Fannie Mae 2010 Annual Report Download - page 108

net deferred tax assets. As a result, we recorded an increase in our valuation allowance in 2010 that resulted in
the recognition of $5.9 billion in our provision for income taxes. This amount represented the tax effect
associated with a portion of the pre-tax loss. The change in our 2010 valuation allowance also includes a
$2.4 billion reduction primarily due to our adoption of the new accounting standards for amounts originally
recognized in “Accumulated deficit.” The valuation allowance recorded against our deferred tax assets totaled
$56.3 billion as of December 31, 2010, resulting in a net deferred tax asset of $754 million. Our tax benefit
for the year resulted in an effective income tax rate of less than 1%. Our effective tax rate was different from
the statutory rate of 35% primarily due to an increase in our valuation allowance. The difference in rates was
also the result of the settlement agreement with the IRS.
We recorded a tax benefit for federal income taxes of $985 million for 2009, due primarily to the benefit of
carrying back a portion of our 2009 loss, net of the reversal of the use of certain tax credits, to prior years. In
comparison, we recorded a provision for federal income taxes of $13.7 billion in 2008, due primarily to the
valuation allowance recorded against our deferred tax assets that totaled $30.8 billion as of December 31,
2008, resulting in a net deferred tax asset of $3.9 billion.
We discuss the factors that led us to record a partial valuation allowance against our net deferred tax assets in
“Note 11, Income Taxes.” The amount of deferred tax assets considered realizable is subject to adjustment in
future periods. We will continue to monitor all available evidence related to our ability to utilize our
remaining deferred tax assets. If we determine that recovery is not likely, we will record an additional
valuation allowance against the deferred tax assets that we estimate may not be recoverable. Our income tax
expense in future periods will be reduced or increased to the extent of offsetting decreases or increases to our
valuation allowance.
Financial Impact of the Making Home Affordable Program on Fannie Mae
Home Affordable Refinance Program
Because we already own or guarantee the original mortgages that we refinance under HARP, our expenses
under that program consist mostly of limited administrative costs.
Home Affordable Modification Program
Modifying loans we own or guarantee under HAMP, pursuant to our mission, directly affects our financial
results in the following ways:
Key elements affecting our financial results
Loans in trial modification plans are treated as individually impaired. Under HAMP, a borrower must satisfy
the terms of a trial modification plan, typically for a period of at least three months, before the modification
of the loan can become effective. A trial modification period begins when the borrower and Fannie Mae agree
to the terms of the trial modification plan. If the loan is recorded on our consolidated balance sheet, we
account for the loan as a TDR, because it is a restructuring of a mortgage loan in which a concession is
granted to a borrower experiencing financial hardship. As a result, we consider the loan to be individually
impaired when it enters a trial modification period, and we calculate our allowance for loan losses for the
restructured loan on an individual basis. Once a permanent loan modification becomes effective, the loan will
continue to be considered individually impaired.
We continually reassess our loss reserves to determine if the amount of impairment recorded is appropriate
and make adjustments as required. Consequently, after a loan has entered into a trial modification under
HAMP, we continue to adjust the amount of impairment.
When we begin to individually assess a loan for impairment, we exclude the loan from the population of loans
on which we calculate our collective loss reserves. Amounts in the table below do not reflect the impact of
removing these individually impaired loans from this population. The collective loss reserves are reduced by
the fact that these loans are no longer included in the population for which the collective reserves are
calculated.
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