Fannie Mae 2007 Annual Report Download - page 80

concluded that our model-based estimates of fair value for delinquent loans were no longer aligned with the
market prices for these loans. Therefore, we began obtaining indicative market prices from large, experienced
dealers and used an average of these market prices to estimate the initial fair value of delinquent loans
purchased from MBS trusts. Because these prices reflected significant declines in value due to the disruption
in the mortgage markets, we experienced a substantial increase in the SOP 03-3 fair value losses recorded
upon the purchase of delinquent loans from MBS trusts.
Other-than-temporary Impairment of Investment Securities
Other-than-temporary impairment occurs when the fair value of an AFS security is below its amortized cost, and
we determine that it is probable we will be unable to collect all of the contractual principal and interest payments
of a security or we do not have the ability and intent to hold the security until it recovers to its amortized cost. We
consider many factors that may involve significant judgment in assessing other-than-temporary impairment,
including: the severity and duration of the impairment; recent events specific to the issuer and/or the industry to
which the issuer belongs; and external credit ratings, as well as the probability that we will be able to collect all of
the contractual amounts due and our ability and intent to hold the securities until recovery.
We generally view changes in the fair value of our AFS securities caused by movements in interest rates to be
temporary. When we either decide to sell a security in an unrealized loss position or determine that a security
in an unrealized loss position may be sold in future periods prior to recovery of the impairment, we identify
the security as other-than-temporarily impaired in the period that we make the decision to sell or determine
that the security may be sold. For all other securities in an unrealized loss position resulting primarily from
movements in interest rates, we have the positive intent and ability to hold such securities until the earlier of
recovery of the unrealized loss amounts or maturity. For securities in an unrealized loss position due to factors
other than movements in interest rates, such as the widening of credit spreads, we consider whether it is
probable that we will collect all of the contractual cash flows. If we believe it is probable that we will collect
all of the contractual cash flows and we have the ability and intent to hold the security until recovery, we
consider the impairment to be temporary. If we determine that it is not probable that we will collect all of the
contractual cash flows or we do not have the ability and intent to hold the security until recovery, we consider
the impairment to be other-than-temporary. We may subsequently recover other-than-temporary impairment
amounts we record on securities if we collect all of the contractual principal and interest payments due or if
we sell the security at an amount greater than its carrying value.
Allowance for Loan Losses and Reserve for Guaranty Losses
We maintain an allowance for loan losses for loans in our mortgage portfolio classified as held-for-investment.
We maintain a reserve for guaranty losses for loans that back Fannie Mae MBS we guarantee and loans that
we have guaranteed under long-term standby commitments. We report the allowance for loan losses and
reserve for guaranty losses as separate line items in the consolidated balance sheets. These amounts, which we
collectively refer to as our loan loss reserves, represent our estimate of probable credit losses inherent in our
guaranty book of business. We employ a systematic and consistently applied methodology to determine our
best estimate of incurred credit losses and use the same methodology to determine both our allowance for loan
losses and reserve for guaranty losses, as the relevant factors affecting credit risk are the same.
To calculate the loan loss reserves for the single-family guaranty book of business, we aggregate homogeneous
loans into pools based on common underlying characteristics or cohorts based on similar risk characteristics,
such as origination year and seasoning, loan-to-value ratio and loan product type. We calculate our loan loss
reserves using internally developed statistical loss curve models that estimate losses based on consideration of
a variety of factors affecting loan collectability. To calculate loan loss reserves for the multifamily mortgage
credit book of business, we use loss curve models, evaluate loans for impairment based on the risk profile and
review repayment prospects and collateral values underlying individual loans. For a more detailed discussion
of the methodology used in developing our loan loss reserves, see “Notes to Consolidated Financial
Statements—Note 1, Summary of Significant Accounting Policies.”
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