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 full satisfaction of a loan, such as the underlying collateral upon foreclosure or cash upon completion of a short sale.

We aggregate single-family HFI loans that are not individually impaired based on similar risk characteristics, for purposes of estimating incurred credit losses and establishing a collective single-family loss reserve using an econometric model that derives an overall loss reserve estimate. We base our allowance and reserve 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. 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.

Individually impaired single-family loans currently include those restructured in a TDR and acquired credit-impaired loans. When a loan has been restructured, we measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate. However, if we expect to recover our recorded investment in an individually impaired loan through probable foreclosure of the underlying collateral, we measure impairment based on the fair value of the collateral, reduced by estimated disposal costs and adjusted for estimated proceeds from mortgage, flood, or hazard insurance and other credit enhancements.

We identify multifamily loans for evaluation for impairment through a credit risk assessment process. If we determine that a multifamily loan is individually impaired, we generally measure impairment on that loan based on the fair value of the underlying collateral less estimated costs to sell the property. If we determine that an individual loan that was specifically evaluated for impairment is not individually impaired, we include the loan as part of a pool of loans with similar characteristics that are evaluated collectively for incurred losses.

The following table displays changes in single-family, multifamily and total allowance for loan losses for the three and nine months ended September 30, 2013 and 2012.



	For the Three Months Ended September 30,
	2013										2012
	Of Fannie Mae			Of Consolidated Trusts				Total			Of Fannie Mae			Of Consolidated Trusts				Total
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance	$	44,332			$	4,438		$	48,770		$	51,322			$	10,812		$	62,134
(Benefit) provision for loan losses⁽¹⁾	(2,126		)		(345		)	(2,471		)	3,104				(922		)	2,182
Charge-offs⁽²⁾	(2,221		)		(50		)	(2,271		)	(3,281		)		(232		)	(3,513		)
Recoveries	257				37			294			323				27			350
Transfers⁽³⁾	549				(549		)	—			1,372				(1,372		)	—
Other⁽⁴⁾	132				22			154			710				34			744
Ending balance	$	40,923			$	3,553		$	44,476		$	53,550			$	8,347		$	61,897
Multifamily allowance for loan losses:
Beginning balance	$	493			$	380		$	873		$	760			$	481		$	1,241
Benefit for loan losses⁽¹⁾	(24		)		(105		)	(129		)	(75		)		(24		)	(99		)
Charge-offs⁽²⁾	(54		)		—			(54		)	(28		)		—			(28		)
Transfers⁽³⁾	5				(5		)	—			6				(6		)	—
Other⁽⁴⁾	2				1			3			1				—			1
Ending balance	$	422			$	271		$	693		$	664			$	451		$	1,115
Total allowance for loan losses:
Beginning balance	$	44,825			$	4,818		$	49,643		$	52,082			$	11,293		$	63,375
(Benefit) provision for loan losses⁽¹⁾	(2,150		)		(450		)	(2,600		)	3,029				(946		)	2,083
Charge-offs⁽²⁾⁽⁵⁾	(2,275		)		(50		)	(2,325		)	(3,309		)		(232		)	(3,541		)
Recoveries	257				37			294			323				27			350
Transfers⁽³⁾	554				(554		)	—			1,378				(1,378		)	—
Other⁽⁴⁾	134				23			157			711				34			745
Ending balance	$	41,345			$	3,824		$	45,169		$	54,214			$	8,798		$	63,012



	For the Nine Months Ended September 30,
	2013										2012
	Of Fannie Mae			Of Consolidated Trusts				Total			Of Fannie Mae			Of Consolidated Trusts				Total
	(Dollars in millions)
Single-family allowance for loan losses:
Beginning balance	$	49,848			$	7,839		$	57,687		$	56,294			$	14,339		$	70,633
(Benefit) provision for loan losses⁽¹⁾	(6,660		)		(2,078		)	(8,738		)	1,260				(372		)	888
Charge-offs⁽²⁾	(6,906		)		(236		)	(7,142		)	(11,409		)		(703		)	(12,112		)
Recoveries	1,750				388			2,138			1,185				136			1,321
Transfers⁽³⁾	2,440				(2,440		)	—			5,172				(5,172		)	—
Other⁽⁴⁾	451				80			531			1,048				119			1,167
Ending balance	$	40,923			$	3,553		$	44,476		$	53,550			$	8,347		$	61,897
Multifamily allowance for loan losses:
Beginning balance	$	671			$	437		$	1,108		$	1,015			$	508		$	1,523
Benefit for loan losses⁽¹⁾	(151		)		(144		)	(295		)	(177		)		(35		)	(212		)
Charge-offs⁽²⁾	(121		)		—			(121		)	(216		)		—			(216		)
Transfers⁽³⁾	22				(22		)	—			23				(23		)	—
Other⁽⁴⁾	1				—			1			19				1			20
Ending balance	$	422			$	271		$	693		$	664			$	451		$	1,115
Total allowance for loan losses:
Beginning balance	$	50,519			$	8,276		$	58,795		$	57,309			$	14,847		$	72,156
(Benefit) provision for loan losses⁽¹⁾	(6,811		)		(2,222		)	(9,033		)	1,083				(407		)	676
Charge-offs⁽²⁾⁽⁵⁾	(7,027		)		(236		)	(7,263		)	(11,625		)		(703		)	(12,328		)
Recoveries	1,750				388			2,138			1,185				136			1,321
Transfers⁽³⁾	2,462				(2,462		)	—			5,195				(5,195		)	—
Other⁽⁴⁾	452				80			532			1,067				120			1,187
Ending balance	$	41,345			$	3,824		$	45,169		$	54,214			$	8,798		$	63,012

__________


⁽¹⁾	(Benefit) provision for loan losses is included in “Benefit (provision) for credit losses” in our condensed consolidated statements of operations and comprehensive income.


⁽²⁾	While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default.


⁽³⁾	Includes transfers from trusts for delinquent loan purchases.

⁽⁴⁾

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, recoveries and transfer 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.


⁽⁵⁾	Total charge-offs include accrued interest of $100 million and $198 million for the three months ended September 30, 2013 and 2012, respectively, and $337 million and $709 million for the nine months ended September 30, 2013 and 2012, respectively.

As of September 30, 2013, the allowance for accrued interest receivable for loans of Fannie Mae was $1.1 billion and for loans of consolidated trusts was $113 million. As of December 31, 2012, the allowance for accrued interest receivable for loans of Fannie Mae was $1.5 billion and for loans of consolidated trusts was $192 million.