Fannie Mae 2010 Annual Report Download - page 278

Mortgage Loans
Loans Held for Investment
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”). When we consolidate a trust, we
recognize the loans underlying the trust in our consolidated balance sheet. The trusts do not have the ability to
sell mortgage loans and the use of such loans is limited exclusively to the settlement of obligations of the
trusts. Therefore, mortgages acquired when we have the intent to securitize via trusts that are consolidated will
generally be classified as HFI in our consolidated balance sheets both prior to and subsequent to their
securitization. This is consistent with our intent and ability to hold the loans for the foreseeable future or until
maturity.
We report HFI loans at their outstanding unpaid principal balance adjusted for any deferred and unamortized
cost basis adjustments, including purchase premiums, discounts and other cost basis adjustments. We
recognize interest income on HFI loans on an accrual basis using the interest method, unless we determine
that the ultimate collection of contractual principal or interest payments in full is not reasonably assured.
Historically, mortgage loans held both by us and by consolidated trusts were reported collectively as
“Mortgage loans held for investment.” We now report loans held by consolidated trusts as “Mortgage loans
held for investment of consolidated trusts” and those held directly by us as “Mortgage loans held for
investment of Fannie Mae” in our consolidated balance sheets.
Loans Held for Sale
When we acquire mortgage loans that we intend to sell or securitize via trusts that are not consolidated, we
classify the loans as held for sale (“HFS”). Prior to the adoption of the new accounting standards, we initially
classified loans as HFS if they were product types that we actively securitized from our portfolio because we
had the intent, at acquisition, to securitize the loans (either during the month in which the acquisition occurred
or during the following month) via a trust that we did not consolidate and for which we sold all or a portion
of the resulting securities. At month-end, we reclassified the loans acquired during the month from HFS to
HFI, if we had not securitized or were not in the process of securitizing them because we had the intent to
hold the loans for the foreseeable future or until maturity.
We report HFS loans at the lower of cost or fair value. 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 that the ultimate collection of contractual principal or interest payments in
full is not reasonably assured. 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 lower of cost or fair value 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 lower of cost or fair value on the date
of reclassification. We recognize any lower of cost or fair value adjustment recognized upon reclassification as
a basis adjustment to the HFI loan.
Nonaccrual Loans
We discontinue accruing interest on single-family and multifamily loans when we believe collectibility of
principal or interest is not reasonably assured, unless the loan is well secured and in the process of collection
based upon an individual loan assessment. When a loan is placed on nonaccrual status, interest previously
F-20
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)