Fannie Mae 2008 Annual Report Download - page 116

(5)
Includes $150 million, $39 million, $28 million and $22 million as of December 31, 2008, 2007, 2006 and 2005,
respectively, for acquired loans subject to the application of SOP 03-3.
(6)
Includes charges recorded at the date of acquisition of $2.1 billion, $1.4 billion, $204 million and $251 million in
2008, 2007, 2006 and 2005, respectively, for acquired loans subject to the application of SOP 03-3 where the
acquisition cost exceeded the fair value of the acquired loan. Excludes delinquent loans totaling $56 million that are
subject to SOP 03-3 but are held in MBS trusts consolidated on our balance sheets.
(7)
Represents loss reserves amount attributable to each loan type as a percentage of the guaranty book of business for
each loan type.
(8)
Loans are classified as nonperforming when we believe collectability of interest or principal on the loan is not
reasonably assured. Additionally, troubled debt restructurings and HomeSaver Advance first-lien loans are classified as
nonperforming loans. See Table 48: Nonperforming Single-Family and Multifamily Loans for detail on nonperforming
loans.
We continued to build our combined loss reserves in 2008 and 2007 through provisions that have been well in
excess of our charge-offs. The provision for credit losses attributable to our guaranty book of business of
$25.5 billion for 2008 exceeded net charge-offs of $4.2 billion, reflecting an incremental build of $21.3 billion
in our combined loss reserves for 2008. In comparison, we recorded a provision for credit losses attributable
to our guaranty book of business of $3.2 billion and $385 million for 2007 and 2006, respectively.
As a result of our higher loss provisioning levels, we have substantially increased our combined loss reserves
both in absolute terms and as a percentage of our guaranty book of business, to $24.8 billion, or 0.83% of our
guaranty book of business, as of December 31, 2008, from $3.4 billion, or 0.12% of our guaranty book of
business, as of December 31, 2007. This increase reflected the impact of the continued and dramatic national
decline in home prices and the deepening economic downturn, which have resulted in higher delinquencies
and defaults and an increase in the average loss severity, or initial charge-off per default. Our conventional
single-family serious delinquency rate increased to 2.42% as of December 31, 2008, from 0.98% as of
December 31, 2007. The average default rate and loss severity, excluding fair value losses related to SOP 03-3
and HomeSaver Advance loans, was 0.59% and 26%, respectively, for 2008, compared with 0.32% and 11%
for 2007, and 0.26% and 4% for 2006.
These worsening mortgage performance trends have been most notable in certain states, certain higher risk
loan categories and our 2006 and 2007 loan vintages. The Midwest, which has experienced prolonged
economic weakness, and California, Florida, Arizona and Nevada, which previously experienced rapid home
price increases and are now experiencing steep home price declines, have accounted for a disproportionately
large share of our seriously delinquent loans and charge-offs. Our Alt-A book, particularly the 2006 and 2007
loan vintages, has exhibited early stage payment defaults and represented a disproportionate share of our
seriously delinquent loans and charge-offs for 2008. In addition, the deepening economic downturn and
increase in unemployment rates have adversely affected the performance of our more traditional loans, which
recently have exhibited higher delinquency rates.
The rapidly changing and deteriorating housing and credit market conditions had a more prounounced impact
on our loss reserves during the third and fourth quarters of 2008, as we made changes to our loss reserve
models and adjustments to reflect: (1) higher severities and higher unpaid principal balance loan balance
exposure at default relating to loans originated in 2006 and 2007, and Alt-A loans originated in 2005; (2) the
sharp rise in unemployment rates in the second half of 2008 that is not yet fully reflected in our internal
models; and (3) the significant adverse impact of geographically concentrated stress, particularly in California,
Florida, Nevada, Arizona and the Midwest.
Although the suspension of foreclosure sales on occupied single-family properties scheduled to occur between
the periods November 26, 2008 through January 31, 2009 and February 17, 2009 through March 6, 2009
affects the timing of when we incur a credit loss, it does not necessarily affect the credit-related expenses
recognized in our consolidated statements of operations because we estimate probable losses inherent in our
guaranty book of business as of each balance date in determining our loss reserves. See “Critical Accounting
Policies and Estimates — Allowance for Loan Losses and Reserve for Guaranty Losses” for additional
information on the process for estimating our loss reserves.
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