Fannie Mae 2004 Annual Report Download - page 89

The following categories summarize the most significant other adjustments recorded as part of the restatement:
•Accounting for partnership investments. We incorrectly accounted for a portion of our LIHTC and other
partnership investments using the effective yield method instead 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 cumulative pre-tax decrease in retained earnings of $603 million, an increase of
$791 million in total assets and an increase of $878 million in total liabilities as of December 31, 2003.
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 for the year ended December 31, 2003
due to changes in the recognition and classification of related tax credits and net operating losses.
•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. Accordingly, we did not record 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 cumulative pre-tax decrease in retained
earnings of $386 million as of December 31, 2003.
•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,” as well as REO and
troubled debt restructurings (“TDRs”).
— 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
REO assets at foreclosure, as well as not expensing costs related to foreclosure activities in the proper
periods. To correct these errors, we reviewed REO and foreclosed property expense to determine and
record the appropriate cost basis and timing of charge-offs and expense recognition. We also
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