Fannie Mae 2008 Annual Report Download - page 304

present value of cash flows expected to be received as compensation over the life of the guaranty. As
described above, for lender swap transactions entered into from January 1, 2003 to December 31, 2007, if the
fair value of the guaranty obligation is less than the present value of the consideration we expect to receive,
including the fair value of the guaranty asset and any upfront assets exchanged, we defer the excess as
deferred profit, which is recorded as an additional component of “Guaranty obligations.” If the fair value of
the guaranty obligation exceeds the compensation received, we recognize a loss in “Losses on certain guaranty
contracts” in our consolidated statements of operations at inception of the guaranty fee contract. Beginning on
January 1, 2008, as part of the implementation of SFAS 157, we measure the fair value of the guaranty
obligations equal to the fair value of the total compensation received for providing the guaranty. Therefore, we
do not recognize losses or record deferred profit in our consolidated financial statements at inception of those
guaranty contracts issued after December 31, 2007.
We recognize a liability for estimable and probable losses for the credit risk we assume on loans underlying
Fannie Mae MBS based on management’s estimate of probable losses incurred on those loans as of each
balance sheet date. We record this contingent liability in our consolidated balance sheets as “Reserve for
guaranty losses.”
We also record a guaranty asset that represents the present value of cash flows expected to be received as
compensation over the life of the guaranty. We subsequently account for the guaranty asset at amortized cost.
As we collect monthly guaranty fees, we reduce guaranty assets to reflect cash payments received and
recognize imputed interest income on guaranty assets as a component of “Guaranty fee income” under the
prospective interest method pursuant to EITF 99-20. We reduce the corresponding guaranty obligation,
including any deferred profit, in proportion to the reduction in guaranty assets and recognize this reduction in
our consolidated statements of operations as an additional component of “Guaranty fee income.” We assess
guaranty assets for other-than-temporary impairment based on changes in our estimate of the cash flows to be
received. When we determine a guaranty asset is other-than-temporarily impaired, we write down the cost
basis of the guaranty asset to its fair value and include the amount written-down in “Guaranty fee income” in
our consolidated statements of operations. Any other-than-temporary impairment recorded on guaranty assets
results in a proportionate reduction in the corresponding guaranty obligations, including any deferred profit
recorded prior to January 1, 2008.
We record buy-ups in our consolidated balance sheets at fair value in “Other assets.” Buy-ups issued prior to
our January 1, 2007 adoption of SFAS No. 155, Accounting for Certain Hybrid Financial Instruments
(“SFAS 155”), are accounted for in the same manner as AFS securities with changes in fair value recorded in
AOCI, net of tax. We assess these buy-ups for other-than-temporary impairment based on the provisions of
SFAS 115 and EITF 99-20. Buy-ups issued on or after January 1, 2007 are accounted for in the same manner
as trading securities, with unrealized gains and losses included in “Guaranty fee income” in our consolidated
statements of operations. When we determine a buy-up is other-than-temporarily impaired, we write down the
cost basis of the buy-up to its fair value and include the amount of the write-down in “Guaranty fee income”
in our consolidated statements of operations. Upfront cash receipts for buy-downs and risk-based price
adjustments on and after January 1, 2003 and prior to January 1, 2008 are a component of the compensation
received for issuing the guaranty and are recorded upon issuing a guaranty as an additional component of
“Guaranty obligations,” for contracts with deferred profit, or a reduction of the loss recorded as a component
of “Losses on certain guaranty contracts,” for contracts where the compensation received is less than the
guaranty obligation.
Beginning on January 1, 2008, with the implementation of SFAS 157, we measure the initial fair value of the
guaranty obligation equal to the fair value of the total compensation received for providing the guaranty.
Therefore, we do not recognize losses or record deferred profit at the inception of a lender swap transaction
F-26
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)