Fannie Mae 2004 Annual Report Download - page 265

We failed to consolidate MBS trusts that were not considered QSPEs and for which we were deemed to be the
primary beneficiary or sponsor of the trust. These entities included those to which we transferred assets in a
transaction that initially qualified as a sale and for QSPE status, but where the trust subsequently failed to
meet the criteria to be a QSPE, primarily because our ownership interests in the trust exceeded the threshold
permitted for a QSPE. Additionally, these entities included those where we were not the transferor of assets to
the trust, but where the trust is not considered a QSPE and our investments or guaranty contracts provide us
with the majority of the expected losses or residual returns, as defined by FIN No. 46 (revised December
2003), Consolidation of Variable Interest Entities (an interpretation of ARB No. 51) (“FIN 46R”). To correct
this error, we consolidated these trusts, then deconsolidated trusts when they no longer required consolidation.
We incorrectly did not consolidate MBS trusts in which we owned or acquired over time 100% of the related
securities issued by the trust and had the ability to unilaterally liquidate the trust. To correct this error, we
consolidated those MBS trusts in which we had the unilateral ability to liquidate and deconsolidated these
trusts when we no longer had the unilateral ability to liquidate.
Correcting these errors related to MBS trust consolidation and sale accounting resulted in a decrease in
“Investments in securities” of $154.0 billion and $128.8 billion, an increase in “Mortgage loans” of
$162.8 billion and $136.1 billion and an increase in debt of $9.9 billion and $7.5 billion as of December 31,
2003 and 2002, respectively.
In situations where we were required to consolidate an MBS trust, we derecognized the MBS recorded in the
consolidated balance sheets as “Investments in securities” and recognized the underlying assets held by the
trust, either as mortgage loans or mortgage-related securities. Loans that were consolidated from trusts in
which we were the transferor have been classified as held for sale (“HFS”) and are recorded at the lower of
cost or market, whereas loans that were consolidated from trusts in which we were not the transferor have
been classified as held for investment (“HFI”) and recorded at amortized cost. Mortgage-related securities that
were consolidated from trusts have been classified as AFS securities. We also derecognized assets and
liabilities associated with our guaranty and master servicing arrangements associated with the consolidated
MBS trusts and recognized these amounts as cost basis adjustments to “Mortgage loans” in the consolidated
balance sheets, where applicable. The impact of the amortization of this cost basis adjustment is reflected in
the “Amortization of Cost Basis Adjustments” section below. For consolidated MBS trusts in which we owned
less than 100% of the related securities, we recorded short-term or long-term debt in the consolidated balance
sheets for the portion of the security position due to third parties.
Correcting these errors related to MBS trust consolidation and sale accounting also impacted the consolidated
statements of income. We recorded an additional loss of $230 million and $26 million in “Investments losses,
net” in the consolidated statements of income for the years ended December 31, 2003 and 2002, respectively,
primarily due to reversing previously recorded asset sales. As a result of adopting FIN 46R, we consolidated
certain MBS trusts created prior to February 1, 2003 and recorded a $34 million gain in “Cumulative effect of
change in accounting principle, net of tax effect” in the consolidated statement of income for the year ended
December 31, 2003. For MBS trusts created after January 31, 2003 and that were consolidated due to the
application of FIN 46R, we recorded a $195 million gain in “Extraordinary gains (losses), net of tax effect” in
the consolidated statement of income for the year ended December 31, 2003, reflecting the difference between
the fair value of the consolidated assets and liabilities and the carrying amount of our interest in the MBS
trust. In addition, we recorded a decrease in “Guaranty fee income” of $247 million and $198 million and an
increase in “Interest income” of $594 million and $710 million for the years ended December 31, 2003 and
2002, respectively, as a result of derecognizing our guaranty assets and obligations and recognizing cost basis
adjustments to the consolidated mortgage loans and mortgage-related securities.
Additionally, two real estate mortgage investment conduit (“REMIC”) transactions were specifically identified
and questioned by OFHEO regarding our intent for entering into the transactions and the timing of income
recognition. Our review concluded that the historical treatment of accounting for these transfers was
appropriate and consistently applied.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)