Fannie Mae 2007 Annual Report Download - page 201

assets such as cash in a pre-foreclosure sale or the underlying collateral in full satisfaction of the mortgage
loan upon foreclosure.
Single-family Loans
We aggregate single-family loans (except for those that are deemed to be individually impaired pursuant to
SFAS 114, which are described below), based on similar risk characteristics for purposes of estimating
incurred credit losses. Those characteristics include but are not limited to: origination year; loan product type;
and loan-to-value (“LTV”) ratio. Once loans are aggregated, there typically is not a single, distinct event that
would result in an individual loan or pool of loans being impaired. Accordingly, to determine an estimate of
incurred credit losses, we base our allowance and reserve methodology on the accumulation of a series of
historical events and trends, such as loss severity, default rates and recoveries from mortgage insurance
contracts that are contractually attached to a loan or other credit enhancements that were entered into
contemporaneous with and in contemplation of a guaranty or loan purchase transaction. Our allowance
calculation also incorporates a loss confirmation period (the anticipated time lag between a credit loss event
and the confirmation of the credit loss resulting from that event) to ensure our allowance estimate captures
credit losses that have been incurred as of the balance sheet date but have not been confirmed. In addition,
management performs a review of the observable data used in its estimate to ensure it is representative of
prevailing economic conditions and other events existing as of the balance sheet date. We consider certain
factors when determining whether adjustments to the observable data used in our allowance methodology are
necessary. These factors include, but are not limited to, levels of and trends in delinquencies; levels of and
trends in charge-offs and recoveries; and terms of loans.
For both single-family and multifamily loans, the primary components of observable data used to support our
allowance and reserve methodology include historical severity (the amount of charge-off loss recognized by us
upon full satisfaction of a loan at foreclosure or upon receipt of cash in a pre-foreclosure sale) and historical
loan default experience. The excess of our recorded investment in a loan, including recorded accrued interest,
over the fair value of the assets received in full satisfaction of the loan is treated as a charge-off loss that is
deducted from the allowance for loan losses or reserve for guaranty losses. Any excess of the fair value of the
assets received in full satisfaction over our recorded investment in a loan at charge-off is applied first to
recover any forgone, yet contractually past due, interest, then to “Foreclosed property expense (income)” in
the consolidated statements of operations. We also apply estimated proceeds from primary mortgage insurance
that is contractually attached to a loan and other credit enhancements entered into contemporaneous with and
in contemplation of a guaranty or loan purchase transaction as a recovery of our recorded investment in a
charged-off loan, up to the amount of loss recognized as a charge-off. Proceeds from credit enhancements in
excess of our recorded investment in charged-off loans are recorded in “Foreclosed property expense
(income)” in the consolidated statements of operations when received.
Multifamily Loans
Multifamily loans are identified for evaluation for impairment through a credit risk classification process and
are individually assigned a risk rating. Based on this evaluation, we determine whether or not a loan is
individually impaired. If we deem a multifamily loan to be individually impaired, we measure impairment on
that loan based on the fair value of the underlying collateral less estimated costs to sell the property on a
discounted basis, as such loans are considered to be collateral-dependent. If we determine that an individual
loan that was specifically evaluated for impairment is not individually impaired, we include the loan as part of
a pool of loans with similar characteristics that are evaluated collectively for incurred losses.
We stratify multifamily loans into different risk rating categories based on the credit risk inherent in each
individual loan. Credit risk is categorized based on relevant observable data about a borrower’s ability to pay,
including reviews of current borrower financial information, operating statements on the underlying collateral,
F-13
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)