Fannie Mae 2011 Annual Report Download - page 263

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
When an acquired credit-impaired loan is returned to accrual status, the portion of the expected cash flows
(which incorporates changes in the timing and amount that are associated with credit and prepayment events) that
exceeds the recorded investment in the loan is accreted into interest income over the expected remaining life of
the loan. We prospectively recognize increases in future cash flows expected to be collected as interest income
over the remaining expected life of the loan through a yield adjustment. If we subsequently refinance or
restructure an acquired credit-impaired loan, other than through a TDR, the loan is not accounted for as a new
loan but continues to be accounted for under the accounting guidance for acquired credit-impaired loans.
Allowance for Loan Losses and Reserve for Guaranty Losses
The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to
our recorded investment in both single-family and multifamily HFI loans. This population includes both HFI
loans held by Fannie Mae and by consolidated Fannie Mae MBS trusts. When calculating our loan loss
allowance, we consider only our net recorded investment in the loan at the balance sheet date, which includes the
loan’s unpaid principal balance and accrued interest recognized while the loan was on accrual status and any
applicable cost basis adjustments.
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 and our agreements to purchase credit-impaired loans from lenders
under the terms of our long-term standby commitments. 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 any additional interest payments
due to the trust from the current balance sheet date until the point of loan acquisition or foreclosure.
We recognize incurred losses by recording a charge to the “Provision for loan losses” or the “Provision for
guaranty losses” in our consolidated statements of operations and comprehensive loss.
Single-Family Loans
We recognize credit losses related to groups of similar single-family HFI loans that are not individually impaired
when (1) available information as of each balance sheet date indicates that it is probable a loss has occurred and
(2) the amount of the loss can be reasonably estimated. We aggregate such loans, based on similar risk
characteristics, for purposes of estimating incurred credit losses and establish a collective single-family loss
reserve using an econometric model that derives an overall loss reserve estimate. The estimate takes into account
multiple factors which include but are not limited to origination year, loan product type, mark-to-market
loan-to-value (“LTV”) ratio; and delinquency status. Once loans are aggregated, there typically is not a single,
distinct event that would result in an individual loan or pool of loans being impaired. Accordingly, to determine
an estimate of incurred credit losses, we base our allowance and reserve methodology on historical events and
trends, such as loss severity (in event of default), default rates, and recoveries from mortgage insurance contracts
and other credit enhancements that provide loan level loss coverage and are either contractually attached to a
loan or that were entered into contemporaneously with and in contemplation of a guaranty or loan purchase
transaction. In determining our collective reserve, we use recent actual severity experienced in our real-estate
owned (“REO”) and loss mitigation operations, including the sales of our own foreclosed properties, to estimate
the loss given default. Our allowance calculation also incorporates a loss confirmation period (the anticipated
time lag between a credit loss event and the confirmation of the credit loss resulting from that event) to ensure
our allowance estimate captures credit losses that have been incurred as of the balance sheet date but have not
been confirmed. In addition, management performs a review of the observable data used in its estimate to ensure
it is representative of prevailing economic conditions and other events existing as of the balance sheet date.
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