Fannie Mae 2009 Annual Report Download - page 86

single-family loss reserves as of December 31, 2009 of approximately $800 million relative to what the loss
reserve would have been using the previous model.
We believe that the loss severity estimates used in determining our loss reserves reflect current available
information on actual events and conditions as of each balance sheet date, including current home price and
unemployment trends. Our loss severity estimates do not incorporate assumptions about future changes in
home prices. We do, however, use a one-quarter look back period to develop our loss severity estimates for all
loan categories. When using our previous model, we made adjustments to the period of default history used to
estimate defaults for loans originated in 2006, 2007, and 2008, as well as some product types originated in
2005. Our new model, because it directly includes vintage effects in the estimation, does not require these
adjustments.
Because the previous model was heavily dependent on changing default patterns, it was necessary to make
adjustments to the loss curves to reflect the impacts of foreclosure moratoria and modification programs we
implemented. Our new model directly uses delinquency status; therefore, it is no longer necessary to make
these adjustments.
For the first three quarters of 2009, consistent with the approach we used as of December 31, 2008, we made
adjustments to our model-generated results to capture incremental losses that may not have been fully
reflected in our model related to geographically concentrated areas that are experiencing severe stress as a
result of significant home price declines. These adjustments are no longer necessary because the new model
captures the impact of mark-to-market LTV on default risk and captures the stress in those areas that have
experienced significant home price declines. At the end of December 31, 2008 and the end of the first and
second quarters of 2009, we also made adjustments to our model-generated results to capture incremental
losses attributable to the sharp rise in unemployment during those quarters, which had not been fully captured
in our prior model. We believe our new model incorporates the continuing high rate of unemployment.
Multifamily Loss Reserves
We establish a specific multifamily loss reserve for multifamily loans that we determine are individually
impaired. We use an internal credit-risk rating system and the delinquency status to evaluate the credit quality
of our multifamily loans and to determine which loans we believe are impaired. Our risk-rating system assigns
an internal rating through an assessment of the credit risk profile and repayment prospects of each loan, taking
into consideration available operating statements and expected cash flows from the property, the estimated
value of the property, the historical loan payment experience and current relevant market conditions that may
impact credit quality. Because our multifamily loans are collateral-dependent, if we conclude that a
multifamily loan is impaired, we measure the impairment based on the difference between our recorded
investment in the loan and the fair value of the underlying property less the estimated discounted costs to sell
the property. We generally obtain property appraisals from independent third-parties to determine the fair
value of multifamily loans that we consider to be individually impaired. We also obtain property appraisals
when we foreclose on a multifamily property.
The collective multifamily loss reserve for all other multifamily loans in our multifamily guaranty book of
business is established using an internal model that applies loss factors to loans with similar risk ratings. Our
loss factors are developed based on our historical data of default and loss severity experience. Management
may also apply judgment to adjust the loss factors derived from our models, taking into consideration model
imprecision and specifically known events, such as current credit conditions, that may affect the credit quality
of our multifamily loan portfolio but are not yet reflected in our model-generated loss factors.
During the first and second quarters of 2009, we made several enhancements to the models used in
determining our multifamily loss reserves to reflect the impact of the continuing deterioration in the credit
performance of loans in our multifamily guaranty book of business, as evidenced by a significant increase in
multifamily loan defaults and loss severities. These model enhancements involved weighting recent loan
default and severity experience, which has been higher than in previous periods, to derive the key parameters
used in calculating our expected default rates. During the third and fourth quarters of 2009, we made
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