Fannie Mae 2007 Annual Report Download - page 203

of operations. Modifications to loans that are subject to the accounting requirements of SOP 03-3 are
accounted for as a continuation of the previously recorded loan unless the modification is considered a TDR.
Individually Impaired Loans
A loan is considered to be impaired when, based on current information, it is probable that we will not receive
all amounts due, including interest, in accordance with the contractual terms of the loan agreement. When
making our assessment as to whether a loan is impaired, we also take into account insignificant delays in
payment. We consider loans with payment delays in excess of three consecutive months as more than
insignificant and therefore impaired.
Individually impaired loans currently include those restructured in a TDR, loans subject to SOP 03-3, certain
multifamily loans, and certain single-family and multifamily loans that were impacted by Hurricane Katrina in
2005. Our measurement of impairment on an individually impaired loan follows the method that is most
consistent with our expectations of recovery of our recorded investment in the loan. When a loan has been
restructured, we measure impairment using a cash flow analysis discounted at the loan’s original effective
interest rate, as our expectation is that the loan will continue to perform under the restructured terms. When it
is determined that the only source to recover our recorded investment in an individually impaired loan is
through probable foreclosure of the underlying collateral, we measure impairment based on the fair value of
the collateral, reduced by estimated disposal costs, on a discounted basis, and estimated proceeds from
mortgage, flood, or hazard insurance or similar sources. Impairment recognized on individually impaired loans
is part of our allowance for loan losses.
We use internal models to project cash flows used to assess impairment of loans on nonaccrual status,
including loans subject to SOP 03-3. We generally update the market and loan characteristic inputs we use in
these models monthly, using month-end data. Market inputs include information such as interest rates,
volatility and spreads, while loan characteristic inputs include information such as mark-to-market loan-to-
value ratio and delinquency status. The loan characteristic inputs are key factors that affect the predicted rate
of default for loans evaluated for impairment through our internal cash flow models. We evaluate the
reasonableness of our models by comparing the results with actual performance and our assessment of current
market conditions. In addition, we review our models at least annually for reasonableness and predictiveness
in accordance with our corporate model review policy. Accordingly, we believe the projected cash flows
generated by our models that we use to assess impairment appropriately reflect the expected future
performance of the loans.
Loans Purchased or Eligible to be Purchased from Trusts
For MBS trusts that include a Fannie Mae guaranty, we have the option to purchase loans from the MBS trust
after four or more consecutive monthly payments due under the loan are delinquent in whole or in part. Our
acquisition cost for these loans is the unpaid principal balance of the loan plus accrued interest. Fannie Mae,
as guarantor, may also purchase mortgage loans when other predefined contingencies have been met, such as
when there is a material breach of a representation and warranty.
When, for a loan that will be classified as HFI, there is evidence of credit deterioration subsequent to the
loan’s origination and it is probable, at acquisition, that we will be unable to collect all contractually required
payments receivable, ignoring insignificant delays in contractual payments, we record the loan at the lower of
the acquisition cost or fair value. These loans are within the scope of SOP 03-3. Each acquired loan that does
not meet these criteria is recorded at the loan’s acquisition cost.
For MBS trusts where we are considered the transferor, when the contingency on our options to purchase
loans from the trust has been met and we regain effective control over the transferred loan, we recognize the
loan on our consolidated balance sheets at fair value and record a corresponding liability to the MBS trust.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)