Fannie Mae 2010 Annual Report Download - page 285

We account for our guaranty related to a long term standby commitment in the same manner as our guaranty
resulting from an unconsolidated lender swap transaction as described above.
In addition to our guaranty assets and obligations, we recognize a liability for estimable and probable losses
for the credit risk we assume on loans underlying Fannie Mae MBS and long term standby commitments
based on management’s estimate of probable losses incurred on those loans as of each balance sheet date. We
record this contingent liability in our consolidated balance sheets as “Reserve for guaranty losses.”
Fannie Mae MBS included in “Investments in securities”
When we own unconsolidated Fannie Mae MBS, we do not derecognize any components of the guaranty
assets, guaranty obligations, reserve for guaranty losses, or any other outstanding recorded amounts associated
with the guaranty transaction because our contractual obligation to the MBS trust remains in force until the
trust is liquidated. We value Fannie Mae MBS based on their legal terms, which includes the Fannie Mae
guaranty to the MBS trust, and continue to reflect the unamortized obligation to stand ready to perform over
the term of our guaranty and any incurred credit losses in our “Other liabilities” and “Reserve for guaranty
losses,” respectively. We disclose the aggregate amount of Fannie Mae MBS held as “Investments in
securities” in our consolidated balance sheets as well as the amount of our “Reserve for guaranty losses” and
“Other liabilities” that relates to Fannie Mae MBS held as “Investments in securities.” Upon subsequent sale
of a Fannie Mae MBS, we continue to account for any outstanding recorded amounts associated with the
guaranty transaction on the same basis of accounting as prior to the sale of Fannie Mae MBS, as no new
assets were retained and no new liabilities have been assumed upon the subsequent sale.
Credit Enhancements
Credit enhancements that we recognize separately as “Other assets” in our consolidated balance sheets are
amortized in our consolidated statements of operations as “Other expenses.” We amortize these assets at the
greater of amounts calculated (1) commensurate with the observed decline in the unpaid principal balance of
covered mortgage loans or (2) on a straight-line basis over a credit enhancement’s contract term. We record
recurring insurance premiums at the amount paid and amortize them over their contractual life.
Amortization of Cost Basis Adjustments
We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a
yield adjustment using the interest method over the contractual or estimated life of the loan or security. We
amortize these cost basis adjustments into interest income for mortgage securities and for loans we classify as
HFI. We do not amortize cost basis adjustments for loans that we classify as HFS, but include them in the
calculation of the gain or loss on the sale of those loans.
F-27
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)