Fannie Mae 2008 Annual Report Download - page 291

investor in variable interest entities that Freddie Mac consolidates. The Federal Reserve may purchase our debt
along with MBS guaranteed by us as a result of a new program announced by the Federal Reserve Board on
November 25, 2008. The Federal Reserve began purchasing our MBS on the open market under this program
in January 2009.
As of December 31, 2008 and 2007, we held Freddie Mac mortgage-related securities with a fair value of
$33.9 billion and $31.2 billion, respectively and had accrued interest receivable of $198 million and
$192 million, respectively. For the years ended December 31, 2008, 2007 and 2006, we recognized interest
income on Freddie Mac mortgage-related securities held by us of $1.6 billion, $1.5 billion and $1.5 billion,
respectively.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of our consolidated financial statements and the amounts of
revenues and expenses during the reporting period. Management has made significant estimates in a variety of
areas, including but not limited to, valuation of certain financial instruments and other assets and liabilities,
the allowance for loan losses and reserve for guaranty losses, other-than-temporary impairment of investment
securities and LIHTC partnerships and our assessment of realizing our deferred tax assets. Actual results could
be different from these estimates.
Principles of Consolidation
The typical condition for a controlling financial interest is ownership of a majority of the voting interests of an
entity. A controlling financial interest may also exist in entities through arrangements that do not involve
voting interests. We evaluate entities deemed to be variable interest entities (“VIEs”) under Financial
Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46 (revised December 2003), Consolidation
of Variable Interest Entities (an interpretation of ARB No. 51) (“FIN 46R”), to determine when we must
consolidate the assets, liabilities and noncontrolling interests of a VIE. A VIE is an entity (i) that has total
equity at risk that is not sufficient to finance its activities without additional subordinated financial support
from other entities, (ii) where the group of equity holders does not have the ability to make significant
decisions about the entity’s activities, or the obligation to absorb the entity’s expected losses or the right to
receive the entity’s expected residual returns, or both, or (iii) where the voting rights of some investors are not
proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected
residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are
conducted on behalf of an investor that has disproportionately few voting rights. The primary types of entities
we evaluate under FIN 46R include those special purpose entities (“SPEs”) established to facilitate the
securitization of mortgage assets in which we have the unilateral ability to liquidate the trust, those SPEs that
do not meet the qualifying special purpose entity (“QSPE”) criteria, our LIHTC partnerships, equity
investments and other entities that meet the VIE criteria.
If an entity is a VIE, we determine if our variable interest causes us to be considered the primary beneficiary.
We are the primary beneficiary and are required to consolidate the entity if we absorb the majority of
expected losses or expected residual returns, or both. In making the determination as to whether we are the
primary beneficiary, we evaluate the design of the entity, including the risks that cause variability, the purpose
for which the entity was created, and the variability that the entity was designed to create and pass along to its
interest holders. When the primary beneficiary cannot be identified through a qualitative analysis, we use
internal cash flow models, which may include Monte Carlo simulations, to compute and allocate expected
losses or residual returns to each variable interest holder. The allocation of expected cash flows is based upon
the relative contractual rights and preferences of each interest holder in the VIE’s capital structure.
F-13
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)