Fannie Mae 2012 Annual Report Download - page 288

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-54
As of December 31, 2012, we have concluded that it is more likely than not that our deferred tax asset will not be realized in
its entirety and that therefore we should retain the valuation allowance against our net deferred tax assets. The valuation
allowance as of December 31, 2012 was $58.9 billion. Giving more weight to evidence that could be objectively verified than
to evidence that could not be objectively verified, we determined that the factors in favor of releasing the allowance were
outweighed by the evidence against releasing the valuation allowance. The factors that weighed against releasing the
allowance as of December 31, 2012 and ultimately outweighed the factors in favor of releasing the reserve discussed below
were the following:
• on a cumulative basis, we reported losses in our consolidated statements of operations for the three-years ended
December 31, 2012;
• the impact of a reduction in funds available to us under the senior preferred stock purchase agreement that would
have resulted from releasing the valuation allowance during the three months ended December 31, 2012, which we
discuss below;
• stability in the housing market is relatively recent and home prices, while improving, are still well below their peak,
which results in uncertainty regarding our projections of future credit losses;
• the uncertainty surrounding the future of our company given we are in conservatorship; and
• we have a limited recent history of profitability and a large number of delinquent loans in our book of business.
Under the terms of the senior preferred stock purchase agreement, the amount of funding available to us after December 31,
2012 is adjusted based on our positive net worth as of December 31, 2012 and is not affected by any positive net worth we
may have on future dates. Accordingly, the amount of funding available under the senior preferred stock purchase agreement
will be reduced only to the extent that we draw funds from Treasury under the agreement in the future. A decision to release
the valuation allowance in 2013 will not reduce the funding available to us under the senior preferred stock purchase
agreement.
Releasing the valuation allowance during the three months ended December 31, 2012 would have decreased our available
funding under the senior preferred stock purchase agreement to approximately $84 billion, compared to approximately $118
billion of available funding that resulted from not releasing the valuation allowance in the fourth quarter.
There was significant uncertainty regarding the effects that an approximately $34 billion reduction in the funds available to
us under the senior preferred stock purchase agreement would have had on our business and financial results, including
regulatory actions that would limit our business operations to ensure safety and soundness of the company, particularly in
view of the fact that stability in the housing market and improvements in our financial results are relatively recent. This
uncertainty was a significant consideration in our determination not to release the valuation allowance as of December 31,
2012.
In addition, it is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable
negative evidence, such as cumulative losses in recent years. We utilize a rolling three years of pre-tax income or loss as the
primary measure of cumulative losses in recent years. Over the three years ended December 31, 2012, we remain in a
cumulative loss position. However, we expect that as of the three months ended March 31, 2013, we will report income for
the fifth consecutive quarter and we will show cumulative profits for the past twelve quarters.
The following factors weighed in favor of releasing the allowance as of December 31, 2012:
• our 2012 profitability and our expectations regarding the sustainability of profits;
• the strong credit profile of the loans we have acquired since 2009;
• the significant size of our guaranty book of business and our contractual rights for future revenue from this book of
business;
• our taxable income for 2012 and our expectations regarding the likelihood of future taxable income; and
• the carryforward periods for our net operating losses and tax credits.
We will continue to evaluate the recoverability of our deferred tax assets. Our evaluation in future quarters will be made by
reviewing all relevant factors as of the end of those periods including the factors discussed above to the extent applicable.
Releasing all or a portion of the valuation allowance after December 31, 2012 will not reduce the funding available to us
under the senior preferred stock purchase agreement as discussed above. In addition, we expect that, for the three months
ended March 31, 2013, we will no longer be in a three-year cumulative loss position. Accordingly, although we have not