Fannie Mae 2010 Annual Report Download - page 85

Mae MBS trusts. We maintain a reserve for guaranty losses for loans held in unconsolidated Fannie Mae MBS
trusts we guarantee and loans we have guaranteed under long-term standby commitments and other credit
enhancements we have provided. We also maintain an allowance for preforeclosure property tax and insurance
receivable on delinquent loans that is included in “Other assets” in our consolidated balance sheets. These
amounts, which we collectively refer to as our total loss reserves, represent probable losses related to loans in
our guaranty book of business as of the balance sheet date.
The allowance for loan losses, allowance for accrued interest receivable and allowance for preforeclosure
property tax and insurance receivable are valuation allowances that reflect an estimate of incurred credit losses
related to our recorded investment in loans held for investment. 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. 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 an estimate of any additional interest payments due to the trust from
the current balance sheet date until the point of loan acquisition or foreclosure. Our loss reserves consist of a
specific loss reserve for individually impaired loans and a collective loss reserve for all other loans.
We have an established process, using analytical tools, benchmarks and management judgment, to determine
our loss reserves. Although our loss reserve process benefits from extensive historical loan performance data,
this process is subject to risks and uncertainties, including a reliance on historical loss information that may
not be representative of current conditions. We continually monitor delinquency and default trends and make
changes in our historically developed assumptions and estimates as necessary to better reflect present
conditions, including current trends in borrower risk and/or general economic trends, changes in risk
management practices, and changes in public policy and the regulatory environment. We also consider the
recoveries that we expect to receive on mortgage insurance and other loan-specific credit enhancements
entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction, as such
recoveries reduce the severity of the loss associated with defaulted loans. Due to the stress in the housing and
credit markets, and the speed and extent of deterioration in these markets, our process for determining our loss
reserves has become significantly more complex and involves a greater degree of management judgment than
prior to this period of housing and mortgage market stress.
Single-Family Loss Reserves
We establish a specific single-family loss reserve for individually impaired loans, which includes loans we
restructure in troubled debt restructurings, certain nonperforming loans in MBS trusts and acquired credit-
impaired loans that have been further impaired subsequent to acquisition. The single-family loss reserve for
individually impaired loans has grown as a proportion of the total single-family loss reserves in recent periods
due to increases in the population of restructured loans. We typically measure impairment based on the
difference between our recorded investment in the loan and the present value of the estimated cash flows we
expect to receive, which we calculate using the effective interest rate of the original loan or the effective
interest rate at acquisition for an acquired credit-impaired loan. However, when foreclosure is probable on an
individually impaired loan, we measure impairment based on the difference between our recorded investment
in the loan and the fair value of the underlying property, adjusted for the estimated discounted costs to sell the
property and estimated insurance or other proceeds we expect to receive. We then allocate a portion of the
reserve to interest accrued on the loans as of the balance sheet date.
We establish a collective single-family loss reserve for all other single-family loans in our single-family guaranty
book of business using a model that estimates the probability of default of loans to derive an overall loss reserve
estimate given multiple factors such as: origination year, mark-to-market LTV ratio, delinquency status and loan
product type. We believe that the loss severity estimates we use in determining our loss reserves reflect current
available information on actual events and conditions as of each balance sheet date, including current home
prices. Our loss severity estimates do not incorporate assumptions about future changes in home prices. We do,
however, use a look back period to develop our loss severity estimates for all loan categories. We then allocate a
portion of the reserve to interest accrued on the loans as of the balance sheet date.
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