Fannie Mae 2014 Annual Report Download - page 227

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-12
holders, the rights of the parties and the purpose of the arrangement. If we cannot conclude after a qualitative analysis
whether an entity is a VIE, we perform a quantitative analysis.
The primary types of VIE entities with which we are involved are securitization trusts guaranteed by us via lender swap and
portfolio securitization transactions, limited partnership investments in low-income housing tax credit (“LIHTC”) and other
housing partnerships, as well as mortgage and asset-backed trusts that were not created by us.
Primary Beneficiary Determination
If an entity is a VIE, we consider whether our variable interest in that entity causes us to be the primary beneficiary. We are
deemed to be the primary beneficiary of a VIE when we have both (1) the power to direct the activities of the VIE that most
significantly impact the entity’s economic performance, and (2) exposure to benefits and/or losses that could potentially be
significant to the entity. The primary beneficiary of the VIE is required to consolidate and account for the assets, liabilities,
and noncontrolling interests of the VIE in its consolidated financial statements. The assessment of which party has the power
to direct the activities of the VIE may require significant management judgment when (1) more than one party has power or
(2) more than one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that
could be significant.
We continually assess whether we are the primary beneficiary of the VIEs with which we are involved and therefore may
consolidate or deconsolidate a VIE through the duration of our involvement. Examples of certain events that may change
whether or not we consolidate the VIE include a change in the design of the entity or a change in our ownership in the entity
such that we no longer hold substantially all of the certificates issued by a multi-class resecuritization trust.
Measurement of Consolidated Assets and Liabilities
When we are the transferor of assets into a VIE that we consolidate at the time of the transfer, we continue to recognize the
assets and liabilities of the VIE at the amounts that they would have been recognized if we had not transferred them, and no
gain or loss is recognized. For all other VIEs that we consolidate (that is, those for which we are not the transferor), we
recognize the assets and liabilities of the VIE in our consolidated financial statements at fair value, and we recognize a gain
or loss for the difference between (1) the fair value of the consideration paid, fair value of noncontrolling interests and the
reported amount of any previously held interests, and (2) the net amount of the fair value of the assets and liabilities
consolidated. However, for the securitization trusts established under our lender swap program, no gain or loss is recognized
if the trust is consolidated at formation as there is no difference in the respective fair value of (1) and (2) above. We record
gains or losses that are associated with the consolidation of VIEs as “Investment gains (losses), net” in our consolidated
statements of operations and comprehensive income.
If we cease to be deemed the primary beneficiary of a VIE, we deconsolidate the VIE. We use fair value to measure the initial
cost basis for any retained interests that are recorded upon the deconsolidation of a VIE. Any difference between the fair
value and the previous carrying amount of our investment in the VIE is recorded as “Investment gains (losses), net” in our
consolidated statements of operations and comprehensive income.
Purchase/Sale of Fannie Mae Securities
We actively purchase and may subsequently sell guaranteed MBS that have been issued through our lender swap and
portfolio securitization transaction programs. The accounting for the purchase and sale of our guaranteed MBS issued by the
trusts differs based on the characteristics of the securitization trusts and whether the trusts are consolidated.
Single-Class Securitization Trusts
We create single-class securitization trusts to issue single-class Fannie Mae MBS that evidence an undivided interest in the
mortgage loans held in the trust. Investors in single-class Fannie Mae MBS receive principal and interest payments in
proportion to their percentage ownership of the MBS issuance. We guarantee to each single-class securitization trust that we
will supplement amounts received by the single-class securitization trust as required to permit timely payments of principal
and interest on the related Fannie Mae MBS. This guaranty exposes us to credit losses on the loans underlying Fannie Mae
MBS.
Single-class securitization trusts are used for both our lender swap and portfolio securitization transaction programs. A lender
swap transaction occurs when a mortgage lender delivers a pool of single-family mortgage loans to us, which we
immediately deposit into an MBS trust. The MBS are then issued to the lender in exchange for the mortgage loans. A
portfolio securitization transaction occurs when we purchase mortgage loans from third-party sellers for cash and later