Fannie Mae 2005 Annual Report Download - page 79

significant management judgment, primarily due to inherent uncertainties related to the interest rate and
housing price environment, as well as the actual credit performance of the mortgage loans and securities that
were held by each investment trust. If we determine that an investment trust meets the criteria of a VIE, we
consolidate the investment trust when our models indicate that we are likely to absorb more than 50% of the
variability in the expected losses or expected residual returns.
The following demonstrates the sensitivity of our FIN 46R modeling results. We considered the impact of
different primary beneficiary conclusions for the trusts in which a change in the variability would have
affected our primary beneficiary assessment and our consolidation determination at the time we adopted
FIN 46R and at the time we applied FIN 46 to subsequent transactions:
• If we changed our assumptions to cause our variability in trusts to increase from an amount between 40%
and 50% to greater than 50%, our total assets and liabilities as of December 31, 2005 would increase by
approximately $380 million.
• If we changed our assumptions to cause our variability in trusts to decrease from an amount between 60%
and 50.1% to 50% or less, our total assets and liabilities as of December 31, 2005 would decrease by
approximately $400 million.
We also examine our LIHTC partnerships and other limited partnerships to determine if consolidation is
required. We use internal cash flow models that are applied to a sample of the partnerships to qualitatively
evaluate homogenous populations to determine if these entities are VIEs and, if so, whether we are the primary
beneficiary. LIHTC partnerships are created by third parties to finance construction of property, giving rise to
tax credits for these partnerships. Material assumptions we make in determining whether the partnerships are
VIEs and, if so, whether we are the primary beneficiary, include the degree of development cost overruns
related to the construction of the building, the probability of the lender foreclosing on the building, as well as
an investor’s ability to use the tax credits to offset taxable income. The projection of cash flows and
probabilities related to these cash flows requires significant management judgment because of the inherent
limitations that relate to the use of historical loss and cost overrun data for the projection of future events.
Additionally, we apply similar assumptions and cash flow models to determine the VIE and primary
beneficiary status of our other limited partnership investments.
We are exempt from applying FIN 46R to certain investment trusts if the investment trusts meet the criteria of
a qualifying special purpose entity (“QSPE”), and if we do not have the unilateral ability to cause the trust to
liquidate or change the trust’s QSPE status. The QSPE requirements significantly limit the activities in which
a QSPE may engage and the types of assets and liabilities it may hold. Management judgment is required to
determine whether a trust’s activities meet the QSPE requirements. To the extent any trust fails to meet these
criteria, we would be required to consolidate its assets and liabilities if, based on the provisions of FIN 46R,
we are determined to be the primary beneficiary of the entity.
The FASB currently is assessing further what activities a QSPE may perform. The outcome of these and future
assessments may affect our interpretation of this guidance, and, consequently, the entities we consolidate in
future periods.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion of our consolidated results of operations is based on our results for the years ended
December 31, 2005, 2004 and 2003. Table 3 presents a condensed summary of our consolidated results of
operations.
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