Fannie Mae 2006 Annual Report Download - page 251

compensation is the amount of compensation that would be required by a substitute master servicer should one
be required and is determined based on market information for such services.
An MSA is carried at LOCOM and amortized in proportion to net servicing income for each period. We
record impairment of the MSA through a valuation allowance. When we determine an MSA is other-than-
temporarily impaired, we write down the cost basis of the MSA to its fair value. We individually assess our
MSA for impairment by reviewing changes in historical interest rates and the impact of those changes on the
historical fair values of the MSA. We then determine our expectation of the likelihood of a range of interest
rate changes over an appropriate recovery period using historical interest rate movements. We record an other-
than-temporary impairment when we do not expect to recover the valuation allowance based on our
expectation of the interest rate changes and their impact on the fair value of the MSA during the recovery
period. Amortization and impairment of the MSA are recorded as components of “Fee and other income” in
the consolidated statements of income.
An MSL is carried at amortized cost and amortized in proportion to net servicing loss for each period. The
carrying amount of the MSL is increased to fair value when the fair value exceeds the carrying amount.
Amortization and valuation adjustments of the MSL are recorded as components of “Fee and other income” in
the consolidated statements of income.
When we receive an MSA in connection with a lender swap transaction, we record a corresponding amount of
deferred profit as a component of “Other liabilities” in the consolidated balance sheets. This deferred profit is
amortized in proportion to the amortization of the MSA. We also record a reduction or recovery of the
recorded deferred profit amount based on any changes to the valuation allowance associated with the MSA.
Changes in the deferred profit amount, including amortization and reductions or recoveries to the valuation
allowance, are recorded as a component of “Fee and other income” in the consolidated statements of income.
When we incur an MSL in connection with a lender swap transaction, we record a corresponding loss as “Fee
and other income” in the consolidated statements of income.
MSA and MSL recorded in connection with portfolio securitizations are recorded in the same manner as
retained interests and liabilities incurred in a securitization, respectively. Accordingly, these amounts are a
component of the calculation of gain or loss on the sale of assets.
The fair values of the MSA and MSL are based on the present value of expected cash flows using
management’s best estimates of certain key assumptions, which include prepayment speeds, forward yield
curves, adequate compensation, and discount rates commensurate with the risks involved. Changes in
anticipated prepayment speeds, in particular, result in fluctuations in the estimated fair values of the MSA and
MSL. If actual prepayment experience differs from the anticipated rates used in our model, this difference
may result in a material change in the MSA and MSL fair values.
Other Investments
Unconsolidated investments in limited partnerships are primarily accounted for under the equity method of
accounting. These investments include our LIHTC and other partnership investments. Under the equity
method, our investment is increased (decreased) for our share of the limited partnership’s net income or loss
reflected in “Loss from partnership investments” in the consolidated statements of income, as well as
increased for contributions made and reduced by distributions received.
For unconsolidated common and preferred stock investments that are not within the scope of SFAS 115, we
apply either the equity or the cost method of accounting. Investments in entities where our ownership is
between 20% and 50%, or which provide us the ability to exercise significant influence over the entity’s
operations and management functions, are accounted for using the equity method. Investments in entities
where our ownership is less than 20% and we have no ability to exercise significant influence over an entity’s
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)