Fannie Mae 2012 Annual Report Download - page 79

74
Releasing the valuation allowance in the fourth quarter of 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 end of the first quarter 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, as of the first quarter of
2013, we will no longer be in a three-year cumulative loss position. Accordingly, although we have not completed the
analysis, we believe that, after considering all relevant factors, we may release the valuation allowance as early as the first
quarter of 2013.
If we reverse all or a significant portion of our valuation allowance in a future period we would record a material tax benefit
in net income reflecting the reversal. This tax benefit would increase our net worth as of the end of the period in which we
record it and, as a result, the amount of the dividend we will be required to pay Treasury in the following quarter pursuant to
the terms of the senior preferred stock purchase agreement. This tax benefit would also result in a large negative effective tax
rate in the period in which the valuation allowance is released.
In addition, if all or a significant portion of the valuation allowance is reversed, our effective tax rate will approach the
statutory tax rate after the year in which the reversal is recorded. Our recorded effective tax rate has been at or close to zero
since we established our valuation allowance because our provision or benefit for income taxes, as it relates to the change in
the deferred tax asset balance, has been offset by a corresponding decrease or increase to our valuation allowance.
CONSOLIDATED RESULTS OF OPERATIONS
This section provides a discussion of our consolidated results of operations for the periods indicated and should be read
together with our consolidated financial statements, including the accompanying notes. In 2009, FASB concurrently revised
the accounting guidance related to the consolidation of variable interest entities and the accounting guidance related to
transfers of financial assets. On January 1, 2010, we prospectively adopted the revised guidance for these topics, which had a
significant impact on the presentation and comparability of our consolidated financial statements. See “Note 1, Summary of
Significant Accounting Policies” for more information on the revised accounting guidance.