Fannie Mae 2012 Annual Report Download - page 255

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-21
conditions and values). We evaluate loans in the orange and red risk categories to determine which ones are individually
impaired.
For each risk category, certain observed default probability and loss severity (in event of default) factors, based on historical
performance of loans in the same risk category, are applied against our recorded investment in the loans, including recorded
accrued interest associated with such loans, to determine an appropriate allowance. Such performance data reflect historical
delinquencies and charge-offs, as well as loan size. In addition, we consider any credit enhancements such as letters of credit
or loss sharing arrangements with our lenders.
Advances to Lenders
Advances to lenders represent our payments of cash in exchange for the receipt of mortgage loans from lenders in a transfer
that is accounted for as a secured lending arrangement. These transfers primarily occur when we provide early funding to
lenders for loans that they will subsequently either sell to us or securitize into a Fannie Mae MBS that they will deliver to us.
We individually negotiate early lender funding advances with our lender customers. Early lender funding advances have
terms up to 60 days and earn a short-term market rate of interest.
We report cash outflows from advances to lenders as an investing activity in our consolidated statements of cash flows.
Settlements of the advances to lenders, other than through lender repurchases of loans, are not collected in cash, but rather in
the receipt of either loans or Fannie Mae MBS. Accordingly, this activity is reflected as a non-cash transfer in our
consolidated statements of cash flows in the line item entitled “Transfers from advances to lenders to loans held for
investment of consolidated trusts.”
Acquired Property, Net
“Acquired property, net” includes foreclosed property and any receivable outstanding on short sales received in full
satisfaction of a loan. We recognize foreclosed property upon the earlier of the loan foreclosure event or when we take
physical possession of the property (i.e., through a deed-in-lieu of foreclosure transaction). We initially measure foreclosed
property at its fair value less its estimated costs to sell. We treat any excess of our recorded investment in the loan over the
fair value less estimated costs to sell the property as a charge-off to the “Allowance for loan losses.” Any excess of the fair
value less estimated costs to sell the property over our recorded investment in the loan is recognized first to recover any
forgone, contractually due interest, then to “Foreclosed property (income) expense” in our consolidated statements of
operations and comprehensive income (loss).
We classify foreclosed properties as held for sale when we intend to sell the property and the following conditions are met at
either acquisition or within a relatively short period thereafter: we are actively marketing the property and it is available for
immediate sale in its current condition such that the sale is reasonably expected to take place within one year. We report these
properties at the lower of their carrying amount or fair value less estimated selling costs, on a discounted basis if the sale is
expected to occur beyond one year from the date of foreclosure. We do not depreciate these properties.
We recognize a loss for any subsequent write-down of the property to its fair value less its estimated costs to sell through a
valuation allowance with an offsetting charge to “Foreclosed property (income) expense” in our consolidated statements of
operations and comprehensive income (loss). We recognize a recovery for any subsequent increase in fair value less
estimated costs to sell up to the cumulative loss previously recognized through the valuation allowance. We recognize gains
or losses on sales of foreclosed property through “Foreclosed property (income) expense” in our consolidated statements of
operations and comprehensive income (loss).
Properties that do not meet the criteria to be classified as held for sale are classified as held for use and are recorded in “Other
assets” in our consolidated balance sheets. These properties are depreciated and are evaluated for impairment when
circumstances indicate that the carrying amount of the property is no longer recoverable.
Fannie Mae MBS included in “Investments in securities”
When we own unconsolidated Fannie Mae MBS, we do not derecognize any components of the guaranty assets, guaranty
obligations, reserve for guaranty losses, or any other outstanding recorded amounts associated with the guaranty transaction
because our contractual obligation to the MBS trust remains in force until the trust is liquidated. We value Fannie Mae MBS
based on their legal terms, which includes the Fannie Mae guaranty to the MBS trust, and continue to reflect the unamortized
obligation to stand ready to perform over the term of our guaranty and any incurred credit losses in our “Other liabilities” and
“Reserve for guaranty losses,” respectively. We disclose the aggregate amount of Fannie Mae MBS held as “Investments in
securities” in our consolidated balance sheets as well as the amount of our “Reserve for guaranty losses” and “Other