Fannie Mae 2001 Annual Report Download - page 55

{ 53 } Fannie Mae 2001 Annual Report
1. Summary of Significant Accounting
Policies
Fannie Mae is a federally chartered and stockholder-owned
corporation operating in the residential mortgage finance
industry.
The accounting and reporting policies of Fannie Mae
conform with accounting principles generally accepted in
the United States of America. Certain amounts in prior
years’ financial statements have been reclassified to conform
to the current presentation.
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Mortgage Portfolio
Mortgages and mortgage-backed securities that Fannie Mae
has the ability and positive intent to hold to maturity are
classified as “held-to-maturity” and are carried at their
unpaid principal balance (UPB) adjusted for unamortized
purchase discount or premium and other deferred price
adjustments. Mortgage loans held for sale are carried at the
lower of cost or fair value, determined on a portfolio basis,
with any unrealized losses included in current period
earnings. Mortgage-backed securities that Fannie Mae
intends to hold for an undetermined period, but not
necessarily to maturity, are classified as “available-for-sale”
and are carried at fair value, with any valuation adjustments
reported as a component of accumulated other
comprehensive income (AOCI), net of deferred taxes,
in stockholders’ equity.
Fannie Mae uses actual principal prepayment experience and
estimates of future principal prepayments in calculating the
constant effective yield necessary to apply the interest
method in the amortization of purchase discount or
premium and other deferred price adjustments. In evaluating
prepayments, loans are aggregated by similar characteristics
(e.g., loan type, acquisition date, and maturity). Factors used
in determining estimates of future prepayments include
historical prepayment data and expected prepayment
performance under varying interest rate scenarios.
Interest income is not accrued on nonperforming loans.
Conventional single-family and multifamily loans are
classified as nonperforming and previously accrued interest is
reversed against current period income when payment on the
loan is 90 days or more delinquent. Once loans become
performing (payment on the loan is less than 90 days
delinquent), they are placed on accrual status and all
reversed income is recognized in the period the loans
become performing.
Investments
Investments consist of Fannie Mae’s Liquid Investment
Portfolio and other investments. Investments are classified
as either held-to-maturity or available-for-sale. Investments
classified as held-to-maturity are carried at historical cost,
adjusted for unamortized discount or premium. Investments
classified as available-for-sale are carried at fair value as of the
balance sheet date, with any valuation adjustments reported
as a component of AOCI, net of deferred taxes, in
stockholders’ equity. Interest income is recognized on an
accrual basis unless the collection of interest income is
considered doubtful, in which case interest income is
recognized on a cash basis.
Guaranteed Mortgage-Backed Securities
Fannie Mae guarantees the timely payment of principal and
interest on most Fannie Mae Mortgage-Backed Securities
(MBS). These securities represent beneficial interests in
pools of mortgages or other MBS held in trust by
Fannie Mae. The pools of mortgages or MBS are not assets
of Fannie Mae, except when acquired for investment
purposes, nor are the related outstanding securities
liabilities; accordingly, neither are reflected on the
accompanying balance sheets. Fannie Mae receives monthly
guaranty fees for each MBS mortgage pool based on a
percentage of the pool’s outstanding balance. Adjustments to
the guaranty fee rate effected through an upfront payment at
securitization are deferred and amortized into guaranty fee
income over the estimated life of the underlying loans using
the interest method. For MBS pools held in Fannie Mae’s
portfolio, the guaranty fee is reflected as interest income.
Allowance for Losses
The allowance for losses is determined based on an analysis
of portfolio loans and MBS outstanding and provides for
known probable losses and losses inherent in the mortgage
portfolio and MBS. Management’s analysis considers current
delinquency levels, historical loss experience, current
economic conditions, payment performance in areas of
geographic concentration, and mortgage characteristics. The
allowance for losses is established by recording an expense
for the provision for losses and may be reduced by recording
a negative provision if management believes the allowance
amount exceeds expected losses. The allowance for losses is
subsequently reduced through charge-offs and is increased
Notes to Financial Statements