Fannie Mae 2006 Annual Report Download - page 249

using the interest method prescribed in SFAS 91. The accounting for buy-ups was not changed when FIN 45
became effective.
Guaranties Issued in Connection with Portfolio Securitizations
In addition to retained interests in the form of Fannie Mae MBS, REMICs, and MSAs, we retain an interest in
securitized loans in a portfolio securitization, which represents our right to future cash flows associated
primarily with providing our guaranty. We account for the retained guaranty interest in a portfolio
securitization in the same manner as AFS securities and record it in the consolidated balance sheets as a
component of “Guaranty assets.” The fair value of the guaranty asset is determined in the same manner as the
fair value of the guaranty asset in a lender swap transaction. We assume a recourse obligation in connection
with our guaranty of the timely payment of principal and interest to the MBS trust that we measure and record
in the consolidated balance sheets under “Guaranty obligations” based on the fair value of the recourse
obligation at inception. Any difference between the guaranty asset and the guaranty obligation in a portfolio
securitization is recognized as a component of the gain or loss on the sale of mortgage-related assets and is
recorded as “Investment losses, net” in the consolidated statements of income.
We evaluate the component of the “Guaranty assets” that represents the retained interest in securitized loans
for other-than-temporary impairment under EITF 99-20. We amortize and account for the guaranty obligations
subsequent to the initial recognition in the same manner that we account for the guaranty obligations that arise
under lender swap transactions and record a “Reserve for guaranty losses” for estimable and probable losses
incurred on the underlying loans as of each balance sheet date.
Fannie Mae MBS included in “Investments in securities”
When we own Fannie Mae MBS, we do not derecognize any components of the “Guaranty assets,” “Guaranty
obligations,” “Reserve for guaranty losses,” or any other outstanding recorded amounts associated with the
guaranty transaction because our contractual obligation to the unconsolidated MBS trust remains in force until
the trust is liquidated, unless the trust is consolidated. We value Fannie Mae MBS based on their legal terms,
which includes the Fannie Mae guaranty to the MBS trust, and continue to reflect the unamortized obligation
to stand ready to perform over the term of our guaranty and any incurred credit losses in our “Guaranty
obligations” and “Reserve for guaranty losses,” respectively. We disclose the aggregate amount of Fannie Mae
MBS held as “Investments in securities” in the consolidated balance sheets as well as the amount of our
“Reserve for guaranty losses” and “Guaranty obligations” that relates to Fannie Mae MBS held as
“Investments in securities.”
Upon subsequent sale of a Fannie Mae MBS, we continue to account for any outstanding recorded amounts
associated with the guaranty transaction on the same basis of accounting as prior to the sale of Fannie Mae
MBS as no new assets were retained and no new liabilities have been assumed upon the subsequent sale.
Amortization of Cost Basis and Guaranty Price Adjustments
Cost Basis Adjustments
We account for cost basis adjustments, including premiums and discounts on mortgage loans and securities, in
accordance with SFAS 91,which generally requires deferred fees and costs to be recognized as an adjustment
to yield using the interest method over the contractual or estimated life of the loan or security. We amortize
these cost basis adjustments into interest income for mortgage securities and loans held for investment. We do
not amortize cost basis adjustments for loans that we classify as HFS but include them in the calculation of
gain or loss on the sale of those loans.
We hold a large number of similar mortgage loans and mortgage-related securities backed by a large number
of similar mortgage loans for which prepayments are probable and for which we can reasonably estimate the
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)