Fannie Mae 2005 Annual Report Download - page 264

At times, we modify loans and categorize the modification either as minor, more than minor, or as a TDR. We
collectively evaluate single-family and multifamily loans that (i) have not been modified as a TDR and (ii) are
not considered individually impaired for incurred losses in accordance with our allowance for loan losses
policy. Refer to “Note 4, Allowance for Loan Losses and Reserve for Guaranty Losses” for additional
information. We individually evaluate loans restructured in a TDR for impairment.
Our impaired loans include single-family and multifamily TDRs, certain single-family and multifamily loans
identified for individual impairment as a result of Hurricane Katrina and other multifamily individually
impaired loans. The amount of interest income recognized on impaired loans was $59 million, $47 million and
$44 million for the years ended December 31, 2005, 2004 and 2003, respectively. Our average recorded
investment in all of these loans throughout the year was $1.7 billion, $1.0 billion and $812 million for the
years ended December 31, 2005, 2004 and 2003, respectively.
The following table displays the total recorded investment in impaired loans and the corresponding specific
loss allowances as of December 31, 2005 and 2004.
2005 2004
As of December 31,
(Dollars in millions)
Impaired loans with an allowance
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,595 $ 826
Impaired loans without an allowance
(1)(2)
..................................... 466 225
Total impaired loans
(1)(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,061 $1,051
Allowance for impaired loans
(1)(4)
.......................................... $ 66 $ 63
(1)
Includes $907 million of mortgage loans accounted for in accordance with SOP 03-3 that were impaired subsequent to
acquisition.
(2)
The discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, and as
such, no allowance is required.
(3)
Amount includes single-family and multifamily loans restructured in a TDR of $789 million and $833 million and
single-family and multifamily loans individually impaired of $1.3 billion and $218 million as of December 31, 2005
and 2004, respectively.
(4)
Amount is included in the “Allowance for loan losses.”
Loans Acquired in a Transfer
If a borrower of a loan underlying a Fannie Mae MBS is three or more months past due, we have the right to
purchase the loan out of the related MBS trust. Typically, we purchase these loans when the cost of advancing
interest to the MBS trust at the security coupon rate exceeds the cost of holding the nonperforming loan in our
mortgage portfolio. We purchased $8.0 billion, $9.4 billion and $10.1 billion of delinquent loans from MBS
trusts for the years ended December 31, 2005, 2004 and 2003, respectively. We also purchase loans from
lenders as a result of long-term standby commitments when loans subject to these commitments meet certain
delinquency criteria. In addition, we acquire loans upon consolidating MBS trusts when the underlying
collateral of these trusts includes loans.
We account for loans acquired on or after January 1, 2005 as a result of purchases from MBS trusts, purchases
under long-term standby commitments, or consolidation of MBS trusts in accordance with SOP 03-3 if, at
acquisition, the loans had credit deterioration and we do not consider it probable that we will collect all
contractual cash flows from the borrower. As of December 31, 2005, the outstanding balance of these loans
was $5.3 billion, while the carrying amount of these loans was $5.0 billion.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)