Fannie Mae 2012 Annual Report Download - page 251

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-17
consecutive quarters of the expected or actual cash flows. We calculate the new effective yield by using the new cost basis
and the significantly increased actual or expected cash flows.
Mortgage Loans
Loans Held for Investment
When we acquire mortgage loans that we have the ability and the intent to hold for the foreseeable future or until maturity,
we classify the loans as held for investment (“HFI”). When we consolidate a trust, we recognize the loans underlying the trust
in our consolidated balance sheets. The trusts do not have the ability to sell mortgage loans and the use of such loans is
limited exclusively to the settlement of obligations of the trusts. Therefore, mortgages acquired when we have the intent to
securitize via trusts that are consolidated will generally be classified as HFI in our consolidated balance sheets both prior to
and subsequent to their securitization.
We report HFI loans at their outstanding unpaid principal balance adjusted for any deferred and unamortized cost basis
adjustments, including purchase premiums, discounts and other cost basis adjustments. We recognize interest income on HFI
loans on an accrual basis using the interest method, including the amortization of any deferred cost basis adjustments, unless
we determine that the ultimate collection of contractual principal or interest payments in full is not reasonably assured.
Loans Held for Sale
When we acquire mortgage loans that we intend to sell or securitize via trusts that will not be consolidated, we classify the
loans as held for sale (“HFS”). We report HFS loans at the lower of cost or fair value. Any excess of an HFS loan’s cost over
its fair value is recognized as a valuation allowance, with changes in the valuation allowance recognized as “Investment
gains, net” in our consolidated statements of operations and comprehensive income (loss). We recognize interest income on
HFS loans on an accrual basis, unless we determine that the ultimate collection of contractual principal or interest payments
in full is not reasonably assured. Purchased premiums, discounts and other cost basis adjustments on HFS loans are deferred
upon loan acquisition, included in the cost basis of the loan, and not amortized. We determine any lower of cost or fair value
adjustment on HFS loans on a pool basis by aggregating those loans based on similar risks and characteristics, such as
product types and interest rates.
In the event that we reclassify HFS loans to HFI, we record the loans at lower of cost or fair value on the date of
reclassification. We recognize any lower of cost or fair value adjustment recognized upon reclassification as a basis
adjustment to the HFI loan.
Nonaccrual Loans
We discontinue accruing interest on loans when we believe collectibility of principal or interest is not reasonably assured,
which for single-family loans we have determined, based on our historical experience, to be when the loan becomes two
months or more past due according to its contractual terms. We generally place multifamily loans on nonaccrual status when
the loan is deemed to be individually impaired, unless the loan is well secured such that collectibility of principal and accrued
interest is reasonably assured.
When a loan is placed on nonaccrual status, interest previously accrued but not collected becomes part of our recorded
investment in the loan and is collectively reviewed for impairment. For single-family loans, we recognize interest income for
loans on nonaccrual status when cash is received. For multifamily loans, we apply any payment received on a cost recovery
basis to reduce principal on the mortgage loan unless the loan is determined to be well secured.
We return a single-family loan to accrual status at the point that the borrower has made sufficient payments to reduce their
delinquency below our nonaccrual threshold. For modified single-family loans, the loan is not returned to accrual status until
the borrower successfully makes all required payments during the trial period (generally three to four months) and the
modification is made permanent. We generally return a multifamily loan to accrual status when the borrower cures the
delinquency of the loan or we otherwise determine that the loan is well secured such that collectibility is reasonably assured.
Restructured Loans
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial
difficulties is considered a troubled debt restructuring (“TDR”). Our loss mitigation programs primarily include modifications
that result in the capitalization of past due amounts in combination with interest rate reductions below market and/or the
extension of the loan’s maturity date. Such restructurings are granted to borrowers in financial difficulty on either a