Allowance for Loan Losses

6 Months Ended

Jun. 30, 2011

Notes to Consolidated Financial Statements

4. Allowance for Loan Losses

We maintain an allowance for loan losses for HFI loans in our mortgage portfolio and loans backing Fannie Mae MBS issued from consolidated 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 interest income only while the loan was on accrual status. The allowance for loan losses is calculated based on our estimate of incurred losses as of the balance sheet date. Determining the adequacy of our allowance for loan losses is complex and requires judgment about the effect of matters that are inherently uncertain.

Allowance for Loan Losses

The following table displays changes in both single-family and multifamily allowance for loan losses for the three and six months ended June 30, 2011 and total allowance for loan losses for the three and six months ended June 30, 2011 and 2010.

			For the Three Months Ended June 30,
			2011						2010
			Of		Of				Of		Of
			Fannie		Consolidated				Fannie		Consolidated
			Mae		Trusts		Total		Mae		Trusts		Total
			(Dollars in millions)
Single-family allowance for loan losses:
	Beginning balance		$	52,671	$	13,413	$	66,084
		Provision for loan losses		2,954		2,723		5,677
		Charge-offs⁽¹⁾		(5,341)		(758)		(6,099)
		Recoveries		1,819		550		2,369
		Transfers⁽²⁾		2,750		(2,750)		-
		Net reclassifications⁽³⁾		96		(100)		(4)
	Ending balance		$	54,949	$	13,078	$	68,027
Multifamily allowance for loan losses:
	Beginning balance		$	1,037	$	436	$	1,473
		Provision for loan losses		86		39		125
		Charge-offs⁽¹⁾		(119)		-		(119)
		Transfers⁽²⁾		12		(12)		-
		Net reclassifications⁽³⁾		1		(1)		-
	Ending balance		$	1,017	$	462	$	1,479
Total allowance for loan losses:
	Beginning balance		$	53,708	$	13,849	$	67,557	$	25,675	$	34,894	$	60,569
		Total provision for loan losses		3,040		2,762		5,802		2,593		1,702		4,295
		Charge-offs⁽¹⁾		(5,460)		(758)		(6,218)		(4,446)		(1,947)		(6,393)
		Recoveries		1,819		550		2,369		65		291		356
		Transfers⁽²⁾		2,762		(2,762)		-		22,620		(22,620)		-
		Net reclassifications⁽³⁾		97		(101)		(4)		(3,663)		5,418		1,755
	Ending balance⁽⁴⁾⁽⁵⁾		$	55,966	$	13,540	$	69,506	$	42,844	$	17,738	$	60,582

			For the Six Months Ended June 30,
			2011						2010
			Of		Of				Of		Of
			Fannie		Consolidated				Fannie		Consolidated
			Mae		Trusts		Total		Mae		Trusts		Total
			(Dollars in millions)
Single-family allowance for loan losses:
	Beginning balance		$	47,377	$	12,603	$	59,980
		Provision for loan losses		10,197		6,092		16,289
		Charge-offs⁽¹⁾		(10,964)		(1,206)		(12,170)
		Recoveries		2,349		1,502		3,851
		Transfers⁽²⁾		5,912		(5,912)		-
		Net reclassifications⁽³⁾		78		(1)		77
	Ending balance		$	54,949	$	13,078	$	68,027
Multifamily allowance for loan losses:
	Beginning balance		$	1,153	$	423	$	1,576
		Provision for loan losses		2		98		100
		Charge-offs⁽¹⁾		(201)		-		(201)
		Transfers⁽²⁾		57		(57)		-
		Net reclassifications⁽³⁾		6		(2)		4
	Ending balance		$	1,017	$	462	$	1,479
Total allowance for loan losses:
	Beginning balance		$	48,530	$	13,026	$	61,556	$	8,078	$	1,847	$	9,925
		Adoption of new accounting standards		-		-		-		-		43,576		43,576
		Total provision for loan losses		10,199		6,190		16,389		8,864		7,370		16,234
		Charge-offs⁽¹⁾		(11,165)		(1,206)		(12,371)		(6,151)		(5,402)		(11,553)
		Recoveries		2,349		1,502		3,851		162		568		730
		Transfers⁽²⁾		5,969		(5,969)		-		36,475		(36,475)		-
		Net reclassifications⁽³⁾		84		(3)		81		(4,584)		6,254		1,670
	Ending balance⁽⁴⁾⁽⁵⁾		$	55,966	$	13,540	$	69,506	$	42,844	$	17,738	$	60,582

___________

⁽¹⁾	Total charge-offs include accrued interest of $438 million and $611 million for the three months ended June 30, 2011 and 2010, respectively and $824 million and $1.2 billion for the six months ended June 30, 2011 and 2010, respectively. Single-family charge-offs include accrued interest of $423 million and $800 million for the three and six months ended June 30, 2011, respectively. Multifamily charge-offs include accrued interest of $15 million and $24 million for the three and six months ended June 30, 2011, respectively.

⁽²⁾	Includes transfers from trusts for delinquent loan purchases.

⁽³⁾	Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers.
⁽⁴⁾	Total allowance for loan losses includes $414 million and $637 million as of June 30, 2011 and 2010, respectively, for acquired credit-impaired loans.

⁽⁵⁾	Total single-family allowance for loan losses was $59.0 billion as of June 30, 2010. Total multifamily allowance for loan losses was $1.6 billion as of June 30, 2010.

As of June 30, 2011, the allowance for accrued interest receivable for loans of Fannie Mae was $2.6 billion and for loans of consolidated trusts was $442 million. As of December 31, 2010, the allowance for accrued interest receivable for loans of Fannie Mae was $3.0 billion and for loans of consolidated trusts was $439 million.

In the three month period ended June 30, 2010, we identified that for a portion of our delinquent loans we had not estimated and recorded our obligation to reimburse servicers for advances they made on our behalf for preforeclosure property taxes and insurance. We previously recognized these expenses when we reimbursed servicers. We also did not record a receivable from borrowers for these payments or assess the collectibility of the receivable. As such, we did not record an allowance for estimated uncollectable amounts. To correct the above misstatement, we recorded an out-of-period adjustment of $1.1 billion to “Provision for loan losses” in our condensed consolidated statements of operations for the three and six month periods ended June 30, 2010, reflecting our assessment of the collectibility of the receivable from the borrowers. We evaluated the effects of this misstatement, both quantitatively and qualitatively, on our three and six month periods ended June 30, 2010 and prior consolidated financial statements and concluded that no prior periods are materially misstated.

The following table displays the allowance for loan losses and total recorded investment in our HFI loans, excluding loans for which we have elected the fair value option, by impairment or reserve methodology and portfolio segment as of June 30, 2011 and December 31, 2010.

			As of
			June 30, 2011						December 31, 2010
			Single-						Single-
			Family		Multifamily		Total		Family		Multifamily		Total
			(Dollars in millions)
Allowance for loan losses by segment:
	Individually impaired loans		$	43,803	$	518	$	44,321	$	37,296	$	549	$	37,845
	Collectively reserved loans			23,815		956		24,771		22,306		1,020		23,326
	Acquired credit-impaired loans			409		5		414		378		7		385
		Total allowance for loan losses	$	68,027	$	1,479	$	69,506	$	59,980	$	1,576	$	61,556

Recorded investment in loans by segment:⁽¹⁾
	Individually impaired loans		$	149,813	$	2,770	$	152,583	$	140,062	$	3,074	$	143,136
	Collectively reserved loans			2,678,465		171,961		2,850,426		2,677,640		169,332		2,846,972
	Acquired credit-impaired loans			3,938		67		4,005		4,798		108		4,906
		Total recorded investment in loans	$	2,832,216	$	174,798	$	3,007,014	$	2,822,500	$	172,514	$	2,995,014

___________

⁽¹⁾	Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable.