Fannie Mae 2012 Annual Report Download - page 246

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-12
modified loan increases the charge we record related to the concession. Therefore, while our expectations of credit
loss decreased due to better performance of our modified loans, this decrease was more than offset by an increase in
the present value of the concession granted to the borrower by the modification. The change resulted in an
approximately $5.0 billion increase to our allowance for loan losses and provision for credit losses.
In the three months ended June 30, 2012, we updated our assumptions used to project cash flow estimates on our Alt-A and
subprime private-label securities to incorporate recent observable market trends, which included extending the time it takes to
liquidate loans underlying these securities and increasing severity rates for loans where the servicer stopped advancing
payments. These updates resulted in lower net present value of cash flow projections on our Alt-A and subprime private-label
securities and increased our other-than-temporary impairment expense by approximately $500 million.
Principles of Consolidation
Our consolidated financial statements include our accounts as well as the accounts of the other entities in which we have a
controlling financial interest. All intercompany balances and transactions have been eliminated. The typical condition for a
controlling financial interest is ownership of a majority of the voting interests of an entity. A controlling financial interest
may also exist in entities through arrangements that do not involve voting interests, such as a variable interest entity (“VIE”).
VIE Assessment
In 2009, the Financial Accounting Standards Board (“FASB”) concurrently revised the accounting guidance related to the
consolidation of VIEs (the “consolidation accounting guidance”) and the guidance related to transfers of financial assets, and
we adopted the revised guidance for these topics prospectively effective January 1, 2010 (the “transition date”).
We have interests in various entities that are considered VIEs. A VIE is an entity (1) that has total equity at risk that is not
sufficient to finance its activities without additional subordinated financial support from other entities, (2) where the group of
equity holders does not have the power to direct the activities of the entity that most significantly impact the entity’s
economic performance, or the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected
residual returns, or both, or (3) where the voting rights of some investors are not proportional to their obligations to absorb
the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all
of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
We determine if an entity is a VIE by performing a qualitative analysis, which requires certain subjective decisions including,
but not limited to, the design of the entity, the variability that the entity was designed to create and pass along to its interest
holders, the rights of the parties, and the purpose of the arrangement. If we cannot conclude after a qualitative analysis
whether an entity is a VIE, we perform a quantitative analysis.
The primary types of VIE entities with which we are involved are securitization trusts guaranteed by us via lender swap and
portfolio securitization transactions, limited partnership investments in low-income housing tax credit (“LIHTC”) and other
housing partnerships, as well as mortgage and asset-backed trusts that were not created by us.
Primary Beneficiary Determination
If an entity is a VIE, we consider whether our variable interest in that entity causes us to be the primary beneficiary. An
enterprise is deemed to be the primary beneficiary of a VIE when the enterprise has both (1) the power to direct the activities
of the VIE that most significantly impact the entity’s economic performance, and (2) exposure to benefits and/or losses that
could potentially be significant to the entity. The primary beneficiary of the VIE is required to consolidate and account for the
assets, liabilities, and noncontrolling interests of the VIE in its consolidated financial statements. The assessment of the party
that has the power to direct the activities of the VIE may require significant management judgment when (1) more than one
party has power or (2) more than one party is involved in the design of the VIE but no party has the power to direct the
ongoing activities that could be significant.
We continually assess whether we are the primary beneficiary of the VIEs with which we are involved and therefore may
consolidate or deconsolidate a VIE through the duration of our involvement. Examples of certain events that may change
whether or not we consolidate the VIE include a change in the design of the entity or a change in our ownership in the entity
such that we no longer hold substantially all of the certificates issued by a multi-class resecuritization trust.
Measurement of Consolidated Assets and Liabilities
As of the transition date for the revised consolidation accounting guidance, we initially measured the assets and liabilities of
the consolidated securitization trusts at their unpaid principal balances and established a corresponding valuation allowance