Fannie Mae 2008 Annual Report Download - page 299

value of delinquent loans purchased from MBS trusts. We consider loans within the scope of SOP 03-3 to be
individually impaired at acquisition. However, in accordance with SOP 03-3, no valuation allowance is
established or carried over at acquisition. We record the excess of the loan’s acquisition cost over its fair value
as a charge-off against our “Reserve for guaranty losses” at acquisition. Any subsequent decreases in estimated
future cash flows to be collected are recognized as impairment losses through the allowance for loan losses.
We place loans that we acquire from MBS trusts that are within the scope of SOP 03-3 on nonaccrual status at
acquisition in accordance with our nonaccrual policy. If we subsequently determine that the collectability of
principal and interest is reasonably assured we return the loan to accrual status. We determine the initial
accrual status of acquired loans that are not within the scope of SOP 03-3 in accordance with our nonaccrual
policy. Accordingly, loans purchased under other contingent call options are placed on accrual status at
acquisition if they are current or if there has been only an insignificant delay in payment, and there are no
other facts and circumstances that would lead us to conclude that the collection of principal and interest is not
probable.
When the loan is returned to accrual status, the portion of the expected cash flows, excluding prepayment
estimates, that exceeds the recorded investment in the loan is accreted into interest income over the contractual
life of the loan. We prospectively recognize increases in future cash flows expected to be collected as interest
income over the remaining contractual life of the loan through a yield adjustment.
Allowance for Loan Losses and Reserve for Guaranty Losses
The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related
to our recorded investment in HFI loans. The reserve for guaranty losses is a liability account in our
consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each
Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to
permit timely payment of principal and interest on the related Fannie Mae MBS. We recognize incurred losses
by recording a charge to the “Provision for credit losses” in our consolidated statements of operations.
Credit losses related to groups of similar single-family and multifamily HFI loans that are not individually
impaired, or those that are collateral for Fannie Mae MBS, are recognized when (i) available information as of
each balance sheet date indicates that it is probable a loss has occurred and (ii) the amount of the loss can be
reasonably estimated in accordance with SFAS No. 5, Accounting for Contingencies (“SFAS 5”). Single-family
and multifamily loans that we evaluate for individual impairment are measured in accordance with the
provisions of SFAS No. 114, Accounting by Creditors for Impairment of a Loan (an amendment of FASB
Statement No. 5 and 15) (“SFAS 114”). We record charge-offs as a reduction to the allowance for loan losses
or reserve for guaranty losses when losses are confirmed through the receipt of assets such as cash in a pre-
foreclosure sale or the underlying collateral in full satisfaction of the mortgage loan upon foreclosure.
Single-family Loans
We aggregate single-family loans (except for those that are deemed to be individually impaired pursuant to
SFAS 114, which are described below), based on similar risk characteristics for purposes of estimating
incurred credit losses. Those characteristics include but are not limited to: origination year; loan product type;
and loan-to-value (“LTV”) ratio. Once loans are aggregated, there typically is not a single, distinct event that
would result in an individual loan or pool of loans being impaired. Accordingly, to determine an estimate of
incurred credit losses, we base our allowance and reserve methodology on the accumulation of a series of
historical events and trends, such as loss severity, default rates and recoveries from mortgage insurance
contracts that are contractually attached to a loan or other credit enhancements that were entered into
contemporaneous with and in contemplation of a guaranty or loan purchase transaction. Our allowance
F-21
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)