Fannie Mae 2002 Annual Report Download - page 97

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95
FANNIE MAE 2002 ANNUAL REPORT
We previously recorded gains from the sale of foreclosed
properties and related mortgage insurance claims against
our allowance for loan losses and guaranty liability as a
recovery of charge-offs. During 2002, we reclassified these
gains to “Foreclosed property income.” Additionally, the
AICPA rescinded Statement of Position 92-3, Accounting for
Foreclosed Assets (SOP 92-3), during the fourth quarter of
2002. Under SOP 92-3, we recorded selling costs related to
the disposition of foreclosed properties in our income
statement under “Foreclosed property income.” We now
include selling costs in our initial charge-off estimate. All
prior periods have been reclassified to conform to the current
year presentation. The reclassified amounts result in equal
and offsetting changes to our “Provision for losses” and
“Foreclosed property income” line items within our
previously reported income statements. These
reclassifications have no impact on previously reported
net income, total credit-related expenses, or the balance
of the allowance for losses.
Acquired Property
We measure foreclosed assets at fair value, less estimated cost
to sell, at the time of foreclosure. Fair value is determined
based on the estimated net proceeds the company will receive
from the disposition of the foreclosed asset. We charge
subsequent changes in the collateral’s fair value as well as
foreclosure, holding, and disposition costs, directly to
earnings through foreclosed property income.
We account for and classify deeds-in-lieu of foreclosure
similar to foreclosures. Our accounting for preforeclosure
sales of properties by the borrower is slightly different
because we do not have title to the underlying properties. In
a preforeclosure situation, the loan remains in the mortgage-
related security or our mortgage portfolio until the borrower
sells the property. At that point, we reduce the carrying
amount of the mortgage loan and create a receivable for the
sale proceeds in the amount of the sales price. We classify the
receivable for the sale proceeds as part of “Acquired property
and foreclosure claims, net” on the balance sheet. If there is
any remaining investment in the mortgage loan, we charge
off the mortgage loan against the allowance for loan losses or
guaranty liability for MBS. If the sale proceeds exceed the
mortgage loan balance, we record it in “Foreclosed property
income” on the income statement.
Derivative Instruments and Hedging Activities
On January 1, 2001, we adopted Financial Accounting
Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133), as amended by Financial
Accounting Standard No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities.
Under FAS 133, we recognize all derivatives as either assets
or liabilities on the balance sheet at their fair value. Subject to
certain qualifying conditions, we may designate a derivative
as either a hedge of the cash flows of a variable-rate
instrument or anticipated transaction (cash flow hedge) or a
hedge of the fair value of a fixed-rate instrument (fair value
hedge). For a derivative qualifying as a cash flow hedge, we
report fair value gains or losses in a separate component of
AOCI, net of deferred taxes, in stockholders’ equity to the
extent the hedge is effective. We recognize these fair value
gains or losses in earnings during the period(s) in which the
hedged item affects earnings. For a derivative qualifying as
a fair value hedge, we report fair value gains or losses on the
derivative in earnings along with fair value gains or losses on
the hedged item attributable to the risk being hedged. For a
derivative not qualifying as a hedge, or components of a
derivative that are excluded from any hedge effectiveness
assessment, we report fair value gains and losses in earnings.
If a derivative no longer qualifies as a cash flow or fair value
hedge, we discontinue hedge accounting prospectively. We
continue to carry the derivative on the balance sheet at fair
value and record fair value gains and losses in earnings until
the derivative is settled. For discontinued cash flow hedges,
we recognize the gains or losses previously deferred in AOCI
in earnings in the same period(s) that the hedged item affects
earnings. For discontinued fair value hedges, we no longer
adjust the carrying amount of the hedged asset or liability for
changes in its fair value. We then amortize previous fair value
adjustments to the carrying amount of the hedged item to
earnings over the remaining life of the hedged item using
the effective yield method.
Our adoption of FAS 133 on January 1, 2001 resulted in a
cumulative after-tax increase in income of $168 million and
an after-tax reduction in AOCI of $3.9 billion. In addition,
we reclassified investment securities and MBS with an
amortized cost of approximately $20 billion from held-to-
maturity to available-for-sale upon the adoption of FAS 133.
At the time of this noncash transfer, we had gross unrealized
gains and losses of $164 million and $32 million, respectively,
on these securities.
We reflect payments to purchase and terminate derivatives
used as hedges of our debt as “net payments to purchase
or settle hedge instruments” in our cash flow statement.
We classify these payments as financing activities because
we use these derivatives as hedges of our funding costs.
During the fourth quarter of 2002, we refined our
methodology for estimating the initial time value of interest
rate caps at the date of purchase and prospectively adopted a
preferred method that resulted in a $282 million pre-tax