Fannie Mae 2012 Annual Report Download - page 78

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Our evaluation requires significant management judgment and consideration of various factors to determine if we will receive
the amortized cost basis of our investment securities. We evaluate a debt security for other-than-temporary impairment using
an econometric model that estimates the present value of cash flows given multiple factors. These factors include: the
severity and duration of the impairment; recent events specific to the issuer and/or industry to which the issuer belongs; the
payment structure of the security; external credit ratings and the failure of the issuer to make scheduled interest or principal
payments. We rely on expected future cash flow projections to determine if we will recover the amortized cost basis of our
available-for-sale securities.
In the second quarter of 2012, we updated our assumptions used to project cash flow estimates on our Alt-A and subprime
private-label securities to incorporate recent observable market trends, which included extending the time it takes to liquidate
loans underlying these securities and increasing severity rates for loans where the servicer stopped advancing payments.
These updates resulted in lower net present value of cash flow projections on our Alt-A and subprime private-label securities
and increased our other-than-temporary impairment expense by approximately $500 million.
We provide more detailed information on our accounting for other-than-temporary impairment in “Note 1, Summary of
Significant Accounting Policies” and “Note 5, Investments in Securities.” See “Risk Factors” for a discussion of the risks
associated with possible future write-downs of our investment securities.
Deferred Tax Assets
We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying
amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards
and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets, weighing all positive and negative
evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely
than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate
with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary
to support a conclusion that a valuation allowance is not needed.
Our framework for assessing the recoverability of deferred tax assets requires us to weigh all available evidence, including:
• the sustainability of recent profitability required to realize the deferred tax assets;
• the cumulative net losses in our consolidated statements of operations in recent years;
• unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a
continuing basis in future years; and
• the carryforward periods for net operating losses and tax credits.
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 in the fourth quarter of 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.