Fannie Mae 2011 Annual Report Download - page 264

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We record charge-offs as a reduction to the allowance for loan losses or reserve for guaranty losses when losses
are confirmed through the receipt of assets in full satisfaction of a loan, such as the underlying collateral upon
foreclosure or cash upon completion of a short sale. The excess of a loan’s unpaid principal balance, accrued
interest, and any applicable cost basis adjustments (“our total exposure”) over the fair value of the assets received
is treated as a charge-off loss that is deducted from the allowance for loan losses or reserve for guaranty losses.
The amount charged off also considers estimated proceeds from primary mortgage insurance or other credit
enhancements that are either contractually attached to a loan or that were entered into contemporaneously with
and in contemplation of a guaranty or loan purchase transaction as a recovery of our total exposure, up to the
amount of loss recognized as a charge-off. We record additional proceeds from primary mortgage insurance and
credit enhancements in excess of our total exposure as a recovery of any forgone contractually past due
interest, and then as an offset to the expenses recorded in “Foreclosed property expense” in our consolidated
statements of operations and comprehensive loss when received.
Individually Impaired Single-Family Loans
Individually impaired single-family loans currently include those restructured in a TDR and acquired credit-
impaired loans. We consider a loan to be impaired when, based on current information, it is probable that we will
not receive all amounts due, including interest, in accordance with the contractual terms of the loan agreement.
When making our assessment as to whether a loan is impaired, we also take into account more than insignificant
delays in payment and shortfalls in amounts received. Determination of whether a delay in payment or shortfall
in amount is more than insignificant requires management’s judgment as to the facts and circumstances
surrounding the loan.
Our measurement of impairment on an individually impaired loan follows the method that is most consistent with
our expectations of recovery of our recorded investment in the loan. When a loan has been restructured, we
measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate. If we
expect to recover our recorded investment in an individually impaired loan through probable foreclosure of the
underlying collateral, we measure impairment based on the fair value of the collateral, reduced by estimated
disposal costs on a discounted basis and adjusted for estimated proceeds from mortgage, flood, or hazard
insurance or similar sources. For individually impaired loans that we believe are probable of foreclosure, we take
into consideration the sales prices of foreclosed properties in determining the value of the underlying real estate
collateral.
We use internal models to project cash flows used to assess impairment of individually impaired loans, and
generally update the market and loan characteristic inputs we use in these models monthly, using month-end
data. Market inputs include information such as interest rates, volatility and spreads, while loan characteristic
inputs include information such as mark-to-market LTV ratios and delinquency status. The loan characteristic
inputs are key factors that affect the predicted rate of default for loans evaluated for impairment through our
internal cash flow models. We evaluate the reasonableness of our models by comparing the results with actual
performance and our assessment of current market conditions. In addition, we review our models at least
annually for reasonableness and predictive ability in accordance with our corporate model review policy.
Accordingly, we believe the projected cash flows generated by our models that we use to assess impairment
appropriately reflect the expected future performance of the loans.
Multifamily Loans
We identify multifamily loans for evaluation for impairment through a credit risk assessment process. Based on
this evaluation, we determine for loans that are not in homogeneous pools whether or not a loan is individually
impaired. We consider a loan to be individually impaired when, based on current information gathered in our risk
assessment process, it is probable that we will not receive all amounts due, including interest, in accordance with
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