Fannie Mae 2009 Annual Report Download - page 284

In addition, we recognize a liability for estimable and probable losses for the credit risk we assume on loans
underlying Fannie Mae MBS based on management’s estimate of probable losses incurred on those loans as of
each balance sheet date. We record this contingent liability in our consolidated balance sheets as “Reserve for
guaranty losses.”
Subsequent to initial recognition, we account for the guaranty asset at amortized cost. As we collect monthly
guaranty fees, we reduce guaranty assets to reflect cash payments received and recognize imputed interest
income on guaranty assets as a component of “Guaranty fee income” under the prospective interest method.
We reduce the corresponding guaranty obligation, including any deferred profit, in proportion to the reduction
in guaranty assets and recognize this reduction in our consolidated statements of operations as an additional
component of “Guaranty fee income.” We assess guaranty assets for other-than-temporary impairment based
on changes in our estimate of the cash flows to be received. When we determine a guaranty asset is
other-than-temporarily impaired, we write down the cost basis of the guaranty asset to its fair value and
include the amount written-down in “Guaranty fee income” in our consolidated statements of operations. Any
other-than-temporary impairment recorded on guaranty assets results in a proportionate reduction in the
corresponding guaranty obligations, including any deferred profit recorded prior to 2008.
We record buy-ups in our consolidated balance sheets at fair value in “Other assets.” We account for buy-ups
issued prior to 2007 in the same manner as AFS securities with changes in fair value recorded in AOCI, net of
tax. We assess these buy-ups for other-than-temporary impairment. Buy-ups issued beginning in 2007 are
accounted for in the same manner as trading securities, with unrealized gains and losses included in “Guaranty
fee income” in our consolidated statements of operations. When we determine a buy-up is
other-than-temporarily impaired, we write down the cost basis of the buy-up to its fair value and include the
amount of the write-down in “Guaranty fee income” in our consolidated statements of operations.
Upfront cash receipts for buy-downs and risk-based price adjustments on and after 2003 and prior to 2008 are
a component of the compensation received for issuing the guaranty and are recorded upon issuing a guaranty
as an additional component of “Guaranty obligations,” for contracts with deferred profit, or a reduction of the
loss recorded as a component of “Losses on certain guaranty contracts,” for contracts where the compensation
received is less than the guaranty obligation. Beginning in 2008, we consider the initial fair value of the
guaranty obligation to be equal to the fair value of the total compensation received for providing the guaranty.
Therefore, we do not recognize losses or record deferred profit at the inception of a lender swap transaction
and account for all upfront cash receipts for buy-downs and risk-based price adjustments for as a component
of “Guaranty obligations.”
We base the fair value of the guaranty asset at inception on the present value of expected cash flows using
management’s best estimates of certain key assumptions, which include prepayment speeds, forward yield
curves and discount rates commensurate with the risks involved. We project these cash flows using proprietary
prepayment, interest rate and credit risk models. Because guaranty assets are like an interest-only income
stream, we discount the projected cash flows from our guaranty assets using interest spreads from a
representative sample of interest-only trust securities. We adjust these discounted cash flows for the less liquid
nature of the guaranty asset as compared to the interest-only trust securities.
These initial recognition and measurement provisions apply to our guaranties issued or modified beginning in
2003. For lender swap transactions entered into prior to 2003, we recognized guaranty fees in our consolidated
statements of operations as “Guaranty fee income” on an accrual basis over the term of the unconsolidated
Fannie Mae MBS. We recognized a contingent liability based on management’s estimate of probable losses
incurred on those loans as of each balance sheet date, and we deferred upfront cash payments received in the
form of risk-based pricing adjustments or buy-downs as a component of “Other liabilities” in our consolidated
balance sheets and amortized them into “Guaranty fee income” in our consolidated statements of operations
over the life of the guaranty using the interest method.
F-26
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)