Fannie Mae 2011 Annual Report Download - page 93

Other-Than-Temporary Impairment of Investment Securities
We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-
than-temporary impairment. A debt security is evaluated for other-than-temporary impairment if its fair value is
less than its amortized cost basis. We recognize other-than-temporary impairment in earnings if one of the
following conditions exists: (1) our intent is to sell the security; (2) it is more likely than not that we will be
required to sell the security before the impairment is recovered; or (3) we do not expect to recover our amortized
cost basis. If, by contrast, we do not intend to sell the security and will not be required to sell prior to recovery of
the amortized cost basis, we recognize only the credit component of other-than-temporary impairment in
earnings. We record the noncredit component in other comprehensive income. The credit component is the
difference between the security’s amortized cost basis and the present value of its expected future cash flows,
while the noncredit component is the remaining difference between the security’s fair value and the present value
of expected future cash flows. If, subsequent to recognizing other-than-temporary impairment, our estimates of
future cash flows improve, we recognize the change in estimate prospectively over the remaining life of
securities as a component of interest income.
Our evaluation requires significant management judgment and consideration of various factors to determine if we
will receive the amortized cost basis of our investment securities. We evaluate a debt security for other-than-
temporary impairment using an econometric model that estimates the present value of cash flows given multiple
factors. These factors include: the severity and duration of the impairment; recent events specific to the issuer
and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings and the
failure of the issuer to make scheduled interest or principal payments. We rely on expected future cash flow
projections to determine if we will recover the amortized cost basis of our available-for-sale securities.
We provide more detailed information on our accounting for other-than-temporary impairment in “Note 1,
Summary of Significant Accounting Policies” and “Note 5, Investments in Securities.” Also refer to
“Consolidated Balance Sheet Analysis—Investments in Mortgage-Related Securities—Investments in Private-
Label Mortgage-Related Securities” for a discussion of other-than-temporary impairment recognized on our
investments in Alt-A and subprime private-label securities. See “Risk Factors” for a discussion of the risks
associated with possible future write-downs of our investment securities.
Total Loss Reserves
Our total loss reserves consist of the following components:
• Allowance for loan losses;
• Allowance for accrued interest receivable;
• Reserve for guaranty losses; and
• Allowance for preforeclosure property tax and insurance receivable.
These components can be further divided into single-family portions, which collectively make up our single-
family loss reserves, and multifamily portions, which collectively make up our multifamily loss reserves.
We maintain an allowance for loan losses and an allowance for accrued interest receivable for loans classified as
held for investment, including both loans we hold in our portfolio and loans held in consolidated Fannie 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 incurred related to
loans in our guaranty book of business, including concessions granted to borrowers upon modifications of their
loans, as of the balance sheet date.
-88-