Fannie Mae 2010 Annual Report Download - page 273

class securitization trusts that are issued under these programs because our role as guarantor and master
servicer provides us with the power to direct matters that impact the credit risk to which we are exposed.
When we purchase single-class Fannie Mae MBS issued from a consolidated trust, we account for the
transaction as an extinguishment of the related debt in our consolidated financial statements. We record a gain
or loss on the extinguishment of such debt to the extent that the purchase price of the MBS does not equal the
carrying value of the related consolidated debt reported in our consolidated balance sheet (including
unamortized premiums, discounts or the other cost basis adjustments) at the time of purchase. We account for
the sale of an MBS from Fannie Mae’s portfolio to a third party that was issued from a consolidated trust as
the issuance of debt in our consolidated financial statements. We amortize the related premiums, discounts and
other cost basis adjustments into income over time.
To determine the order in which consolidated debt is extinguished, we have elected to use a daily convention
in the application of the last-issued first-extinguished method. Under this method, we record the net daily
change in each MBS holding as either the issuance of debt if there has been an increase in the position that is
held by third parties, or the extinguishment of the most recently issued related debt if there has been a
decrease in the position held by third parties. The impact of this method is that we record the net daily
activity for an MBS as if it were a single buy or sell trade, which results in a change in our beginning debt
balance if the total unpaid principal balance purchased does not match the total unpaid principal balance sold.
If a single-class securitization trust is not consolidated, we account for the purchase and subsequent sale of
such securities as the transfer of an investment security in accordance with the new accounting standard for
the transfers of financial assets.
Single-Class Resecuritization Trusts
Single-class resecuritization trusts are created by depositing Fannie Mae MBS into a new securitization trust
for the purpose of aggregating multiple MBS into a single larger security. The cash flows from the new
security represent an aggregation of the cash flows from the underlying MBS. We guarantee to each single-
class resecuritization trust that we will supplement amounts received by the trust as required to permit timely
payments of principal and interest on the related Fannie Mae securities. However, we assume no additional
credit risk in such a resecuritization transaction, because the underlying assets are MBS for which we have
already provided a guaranty. Additionally, our involvement with these trusts does not provide any incremental
rights or power that would enable Fannie Mae to direct any activities of the trusts. As a result, we are not the
primary beneficiaries of, and therefore do not consolidate, our single-class resecuritization trusts.
As our single-class resecuritization securities pass through all of the cash flows of the underlying MBS
directly to the holders of the securities, they are deemed to be substantially the same as the underlying MBS.
Therefore, we account for purchases of our single-class resecuritization securities as an extinguishment of the
underlying MBS debt and the sale of these securities as an issuance of the underlying MBS debt.
Multi-Class Resecuritization Trusts
Multi-class resecuritization trusts are trusts we create to issue multi-class Fannie Mae securities, including
Real Estate Mortgage Investment Conduits (“REMICs”) and strip securities, in which the cash flows of the
underlying mortgage assets are divided, creating several classes of securities, each of which represents a
beneficial ownership interest in a separate portion of cash flows. We guarantee to each multi-class
resecuritization trust that we will supplement amounts received by the trusts as required to permit timely
payments of principal and interest, as applicable, on the related Fannie Mae securities. However, we assume
no additional credit risk in such a resecuritization transaction because the underlying assets are Fannie Mae
MBS for which we have already provided a guaranty. Although we may be exposed to prepayment risk via
F-15
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)