Fannie Mae 2004 Annual Report Download - page 280

the reclassification of net derivative losses from AOCI into net income had a significant negative impact on
required minimum and critical capital, despite an increase in stockholders’ equity.
2. Summary of Significant Accounting Policies
We are an entirely stockholder-owned corporation organized and existing under the Federal National Mortgage
Association Charter Act, which we refer to as the “Charter Act” or our “charter” (the Federal National
Mortgage Association Charter Act, 12 U.S.C. §1716 et seq.). We were established in 1938 as a U.S. govern-
ment entity. We became a mixed-ownership corporation by legislation enacted in 1954, with our preferred
stock owned by the federal government and our common stock held by private investors. We became a fully
privately-owned corporation by legislation enacted in 1968. The U.S. government does not guarantee, directly
or indirectly, our securities or other obligations. Our regulators include OFHEO, the Department of Housing
and Urban Development (“HUD”), the SEC and the Department of Treasury.
We operate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities,
including mortgage-related securities guaranteed by us, from primary market institutions, such as commercial
banks, savings and loan associations, mortgage banking companies, securities dealers and other investors. We
do not lend money directly to consumers. We provide additional liquidity in the secondary mortgage market
by issuing guaranteed mortgage-related securities.
We operate under three business segments: Single-Family Credit Guaranty, Housing and Community Develop-
ment (“HCD”) and Capital Markets. Our Single-Family Credit Guaranty segment generates revenue primarily
from the guaranty fees we charge to compensate us for assuming the credit risk on the mortgage loans
underlying guaranteed Single-Family Fannie Mae MBS. Our HCD segment generates revenue from a variety
of sources including multifamily guaranty and transaction fees, bond credit enhancement fees, and investments
in LIHTC and other housing partnerships. In addition, our HCD segment provides capital for housing projects
that, among other things, generate tax credits. Our Capital Markets segment invests in mortgage loans,
mortgage-related securities and liquid investments and generates interest income from those assets.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the consolidated financial statements and the amounts of revenues and
expenses during the reporting period. Management has made significant estimates in a variety of areas,
including but not limited to, valuation of certain financial instruments and other assets and liabilities,
amortization of deferred price adjustments, the allowance for loan losses and reserve for guaranty losses, and
assumptions used in the calculation of expected losses and/or expected residual returns in certain variable
interest entities for consolidation determinations. Actual results could be different from these estimates.
Principles of Consolidation
The consolidated financial statements include our accounts as well as other entities in which we have a
controlling financial interest. All significant intercompany balances and transactions have been eliminated.
In addition to voting interests in an entity, a controlling financial interest may also exist in entities through
arrangements that do not involve voting interests. Beginning in 2003, we began evaluating entities deemed to
be variable interest entities (“VIE”) under FIN 46R to determine when we must consolidate the assets,
liabilities and non-controlling interests of a VIE. A VIE is an entity (i) that has total equity at risk that is not
sufficient to finance its activities without additional subordinated financial support from other entities,
(ii) where the group of equity holders does not have the ability to make significant decisions about the entity’s
activities, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected
residual returns, or both, or (iii) where the voting rights of some investors are not proportional to their
obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of
the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)