SecProbe.io

CORRESP
1
filename1.htm

Document

April 18, 2024

via EDGAR

United States Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549

Attention: Lory Empie & Robert Klein

Re: Federal National Mortgage Association

Form 10-K for the Fiscal Year Ended December 31, 2023

File No. 000-50231

Dear Messrs. Empie & Klein,

The Federal National Mortgage Association (“Fannie Mae”) provides the following information in response to the comment contained in the correspondence of the staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission, dated March 21, 2024, relating to the above-referenced filing. Below we have repeated the text of your comment, following each part of the comment with our response.

Note that our responses herein are limited to the policies and data that relate to our single-family loan portfolio as the income recognition policies adopted for our multifamily loan portfolio during the COVID-19 National Emergency (the Pandemic) were not material to our financial statements. The incremental income we recognized because of the adoption of our Pandemic-related multifamily income recognition policy was less than $200 million, annually, during the period from 2020 to 2023.

1.We note that you elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act during the period beginning on March 1, 2020 and ending on January 1, 2022. We also note the disclosure of your COVID-19 nonaccrual policy on page 117. Please provide us with the following:

•An analysis explaining, in detail, your accounting treatment and policies regarding non-accrual loans and interest income recognition for eligible modifications under Section 4013 of the CARES Act. Cite any authoritative accounting literature or guidance considered and applied. In your response, explain how the interest rate was determined for purposes of any interest income recognition for these loans and discuss any differences in how the interest rate was calculated if it varied depending on the type or length of the modification.

Income Recognition/Nonaccrual Loans

At the beginning of the Pandemic, we adopted a tailored income recognition and nonaccrual policy for our single-family loan portfolio that considered the unique circumstances that were associated with the Pandemic. Specifically, for single-family loans negatively impacted by the Pandemic,(1) we continued to recognize interest income for up to six months of delinquency provided that the loan was either current as of March 1, 2020, or originated after March 1, 2020. We continued to accrue interest income after six months of delinquency provided that the collection of principal and interest continued to be reasonably assured. Otherwise, the loan was placed on nonaccrual status. As noted in the section below titled “The Allowance for Credit Losses on Accrued Interest Receivable,” we concurrently established a valuation allowance for expected credit losses on the accrued interest receivable balances for loans that were subject to our Pandemic-related income recognition policy.

(1)  A single-family loan was considered negatively impacted by the Pandemic if the loan went past due or if the borrower requested forbearance during the Pandemic.

Fannie Mae | Midtown Center, 1100 15th Street, NW, Washington, DC 20005

U.S. Securities and Exchange Commission

The income recognition policy we adopted during the Pandemic was, in part, based on the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) that was issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, and in consultation with state financial regulators, dated April 7, 2020 (the Interagency Statement).

Our decision to recognize interest income on loans negatively impacted by the Pandemic for up to 6 months was based on the guidance in the Interagency Statement. As the accounting literature does not provide guidance for when a financial institution should place loans on nonaccrual status (other than assets that qualify for the purchased credit deteriorated (PCD) accounting model, which is not applicable), we generally consider the guidance that is issued by the banking regulators when establishing our income recognition policies as such guidance represents a source of industry practice.(2)

We concluded that the forbearance arrangements that we provided are within the scope of the income recognition guidance provided by the Interagency Statement for the following reasons:

•Scope of income recognition guidance: The Interagency Statement indicates that “during the short-term arrangements discussed in [the Interagency Statement], these loans should generally not be reported as nonaccrual.”

•Government mandated modification or deferral programs: The short-term arrangements discussed in the Interagency Statement include “government mandated modification or deferral programs related to COVID-19.” Section 4022 of the CARES Act is an example of a deferral program that was mandated by the government. Specifically, Section 4022 of the CARES Act mandated that Fannie Mae provide forbearance programs to single-family borrowers experiencing financial hardship caused by the Pandemic. A forbearance plan is a short-term loss mitigation option that grants a period during which the borrower’s monthly payment obligations are temporarily reduced or suspended.

•Short-term arrangements: The Interagency Statement indicates that short-term arrangements include those that result in payment delays of up to six months. Under Section 4022 of the CARES Act, we were legally obligated to provide forbearance for periods of up to twelve months. In actual practice, forbearance arrangements were generally granted by our servicers in three and six-month increments. Thus, the forbearance arrangements that we provided during the Pandemic met the definition of short-term as contemplated in the Interagency Statement. To understand how we thought about short term, consider a servicer that granted a borrower forbearance for a period of three months. In this example, the servicer extended the forbearance period twice for a total duration of nine months. In each case, the extension was provided just prior to the previous forbearance arrangement expiring. The short-term arrangement that was subject to the Interagency Statement would only be the first two forbearance periods that total six months in duration.

As we were obligated by the government to provide short-term forbearance arrangements that were consistent with the scope of the Interagency Statement, we concluded that single-family loans that were negatively impacted by the Pandemic should generally remain on accrual status while in a forbearance arrangement for a period that should not exceed six months.

There were some exceptions to the six -month income recognition policy. Specifically, loans that were past due on March 1, 2020, and loans where the borrower declared bankruptcy were placed on nonaccrual status in accordance with our pre-Pandemic income recognition policy.

 (2) Note that ASC 606, Revenue from Contracts with Customers, explicitly excludes loans from its scope as such financial instruments are within the scope of ASC 310, Receivables (ASC 606-10-15(c)1). ASC 310 does not provide guidance on when a loan should be placed on nonaccrual status. Specifically, ASC 310-10-35-53A, Interest Income, indicates that ASC 310 does not address how a creditor should recognize, measure or display interest income on a financial asset with a credit loss (except for the guidance related to PCD assets in ASC 310-10-35-53(b) and 53(c), which is not applicable).

2

U.S. Securities and Exchange Commission

The implementation of our income recognition policy considered the unique legal rights provided to our borrowers. Specifically, each borrower had the legal right to receive forbearance with no additional documentation required other than the borrower’s attestation to a financial hardship caused by the Pandemic. When we implemented the guidance in the Interagency Statement, we assumed that most borrowers whose loans became past due would ultimately exercise their right to receive forbearance. Therefore, we concluded that it would be appropriate to apply the interagency statement’s income recognition guidance to the first 6 months of a loan’s delinquency because each borrower had the legal right to receive forbearance. With the benefit of hindsight, we know that our initial assumption was valid. As an example, from March 2020 through September 2020, 87% of loans that were 60 days or more past due entered forbearance arrangements by September 30, 2020.(3)

For single-family loans that were greater than six months past due, we continued to recognize interest income to the extent that we had concluded that the collection of principal and interest on the loan was reasonably assured. The accounting principle of only recognizing interest income when collection of principal and interest is “reasonably assured” is consistent with the principle that underpins our historical interest income recognition approach. To determine if principal and interest was reasonably assured of collection, we considered data that we believed would give us insight into the loans’ expected performance. Specifically, we considered the borrower’s willingness to engage in loss mitigation options, the probability of default for each loan (from our single-family credit model), the current value of the collateral (an indication of the borrower’s expected behavior), trends in the impacted borrower’s FICO scores and credit card debt, and any other evidence that we determined provided information on expected loan performance. We also considered trends related to other loans that were exiting forbearance arrangements. This data was used to determine which loans would remain on accrual status after the loan was greater than six months past due and which loans would be placed on nonaccrual status.

During each quarter, we established an allowance for credit losses on the accrued interest receivable balance that related to our Pandemic related income recognition policy to ensure that our receivable balance, net of the allowance for credit losses, was always equal to the net amount we expected to collect. See additional information below in the section titled “The Allowance for Credit Losses on Accrued Interest Receivable.”

Accounting for loan restructurings

Restructurings of single-family loans were evaluated to determine whether they resulted in a new loan or a continuation of an existing loan in accordance with ASC 310-20-35-9 through 11. Single-family loan restructurings for borrowers experiencing financial difficulty are accounted for as a continuation of the existing loan because the terms of the restructured loans are not “at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks who are not refinancing or restructuring a loan with the lender.”

When a loan is restructured via a loan modification or a payment deferral, the past due interest (whether accrued or not) is capitalized into the unpaid principal balance (UPB) of the mortgage loan and such amounts remain contractually due from the borrower. When the past due interest is capitalized, we record a debit to the UPB of the mortgage loan. A corresponding credit must be recorded in our financial statements. To the extent that an accrued interest receivable balance was previously recognized, the credit eliminates that receivable, which ultimately results in a reclassification of the accrued interest receivable balance to the UPB balance. To the extent that all or a portion of the past due interest was not previously recognized as a receivable, the credit is recorded as a discount on the mortgage loan (a form of deferred revenue) which is amortized over the remaining life of the loan on a level yield basis. Our interest income recognition policy related to the capitalization and associated deferral of unrecognized interest income is not material to our financial statements. The amounts capitalized and deferred during the years 2020 through 2023 are disclosed in the table below titled “Held for Investment Loans Negatively Impacted by the Pandemic that Missed Two or More Monthly Payments and were Not Placed on Nonaccrual Status.”

(3) On March 31, 2024, the loan status had improved for approximately 90% of the loans that were 60 days or more past due in this illustrative example (for the period from March 2020 through September 2020). The loan status improves when the loan is current, paid off, repurchased by the seller, or had an improvement in the delinquency status because the borrower has been making payments on the loan. Of the remaining 10%, approximately 7% of the loans in the original population were sold to a third-party and only 3% of the loans in the original population had a negative outcome (foreclosure had occurred or the loan had a higher delinquency status as of March 31, 2024).

3

U.S. Securities and Exchange Commission

We generally do not write-off the capitalized accrued interest receivable balance on the date of the restructuring as we do not deem these amounts to be uncollectable. A write-off is required in accordance with ASC 326-20-35-8 in the period in which the financial asset is deemed uncollectable. Historically, we have considered the threshold for a write-off as significantly higher than the threshold for a probable loss. The probable loss threshold has generally been interpreted within the financial services industry as between 75% and 80% percent likely. Our historical experience adjusted for current business practices does not support a determination that the uncollectable threshold has been met when a loan has been restructured. When we started to execute payment deferrals and modifications in the second half of 2020, we considered our performance on recent vintages of modifications that had seasoned for a sufficient time-period such that we could evaluate their performance. The most recent vintage of restructurings that had two years of performance were those loans that were modified in 2018. For those loans, approximately 70% of the restructured loans were current or paid off at two years post modification.(4) With the benefit of hindsight, we can evaluate the performance of the payment deferrals and modifications that were made during the Pandemic.  For example, of the loans modified between the third quarter of 2020 and the fourth quarter of 2021, more than 90% were current or paid-off at two years post modification.(5) Although this data supports that a write-off was not appropriate, it is also important to understand that we established a valuation allowance against these loans for expected credit losses. As a result, expected credit losses were recognized in a timely manner.

Calculation of Effective Yield

When a loan is on accrual status, we recognize interest income over the contractual life of the loan using the interest method in accordance with ASC 310-20-35-17 through 20. The objective of the interest method is to arrive at periodic interest income (including fees and costs) at a constant effective yield on the net investment in the receivable. The constant effective yield that is necessary to apply the interest method is determined based on the loan’s initial measurement at acquisition (that is, the principal amount of the receivable adjusted by unamortized fees or costs and purchase premium or discount) and the remaining contractual cash flows of the loan. As we have elected to use the contractual method of amortization and the Pandemic-related