Fannie Mae 2005 Annual Report Download - page 249

constant effective yield for deferred guaranty price adjustments based upon our estimate of the cash flows of
the mortgage loans underlying the related Fannie Mae MBS, which includes an estimate of prepayments. For
each reporting period, we recalculate the constant effective yield to reflect the actual payments and our new
estimate of future prepayments. We adjust the carrying amount of deferred guaranty price adjustments to the
amount at which they would have been stated if the recalculated constant effective yield had been applied
since their inception.
For risk-based pricing adjustments and buy-downs that arose on Fannie Mae MBS issued on or after January 1,
2003, we record the cash received and increase “Guaranty obligations” by a similar amount.
Master Servicing
Upon a transfer of loans to us, either in connection with a portfolio purchase or a lender swap transaction, we
enter into an agreement with the lender, or its designee, to have that entity continue to perform the day-to-day
servicing of the mortgage loans, herein referred to as primary servicing. We assume an obligation to perform
certain limited master servicing activities when these loans are securitized. These activities include assuming
the ultimate obligation for the day-to-day servicing in the event of default by the primary servicer until a new
primary servicer can be put in place and certain ongoing administrative functions associated with the
securitization. As compensation for performing these master servicing activities, we receive the right to the
interest earned on cash flows from the date of remittance by the servicer to us until the date of distribution of
such cash flows to MBS certificate holders.
We record an MSA as a component of “Other assets” when the present value of the estimated compensation
for master servicing activities exceeds adequate compensation for such servicing activities. Conversely, we
record a master servicing liability (“MSL”) as a component of “Other liabilities” when the present value of the
estimated compensation for master servicing activities is less than adequate compensation. Adequate compen-
sation is the amount of compensation that would be required by a substitute master servicer should one be
required and is determined based on market information for such services.
An MSA is carried at LOCOM and amortized in proportion to net servicing income for each period. We
record impairment of the MSA through a valuation allowance. When we determine an MSA is other-than-tem-
porarily impaired, we write down the cost basis of the MSA to its fair value. We individually assess our MSA
for impairment by reviewing changes in historical interest rates and the impact of those changes on the
historical fair values of the MSA. We then determine our expectation of the likelihood of a range of interest
rate changes over an appropriate recovery period using historical interest rate movements. We record an
other-than-temporary impairment when we do not expect to recover the valuation allowance based on our
expectation of the interest rate changes and their impact on the fair value of the MSA during the recovery
period. Amortization and impairment of the MSA are recorded as components of “Fee and other income” in
the consolidated statements of income.
An MSL is carried at amortized cost and amortized in proportion to net servicing loss for each period. The
carrying amount of the MSL is increased to fair value when the fair value exceeds the carrying amount.
Amortization and valuation adjustments of the MSL are recorded as components of “Fee and other income” in
the consolidated statements of income.
When we receive an MSA in connection with a lender swap transaction, we record a corresponding amount of
deferred profit as a component of “Other liabilities” in the consolidated balance sheets. This deferred profit is
amortized in proportion to the amortization of the MSA. We also record a reduction or recovery of the
recorded deferred profit amount based on any changes to the valuation allowance associated with the MSA.
Changes in the deferred profit amount, including amortization and reductions or recoveries to the valuation
allowance, are recorded as a component of “Fee and other income” in the consolidated statements of income.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)