Fannie Mae 2007 Annual Report Download - page 202

historical payment experience, collateral values when appropriate, and other related credit documentation.
Multifamily loans that are categorized into pools based on their relative credit risk ratings are assigned certain
default and severity factors representative of the credit risk inherent in each risk category. These factors are
applied against our recorded investment in the loans, including recorded accrued interest associated with such
loans, to determine an appropriate allowance. As part of our allowance process for multifamily loans, we also
consider other factors based on observable data such as historical charge-off experience, loan size and trends
in delinquency.
Nonaccrual Loans
We discontinue accruing interest on single-family loans when it is probable that we will not collect principal
or interest on a loan, which we have determined to be the earlier of either: (i) payment of principal and
interest becomes three months or more past due according to the loan’s contractual terms or (ii) in
management’s opinion, collectability of principal or interest is not reasonably assured, unless the loan is well
secured and in the process of collection based upon an individual loan assessment. We place a multifamily
loan on nonaccrual status using the same criteria; however, multifamily loans are assessed on an individual
loan basis whereas single-family loans are assessed on an aggregate basis.
When a loan is placed on nonaccrual status, interest previously accrued but not collected becomes part of our
recorded investment in the loan and is collectively reviewed for impairment. If cash is received while a loan is
on nonaccrual status, it is applied first towards the recovery of accrued interest and related scheduled principal
repayments. Once these amounts are recovered, interest income is recognized on a cash basis. If there is doubt
regarding the ultimate collectability of the remaining recorded investment in a nonaccrual loan, any payment
received is applied to reduce principal to the extent necessary to eliminate such doubt. We return a loan to
accrual status when we determine that the collectability of principal and interest is reasonably assured, which
is generally when a loan becomes less than three months past due, or when we subsequently modify the loan
and determine through a financial analysis that the borrower is able to make the modified payments.
Restructured Loans
A modification to the contractual terms of a loan that results in a concession to a borrower experiencing
financial difficulties is considered a troubled debt restructuring (“TDR”). A concession has been granted to a
borrower when we determine that the effective yield based on the restructured loan term is less than the
effective yield prior to the modification pursuant to EITF 02-4, Determining Whether a Debtor’s Modification
or Exchange of Debt Instruments is within the Scope of FASB Statement No. 15. Impairment of a loan
restructured in a TDR is based on the excess of the recorded investment in the loan over the present value of
the expected future cash inflows discounted at the loan’s original effective interest rate.
A loan modification for reasons other than a borrower experiencing financial difficulties or that results in
terms at least as favorable to us as the terms for comparable loans to other customers with similar collection
risks who are not refinancing or restructuring a loan is not considered a TDR. We further evaluate such a loan
modification to determine whether the modification is considered “more than minor” pursuant to SFAS No. 91,
Accounting for Nonrefundable Fees and Cost Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases (an amendment of FASB Statements No. 13, 60 and 65 and rescission of FASB
Statement No. 17) (“SFAS 91”) and EITF 01-7, Creditor’s Accounting for a Modification or Exchange of Debt
Instruments. If the modification is considered more than minor and the modified loan is not subject to the
accounting requirements of the American Institute of Certified Public Accountants Statement of Position 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”), we treat the
modification as an extinguishment of the previously recorded loan and recognition of a new loan, and any
unamortized basis adjustments on the previously recorded loan are recognized in the consolidated statements
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)