Fannie Mae 2004 Annual Report Download - page 87

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.
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