Fannie Mae 2004 Annual Report Download - page 291

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 compen-
sation 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-tem-
porarily 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
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)