Fannie Mae 2012 Annual Report Download - page 315

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-81
17. Fair Value
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain
assets and liabilities on a recurring or nonrecurring basis.
Fair Value Measurement
Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and sets forth
disclosures around fair value measurements. This guidance applies whenever other accounting guidance requires or permits
assets or liabilities to be measured at fair value. The guidance establishes a three-level fair value hierarchy that prioritizes the
inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to
measurements based on unadjusted quoted prices in active markets for identical assets or liabilities. The next highest priority,
Level 2, is given to measurements of assets and liabilities based on limited observable inputs or observable inputs for similar
assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs.
Effective January 1, 2012, we adopted new accounting guidance that requires enhanced disclosures about fair value
measurement. Upon adoption of the new fair value guidance, we made changes to the principal markets that we use to
estimate the fair value of the following categories of mortgage loans: (a) for loans that are one month delinquent, we changed
to the GSE securitization market; (b) for loans that are two and three months delinquent, we changed to the whole loan
market; and (c) for loans that have been modified in a troubled debt restructuring but have been reperforming for nine months
or more, we changed to the whole loan market. After making these changes, (a) the principal market for all performing loans
and those loans that are one month delinquent is the GSE securitization market; and (b) the principal market for all loans that
are two or more months delinquent and all loans that have been modified in a troubled debt restructuring is the whole loan
market. The impact of making these changes to our principal markets was a net decrease in the estimated fair value of our
loans of $24.4 billion as of March 31, 2012.
In addition, we enhanced our fair value estimation process for HARP loans to use the modified build-up
approach, as described in “Fair Value of Financial Instruments—HARP Loans.” Previously, we measured the fair value of
these loans using our standard build-up approach. Based on the definition of HARP at the time we implemented this process
enhancement, the impact of this enhancement was an increase in the estimated fair value of HARP loans of $7.4 billion as of
March 31, 2012.
In the three months ended September 30, 2012, we updated our assumptions for prepayment speeds, severities and default
rates, which resulted in an increase in the fair value of our loans of approximately $23 billion. These updates resulted in
lower expectation of losses on certain loans, primarily performing loans with high LTV ratios.