Fannie Mae 2004 Annual Report Download - page 268

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 calcula-
tion 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:
•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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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)