Fannie Mae 2007 Annual Report Download - page 208

Fannie Mae MBS included in “Investments in securities”
When we own Fannie Mae MBS, we do not derecognize any components of the guaranty assets, guaranty
obligations, reserve for guaranty losses, or any other outstanding recorded amounts associated with the
guaranty transaction because our contractual obligation to the unconsolidated MBS trust remains in force until
the trust is liquidated, unless the trust is consolidated. We value Fannie Mae MBS based on their legal terms,
which includes the Fannie Mae guaranty to the MBS trust, and continue to reflect the unamortized obligation
to stand ready to perform over the term of our guaranty and any incurred credit losses in our “Guaranty
obligations” and “Reserve for guaranty losses,” respectively. We disclose the aggregate amount of Fannie Mae
MBS held as “Investments in securities” in the consolidated balance sheets as well as the amount of our
“Reserve for guaranty losses” and “Guaranty obligations” that relates to Fannie Mae MBS held as
“Investments in securities.”
Upon subsequent sale of a Fannie Mae MBS, we continue to account for any outstanding recorded amounts
associated with the guaranty transaction on the same basis of accounting as prior to the sale of Fannie Mae
MBS, as no new assets were retained and no new liabilities have been assumed upon the subsequent sale.
Credit Enhancements
Credit enhancements that are separately recognized as “Other assets” in our consolidated balance sheets are
amortized in our consolidated statements of operations as “Other expense.” We amortize these assets over the
related contract terms at the greater of amounts calculated by amortizing recognized credit enhancements
(i) commensurate with the observed decline in the unpaid principal balance of covered mortgage loans or
(ii) on a straight-line basis over a credit enhancement’s contract term. Recurring insurance premiums are
recorded at the amount paid and amortized over their contractual life and, if provided quarterly, then the
amortization period is three months.
Amortization of Cost Basis and Guaranty Price Adjustments
Cost Basis Adjustments
We account for cost basis adjustments, including premiums and discounts on mortgage loans and securities, in
accordance with SFAS 91,which generally requires deferred fees and costs to be recognized as an adjustment
to yield using the interest method over the contractual or estimated life of the loan or security. We amortize
these cost basis adjustments into interest income for mortgage securities and loans held for investment. We do
not amortize cost basis adjustments for loans that we classify as HFS but include them in the calculation of
gain or loss on the sale of those loans.
We hold a large number of similar mortgage loans and mortgage-related securities backed by a large number
of similar mortgage loans for which prepayments are probable and for which we can reasonably estimate the
timing of such prepayments. We use prepayment estimates in determining periodic amortization of cost basis
adjustments on substantially all mortgage loans and mortgage-related securities in our portfolio under the
interest method using a constant effective yield. We include this amortization in “Interest income” in each
period. For the purpose of amortizing cost basis adjustments, we aggregate similar mortgage loans or
mortgage-related securities with similar prepayment characteristics. We consider Fannie Mae MBS to be
aggregations of similar loans for the purpose of estimating prepayments. We aggregate individual mortgage
loans based upon coupon rate, product type and origination year for the purpose of estimating prepayments.
For each reporting period, we recalculate the constant effective yield to reflect the actual payments and
prepayments we have received to date and our new estimate of future prepayments. We adjust the net
investment of our mortgage loans and mortgage-related securities to the amount at which they would have
been stated if the recalculated constant effective yield had been applied since their acquisition with a
corresponding charge or credit to interest income.
F-20
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)