Fannie Mae 2004 Annual Report Download - page 269

of using the equity method of accounting. The correction of this error resulted in changes in the carrying
amount of these investments in the consolidated balance sheets, the recognition of our obligations to fund
the partnerships, and changes in the income recognition on these investments in the consolidated
statements of income. Additionally, we failed to consolidate a portion of the LIHTC and other partnership
investments in which we were deemed to be the primary beneficiary pursuant to FIN 46R, which resulted
in the reversal of any previously recorded investment and recognition of the underlying assets and
liabilities of the entity in the consolidated balance sheets and, at the same time, we incorrectly
consolidated some partnership investments which had the reverse effect. We also made errors in the
capitalization of interest expense, measurement of impairment, and the recognition of our obligations to
fund our partnership investments. The correction of these errors resulted in changes in the amount of
interest expense and impairment recognized in the consolidated statements of income. Lastly, we made
errors in the computation of net operating losses and tax credits allocated to us from these partnerships.
The correction of these errors resulted in changes in “Deferred tax assets” in the consolidated balance
sheets and changes in the “Provision for federal income taxes” in the consolidated statements of income.
These restatement adjustments resulted in a pre-tax decrease in net income of $293 million and
$199 million for the years ended December 31, 2003 and 2002, respectively. In addition to the tax
provision recorded for the partnership investments restatement adjustments, we also recorded a decrease
in federal income tax expense of $138 million and $206 million due to changes in the recognition and
classification of related tax credits and net operating losses for the years ended December 31, 2003 and
2002, respectively. These restatement adjustments also impacted the consolidated balance sheets, resulting
in an increase of $791 million and $1.2 billion in total assets and an increase of $878 million and
$1.3 billion in total liabilities as of December 31, 2003 and 2002, respectively.
•Classification of loans held for sale. We incorrectly classified loans held for securitization at a future
date as HFI loans rather than HFS loans pursuant to SFAS No. 65, Accounting for Certain Mortgage
Banking Activities (“SFAS 65”). Accordingly, we did not record lower of cost or market (“LOCOM”)
adjustments on these loans. To correct this error, we recorded an adjustment to reclassify such loans from
HFI to HFS and recorded an associated LOCOM adjustment. These restatement adjustments resulted in a
pre-tax decrease in net income of $303 million and $40 million for the years ended December 31, 2003
and 2002, respectively.
•Provision for credit losses. We incorrectly recorded the “Provision for credit losses” due to errors
associated with the “Allowance for loan losses,” “Reserve for guaranty losses,” real estate owned (“REO”)
and troubled debt restructurings (“TDR”).
— We made errors in developing our estimates of the “Allowance for loan losses” and the “Reserve for
guaranty losses,” which resulted in an understatement of the provision for credit losses. These errors
were primarily related to the use of inappropriate data in the calculation of the allowance and reserve,
such as incorrect loan populations, inaccurate default statistics and inaccurate loss severity in the
event that loans default. We also made judgmental adjustments to the calculated allowance without
adequate support and incorrectly included an estimate of credit enhancement collections in the
estimate of the “Allowance for loan losses.” Estimates of recoveries from credit enhancements that
were not entered into contemporaneously or in contemplation of a guaranty or loan purchase should
not have been included in the overall estimate of the allowance or the reserve. As a result of
misclassifying certain loans as HFI, we incorrectly recorded an “Allowance for loan losses” on these
loans. Finally, we did not properly allocate the reserve between the “Allowance for loan losses” and
the “Reserve for guaranty losses.” To correct these errors, we recalculated the allowance and reserve
with updated information and supportable data, reviewed and documented any judgmental adjustments
and appropriately applied estimates of recoveries from credit enhancements to the loan population.
— We made errors in calculating loan charge-off amounts. These errors were related to REO and
foreclosed property expense, including making inappropriate determinations of the initial cost basis of
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)