Fannie Mae 2014 Annual Report Download - page 233

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-18
insignificant delay, and thus not a TDR. If we defer or capitalize more than three missed payments, the delay is no longer
considered insignificant, and the restructuring is accounted for as a TDR.
We measure impairment of a loan restructured in a TDR individually based on the excess of the recorded investment in the
loan over the present value of the expected future cash inflows discounted at the loan’s original effective interest rate. Costs
incurred to complete a TDR are expensed as incurred. However, when foreclosure is probable on an individually impaired
loan, we measure impairment based on the difference between our recorded investment in the loan and the fair value of the
underlying property, adjusted for the estimated costs to sell the property and estimated insurance or other proceeds we expect
to receive.
Allowance for Loan Losses and Reserve for Guaranty Losses
Our allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our
recorded investment in both single-family and multifamily HFI loans. This population includes both HFI loans held by
Fannie Mae and by consolidated Fannie Mae MBS trusts. When calculating our allowance for loan losses, we consider only
our net recorded investment in the loan at the balance sheet date, which includes the loan’s unpaid principal balance and
accrued interest recognized while the loan was on accrual status and any applicable cost basis adjustments. We record charge-
offs as a reduction to the allowance for loan losses when losses are confirmed through the receipt of assets in satisfaction of a
loan, such as the underlying collateral upon foreclosure or cash upon completion of a short sale. We recognize incurred losses
by recording a charge to the provision for loan losses, which is a component of “Benefit for credit losses” in our consolidated
statements of operations and comprehensive income.
The reserve for guaranty losses is a liability account which is a component of “Other liabilities” in our consolidated balance
sheets that reflects an estimate of incurred credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust
that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payments of principal
and interest on the related Fannie Mae MBS and our agreements to purchase credit-impaired loans from lenders under the
terms of our long-term standby commitments. As a result, the reserve for guaranty losses considers not only the principal and
interest due on the loan at the current balance sheet date, but also any additional interest payments due to the trust from the
current balance sheet date until the point of loan acquisition or foreclosure. The reserve for guaranty losses was $1.2 billion
and $1.4 billion as of December 31, 2014 and 2013, respectively.
We recognize incurred losses by recording a charge to the provision for guaranty losses, which is a component of “Benefit for
credit losses,” in our consolidated statements of operations and comprehensive income.
Single-Family Loans
We recognize credit losses related to groups of similar single-family HFI loans that are not individually impaired when
(1) available information as of each balance sheet date indicates that it is probable a loss has occurred and (2) the amount of
the loss can be reasonably estimated. We aggregate such loans, based on similar risk characteristics, for purposes of
estimating incurred credit losses and establish a collective single-family loss reserve using an econometric model that derives
an overall loss reserve estimate. The estimate takes into account multiple factors which include but are not limited to
origination year, loan product type, mark-to-market LTV ratio, and delinquency status. Once loans are aggregated, there
typically is not a single, distinct event that would result in an individual loan or pool of loans being impaired. In determining
our collective reserve, we base our allowance methodology on historical events and trends, such as loss severity (in event of
default), default rates, and recoveries from mortgage insurance contracts and other credit enhancements that provide loan
level loss coverage and are either contractually attached to a loan or that were entered into contemporaneously with and in
contemplation of a guaranty or loan purchase transaction. We use recent regional historical sales and appraisal information,
including the sales of our own foreclosed properties, to develop our loss severity estimates for all loan categories. Our
allowance calculation also incorporates a loss confirmation period (the anticipated time lag between a credit loss event and
the confirmation of the credit loss resulting from that event) to ensure our allowance estimate captures credit losses that have
been incurred as of the balance sheet date but have not been confirmed. In addition, management performs a review of the
observable data used in its estimate to ensure it is representative of prevailing economic conditions and other events existing
as of the balance sheet date.
We record charge-offs as a reduction to the allowance for loan losses or reserve for guaranty losses when losses are
confirmed through the receipt of assets in full satisfaction of a loan, such as the underlying collateral upon foreclosure or cash
upon completion of a short sale. The excess of a loan’s unpaid principal balance, accrued interest, and any applicable cost
basis adjustments (“our total exposure”) over the fair value of the assets received is treated as a charge-off loss that is