Fannie Mae 2004 Annual Report Download - page 287

or Exchange of Debt Instruments is within the Scope of FASB Statement No. 15. Impairment of a loan
restructured in a TDR is based on the excess of the recorded investment in the loan over the present value of
the expected future cash inflows discounted at the loan’s original effective interest rate.
Loans modified that result in terms at least as favorable to us or those that are modified not as a result of a
borrower experiencing financial difficulties are further evaluated to determine whether the modification is
considered more than minor pursuant to SFAS 91 and EITF 01-7, Creditor’s Accounting for a Modification or
Exchange of Debt Instruments. If the modification is considered more than minor, we treat the modification as
an extinguishment of the previously recorded loan and recognition of a new loan and any unamortized basis
adjustments on the previously recorded loan are recognized in the consolidated statements of income.
Modifications that are not more than minor are accounted for as a continuation of the previously recorded
loan.
Individually Impaired Loans
A loan is considered to be impaired when, based on current information, it is probable that we will not receive
all amounts due, including interest, in accordance with the contractual terms of the loan agreement. When
making our assessment as to whether a loan is impaired, we also take into account insignificant delays in
payment. We consider loans with payment delays in excess of three consecutive months as more than
insignificant and therefore impaired.
Individually impaired loans include those restructured in a TDR and certain multifamily loans. Our measure-
ment of impairment on an individually impaired loan follows the method that is most consistent with our
expectations of recovery of our recorded investment in the loan. When a loan has been restructured, we
measure impairment using a discounted cash flow analysis using the loan’s original effective interest rate, as
our expectation is that the loan will continue to perform under the restructured terms. When it is determined
that the only source to recover our recorded investment in an individually impaired loan is through probable
foreclosure of the underlying collateral, we measure impairment based on the fair value of the collateral,
reduced by estimated disposal costs. Impairment recognized on individually impaired loans is part of our
allowance for loan losses and reserve for guaranty losses.
Loans Purchased or Eligible to be Purchased from Trusts
For securitization trusts that include a Fannie Mae guaranty, we have the option to purchase from those trusts,
at par plus accrued interest, loans that have been past due for three or more consecutive months. We record
loans that we acquire from trusts to which we were not the transferor at the time of securitization at their
acquisition price, or par value plus interest advanced on behalf of the borrower by the servicer while the loan
was nonperforming in the trust and a portion of the “Reserve for guaranty losses” is reclassified to the
“Allowance for loan losses” in the consolidated balance sheets.
For trusts where we were the transferror prior to April 2, 2003, we recorded loans eligible to be purchased
from trusts at their acquisition price, or par value plus accrued interest and a portion of the “Reserve for
guaranty losses” was reclassified to the “Allowance for loan losses” in the consolidated balance sheets. On or
after April 2, 2003, when a loan becomes three or more months past due we record the loan in the
consolidated balance sheets at fair value and a corresponding repurchase liability to the trust, pursuant to
EITF 02-9, Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold
(“EITF 02-9”).
Acquired Property, Net
“Acquired property, net” includes foreclosed property received in full satisfaction of a loan. We recognize
foreclosed property upon the earlier of the loan foreclosure event or when we take physical possession of the
property (i.e., through a deed in lieu of foreclosure transaction). Foreclosed property is initially measured at its
fair value less estimated costs to sell. We treat any excess of our recorded investment in the loan over the fair
value less estimated costs to sell the property as a charge-off to the “Allowance for loan losses.” Any excess of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)