Fannie Mae 2010 Annual Report Download - page 284

and the level of credit risk we assume. In lieu of charging a higher guaranty fee for loans with greater credit
risk, we may require that the lender pay an upfront fee to compensate us for assuming additional credit risk.
We refer to this payment as a risk-based pricing adjustment. In addition, we may charge a lower guaranty fee
if the lender assumes a portion of the credit risk through recourse or other risk-sharing arrangements. We refer
to these arrangements as credit enhancements. We also adjust the monthly guaranty fee so that the pass-
through coupon rates on Fannie Mae MBS are in more easily tradable increments of a whole or half percent
by making an upfront payment to the lender (“buy-up”) or receiving an upfront payment from the lender
(“buy-down”).
Upon adoption of the new accounting standards on the transfer of financial assets and the consolidation of
VIE’s on January 1, 2010, we consolidated most of the single-class securitization trusts that are issued under
our guaranty accounting programs. As such, a significant portion of our guaranty-related assets and liabilities
have been derecognized from our consolidated balance sheet.
For those trusts that are not consolidated, we initially recognize a liability for the fair value of our obligation
to stand ready to perform over the term of the guaranty as a component of “Other liabilities” in our
consolidated balance sheets. We also record an offsetting asset (a retained interest for portfolio securitizations)
that represents the present value of cash flows expected to be received as compensation over the life of the
guaranty as a component of “Other assets.”
For lender swap transactions, we initially recognize our guaranty obligation at fair value using the transaction
price, as a practical expedient, upon initial recognition. Specifically, we estimate the compensation that we
would require to issue the same guaranty in a standalone arm’s-length transaction with an unrelated party.
Because the fair value of those guaranty obligations equals the fair value of the total compensation we receive,
we do not recognize losses or record deferred profit in our consolidated financial statements at inception of
our guaranty contracts. As such, all upfront cash received for buy-downs and risk-based price adjustments are
included as a component of our guaranty obligation at inception.
For portfolio securitizations, we initially recognize our guaranty obligation at fair value using an estimate of a
hypothetical transaction price that we would receive if we were to issue our guaranty to an unrelated party in a
standalone arm’s-length transaction at the measurement date. We recognize any difference between the fair
value of the guaranty asset and the fair value of the guaranty obligation as a component of the gain or loss on
the sale of mortgage-related assets and record the difference as “Investment gains (losses), net” in our
consolidated statements of operations.
Subsequent to initial recognition, we account for the guaranty asset on lender swap transactions at amortized
cost. As we collect monthly guaranty fees, we reduce guaranty assets to reflect cash payments received and
recognize imputed interest income on guaranty assets as a component of “Guaranty fee income” under the
prospective interest method. We reduce the corresponding guaranty obligation in proportion to the reduction in
guaranty assets and recognize this reduction in our consolidated statements of operations as an additional
component of “Guaranty fee income.” We assess guaranty assets for other-than-temporary impairment based
on changes in our estimate of the cash flows to be received. When we determine a guaranty asset is
other-than-temporarily impaired, we write down the cost basis of the guaranty asset to its fair value and
include the amount written-down in “Guaranty fee income” in our consolidated statements of operations. Any
other-than-temporary impairment recorded on guaranty assets results in a proportionate reduction in the
corresponding guaranty obligations. For portfolio securitizations, we subsequently account for the retained
guarantee asset in the same manner as a trading security, with unrealized gains and losses included in
“Guaranty fee income” in our consolidated statements of operations.
We record buy-ups in our consolidated balance sheets at fair value in “Other assets.” We subsequently account
for buy-ups in the same manner as a trading security.
F-26
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)