Examination and Settlement
In July 2003, OFHEO notified us that it intended to conduct a
special examination of our accounting policies and internal
controls, as well as other areas of inquiry. OFHEO began its
special examination in November 2003 and delivered an interim
report of its findings in September 2004. On May 23, 2006,
OFHEO released its final report on its special examination.
OFHEOs final report concluded that, during the period
covered by the report (1998 to mid-2004), a large number of our
accounting policies and practices did not comply with GAAP and
we had serious problems in our internal controls, financial
reporting and corporate governance.
Concurrently with OFHEOs release of its final report, we
entered into comprehensive settlements that resolved open
matters with OFHEO, as well as with the SEC (described below).
As part of the OFHEO settlement, we agreed to OFHEOs
issuance of a consent order. In entering into this settlement,
we neither admitted nor denied any wrongdoing or any asserted or
implied finding or other basis for the consent order. Under this
consent order, in addition to the civil penalty described below,
we agreed to undertake specified remedial actions to address the
recommendations contained in OFHEOs final report,
including actions relating to our corporate governance, Board of
Directors, capital plans, internal controls, accounting
practices, public disclosures, regulatory reporting, personnel
and compensation practices. We also agreed not to increase our
net mortgage assets above the amount shown in our minimum
capital report to OFHEO for December 31, 2005
($727.75 billion), except in limited circumstances at
OFHEOs discretion. The consent order superseded and
terminated both our September 27, 2004 agreement with OFHEO
and the March 7, 2005 supplement to that agreement, and
resolved all matters addressed by OFHEOs interim and final
reports of its special examination. As part of the OFHEO
settlement, we also agreed to pay a $400 million civil
penalty, with $50 million payable to the U.S. Treasury
and $350 million payable to the SEC for distribution to
shareholders pursuant to the Fair Funds for Investors provision
of the Sarbanes-Oxley Act of 2002. Both amounts were paid in
2006 and were accrued in our 2004 consolidated financial
statements.
SEC
Investigation and Settlement
Following the issuance of the September 2004 interim OFHEO
report, the SEC informed us that it was commencing an
investigation into our accounting practices.
Concurrently, at our request, the SEC reviewed our accounting
practices with respect to hedge accounting and the amortization
of premiums and discounts, which OFHEOs interim report had
concluded did not comply with GAAP. On December 15, 2004,
the SECs Office of the Chief Accountant announced that it
had advised us to (1) restate our financial statements
filed with the SEC to eliminate the use of hedge accounting, and
(2) evaluate our accounting for the amortization of
premiums and discounts, and restate our financial statements
filed with the SEC if the amounts required for correction were
material. The SECs Office of the Chief Accountant also
advised us to reevaluate the GAAP and non-GAAP information that
we previously provided to investors.
On May 23, 2006, without admitting or denying the
SECs allegations, we consented to the entry of a final
judgment requiring us to pay the civil penalty described above
and permanently restraining and enjoining us from future
violations of the anti-fraud, books and records, internal
controls and reporting provisions of the federal securities
laws. The settlement, which included the $400 million civil
penalty described above, resolved all claims asserted against us
in the SECs civil proceeding. The final judgment was
entered by the U.S. District Court of the District of
Columbia on August 9, 2006.
Other
Legal Proceedings
Former
CEO Arbitration
On September 19, 2005, Franklin D. Raines, our former
Chairman and Chief Executive Officer, initiated arbitration
proceedings against Fannie Mae before the American Arbitration
Association. On April 10, 2006, the parties convened an
evidentiary hearing before the arbitrator. The principal issue
before the arbitrator was
F-100
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
whether we were permitted to waive a requirement contained in
Mr. Raines employment agreement that he provide six
months notice prior to retiring. On April 24, 2006, the
arbitrator issued a decision finding that we could not
unilaterally waive the notice period, and that the effective
date of Mr. Raines retirement was June 22, 2005,
rather than December 21, 2004 (his final day of active
employment). Under the arbitrators decision,
Mr. Raines election to receive an accelerated,
lump-sum payment of a portion of his deferred compensation must
now be honored. Moreover, we must pay Mr. Raines any salary
and other compensation to which he would have been entitled had
he remained employed through June 22, 2005, less any
pension benefits that Mr. Raines received during that
period. On November 7, 2006, the parties entered into a
consent award, which partially resolved the issue of amounts due
Mr. Raines. In accordance with the consent award, we paid
Mr. Raines $2.6 million on November 17, 2006. By
agreement, final resolution was deferred until after our
accounting restatement results were announced. These parties
will then have sixty days from announcement to either reach an
agreement or to request additional arbitration proceedings to
ensue.
In Re
G-Fees Antitrust Litigation
Since January 18, 2005, we have been served with 11
proposed class action complaints filed by single-family
borrowers that allege that we and Freddie Mac violated the
Clayton and Sherman Acts and state antitrust and consumer
protection statutes by agreeing to artificially fix, raise,
maintain or stabilize the price of the companies guaranty
fees. Two of these cases were filed in state courts. The
remaining cases were filed in federal court. The two state court
actions were voluntarily dismissed. The federal court actions
were consolidated in the U.S. District Court for the
District of Columbia. Plaintiffs filed a consolidated amended
complaint on August 5, 2005. Plaintiffs in the consolidated
action seek to represent a class of consumers whose loans
allegedly contain a guarantee fee set by Fannie Mae
or Freddie Mac between January 1, 2001 and the present. The
consolidated amended complaint alleges violations of federal and
state antitrust laws and state consumer protection and other
laws. Plaintiffs seek unspecified damages, treble damages,
punitive damages, and declaratory and injunctive relief, as well
as attorneys fees and costs.
We and Freddie Mac filed a motion to dismiss on October 11,
2005. The motion to dismiss has been fully briefed and remains
pending.
Casa Orlando Apartments, Ltd., et al. v. Federal
National Mortgage Association (formerly known as Medlock
Southwest Management Corp., et al. v. Federal National
Mortgage Association)
We are the subject of a lawsuit in which plaintiffs purport to
represent a class of multifamily borrowers whose mortgages are
insured under Sections 221(d)(3), 236 and other sections of
the National Housing Act and are held or serviced by us. The
complaint identified as a class low- and moderate-income
apartment building developers who maintained uninvested escrow
accounts with us or our servicer. Plaintiffs Casa Orlando
Apartments, Ltd., Jasper Housing Development Company, and the
Porkolab Family Trust No. 1 allege that we violated
fiduciary obligations that they contend we owe to borrowers with
respect to certain escrow accounts and that we were unjustly
enriched. In particular, plaintiffs contend that, starting in
1969, we misused these escrow funds and are therefore liable for
any economic benefit we received from use of these funds.
Plaintiffs seek a return of any profits, with accrued interest,
earned by us related to the escrow accounts at issue, as well as
attorneys fees and costs.
The complaint was filed in the U.S. District Court for the
Eastern District of Texas (Texarkana Division) on June 2,
2004 and served on us on June 16, 2004. Our motion to
dismiss and motion for summary judgment were denied on
March 10, 2005. We filed a partial motion for
reconsideration of our motion for summary judgment, which was
denied on February 24, 2006.
Plaintiffs have filed an amended complaint and a motion for
class certification. A hearing on plaintiffs motion for
class certification was held on July 19, 2006, and the
motion remains pending.
F-101
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Lease
Commitments
Certain premises and equipment are leased under agreements that
expire at various dates through 2029, none of which are capital
leases. Some of these leases provide for payment by the lessee
of property taxes, insurance premiums, cost of maintenance and
other costs. Rental expenses for operating leases were
$38 million, $39 million and $35 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
The following table displays the future minimum rental
commitments as of December 31, 2004 for all non-cancelable
operating leases:
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
2005
|
|
$
|
32
|
|
2006
|
|
|
34
|
|
2007
|
|
|
33
|
|
2008
|
|
|
22
|
|
2009
|
|
|
18
|
|
Thereafter
|
|
|
90
|
|
|
|
|
|
|
Total
|
|
$
|
229
|
|
|
|
|
|
|
F-102
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
21.
|
Selected
Quarterly Financial Information (Unaudited)
|
2004
Quarterly Balance Sheets
The following table displays our unaudited interim condensed
consolidated balance sheets as of March 31, 2004,
June 30, 2004, September 30, 2004 and
December 31, 2004. As noted in the table, the condensed
consolidated balance sheets as of March 31, 2004 and
June 30, 2004 have been restated from our previously
reported unaudited interim condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
2004
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
Cash and cash equivalents
|
|
$
|
3,214
|
|
|
$
|
5,205
|
|
|
$
|
340
|
|
|
$
|
3,479
|
|
|
$
|
3,857
|
|
|
$
|
2,655
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading, at fair value
|
|
|
6
|
|
|
|
42,552
|
|
|
|
11
|
|
|
|
38,323
|
|
|
|
37,223
|
|
|
|
35,287
|
|
Available-for-sale,
at fair value
|
|
|
225,853
|
|
|
|
517,106
|
|
|
|
240,475
|
|
|
|
515,067
|
|
|
|
535,826
|
|
|
|
532,095
|
|
Held-to-maturity,
at fair value
|
|
|
468,863
|
|
|
|
|
|
|
|
458,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
694,722
|
|
|
|
559,658
|
|
|
|
698,743
|
|
|
|
553,390
|
|
|
|
573,049
|
|
|
|
567,382
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of
cost or market
|
|
|
6,655
|
|
|
|
13,318
|
|
|
|
2,637
|
|
|
|
11,363
|
|
|
|
11,280
|
|
|
|
11,721
|
|
Loans held for investment, at
amortized cost
|
|
|
236,054
|
|
|
|
380,115
|
|
|
|
239,982
|
|
|
|
385,253
|
|
|
|
389,766
|
|
|
|
390,000
|
|
Allowance for loan losses
|
|
|
(85
|
)
|
|
|
(288
|
)
|
|
|
(80
|
)
|
|
|
(296
|
)
|
|
|
(288
|
)
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
242,624
|
|
|
|
393,145
|
|
|
|
242,539
|
|
|
|
396,320
|
|
|
|
400,758
|
|
|
|
401,372
|
|
Derivative assets at fair value
|
|
|
7,464
|
|
|
|
7,223
|
|
|
|
11,300
|
|
|
|
9,736
|
|
|
|
8,729
|
|
|
|
6,589
|
|
Guaranty assets
|
|
|
5,100
|
|
|
|
4,798
|
|
|
|
5,810
|
|
|
|
5,602
|
|
|
|
5,652
|
|
|
|
5,924
|
|
Deferred tax assets
|
|
|
11,622
|
|
|
|
4,767
|
|
|
|
8,934
|
|
|
|
7,043
|
|
|
|
6,508
|
|
|
|
6,074
|
|
Other assets
|
|
|
30,522
|
|
|
|
36,281
|
|
|
|
21,675
|
|
|
|
26,480
|
|
|
|
28,496
|
|
|
|
30,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
995,268
|
|
|
$
|
1,011,077
|
|
|
$
|
989,341
|
|
|
$
|
1,002,050
|
|
|
$
|
1,027,049
|
|
|
$
|
1,020,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity:
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
468,999
|
|
|
$
|
337,312
|
|
|
$
|
422,899
|
|
|
$
|
312,247
|
|
|
$
|
336,321
|
|
|
$
|
320,280
|
|
Long-term debt
|
|
|
474,091
|
|
|
|
606,340
|
|
|
|
515,296
|
|
|
|
632,076
|
|
|
|
630,585
|
|
|
|
632,831
|
|
Derivative liabilities at fair value
|
|
|
4,146
|
|
|
|
5,357
|
|
|
|
318
|
|
|
|
558
|
|
|
|
1,885
|
|
|
|
1,145
|
|
Reserve for guaranty losses
|
|
|
710
|
|
|
|
271
|
|
|
|
677
|
|
|
|
271
|
|
|
|
299
|
|
|
|
396
|
|
Guaranty obligations
|
|
|
5,100
|
|
|
|
7,084
|
|
|
|
5,810
|
|
|
|
8,208
|
|
|
|
8,396
|
|
|
|
8,784
|
|
Other liabilities
|
|
|
21,370
|
|
|
|
20,731
|
|
|
|
18,176
|
|
|
|
18,395
|
|
|
|
16,549
|
|
|
|
18,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
974,416
|
|
|
|
977,095
|
|
|
|
963,176
|
|
|
|
971,755
|
|
|
|
994,035
|
|
|
|
981,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated
subsidiaries
|
|
|
47
|
|
|
|
52
|
|
|
|
44
|
|
|
|
50
|
|
|
|
47
|
|
|
|
76
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
36,845
|
|
|
|
27,307
|
|
|
|
37,414
|
|
|
|
31,079
|
|
|
|
29,668
|
|
|
|
30,705
|
|
Accumulated other comprehensive
income
|
|
|
(14,896
|
)
|
|
|
7,686
|
|
|
|
(9,994
|
)
|
|
|
374
|
|
|
|
4,462
|
|
|
|
4,387
|
|
Other stockholders equity
|
|
|
(1,144
|
)
|
|
|
(1,063
|
)
|
|
|
(1,299
|
)
|
|
|
(1,208
|
)
|
|
|
(1,163
|
)
|
|
|
3,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
20,805
|
|
|
|
33,930
|
|
|
|
26,121
|
|
|
|
30,245
|
|
|
|
32,967
|
|
|
|
38,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
995,268
|
|
|
$
|
1,011,077
|
|
|
$
|
989,341
|
|
|
$
|
1,002,050
|
|
|
$
|
1,027,049
|
|
|
$
|
1,020,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current condensed consolidated
balance sheet presentation.
|
F-103
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2004
Quarterly Statements of Income
The following table displays our unaudited interim condensed
consolidated statements of income for the quarters ended
March 31, 2004, June 30, 2004, September 30, 2004
and December 31, 2004. As noted in the table, the condensed
consolidated statements of income and earnings per share, for
the quarters ended March 31, 2004 and June 30, 2004
have been restated from previously filed unaudited consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
March 31, 2004
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
Reported(1)
|
|
|
Restated
|
|
|
2004
|
|
|
2004(2)
|
|
|
|
(Dollars and shares in millions, except per share amounts)
|
|
|
Net interest income
|
|
$
|
3,196
|
|
|
$
|
5,062
|
|
|
$
|
3,113
|
|
|
$
|
4,836
|
|
|
$
|
4,000
|
|
|
$
|
4,183
|
|
Guaranty fee income
|
|
|
737
|
|
|
|
891
|
|
|
|
657
|
|
|
|
727
|
|
|
|
1,067
|
|
|
|
919
|
|
Investment gains (losses), net
|
|
|
(8
|
)
|
|
|
525
|
|
|
|
(273
|
)
|
|
|
(1,518
|
)
|
|
|
887
|
|
|
|
(256
|
)
|
Derivatives fair value gains
(losses), net
|
|
|
(972
|
)
|
|
|
(6,446
|
)
|
|
|
(1,958
|
)
|
|
|
2,269
|
|
|
|
(7,136
|
)
|
|
|
(943
|
)
|
Debt extinguishment gains (losses),
net
|
|
|
(27
|
)
|
|
|
(78
|
)
|
|
|
24
|
|
|
|
(7
|
)
|
|
|
(21
|
)
|
|
|
(46
|
)
|
Loss from partnership investments
|
|
|
(92
|
)
|
|
|
(145
|
)
|
|
|
(86
|
)
|
|
|
(177
|
)
|
|
|
(177
|
)
|
|
|
(203
|
)
|
Fee and other income
|
|
|
158
|
|
|
|
56
|
|
|
|
208
|
|
|
|
413
|
|
|
|
103
|
|
|
|
(168
|
)
|
Provision for credit losses
|
|
|
(32
|
)
|
|
|
(13
|
)
|
|
|
12
|
|
|
|
(55
|
)
|
|
|
(65
|
)
|
|
|
(219
|
)
|
Other expenses
|
|
|
(402
|
)
|
|
|
(456
|
)
|
|
|
(416
|
)
|
|
|
(415
|
)
|
|
|
(417
|
)
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
2,558
|
|
|
|
(604
|
)
|
|
|
1,281
|
|
|
|
6,073
|
|
|
|
(1,759
|
)
|
|
|
2,289
|
|
Provision (benefit) for federal
income taxes
|
|
|
659
|
|
|
|
(529
|
)
|
|
|
169
|
|
|
|
1,753
|
|
|
|
(910
|
)
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary
gains (losses)
|
|
|
1,899
|
|
|
|
(75
|
)
|
|
|
1,112
|
|
|
|
4,320
|
|
|
|
(849
|
)
|
|
|
1,579
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(18
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,899
|
|
|
$
|
(65
|
)
|
|
$
|
1,112
|
|
|
$
|
4,317
|
|
|
$
|
(867
|
)
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and
issuance costs at redemption
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
(40
|
)
|
|
|
(40
|
)
|
|
|
(41
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders
|
|
$
|
1,856
|
|
|
$
|
(108
|
)
|
|
$
|
1,072
|
|
|
$
|
4,277
|
|
|
$
|
(908
|
)
|
|
$
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses)
|
|
$
|
1.91
|
|
|
$
|
(0.12
|
)
|
|
$
|
1.11
|
|
|
$
|
4.41
|
|
|
$
|
(0.92
|
)
|
|
$
|
1.59
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
1.91
|
|
|
$
|
(0.11
|
)
|
|
$
|
1.11
|
|
|
$
|
4.41
|
|
|
$
|
(0.94
|
)
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gains
(losses)
|
|
$
|
1.90
|
|
|
$
|
(0.12
|
)
|
|
$
|
1.10
|
|
|
$
|
4.40
|
|
|
$
|
(0.92
|
)
|
|
$
|
1.59
|
|
Extraordinary gains (losses), net
of tax effect
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
1.90
|
|
|
$
|
(0.11
|
)
|
|
$
|
1.10
|
|
|
$
|
4.40
|
|
|
$
|
(0.94
|
)
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding Basic
|
|
|
972
|
|
|
|
972
|
|
|
|
969
|
|
|
|
969
|
|
|
|
968
|
|
|
|
969
|
|
Diluted
|
|
|
975
|
|
|
|
972
|
|
|
|
970
|
|
|
|
973
|
|
|
|
968
|
|
|
|
972
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current condensed consolidated
statement of income presentation.
|
|
(2) |
|
Includes the $400 million
OFHEO and SEC penalty, $116 million impairment of
capitalized software and a $317 million impairment of
securities.
|
F-104
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2004
Quarterly Segment Results
The following table displays our unaudited segment results for
the quarters ended March 31, 2004, June 30, 2004,
September 30, 2004 and December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
93
|
|
|
$
|
(37
|
)
|
|
$
|
5,006
|
|
|
$
|
5,062
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,096
|
|
|
|
98
|
|
|
|
(303
|
)
|
|
|
891
|
|
Investment gains, net
|
|
|
32
|
|
|
|
|
|
|
|
493
|
|
|
|
525
|
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(6,446
|
)
|
|
|
(6,446
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
|
|
(78
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
(145
|
)
|
Fee and other income (expense)
|
|
|
49
|
|
|
|
48
|
|
|
|
(41
|
)
|
|
|
56
|
|
Provision for credit losses
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
(13
|
)
|
Other expenses
|
|
|
(236
|
)
|
|
|
(84
|
)
|
|
|
(136
|
)
|
|
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
1,031
|
|
|
|
(130
|
)
|
|
|
(1,505
|
)
|
|
|
(604
|
)
|
Provision (benefit) for federal
income taxes
|
|
|
359
|
|
|
|
(226
|
)
|
|
|
(662
|
)
|
|
|
(529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary
gains (losses)
|
|
|
672
|
|
|
|
96
|
|
|
|
(843
|
)
|
|
|
(75
|
)
|
Extraordinary gain, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
672
|
|
|
$
|
96
|
|
|
$
|
(833
|
)
|
|
$
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
revenue (expense) of $254 million allocated to
Single-Family Credit Guaranty and HCD from Capital Markets for
absorbing the credit risk on mortgage loans and Fannie Mae MBS
held in our portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended June 30, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Restated)
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
118
|
|
|
$
|
(34
|
)
|
|
$
|
4,752
|
|
|
$
|
4,836
|
|
Guaranty fee income
(expense)(2)
|
|
|
954
|
|
|
|
77
|
|
|
|
(304
|
)
|
|
|
727
|
|
Investment gains (losses), net
|
|
|
29
|
|
|
|
|
|
|
|
(1,547
|
)
|
|
|
(1,518
|
)
|
Derivatives fair value gains, net
|
|
|
|
|
|
|
|
|
|
|
2,269
|
|
|
|
2,269
|
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
(177
|
)
|
Fee and other income
|
|
|
77
|
|
|
|
72
|
|
|
|
264
|
|
|
|
413
|
|
Provision for credit losses
|
|
|
(34
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
(55
|
)
|
Other expenses
|
|
|
(212
|
)
|
|
|
(86
|
)
|
|
|
(117
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
932
|
|
|
|
(169
|
)
|
|
|
5,310
|
|
|
|
6,073
|
|
Provision (benefit) for federal
income taxes
|
|
|
326
|
|
|
|
(243
|
)
|
|
|
1,670
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses)
|
|
|
606
|
|
|
|
74
|
|
|
|
3,640
|
|
|
|
4,320
|
|
Extraordinary losses, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
606
|
|
|
$
|
74
|
|
|
$
|
3,637
|
|
|
$
|
4,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
revenue (expense) of $257 million allocated to
Single-Family Credit Guaranty and HCD from Capital Markets for
absorbing the credit risk on mortgage loans and Fannie Mae MBS
held in our portfolio.
|
F-105
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended September 30, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income (expense)
(1)
|
|
$
|
125
|
|
|
$
|
(36
|
)
|
|
$
|
3,911
|
|
|
$
|
4,000
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,278
|
|
|
|
100
|
|
|
|
(311
|
)
|
|
|
1,067
|
|
Investment gains, net
|
|
|
8
|
|
|
|
|
|
|
|
879
|
|
|
|
887
|
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(7,136
|
)
|
|
|
(7,136
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
(177
|
)
|
Fee and other income (expense)
|
|
|
41
|
|
|
|
87
|
|
|
|
(25
|
)
|
|
|
103
|
|
Provision for credit losses
|
|
|
(74
|
)
|
|
|
9
|
|
|
|
|
|
|
|
(65
|
)
|
Other expenses
|
|
|
(215
|
)
|
|
|
(93
|
)
|
|
|
(109
|
)
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
1,163
|
|
|
|
(110
|
)
|
|
|
(2,812
|
)
|
|
|
(1,759
|
)
|
Provision (benefit) for federal
income taxes
|
|
|
406
|
|
|
|
(220
|
)
|
|
|
(1,096
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary
gains (losses)
|
|
|
757
|
|
|
|
110
|
|
|
|
(1,716
|
)
|
|
|
(849
|
)
|
Extraordinary losses, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
757
|
|
|
$
|
110
|
|
|
$
|
(1,734
|
)
|
|
$
|
(867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
revenue (expense) of $260 million allocated to
Single-Family Credit Guaranty and HCD from Capital Markets for
absorbing the credit risk on mortgage loans and Fannie Mae MBS
held in our portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended December 31, 2004
|
|
|
|
Single-Family
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Credit Guaranty
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
142
|
|
|
$
|
(37
|
)
|
|
$
|
4,078
|
|
|
$
|
4,183
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,127
|
|
|
|
104
|
|
|
|
(312
|
)
|
|
|
919
|
|
Investment gains (losses), net
|
|
|
15
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
(256
|
)
|
Derivatives fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(943
|
)
|
|
|
(943
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
(46
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(203
|
)
|
|
|
|
|
|
|
(203
|
)
|
Fee and other income (expense)
|
|
|
53
|
|
|
|
105
|
|
|
|
(326
|
)
|
|
|
(168
|
)
|
Provision for credit losses
|
|
|
(201
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
(219
|
)
|
Other expenses
|
|
|
(360
|
)
|
|
|
(132
|
)
|
|
|
(486
|
)
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income
taxes and extraordinary gains (losses)
|
|
|
776
|
|
|
|
(181
|
)
|
|
|
1,694
|
|
|
|
2,289
|
|
Provision (benefit) for federal
income taxes
|
|
|
297
|
|
|
|
(238
|
)
|
|
|
651
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gains
(losses)
|
|
|
479
|
|
|
|
57
|
|
|
|
1,043
|
|
|
|
1,579
|
|
Extraordinary gain, net of tax
effect
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
479
|
|
|
$
|
57
|
|
|
$
|
1,046
|
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
revenue (expense) of $260 million allocated to
Single-Family Credit Guaranty and HCD from Capital Markets for
absorbing the credit risk on mortgage loans and Fannie Mae MBS
held in our portfolio.
|
F-106
FANNIE
MAE
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Hurricanes
Katrina and Rita
In August and September 2005, Hurricanes Katrina and Rita
damaged the Gulf Coast. Our exposure to losses as a result of
Hurricanes Katrina and Rita arises primarily from our guaranty
of MBS secured by property in the affected areas, our portfolio
holdings of mortgages and mortgage-related securities secured by
property in the affected areas, and real estate owned in the
affected areas. We continue to evaluate the impact to the
consolidated financial statements as a result of the damage.
Additionally, we instituted mortgage relief provisions designed
to meet the individual needs of borrowers facing hardship as a
result of the hurricanes. Our disaster relief provisions allow
lenders to help borrowers in several ways, including suspending
or reducing mortgage payments for up to 18 months or more
and permitting repayment of the amounts deferred over time,
consistent with provisions included in the trust.
Regulatory
Capital
On September 1, 2005, we entered into an agreement with
OFHEO under which they regulated certain financial risk
management and disclosure commitments designed to enhance market
discipline, liquidity and capital. In addition, every six
months, commencing January 1, 2006, we are required to
submit, and have submitted, to OFHEO a subordinated debt
management plan that includes any issuance plans for the
upcoming six months, which is subject to OFHEOs approval,
and required to comply with our commitment regarding qualifying
subordinated debt issuance requirements.
On May 23, 2006, we agreed to the issuance of a consent
order by OFHEO, which superseded and terminated the
September 27, 2004 OFHEO agreement and the March 8,
2005 OFHEO agreement. See Note 16, Regulatory Capital
Requirements for additional information.
Stock
Repurchase Program
On May 9, 2006, we announced a stock repurchase program
under which we may repurchase up to $100 million of Fannie
Mae shares from non-officer employees. Prior to the creation of
this employee stock repurchase program, we repurchased shares in
a limited number of instances relating to financial hardship as
well as reacquired common stock from employees as payment for
the cost of option exercises and tax withholding.
Final
OFHEO Report and Settlements with OFHEO and SEC
On May 23, 2006, OFHEO issued its final report on its
special examination of our accounting policies, internal
controls, financial reporting, corporate governance, and other
safety and soundness matters. Concurrently with OFHEOs
release of its final report, we entered into comprehensive
settlements that resolved open matters with OFHEO and with the
SEC. As part of the settlements, we agreed to pay
$400 million civil penalty to the U.S. government,
with $50 million payable to the U.S. Treasury and
$350 million payable to the SEC for distribution to
shareholders pursuant to the Fair Funds for Investors provision
of the Sarbanes-Oxley Act of 2002, both of which were paid in
2006. See Note 20, Commitments and
Contingencies for additional information.
Increase
in Common Stock Dividend
On December 6, 2006, the Board of Directors increased the
quarterly common stock dividend to $0.40 per share. The Board
determined that the increased dividend would be effective
beginning in the fourth quarter of 2006, and therefore declared
a special common stock dividend of $0.14 per share, payable on
December 29, 2006, to stockholders of record on
December 15, 2006. This special dividend of $0.14, combined
with our previously declared dividend of $0.26 paid on
November 27, 2006, will result in a total common stock
dividend of $0.40 per share for the fourth quarter of 2006.
F-107