Fannie Mae 2010 Annual Report Download - page 280

contractually required payments receivable (ignoring insignificant delays in contractual payments). We record
each acquired loan that does not meet these criteria at its acquisition cost.
For unconsolidated trusts where we are considered the transferor, we recognize the loan in our consolidated
balance sheets at fair value and record a corresponding liability to the unconsolidated trust when the
contingency on our option to purchase the loan from the trust has been met and we regain effective control
over the transferred loan.
We base our estimate of the fair value of delinquent loans purchased from unconsolidated trusts or long-term
standby commitments upon an assessment of what a market participant would pay for the loan at the date of
acquisition. We utilize indicative market prices from large, experienced dealers to estimate the initial fair value
of delinquent loans purchased from unconsolidated trusts or long-term standby commitments. We consider
acquired credit-impaired loans to be individually impaired at acquisition, and no valuation allowance is
established or carried over. We record the excess of the loan’s acquisition cost over its fair value as a charge-
off against our “Reserve for guaranty losses” at acquisition. We recognize any subsequent decreases in
estimated future cash flows to be collected subsequent to acquisition as impairment losses through our
“Allowance for loan losses.”
We place credit-impaired loans that we acquire from unconsolidated trusts or long-term standby commitments
on nonaccrual status at acquisition in accordance with our nonaccrual policy. If we subsequently determine
that the collectibility of principal and interest is reasonably assured, we return the loan to accrual status. We
determine the initial accrual status of acquired loans that are not credit impaired in accordance with our
nonaccrual policy. Accordingly, we place loans purchased from trusts under other contingent call options on
accrual status at acquisition if they are current or if there has been only an insignificant delay in payment and
there are no other facts and circumstances that would lead us to conclude that the collection of principal and
interest is not reasonably assured.
When an acquired credit-impaired loan is returned to accrual status, the portion of the expected cash flows
incorporating changes in the timing and amount that are associated with credit and prepayment events that
exceeds the recorded investment in the loan is accreted into interest income over the expected remaining life
of the loan. We prospectively recognize increases in future cash flows expected to be collected as interest
income over the remaining expected life of the loan through a yield adjustment. If we subsequently refinance
or restructure an acquired credit-impaired loan, other than through a TDR, the loan is not accounted for as a
new loan but continues to be accounted for under the accounting standard for acquired credit-impaired loans.
Allowance for Loan Losses and Reserve for Guaranty Losses
The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related
to our recorded investment in both single-family and multifamily HFI loans. This population includes both
HFI loans held by Fannie Mae and by consolidated Fannie Mae MBS trusts. The reserve for guaranty losses is
a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related
to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by
the Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related
Fannie Mae MBS and our agreements to purchase credit-impaired loans from lenders under the terms of our
long-term standby commitments. 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 until the point of loan acquisition or foreclosure. We recognize incurred
losses by recording a charge to the “Provision for loan losses” or the “Provision for guaranty losses” in our
consolidated statements of operations.
F-22
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)