|FEDERAL NATIONAL MORTGAGE ASSOCIATION FANNIE MAE filed this Form 10-Q on 05/07/2015|
nonaccrual status. Upon adopting this accounting policy change, we charged off the accrued interest receivable balance on our nonaccrual loans. Our credit losses were $5.4 billion in the first quarter of 2015, compared with $1.6 billion in the fourth quarter of 2014 and $1.1 billion in the first quarter of 2014. Our credit losses in the first quarter of 2015 included (1) $1.8 billion in charge-offs of loans held for investment and $724 million in charge-offs of preforeclosure property taxes and insurance receivable that we recognized on January 1, 2015 under our approach to adopting the charge-off provisions of the Advisory Bulletin and (2) $1.1 billion in charge-offs we recognized on January 1, 2015 upon our implementation of the change in our accounting policy for nonaccrual loans. Because the increase in our charge-off amounts in the first quarter of 2015 compared with the first quarter of 2014 was driven primarily by our initial adoption of the Advisory Bulletin’s charge-off provisions and our initial implementation of our accounting policy change, we expect our credit losses to resume their downward trend in future quarters. See “Business—Our Charter and Regulation of Our Activities—FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans” in our 2014 Form 10-K for further information about this Advisory Bulletin. See “Note 1, Summary of Significant Accounting Policies” for information about our change in accounting principle for nonaccrual loans.
Loss Reserves. Our total loss reserves consist of (1) our allowance for loan losses, (2) our allowance for preforeclosure property taxes and insurance receivable and (3) our reserve for guaranty losses. Prior to our implementation on January 1, 2015 of the change in our accounting policy for nonaccrual loans, our total loss reserves also included an allowance for accrued interest receivable. Our total loss reserves were $32.9 billion as of March 31, 2015, down from $38.2 billion as of December 31, 2014. The decrease in our total loss reserves during the first quarter of 2015 was significantly impacted by our approach to adopting the charge-off provisions of the Advisory Bulletin and our implementation of the change in our accounting policy for nonaccrual loans. The charge-offs of held-for-investment loans, preforeclosure property taxes and insurance receivable and accrued interest receivable described above in “Credit Losses” reduced our allowance for loan losses, our allowance for preforeclosure property taxes and insurance receivable and our allowance for accrued interest receivable. We expect our approach to adopting the Advisory Bulletin’s charge-off provisions and our charge-offs resulting from implementing our change in accounting policy for nonaccrual loans will decrease the amount of future charge-offs on these same loans from what they otherwise would have been.
Although our loss reserves have declined substantially from their peak and are expected to decline further, we expect our loss reserves will remain elevated relative to the levels experienced prior to the 2008 housing crisis for an extended period because (1) we expect future defaults on loans that we acquired prior to 2009 and the resulting charge-offs will occur over a period of years and (2) a significant portion of our reserves represents concessions granted to borrowers upon modification of their loans and our reserves will continue to reflect these concessions until the loans are fully repaid or default.
Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations. We present a number of estimates and expectations in this executive summary regarding our future performance, including estimates and expectations regarding our future financial results and profitability, the level and sources of our future revenues and net interest income, our future dividend payments to Treasury, the level and credit characteristics of, and the credit risk posed by, our future acquisitions, our future credit losses and our future loss reserves. We also present a number of estimates and expectations in this executive summary regarding future housing market conditions, including expectations regarding future single-family loan delinquency and severity rates, future mortgage originations, future refinancings, future home prices and future conditions in the multifamily market. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. Our future estimates of our performance and housing market conditions, as well as the actual results, may differ materially from our current estimates and expectations as a result of: the timing and level of, as well as regional variation in, home price changes; changes in interest rates, unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our guaranty fee revenues and competitive environment; our future serious delinquency rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; future legislative or regulatory requirements or changes that have a significant impact on our business, such as a requirement that we implement a principal forgiveness program or the enactment of housing finance reform legislation; actions we may be required to take by FHFA, as our conservator or as our regulator, such as changes in the type of business we do or implementation of a single GSE security; future updates to our models relating to our loss reserves, including the assumptions used by these models; future changes to our accounting policies; significant changes in modification and foreclosure activity; the volume and pace of future NPL sales and their impact on our results and serious delinquency rates; changes in borrower behavior, such as an increasing number of underwater borrowers who strategically default on their mortgage loans; the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies; whether our counterparties meet their obligations in full; resolution or settlement agreements we may enter into with our counterparties; changes in the fiscal and monetary policies of the Federal Reserve, including any change in the Federal Reserve’s policy towards the reinvestment of principal payments of mortgage-backed securities or any future