Fannie Mae 2008 Annual Report Download - page 98

cash flows or we do not have the ability or the intent to hold the security until recovery, we consider the
impairment to be other-than-temporary. For all other securities in an unrealized loss position, we have the
ability and positive intent to hold the securities until the earlier of full recovery or maturity.
See “Consolidated Balance Sheet Analysis—Mortgage Investments—Trading and Available-for-Sale
Investment Securities—Investments in Private-Label Mortgage-Related Securities” for a discussion of other-
than-temporary impairment recognized on our investments in Alt-A and subprime private-label securities.
Allowance for Loan Losses and Reserve for Guaranty Losses
We maintain an allowance for loan losses for loans in our mortgage portfolio classified as held-for-investment.
We maintain a reserve for guaranty losses for loans that back Fannie Mae MBS we guarantee and loans that
we have guaranteed under long-term standby commitments. We report the allowance for loan losses and
reserve for guaranty losses as separate line items in the consolidated balance sheets. These amounts, which we
collectively refer to as our combined loss reserves, represent our best estimate of credit losses incurred in our
guaranty book of business as of the balance sheet date. We calculate our loss reserves using internally
developed statistical loss curve models, and we use the same methodology to determine both our allowance
for loan losses and reserve for guaranty losses, as the relevant factors affecting credit risk are the same.
To calculate the loss reserves for our single-family guaranty book of business, we aggregate homogeneous
loans into pools based on common underlying risk characteristics, such as origination year and seasoning,
original loan-to-value (“LTV”) ratio and loan product type. Based on the historical performance of the loans in
our guaranty book of business, we develop loss curve models that reflect loan pools with similar risk
attributes. We use these loss curve models to estimate how many loans will default (“default rate”). We then
assess recent performance of these loan pools to estimate how much of the loans’ balances will be lost in the
event of default (“loss severity”). If necessary, we may make adjustments to our historically developed
assumptions to reflect our assessment of the current impact of economic factors not yet reflected in the
historical data underlying our loss estimates, such as local and national economic trends, including rising
unemployment rates; changes in underwriting standards or loss mitigation practices; and changes in the
regulatory environment.
To calculate the loss reserves for our multifamily guaranty book of business, we individually evaluate loans
that we believe may be at risk of impairment by assessing the risk profile, repayment prospects and the
collateral values underlying the loan. We calculate a loss reserve for all other multifamily loans based on the
historical loss experience of loans with similar risk characteristics.
Determining our combined loss reserves is complex and requires judgment by management about the effect of
matters that are inherently uncertain. The key inputs and assumptions that drive our loss reserves include:
• loss severity trends;
• default experience;
• expected proceeds from credit enhancements, such as primary mortgage insurance;
• collateral valuation; and
• identification and assessment of the impact of current economic factors.
Changes in one or more of the key inputs or assumptions used in calculating our loss reserves could have a
material impact on our loss reserves and provision for credit losses. We regularly update our loss forecast
models to incorporate current loan performance data, monitor the delinquency and default experience of our
homogenous loan pools, and adjust our underlying estimates and assumptions as necessary to reflect our view
of current economic and market conditions. Although our loss reserve process benefits from extensive
historical loan performance data, this process is subject to risks and uncertainties, including a reliance on
historical loss information that may not be representative of current conditions. When market conditions
change rapidly and dramatically, as they did during 2008, the historical loan performance underlying our
models and loss estimates may not keep pace with changing market conditions. We address this risk by
monitoring the delinquency and default experience of our homogenous loan pools and by considering the
impact of current economic and market conditions. Our senior management is actively involved in the review
and approval of our loss reserves. Our Enterprise Risk Office, through a designated Allowance for Loan
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