Fannie Mae 2011 Annual Report Download - page 108

credit-impaired loans. Because of our adoption of consolidation accounting guidance in the beginning of 2010,
we no longer record fair value losses upon our acquisition of credit-impaired loans from most of our MBS trusts,
as the substantial majority of these trusts are now consolidated.
Individual Impairment and Troubled Debt Restructurings
Because of the substantial volume of loan modifications we completed and the number of loans that entered a
trial modification period since 2009, approximately two-thirds of our total loss reserves are attributable to
individual impairment rather than the collective reserve for loan losses. Individual impairment for a TDR is
based on the restructured loan’s expected cash flows over the life of the loan, taking into account the effect of
any concessions granted to the borrower, discounted at the loan’s original effective interest rate. The individual
impairment model includes forward-looking assumptions using multiple scenarios of the future economic
environment, including interest rates and home prices. If we expect to recover our recorded investment in an
individually impaired loan through probable foreclosure of the underlying collateral, we measure the impairment
based on the fair value of the collateral, less selling costs. Based on the structure of our modifications, in
particular the size of the concessions granted, and the performance of modified loans combined with the forward-
looking assumptions used in our model, the allowance calculated for an individually impaired loan has generally
been greater than the allowance that would be calculated under the collective reserve.
In April 2011, FASB issued new accounting guidance regarding TDRs effective for the third quarter of 2011 that
applied retrospectively to January 1, 2011. In the third quarter of 2011, we recognized an incremental increase of
$514 million in our provision for credit losses due to loans that were reassessed as TDRs as a result of adopting
the new TDR accounting guidance. For additional information on the new TDR accounting guidance, see
“Note 1, Summary of Significant Accounting Policies.”
Loss Reserves Concentration Analysis
Certain loan categories continued to contribute disproportionately to the increase in our nonperforming loans and
credit losses as displayed in Table 16. These categories include: loans on properties in California, Florida,
Arizona and Nevada and certain Midwest states; loans originated in 2006 and 2007; and loans related to higher-
risk product types, such as Alt-A loans. Although we have identified other vintages as unprofitable, the largest
and most disproportionate contributors to credit losses have been the 2006 and 2007 vintages. Accordingly, our
concentration statistics throughout this MD&A focus on only these two vintages. Our combined single-family
loss reserves are also disproportionately higher for these states, Alt-A loans and our 2006 and 2007 vintages.
Table 13 displays our loss reserves concentration analysis.
Table 13: Loss Reserves Concentration Analysis(1)
Combined Single-
Family Loss Reserves
As of December 31,
2011 2010
Midwest states(2) ............................................................... 16% 14%
California, Florida, Arizona, Nevada ............................................... 49 52
Alt-A ........................................................................ 29 30
2006 and 2007 ................................................................ 62 67
(1) Loans that meet more than one category are included in each applicable category.
(2) Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, KS, MO and WI.
Nonperforming Loans
Our balance of nonperforming single-family loans remained high as of December 31, 2011 due to both high
levels of delinquencies and an increase in TDRs. When a TDR occurs, the loan may return to a current status, but
it will continue to be classified as a nonperforming loan as the loan is not performing in accordance with its
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