Fannie Mae 2013 Annual Report Download - page 86

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(1) Because we recognized mortgage loans held by newly consolidated trusts upon adoption of the consolidation accounting guidance on
January 1, 2010, we increased our “Allowance for loan losses” and decreased our “Reserve for guaranty losses.” The impact at the
transition date is reported as “Adoption of consolidation accounting guidance.” The decrease in the combined loss reserves on the
adoption date represents a difference in the methodology used to estimate incurred losses for our allowance for loan losses as compared
with our reserve for guaranty losses and our separate presentation of the portion of the allowance related to accrued interest as our
“Allowance for accrued interest receivable.”
(2) Includes accrued interest of $436 million, $872 million, $1.4 billion, $2.4 billion and $1.5 billion for the years ended December 31,
2013, 2012, 2011, 2010 and 2009, respectively.
(3) Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and
insurance receivable from borrowers. The (benefit) provision for credit losses, charge-offs and recoveries activity included in this table
reflects all changes for both the allowance for loan losses and the valuation allowances for accrued interest and preforeclosure property
taxes and insurance receivable that relate to the mortgage loans.
(4) Includes off-balance sheet loans in unconsolidated Fannie Mae MBS trusts that would meet our criteria for nonaccrual status if the
loans had been on-balance sheet.
Our benefit or provision for credit losses continues to be a key driver of our results for each period presented. The amount of
our benefit or provision for credit losses varies from period to period based on changes in actual and expected home prices,
borrower payment behavior, the types and volumes of loss mitigation activities and foreclosures completed, and actual and
estimated recoveries from our lender and mortgage insurer counterparties. See “Risk Management—Credit Risk Management
—Institutional Counterparty Credit Risk Management” for information on mortgage insurers and outstanding mortgage seller
and servicer repurchase obligations. In addition, our benefit or provision for credit losses and our loss reserves can be
impacted by updates to the assumptions and data used in determining our allowance for loan losses.
We recognized a benefit for credit losses of $8.9 billion in 2013 and $852 million in 2012. The following factors contributed
to our benefit for credit losses in 2013:
• Home prices increased by 8.8% in 2013 compared with an increase of 4.2% in 2012. Higher home prices decrease
the likelihood that loans will default and reduce the amount of credit loss on loans that default, which reduces our
total loss reserves and provision for credit losses.
• The number of our seriously delinquent single-family loans declined 27% to approximately 419,000 as of December
31, 2013 from approximately 577,000 as of December 31, 2012 and the number of “early stage” delinquent loans
(loans that are 30 to 89 days past due) declined 18% to approximately 375,000 as of December 31, 2013 from
approximately 459,000 as of December 31, 2012. The reduction in the number of delinquent loans was primarily the
result of home retention solutions, foreclosure alternatives and completed foreclosures, and our efforts since 2009 to
improve our underwriting standards and the credit quality of our single-family guaranty book of business. A decline
in the number of loans becoming delinquent or seriously delinquent reduces our total loss reserves and provision for
credit losses.
• Sales prices on dispositions of our REO properties improved in 2013 compared with 2012. We received net proceeds
from our single-family REO sales equal to 67% of the loans’ unpaid principal balance in 2013 compared with 59%
in 2012. The increase in sales prices contributed to a reduction in the single-family initial charge-off severity rate to
24.2% for 2013 from 30.7% for 2012. The decrease in our charge-off severity rate indicates a lower amount of
expected credit loss at foreclosure and, accordingly, results in a lower provision for credit losses.
• In the second quarter of 2013, we updated the assumptions and data used to estimate our allowance for loan losses
for individually impaired single-family loans, which resulted in a $2.2 billion decrease to our allowance for loan
losses. For additional information on this update, see “Critical Accounting Policies and Estimates—Total Loss
Reserves—Single-Family Loss Reserves.”
The factors that contributed to our benefit for credit losses in 2013 were partially offset by lower discounted cash flow
projections on our individually impaired loans due to increasing mortgage interest rates in 2013. Higher mortgage interest
rates lengthen the expected lives of modified loans, which increases the impairment on these loans and results in an increase
to the provision for credit losses. Conversely, in 2012, mortgage interest rates declined, causing higher discounted cash flow
projections on our individually impaired loans, which resulted from shortened expected lives on modified loans and lower
impairment on these loans.
We recognized a benefit for credit losses in 2012 compared with a provision for credit losses in 2011 primarily due to: (1) an
increase in home prices in 2012 compared with a home price decline in 2011; (2) an increase in sales prices of our REO
properties; and (3) a continued reduction in the number of delinquent loans in our single-family guaranty book of business.