Fannie Mae 2004 Annual Report Download - page 90

incorrectly recognized insurance proceeds in excess of estimated charge-off at foreclosure and fair
value gains above the recorded investment of REO properties as recoveries to the allowance and the
reserve. To correct this error, we recalculated the allowance and reserve.
— We historically did not recognize modifications that granted concessions to borrowers as TDRs
pursuant to SFAS No. 114, Accounting by Creditors for Impairment of a Loan (an amendment of
FASB Statement No. 5 and 15) (“SFAS 114”). To correct this error, we recognized these modifications
as TDRs and recorded an adjustment to the “Allowance for loan losses” and the “Provision for credit
losses” in the consolidated balance sheets and consolidated statements of income, respectively.
The restatement adjustments associated with these errors resulted in a pre-tax increase in the provision for
credit losses of $273 million for the year ended December 31, 2003; however, the cumulative impact on
retained earnings was a decrease of $87 million as of December 31, 2003.
•Early funding. We offer early funding options to lenders that allow them to receive cash payments for
mortgage loans that will be securitized into Fannie Mae MBS at a future date. A corresponding forward
commitment to sell the security that will be backed by the mortgage loans is required to be delivered with
the mortgage loans and is executed on the settlement date of the commitment. We incorrectly recorded
these transactions as HFS loans prior to the actual creation of the Fannie Mae MBS when we were the
intended purchaser of the MBS. The impact of correcting this error was to remove any previous HFS
loans from these transactions and record the transactions as “Advances to lenders,” carried at amortized
cost, in the consolidated balance sheets, resulting in a decrease of $4.7 billion in “Mortgage loans” with a
corresponding increase in “Advances to lenders” as of December 31, 2003.
•Collateral associated with derivatives contracts. We did not record cash collateral we received
associated with some derivatives contracts. The impact of correcting this error was to record additional
“Cash and cash equivalents” of $2.3 billion and “Restricted cash” of $1.1 billion, and a corresponding
liability to our derivative counterparties in “Other liabilities” of $3.4 billion, as of December 31, 2003.
The following items, while restatement errors, were not individually significant to the consolidated financial
statements for the restatement period:
•Accounting for reverse mortgages. We made errors in accounting for reverse mortgages. When
computing interest income on reverse mortgages we did not use the expected life of the borrower and
house price expectations in the interest income calculations and did not apply the retrospective level yield
method. To correct this error, we recalculated interest income for these mortgages and recorded the
change in “Interest income” in the consolidated statements of income. We also incorrectly recorded loan
loss reserves on these mortgages. To correct this error, we adjusted the “Allowance for loan losses” and
the “Provision for credit losses” in the consolidated balance sheets and consolidated statements of income,
respectively.
•Accrued interest on delinquent loans. We incorrectly included a recovery rate, which was based on
historic trends of loans that subsequently changed to current payment status, in calculating accrued
interest on delinquent loans. The effect of this error was to record interest income on loans that should
have been on nonaccrual status. The correction of this error resulted in the reversal of interest income
recorded in the periods when loans should have been on nonaccrual status.
•Amortization of prepaid mortgage insurance. We amortized prepaid mortgage insurance over a period
that is not representative of the period in which we received the benefits of the mortgage insurance. To
correct this error, we recalculated amortization of this mortgage insurance and recorded the difference in
“Other expenses” in the consolidated statements of income.
•Computation of interest income. We incorrectly calculated interest income on certain investments. The
calculations utilized a convention that was based on the average number of days of interest in a month
regardless of the actual number of days in the month. We corrected the calculation of interest using the
actual number of days in the month and adjusted the timing of interest income recognition.
85