Fannie Mae 2008 Annual Report Download - page 307

(1)
Includes the impact of other-than-temporary impairment of cost basis adjustments.
(2)
Accretable portion of impairments recorded as a result of previous other-than-temporary impairments.
(3)
Includes the unamorized balance of the fair value discounts that were recorded upon acquisition of SOP 03-3 loans
that have been subsequently modified as TDRs, which accretes into interest income for TDRs that are placed on
accrual status.
(4)
Represents the unamortized balance for outstanding SOP 03-3 loans of the fair value discounts that were recorded
upon acquisition and consolidation that may accrete into interest income for SOP 03-3 loans that are placed on accrual
status.
(5)
Represents the fair value discount related to unsecured HomeSaver Advance loans that will accrete into interest
income based on the contractual terms of the loans for loans on accrual status.
We hold a large number of similar mortgage loans and mortgage-related securities backed by a large number
of similar mortgage loans for which prepayments are probable and the timing of such prepayments can
reasonably be estimated. We use prepayment estimates in determining periodic amortization of cost basis
adjustments on substantially all mortgage loans and mortgage-related securities in our portfolio under the
interest method using a constant effective yield. We include this amortization in “Interest income” in each
period. For the purpose of amortizing cost basis adjustments, we aggregate similar mortgage loans or
mortgage-related securities with similar prepayment characteristics. We consider Fannie Mae MBS to be
aggregations of similar loans for the purpose of estimating prepayments. We aggregate individual mortgage
loans based upon coupon rate, product type and origination year for the purpose of estimating prepayments.
For each reporting period, we recalculate the constant effective yield to reflect the actual payments and
prepayments we have received to date and our new estimate of future prepayments. We adjust the net
investment of our mortgage loans and mortgage-related securities to the amount at which they would have
been stated if the recalculated constant effective yield had been applied since their acquisition with a
corresponding charge or credit to interest income.
We use the contractual terms to determine amortization if prepayments are not probable, we cannot reasonably
estimate prepayments, or we do not hold a large enough number of similar loans or there is not a large
number of similar loans underlying a security. For these loans, we cease amortization of cost basis adjustments
during periods in which interest income on the loan is not being recognized because the collection of the
principal and interest payments is not reasonably assured (that is, when a loan is placed on nonaccrual status).
Deferred Guaranty Price Adjustments
We apply the interest method using a constant effective yield to amortize all risk-based price adjustments and
buy-downs in connection with our Fannie Mae MBS issued prior to January 1, 2003. We calculate the constant
effective yield for these deferred guaranty price adjustments based upon our estimate of the cash flows of the
mortgage loans underlying the related Fannie Mae MBS, which includes an estimate of prepayments. For each
reporting period, we recalculate the constant effective yield to reflect the actual payments and our new
estimate of future prepayments. We adjust the carrying amount of deferred guaranty price adjustments to the
amount at which they would have been stated if the recalculated constant effective yield had been applied
since their inception.
For risk-based pricing adjustments and buy-downs that arose on Fannie Mae MBS issued on or after January 1,
2003, we record the cash received and increase “Guaranty obligations” by a similar amount. Such amounts are
amortized as part of the “Guaranty obligations” in proportion to the reduction in the guaranty asset.
Master Servicing
Upon a transfer of loans to us, either in connection with a portfolio purchase or a lender swap transaction, we
enter into an agreement with the lender, or its designee, to have that entity continue to perform the day-to-day
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FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)