Fannie Mae 2010 Annual Report Download - page 282

through probable foreclosure of the underlying collateral, we measure impairment based on the fair value of
the collateral, reduced by estimated disposal costs on a discounted basis and adjusted for estimated proceeds
from mortgage, flood, or hazard insurance or similar sources.
We use internal models to project cash flows used to assess impairment of individually impaired loans,
including acquired credit-impaired loans. We generally update the market and loan characteristic inputs we use
in these models monthly, using month-end data. Market inputs include information such as interest rates,
volatility and spreads, while loan characteristic inputs include information such as mark-to-market LTV ratios
and delinquency status. The loan characteristic inputs are key factors that affect the predicted rate of default
for loans evaluated for impairment through our internal cash flow models. We evaluate the reasonableness of
our models by comparing the results with actual performance and our assessment of current market conditions.
In addition, we review our models at least annually for reasonableness and predictive ability in accordance
with our corporate model review policy. Accordingly, we believe the projected cash flows generated by our
models that we use to assess impairment appropriately reflect the expected future performance of the loans.
Multifamily Loans
We identify multifamily loans for evaluation for impairment through a credit risk classification process and
individually assign them a risk rating. Based on this evaluation, we determine for loans that are not in
homogeneous pools whether or not a loan is individually impaired. If we deem a multifamily loan to be
individually impaired, we generally measure impairment on that loan based on the fair value of the underlying
collateral less estimated costs to sell the property on a discounted basis. If we determine that an individual
loan that was specifically evaluated for impairment is not individually impaired, we include the loan as part of
a pool of loans with similar characteristics that are evaluated collectively for incurred losses.
We stratify multifamily loans into different risk rating categories based on the credit risk inherent in each
individual loan. We categorize credit risk based on relevant observable data about a borrower’s ability to pay,
including reviews of current borrower financial information, operating statements on the underlying collateral,
historical payment experience, collateral values when appropriate, and other related credit documentation.
Multifamily loans that are categorized into pools based on their relative credit risk ratings are assigned certain
default and severity factors representative of the credit risk inherent in each risk category. We apply these
factors against our recorded investment in the loans, including recorded accrued interest associated with such
loans, to determine an appropriate allowance. As part of our allowance process for multifamily loans, we also
consider other factors based on observable data such as historical charge-off experience, loan size and trends
in delinquency. In addition, we consider any loss sharing arrangements with our lenders.
Advances to Lenders
Advances to lenders represent payments of cash in exchange for the receipt of mortgage loans from lenders in
a transfer that is accounted for as a secured lending arrangement. These transfers primarily occur when we
provide early funding to lenders for loans that they will subsequently either sell to us or securitize into a
Fannie Mae MBS that they will deliver to us. We individually negotiate early lender funding advances with
our lender customers. Early lender funding advances have terms up to 60 days and earn a short-term market
rate of interest. In other cases, the transfers are of loans that the lender has the unilateral ability to repurchase
from us.
We report cash outflows from advances to lenders as an investing activity in our consolidated statements of
cash flows. Settlements of the advances to lenders, other than through lender repurchases of loans, are not
collected in cash, but rather in the receipt of either loans or Fannie Mae MBS. Accordingly, this activity is
reflected as a non-cash transfer in our consolidated statements of cash flows. Currently, in our consolidated
statements of cash flows, we include advances settled through receipt of securities in the line item entitled
F-24
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)