Fannie Mae 2008 Annual Report Download - page 302

Foreclosed property is initially measured at its fair value less its estimated costs to sell. We treat any excess of
our recorded investment in the loan over the fair value less estimated costs to sell the property as a charge-off
to the “Allowance for loan losses.” Any excess of the fair value less estimated costs to sell the property over
our recorded investment in the loan is recognized first to recover any forgone, contractually due interest, then
to “Foreclosed property expense” in our consolidated statements of operations.
Properties that we do not intend to sell or that are not ready for immediate sale in their current condition are
classified separately as held for use, are depreciated and are recorded in “Other assets” in our consolidated
balance sheets. We report foreclosed properties that we intend to sell, are actively marketing and that are
available for immediate sale in their current condition as held for sale. These properties are reported at the
lower of their carrying amount or fair value less estimated selling costs, on a discounted basis if the sale is
expected to occur beyond one year from the date of foreclosure, and are not depreciated. The fair value of our
foreclosed properties is determined by third party appraisals, when available. When third party appraisals are
not available, we estimate fair value based on factors such as prices for similar properties in similar
geographical areas and/or assessment through observation of such properties. We recognize a loss for any
subsequent write-down of the property to its fair value less its estimated costs to sell through a valuation
allowance with an offsetting charge to “Foreclosed property expense” in our consolidated statements of
operations. A recovery is recognized for any subsequent increase in fair value less estimated costs to sell up to
the cumulative loss previously recognized through the valuation allowance. Gains or losses on sales of
foreclosed property are recognized through “Foreclosed property expense” in our consolidated statements of
operations.
Guaranty Accounting
Our primary guaranty transactions result from mortgage loan securitizations in which we issue Fannie Mae
MBS. The majority of our Fannie Mae MBS issuances fall within two broad categories: (i) lender swap
transactions, where a lender delivers mortgage loans to us to deposit into a trust in exchange for our
guaranteed Fannie Mae MBS backed by those mortgage loans and (ii) portfolio securitizations, where we
securitize loans that were previously included in our consolidated balance sheets, and create guaranteed Fannie
Mae MBS backed by those loans. As guarantor, we guarantee to each MBS trust that we will supplement
amounts received by the MBS trust as required to permit timely payments of principal and interest on the
related Fannie Mae MBS. This obligation represents an obligation to stand ready to perform over the term of
the guaranty. Therefore, our guaranty exposes us to credit losses on the loans underlying Fannie Mae MBS.
As guarantor of our Fannie Mae MBS issuances, we recognize at inception a non-contingent liability for the
fair value of our obligation to stand ready to perform over the term of the guaranty as a component of
“Guaranty obligations” in our consolidated balance sheets in accordance with FASB Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (“FIN 45”). Prior to January 1, 2008, we measured the fair value of the guaranty
obligations that we recorded when we issued Fannie Mae MBS based on management’s estimate of the
amount that we would be required to pay a third party of similar credit standing to assume our obligation.
This amount is based on market information obtained from spot transaction prices, when available, or in the
absence of spot transaction prices, which was the case for the substantial majority of our guarantees, we used
internal models to estimate the fair value of our guaranty obligations. We reviewed the reasonableness of the
results of our models by comparing those results with available market information. Key inputs and
assumptions used in our models included the amount of compensation required to cover estimated default
costs, including estimated unrecoverable principal and interest that we expected to incur over the life of the
underlying mortgage loans backing our Fannie Mae MBS, estimated foreclosure-related costs, estimated
administrative and other costs related to our guaranty, and an estimated market risk premium, or profit, that a
market participant of similar credit standing would require to assume the obligation. If our modeled estimate
F-24
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)