Fannie Mae 2009 Annual Report Download - page 100

Our provision for credit losses increased in both 2009 and 2008, as we increased our combined loss reserves,
both in absolute terms and as a percentage of our total guaranty book of business and nonperforming loans, as
provisions have been well in excess of our charge-offs.
Key factors affecting the provision for credit losses attributable to our guaranty book of business for 2009
compared with 2008 include the following:
• An increase in nonperforming loans, delinquencies, and defaults due to the general deterioration in our
guaranty book of business during both 2009 and 2008, reflecting the combination of high unemployment
and the prolonged downturn in the housing market. As shown in Table 43, our conventional single-family
serious delinquency rate and average default rate increased in 2009 compared with 2008. Factors
contributing to these conditions include the following:
• Stress on a broader segment of borrowers due to the rise in unemployment and underemployment and
the decline in home prices has resulted in higher delinquency rates on loans in our single-family
guaranty book of business that do not have characteristics typically associated with higher risk loans.
• Certain loan categories continued to contribute disproportionately to the increase in our nonperforming
loans and credit losses in 2009. These categories include: loans on properties in certain Midwest states,
California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans related to
higher-risk product types, such as Alt-A loans.
• The decline in home prices has also produced negative home equity for some borrowers, including the
impact of existing second mortgage liens, affecting their ability to refinance or willingness to make
their mortgage payments, causing higher delinquencies.
• The number of loans seriously delinquent also increased due to delays in foreclosures as we require
servicers to exhaust foreclosure prevention alternatives as part of our effort to keep borrowers in their
homes, and new laws enacted in a number of states that lengthen the time required to complete a
foreclosure.
• As shown in Table 43, our average loan loss severity, or average initial charge-off per default, increased
primarily as a result of the decline in home prices and a higher percentage of loan charge-offs for loans
that are not covered by mortgage insurance.
• A greater proportion of the loans in our guaranty book of business are subject to individual impairment
rather than the collective reserve for loan losses.
• We consider a loan to be individually impaired when, based on current information, it is probable that
we will not receive all amounts due, including interest, in accordance with the contractual terms of the
loan agreement. Individually impaired loans currently include, among others, those restructured in a
troubled debt restructuring. Any impairment recognized on these loans is part of our provision for
credit losses and allowance for loan losses. The higher levels of workouts initiated as a result of our
foreclosure prevention efforts during 2009, including HAMP, increased the number individually
impaired loans, especially those considered to be troubled debt restructurings.
Although our combined loss reserves increased significantly in 2009 compared with 2008, we did not add to
our combined loss reserves in the fourth quarter of 2009 and our provision for credit losses declined. The
slight decline in our loss reserves as of December 31, 2009 compared with September 30, 2009 was due to a
moderation in the pace at which loans transitioned to seriously delinquent status and an improvement in our
loss severities due to stabilizing home prices as well as an increase in the number of loans acquired from our
MBS trusts in order to complete workouts for the loans. To the extent that the acquisition cost of these loans
exceeds the estimated fair value, we record a fair value loss against the “Reserve for guaranty losses.”
Recognizing these fair value losses, which typically meet or exceed the actual credit losses we ultimately
realize, has the effect of reducing the inherent losses that remain in our guaranty book of business, and
consequently reduces our combined loss reserves. With the adoption of new accounting standards on January
1, 2010, we will no longer recognize the acquisition of loans from the MBS trusts that we have consolidated
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