Fannie Mae 2009 Annual Report Download - page 272

expectations of prepayment, default and severity rates. The projection of future cash flows is a subjective
process involving significant management judgment. This is primarily due to the inherent uncertainties related
to the interest rate and housing price environment, as well as the actual credit performance of the mortgage
loans and securities that were held by each investment trust. If we determined an investment trust to be a VIE,
we consolidated the investment trust when the modeling resulted in our absorption of more than 50% of the
variability in the expected losses or expected residual returns.
We also quantitatively and qualitatively examined our LIHTC partnerships and other limited partnerships that
were considered VIEs. Qualitative analyses considered the extent to which the nature of our variable interest
exposed us to losses. For quantitative analyses, we also used internal cash flow models to determine if these
partnerships were VIEs and, if so, whether we were the primary beneficiary. LIHTC partnerships are created
by third parties to finance construction of property, giving rise to tax credits for these partnerships. Material
assumptions include the degree of development cost overruns related to the construction of the building, the
probability of the lender foreclosing on the building, as well as an investor’s ability to use the tax credits to
offset taxable income. The projection of these cash flows and probabilities thereof requires significant
management judgment because of the inherent limitations that relate to the use of historical data for the
projection of future events. Additionally, we reviewed similar assumptions and applied cash flow models to
determine both VIE status and primary beneficiary status for our other limited partnership investments.
We are exempt from evaluating certain securitization trusts for consolidation if the trusts meet the criteria of a
qualified special purpose entity (“QSPE”), and if we do not have the unilateral ability to cause the trust to
liquidate or change the trust’s QSPE status. The QSPE requirements significantly limit the activities in which
a QSPE may engage and the types of assets and liabilities it may hold. Management judgment is required to
determine whether a trust’s activities meet the QSPE requirements. To the extent any trust fails to meet these
criteria, we would be required to consolidate its assets and liabilities if we determine that we are the primary
beneficiary of the entity.
We are required to evaluate whether to consolidate a VIE when we first become involved and upon subsequent
reconsideration events (e.g., a purchase of additional beneficial interests). Generally, if we are the primary
beneficiary of a VIE, then we initially record the assets and liabilities of the VIE in our consolidated financial
statements at fair value.
With our adoption of the most recent accounting standard on business combinations effective January 1, 2009,
we began recording any difference between the fair value and the previous carrying amount of our interests in
a VIE that holds only financial assets as “Investment gains (losses), net” in our consolidated statements of
operations. Prior to 2009, we classified such differences as “Extraordinary losses, net of tax effect” in our
consolidated statements of operations.
If a consolidated VIE subsequently should not be consolidated because we cease to be deemed the primary
beneficiary or we qualify for a scope exception (for example, the entity is a QSPE that we no longer have the
unilateral ability to liquidate), we deconsolidate the VIE.
Effective January 1, 2009 with our adoption of the accounting standard on the treatment of noncontrolling
interests in consolidated financial statements, we began recording any retained interests in a deconsolidated
entity at its respective fair values. Any difference between the fair values and the previous carrying amounts of
our investment in the entity is recorded as “Investment gains (losses), net” in our consolidated statements of
operations. Prior to 2009, we deconsolidated the entity by carrying over our net basis in the consolidated
assets and liabilities to our investment in the entity.
F-14
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)