Fannie Mae 2008 Annual Report Download - page 298

borrower when we determine that the effective yield based on the restructured loan term is less than the
effective yield prior to the modification pursuant to EITF 02-4, Determining Whether a Debtor’s Modification
or Exchange of Debt Instruments is within the Scope of FASB Statement No. 15. Impairment of a loan
restructured in a TDR is based on the excess of the recorded investment in the loan over the present value of
the expected future cash inflows discounted at the loan’s original effective interest rate.
A loan modification for reasons other than a borrower experiencing financial difficulties or that results in
terms at least as favorable to us as the terms for comparable loans to other customers with similar collection
risks who are not refinancing or restructuring a loan is not considered a TDR. We further evaluate such a loan
modification to determine whether the modification is considered “more than minor” pursuant to
SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases (an amendment of FASB Statements No. 13, 60 and 65 and rescission of
FASB Statement No. 17) (“SFAS 91”) and EITF 01-7, Creditor’s Accounting for a Modification or Exchange
of Debt Instruments. If the modification is considered more than minor and the modified loan is not subject to
the accounting requirements of the American Institute of Certified Public Accountants Statement of Position
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”), we treat the
modification as an extinguishment of the previously recorded loan and recognition of a new loan, and any
unamortized basis adjustments on the previously recorded loan are recognized in “Interest income” in our
consolidated statements of operations. Modifications to loans that are subject to the accounting requirements
of SOP 03-3 are accounted for as a continuation of the previously recorded loan unless the modification is
considered a TDR.
Loans Purchased or Eligible to be Purchased from Trusts
For MBS trusts that include a Fannie Mae guaranty, we have the option to purchase loans from the MBS trust
after four or more consecutive monthly payments due under the loan are delinquent in whole or in part. Our
acquisition cost for these loans is the unpaid principal balance of the loan plus accrued interest. Fannie Mae,
as guarantor, may also purchase mortgage loans when other predefined contingencies have been met, such as
when there is a material breach of a representation and warranty.
When, for a loan that will be classified as HFI, there is evidence of credit deterioration subsequent to the
loan’s origination and it is probable, at acquisition, that we will be unable to collect all contractually required
payments receivable (ignoring insignificant delays in contractual payments), the loan is within the scope of
SOP 03-3. We record such loans at the lower of the acquisition cost or fair value. Each acquired loan that
does not meet these criteria is recorded at the loan’s acquisition cost.
For MBS trusts where we are considered the transferor, when the contingency on our options to purchase
loans from the trust has been met and we regain effective control over the transferred loan, we recognize the
loan on our consolidated balance sheets at fair value and record a corresponding liability to the MBS trust.
Our estimate of the fair value of delinquent loans purchased from MBS trusts is based upon an assessment of
what a market participant would pay for the loan at the date of acquisition. Prior to July 2007, we estimated
the initial fair value of these loans using internal prepayment, interest rate and credit risk models that
incorporated management’s best estimate of certain key assumptions, such as default rates, loss severity and
prepayment speeds. Beginning in July 2007, the mortgage markets experienced a number of significant events,
including a dramatic widening of credit spreads for mortgage securities backed by higher risk loans, a large
number of credit downgrades of higher risk mortgage-related securities, and a severe reduction in market
liquidity for certain mortgage-related transactions. As a result of this extreme disruption in the mortgage
markets, we concluded that our model-based estimates of fair value for delinquent loans were no longer
aligned with the indicative market prices for these loans. Therefore, we began utilizing indicative market
prices from large, experienced dealers and used an average of these market prices to estimate the initial fair
F-20
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)