Fannie Mae 2012 Annual Report Download - page 252

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-18
permanent or contingent basis, as in the case of modifications with a trial period. We consider these types of loan
restructurings to be TDRs.
We do not currently include principal or past due interest forgiveness as part of our loss mitigation programs, and as a result,
we do not charge off any outstanding principal or accrued interest amounts at the time of loan modification. We believe that
the loan underwriting activities we perform as a part of our loan modification process coupled with the borrower’s successful
performance during any required trial period provide us reasonable assurance regarding the collectibility of the principal and
interest due in accordance with the loan’s modified terms, which include any past due interest amounts that are capitalized at
the time of modification. As such, the loan is returned to accrual status when the loan modification is completed (i.e., at the
end of the trial period), and we accrue interest thereafter in accordance with our interest accrual policy. If the loan was on
nonaccrual status prior to entering the trial period, it remains on nonaccrual status until the borrower demonstrates
performance via the trial period and the modification is finalized.
In addition to these loan modifications, we also engage in other loss mitigation activities with troubled borrowers, which
include repayment plans, forbearance arrangements, and the capitalization only of past due amounts. Repayment plans and
forbearance arrangements are informal agreements with the borrower that do not result in the legal modification of the loan.
For all of these activities, we consider the deferral or capitalization of three or fewer missed payments to represent only an
insignificant delay, and thus not a TDR. If we defer or capitalize more than three missed payments, the delay is no longer
considered insignificant, and the restructuring is accounted for as a TDR.
We measure impairment of a loan restructured in a TDR individually based on the excess of the recorded investment in the
loan over the present value of the expected future cash inflows discounted at the loan’s original effective interest rate. Costs
incurred to complete a TDR are expensed as incurred. However, when foreclosure is probable on an individually impaired
loan, we measure impairment based on the difference between our recorded investment in the loan and the fair value of the
underlying property, adjusted for the estimated costs to sell the property and estimated insurance or other proceeds we expect
to receive.
In April 2011, FASB issued new guidance effective for the three months ended September 30, 2011 that applied
retrospectively to January 1, 2011. The new guidance clarified how to determine when a borrower is experiencing financial
difficulty, when a concession is granted by a creditor, and when a delay in payment is considered insignificant. The primary
impact to us of adopting this new guidance was the refinement of how we define an insignificant delay. As a result, we
lowered our threshold for an insignificant delay from approximately nine missed payments to three missed payments and thus
this type of additional loss mitigation activity that had previously been excluded is now considered a TDR. This refinement
was necessary in order to conform our policy to the new guidance on insignificant delay provided by the FASB.
As a result of adopting the new TDR accounting guidance, we identified approximately 22,000 loan restructurings for the
nine months ended September 30, 2011 that had not defaulted as of September 30, 2011 and were not previously considered
TDRs. The impact of this was an increase in our provision for loan losses of $514 million in our condensed consolidated
statements of operations and comprehensive loss for the three months ended September 30, 2011. This amount reflects the net
increase in our allowance for loan losses due to identifying these restructurings as TDRs and measuring their impairment on
an individual basis offset by the elimination of our allowance for loan loss measured on a collective basis related to these
loans.
Allowance for Loan Losses and Reserve for Guaranty Losses
Our 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. We record charge-offs as a
reduction to the allowance for loan 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. We recognize incurred losses
by recording a charge to the provision for loan losses, which is a component of “Benefit (provision) for credit losses” in our
consolidated statements of operations and comprehensive income (loss).
In the three months ended September 30, 2012, we identified a misstatement in the classification of TDRs related to certain
borrowers who used the bankruptcy process to receive a discharge of the mortgage debt or to cure a mortgage delinquency
over time. We determined that the discharge of mortgage debt in bankruptcy was a concession in cases in which the discharge
effectively resulted in us losing our ability to hold the borrower personally liable for deficiencies under state law, although we