Fannie Mae 2006 Annual Report Download - page 239

(“VIEs”) under Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46R (revised
December 2003), Consolidation of Variable Interest Entities (an interpretation of ARB No. 51) (“FIN 46R”),to
determine when we must consolidate the assets, liabilities and non-controlling interests of a VIE. A VIE is an
entity (i) that has total equity at risk that is not sufficient to finance its activities without additional
subordinated financial support from other entities, (ii) where the group of equity holders does not have the
ability to make significant decisions about the entity’s activities, or the obligation to absorb the entity’s
expected losses or the right to receive the entity’s expected residual returns, or both, or (iii) where the voting
rights of some investors are not proportional to their obligations to absorb the expected losses of the entity,
their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity’s
activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
The primary types of entities we evaluate under FIN 46R include those special purpose entities (“SPEs”)
established to facilitate the securitization of mortgage assets in which we have the unilateral ability to
liquidate the trust, those SPEs that do not meet the qualifying special purpose entity (“QSPE”) criteria, our
Low-Income Housing Tax Credit (“LIHTC”) partnerships, other partnerships that provide tax benefits and
other entities that meet the VIE criteria.
If an entity is a VIE, we determine if our variable interest causes us to be considered the primary beneficiary.
We are the primary beneficiary and are required to consolidate the entity if we absorb the majority of
expected losses or expected residual returns, or both. In making the determination as to whether we are the
primary beneficiary, we evaluate the design of the entity, including the risks that cause variability, the purpose
for which the entity was created, and the variability that the entity was designed to create and pass along to its
interest holders. When the primary beneficiary cannot be identified through a qualitative analysis, we use
internal cash flow models, which may include Monte Carlo simulations, to compute and allocate expected
losses or residual returns to each variable interest holder. The allocation of expected cash flows is based upon
the relative contractual rights and preferences of each interest holder in the VIE’s capital structure.
We are required to evaluate whether to consolidate a VIE when we first become involved and upon subsequent
reconsideration events (e.g., a purchase of additional beneficial interests). Generally, if we are the primary
beneficiary of a VIE, then we initially record the assets and liabilities of the VIE in the consolidated financial
statements at the current fair value. For entities that hold only financial assets, any difference between the
current fair value and the previous carrying amount of our interests in the VIE is recorded as “Extraordinary
gains (losses), net of tax effect” in the consolidated statements of income, as required by FIN 46R. However,
if we are the primary beneficiary upon creation of a VIE to which we transferred assets, we initially
consolidate the VIE by carrying over our investment in the VIE to the consolidated assets and liabilities, and
no gain or loss is recorded.
If a consolidated VIE subsequently should not be consolidated because we cease to be deemed the primary
beneficiary or we qualify for one of the scope exceptions of FIN 46R (for example, the entity is a QSPE in
which we no longer have the unilateral ability to liquidate), we deconsolidate the VIE by carrying over our net
basis in the consolidated assets and liabilities to our investment in the VIE.
Portfolio Securitizations
Portfolio securitizations involve the transfer of mortgage loans or mortgage-related securities from the
consolidated balance sheets to a trust (an SPE) to create Fannie Mae MBS, real estate mortgage investment
conduits (“REMICs”) or other types of beneficial interests. We account for portfolio securitizations in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of FASB Statement
No. 125) (“SFAS 140”), which requires that we evaluate a transfer of financial assets to determine if the
transfer qualifies as a sale. Transfers of financial assets for which we surrender control and receive
compensation other than beneficial interests in the transferred assets are recorded as sales. When a transfer
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)