Fannie Mae 2005 Annual Report Download - page 95

our financial statements. In other cases, we account for these investments using the equity method and record
our share of operating losses in the consolidated statements of income as “Loss from partnership investments.”
Investments we accounted for under the equity method totaled $4.5 billion and $4.2 billion as of December 31,
2005 and 2004, respectively. We provide additional information about these investments and applicable
accounting in “Off-Balance Sheet Arrangements and Variable Interest Entities—LIHTC Partnership Interests.”
Loss from partnership investments, net, accounted for under the equity method totaled $849 million, $702 mil-
lion and $637 million in 2005, 2004 and 2003, respectively. The increase in losses in each year was primarily
due to our increased level of LIHTC partnership investments. In March 2007, we sold a portfolio of
investments in LIHTC partnerships totaling approximately $676 million in LIHTC credits. These equity
interests represented less than 10% of our overall LIHTC portfolio. We may sell LIHTC investments in the
future if we believe that the economic return from the sale will be greater than the benefit we would receive
from continuing to hold these investments. However, we view these investments as a significant channel for
advancing our affordable housing mission and expect to continue to invest in LIHTC partnerships, which we
expect will generate additional net operating losses and tax credits in the future. For more information on tax
credits associated with our LIHTC investments, refer to “Provision for Federal Income Taxes” below.
Provision for Credit Losses
The provision for credit losses results from a detailed analysis estimating an appropriate allowance for loan
losses for single-family and multifamily loans classified as held for investment in our mortgage portfolio and
reserve for guaranty losses for credit-related losses associated with certain mortgage loans that back Fannie
Mae MBS held in our portfolio and held by other investors. The provision for credit losses may reflect an
increase or decrease, depending on whether we need to increase or decrease the allowance for loan losses and
reserve for guaranty losses based on our estimate of incurred losses in our portfolio as of each balance sheet
date.
The provision for credit losses increased to $441 million in 2005, an increase of $89 million, or 25%, from the
provision in 2004. We recorded a provision for credit losses of $106 million in 2005 for single-family and
multifamily properties affected by Hurricane Katrina. We initially estimated for the Gulf Coast Hurricanes
Katrina and Rita a range of after-tax losses of $250 million to $550 million (pre-tax range of $385 million to
$846 million). However, as more information became available, we determined that property damage was less
extensive than had been previously estimated, the amount of insurance recoveries were greater than previously
expected, and Hurricane Rita did not have a significant impact on our credit losses. Because we had
information regarding the probable amount of this existing loss contingency available to us prior to issuing our
2005 consolidated financial statements, we were required to record the most recent estimated loss amount of
$106 million in the period it arose based on information available at the time of the issuance of the
consolidated financial statements. We also increased our provision for credit losses as a result of our adoption
of Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(“SOP 03-3”). Under SOP 03-3, we are required to record loans we purchase from Fannie Mae MBS trusts
due to default at fair value because these loans have deteriorated in credit quality since origination. The excess
of the purchase price over the fair value, if any, is recorded as a charge to “Reserve for guarantee losses” in
the consolidated balance sheet.
The provision for credit losses decreased slightly to $352 million in 2004, down $13 million, or 4%, from
2003. An observed trend of reduced levels of recourse proceeds from lenders on charged-off loans had the
effect of increasing the provision for credit losses in 2004; however, lower than anticipated charge-offs more
than offset this increase, leading to a slight reduction in the provision compared to 2003.
We provide additional detail on credit losses and factors affecting our allowance for loan losses and reserve
for guaranty losses in “Risk Management—Credit Risk Management—Mortgage Credit Risk Management”
and “Critical Accounting Policies and Estimates—Allowance for Loan Losses and Reserve for Guaranty
Losses.”
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