Fannie Mae 2009 Annual Report Download - page 276

In periods after we recognize an other-than-temporary impairment of debt securities, we use the prospective
interest method to recognize interest income. Under the prospective interest method, we use the new cost basis
and the cash flows expected to be collected from the security to calculate the effective yield.
As a result of adopting the FASB modified standard on the model for assessing other-than-temporary
impairments, we recorded a cumulative-effect adjustment at April 1, 2009 of $8.5 billion on a pre-tax basis
($5.6 billion after tax) to reclassify the noncredit portion of previously recognized other-than-temporary
impairments from “Accumulated deficit” to AOCI. We also reduced the “Accumulated deficit” and valuation
allowance by $3.0 billion for the deferred tax asset related to the amounts previously recognized as
other-than-temporary impairments in our consolidated statements of operations based upon the assertion of our
intent and ability to hold certain of these securities until recovery. Refer to “Note 5, Investments in Securities”
for disclosures related to our investments in securities and other-than-temporary impairments and “Note 11,
Income Taxes” for disclosures related to our deferred tax assets and related valuation allowance.
Mortgage Loans
When we acquire mortgage loans that we intend to sell or securitize, we classify the loans as held for sale
(“HFS”). When we acquire mortgage loans that we have the ability and the intent to hold for the foreseeable
future or until maturity, we classify the loans as held for investment (“HFI”). We initially classify loans as
HFS if they are product types that we actively securitize from our portfolio, such as 30-year fixed rate
mortgages, because we have the intent, at acquisition, to securitize the loans (either during the month in which
the acquisition occurs or during the following month) and sell all or a portion of the resulting securities. At
month-end, we reclassify loans acquired during the calendar month, from HFS to HFI, if we have not
securitized or are not in the process of securitizing them because we have the intent to hold those loans for the
foreseeable future or until maturity.
We initially classify loans as HFI if they are product types that we do not currently securitize from our
portfolio, such as reverse mortgages. We reclassify loans from HFI to HFS if our investment intent changes.
Reclassification of loans from HFI to HFS is infrequent.
If the underlying assets of a consolidated VIE are mortgage loans and we were initially the transferor of such
loans, we classify the consolidated loans consistent with our intent and ability to hold the securities of the
consolidated entity; otherwise, mortgage loans in consolidated VIEs are classified as HFI.
Loans Held for Sale
We report HFS loans at the lower of cost or fair value (“LOCOM”). Loans held for sale are typically single-
family loans, because we generally do not sell or securitize multifamily loans from our portfolio. Any excess
of an HFS loan’s cost over its fair value is recognized as a valuation allowance, with changes in the valuation
allowance recognized as “Investment gains (losses), net” in our consolidated statements of operations. We
recognize interest income on HFS loans on an accrual basis, unless we determine the ultimate collection of
principal or interest payments is not reasonably assured. When the collection of principal or interest payments
is not reasonably assured, we discontinue the accrual of interest income. Purchase premiums, discounts and
other cost basis adjustments on HFS loans are deferred upon loan acquisition, included in the cost basis of the
loan, and not amortized. We determine any LOCOM adjustment on HFS loans on a pool basis by aggregating
those loans based on similar risks and characteristics, such as product types and interest rates.
In the event that we reclassify HFS loans to HFI, we record the loans at LOCOM on the date of
reclassification. We recognize any LOCOM adjustment recognized upon reclassification as a basis adjustment
to the HFI loan.
F-18
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)