Fannie Mae 2007 Annual Report Download - page 78

the date of purchase. To the extent the acquisition cost exceeds the estimated fair value, we record a SOP 03-3
fair value loss charge-off against the “Reserve for guaranty losses” at the time we acquire the loan. We reduce
the “Guaranty obligation” (in proportion to the “Guaranty asset”) as payments on the loans underlying our
MBS are received, including those resulting from the purchase of seriously delinquent loans from MBS trusts,
and report the reduction as a component of “Guaranty fee income.” These prepayments may cause an
impairment of the “Guaranty asset,” which results in a proportionate reduction in the corresponding “Guaranty
obligation” and recognition of income. We place acquired loans that are three months or more past due on
nonaccrual status. If the loan subsequently becomes less than three months past due, or we subsequently
modify the loan and determine through a financial analysis that the borrower is able to make the modified
payments, we return the loan to accrual status. While the loan is on nonaccrual status, we do not recognize
income on the loan. We apply any cash receipts towards the recovery of the interest receivable at acquisition
and to past due principal payments. We may, however, subsequently recover a portion or the full amount of
these SOP 03-3 fair value losses as discussed below.
To the extent that we have previously recognized an SOP 03-3 fair value loss, our recorded investment in the
loan is less than the acquisition cost. Under SOP 03-3, the excess of the contractual cash flows of the loan
over the estimated cash flows we expect to collect represents a nonaccretable difference that is not recognized
in our earnings. If the estimated cash flows we expect to collect exceed the initial recorded investment in the
loan, we accrete this excess amount into our earnings as a component of interest income over the life of the
loan. If a seriously delinquent loan we purchase pays off in full, we recover the SOP 03-3 fair value loss as a
component of interest income on the date of the payoff. If the loan is returned to accrual status, we recover
the SOP 03-3 fair value loss over the contractual life of the loan as a component of net interest income (via an
adjustment of the effective yield of the loan). If we foreclose upon a loan purchased from an MBS trust, we
record a charge-off at foreclosure based on the excess of our recorded investment in the loan over the fair
value of the collateral less estimated selling costs. Any charge-off recorded at foreclosure for SOP 03-3 loans
recorded at fair value at acquisition would be lower than it would have been if we had recorded the loan at its
acquisition cost. In some cases, the proceeds from the sale of the collateral may exceed our recorded
investment in the loan, resulting in a gain.
Following is an example of how SOP 03-3 fair value losses, credit-related expenses and credit losses related to
loans underlying our guaranty contracts are recorded in our consolidated financial statements. This example
shows the accounting and effect on our financial statements of the following events: (a) we purchase a
seriously delinquent loan subject to SOP 03-3 from an MBS trust; (b) we subsequently foreclose on this
mortgage loan; and (c) we sell the foreclosed property that served as collateral for the loan. This example is
based on the following assumptions:
• We purchase from an MBS trust a seriously delinquent loan that has an unpaid principal balance and
accrued interest of $100 at a cost of $100. The estimated fair value at the date of purchase is $70.
• We subsequently foreclose upon the mortgage loan and record the acquired REO property at the appraised
fair value, net of estimated selling costs, which is $80.
• We sell the REO property for $85.
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