Fannie Mae 2007 Annual Report Download - page 195

FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
We are a stockholder-owned corporation organized and existing under the Federal National Mortgage
Association Charter Act, which we refer to as the “Charter Act” or our “charter” (the Federal National
Mortgage Association Charter Act, 12 U.S.C. § 1716 et seq.). The U.S. government does not guarantee,
directly or indirectly, our securities or other obligations. We are a government-sponsored enterprise, and we
are subject to government oversight and regulation. Our regulators include the Office of Federal Housing
Enterprise Oversight (“OFHEO”), the Department of Housing and Urban Development, the United States
Securities and Exchange Commission (“SEC”) and the Department of Treasury.
We operate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities,
including mortgage-related securities guaranteed by us, from primary mortgage market institutions, such as
commercial banks, savings and loan associations, mortgage banking companies, securities dealers and other
investors. We do not lend money directly to consumers in the primary mortgage market. We provide additional
liquidity in the secondary mortgage market by issuing guaranteed mortgage-related securities.
We operate under three business segments: Single-Family Credit Guaranty (“Single-Family”), Housing and
Community Development (“HCD”) and Capital Markets. Our Single-Family segment generates revenue
primarily from the guaranty fees the segment receives as compensation for assuming the credit risk on the
mortgage loans underlying guaranteed single-family Fannie Mae mortgage-backed securities (“Fannie Mae
MBS”). Our HCD segment generates revenue from a variety of sources, including guaranty fees the segment
receives as compensation for assuming the credit risk on the mortgage loans underlying multifamily Fannie
Mae MBS, transaction fees associated with the multifamily business and bond credit enhancement fees. In
addition, HCD investments in housing projects eligible for the low-income housing tax credit and other
investments generate both tax credits and net operating losses that reduce our federal income tax liability. Our
Capital Markets segment invests in mortgage loans, mortgage-related securities and liquid investments, and
generates income primarily from the difference, or spread, between the yield on the mortgage assets we own
and the cost of the debt we issue in the global capital markets to fund these assets.
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the consolidated financial statements and the amounts of revenues and expenses during the
reporting period. Management has made significant estimates in a variety of areas, including but not limited
to, valuation of certain financial instruments and other assets and liabilities, the allowance for loan losses and
the reserve for guaranty losses. Actual results could be different from these estimates.
Principles of Consolidation
The consolidated financial statements include our accounts as well as the accounts of other entities in which
we have a controlling financial interest. All significant intercompany balances and transactions have been
eliminated.
The typical condition for a controlling financial interest is ownership of a majority of the voting interests of an
entity. A controlling financial interest may also exist in entities through arrangements that do not involve
voting interests. Beginning in 2003, we began evaluating entities deemed to be variable interest entities
(“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
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