Fannie Mae 2009 Annual Report Download - page 279

consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each
Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to
permit timely payment of principal and interest on the related Fannie Mae MBS. As a result, the guaranty
reserve considers not only the principal and interest due on the loan at the current balance sheet date, but also
any additional interest payments due to the trust from the current balance sheet date up until the point of loan
acquisition or foreclosure. We recognize incurred losses by recording a charge to the “Provision for credit
losses” in our consolidated statements of operations.
Credit losses related to groups of similar single-family and multifamily HFI loans that are not individually
impaired, or those that are collateral for Fannie Mae MBS, are recognized when (1) available information as
of each balance sheet date indicates that it is probable a loss has occurred and (2) the amount of the loss can
be reasonably estimated in accordance with the FASB standard on accounting for contingencies. Single-family
and multifamily loans that we evaluate for individual impairment are measured in accordance with the FASB
standard on measuring individual impairment of a loan. When making an assessment as to whether a loan is
individually impaired, we also consider whether a delay in payment is insignificant. Determination of whether
a delay in payment or shortfall of amount is insignificant requires management’s judgment as to the facts and
circumstances surrounding the loan. We record charge-offs as a reduction to the allowance for loan losses or
reserve for guaranty losses when losses are confirmed through the receipt of assets, such as cash in a
preforeclosure sale or the underlying collateral in full satisfaction of the mortgage loan upon foreclosure.
Single-family Loans
We aggregate single-family loans (except for those that are deemed to be individually impaired), based on
similar risk characteristics for purposes of estimating incurred credit losses and establish a collective single-
family loss reserve using an econometric model that derives an overall loss reserve estimate given multiple
factors which include but are not limited to: origination year; loan product type; mark-to-market loan-to-value
(“LTV”) ratio, and delinquency status. Once loans are aggregated, there typically is not a single, distinct event
that would result in an individual loan or pool of loans being impaired. Accordingly, to determine an estimate
of incurred credit losses, we base our allowance and reserve methodology on historical events and trends, such
as loss severity, default rates, and recoveries from mortgage insurance contracts that are contractually attached
to a loan or other credit enhancements that were entered into contemporaneous with and in contemplation of a
guaranty or loan purchase transaction. Our allowance calculation also incorporates a loss confirmation period
(the anticipated time lag between a credit loss event and the confirmation of the credit loss resulting from that
event) to ensure our allowance estimate captures credit losses that have been incurred as of the balance sheet
date but have not been confirmed. In addition, management performs a review of the observable data used in
its estimate to ensure it is representative of prevailing economic conditions and other events existing as of the
balance sheet date. We implemented the econometric model in the fourth quarter of 2009. The previous
model, used during 2007, 2008 and the first nine months of 2009, was a loss curve-based model that was
driven primarily by original LTV ratio, loan product type, the age of the mortgage loan and the performance
to date of the vintage to which the loan belonged. Our previous model required that we consider certain
factors when determining whether adjustments to the observable data used in our allowance methodology are
necessary, such as levels of and trends in delinquencies; levels of and trends in charge-offs and recoveries; and
terms of loans. Our new model directly incorporates delinquency status and vintage effects in the estimation,
and thus certain of these adjustments are no longer required.
The excess of our recorded investment in a loan, including recorded accrued interest, over the fair value of the
assets received in full satisfaction of the loan is treated as a charge-off loss that is deducted from the
allowance for loan losses or reserve for guaranty losses. Any excess of the fair value of the assets received in
full satisfaction over our recorded investment in a loan at charge-off is applied first to recover any forgone, yet
contractually past due interest, and then to “Foreclosed property expense” in our consolidated statements of
F-21
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)