Fannie Mae 2007 Annual Report Download - page 205

Advances settled through receipt of loans are not material, and therefore are not separately disclosed in the
consolidated statements of cash flows.
Acquired Property, Net
“Acquired property, net” includes foreclosed property received in full satisfaction of a loan. We recognize
foreclosed property upon the earlier of the loan foreclosure event or when we take physical possession of the
property (i.e., through a deed in lieu of foreclosure transaction). Foreclosed property is initially measured at its
fair value less its estimated costs to sell. We treat any excess of our recorded investment in the loan over the
fair value less estimated costs to sell the property as a charge-off to the “Allowance for loan losses.” Any
excess of the fair value less estimated costs to sell the property over our recorded investment in the loan is
recognized first to recover any forgone, contractually due interest, then to “Foreclosed property expense
(income)” in the consolidated statements of operations.
Properties that we do not intend to sell or that are not ready for immediate sale in their current condition,
including certain single-family properties we made available for families impacted by Hurricane Katrina, are
classified separately as held for use, are depreciated and are recorded in “Other assets” in the consolidated
balance sheets. We report foreclosed properties that we intend to sell, are actively marketing and that are
available for immediate sale in their current condition as held for sale. These properties are reported at the
lower of their carrying amount or fair value less estimated selling costs, on a discounted basis if the sale is
expected to occur beyond one year from the date of foreclosure, and are not depreciated. The fair value of our
foreclosed properties is determined by third party appraisals, when available. When third party appraisals are
not available, we estimate fair value based on factors such as prices for similar properties in similar
geographical areas and/or assessment through observation of such properties. We recognize a loss for any
subsequent write-down of the property to its fair value less its estimated costs to sell through a valuation
allowance with an offsetting charge to “Foreclosed property expense (income)” in the consolidated statements
of operations. A recovery is recognized for any subsequent increase in fair value less estimated costs to sell up
to the cumulative loss previously recognized through the valuation allowance. Gains or losses on sales of
foreclosed property are recognized through “Foreclosed property expense (income)” in the consolidated
statements of operations.
Guaranty Accounting
Our primary guaranty transactions result from mortgage loan securitizations in which we issue Fannie Mae
MBS. The majority of our Fannie Mae MBS issuances fall within two broad categories: (i) lender swap
transactions, where a lender delivers mortgage loans to us to deposit into a trust in exchange for our
guaranteed Fannie Mae MBS backed by those mortgage loans and (ii) portfolio securitizations, where we
securitize loans that were previously included in the consolidated balance sheets, and create guaranteed Fannie
Mae MBS backed by those loans. As guarantor, we guarantee to each MBS trust that we will supplement
amounts received by the MBS trust as required to permit timely payments of principal and interest on the
related Fannie Mae MBS. This obligation represents an obligation to stand ready to perform over the term of
the guaranty. Therefore, our guaranty exposes us to credit losses on the loans underlying Fannie Mae MBS.
Guaranties Issued in Connection with Lender Swap Transactions
The majority of our guaranty obligations arise from lender swap transactions. In a lender swap transaction, we
receive a guaranty fee for our unconditional guaranty to the Fannie Mae MBS trust. We negotiate a contractual
guaranty fee with the lender and collect the fee on a monthly basis based on the contractual rate multiplied by
the unpaid principal balance of loans underlying a Fannie Mae MBS issuance. The guaranty fee we receive
varies depending on factors such as the risk profile of the securitized loans and the level of credit risk we
assume. In lieu of charging a higher guaranty fee for loans with greater credit risk, we may require that the
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)