Fannie Mae 2011 Annual Report Download - page 262

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
months ended September 30, 2011. This amount reflects the net increase in our allowance for loan losses due to
identifying these restructurings as TDRs and measuring their impairment on an individual basis offset by the
elimination of our allowance for loan loss measured on a collective basis related to these loans.
Loans Purchased or Eligible to be Purchased from Trusts
For our single-class securitization trusts that include a Fannie Mae guaranty, we have the option to purchase a
loan from the trust after four or more consecutive monthly payments due under the loan are delinquent in whole
or in part. With respect to single-family mortgage loans in trusts with issue dates on or after January 1, 2009, we
also have the option to purchase a loan from the trust after the loan has been delinquent for at least one monthly
payment, if the delinquency has not been fully cured on or before the next payment date (that is, 30 days
delinquent), and it is determined that it is appropriate to execute loss mitigation activity that is not permissible
while the loan is held in a trust. Fannie Mae, as guarantor or as issuer, may also purchase mortgage loans when
other pre-defined contingencies have been met, such as when there is a material breach of a seller’s
representation and warranty. Under long-term standby commitments, we purchase credit-impaired loans from
lenders when the loans subject to these commitments meet certain delinquency criteria. This arrangement also
allows the lender to deliver qualified loans in exchange for our guaranteed Fannie Mae MBS.
When we purchase mortgage loans from consolidated trusts, we reclassify the loans from “Mortgage loans held
for investment of consolidated trusts” to “Mortgage loans held for investment by Fannie Mae” and, upon
settlement, we record an extinguishment of the corresponding portion of the debt of the consolidated trusts.
For unconsolidated trusts and long-term standby commitments, loans that are credit impaired at the time of
acquisition are recorded at the lower of their acquisition cost (unpaid principal balance plus accrued interest) or
fair value. A loan is considered credit impaired at acquisition when there is evidence of credit deterioration
subsequent to the loan’s origination and it is probable, at acquisition, that we will be unable to collect all
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 decreases in estimated future cash
flows to be collected subsequent to acquisition as provisions for loan 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.
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