Fannie Mae 2012 Annual Report Download - page 254

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-20
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 (income) expense” in our consolidated
statements of operations and comprehensive income (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. For example, loans with an unsuccessful
trial modification, which are often accompanied by high delinquency rates, have much higher predicted default rates
compared to performing loans with completed modifications, particularly those with a significant payment reduction in the
borrower’s required monthly payment. 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 the contractual terms of the loan
agreement. If we determine that a multifamily loan is individually impaired, we generally measure impairment on that loan
based on the fair value of the underlying collateral less estimated costs to sell the property. If we determine that an individual
loan that was specifically evaluated for impairment is not individually impaired, we include the loan as part of a pool of loans
with similar characteristics that are evaluated collectively for incurred losses.
We stratify multifamily loans into different internal risk categories based on the credit risk inherent in each individual loan.
We categorize loan credit risk based on relevant observable data about a borrower’s ability to pay, including multifamily
market economic fundamentals, review of available current borrower financial information, operating statements on the
underlying collateral, current debt service coverage ratios, historical payment experience, estimates of the current collateral
values and other related credit documentation. As a result of this analysis, multifamily loans are categorized based on
management’s judgment into the following categories: (1) Green (loan with acceptable risk); (2) Yellow (loan with signs of
potential weakness); (3) Orange (loan with a well-defined weakness that may jeopardize the timely full repayment); and
(4) Red (loan with a weakness that makes timely collection or liquidation in full more questionable based on existing