Fannie Mae 2007 Annual Report Download - page 225

Loans Acquired in a Transfer
If a loan underlying a Fannie Mae MBS is in default, we have the option to purchase the loan from the MBS trust,
at the unpaid principal balance of that mortgage loan plus accrued interest, after four or more consecutive monthly
payments due under the loan are delinquent in whole or in part. We purchased delinquent loans from MBS trusts
with an unpaid principal balance plus accrued interest of $6.6 billion, $4.7 billion and $8.0 billion for the years
ended December 31, 2007, 2006, and 2005, respectively. Under long-term standby commitments, we purchase
loans from lenders when the loans subject to these commitments meet certain delinquency criteria. We also acquire
loans upon consolidating MBS trusts when the underlying collateral of these trusts includes loans.
We account for such loans acquired on or after January 1, 2005 in accordance with SOP 03-3 if, at
acquisition, (i) there has been evidence of deterioration in the loan’s credit quality subsequent to origination;
and (ii) it is probable that we will be unable to collect all cash flows, in accordance with the terms of the
contractual agreement, from the borrower, ignoring insignificant delays. As of December 31, 2007 and 2006,
the outstanding balance of these loans was $8.2 billion and $6.0 billion, respectively, while the carrying
amount of these loans was $7.1 billion and $5.7 billion, respectively. Of the carrying amount of these loans,
$4.3 billion and $3.9 billion were on accrual status and $2.8 billion and $1.8 billion were nonaccrual status as
of December 31, 2007 and 2006, respectively.
The following table provides details on acquired loans accounted for in accordance with SOP 03-3 at their
respective acquisition dates for the years ended December 31, 2007, 2006 and 2005.
2007 2006 2005
For the Year Ended
December 31,
(Dollars in millions)
Contractually required principal and interest payments at acquisition
(1)
. . . . . . . . . $7,098 $5,312 $8,527
Nonaccretable difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571 235 328
Cash flows expected to be collected at acquisition
(1)
. . . . . . . . . . . . . . . . . . . . . . 6,527 5,077 8,199
Accretable yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,772 887 1,242
Initial investment in acquired loans at acquisition . . . . . . . . . . . . . . . . . . . . . . . . $4,755 $4,190 $6,957
(1)
Contractually required principal and interest payments at acquisition and cash flows expected to be collected at
acquisition are adjusted for the estimated timing and amount of prepayments.
We estimate the cash flows expected to be collected at acquisition using internal prepayment, interest rate and
credit risk models that incorporate management’s best estimate of certain key assumptions, such as default
rates, loss severity and prepayment speeds. The following table provides activity for the accretable yield of
these loans for the years ended December 31, 2007, 2006 and 2005.
2007 2006 2005
For the Year Ended
December 31,
(Dollars in millions)
Beginning balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,511 $1,112 $ —
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,772 887 1,242
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (273) (235) (82)
Reductions
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,206) (770) (297)
Change in estimated cash flows
(2)
................................... 797 626 334
Reclassifications to nonaccretable difference
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . (349) (109) (85)
Ending balance as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,252 $1,511 $1,112
(1)
Reductions are the result of liquidations and loan modifications due to TDRs.
F-37
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)