Fannie Mae 2009 Annual Report Download - page 83

(a)
Initial
Acquisition
of Loans
from Trust
(b)
Subsequent
Foreclosure
(c)
Sale of
Foreclosed
Property
Cumulative
Earnings
Impact
Accounting Impact of Assumptions
Consolidated Balance Sheet:
Assets:
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70 $(70) $ —
Acquired property, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 80 (80)
Liabilities:
Reserve for guaranty losses-beginning balance . . . . . . . . . . . . . $ — $ — $ —
Plus: Provision for credit losses attributable to acquired
credit-impaired loans fair value losses
(1)
................ 30 — —
Less: Charge-offs related to initial purchase discount on acquired
credit-impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30) — —
Plus: Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —
Reserve for guaranty losses-ending balance . . . . . . . . . . . . . . . . $ — $ — $ —
Consolidated Statement of Operations:
Provision for credit losses attributable to acquired credit-
impaired loans fair value losses . . . . . . . . . . . . . . . . . . . . . . $(30) $ — $ — $(30)
Foreclosed property income (expense) . . . . . . . . . . . . . . . . . . . — 10 5 15
Net pre-tax income (loss) effect . . . . . . . . . . . . . . . . . . . . . . $(30) $ 10 $ 5 $(15)
(1)
The adjustment to the “Provision for credit losses” is presented for illustrative purposes only. We actually determine
our “Reserve for guaranty losses” by aggregating homogeneous loans into pools based on similar underlying risk
characteristics in accordance with the FASB standard on accounting for contingencies. Accordingly, we do not have a
specific reserve or provision attributable to each delinquent loan purchased from an MBS trust prior to its purchase.
As indicated in the example above, we would record the loan at the estimated fair value of $70 and record a
credit-impaired loans fair value loss of $30 as a charge-off to the reserve for guaranty losses when we acquire
the delinquent loan from the MBS trust. We record a provision for credit losses each period to adjust the
reserve for guaranty losses to reflect the probable credit losses incurred on loans remaining in MBS trusts.
Assuming all other things were equal, this reserve for guaranty losses is reduced at period end because the
purchased loan is no longer included in the population for which the reserve is determined. Therefore, if the
charge-off for the credit-impaired loan’s fair value loss is greater than the decrease in the reserve caused by
removing the loan from the population subject to accounting for contingencies, an incremental loss will be
recognized through the provision for credit losses in the period the loan is purchased. We would record the
REO property acquired through foreclosure at the appraised fair value, net of estimated selling costs, of $80.
Although we recorded an initial credit-impaired loan fair value loss of $30, the actual credit-related expense
we experience on this loan would be $15, which represents the difference between the amount we paid for the
loan and the amount we received from the sale of the acquired REO property, net of selling costs.
As described above, if a credit-impaired loan “cures,” which means it returns to accrual status, pays off or is
resolved through a modification, long-term forbearance or a repayment plan, the credit-impaired loan’s fair
value loss would be recovered over the life of the loan as a component of net interest income through an
adjustment of the effective yield or upon full pay off of the loan. Conversely, if a loan remains in an MBS
trust, we would continue to provide for incurred losses in our “Reserve for guaranty losses.”
Our estimate of the fair value of delinquent loans purchased from MBS trusts is based upon an assessment of
what a market participant would pay for the loan at the date of acquisition. Prior to July 2007, we estimated
the initial fair value of these loans using internal prepayment, interest rate and credit risk models that
incorporated market-based inputs of certain key factors, such as default rates, loss severity and prepayment
speeds. Beginning in July 2007, the mortgage markets experienced a number of significant events, including a
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