e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File No.: 0-50231
Federal National Mortgage
Association
(Exact name of registrant as
specified in its charter)
Fannie
Mae
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Federally chartered corporation
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52-0883107
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3900 Wisconsin Avenue, NW
Washington, DC
(Address of principal
executive offices)
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20016
(Zip
Code)
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Registrants telephone number, including area code:
(202) 752-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller
reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009, there were 1,112,020,933 shares
of common stock of the registrant outstanding.
PART IFINANCIAL
INFORMATION
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Item 2.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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We have been under conservatorship, with the Federal
Housing Finance Agency (FHFA) acting as conservator,
since September 6, 2008. As conservator, FHFA succeeded to
all rights, titles, powers and privileges of the company, and of
any shareholder, officer or director of the company with respect
to the company and its assets. The conservator has since
delegated specified authorities to our Board of Directors and
has delegated to management the authority to conduct our
day-to-day
operations. We describe the rights and powers of the
conservator, the provisions of our agreements with the
U.S. Department of Treasury (Treasury), and
changes to our business, liquidity, corporate structure,
business strategies and objectives since conservatorship in our
Annual Report on
Form 10-K
for the year ended December 31, 2008 (2008
Form 10-K)
in Part IItem 1Business and in
our Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2009 (First Quarter
2009
Form 10-Q)
in Part IItem 2Managements
Discussion and Analysis of Financial Condition and Results of
OperationsExecutive Summary.
You should read this Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A) in conjunction with our unaudited
condensed consolidated financial statements and related notes,
and the more detailed information contained in our 2008
Form 10-K.
This discussion contains forward-looking statements that are
based upon managements current expectations and are
subject to significant uncertainties and changes in
circumstances. Our actual results may differ materially from
those included in these forward-looking statements due to a
variety of factors including, but not limited to, those
described in this report in
Part IIItem 1ARisk Factors and
in our 2008
Form 10-K
in Part IItem 1ARisk
Factors.
Please also refer to our 2008
Form 10-K
in
Part IItem 7MD&AGlossary
of Terms Used in This Report for an explanation of terms
we use in this report.
INTRODUCTION
Fannie Mae is a government-sponsored enterprise
(GSE) that was chartered by Congress in 1938. Fannie
Mae has a public mission to support liquidity and stability in
the secondary mortgage market, where existing mortgage loans are
purchased and sold. We securitize mortgage loans originated by
lenders in the primary mortgage market into mortgage-backed
securities that we refer to as Fannie Mae MBS, which can then be
bought and sold in the secondary mortgage market. We also
participate in the secondary mortgage market by purchasing
mortgage loans (often referred to as whole loans)
and mortgage-related securities, including our own Fannie Mae
MBS, for our mortgage portfolio. In addition, we make other
investments that increase the supply of affordable housing.
Under our charter, we may not lend money directly to consumers
in the primary mortgage market. Although we are a corporation
chartered by the U.S. Congress, and although our
conservator is a U.S. government agency and Treasury owns
our senior preferred stock and a warrant to purchase our common
stock, the U.S. government does not guarantee, directly or
indirectly, our securities or other obligations.
1
EXECUTIVE
SUMMARY
Our
Mission
In connection with our public mission to support liquidity and
stability in the secondary mortgage market, and in addition to
the investments we undertake to increase the supply of
affordable housing, FHFA, as our conservator, and the Obama
Administration have given us an important role in addressing
housing and mortgage market conditions. As we discuss below in
Our Business Objectives and Strategy,
Homeowner Assistance Initiatives and Providing
Mortgage Market Liquidity, pursuant to our mission, we are
concentrating our efforts on keeping people in their homes and
preventing foreclosures while continuing to support liquidity
and stability in the secondary mortgage market.
Our
Business Objectives and Strategy
Our Board of Directors and management consult with our
conservator in establishing our strategic direction, taking into
consideration our role in addressing housing and mortgage market
conditions, and FHFA has approved our business objectives.
We face a variety of different, and potentially conflicting,
objectives, including:
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providing liquidity, stability and affordability in the mortgage
market;
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immediately providing additional assistance to the mortgage
market and to the struggling housing market;
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limiting the amount of the investment Treasury must make under
our senior preferred stock purchase agreement with Treasury in
order to eliminate a net worth deficit;
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returning to long-term profitability; and
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protecting the interests of the taxpayers.
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We therefore regularly consult with and receive direction from
our conservator on how to balance these objectives. Our pursuit
of our mission creates conflicts in strategic and
day-to-day
decision-making that could hamper achievement of some or all of
these objectives. Our financial results are likely to suffer, at
least in the short term, as we expand our efforts to assist the
mortgage market, thereby increasing the amount of funds that
Treasury is required to provide to us and further limiting our
ability to return to long-term profitability.
Pursuant to our mission, we currently are concentrating our
efforts on keeping people in their homes and preventing
foreclosures. We also are continuing our significant role in the
secondary mortgage market through our guaranty business. These
efforts are intended to support liquidity and affordability in
the mortgage market, while we also work to implement foreclosure
prevention programs. Currently, one of the principal ways in
which we are pursuing these efforts is through our participation
in the Obama Administrations Making Home Affordable
Program. We provide an update on our participation in the Making
Home Affordable Program below.
Concentrating our efforts on keeping people in their homes and
preventing foreclosures while continuing to be active in the
secondary mortgage market, rather than concentrating solely on
returning to long-term profitability, is likely to contribute,
at least in the short term, to additional financial losses and
declines in our net worth. Continuing deterioration in the
housing and mortgage markets, along with the continuing
deterioration in our book of business and the costs associated
with these efforts pursuant to our mission, will increase the
amount of funds that Treasury is required to provide to us. In
turn, these factors put additional pressure on our ability to
return to long-term profitability. If, however, the Making Home
Affordable Program is successful in reducing foreclosures and
keeping borrowers in their homes, it may benefit the overall
housing market and help in reducing our long-term credit losses.
2
Obama
Administration Financial Regulatory Reform Plan
In June 2009, the Obama Administration announced a comprehensive
financial regulatory reform plan. The Administrations
white paper describing the plan notes that [w]e need to
maintain the continued stability and strength of the GSEs during
these difficult financial times. Although the white paper
does not include proposals for reform of Fannie Mae, Freddie Mac
and the Federal Home Loan Bank system, the Administration has
stated that it expects to provide its recommendations in
February 2010. See Legislative and Regulatory
MattersObama Administration Financial Regulatory Reform
Plan and Congressional Hearing for more information,
including a list of possible reform options for the GSEs
outlined in the Administrations white paper.
Housing
and Mortgage Market and Economic Conditions
The U.S. residential mortgage market continued to
deteriorate in the second quarter of 2009, which adversely
affected our financial condition and results of operations.
While housing activity, as measured by sales, stabilized in the
second quarter of 2009, the number of mortgage delinquencies and
mortgage foreclosures continued to increase.
We estimate that home prices on a national basis declined in the
first quarter of 2009, but increased slightly in the second
quarter of 2009, resulting in an estimated home price decline of
2.2% for the first half of 2009. Although the increase in home
prices in the second quarter of 2009 was broad-based, with
increases in approximately 75% of large metropolitan statistical
areas, the second quarter typically is the highest growth
quarter of the year because it is the peak home buying season.
Accordingly, as described in Outlook, we believe
that home prices will decline from current levels in the second
half of 2009. We estimate that home prices on a national basis
have declined by 16.1% from their peak in the third quarter of
2006. Our home price estimates are based on preliminary data and
are subject to change as additional data become available.
The economic recession that began in December 2007 continued in
the second quarter. The U.S. gross domestic product, or
GDP, declined by 1.0% in the second quarter of 2009, compared
with a decline of 6.4% in the first quarter of 2009. The
U.S. has lost a net total of 6.46 million jobs since
the start of the recession. The U.S. Bureau of Labor
Statistics reported successive increases in the unemployment
rate in each month of the second quarter, reaching 9.5% in June.
High levels of unemployment and severe declines in home prices
have contributed to a continued increase in residential mortgage
delinquencies.
The number of single-family unsold homes in inventory increased
in the second quarter of 2009 as compared to the first quarter,
and the supply of homes as measured by the inventory/sales ratio
remains high. In addition, we believe there are a considerable
number of foreclosed homes that are not yet on the market, as
well as a large number of seriously delinquent loans that will
be foreclosed upon. These homes are likely to contribute to a
significant increase in the market supply of single-family homes
in the future.
The National Association of Realtors reported in June 2009 that
existing home sales increased in the second quarter of 2009 to
roughly the same level they were in the fourth quarter of 2008.
Although affordability measures have risen dramatically as home
prices have declined from their peak, the limited availability
of conventional financing for many potential homebuyers, low
consumer confidence and adverse economic conditions have kept
purchase activity at historically low levels. However, on a
seasonally adjusted basis, single-family housing starts, new
home sales, and existing home sales were all higher in June of
this year than in March.
In addition, multifamily housing fundamentals are under
increasing stress, reflecting broader unfavorable economic
conditions, including higher unemployment and severely
restricted capital. These conditions are negatively affecting
multifamily property level cash flows, vacancy rates and rent
levels. Property values are declining due to both the downward
pressure on cash flows and the higher premium required by
investors. In addition, as some multifamily loans begin reaching
maturity during the next several years, some portion of those
loans may be exposed to refinancing risk.
As of March 31, 2009, the latest date for which information
was available, the amount of U.S. residential mortgage debt
outstanding was estimated by the Federal Reserve to be
approximately $11.9 trillion, including
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$11.0 trillion of single-family mortgages. Total
U.S. residential mortgage debt outstanding decreased by
0.2% in the first quarter of 2009 on an annualized basis,
compared with an increase of 2.7% in the first quarter of 2008.
Our mortgage credit book of business, which consists of the
mortgage loans and mortgage-related securities we hold in our
investment portfolio, Fannie Mae MBS held by third parties and
other credit enhancements that we provide on mortgage assets,
was $3.1 trillion as of March 31, 2009, or approximately
26.3% of total U.S. residential mortgage debt outstanding.
See Part IItem 1ARisk Factors
of our 2008
Form 10-K
for a description of risks to our business associated with the
housing market downturn and continued home price declines.
Summary
of Our Financial Results and Condition for the Second Quarter
and First Six Months of 2009
Our financial results and condition for the second quarter and
first six months of 2009 were adversely affected by the ongoing
deterioration in the housing and mortgage markets, the economic
recession and rising unemployment.
Consolidated
Results of Operations
Quarterly
Results
We recorded a net loss of $14.8 billion and a diluted loss
per share of $2.67 for the second quarter of 2009. Our net loss
was driven by significant credit-related expenses, which totaled
$18.8 billion in the second quarter, and more than offset
our net revenues of $5.6 billion generated from net
interest income and guaranty fee income, and $823 million
in fair value gains.
In comparison, we recorded a net loss of $23.2 billion and
a diluted loss per share of $4.09 for the first quarter of 2009,
which was primarily due to credit-related expenses of
$20.9 billion,
other-than-temporary
impairment losses of $5.7 billion and fair value losses of
$1.5 billion, which more than offset our net revenues of
$5.2 billion. Our net loss of $2.3 billion and diluted
loss per share of $2.54 for the second quarter of 2008 reflected
credit-related expenses of $5.3 billion that more than
offset our net revenues of $4.0 billion and
$517 million in fair value gains.
The $8.4 billion decrease in our net loss for the second
quarter of 2009 from the first quarter of 2009 was driven
principally by: a substantial decrease in
other-than-temporary
impairment, a significant portion of which was attributable to a
change in the accounting standard relating to the assessment of
other-than-temporary
impairment; a reduction in credit-related expenses; and a shift
to fair value gains from fair value losses in the first quarter
of 2009.
The $12.5 billion increase in our net loss for the second
quarter of 2009 from the second quarter of 2008 was driven
principally by a $13.4 billion increase in credit-related
expenses that more than offset a $1.7 billion increase in
net interest income.
Year-to-Date
Results
We recorded a net loss attributable to Fannie Mae of
$37.9 billion and a diluted loss per share of $6.76 for the
first six months of 2009, driven primarily by credit-related
expenses of $39.7 billion and
other-than-temporary
impairment of $6.4 billion that more than offset our net
revenues of $10.8 billion. In comparison, we recorded a net
loss attributable to Fannie Mae of $4.5 billion and a
diluted loss per share of $5.11 for the first six months of
2008, driven primarily by $8.6 billion in credit-related
expenses and $3.9 billion in fair value losses that more
than offset our net revenues of $7.7 billion.
The $33.4 billion increase in our net loss for the first
six months of 2009 from the first six months of 2008 was driven
principally by a $31.1 billion increase in credit-related
expenses, coupled with a $5.8 billion increase in
other-than-temporary
impairment, that more than offset a $3.2 billion increase
in net interest income and a $3.2 billion decrease in fair
value losses.
4
Credit
Overview
Table 1 below presents information about the credit performance
of mortgage loans in our single-family guaranty book of business
for each quarter of 2008 and the first two quarters of 2009,
illustrating the worsening trend in performance throughout 2008
and continuing in the first half of 2009.
Table
1: Credit Statistics, Single-Family Guaranty Book of
Business(1)
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2009
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2008
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Q2 YTD
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Q2
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Q1
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Full Year
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Q4
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Q3
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Q2
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Q1
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(Dollars in millions)
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As of the end of each period:
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Serious delinquency
rate(2)
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3.94
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%
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3.94
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%
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3.15
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%
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2.42
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%
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2.42
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%
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1.72
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%
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1.36
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%
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1.15
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%
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On-balance sheet nonperforming
loans(3)
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$
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26,300
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$
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26,300
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$
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23,145
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$
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20,484
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$
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20,484
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$
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14,148
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$
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11,275
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$
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10,947
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Off-balance sheet nonperforming
loans(4)
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$
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144,183
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$
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144,183
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$
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121,378
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$
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98,428
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$
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98,428
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$
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49,318
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$
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34,765
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$
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23,983
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Combined loss
reserves(5)
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$
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54,152
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$
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54,152
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$
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41,082
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$
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24,649
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$
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24,649
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$
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15,528
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$
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8,866
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$
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5,140
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Foreclosed property inventory (number of
properties)(6)
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62,615
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62,615
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62,371
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63,538
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63,538
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67,519
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54,173
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43,167
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During the period:
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Loan modifications (number of
loans)(7)
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29,130
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16,684
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12,446
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33,388
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6,313
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5,291
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10,229
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11,555
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HomeSaver Advance problem loan workouts (number of
loans)(8)
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32,093
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11,662
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20,431
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70,967
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25,788
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27,278
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16,749
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1,152
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Foreclosed property acquisitions (number of
properties)(9)
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57,469
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32,095
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25,374
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94,652
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20,998
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29,583
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23,963
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20,108
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Single-family credit-related
expenses (10)
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$
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38,721
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$
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18,391
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$
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20,330
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$
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29,725
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$
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11,917
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$
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9,215
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$
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5,339
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$
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3,254
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Single-family credit
losses(11)
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$
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5,766
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$
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3,301
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$
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2,465
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$
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6,467
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$
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2,197
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$
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2,164
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$
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1,249
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$
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857
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(1) |
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The single-family guaranty book of
business consists of single-family mortgage loans held in our
mortgage portfolio, single-family Fannie Mae MBS held in our
mortgage portfolio, single-family Fannie Mae MBS held by third
parties, and other credit enhancements that we provide on
single-family mortgage assets. It excludes non-Fannie Mae
mortgage-related securities held in our investment portfolio for
which we do not provide a guaranty.
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(2) |
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Calculated based on number of
conventional single-family loans that are three or more months
past due and loans that have been referred to foreclosure but
not yet foreclosed upon, divided by the number of loans in our
conventional single-family guaranty book of business. We include
all of the conventional single-family loans that we own and
those that back Fannie Mae MBS in the calculation of the
single-family serious delinquency rate.
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(3) |
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Represents the total amount of
nonaccrual loans, troubled debt restructurings, and first-lien
loans associated with unsecured HomeSaver Advance loans
including troubled debt restructurings and HomeSaver Advance
first-lien loans on accrual status. A troubled debt
restructuring is a restructuring of a mortgage loan in which a
concession is granted to a borrower experiencing financial
difficulty. Prior to the fourth quarter of 2008, we generally
classified loans as nonperforming when the payment of principal
or interest on the loan was three months or more past due. In
the fourth quarter of 2008, we began classifying loans as
nonperforming at an earlier stage in the delinquency cycle,
generally when the payment of principal or interest on the loan
is two months or more past due.
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(4) |
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Represents unpaid principal balance
of nonperforming loans in our outstanding and unconsolidated
Fannie Mae MBS held by third parties, including first-lien loans
associated with unsecured HomeSaver Advance loans that are not
seriously delinquent. Prior to the fourth quarter of 2008, we
generally classified loans as nonperforming when the payment of
principal or interest on the loan was three months or more past
due. In the fourth quarter of 2008, we began classifying loans
as nonperforming at an earlier stage in the delinquency cycle,
generally when the payment of principal or interest on the loan
is two months or more past due. Loans have been classified as
nonperforming according to the classification standard in effect
at the time the loan became a nonperforming loan, and prior
periods have not been revised to reflect changes in
classification.
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(5) |
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Consists of the allowance for loan
losses for loans held for investment in our mortgage portfolio
and reserve for guaranty losses related to both loans backing
Fannie Mae MBS and loans that we have guaranteed under long-term
standby commitments.
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(6) |
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Reflects the number of
single-family foreclosed properties we held in inventory as of
the end of each period. Includes properties we acquired through
deeds in lieu of foreclosure.
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(7) |
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Modifications are granted for
borrowers experiencing financial difficulty and include troubled
debt restructurings as well as other modifications to the terms
of the loan. A troubled debt restructuring of a mortgage loan is
a restructuring in which a concession is granted to the
borrower. It is the only form of modification in which we agree
to accept less than the full original contractual principal and
interest amount due under the loan, although other resolutions
and modifications may result in our receiving the full amount
due, or certain installments due, under the loan over a period
of time that is longer than the period of time originally
provided for under the terms of the loans.
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(8) |
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Represents number of first-lien
loans associated with unsecured HomeSaver Advance loans.
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(9) |
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Includes deeds in lieu of
foreclosure.
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(10) |
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Consists of the provision for
credit losses and foreclosed property expense.
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(11) |
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Consists of (a) charge-offs,
net of recoveries and (b) foreclosed property expense;
adjusted to exclude the impact of
SOP 03-3
and HomeSaver Advance fair value losses for the reporting
period. Interest forgone on single-family nonperforming loans in
our mortgage portfolio is not reflected in our credit losses
total. In addition, we exclude
other-than-temporary
impairment losses resulting from deterioration in the credit
quality of our mortgage-related securities and accretion of
interest income on single-family loans subject to Statement of
Position
No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
(SOP 03-3),
from credit losses. See Consolidated Results of
OperationsCredit-Related ExpensesProvision
Attributable to
SOP 03-3
and HomeSaver Advance Fair Value Losses for a discussion
of
SOP 03-3.
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As shown in Table 1 above, we continued to experience
deterioration in the credit performance of mortgage loans in our
guaranty book of business throughout the second quarter of 2009,
reflecting the ongoing impact of the adverse conditions in the
housing market, as well as the economic recession and rising
unemployment. See Housing and Mortgage Market and Economic
Conditions above for more detailed information regarding
these conditions. We expect these conditions to continue to
adversely affect our credit results in 2009 and into 2010.
We increased our single-family loss reserves to
$54.2 billion as of June 30, 2009, or 31.76% of the
amount of our single-family nonperforming loans, from
$41.1 billion as of March 31, 2009, or 28.43% of the
amount of our nonperforming loans, and $24.6 billion as of
December 31, 2008, or 20.73% of the amount of our
nonperforming loans. The increase in our loss reserves in the
second quarter and first six months of 2009 reflected the
continued deterioration in the overall credit performance of
loans in our guaranty book of business, as evidenced by the
significant increase in delinquent, seriously delinquent and
nonperforming loans. In addition, our average loss severity, or
average initial charge-off per default, increased as a result of
the decline in home prices during the first half of 2009. We
recorded a lower provision for credit losses in the second
quarter of 2009 than in the first quarter of 2009, however, due
to a slower rate of increase in both our estimated default rate
and average loss severity as compared with the prior quarter.
We are experiencing increases in delinquency and default rates
for our entire guaranty book of business, including on loans
with fewer risk layers. Risk layering is the combination of risk
characteristics that could increase the likelihood of default,
such as higher
loan-to-value
ratios, lower FICO credit scores, higher
debt-to-income
ratios and adjustable-rate mortgages. This general deterioration
in our guaranty book of business is a result of the stress on a
broader segment of borrowers due to the rise in unemployment and
the decline in home prices. Certain loan categories continue to
contribute disproportionately to the increase in nonperforming
loans and credit losses for the second quarter and first six
months of 2009. These categories include: loans on properties in
the Midwest, California, Florida, Arizona and Nevada; loans
originated in 2006 and 2007; and loans related to higher-risk
product types, such as Alt-A loans. The term Alt-A
loans generally refers to mortgage loans that can be
underwritten with reduced or alternative documentation than that
required for a full documentation mortgage loan but may also
include other alternative product features. In reporting our
credit exposure, we classify mortgage loans as Alt-A if the
lenders that delivered the mortgage loans to us classified the
loans as Alt-A based on documentation or other product features.
See Risk ManagementCredit Risk
ManagementMortgage Credit Risk ManagementMortgage
Credit Book of Business for more detailed information on
the risk profile and the performance of the loans in our
mortgage credit book of business.
Current market and economic conditions have also adversely
affected the liquidity and financial condition of many of our
institutional counterparties, particularly mortgage insurers and
mortgage servicers, which has
6
significantly increased the risk to our business of defaults by
these counterparties due to bankruptcy or receivership, lack of
liquidity, insufficient capital, operational failure or other
reasons. See Risk ManagementCredit Risk
ManagementInstitutional Counterparty Credit Risk
Management for more information about our institutional
counterparty credit risk.
Consolidated
Balance Sheet
Total assets of $911.4 billion as of June 30, 2009
decreased by $1.0 billion, or 0.1%, from December 31,
2008. Total liabilities of $922.0 billion decreased by
$5.6 billion, or 0.6%, from December 31, 2008. Total
Fannie Mae stockholders deficit decreased by
$4.6 billion during the first six months of 2009, to a
deficit of $10.7 billion as of June 30, 2009 from a
deficit of $15.3 billion as of December 31, 2008. The
decrease in total Fannie Mae stockholders deficit was
attributable to the $34.2 billion in funds received from
Treasury under the senior preferred stock purchase agreement,
$5.9 billion in unrealized gains on
available-for-sale
securities and a $3.0 billion reduction in our accumulated
deficit to reverse a portion of our deferred tax asset valuation
allowance in conjunction with our April 1, 2009 adoption of
the new accounting guidance for assessing
other-than-temporary
impairment, partially offset by our net loss attributable to
Fannie Mae of $37.9 billion for the first six months of
2009.
Our mortgage credit book of business increased to $3.2 trillion
as of June 30, 2009, from $3.1 trillion as of
December 31, 2008 as our market share of mortgage-related
securities issuance remained high and new business acquisitions
outpaced liquidations. Our estimated market share of new
single-family mortgage-related securities issuance was 53.5% for
the second quarter of 2009, compared with 44.2% for the first
quarter of 2009. As described in Liquidity and Capital
ManagementLiquidity Contingency PlanningUnencumbered
Mortgage Portfolio, we securitized approximately
$94.6 billion of whole loans held for investment in our
mortgage portfolio into Fannie Mae MBS in the second quarter of
2009 in order to hold these assets in a more liquid form. These
Fannie Mae MBS were retained in our mortgage portfolio and
consolidated on our consolidated condensed balance sheets,
rather than issued to third parties. Excluding these Fannie Mae
MBS from both Fannie Mae and total market mortgage-related
securities issuance volumes, our estimated market share of new
single-family mortgage-related securities issuance was 44.5% for
the second quarter of 2009. We did not issue Fannie Mae MBS
backed by whole loans held for investment in our mortgage
portfolio in the first quarter of 2009. Fannie Mae was the
largest single issuer of mortgage-related securities in the
secondary market in the second quarter of 2009.
We provide more detailed discussions of key factors affecting
changes in our results of operations and financial condition in
Consolidated Results of Operations, Business
Segment Results, Consolidated Balance Sheet
Analysis, Supplemental
Non-GAAP InformationFair Value Balance Sheets,
and Risk ManagementCredit Risk
ManagementMortgage Credit Risk ManagementMortgage
Credit Book of Business.
Net
Worth Deficit
We had an estimated net worth deficit of $10.6 billion as
of June 30, 2009, compared with a net worth deficit of
$18.9 billion as of March 31, 2009 and
$15.2 billion as of December 31, 2008. This net worth
deficit equals the total deficit that we report in our condensed
consolidated balance sheets, and is calculated by subtracting
our total liabilities from our total assets, each as shown on
our condensed consolidated balance sheets prepared in accordance
with generally accepted accounting principles (GAAP)
for that fiscal quarter.
Under the Federal Housing Finance Regulatory Reform Act
(Regulatory Reform Act), FHFA must place us into
receivership if the Director of FHFA makes a written
determination that our assets are, and during the preceding
60 days have been, less than our obligations. FHFA has
notified us that the measurement period for such a determination
begins no earlier than the date of the SEC filing deadline for
our quarterly and annual financial statements and continues for
a period of 60 days after that date. FHFA also has advised
us that, if we receive funds from Treasury during that
60-day
period in order to eliminate our net worth deficit as of the
prior period end in accordance with the senior preferred stock
purchase agreement, the Director of FHFA will not make a
mandatory receivership determination.
7
Under the senior preferred stock purchase agreement that was
entered into between us and Treasury in September 2008 and
amended in May 2009, Treasury committed to provide us with funds
of up to $200 billion under specified conditions. The
agreement requires Treasury, upon the request of our
conservator, to provide funds to us after any quarter in which
we have a negative net worth (that is, our total liabilities
exceed our total assets, as reflected on our GAAP balance
sheet). The senior preferred stock purchase agreement does not
terminate as of a particular time; however, we may no longer
obtain new funds under the agreement once we have received a
total of $200 billion under the agreement.
All references to the senior preferred stock purchase agreement
in this report are to the agreement as amended in May 2009. We
describe the terms of the May 2009 amendment to the senior
preferred stock purchase agreement in our First Quarter 2009
Form 10-Q
in
Part IItem 2MD&AExecutive
SummaryAmendment to Senior Preferred Stock Purchase
Agreement and we describe the terms of the agreement prior
to its May 2009 amendment, most of which continue to apply, in
our 2008
Form 10-K
in
Part IItem 1BusinessConservatorship,
Treasury Agreements, Our Charter and Regulation of Our
ActivitiesTreasury Agreements.
On March 31, 2009, we received $15.2 billion from
Treasury under the senior preferred stock purchase agreement,
which eliminated our net worth deficit as of December 31,
2008. We received an additional $19.0 billion from Treasury
on June 30, 2009, which eliminated our net worth deficit as
of March 31, 2009. The Director of FHFA submitted a request
to Treasury on August 6, 2009 for an additional
$10.7 billion on our behalf to eliminate our net worth
deficit as of June 30, 2009, and requested receipt of those
funds on or prior to September 30, 2009.
Upon receipt of these funds from Treasury, the aggregate
liquidation preference of our senior preferred stock will total
$45.9 billion and the annualized dividend on the senior
preferred stock will be $4.6 billion, based on the 10%
dividend rate. This dividend obligation exceeds our reported
annual net income for four of the past seven years and will
contribute to increasingly negative cash flows in future periods
if we continue to pay the dividends on a quarterly basis. If we
do not pay the dividend quarterly and in cash, the dividend rate
would increase to 12% annually, and the unpaid dividend would
accrue and be added to the liquidation preference of the senior
preferred stock, further increasing the amount of the annual
dividends.
Due to current trends in the housing and financial markets, we
expect to have a net worth deficit in future periods, and
therefore will be required to obtain additional funding from
Treasury pursuant to the senior preferred stock purchase
agreement. As a result, we are dependent on the continued
support of Treasury in order to continue operating our business.
Our ability to access funds from Treasury under the senior
preferred stock purchase agreement is critical to keeping us
solvent and avoiding the appointment of a receiver by FHFA under
statutory mandatory receivership provisions.
Our senior preferred stock dividend obligation, combined with
potentially substantial commitment fees payable to Treasury
starting in 2010 (the amounts of which have not yet been
determined) and our effective inability to pay down draws under
the senior preferred stock purchase agreement, will have a
significant adverse impact on our future financial position and
net worth. See Part IIItem 1ARisk
Factors for more information on the risks to our business
posed by our dividend obligations under the senior preferred
stock purchase agreement.
Fair
Value Deficit
Our fair value deficit as of June 30, 2009, which is
reflected in our supplemental non-GAAP fair value balance sheet,
was $102.0 billion, compared with a deficit of
$110.3 billion as of March 31, 2009 and
$105.2 billion as of December 31, 2008.
The fair value of our net assets, including capital
transactions, increased by $3.1 billion during the first
six months of 2009. Included in this increase was
$34.2 billion of capital received from Treasury under the
senior preferred stock purchase agreement. The fair value of our
net assets, excluding capital transactions, decreased by
$30.6 billion during the first six months of 2009. This
decrease reflected the adverse impact on our net guaranty assets
from the continued weakness in the housing market and increases
in unemployment resulting
8
from the economic recession, which contributed to a significant
increase in the fair value of our guaranty obligations. We
experienced a favorable impact on the fair value of our net
assets attributable to an increase in the fair value of our net
portfolio primarily due to changes in the net spread between our
mortgage assets and our debt.
The amount that Treasury has committed to provide us under the
senior preferred stock purchase agreement is determined based on
our GAAP balance sheet, not our non-GAAP fair value balance
sheet. There are significant differences between our GAAP
balance sheet and our non-GAAP fair value balance sheet, which
we describe in greater detail in Supplemental
Non-GAAP InformationFair Value Balance Sheets.
Significance
of Net Worth Deficit, Fair Value Deficit and Combined Loss
Reserves
Our net worth deficit, which equals our total deficit as
reported on our consolidated GAAP balance sheet, includes the
combined loss reserves of $55.1 billion that we recorded in
our consolidated balance sheet as of June 30, 2009. Our
non-GAAP fair value balance sheet presents all of our assets and
liabilities at estimated fair value as of the balance sheet
date. Fair value represents the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date, which is also referred to as the exit
price. In determining fair value, we use a variety of
valuation techniques and processes. In general, fair value
incorporates the markets current view of the future, and
that view is reflected in the current price of the asset or
liability. However, future market conditions may be different
from what the market has currently estimated and priced into
these fair value measures. We describe our use of assumptions
and management judgment and our valuation techniques and
processes for determining fair value in more detail in
Supplemental Non-GAAP informationFair Value Balance
Sheets, Critical Accounting Policies and
EstimatesFair Value of Financial Instruments and
Notes to Condensed Consolidated Financial
StatementsNote 18, Fair Value of Financial
Instruments.
Our combined GAAP loss reserves reflect probable losses that we
believe we have already incurred as of the balance sheet date.
In contrast, the fair value of our guaranty obligation is based
not only on future expected credit losses over the life of the
loans underlying our guarantees as of June 30, 2009, but
also on the estimated profit that a market participant would
require to assume that guaranty obligation.
Accounting
Developments
Elimination
of QSPEs and Changes in the Consolidation of Variable Interest
Entities
In June 2009, the Financial Accounting Standards Board (the
FASB) issued new accounting standards relating to
the elimination of qualified special purpose entities
(QSPEs) and changes in the consolidation of variable
interest entities. We intend to adopt these new accounting
standards effective January 1, 2010. The adoption of this
new accounting guidance will have a major impact on our
consolidated financial statements, including the consolidation
of the substantial majority of our MBS trusts. Accordingly, we
will record the underlying loans in these trusts on our balance
sheet. The outstanding unpaid principal balance of our MBS
trusts was approximately $2.8 trillion as of June 30, 2009.
In addition, consolidation of these MBS trusts will have a
material impact on our statements of operations and cash flows,
including a significant increase in our interest income,
interest expense and cash flows from investing and financing
activities. We continue to evaluate the impact of the adoption
of this new accounting guidance, including the impact on our net
worth and capital. We also are in the process of making major
operational and system changes to implement these new standards
by the effective date.
Change
in Assessment of
Other-Than-Temporary
Impairment
In April 2009, the FASB issued a new accounting standard that
changed the accounting guidance for assessing
other-than-temporary
impairment for investments in debt securities. In connection
with our adoption of this guidance on April 1, 2009, we
recorded a cumulative-effect adjustment at April 1, 2009 of
$8.5 billion on a pre-tax basis ($5.6 billion after
tax) to reclassify the noncredit portion of previously
recognized
other-than-temporary
impairments from Accumulated deficit to
Accumulated other comprehensive loss. Because we
have asserted an intent and ability to hold certain of these
securities until recovery, we also
9
reduced the Accumulated deficit and the valuation
allowance for the deferred tax asset by $3.0 billion, which
is the deferred tax asset amount related to the noncredit
portion of the previously recognized
other-than-temporary
impairments that was reclassified to Accumulated other
comprehensive loss. The adoption of this accounting
standard resulted in $344 million of noncredit related
losses for the second quarter of 2009 being recognized in
Other comprehensive loss instead of being recorded
in our condensed consolidated statement of operations, as
previously required.
See Critical Accounting Policies and
EstimatesOther-Than-Temporary
Impairment of Investment Securities, Off-Balance
Sheet Arrangements and Variable Interest
EntitiesElimination of QSPEs and Changes in the
FIN 46R Consolidation Model and Notes to
Condensed Consolidated Financial StatementsNote 2,
Summary of Significant Accounting Policies for further
information on these accounting changes.
Liquidity
In response to the strong demand that we experienced for our
debt securities during the first half of 2009, we issued a
variety of non-callable and callable debt securities in a wide
range of maturities to achieve cost efficient funding and an
appropriate debt maturity profile. In particular, we issued a
significant amount of long-term debt during this period, which
we then used to repay maturing short-term debt and prepay more
expensive long-term debt. As a result, our short-term debt
decreased as a percentage of our total outstanding debt to 31%
as of June 30, 2009 from 38% as of December 31, 2008,
and the average interest rate on our long-term debt (excluding
debt from consolidations) decreased to 3.81% as of June 30,
2009 from 4.66% as of December 31, 2008.
Our debt roll-over, or refinancing, risk has
significantly declined since November 2008 due to the
combination of our improved access to long-term debt funding,
improved market conditions, the reduced proportion of our
outstanding debt that consists of short-term debt, and our
expected reduced debt funding needs in the future. We believe
that the improvement in our access to long-term debt funding
since November 2008 stems from actions taken by the federal
government to support us and the financial markets. Accordingly,
we believe that our status as a GSE and continued federal
government support of our business and the financial markets is
essential to maintaining our access to debt funding, and changes
or perceived changes in the governments support of us or
the markets could lead to an increase in our debt roll-over risk
in future periods and have a material adverse effect on our
ability to fund our operations. Demand for our debt securities
could decline in the future if the government does not extend or
replace the Treasury credit facility and the Federal
Reserves agency debt and MBS purchase programs, each of
which expire on December 31, 2009, or for other reasons. As
of the date of this filing, however, demand for our long-term
debt securities continues to be strong.
See Liquidity and Capital ManagementLiquidity
ManagementDebt Funding for more information on our
debt funding activities and
Part IIItem 1ARisk Factors of
this report and Part IItem 1ARisk
Factors of our 2008
Form 10-K
for a discussion of the risks to our business posed by our
reliance on the issuance of debt to fund our operations.
Homeowner
Assistance Initiatives
During the second quarter of 2009, we continued our efforts,
pursuant to our mission, to help homeowners avoid foreclosure.
Much of our effort during the quarter was focused on
implementing the Making Home Affordable Program, the details of
which were first announced by the Obama Administration on
March 4, 2009. That program is designed to significantly
expand the number of borrowers who can refinance or modify their
mortgages to achieve a monthly payment that is more affordable
now and into the future or to obtain a more stable loan product,
such as a fixed-rate mortgage loan in lieu of an adjustable-rate
mortgage loan. In addition, if it is determined that a borrower
is not eligible for a refinance or modification under that
program, we will attempt to find another foreclosure alternative
solution for the borrower.
10
The
Making Home Affordable Program
Key elements of the Making Home Affordable Program are the Home
Affordable Refinance Program and the Home Affordable
Modification Program.
The Home Affordable Refinance Program provides for us to acquire
or guarantee loans that are refinancings of mortgage loans we
own or guarantee, and for Freddie Mac to acquire or guarantee
loans that are refinancings of mortgage loans that it owns or
guarantees. The program is targeted at borrowers who have
demonstrated an acceptable payment history on their mortgage
loans but may have been unable to refinance due to a decline in
home values. We make refinancings under the Home Affordable
Refinance Program through our Refi
Plustm
initiatives, which provide refinance solutions for eligible
Fannie Mae loans. To qualify for the Home Affordable Refinance
Program, the new mortgage loan must either:
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reduce the borrowers monthly principal and interest
payment, or
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provide a more stable loan product.
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The Home Affordable Modification Program provides for the
modification of mortgage loans owned or guaranteed by us or
Freddie Mac, as well as other mortgage loans. The program is
aimed at helping borrowers whose loan either is currently
delinquent or who are at imminent risk of default by modifying
their mortgage loan to make their monthly payments more
affordable. Under the program, borrowers must satisfy the terms
of a trial modification plan for a period of three or four
months before the modification of the loan becomes effective. We
have advised our servicers that we expect borrowers who are at
risk of foreclosure to be evaluated for eligibility under the
Home Affordable Modification Program before any other workout
alternative is considered. The program is designed to provide a
uniform, consistent regime for servicers to use in modifying
mortgage loans to prevent foreclosures. For modifications under
the program for loans that are not owned or guaranteed by Fannie
Mae, we serve as the program administrator for Treasury. More
detailed information regarding our role as program administrator
for the Home Affordable Modification Program is provided in
Part IItem 2MD&AExecutive
SummaryHomeowner Assistance and Foreclosure Prevention
Initiatives of our First Quarter 2009
Form 10-Q.
Both the Home Affordable Refinance Program and the Home
Affordable Modification Program are now in operation. We began
accepting delivery of newly refinanced mortgage loans under the
Home Affordable Refinance Program on April 1, 2009, and we
entered into the first trial modification plans for loans that
we own or guarantee in March 2009.
We have taken a number of steps since the Home Affordable
Refinance Program and the Home Affordable Modification Program
were launched in March 2009 to let borrowers know that help may
be available to them under the programs. We responded to an
average of 7,300 phone calls each week from borrowers inquiring
about the Making Home Affordable Program during the second
quarter of 2009. During that period, the loan-lookup tool we
added to our Web site, which allows borrowers to find out
instantly whether we own their loans, was used over three
million times. We also have worked with servicers to mail
letters to approximately 288,000 Fannie Mae borrowers through
July 15, 2009 regarding the possibility of modifying their
loans. Together with Treasury, the Department of Housing and
Urban Development (HUD), NeighborWorks, and Freddie
Mac, we are implementing a Making Home Affordable marketing and
communications outreach campaign. As part of that campaign, in
June we launched a targeted market campaign that over the coming
year will cover 40 communities experiencing high levels of
foreclosure to raise awareness about the Making Home Affordable
Program, educate borrowers about options available to them,
prepare them to work more efficiently with their servicers, and
help keep them from falling victim to foreclosure prevention
scams. The targeted market campaign includes a variety of
outreach activities, including distribution of brochures and
other informational materials, community partner roundtables,
training sessions with local housing counselors, and borrower
foreclosure prevention workshops, where HUD-certified housing
counselors and mortgage servicers meet
one-on-one
with borrowers.
We have also worked to support servicers who are modifying or
refinancing our loans under the Making Home Affordable Program
or who are modifying loans that we do not own or guarantee.
Servicers face challenges putting in place personnel, training,
systems and operations to support the Making Home
11
Affordable programs. To help them address these challenges, we
have established
on-site
support for 39 of our top servicers, developed recorded
tutorials, and we continue to offer live, Web-based training to
servicers. We have also revised Desktop
Underwriter®
(DU®),
our proprietary underwriting system that assists lenders in
underwriting loans, to permit many refinancings under the Home
Affordable Refinance Program to be made using DU.
A number of updates have been announced to expand the Making
Home Affordable Program since its initial announcement:
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On April 28, 2009, the Obama Administration announced the
Second Lien Modification Program. Under the program when a
borrowers first lien mortgage loan is modified under the
Home Affordable Modification Program, a servicer participating
in the Second Lien Program will be required to offer either to
modify the associated second lien according to a pre-set
protocol or to extinguish the second lien mortgage loan in
return for a lump sum payment under a pre-set formula determined
by Treasury.
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On May 14, 2009, the Obama Administration announced two new
components of the Making Home Affordable Program to help
distressed borrowers:
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The Foreclosure Alternatives Program is aimed at assisting
distressed borrowers by promoting alternatives to foreclosure
when it is not an option for the borrower to keep the home. The
program is designed to mitigate the impact of foreclosure on
borrowers and communities by encouraging a short
sale of the home (in which the borrower, working with the
servicer, sells the home for less than the amount owed on the
mortgage loan in full satisfaction of the loan) or a transfer of
the home by a deed in lieu of foreclosure in cases where a
borrower meets the eligibility requirements for a Home
Affordable Modification but does not receive a modification
offer or cannot maintain the required payments during the trial
period or following modification.
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Home Price Decline Protection Incentives are intended to provide
investors with additional incentives for Home Affordable
Modifications of loans secured by homes in areas where home
prices have recently declined and where investors are concerned
that price declines may persist.
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On May 29, 2009, we announced a 2% limit on the cumulative
loan level price adjustments and adverse market delivery charge
we apply to loans refinanced through our Refi
Plustm
initiatives, through which we refinance loans under the Home
Affordable Refinance Program. This limit was designed to reduce
the cost of refinancing for some borrowers and thereby permit
more borrowers to refinance under the program.
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On June 25, 2009, we announced that we are easing the
restrictions on the type of credit enhancement to which an
existing loan can be subject, allowing more loans to be eligible
for refinancing through the Home Affordable Refinance Program.
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On July 1, 2009, FHFA authorized Fannie Mae and Freddie Mac
to expand the Home Affordable Refinance Program to refinance
their existing mortgage loans with an unpaid principal balance
of up to 125% of the current value of the property covered by
the mortgage loan, instead of the programs initial 105%
limit. We will begin acquiring these mortgage loans on
September 1, 2009.
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Not all of the announced program updates have been implemented
at this time. More detailed information regarding the Home
Affordable Refinance Program and the Home Affordable
Modification Program is provided in
Part IItem 2MD&AExecutive
SummaryHomeowner Assistance and Foreclosure Prevention
Initiatives of our First Quarter 2009
Form 10-Q.
Refinancing
Activity
With long-term interest rates near record lows at the beginning
of the second quarter of 2009, many borrowers took the
opportunity to refinance their loans and obtain lower interest
rates, a more stable loan product (such as a fixed-rate loan
instead of an adjustable-rate loan), a lower monthly payment, or
cash. During the second quarter and first six months of 2009, we
acquired or guaranteed approximately 843,000 and 1,447,000 loans
that were refinancings, including approximately 84,000 loans
that represented refinancings in the second
12
quarter through our Refi Plus initiatives. On average, during
the second quarter of 2009, borrowers who refinanced through our
Refi Plus initiatives reduced their monthly mortgage payments by
$192. In addition, approximately 6.2% of the total loans
refinanced through our Refi Plus initiatives provided the
borrowers with a more stable loan product than their prior loan,
such as a fixed-rate loan or a fully amortizing loan.
We acquired approximately 16,000 loans under the Home Affordable
Refinance Program for our portfolio or for securitization during
the second quarter of 2009. The pace of our acquisitions under
the Home Affordable Refinance Program increased notably in July,
with an estimated 16,000 loans acquired during the month. During
the early phase of the program, we, along with servicers and
other mortgage market participants, including mortgage insurers,
took a number of stepssuch as modifying systems and
operations, and training personnelthat required time to
put in place and therefore limited the number of loans that
could be refinanced under the program during the second quarter.
The number of loans that could be refinanced was also limited by
the capacity of lenders to handle the large volume of
refinancings generated by record-low rates and by the time it
takes to go through the loan origination process from
application to closing and delivery. As a result, we expect an
increase in refinancings under this program in the third quarter
as compared to the second quarter, as second quarter
applications are closed and delivered.
We believe the most significant factor that will affect the
number of borrowers refinancing under the program is mortgage
rates. As rates increase, fewer borrowers benefit from
refinancing their mortgage loan; as rates decrease, more
borrowers benefit from refinancing. The number of borrowers who
refinance under the Home Affordable Refinance Program is also
likely to be constrained by a number of other factors, including
lack of borrower awareness, lack of borrower action to initiate
a refinancing, and borrower ineligibility due, for example, to
severe home price declines or to borrowers failing to remain
current in their mortgage payments. The increase in the maximum
loan-to-value
(LTV) ratio of the refinanced loan to up to 125% of
the current value of the property and the increasing awareness
of the availability of refinance options will, over time, help
to lessen the effects of some of these constraints, but will
take time to take effect.
Loan
Workout Activity
During the second quarter of 2009, we continued our efforts to
help homeowners avoid foreclosure through a variety of
foreclosure alternatives. We refer to actions taken by servicers
with a borrower to resolve the problem of delinquent loan
payments as workouts. During the second quarter and
first six months of 2009, we completed approximately 41,000 and
88,000 loan workouts, compared with approximately 124,000
workouts during all of 2008. These amounts do not include trial
loan modifications under the Home Affordable Modification
Program or repayment and forbearance plans that were initiated
but not completed as of June 30, 2009. Loan modifications
represented 40% of all workouts during the second quarter of
2009, compared with 27% of workouts during all of 2008. The
workouts we completed during the second quarter of 2009 included
approximately 17,000 loan modifications; 12,000 loans under our
HomeSaver
Advancetm
program; and 5,000 repayment plans and forbearances completed.
During the second quarter, borrowers who accepted offers for
modifications under the Home Affordable Modification Program
entered three or four month trial periods that must be completed
prior to the execution of a modification under the program.
Activity during the early stages of the program has been
affected by the need to build consumer awareness and by
servicers success in identifying eligible borrowers and
executing trial modification plans. Only a small number of loans
had time to complete a trial modification period under the
program prior to June 30, 2009.
We expect to see increased activity under the program in the
coming months as servicers gain experience with the program,
borrower awareness grows, and new updates aimed at expanding the
programs reach are implemented. As reported by servicers
as part of the Making Home Affordable Program, there have been
approximately 85,000 trial modifications started on Fannie Mae
loans through July 30, 2009. The number of trial
modifications started in July increased notably compared to
monthly volumes during the second quarter.
13
Factors that have affected and may in the future continue to
affect the number of loans modified include the following.
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Servicer Capacity to Handle a New and Complex
Process. Modifications require servicers to
handle a multi-step process that includes identifying loans that
are candidates for modification, making contact with the
borrower, obtaining current financial information from the
borrower, evaluating whether the program is a viable workout
option, structuring the terms of the modification, communicating
those terms to the borrower, providing the legal documentation,
and receiving the borrowers agreements to both enter the
trial period and modify the loan. As with the Home Affordable
Refinance Program, during the early phase of the Home Affordable
Modification program, servicers took a number of steps to
implement the program, such as establishing or modifying systems
and operations, and training personnel, that required time to
put in place. Many servicers are still increasing their capacity
to implement the program by hiring staff, enhancing technology,
and changing their processes. Servicers will need to continue to
adapt and take actions to implement new program elements as they
are introduced to the program in an effort to assist more
borrowers. The number of loans ultimately modified under the
program depends on the extent to which servicers are able and
willing to increase their capacity sufficiently to address the
demand for modifications.
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Borrower Awareness, Initiation and
Agreement. Before a loan can be modified under
the program, a borrower must learn of the program, initiate a
request for a modification or respond to solicitations to apply
for the program, provide current, accurate financial
information, agree to the terms of a proposed modification and
successfully complete the trial payment period. Many distressed
borrowers are reluctant or unwilling even to contact their
lenders, as demonstrated by the substantial percentage of
foreclosures that are completed without the borrower having ever
contacted the lender. Thus, extensive borrower outreach is
required to encourage distressed borrowers to initiate a
modification.
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Borrower Inability or Unwillingness to Make Payments Even
under a Modified Loan. Modifications under the
Home Affordable Modification Program, or indeed under any
program, will not be sufficient to help some borrowers keep
their homes, particularly borrowers who have significant
non-mortgage debt obligations or who are suffering from loss of
income or other life events that impair their ability to
maintain their mortgage even if it is modified. Other borrowers,
particularly those whose mortgage obligations significantly
exceed the value of their homes, may be unwilling to make
payments even on a modified mortgage.
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Our efforts to reach out to borrowers and support servicers, as
well as the Obama Administrations recently announced
program expansions, such as the Second Lien Program, are
designed to address these factors and maximize the
programs ability to help as many borrowers as possible. We
discuss these efforts and program updates above under The
Making Home Affordable Program.
The actions we are taking and the initiatives introduced to
assist homeowners and limit foreclosures, including those under
the Making Home Affordable Program, are significantly different
from our historical approach to delinquencies, defaults and
problem loans. The unprecedented nature of these actions and
uncertainties related to interest rates and the broader economic
environment mean that it will take time for us to assess and
provide information on the success of these efforts. Some of the
initiatives we undertook prior to the Making Home Affordable
Program have not achieved the results we expected. As we move
forward under the Making Home Affordable Program, we will
continue to work with our conservator to help us best fulfill
our objective of helping homeowners and the mortgage market.
Activity
as Program Administrator for Modifications on non-Fannie Mae
loans
We have been active in our role as program administrator for
loans modified under the Home Affordable Modification Program
that are not owned or guaranteed by us. To date, over 30
servicers have signed up to offer modifications on non-agency
loans under the program. Loans serviced by these servicers,
together with other loans owned or guaranteed by us or by
Freddie Mac, cover over 85% of the loans that may be eligible to
be modified under the Home Affordable Modification Program. To
help support servicers participating in the program, we have
rolled out extensive systems and new technology tools, as well
as updates to technology
14
tools in response to feedback we have received from servicers.
Servicers can access these tools, as well as documentation,
guidelines and materials for borrowers, on a Web site we
launched to support their participation in the program.
Expected
Impact of Making Home Affordable Program on Fannie
Mae
The unprecedented nature of the Making Home Affordable Program
and uncertainties related to interest rates and the broader
economic environment make it difficult for us to predict the
full extent of our activities under the program and how those
will affect us, or the costs that we will incur either in the
short term or over the long term. As we gain more experience
under these programs, we may recommend supplementing the
programs with other initiatives that would allow us, pursuant to
our mission, to assist more homeowners.
We have included data relating to our borrower loss mitigation
activities for the second quarter, which includes activities
under the Making Home Affordable Program, and our borrower loss
mitigation activities for prior periods in Risk
ManagementCredit Risk ManagementMortgage Credit Risk
Management. A discussion of the risks to our business
posed by the Making Home Affordable Program is included in
Part IIItem 1ARisk Factors.
We expect that modifications we make, pursuant to our mission,
under the Home Affordable Modification Program of loans we own
or guarantee will adversely affect our financial results and
condition due to several factors, including:
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The requirement that we acquire any loan held in a Fannie Mae
MBS prior to modifying it which, prior to January 1, 2010,
will result in fair value loss charge-offs under
SOP 03-3
against the Reserve for guaranty losses at the time
we acquire the loan;
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Incentive and pay for success fees paid to our
servicers for modification of loans we own or guarantee;
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Incentives to some borrowers under the program in the form of
principal balance reductions if the borrowers continue to make
payments due on the modified loan for specified periods; and
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The effect of holding modified loans in our mortgage portfolio,
to the extent the loans provide a below market yield, which may
be lower than our cost of funds.
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We also expect to incur significant additional operational
expenses associated with the Making Home Affordable Program.
Accordingly, the Making Home Affordable Program will likely have
a material adverse effect on our business, results of operations
and financial condition, including our net worth. If the program
is successful in reducing foreclosures and keeping borrowers in
their homes, however, it may benefit the overall housing market
and help in reducing our long-term credit losses.
Providing
Mortgage Market Liquidity
During the first half of 2009, we purchased or guaranteed an
estimated $415.2 billion in new business, measured by
unpaid principal balance, which provided financing for
approximately 1,737,000 conventional single-family loans and
approximately 193,000 multifamily units. Most of these purchases
and guarantees were of single-family loans and approximately 84%
of our single-family business during the first half of 2009
consisted of refinancings. The $415.2 billion in new
single-family and multifamily business for the first half of
2009 consisted of $255.8 billion in Fannie Mae MBS that
were issued, and $159.4 billion in mortgage loans and
mortgage-related securities that we purchased for our mortgage
investment portfolio.
We remain a constant source of liquidity in the multifamily
market and we have been successful with our goal of
reinvigorating our multifamily MBS business and broadening our
multifamily investor base. Approximately 71% of total
multifamily production in the first half of 2009 was an MBS
execution, compared to 17% in the first half of 2008.
15
In addition to purchasing and guaranteeing mortgage assets, we
are taking a variety of other actions to provide liquidity to
the mortgage market. These actions include:
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Whole Loan Conduit. Whole loan conduit
activities involve our purchase of loans principally for the
purpose of securitizing them. We purchase loans from a large
group of lenders and then securitize them as Fannie Mae MBS,
which may then be sold to dealers and investors.
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Early Funding. Normally, lenders must wait 30
to 45 days between loan closing and settlement of an MBS
transaction before they receive payment for the loans they sell
to us. Our early lender funding program allows lenders to
deliver closed loans to us and receive payment for those loans
within a more accelerated timeframe, which allows lenders to
replenish their funds and make new loans as soon as possible.
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Dollar Roll Transactions. We have increased
the amount of our dollar roll activity in the second quarter of
2009 as a result of continued strain on financial
institutions balance sheets, higher lending rates from
prepayment uncertainty, attractive discount note funding and a
desire to increase market liquidity by lending our balance sheet
to the market at positive economic returns to us. A dollar roll
transaction is a commitment to purchase a mortgage-related
security with a concurrent agreement to re-sell a substantially
similar security at a later date or vice versa. An entity who
sells a mortgage-related security to us with a concurrent
agreement to repurchase a security in the future gains immediate
financing for their balance sheet.
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Outlook
We anticipate that adverse market dynamics and certain of our
activities undertaken, pursuant to our mission, to stabilize and
support the housing and mortgage markets will continue to
negatively affect our financial condition and performance
through the remainder of 2009 and into 2010.
Overall Market Conditions. We expect adverse
conditions in the financial markets to continue through 2009. We
expect further home price declines and rising default and
severity rates during this period, all of which may worsen if
unemployment rates continue to increase and if the
U.S. continues to experience a broad-based economic
recession. We continue to expect further increases in the level
of foreclosures and single-family delinquency rates in 2009 and
into 2010, as well as in the level of multifamily defaults and
loss severity. We expect growth in residential mortgage debt
outstanding to be flat in 2009 and 2010.
Home Price Declines: Following a decline of
approximately 10% in 2008, we expect that home prices will
decline another 7% to 12% on a national basis in 2009. We also
continue to expect that we will experience a
peak-to-trough
home price decline on a national basis of 20% to 30%. Based on
the observed home price trend during the first half of 2009, we
expect future home price declines to be on the lower end of our
estimated ranges. These estimates are based on our home price
index, which is calculated differently from the
S&P/Case-Shiller U.S. National Home Price Index and
therefore results in lower percentages for comparable declines.
These estimates also contain significant inherent uncertainty in
the current market environment, due to historically
unprecedented levels of uncertainty regarding a variety of
critical assumptions we make when formulating these estimates,
including: the effect of actions the federal government has
taken and may take with respect to national economic recovery;
the impact of those actions on home prices, unemployment and the
general economic environment; and the rate of unemployment
and/or wage
decline. Because of these uncertainties, the actual home price
decline we experience may differ significantly from these
estimates. We also expect significant regional variation in home
price decline percentages.
Our estimate of a 7% to 12% home price decline for 2009 compares
with a home price decline of approximately 12% to 18% using the
S&P/Case-Shiller index method, and our 20% to 30%
peak-to-trough
home price decline estimate compares with an approximately 33%
to 46%
peak-to-trough
decline using the S&P/Case-Shiller index method. Our
estimates differ from the S&P/Case-Shiller index in two
principal ways: (1) our estimates weight expectations for
each individual property by number of properties, whereas the
S&P/Case-Shiller
index weights expectations of home price declines based on
property value, causing declines in home prices on higher priced
homes to have a greater effect on the overall result; and
(2) our estimates do
16
not include sales of foreclosed homes because we believe that
differing maintenance practices and the forced nature of the
sales make foreclosed home prices less representative of market
values, whereas the S&P/Case-Shiller index includes sales
of foreclosed homes. The S&P/Case-Shiller comparison
numbers shown above are calculated using our models and
assumptions, but modified to use these two factors (weighting of
expectations based on property value and the inclusion of
foreclosed property sales). In addition to these differences,
our estimates are based on our own internally available data
combined with publicly available data, and are therefore based
on data collected nationwide, whereas the S&P/Case-Shiller
index is based only on publicly available data, which may be
limited in certain geographic areas of the country. Our
comparative calculations to the S&P/Case-Shiller index
provided above are not modified to account for this data pool
difference.
Credit Losses and Credit-Related Expenses. We
currently expect our credit losses and our credit loss ratio
(each of which excludes fair value losses under
SOP 03-3
and our HomeSaver Advance product) in 2009 to exceed our credit
losses and our credit loss ratio in 2008 by a significant
amount. We also continue to expect a significant increase in our
SOP 03-3
fair value losses in 2009 as we increase the number of loans we
repurchase from MBS trusts in order to modify them, particularly
as more servicers participate in the Home Affordable
Modification Program. In addition, we expect our credit-related
expenses to be higher in 2009 than they were in 2008.
Expected Lack of Profitability for Foreseeable
Future. We expect to continue to have losses as
our guaranty book of business continues to deteriorate and as we
continue to incur ongoing costs in our efforts to keep people in
homes and provide liquidity to the mortgage market. We do not
expect to operate profitably in the foreseeable future.
Uncertainty Regarding our Future Status and Long-Term
Financial Sustainability: We expect that we will
experience adverse financial effects as we seek to fulfill our
mission by concentrating our efforts on keeping people in their
homes and preventing foreclosures, including our efforts under
the Making Home Affordable Program, while remaining active in
the secondary mortgage market. In addition, future activities
that our regulators, other U.S. government agencies or
Congress may request or require us to take to support the
mortgage market and help borrowers may contribute to further
deterioration in our results of operations and financial
condition. Although Treasurys additional funds under the
senior preferred stock purchase agreement permit us to remain
solvent and avoid receivership, the resulting dividend payments
are substantial and will increase as we request additional funds
from Treasury under the senior preferred stock purchase
agreement. As a result of these factors, along with current and
expected market and economic conditions and the deterioration in
our single-family and multifamily books of business, there is
significant uncertainty as to our long-term financial
sustainability. We expect that, for the foreseeable future, the
earnings of the company, if any, will not be sufficient to pay
the dividends on the senior preferred stock. As a result, future
dividend payments will be effectively funded from equity drawn
from the Treasury.
Further, as described under Legislative and Regulatory
MattersObama Administration Financial Regulatory Reform
Plan and Congressional Hearing, Treasury and HUD are
currently engaged in an initiative to develop recommendations on
the future of our business. In July 2009, the Treasury Secretary
stated that: As a government, were going to have to
figure out [Fannie Mae and Freddie Macs] future. What they
are today is not going to be their future. In addition, a
Congressional subcommittee held hearings in June regarding the
present condition and future status of our business, and future
hearings are expected. We expect significant uncertainty
regarding the future of our business, including whether we will
continue to exist, to continue until February 2010 and beyond.
LEGISLATIVE
AND REGULATORY MATTERS
Obama
Administration Financial Regulatory Reform Plan and
Congressional Hearing
In June 2009, the Obama Administration announced a comprehensive
regulatory reform plan to transform the manner in which the
financial services industry is regulated. The
Administrations white paper describing the plan notes that
[w]e need to maintain the continued stability and strength
of the GSEs during these difficult financial times. The
white paper states that Treasury and HUD, in consultation with
other government
17
agencies, will engage in a wide-ranging initiative to develop
recommendations on the future of Fannie Mae, Freddie Mac and the
Federal Home Loan Bank system, and will report its
recommendations to Congress and the American public at the time
of the Presidents 2011 budget release. The
Presidents 2011 budget is currently expected to be
released in February 2010.
The Obama Administrations white paper notes that there are
a number of options for the reform of the GSEs, including:
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returning them to their previous status as GSEs with the paired
interests of maximizing returns for private shareholders and
pursuing public policy home ownership goals;
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gradually winding down the GSEs operations and liquidating
their assets;
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incorporating the GSEs functions into a federal agency;
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implementing a public utility model where the government
regulates the GSEs profit margin, sets guarantee fees, and
provides explicit backing for GSE commitments;
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converting the GSEs role to providing insurance for
covered bonds; and
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dissolving Fannie Mae and Freddie Mac into many smaller
companies.
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In June 2009, a Congressional subcommittee held a hearing to
discuss the present condition and future status of Fannie Mae
and Freddie Mac. The subcommittee chairman indicated that this
was the first of many hearings regarding the roles and functions
of Fannie Mae and Freddie Mac. In July 2009, GSE reform
legislation was introduced in the House of Representatives that,
if enacted, would substantially alter our current structure and
provide for the eventual wind-down of the GSEs. It is unclear
what action the House of Representatives will take on this
legislation, if any. In addition, we believe additional GSE
reform legislation is likely to be introduced in the future. As
a result, there continues to be significant uncertainty
regarding the future of our company, including whether we will
continue to exist.
The Administrations financial regulatory reform plan also
proposes significantly altering the current regulatory framework
applicable to the financial services industry, with enhanced and
more comprehensive regulation of financial firms and markets.
This regulation may directly and indirectly affect many aspects
of our business and that of our business partners. The plan
includes proposals relating to the enhanced regulation of
securitization markets, changes to existing capital and
liquidity requirements for financial firms, additional
regulation of the
over-the-counter
derivatives market, stronger consumer protection regulations,
regulations on compensation practices and changes in accounting
standards. In July 2009, the House Financial Services Committee
began a series of hearings on the Administrations plan and
proposed legislation.
We cannot predict the ultimate impact of these proposed
regulatory reforms on our company or our industry.
Pending
Legislation
In June 2009, the House of Representatives passed a bill that,
among other things, would impose upon Fannie Mae and Freddie Mac
a duty to develop loan products and flexible underwriting
guidelines to facilitate a secondary market for
energy-efficient and location-efficient
mortgages. The legislation would also allow Fannie Mae and
Freddie Mac additional credit toward their housing goals for
purchases of energy-efficient and location-efficient mortgages.
It is unclear what action the Senate will take on this
legislation, or what impact it may have on our business if this
legislation is enacted.
In May 2009, the House of Representatives passed a bill that,
among other things, would require originators to retain a level
of credit risk for certain mortgages that they sell, enhance
consumer disclosures, impose new servicing standards and allow
for assignee liability. If enacted, the legislation would impact
our business and the overall mortgage market. However, it is
unclear when, or if, the Senate will consider comparable
legislation.
In March 2009, the House of Representatives passed a housing
bill that, among other things, includes provisions intended to
stem the rate of foreclosures by allowing bankruptcy judges to
modify the terms of
18
mortgages on principal residences for borrowers in
Chapter 13 bankruptcy. Specifically, the House bill would
allow bankruptcy judges to adjust interest rates, extend
repayment terms and lower the outstanding principal amount to
the current estimated fair value of the underlying property. If
enacted, this legislation could have an adverse impact on our
business. The Senate passed a similar housing bill in May 2009
that did not include comparable bankruptcy-related provisions.
It is unclear when, or if, the Senate will reconsider other
alternative bankruptcy-related legislation.
Housing
Goals
On July 30, 2009, FHFA issued a final rule changing our
2009 housing goals from the goals initially set by the
Regulatory Reform Act. FHFA determined that, in light of current
market conditions, the previously established 2009 housing goals
were not feasible unless adjusted. The final rule reduces our
2009 base housing goals and home purchase subgoals approximately
to the levels that prevailed in 2004 through 2006. The final
rule also raises our multifamily special affordable housing
subgoal. The subgoal is 1% of the average annual dollar volume
of combined (single-family and multifamily) mortgages purchased
by Fannie Mae during specified years. To adjust the subgoal,
FHFA changed the base years on which the average is calculated.
HUDs 2004 rule used the years
2000-2002 to
set the subgoal. FHFAs rule uses the years
1999-2008.
The final rule also permits loan modifications that we make in
accordance with the Making Home Affordable Program to be treated
as mortgage purchases and count towards the housing goals. In
addition, the final rule excludes from counting towards the 2009
housing goals any purchases of loans on one-to
four-unit
properties with a maximum original principal balance higher than
the nationwide conforming loan limit (currently set at $417,000).
The following table sets forth our revised 2009 housing goals
and subgoals.
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2009
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Goal
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Housing
goals:(1)
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Low- and moderate-income housing
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43.0
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%
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Underserved areas
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32.0
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Special affordable housing
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18.0
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Housing subgoals:
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Home purchase
subgoals:(2)
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Low- and moderate-income housing
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40.0
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%
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Underserved areas
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30.0
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Special affordable housing
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14.0
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Multifamily special affordable housing subgoal ($ in
billions)(3)
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$
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6.56
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(1) |
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Goals are expressed as a percentage
of the total number of dwelling units financed by eligible
mortgage loan purchases during the period.
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(2) |
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Home purchase subgoals measure our
performance by the number of loans (not dwelling units)
providing purchase money for owner-occupied single-family
housing in metropolitan areas.
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(3) |
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The multifamily subgoal is measured
by loan amount and expressed as a dollar amount.
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Regulation
of New Products and Activities
In July 2009, FHFA published an interim final rule, Prior
Approval for Enterprise Products, setting forth a process
for FHFA to review new products and activities prior to their
launch by Fannie Mae or Freddie Mac. This interim final rule,
which became effective upon publication, implements a provision
of the Housing and Economic Recovery Act of 2008 that requires
Fannie Mae and Freddie Mac to obtain the approval of the
Director of FHFA before initially offering a new product. The
interim final rule requires that we submit detailed information
about all new products and activities to the Director of FHFA
prior to launching the product or commencing the activity. The
Director will determine which proposed new activities require a
30-day
public notice and comment period and prior approval. In
determining whether to approve a proposed
19
new product, the Director will consider whether the product is
consistent with our charter, the public interest, and safety and
soundness. We have received instructions from the Director of
FHFA regarding compliance with the rule during the period that
FHFA is receiving and considering comments on the interim final
rule. Pursuant to these instructions, we are working with FHFA
to finalize the processes and procedures to implement this
statutory requirement. Depending on the manner in which it is
implemented, this rule could have an adverse impact on our
ability to develop and introduce new products and activities to
the marketplace.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP
requires management to make a number of judgments, estimates and
assumptions that affect the reported amount of assets,
liabilities, income and expenses in the condensed consolidated
financial statements. Understanding our accounting policies and
the extent to which we use management judgment and estimates in
applying these policies is integral to understanding our
financial statements. We describe our most significant
accounting policies in Notes to Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies of our 2008
Form 10-K
and in Notes to Condensed Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies of this report.
We have identified four of our accounting policies as critical
because they involve significant judgments and assumptions about
highly complex and inherently uncertain matters and the use of
reasonably different estimates and assumptions could have a
material impact on our reported results of operations or
financial condition. These critical accounting policies and
estimates are as follows:
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Fair Value of Financial Instruments
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Other-Than-Temporary
Impairment of Investment Securities
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Allowance for Loan Losses and Reserve for Guaranty Losses
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Deferred Tax Assets
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We evaluate our critical accounting estimates and judgments
required by our policies on an ongoing basis and update them as
necessary based on changing conditions. We describe below
significant changes in the judgments and assumptions we made
during the second quarter of 2009 in applying our critical
accounting policies and estimates. Management has discussed any
significant changes in judgments and assumptions in applying our
critical accounting policies with the Audit Committee of the
Board of Directors. See
Part IIItem 7MD&ACritical
Accounting Policies and Estimates of our 2008
Form 10-K
for additional information about our critical accounting
policies and estimates.
Fair
Value of Financial Instruments
The use of fair value to measure our financial instruments is
fundamental to our financial statements and is a critical
accounting estimate because we account for and record a
substantial portion of our assets and liabilities at fair value.
SFAS No. 157, Fair Value Measurements
(SFAS 157), defines fair value as the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date (also referred to as an exit price).
In April 2009, the FASB issued FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP
FAS 157-4).
FSP
FAS 157-4
provides guidance on how to determine the fair value when the
volume and level of activity for the asset or liability have
significantly decreased. If there has been a significant
decrease in the volume and level of activity for an asset or
liability as compared to the normal level of market activity for
the asset or liability, there is an increased likelihood that
quoted prices or transactions for the instrument are not
reflective of an orderly transaction and may therefore require
significant adjustment to estimate fair value. We evaluate the
existence of the following conditions in determining whether
there is an inactive market for our financial instruments:
(1) there are few transactions for the financial
instrument; (2) price quotes are not based on current
market information; (3) the price quotes we receive vary
significantly
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either over time or among independent pricing services or
dealers; (4) price indices that were previously highly
correlated are demonstrably uncorrelated; (5) there is a
significant increase in implied liquidity risk premiums, yields
or performance indicators, such as delinquency rates or loss
severities, for observed transactions or quoted prices when
compared with our estimate of expected cash flows, considering
all available market data about credit and other nonperformance
risk for the financial instrument; (6) there is a wide
bid-ask spread or significant increase in the bid-ask spread;
(7) there is a significant decline or absence of a market
for new issuances (i.e., primary market) for the
financial instrument or similar financial instruments; or
(8) there is limited availability of public market
information.
In determining fair value, we use various valuation techniques.
We disclose the carrying value and fair value of our financial
assets and liabilities and describe the specific valuation
techniques used to determine the fair value of these financial
instruments in Notes to Condensed Consolidated Financial
StatementsNote 18, Fair Value of Financial
Instruments. Our adoption of FSP
FAS 157-4
effective April 1, 2009 did not result in a change in our
valuation techniques for estimating fair value.
SFAS 157 provides a three-level fair value hierarchy for
classifying financial instruments. This hierarchy is based on
whether the inputs to the valuation techniques used to measure
fair value are observable or unobservable. Each asset or
liability is assigned to a level based on the lowest level of
any input that is significant to the fair value measurement. The
three levels of the SFAS 157 fair value hierarchy are
described below:
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Level 1:
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Quoted prices (unadjusted) in active markets for identical
assets or liabilities.
|
|
|
Level 2:
|
Observable market-based inputs, other than quoted prices in
active markets for identical assets or liabilities.
|
|
|
Level 3:
|
Unobservable inputs.
|
The majority of our financial instruments carried at fair value
fall within the level 2 category and are valued primarily
utilizing inputs and assumptions that are observable in the
marketplace, that can be derived from observable market data or
that can be corroborated by recent trading activity of similar
instruments with similar characteristics. For example, we
generally request non-binding prices from at least four
independent pricing services to estimate the fair value of our
trading and
available-for-sale
investment securities at an individual security level. We use
the average of these prices to determine the fair value. In the
absence of such information or if we are not able to corroborate
these prices by other available, relevant market information, we
estimate their fair values based on single source quotations
from brokers or dealers or by using internal calculations or
discounted cash flow techniques that incorporate inputs, such as
prepayment rates, discount rates and delinquency, default and
cumulative loss expectations, that are implied by market prices
for similar securities and collateral structure types. Because
items classified as level 3 are valued using significant
unobservable inputs, the process for determining the fair value
of these items is generally more subjective and involves a high
degree of management judgment and assumptions. These assumptions
may have a significant effect on our estimates of fair value,
and the use of different assumptions as well as changes in
market conditions could have a material effect on our results of
operations or financial condition.
Fair
Value Hierarchy Level 3 Assets and
Liabilities
Our level 3 assets and liabilities consist primarily of
financial instruments for which the fair value is estimated
using valuation techniques that involve significant unobservable
inputs because there is limited market activity and therefore
little or no price transparency. Our level 3 financial
instruments include certain mortgage- and asset-backed
securities and residual interests, certain performing
residential mortgage loans, nonperforming mortgage-related
assets, our guaranty assets and
buy-ups, our
master servicing assets and certain highly structured, complex
derivative instruments. We use the term
buy-ups
to refer to upfront payments that we make to lenders to adjust
the monthly contractual guaranty fee rate so that the
pass-through coupon rates on Fannie Mae MBS are in more easily
tradable increments of a whole or half percent.
21
Fair value measurements related to financial instruments that
are reported at fair value in our condensed consolidated
financial statements each period, such as our trading and
available-for-sale
securities and derivatives, are referred to as recurring fair
value measurements. Fair value measurements related to financial
instruments that are not reported at fair value each period,
such as
held-for-sale
mortgage loans, are referred to as non-recurring fair value
measurements. The following discussion identifies the primary
types of financial assets and liabilities within each balance
sheet category that are reported at fair value on a recurring
basis and are based on level 3 inputs, We also describe the
valuation techniques we use to determine their fair values,
including key inputs and assumptions.
|
|
|
|
|
Trading and
Available-for-Sale
Investment Securities. Our financial instruments
within these asset categories that are classified as
level 3 primarily consist of mortgage-related securities
backed by Alt-A loans, subprime loans and manufactured housing
loans and mortgage revenue bonds. We have relied on external
pricing services to estimate the fair value of these securities
and validated those results with our internally derived prices,
which may incorporate spread, yield, or vintage and product
matrices, and standard cash flow discounting techniques. The
inputs we use in estimating these values are based on multiple
factors, including market observations, relative value to other
securities, and non-binding dealer quotes. If we are not able to
corroborate vendor-based prices, we rely on managements
best estimate of fair value.
|
|
|
|
Derivatives. Our derivative financial
instruments that are classified as level 3 primarily
consist of a limited population of certain highly structured,
complex interest rate risk management derivatives. Examples
include certain swaps with embedded caps and floors that
reference non-standard indices. We determine the fair value of
these derivative instruments using indicative market prices
obtained from independent third parties. If we obtain a price
from a single source and we are not able to corroborate that
price, the fair value measurement is classified as level 3.
|
|
|
|
Guaranty Assets and
Buy-ups. We
determine the fair value of our guaranty assets and
buy-ups
based on the present value of the estimated compensation we
expect to receive for providing our guaranty. We generally
estimate the fair value using proprietary internal models that
calculate the present value of expected cash flows. Key model
inputs and assumptions include prepayment speeds, forward yield
curves and discount rates that are commensurate with the level
of estimated risk.
|
|
|
|
Guaranty Obligations. The fair value of all
guaranty obligations, measured subsequent to their initial
recognition, reflects our estimate of a hypothetical transaction
price that we would receive if we were to issue our guaranty to
an unrelated party in a standalone arms-length transaction
at the measurement date. We estimate the fair value of the
guaranty obligations using internal valuation models that
calculate the present value of expected cash flows based on
managements best estimate of certain key assumptions, such
as default rates, severity rates and a required rate of return.
During 2008, we further adjusted the model-generated values
based on our current market pricing to arrive at our estimate of
a hypothetical transaction price for our existing guaranty
obligations. Beginning in the first quarter of 2009, we
concluded that the credit characteristics of the pools of loans
upon which we were issuing new guarantees increasingly did not
reflect the credit characteristics of our existing guaranteed
pools; thus, current market prices for our new guarantees were
not a relevant input to our estimate of the hypothetical
transaction price for our existing guaranty obligations.
Therefore, at June 30, 2009, we based our estimate of the
fair value of our existing guaranty obligations solely upon our
model without further adjustment.
|
Table 2 presents a comparison, by balance sheet category, of the
amount of financial assets carried in our consolidated balance
sheets at fair value on a recurring basis and classified as
level 3 as of June 30, 2009 and December 31,
2008. The availability of observable market inputs to measure
fair value varies based on changes in market conditions, such as
liquidity. As a result, we expect the amount of financial
instruments carried at fair value on a recurring basis and
classified as level 3 to vary each period.
22
Table
2: Level 3 Recurring Financial Assets at Fair
Value
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Balance Sheet Category
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Trading securities
|
|
$
|
9,728
|
|
|
$
|
12,765
|
|
Available-for-sale securities
|
|
|
39,915
|
|
|
|
47,837
|
|
Derivatives assets
|
|
|
256
|
|
|
|
362
|
|
Guaranty assets and
buy-ups
|
|
|
1,483
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
Level 3 recurring assets
|
|
$
|
51,382
|
|
|
$
|
62,047
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
911,382
|
|
|
$
|
912,404
|
|
Total recurring assets measured at fair value
|
|
$
|
369,205
|
|
|
$
|
359,246
|
|
Level 3 recurring assets as a percentage of total assets
|
|
|
6
|
%
|
|
|
7
|
%
|
Level 3 recurring assets as a percentage of total recurring
assets measured at fair value
|
|
|
14
|
%
|
|
|
17
|
%
|
Total recurring assets measured at fair value as a percentage of
total assets
|
|
|
41
|
%
|
|
|
39
|
%
|
Level 3 recurring assets totaled $51.4 billion, or 6%
of our total assets, as of June 30, 2009, compared with
$62.0 billion, or 7% of our total assets, as of
December 31, 2008. The decrease in assets classified as
level 3 during the first six months of 2009 was principally
the result of a net transfer of approximately $6.3 billion
in assets to level 2 from level 3. The transferred
assets consisted primarily of private-label mortgage-related
securities backed by non-fixed rate Alt-A loans. The market for
Alt-A securities continues to be relatively illiquid. However,
during the first half of 2009, price transparency improved as a
result of recent transactions, and we noted some convergence in
prices obtained from third party vendors. As a result, we
determined that it was appropriate to rely on level 2
inputs to value these securities.
Financial assets measured at fair value on a non-recurring basis
and classified as level 3, which are not presented in the
table above, include
held-for-sale
loans that are measured at lower of cost or fair value and that
were written down to fair value during the period.
Held-for-sale
loans that were reported at fair value, rather than amortized
cost, totaled $2.4 billion and $1.3 billion as of
June 30, 2009 and December 31, 2008, respectively. In
addition, certain other financial assets carried at amortized
cost that have been written down to fair value during the period
due to impairment are classified as non-recurring. The fair
value of these level 3 non-recurring financial assets,
which primarily consisted of certain guaranty assets, low income
housing tax credit (LIHTC) partnership investments
and acquired property, totaled $18.1 billion and
$22.4 billion as of June 30, 2009 and
December 31, 2008, respectively.
Our LIHTC investments trade in a market with limited observable
transactions. There is decreased market demand for LIHTC
investments because there are fewer tax benefits derived from
these investments by traditional investors, as these investors
are currently projecting much lower levels of future profits
than in previous years. This decreased demand has reduced the
value of these investments. We determine the fair value of our
LIHTC investments using internal models that estimate the
present value of the expected future tax benefits (tax credits
and tax deductions for net operating losses) expected to be
generated from the properties underlying these investments. Our
estimates are based on assumptions that other market
participants would use in valuing these investments. The key
assumptions used in our models, which require significant
management judgment, include discount rates and projections
related to the amount and timing of tax benefits. We compare the
model results to the limited number of observed market
transactions and make adjustments to reflect differences between
the risk profile of the observed market transactions and our
LIHTC investments.
Financial liabilities measured at fair value on a recurring
basis and classified as level 3 consisted of long-term debt
with a fair value of $1.0 billion and $2.9 billion as
of June 30, 2009 and December 31, 2008, respectively,
and derivatives liabilities with a fair value of
$24 million and $52 million as of June 30, 2009
and December 31, 2008, respectively.
23
Fair
Value Control Processes
We have control processes that are designed to ensure that our
fair value measurements are appropriate and reliable, that they
are based on observable inputs wherever possible and that our
valuation approaches are consistently applied and the
assumptions used are reasonable. Our control processes consist
of a framework that provides for a segregation of duties and
oversight of our fair value methodologies and valuations and
validation procedures.
Our Valuation Oversight Committee, which includes senior
representation from business areas, our Enterprise Risk
Management office and our Finance Division, is responsible for
reviewing the valuation and pricing methodologies used in our
fair value measurements and any significant valuation
adjustments, judgments, controls and results. Actual valuations
are performed by personnel independent of our business units.
Our Price Verification Group, which is an independent control
group separate from the group that is responsible for obtaining
the prices, also is responsible for performing monthly
independent price verification. The Price Verification Group
also performs independent reviews of the assumptions used in
determining the fair value of products we hold that have
material estimation risk because observable market-based inputs
do not exist.
Our validation procedures are intended to ensure that the
individual prices we receive are consistent with our
observations of the marketplace and prices that are provided to
us by pricing services or other dealers. We verify selected
prices using a variety of methods, including comparing the
prices to secondary pricing services, corroborating the prices
by reference to other independent market data, such as
non-binding broker or dealer quotations, relevant benchmark
indices, and prices of similar instruments, checking prices for
reasonableness based on variations from prices provided in
previous periods, comparing prices to internally calculated
expected prices and conducting relative value comparisons based
on specific characteristics of securities. In addition, we
compare our derivatives valuations to counterparty valuations as
part of the collateral exchange process. We have formal
discussions with the pricing services as part of our due
diligence process in order to maintain a current understanding
of the models and related assumptions and inputs that these
vendors use in developing prices. The prices provided to us by
independent pricing services reflect the existence of credit
enhancements, including monoline insurance coverage, and the
current lack of liquidity in the marketplace. If we determine
that a price provided to us is outside established parameters,
we will further examine the price, including having
follow-up
discussions with the specific pricing service or dealer. If we
conclude that a price is not valid, we will adjust the price for
various factors, such as liquidity, bid-ask spreads and credit
considerations. These adjustments are generally based on
available market evidence. In the absence of such evidence,
managements best estimate is used. All of these processes
are executed before we use the prices in the financial statement
process.
We continually refine our valuation methodologies as markets and
products develop and the pricing for certain products becomes
more or less transparent. While we believe our valuation methods
are appropriate and consistent with those of other market
participants, using different methodologies or assumptions to
determine fair value could result in a materially different
estimate of the fair value of some of our financial instruments.
Other-Than-Temporary
Impairment of Investment Securities
We evaluate
available-for-sale
securities in an unrealized loss position as of the end of each
quarter for
other-than-temporary
impairment. In April 2009, the FASB issued FSP
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (FSP
FAS 115-2),
which modifies the model for assessing
other-than-temporary
impairment for investments in debt securities. Under this
guidance, a debt security is evaluated for
other-than-temporary
impairment if its fair value is less than its amortized cost
basis.
Other-than-temporary
impairment is recognized in earnings if one of the following
conditions exists: (1) the intent is to sell the security;
(2) it is more likely than not that we will be required to
sell the security before the impairment is recovered; or
(3) the amortized cost basis is not expected to be
recovered. If, however, we do not intend to sell the security
and will not be required to sell prior to recovery of the
amortized cost basis, only the credit component of
other-than-temporary
impairment is recognized in earnings. The noncredit component is
recorded in other comprehensive income (OCI). The
credit component is the difference between the securitys
amortized cost basis and the present value of its expected
future cash flows,
24
while the noncredit component is the remaining difference
between the securitys fair value and the present value of
expected future cash flows. We adopted this new accounting
guidance effective April 1, 2009, which resulted in a
cumulative-effect pre-tax reduction of $8.5 billion
($5.6 billion after tax) in our accumulated deficit to
reclassify to accumulated other comprehensive income
(AOCI) the noncredit component of
other-than-temporary
impairment losses previously recognized in earnings. We also
reversed $3.0 billion of our deferred tax asset valuation
allowance, which resulted in a $3.0 billion reduction in
our accumulated deficit, because we continue to have the intent
and ability to hold these securities to recovery.
We conduct periodic reviews of each investment security that has
an unrealized loss to determine whether
other-than-temporary
impairment has occurred. As a result of our April 1, 2009
adoption of the new
other-than-temporary
impairment guidance, we revised our approach for measuring and
recognizing impairment. Our evaluation continues to require
significant management judgment and a consideration of various
factors to determine if we will receive the amortized cost basis
of our investment securities. These factors include, but are not
limited to, the severity and duration of the impairment; recent
events specific to the issuer
and/or
industry to which the issuer belongs; the payment structure of
the security; external credit ratings and the failure of the
issuer to make scheduled interest or principal payments. We rely
on expected future cash flow projections to determine if we will
recover the amortized cost basis of our
available-for-sale
securities. These cash flow projections are derived from
internal models that consider particular attributes of the loans
underlying our securities and assumptions about changes in the
economic environment, such as home prices and interest rates, to
predict borrower behavior and the impact on default frequency,
loss severity and remaining credit enhancement.
We provide more detailed information on our accounting for
other-than-temporary
impairment in Notes to Condensed Consolidated Financial
StatementsNote 2, Summary of Significant Accounting
Policies. Also refer to Consolidated Balance Sheet
AnalysisMortgage InvestmentsTrading and
Available-for-Sale
Investment SecuritiesInvestments in Private-Label
Mortgage-Related Securities for a discussion of
other-than-temporary
impairment recognized on our investments in Alt-A and subprime
private-label securities.
Allowance
for Loan Losses and Reserve for Guaranty Losses
We maintain an allowance for loan losses for loans in our
mortgage portfolio classified as
held-for-investment.
We maintain a reserve for guaranty losses for loans that back
Fannie Mae MBS we guarantee and loans that we have guaranteed
under long-term standby commitments. We report the allowance for
loan losses and reserve for guaranty losses as separate line
items in the consolidated balance sheets. These amounts, which
we collectively refer to as our combined loss reserves,
represent our best estimate of credit losses incurred in our
guaranty book of business as of the balance sheet date.
We have an established process, using analytical tools,
benchmarks and management judgment, to determine our loss
reserves. Although our loss reserve process benefits from
extensive historical loan performance data, this process is
subject to risks and uncertainties, including a reliance on
historical loss information that may not be representative of
current conditions. It is our practice to continually monitor
delinquency and default trends and make changes in our
historically developed assumptions and estimates as necessary to
better reflect the impact of present conditions, including
current trends in borrower risk
and/or
general economic trends, changes in risk management practices,
and changes in public policy and the regulatory environment.
Because of the current stress in the housing and credit markets,
and the speed and extent to which these markets have
deteriorated, our process for determining our loss reserves has
become more complex and involves a greater degree of management
judgment. As a result of the continued decline in home prices,
more limited opportunities for refinancing due to the tightening
of the credit markets and the sharp rise in unemployment,
mortgage delinquencies have reached record levels. Our
historical loan performance data indicates a pattern of default
rates and credit losses that typically occur over time, which
are strongly dependent on the age of a mortgage loan. However,
we have witnessed significant changes in traditional loan
performance and delinquency patterns, including an increase in
early-stage delinquencies for certain loan categories and faster
transitions to later stage delinquencies. We believe that
recently announced government policies and our initiatives under
these policies have partly contributed to these newly observed
delinquency
25
patterns. For example, our level of foreclosures and associated
charge-offs were lower during the first and second quarters of
2009 than they otherwise would have been due to foreclosure
delays resulting from our foreclosure suspension, our
requirement that loan modification options be pursued with the
borrower before proceeding to a foreclosure sale, and
state-driven changes in foreclosure rules to slow and extend the
foreclosure process. As a result, we determined that it was
necessary to refine our loss reserve estimation process to
reflect these newly observed delinquency patterns, as we
describe in more detail below.
We historically have relied on internally developed default loss
curves derived from observed default trends in our single-family
guaranty book of business to determine our single-family loss
reserve. These loss curves are shaped by the normal pattern of
defaults, based on the age of the book, and informed by
historical default trends and the performance of the loans in
our book to date. We develop the loss curves by aggregating
homogeneous loans into pools based on common underlying risk
characteristics, such as origination year and seasoning,
original LTV ratio and loan product type, to derive an overall
estimate. We use these loss curve models to estimate, based on
current events and conditions, the number of loans that will
default (default rate) and how much of a loans
balance will be lost in the event of default (loss
severity). For the majority of our loan risk categories,
our default rate estimates have traditionally been based on loss
curves developed from available historical loan performance data
dating back to 1980. However, we have recently used a shorter,
more near-term default loss curve based on a one quarter
look-back period to generate estimated default rates
for loans originated in 2006 and 2007 and for Alt-A loans
originated in 2005. More recently, we also have relied on a
one-quarter look back period to develop loss severity estimates
for all of our loan categories.
We experienced a substantial reduction in foreclosures and
charge-offs during the periods November 26, 2008 through
January 31, 2009 and February 17, 2009 through
March 6, 2009 when our foreclosure suspension was in effect
and a surge in foreclosures during the two-week period of
February 1, 2009 through February 16, 2009. Since
February 16, 2009, we have continued to observe a reduced
level of foreclosures as our servicers, in keeping with our
guidelines, evaluate borrowers for newly introduced workout
options before proceeding to a foreclosure. Because of the
distortion in defaults caused by these temporary events, we
adjusted our loss curves to incorporate default estimates
derived from an assessment of our most recently observed loan
delinquencies and the related transition of loans through the
various delinquency categories. We used this delinquency
assessment and our most recent default information prior to the
foreclosure suspension to estimate the number of defaults that
we would have expected to occur during the first six months of
2009 if the foreclosure moratorium and our new foreclosure
guidelines had not been in effect. We then used these estimated
defaults, rather than the actual number of defaults that
occurred during the first six months of 2009, to estimate our
loss curves and derive the default rates used in determining our
single-family loss reserves as of June 30, 2009. Consistent
with the approach we used as of December 31, 2008, we also
made management adjustments to our model-generated results to
capture incremental losses that may not be fully reflected in
our models related to geographically concentrated areas that are
experiencing severe stress as a result of significant home price
declines and the sharp rise in unemployment rates.
In determining our multifamily loss reserves, we made several
enhancements in the first and second quarters of 2009 to the
models used in determining our multifamily loss reserves to
reflect the impact of the continuing deterioration in the credit
performance of loans in our multifamily guaranty book of
business. These model enhancements involved weighting more
heavily recent loan default and severity experience to derive
the key parameters used in calculating our expected default
rates. We expect increased multifamily defaults and loss
severities in 2009.
Our combined loss reserves increased by $30.4 billion
during the first six months of 2009 to $55.1 billion as of
June 30, 2009, reflecting further deterioration in both our
single-family and multifamily guaranty book of business, as
evidenced by the significant increase in delinquent, seriously
delinquent and nonperforming loans, as well as an increase in
our average loss severities as a result of the decline in home
prices during the first six months of 2009. The incremental
management adjustment to our loss reserves for geographic and
unemployment stresses accounted for approximately
$8.2 billion of our combined loss reserves of
26
$55.1 billion as of June 30, 2009, compared with
approximately $2.3 billion of our combined loss reserves of
$24.8 billion as of December 31, 2008.
We provide additional information on our combined loss reserves
and the impact of adjustments to our loss reserves on our
condensed consolidated financial statements in
Consolidated Results of OperationsCredit-Related
Expenses and Notes to Condensed Consolidated
Financial StatementsNote 5, Allowance for Loan Losses
and Reserve for Guaranty Losses.
CONSOLIDATED
RESULTS OF OPERATIONS
Our business generates revenues from three principal sources:
net interest income; guaranty fee income; and fee and other
income. Other significant factors affecting our results of
operations include: fair value gains and losses; the timing and
size of investment gains and losses; credit-related expenses;
losses from partnership investments; administrative expenses and
our effective tax rate. We expect high levels of
period-to-period
volatility in our results of operations and financial condition,
principally due to changes in market conditions that result in
periodic fluctuations in the estimated fair value of financial
instruments that we
mark-to-market
through our earnings. These instruments include trading
securities and derivatives. The estimated fair value of our
trading securities and derivatives may fluctuate substantially
from period to period because of changes in interest rates,
credit spreads and expected interest rate volatility, as well as
activity related to these financial instruments.
Table 3 presents a condensed summary of our consolidated results
of operations for the three and six months ended June 30,
2009 and 2008 and selected performance metrics that we believe
are useful in evaluating changes in our results between periods.
Table
3: Summary of Condensed Consolidated Results of
Operations and Performance Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
|
Net interest income
|
|
$
|
3,735
|
|
|
$
|
2,057
|
|
|
$
|
6,983
|
|
|
$
|
3,747
|
|
|
$
|
1,678
|
|
|
|
82
|
%
|
|
$
|
3,236
|
|
|
|
86
|
%
|
Guaranty fee income
|
|
|
1,659
|
|
|
|
1,608
|
|
|
|
3,411
|
|
|
|
3,360
|
|
|
|
51
|
|
|
|
3
|
|
|
|
51
|
|
|
|
2
|
|
Trust management income
|
|
|
13
|
|
|
|
75
|
|
|
|
24
|
|
|
|
182
|
|
|
|
(62
|
)
|
|
|
(83
|
)
|
|
|
(158
|
)
|
|
|
(87
|
)
|
Fee and other income
|
|
|
184
|
|
|
|
225
|
|
|
|
365
|
|
|
|
452
|
|
|
|
(41
|
)
|
|
|
(18
|
)
|
|
|
(87
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
5,591
|
|
|
|
3,965
|
|
|
|
10,783
|
|
|
|
7,741
|
|
|
|
1,626
|
|
|
|
41
|
|
|
|
3,042
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses),
net(1)
|
|
|
(45
|
)
|
|
|
(376
|
)
|
|
|
178
|
|
|
|
(432
|
)
|
|
|
331
|
|
|
|
88
|
|
|
|
610
|
|
|
|
141
|
|
Net
other-than-temporary impairments(1)
|
|
|
(753
|
)
|
|
|
(507
|
)
|
|
|
(6,406
|
)
|
|
|
(562
|
)
|
|
|
(246
|
)
|
|
|
(49
|
)
|
|
|
(5,844
|
)
|
|
|
(1,040
|
)
|
Fair value gains (losses),
net(2)
|
|
|
823
|
|
|
|
517
|
|
|
|
(637
|
)
|
|
|
(3,860
|
)
|
|
|
306
|
|
|
|
59
|
|
|
|
3,223
|
|
|
|
83
|
|
Losses from partnership investments
|
|
|
(571
|
)
|
|
|
(195
|
)
|
|
|
(928
|
)
|
|
|
(336
|
)
|
|
|
(376
|
)
|
|
|
(193
|
)
|
|
|
(592
|
)
|
|
|
(176
|
)
|
Administrative expenses
|
|
|
(510
|
)
|
|
|
(512
|
)
|
|
|
(1,033
|
)
|
|
|
(1,024
|
)
|
|
|
2
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
(1
|
)
|
Credit-related
expenses(3)
|
|
|
(18,784
|
)
|
|
|
(5,349
|
)
|
|
|
(39,656
|
)
|
|
|
(8,592
|
)
|
|
|
(13,435
|
)
|
|
|
(251
|
)
|
|
|
(31,064
|
)
|
|
|
(362
|
)
|
Other non-interest
expenses(4)
|
|
|
(508
|
)
|
|
|
(283
|
)
|
|
|
(866
|
)
|
|
|
(788
|
)
|
|
|
(225
|
)
|
|
|
(80
|
)
|
|
|
(78
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary losses
|
|
|
(14,757
|
)
|
|
|
(2,740
|
)
|
|
|
(38,565
|
)
|
|
|
(7,853
|
)
|
|
|
(12,017
|
)
|
|
|
(439
|
)
|
|
|
(30,712
|
)
|
|
|
(391
|
)
|
Benefit (provision) for federal income taxes
|
|
|
(23
|
)
|
|
|
476
|
|
|
|
600
|
|
|
|
3,404
|
|
|
|
(499
|
)
|
|
|
(105
|
)
|
|
|
(2,804
|
)
|
|
|
(82
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(34
|
)
|
|
|
33
|
|
|
|
100
|
|
|
|
34
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,780
|
)
|
|
|
(2,297
|
)
|
|
|
(37,965
|
)
|
|
|
(4,483
|
)
|
|
|
(12,483
|
)
|
|
|
(543
|
)
|
|
|
(33,482
|
)
|
|
|
(747
|
)
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
|
|
26
|
|
|
|
(3
|
)
|
|
|
43
|
|
|
|
(3
|
)
|
|
|
29
|
|
|
|
967
|
|
|
|
46
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
$
|
(14,754
|
)
|
|
$
|
(2,300
|
)
|
|
$
|
(37,922
|
)
|
|
$
|
(4,486
|
)
|
|
$
|
(12,454
|
)
|
|
|
(541
|
)%
|
|
$
|
(33,436
|
)
|
|
|
(745
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(2.67
|
)
|
|
$
|
(2.54
|
)
|
|
$
|
(6.76
|
)
|
|
$
|
(5.11
|
)
|
|
$
|
(0.13
|
)
|
|
|
(5.12
|
)%
|
|
$
|
(1.65
|
)
|
|
|
(32.29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
yield(5)
|
|
|
1.69
|
%
|
|
|
1.00
|
%
|
|
|
1.57
|
%
|
|
|
0.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average effective guaranty fee rate (in basis
points)(6)
|
|
|
25.5
|
bp
|
|
|
26.3
|
bp
|
|
|
26.4
|
bp
|
|
|
27.9
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss ratio (in basis
points)(7)
|
|
|
44.1
|
|
|
|
17.5
|
|
|
|
38.6
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
(1) |
|
Certain prior period amounts have
been reclassified to conform with the current period
presentation in our consolidated statements of operations.
|
|
(2) |
|
Consists of the following:
(a) derivatives fair value gains (losses), net;
(b) trading securities gains (losses), net; (c) hedged
mortgage assets losses, net; (d) debt foreign exchange
gains (losses), net; and (e) debt fair value gains
(losses), net.
|
|
(3) |
|
Consists of provision for credit
losses and foreclosed property expense.
|
|
(4) |
|
Consists of the following:
(a) debt extinguishment gains (losses), net and
(b) other expenses.
|
|
(5) |
|
Calculated based on annualized net
interest income for the reporting period divided by the average
balance of total interest-earning assets during the period,
expressed as a percentage.
|
|
(6) |
|
Calculated based on annualized
guaranty fee income for the reporting period divided by average
outstanding Fannie Mae MBS and other guarantees during the
period, expressed in basis points.
|
|
(7) |
|
Calculated based on annualized
(a) charge-offs, net of recoveries; plus
(b) foreclosed property expense; adjusted to exclude
(c) the impact of
SOP 03-3
and HomeSaver Advance fair value losses for the reporting period
divided by the average guaranty book of business during the
period, expressed in basis points.
|
The section below provides a comparative discussion of our
condensed consolidated results of operations for the three and
six months ended June 30, 2009 and 2008. Following this
section, we provide a discussion of our business segment
results. You should read this section together with our
Executive Summary where we discuss trends and other
factors that we expect will affect our future results of
operations.
Net
Interest Income
Net interest income represents the difference between interest
income and interest expense and is a primary source of our
revenue. Our net interest yield represents the difference
between the yield on our interest-earning assets and the cost of
our debt. We supplement our issuance of debt with interest
rate-related derivatives to manage the prepayment and duration
risk inherent in our mortgage investments. The effect of these
derivatives, in particular the periodic net interest expense
accruals on interest rate swaps, is not reflected in net
interest income. See Fair Value Gains (Losses), Net
for additional information.
We expect net interest income and our net interest yield to
fluctuate based on changes in interest rates and changes in the
amount and composition of our interest-earning assets and
interest-bearing liabilities. Table 4 presents an analysis of
our net interest income and net interest yield for the three and
six months ended June 30, 2009 and 2008.
28
Table
4: Analysis of Net Interest Income and
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
|
(Dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(2)
|
|
$
|
428,975
|
|
|
$
|
5,611
|
|
|
|
5.23
|
%
|
|
$
|
418,504
|
|
|
$
|
5,769
|
|
|
|
5.51
|
%
|
Mortgage securities
|
|
|
343,031
|
|
|
|
4,162
|
|
|
|
4.85
|
|
|
|
318,396
|
|
|
|
4,063
|
|
|
|
5.10
|
|
Non-mortgage
securities(3)
|
|
|
55,338
|
|
|
|
68
|
|
|
|
0.49
|
|
|
|
57,504
|
|
|
|
400
|
|
|
|
2.75
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
49,678
|
|
|
|
110
|
|
|
|
0.87
|
|
|
|
26,869
|
|
|
|
186
|
|
|
|
2.74
|
|
Advances to lenders
|
|
|
5,970
|
|
|
|
29
|
|
|
|
1.92
|
|
|
|
3,332
|
|
|
|
46
|
|
|
|
5.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
882,992
|
|
|
$
|
9,980
|
|
|
|
4.52
|
%
|
|
$
|
824,605
|
|
|
$
|
10,464
|
|
|
|
5.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
290,189
|
|
|
$
|
600
|
|
|
|
0.82
|
%
|
|
$
|
242,453
|
|
|
$
|
1,685
|
|
|
|
2.75
|
%
|
Long-term debt
|
|
|
576,008
|
|
|
|
5,645
|
|
|
|
3.92
|
|
|
|
550,940
|
|
|
|
6,720
|
|
|
|
4.88
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
3
|
|
|
|
|
|
|
|
4.27
|
|
|
|
303
|
|
|
|
2
|
|
|
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
866,200
|
|
|
$
|
6,245
|
|
|
|
2.88
|
%
|
|
$
|
793,696
|
|
|
$
|
8,407
|
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of net non-interest bearing funding
|
|
$
|
16,792
|
|
|
|
|
|
|
|
0.05
|
%
|
|
$
|
30,909
|
|
|
|
|
|
|
|
0.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest
yield(4)
|
|
|
|
|
|
$
|
3,735
|
|
|
|
1.69
|
%
|
|
|
|
|
|
$
|
2,057
|
|
|
|
1.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected benchmark interest rates at end of
period:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month LIBOR
|
|
|
|
|
|
|
|
|
|
|
0.60
|
%
|
|
|
|
|
|
|
|
|
|
|
2.78
|
%
|
2-year swap
interest rate
|
|
|
|
|
|
|
|
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
3.55
|
|
5-year swap
interest rate
|
|
|
|
|
|
|
|
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
4.26
|
|
30-year
Fannie Mae MBS par coupon rate
|
|
|
|
|
|
|
|
|
|
|
4.59
|
|
|
|
|
|
|
|
|
|
|
|
5.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
Balance(1)
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
|
(Dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(2)
|
|
$
|
429,969
|
|
|
$
|
11,209
|
|
|
|
5.21
|
%
|
|
$
|
414,163
|
|
|
$
|
11,431
|
|
|
|
5.52
|
%
|
Mortgage securities
|
|
|
344,985
|
|
|
|
8,782
|
|
|
|
5.09
|
|
|
|
317,107
|
|
|
|
8,207
|
|
|
|
5.18
|
|
Non-mortgage
securities(3)
|
|
|
51,862
|
|
|
|
159
|
|
|
|
0.61
|
|
|
|
62,067
|
|
|
|
1,078
|
|
|
|
3.44
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
56,893
|
|
|
|
214
|
|
|
|
0.74
|
|
|
|
31,551
|
|
|
|
579
|
|
|
|
3.63
|
|
Advances to lenders
|
|
|
5,118
|
|
|
|
52
|
|
|
|
2.02
|
|
|
|
3,780
|
|
|
|
111
|
|
|
|
5.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
888,827
|
|
|
$
|
20,416
|
|
|
|
4.59
|
%
|
|
$
|
828,668
|
|
|
$
|
21,406
|
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
310,200
|
|
|
|
1,707
|
|
|
|
1.09
|
%
|
|
$
|
249,949
|
|
|
$
|
4,243
|
|
|
|
3.36
|
%
|
Long-term debt
|
|
|
565,407
|
|
|
|
11,726
|
|
|
|
4.15
|
|
|
|
548,244
|
|
|
|
13,411
|
|
|
|
4.89
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
41
|
|
|
|
|
|
|
|
1.24
|
|
|
|
371
|
|
|
|
5
|
|
|
|
2.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
875,648
|
|
|
$
|
13,433
|
|
|
|
3.07
|
%
|
|
$
|
798,564
|
|
|
$
|
17,659
|
|
|
|
4.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of net non-interest bearing funding
|
|
$
|
13,179
|
|
|
|
|
|
|
|
0.05
|
%
|
|
$
|
30,104
|
|
|
|
|
|
|
|
0.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest
yield(4)
|
|
|
|
|
|
$
|
6,983
|
|
|
|
1.57
|
%
|
|
|
|
|
|
$
|
3,747
|
|
|
|
0.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have calculated the average
balances for mortgage loans based on the average of the
amortized cost amounts as of the beginning of the period and as
of the end of each month in the period. For all other
categories, the average balances have been calculated based on a
daily average.
|
|
(2) |
|
Average balance amounts include
nonaccrual loans with an average balance totaling
$20.9 billion and $8.4 billion for the three months
ended June 30, 2009 and 2008, respectively, and
$19.7 billion and $8.3 billion for the six months
ended June 30, 2009 and 2008, respectively. Interest income
includes interest income on loans purchased from MBS
|
29
|
|
|
|
|
trusts subject to
SOP 03-3,
which totaled $256 million and $168 million for the
three months ended June 30, 2009 and 2008, respectively,
and $409 million and $313 million for the six months
ended June 30, 2009 and 2008, respectively. These interest
income amounts included accretion of $198 million and
$53 million for the three months ended June 30, 2009
and 2008, respectively and $263 million and
$88 million for the six months ended June 30, 2009 and
2008, respectively, relating to a portion of the fair value
losses recorded upon the acquisition of loans subject to
SOP 03-3.
|
|
(3) |
|
Includes cash equivalents.
|
|
(4) |
|
We compute net interest yield by
dividing annualized net interest income for the period by the
average balance of our total interest-earning assets during the
period.
|
|
(5) |
|
Data from British Bankers
Association, Thomson Reuters Indices and Bloomberg.
|
Table 5 presents the change in our net interest income between
periods and the extent to which that variance is attributable
to: (1) changes in the volume of our interest-earning
assets and interest-bearing liabilities or (2) changes in
the interest rates of these assets and liabilities.
Table
5: Rate/Volume Analysis of Net Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2009 vs. 2008
|
|
|
2009 vs. 2008
|
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
(158
|
)
|
|
$
|
142
|
|
|
$
|
(300
|
)
|
|
$
|
(222
|
)
|
|
$
|
426
|
|
|
$
|
(648
|
)
|
Mortgage securities
|
|
|
99
|
|
|
|
304
|
|
|
|
(205
|
)
|
|
|
575
|
|
|
|
712
|
|
|
|
(137
|
)
|
Non-mortgage
securities(2)
|
|
|
(332
|
)
|
|
|
(15
|
)
|
|
|
(317
|
)
|
|
|
(919
|
)
|
|
|
(153
|
)
|
|
|
(766
|
)
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
(76
|
)
|
|
|
99
|
|
|
|
(175
|
)
|
|
|
(365
|
)
|
|
|
279
|
|
|
|
(644
|
)
|
Advances to lenders
|
|
|
(17
|
)
|
|
|
23
|
|
|
|
(40
|
)
|
|
|
(59
|
)
|
|
|
30
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(484
|
)
|
|
|
553
|
|
|
|
(1,037
|
)
|
|
|
(990
|
)
|
|
|
1,294
|
|
|
|
(2,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
(1,085
|
)
|
|
|
281
|
|
|
|
(1,366
|
)
|
|
|
(2,536
|
)
|
|
|
841
|
|
|
|
(3,377
|
)
|
Long-term debt
|
|
|
(1,075
|
)
|
|
|
294
|
|
|
|
(1,369
|
)
|
|
|
(1,685
|
)
|
|
|
409
|
|
|
|
(2,094
|
)
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(2,162
|
)
|
|
|
572
|
|
|
|
(2,734
|
)
|
|
|
(4,226
|
)
|
|
|
1,247
|
|
|
|
(5,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,678
|
|
|
$
|
(19
|
)
|
|
$
|
1,697
|
|
|
$
|
3,236
|
|
|
$
|
47
|
|
|
$
|
3,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Combined rate/volume variances are
allocated to both rate and volume based on the relative size of
each variance.
|
|
(2) |
|
Includes cash equivalents.
|
Net interest income increased 82% and 86% in the second quarter
and first six months of 2009, respectively, from comparable
prior year periods driven primarily by a 69% and 73% expansion
of our net interest yield for the second quarter and first six
months, respectively, and a 7% increase in average interest
earning assets for both the second quarter and first six months.
The 69 basis point increase in our net interest yield
during the second quarter of 2009 as compared with the second
quarter of 2008 was primarily attributable to a 135 basis
point reduction in the average cost of our debt for the second
quarter of 2009 to 2.88%, which more than offset the
55 basis point decline in the average yield on our
interest-earning assets to 4.52%. The 66 basis point
increase in our net interest yield during the first six months
of 2009 as compared with the first six months of 2008 was
primarily attributable to a 134 basis point reduction in
the average cost of our debt for the first six months of 2009 to
3.07%, which more than offset the 57 basis point decline in
the average yield on our interest-earning assets to 4.59%.
The significant reduction in the average cost of our debt during
the second quarter and first six months of 2009 from the
comparable prior year periods was primarily attributable to a
decline in borrowing rates, a shift in our funding mix in the
second half of 2008 to more short-term debt because of the
reduced demand for our longer-term and callable debt securities,
and significant repurchasing activity of callable debt. Due to
the
30
improved demand and attractive pricing for our non-callable and
callable long-term debt during the first half of 2009, we issued
a significant amount of long-term debt during this period, which
we then used to repay maturing short-term debt and prepay more
expensive long-term debt. Our net interest yield for the second
quarter and first six months of 2008 reflected a benefit from
the redemption of step-rate debt securities, which reduced the
average cost of our debt. Because we paid off these securities
prior to maturity, we reversed a portion of the interest expense
that we had previously accrued using an average effective rate.
Although we consider the periodic net contractual interest
accruals on our interest rate swaps to be part of the cost of
funding our mortgage investments, these amounts are not
reflected in our net interest income and net interest yield.
Instead, these amounts are included in our derivatives gains
(losses) and reflected in our condensed consolidated statements
of operations as a component of Fair value gains (losses),
net. As shown in Table 8 below, we recorded net
contractual interest expense on our interest rate swaps totaling
$779 million and $1.7 billion for the second quarter
and first six months of 2009, respectively, and
$304 million and $330 million for the second quarter
and first six months of 2008, respectively. The economic effect
of the interest accruals on our interest rate swaps increased
our funding costs by 35 and 39 basis points for the second
quarter and first six months of 2009, respectively, and
15 basis points and 8 basis points for the second
quarter and first six months of 2008, respectively.
The 7% increase in our average interest-earning assets for both
the second quarter and first six months of 2009 compared to the
second quarter and first six months of 2008 was attributable to
the second half of 2008 when we increased portfolio purchases,
as mortgage-to-debt spreads reached historic highs, and there
was a reduction in liquidations due to the disruption in the
housing and credit markets. However, in the second quarter and
first six months of 2009, we significantly reduced our net
purchases of agency MBS, largely due to the significant
narrowing of spreads on agency MBS during this period in
response to the Federal Reserves program to purchase up to
$1.25 trillion of agency MBS by the end of 2009. The Federal
Reserve currently is the primary purchaser of agency MBS.
Under the senior preferred stock purchase agreement, we are
limited in the amount of mortgage assets we are allowed to own
and the amount of debt we are allowed to issue. Although the
debt and mortgage portfolio caps did not have a significant
impact on our portfolio activities during the second quarter or
first six months of 2009, these limits may have a significant
adverse impact on our future portfolio activities and net
interest income. For additional information on our portfolio
investment and funding activity, see Consolidated Balance
Sheet AnalysisMortgage Investments and
Liquidity and Capital ManagementLiquidity
ManagementDebt Funding.
Guaranty
Fee Income
Guaranty fee income primarily consists of contractual guaranty
fees related to both Fannie Mae MBS held in our portfolio and
held by third-party investors, adjusted for the amortization of
upfront fees over the estimated life of the loans underlying the
MBS and impairment of guaranty assets, net of a proportionate
reduction in the related guaranty obligation and deferred
profit, and impairment of
buy-ups.
Table 6 shows the components of our guaranty fee income, our
average effective guaranty fee rate and Fannie Mae MBS activity
for the three and six months ended June 30, 2009 and 2008.
31
Table
6: Guaranty Fee Income and Average Effective Guaranty
Fee
Rate(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
%Change
|
|
|
|
(Dollars in millions)
|
|
|
Guaranty fee income/average effective guaranty fee rate
excluding certain fair value adjustments and
buy-up
impairment
|
|
$
|
1,545
|
|
|
|
23.7
|
bp
|
|
$
|
1,458
|
|
|
|
23.8
|
bp
|
|
|
6
|
%
|
Net change in fair value of
buy-ups and
certain guaranty assets
|
|
|
116
|
|
|
|
1.8
|
|
|
|
152
|
|
|
|
2.5
|
|
|
|
(24
|
)
|
Buy-up
impairment
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income/average effective guaranty fee rate
|
|
$
|
1,659
|
|
|
|
25.5
|
bp
|
|
$
|
1,608
|
|
|
|
26.3
|
bp
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding Fannie Mae MBS and other
guarantees(3)
|
|
$
|
2,600,781
|
|
|
|
|
|
|
$
|
2,442,886
|
|
|
|
|
|
|
|
6
|
%
|
Fannie Mae MBS
issues(4)
|
|
|
315,911
|
|
|
|
|
|
|
|
177,763
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
Amount
|
|
|
Rate(2)
|
|
|
%Change
|
|
|
|
(Dollars in millions)
|
|
|
Guaranty fee income/average effective guaranty fee rate
excluding certain fair value adjustments and
buy-up
impairment
|
|
$
|
3,271
|
|
|
|
25.3
|
bp
|
|
$
|
3,177
|
|
|
|
26.4
|
bp
|
|
|
3
|
%
|
Net change in fair value of
buy-ups and
certain guaranty assets
|
|
|
162
|
|
|
|
1.3
|
|
|
|
214
|
|
|
|
1.8
|
|
|
|
(24
|
)
|
Buy-up
impairment
|
|
|
(22
|
)
|
|
|
(0.2
|
)
|
|
|
(31
|
)
|
|
|
(0.3
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income/average effective guaranty fee rate
|
|
$
|
3,411
|
|
|
|
26.4
|
bp
|
|
$
|
3,360
|
|
|
|
27.9
|
bp
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding Fannie Mae MBS and other
guarantees(3)
|
|
$
|
2,581,968
|
|
|
|
|
|
|
$
|
2,407,296
|
|
|
|
|
|
|
|
7
|
%
|
Fannie Mae MBS
issues(4)
|
|
|
470,231
|
|
|
|
|
|
|
|
346,355
|
|
|
|
|
|
|
|
36
|
|
|
|
|
(1) |
|
Guaranty fee income includes the
accretion of losses recognized at inception on certain guaranty
contracts for periods prior to January 1, 2008.
|
|
(2) |
|
Presented in basis points and
calculated based on annualized guaranty fee income components
divided by average outstanding Fannie Mae MBS and other
guarantees for each annualized respective period.
|
|
(3) |
|
Includes unpaid principal balance
of other guarantees totaling $26.1 billion and
$27.8 billion as of June 30, 2009 and
December 31, 2008, respectively, and $31.8 billion and
$41.6 billion on June 30, 2008 and December 31,
2007, respectively.
|
|
(4) |
|
Reflects unpaid principal balance
of Fannie Mae MBS issued and guaranteed by us, including
mortgage loans held in our portfolio that we securitized during
the period and Fannie Mae MBS issued during the period that we
acquired for our portfolio.
|
The 3% and 2% increase in our guaranty fee income in the second
quarter and first six months of 2009 was driven by a 6% and 7%
increase in our average outstanding Fannie Mae MBS and other
guarantees in the respective periods that was partially offset
by a decrease in the average charged guaranty fee. Other factors
contributing to higher guaranty fee income include an increase
in the recognition of deferred amounts into income partially
offset by lower fair value adjustments of
buy-ups and
certain guaranty assets. We experienced an increase in our
average outstanding Fannie Mae MBS and other guarantees
throughout 2008 and for the first six months of 2009 as our
market share of new single-family mortgage-related securities
issuances remained high and new MBS issuances outpaced
liquidations.
The decrease in our average effective guaranty fee rate for the
second quarter and first six months of 2009 was attributable to
a lower average charged guaranty fee on new business as well as
lower fair value adjustments on
buy-ups and
certain guaranty assets. This was partially offset by the
recognition of deferred amounts into income as interest rates in
the second quarter and first six months of 2009 were lower than
32
comparable prior year periods. The average charged guaranty fee
on our new single-family business for the second quarter and
first six months of 2009 was 23.7 basis points and
22.5 basis points, respectively, compared with
28.0 basis points and 26.9 basis points for the second
quarter and first six months of 2008, respectively. The average
charged guaranty fee represents the average contractual fee rate
for our single-family guaranty arrangements plus the recognition
of any upfront cash payments ratably over an estimated average
life. The decrease in the average charged guaranty fee was
primarily the result of a shift in the composition of our new
business given changes in underwriting and eligibility
standards. The change in the average charged guaranty fee
reflects a reduction in our acquisition of loans with higher
risk, higher fee categories such as higher LTV and lower FICO
credit scores. Beginning in 2009, we extended the estimated
average life used in calculating the recognition of upfront cash
payments for the purpose of determining our average charged
guaranty fee for new single-family business to reflect a longer
expected duration because of the record low interest rate
environment. This change did not have a material impact on the
average charged guaranty fee on our new single-family business
in the second quarter or first six months of 2009.
Our guaranty fee income includes an estimated $141 million
and $334 million for the second quarter and first six
months of 2009, respectively, and $127 million and
$424 million for the second quarter and first six months of
2008, respectively, related to the accretion of deferred amounts
on guaranty contracts where we recognized losses at the
inception of the contract.
Trust Management
Income
Trust management income consists of the fees we earn as master
servicer, issuer and trustee for Fannie Mae MBS. We derive these
fees from the interest earned on cash flows between the date of
remittance of mortgage and other payments to us by servicers and
the date of distribution of these payments to MBS
certificateholders, which we refer to as float income. Trust
management income decreased to $13 million and
$24 million for the second quarter and first six months of
2009, respectively, from $75 million and $182 million
for the second quarter and first six months of 2008,
respectively. The decrease during each period was attributable
to significantly lower short-term interest rates for the first
six months of 2009 relative to the first six months of 2008.
Fee and
Other Income
Fee and other income consists of transaction fees, technology
fees and multifamily fees. These fees are largely driven by our
business volume. Fee and other income decreased to
$184 million and $365 million for the second quarter
and first six months of 2009, respectively, from
$225 million and $452 million for the second quarter
and first six months of 2008, respectively. The decrease during
each period was primarily attributable to lower multifamily fees
due to slower multifamily loan prepayments during the second
quarter and first six months of 2009 relative to the second
quarter and first six months of 2008.
Investment
Gains (Losses), Net
Investment gains and losses, net includes lower of cost or fair
value adjustments on held-for-sale loans; gains and losses
recognized on the securitization of loans or securities from our
portfolio and from the sale of available-for-sale securities;
and other investment losses. Investment gains and losses may
fluctuate significantly from period to period depending upon our
portfolio investment and securitization activities. The
$331 million decrease in investment losses and
$610 million shift from losses to gains for the second
quarter and first six months of 2009, respectively, from the
second quarter and first six months of 2008 was primarily
attributable to an increase in gains on securitizations as a
result of increased whole loan conduit activity as we focus on
providing liquidity to the market and realized gains on sales of
available-for-sale securities partially offset by higher lower
of cost or market adjustments on loans.
Net
Other-Than-Temporary Impairment
The net other-than-temporary impairment of $753 million and
$6.4 billion that we recognized in the second quarter and
first six months of 2009, respectively, increased from the
second quarter and first six months of
33
2008 as it included additional impairment losses on some of our
Alt-A and subprime private-label securities that we had
previously impaired, as well as impairment losses on other Alt-A
and subprime securities, due to continued deterioration in the
credit quality of the loans underlying these securities and
further declines in the expected cash flows. Beginning in the
second quarter of 2009 with the change in impairment accounting,
only the credit portion of an other-than-temporary impairment is
recognized in our condensed consolidated statement of
operations. See Consolidated Balance Sheet
AnalysisTrading and Available-for-Sale Investment
Securities Investments in Private-Label
Mortgage-Related Securities for additional information on
the other-than-temporary impairment recognized on our
investments in Alt-A and subprime private-label mortgage-related
securities. See Part IIItem 1ARisk
Factors for a discussion of the risks associated with
possible future write-downs of our investment securities.
Fair
Value Gains (Losses), Net
Fair value gains and losses, net consists of
(1) derivatives fair value gains and losses;
(2) trading securities gains and losses; (3) hedged
mortgage assets losses; (4) foreign exchange gains and
losses on our foreign-denominated debt; and (5) fair value
gains and losses on certain debt securities carried at fair
value. By presenting these items together in our consolidated
results of operations, we are able to show the net impact of
mark-to-market adjustments that generally result in offsetting
gains and losses attributable to changes in interest rates.
We seek to eliminate our exposure to fluctuations in foreign
exchange rates by entering into foreign currency swaps that
effectively convert debt denominated in a foreign currency to
debt denominated in U.S. dollars. The foreign currency
exchange gains and losses on our foreign-denominated debt are
offset in part by corresponding losses and gains on foreign
currency swaps.
Table 7 summarizes the components of fair value gains (losses),
net for the three and six months ended June 30, 2009 and
2008.
Table
7: Fair Value Gains (Losses), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Derivatives fair value gains (losses), net
|
|
$
|
(537
|
)
|
|
$
|
2,293
|
|
|
$
|
(2,243
|
)
|
|
$
|
(710
|
)
|
Trading securities gains (losses), net
|
|
|
1,561
|
|
|
|
(965
|
)
|
|
|
1,728
|
|
|
|
(2,192
|
)
|
Hedged mortgage assets losses,
net(1)
|
|
|
|
|
|
|
(803
|
)
|
|
|
|
|
|
|
(803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value gains (losses) on derivatives, trading securities,
and hedged mortgage assets, net
|
|
|
1,024
|
|
|
|
525
|
|
|
|
(515
|
)
|
|
|
(3,705
|
)
|
Debt foreign exchange losses, net
|
|
|
(169
|
)
|
|
|
(12
|
)
|
|
|
(114
|
)
|
|
|
(169
|
)
|
Debt fair value gains (losses), net
|
|
|
(32
|
)
|
|
|
4
|
|
|
|
(8
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value gains (losses), net
|
|
$
|
823
|
|
|
$
|
517
|
|
|
$
|
(637
|
)
|
|
$
|
(3,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents adjustments to the
carrying value of mortgage assets designated for hedge
accounting that are attributable to changes in interest rates.
|
Derivatives
Fair Value Gains (Losses), Net
Derivative instruments are an integral part of our management of
interest rate risk. We supplement our issuance of debt with
derivative instruments to manage our duration and prepayment
risks. Table 8 presents, by type of derivative instrument, the
fair value gains and losses on our derivatives for the three and
six months ended June 30, 2009 and 2008. Table 8 also
includes an analysis of the components of derivatives fair value
gains and losses attributable to net contractual interest
accruals on our interest rate swaps, the net change in the fair
value of terminated derivative contracts through the date of
termination and the net change in the fair
34
value of outstanding derivative contracts. The
5-year swap
interest rate, which is shown below in Table 8, is a key
reference interest rate that affects the fair value of our
derivatives.
Table
8: Derivatives Fair Value Gains (Losses),
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
19,430
|
|
|
$
|
15,782
|
|
|
$
|
22,744
|
|
|
$
|
(113
|
)
|
Receive-fixed
|
|
|
(16,877
|
)
|
|
|
(11,092
|
)
|
|
|
(18,239
|
)
|
|
|
1,700
|
|
Basis
|
|
|
45
|
|
|
|
(73
|
)
|
|
|
22
|
|
|
|
(68
|
)
|
Foreign
currency(1)
|
|
|
159
|
|
|
|
(20
|
)
|
|
|
86
|
|
|
|
126
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
900
|
|
|
|
270
|
|
|
|
885
|
|
|
|
81
|
|
Receive-fixed
|
|
|
(4,250
|
)
|
|
|
(2,499
|
)
|
|
|
(7,488
|
)
|
|
|
(2,226
|
)
|
Interest rate caps
|
|
|
21
|
|
|
|
4
|
|
|
|
21
|
|
|
|
3
|
|
Other(2)
|
|
|
(52
|
)
|
|
|
(13
|
)
|
|
|
(23
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk management derivatives fair value gains (losses), net
|
|
|
(624
|
)
|
|
|
2,359
|
|
|
|
(1,992
|
)
|
|
|
(446
|
)
|
Mortgage commitment derivatives fair value gains (losses), net
|
|
|
87
|
|
|
|
(66
|
)
|
|
|
(251
|
)
|
|
|
(264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives fair value gains (losses), net
|
|
$
|
(537
|
)
|
|
$
|
2,293
|
|
|
$
|
(2,243
|
)
|
|
$
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk management derivatives fair value gains (losses)
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net contractual interest income (expense) accruals on interest
rate swaps
|
|
|
(779
|
)
|
|
|
(304
|
)
|
|
|
(1,719
|
)
|
|
|
(330
|
)
|
Net change in fair value of terminated derivative contracts from
end of prior period to date of termination
|
|
|
(1,000
|
)
|
|
|
(108
|
)
|
|
|
(1,825
|
)
|
|
|
174
|
|
Net change in fair value of outstanding derivative contracts,
including derivative contracts entered into during the period
|
|
|
1,155
|
|
|
|
2,771
|
|
|
|
1,552
|
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk management derivatives fair value gains (losses),
net(3)
|
|
$
|
(624
|
)
|
|
$
|
2,359
|
|
|
$
|
(1,992
|
)
|
|
$
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
5-year swap
interest rate:
|
|
|
|
|
|
|
|
|
As of January 1
|
|
|
2.13
|
%
|
|
|
4.19
|
%
|
As of March 31
|
|
|
2.22
|
|
|
|
3.31
|
|
As of June 30
|
|
|
2.97
|
|
|
|
4.26
|
|
|
|
|
(1) |
|
Includes the effect of net
contractual interest income accruals of $9 million and
$6 million for the three months ended June 30, 2009
and 2008, respectively, and $15 million and $3 million
for the six months ended June 30, 2009 and 2008,
respectively. The change in fair value of foreign currency swaps
excluding this item resulted in a net gain of $150 million
and a net loss of $26 million for the three months ended
June 30, 2009 and 2008, and a net gain of $71 million
and $123 million for the six months ended June 30,
2009 and 2008, respectively.
|
|
(2) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts.
|
|
(3) |
|
Reflects net derivatives fair value
gains (losses), excluding mortgage commitments, recognized in
the condensed consolidated statements of operations.
|
During the second quarter and first six months of 2009,
increases in swap rates resulted in gains on our net pay-fixed
swap position. These gains were more than offset by losses on
our option-based derivatives as swap rate increases drove losses
on our receive-fixed swaptions.
The derivatives fair value gains of $2.3 billion for the
second quarter of 2008 were driven by an increase of
95 basis points in
5-year swap
interest rates, resulting in fair value gains on our pay-fixed
swaps that exceeded the fair value losses on our receive-fixed
swaps. The derivatives fair value losses of $710 million
for the first
35
six months of 2008 were largely attributable to losses resulting
from a combination of the time decay on our purchased options
and rebalancing activities.
For additional information on our interest rate risk management
strategy and our use of derivatives in managing our interest
rate risk, see
Part IIItem 7MD&ARisk
ManagementInterest Rate Risk Management and Other Market
RisksInterest Rate Risk Management Strategies of our
2008
Form 10-K
and Interest Rate Risk Management Strategies below.
Trading
Securities Gains (Losses), Net
We recorded net gains on trading securities of $1.6 billion
and $1.7 billion for the second quarter and first six
months of 2009, respectively, compared with net losses of
$965 million and $2.2 billion for the second quarter
and first six months of 2008, respectively. The gains on our
trading securities during the second quarter and first six
months of 2009 were primarily attributable to the narrowing of
spreads on commercial mortgage-backed securities
(CMBS), asset-backed securities, and corporate debt
securities. Narrowing of spreads on agency MBS also contributed
to the gains in the first six months of 2009. The losses on our
trading securities during the second quarter and first six
months of 2008 were attributable to an increase in long-term
interest rates during the second quarter of 2008 and a
significant widening of credit spreads during the first six
months of 2008, particularly related to private-label
mortgage-related securities backed by Alt-A and subprime loans
and CMBS.
We provide additional information on our trading and
available-for-sale securities in Consolidated Balance
Sheet AnalysisTrading and Available-for-Sale Investment
Securities and disclose the sensitivity of changes in the
fair value of our trading securities to changes in interest
rates in Risk ManagementInterest Rate Risk
Management and Other Market RisksInterest Rate Risk
Metrics.
Hedged
Mortgage Assets Losses, Net
We did not apply hedge accounting in the first six months of
2009; however, we did apply hedge accounting in the second
quarter of 2008. Our hedge accounting relationships during the
second quarter of 2008 consisted of pay-fixed interest rate
swaps designated as fair value hedges of changes in the fair
value, attributable to changes in the London Interbank Offered
Rate (LIBOR) benchmark interest rate, of specified
mortgage assets. These fair value accounting hedges resulted in
losses on the hedged mortgage assets for the second quarter and
first six months of 2008 of $803 million, which were
partially offset by gains of $789 million on the pay-fixed
swaps designated as hedging instruments. The gains on these
pay-fixed swaps are included as a component of derivatives fair
value gains (losses), net. We also recorded as a component of
derivatives fair value gains (losses), net the ineffectiveness,
or the portion of the change in the fair value of our
derivatives that was not effective in offsetting the change in
the fair value of the designated hedged mortgage assets.
Included in our derivatives fair value gains (losses), net was a
loss of $14 million for the second quarter and first six
months of 2008, representing the ineffectiveness of our fair
value hedges.
Losses
from Partnership Investments
Losses from partnership investments increased to
$571 million and $928 million for the second quarter
and first six months of 2009, respectively, from
$195 million and $336 million for the second quarter
and first six months of 2008, respectively. The increase in
losses during each period was largely due to the recognition of
additional other-than-temporary impairment of $302 million
and $449 million in the second quarter and first six months
of 2009, respectively, on a portion of our LIHTC and other
affordable housing investments, reflecting the decline in value
of these investments as a result of the economic recession. In
addition, our partnership losses for the first six months of
2008 were partially reduced by gains on sales of some of our
LIHTC investments. We did not have any sales of LIHTC
investments during the first six months of 2009. If we determine
that in the future a market for our LIHTC investments does not
exist or that we do not have both the intent and ability to
participate in the LIHTC market, we may not be able to realize
the full value of this asset. This would result in significant
additional other-than-temporary impairment on our LIHTC
investments.
36
Administrative
Expenses
Administrative expenses include ongoing operating costs, such as
salaries and employee benefits, professional services, occupancy
costs and technology expenses. Administrative expenses were
$510 million and $1.0 billion for the second quarter
and first six months of 2009, respectively, compared with
$512 million and $1.0 billion for the second quarter
and first six months of 2008, respectively. We took steps in the
first six months of 2009 to realign our organization, personnel
and resources to focus on our most critical priorities, which
include providing liquidity to the mortgage market and
preventing foreclosures. As part of this realignment, we reduced
staffing levels in some areas of the company. This reduction in
staff, however, was partially offset by an increase in employee
and contractor staffing levels in other areas, particularly
those divisions of the company that focus on our
foreclosure-prevention efforts, which we expect will continue as
we increase these efforts.
Credit-Related
Expenses
Credit-related expenses included in our consolidated statements
of operations consist of the provision for credit losses and
foreclosed property expense. We detail the components of our
credit-related expenses below in Table 9. The substantial
increase in our credit-related expenses in the second quarter
and first six months of 2009 from the second quarter and first
six months of 2008 was largely due to the significant increase
in our provision for credit losses, reflecting the deteriorating
credit performance of the loans in our guaranty book of business
given the current economic environment, including continued
weakness in the housing market and rising unemployment.
Table
9: Credit-Related Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Provision for credit losses attributable to guaranty book of
business
|
|
$
|
16,060
|
|
|
$
|
4,591
|
|
|
$
|
34,869
|
|
|
$
|
6,927
|
|
Provision for credit losses attributable to
SOP 03-3
and HomeSaver Advance fair value losses
|
|
|
2,165
|
|
|
|
494
|
|
|
|
3,690
|
|
|
|
1,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit
losses(1)
|
|
|
18,225
|
|
|
|
5,085
|
|
|
|
38,559
|
|
|
|
8,158
|
|
Foreclosed property expense
|
|
|
559
|
|
|
|
264
|
|
|
|
1,097
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-related expenses
|
|
$
|
18,784
|
|
|
$
|
5,349
|
|
|
$
|
39,656
|
|
|
$
|
8,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects total provision for credit losses reported in our
condensed consolidated statements of operations and in Table 10
below under Combined loss reserves. |
Provision
for Credit Losses Attributable to Guaranty Book of
Business
Our allowance for loan losses and reserve for guaranty losses,
which we collectively refer to as our combined loss reserves,
provide for probable credit losses inherent in our guaranty book
of business as of each balance sheet date. We build our loss
reserves through the provision for credit losses for losses that
we believe have been incurred and will eventually be reflected
over time in our charge-offs. When we determine that a loan is
uncollectible, typically upon foreclosure, we record the
charge-off against our loss reserves. We record recoveries of
previously charged-off amounts as a credit to our loss reserves.
Table 10, which summarizes changes in our loss reserves for the
three and six months ended June 30, 2009 and 2008, details
the provision for credit losses recognized in our condensed
consolidated statements of operations each period and the
charge-offs recorded against our combined loss reserves.
37
Table
10: Allowance for Loan Losses and Reserve for
Guaranty Losses (Combined Loss Reserves)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Changes in combined loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance(1)
|
|
$
|
4,830
|
|
|
$
|
993
|
|
|
$
|
2,923
|
|
|
$
|
698
|
|
Provision for credit losses
|
|
|
2,615
|
|
|
|
880
|
|
|
|
5,124
|
|
|
|
1,424
|
|
Charge-offs(2)
|
|
|
(672
|
)
|
|
|
(495
|
)
|
|
|
(1,309
|
)
|
|
|
(774
|
)
|
Recoveries
|
|
|
68
|
|
|
|
98
|
|
|
|
103
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(1)
|
|
$
|
6,841
|
|
|
$
|
1,476
|
|
|
$
|
6,841
|
|
|
$
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
36,876
|
|
|
|
4,202
|
|
|
|
21,830
|
|
|
|
2,693
|
|
Provision for credit losses
|
|
|
15,610
|
|
|
|
4,205
|
|
|
|
33,435
|
|
|
|
6,734
|
|
Charge-offs(3)(4)
|
|
|
(4,314
|
)
|
|
|
(989
|
)
|
|
|
(7,258
|
)
|
|
|
(2,026
|
)
|
Recoveries
|
|
|
108
|
|
|
|
32
|
|
|
|
273
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
48,280
|
|
|
$
|
7,450
|
|
|
$
|
48,280
|
|
|
$
|
7,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance(1)
|
|
|
41,706
|
|
|
|
5,195
|
|
|
|
24,753
|
|
|
|
3,391
|
|
Provision for credit losses
|
|
|
18,225
|
|
|
|
5,085
|
|
|
|
38,559
|
|
|
|
8,158
|
|
Charge-offs(2)(3)(4)
|
|
|
(4,986
|
)
|
|
|
(1,484
|
)
|
|
|
(8,567
|
)
|
|
|
(2,800
|
)
|
Recoveries
|
|
|
176
|
|
|
|
130
|
|
|
|
376
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(1)
|
|
$
|
55,121
|
|
|
$
|
8,926
|
|
|
$
|
55,121
|
|
|
$
|
8,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Combined loss reserves
|
|
$
|
55,121
|
|
|
$
|
24,753
|
|
Allocation of combined loss reserves:
|
|
|
|
|
|
|
|
|
Balance at end of each period attributable to:
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
54,152
|
|
|
$
|
24,649
|
|
Multifamily
|
|
|
969
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,121
|
|
|
$
|
24,753
|
|
|
|
|
|
|
|
|
|
|
Single-family and multifamily loss reserve
ratios:(5)
|
|
|
|
|
|
|
|
|
Single-family loss reserves as a percentage of single-family
guaranty book of business
|
|
|
1.88
|
%
|
|
|
0.88
|
%
|
Multifamily loss reserves as a percentage of multifamily
guaranty book of business
|
|
|
0.54
|
|
|
|
0.06
|
|
Combined loss reserves as a percentage of:
|
|
|
|
|
|
|
|
|
Total guaranty book of business
|
|
|
1.80
|
%
|
|
|
0.83
|
%
|
Total nonperforming
loans(6)
|
|
|
32.24
|
|
|
|
20.76
|
|
|
|
|
(1) |
|
Includes $309 million and
$114 million as of June 30, 2009 and 2008,
respectively, and $150 million as of December 31,
2008, for acquired loans subject to the application of
SOP 03-3.
|
|
(2) |
|
Includes accrued interest of
$328 million and $161 million for the three months
ended June 30, 2009 and 2008, respectively, and
$575 million and $239 million for the six months ended
June 30, 2009 and 2008, respectively.
|
38
|
|
|
(3) |
|
Includes charges of
$73 million and $114 million for the three months
ended June 30, 2009 and 2008, respectively, and
$188 million and $123 million for the six months ended
June 30, 2009 and 2008, respectively, related to unsecured
HomeSaver Advance loans.
|
|
(4) |
|
Includes charges recorded at the
date of acquisition totaling $2.1 billion and
$380 million for the three months ended June 30, 2009
and 2008, respectively, and $3.5 billion and
$1.1 billion for the six months ended June 30, 2009
and 2008, respectively, for acquired loans subject to the
application of
SOP 03-3
where the acquisition cost exceeded the fair value of the
acquired loan.
|
|
(5) |
|
Represents amount of loss reserves
attributable to each loan type as a percentage of the guaranty
book of business for each loan type.
|
|
(6) |
|
Loans are classified as
nonperforming when we believe collectability of interest or
principal on the loan is not reasonably assured, which typically
occurs when payment of principal or interest on the loan is two
months or more past due. Additionally, troubled debt
restructurings and HomeSaver Advance first-lien loans are
classified as nonperforming loans. See Table 41: Nonperforming
Single-Family and Multifamily Loans for additional information
on our nonperforming loans.
|
We have continued to build our combined loss reserves, both in
absolute terms and as a percentage of our total guaranty book of
business and nonperforming loans, through provisions that have
been well in excess of our charge-offs due to the general
deterioration in the overall credit performance of loans in our
guaranty book of business. Certain states, certain higher risk
loan categories and our 2006 and 2007 loan vintages continue to
account for a disproportionate share of our foreclosures and
charge-offs. Our mortgage loans in the Midwest, which has
experienced prolonged economic weakness, and California,
Florida, Arizona and Nevada, which are experiencing the most
significant declines in home prices coupled with rising
unemployment rates that, except for Arizona, are near or above
the national average, have exhibited much higher delinquency
rates and accounted for a disproportionate share of our
foreclosures and charge-offs. Loans in our Alt-A book,
particularly the 2006 and 2007 loan vintages, also have
exhibited significantly higher delinquency rates and represented
a disproportionate share of our foreclosures and charge-offs. We
are also experiencing deterioration in the credit performance of
loans in our single-family guaranty book of business with fewer
risk layers, reflecting the adverse impact of the sharp rise in
unemployment and home price declines.
The provision for credit losses attributable to our guaranty
book of business of $16.1 billion and $34.9 billion
for the second quarter and first six months of 2009,
respectively, exceeded net charge-offs of $2.7 billion and
$4.5 billion for the second quarter and first six months of
2009, respectively, and included an incremental build in our
combined loss reserves of $13.4 billion and
$30.4 billion for the second quarter and first six months
of 2009, respectively. In comparison, we recorded a provision
for credit losses attributable to our guaranty book of business
of $4.6 billion and $6.9 billion for the second
quarter and first six months of 2008, respectively. Our
increased provision levels were largely driven by a substantial
increase in nonperforming single-family loans, higher
delinquencies and an increase in the average loss severity. Our
conventional single-family serious delinquency rate increased to
3.94% as of June 30, 2009, from 3.15% as of March 31,
2009, 2.42% as of December 31, 2008 and 1.36% as of
June 30, 2008. The average default rate and loss severity,
excluding fair value losses related to
SOP 03-3
and HomeSaver Advance loans, was 0.24% and 39%, respectively,
for the second quarter of 2009, compared with 0.13% and 23% for
the second quarter of 2008, respectively.
We increased the portion of our combined loss reserves
attributable to our multifamily guaranty book of business to
$969 million, or 0.54% of our multifamily guaranty book of
business, as of June 30, 2009, from $104 million, or
0.06% of our multifamily guaranty book of business, as of
December 31, 2008. The increase in the multifamily reserve
was primarily driven by larger loans within the non- performing
loan population and increased reliance on the most recent
severity and default experience, which is a reflection of the
current economic recession and lack of liquidity in the market.
Provision
for Credit Losses Attributable to
SOP 03-3
and HomeSaver Advance Fair Value Losses
In our capacity as guarantor of our MBS trusts, we have the
option under the trust agreements to purchase specified mortgage
loans from our MBS trusts. We generally are not permitted to
complete a modification of a loan while the loan is held in the
MBS trust. As a result, we must exercise our option to purchase
any delinquent loan that we intend to modify from an MBS trust
prior to the time that the modification becomes
39
effective. The proportion of delinquent loans purchased from MBS
trusts for the purpose of modification varies from period to
period, driven primarily by factors such as changes in our loss
mitigation efforts, as well as changes in interest rates and
other market factors. See
Part IItem 1BusinessBusiness
SegmentsSingle-Family Credit Guaranty BusinessMBS
Trusts of our 2008
10-K for
additional information on the provisions in our MBS trusts
agreements that govern the purchase of loans from our MBS trusts
and the factors that we consider in determining whether to
purchase delinquent loans from our MBS trusts.
SOP 03-3
refers to the accounting guidance issued by the American
Institute of Certified Public Accountants Statement of Position
No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. This guidance is generally applicable to
delinquent loans purchased from our MBS trusts and delinquent
loans held in any MBS trust that we are required to consolidate,
which we collectively refer to as Acquired Loans from MBS
Trusts Subject to
SOP 03-3.
We record our net investment in these loans at the lower of the
acquisition cost of the loan or the estimated fair value at the
date of purchase or consolidation. To the extent the acquisition
cost exceeds the estimated fair value, we record a
SOP 03-3
fair value loss charge-off against the Reserve for
guaranty losses at the time we acquire the loan.
We introduced HomeSaver Advance in the first quarter of 2008.
HomeSaver Advance serves as a foreclosure prevention tool early
in the delinquency cycle and does not conflict with our MBS
trust requirements because it allows borrowers to cure their
payment defaults without modifying their mortgage loan.
HomeSaver Advance allows servicers to provide qualified
borrowers with a
15-year
unsecured personal loan in an amount equal to all past due
payments relating to their mortgage loan, generally up to the
lesser of $15,000 or 15% of the unpaid principal balance of the
delinquent first lien loan. We record HomeSaver Advance loans at
their estimated fair value at the date we purchase these loans
from servicers, and, to the extent the acquisition cost exceeds
the estimated fair value, we record a HomeSaver fair value loss
charge-off against the Reserve for guaranty losses
at the time we acquire the loan.
As indicated in Table 9,
SOP 03-3
and HomeSaver Advance fair value losses increased to
$2.2 billion and $3.7 billion in the second quarter
and first six months of 2009, respectively, from
$494 million and $1.2 billion in the second quarter
and first six months of 2008, respectively, reflecting both an
increase in the number of acquired delinquent loans and a
decrease in the fair value of these loans.
Table 11 provides a quarterly comparison of the number of
delinquent loans acquired from MBS trusts subject to
SOP 03-3,
the unpaid principal balance and accrued interest of these
loans, and the average fair value based on indicative market
prices. The decline in home prices and significant reduction in
liquidity in the mortgage markets, along with the increase in
mortgage credit risk, have resulted in continued downward
pressure on the fair value of these loans.
Table
11: Statistics on Acquired Loans from MBS Trusts
Subject to
SOP 03-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Number of acquired loans from MBS trusts subject to
SOP 03-3
|
|
|
17,580
|
|
|
|
12,223
|
|
|
|
6,124
|
|
|
|
3,678
|
|
|
|
4,618
|
|
|
|
10,586
|
|
Average indicative market
price(1)
|
|
|
43
|
%
|
|
|
45
|
%
|
|
|
50
|
%
|
|
|
53
|
%
|
|
|
53
|
%
|
|
|
60
|
%
|
Unpaid principal balance and accrued interest of loans acquired
|
|
$
|
3,717
|
|
|
$
|
2,561
|
|
|
$
|
1,286
|
|
|
$
|
744
|
|
|
$
|
807
|
|
|
$
|
1,704
|
|
|
|
|
(1) |
|
Calculated based on the estimated
fair value at the date of acquisition of delinquent loans
subject to
SOP 03-3
divided by the unpaid principal balance and accrued interest of
these loans at the date of acquisition. The value of primary
mortgage insurance is included as a component of the average
market price. Beginning in the first quarter of 2009, we
incorporated the average fair value of acquired multifamily
loans subject to
SOP 03-3
into the calculation of our average indicative market price. We
have revised the previously reported prior period amounts to
reflect this change.
|
During the fourth quarter of 2008, we began increasing the
number of delinquent loans we purchased from MBS trusts in
response to our efforts to take a more proactive approach to
prevent foreclosures by addressing potential problem loans
earlier and offering additional, more flexible workout
alternatives. As a result of the
40
increase in our loan modification volume, which we expect will
continue throughout 2009, particularly as we modify more loans
through the Home Affordable Modification Program, we expect our
acquisition of delinquent loans from MBS trusts to continue to
increase during 2009. We also expect to continue to incur
significant losses in 2009 in connection with the acquisition of
delinquent loans and the modification of loans. We provide
additional information on our loan workout activities in
Risk ManagementCredit Risk ManagementMortgage
Credit Risk ManagementProblem Loan Management and
Foreclosure Prevention.
Credit
Loss Performance Metrics
Management views our credit loss performance metrics, which
include our historical credit losses and our credit loss ratio,
as significant indicators of the effectiveness of our credit
risk management strategies. Management uses these metrics
together with other credit risk measures to assess the credit
quality of our existing guaranty book of business, make
determinations about our loss mitigation strategies, evaluate
our historical credit loss performance and determine the level
of our loss reserves. These metrics, however, are not defined
terms within GAAP and may not be calculated in the same manner
as similarly titled measures reported by other companies.
Because management does not view changes in the fair value of
our mortgage loans as credit losses, we exclude
SOP 03-3
and HomeSaver Advance fair value losses from our credit loss
performance metrics. However, we include in our credit loss
performance metrics the impact of any credit losses we
experience on loans subject to
SOP 03-3
or first lien loans associated with HomeSaver Advance loans that
ultimately result in foreclosure.
We believe that our credit loss performance metrics are useful
to investors because they reflect how management evaluates our
credit performance and the effectiveness of our credit risk
management strategies and loss mitigation efforts. They also
provide a consistent treatment of credit losses for on- and
off-balance sheet loans. Moreover, by presenting credit losses
with and without the effect of
SOP 03-3
and HomeSaver Advance fair value losses, investors are able to
evaluate our credit performance on a more consistent basis among
periods.
Table 12 below details the components of our credit loss
performance metrics, which exclude the effect of
SOP 03-3
and HomeSaver Advance fair value losses, for the three and six
months ended June 30, 2009 and 2008.
Table
12: Credit Loss Performance Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
|
(Dollars in millions)
|
|
|
Charge-offs, net of recoveries
|
|
$
|
4,810
|
|
|
|
63.4
|
bp
|
|
$
|
1,354
|
|
|
|
18.9
|
bp
|
|
$
|
8,191
|
|
|
|
54.3
|
bp
|
|
$
|
2,623
|
|
|
|
18.6
|
bp
|
Foreclosed property expense
|
|
|
559
|
|
|
|
7.4
|
|
|
|
264
|
|
|
|
3.7
|
|
|
|
1,097
|
|
|
|
7.3
|
|
|
|
434
|
|
|
|
3.1
|
|
Less:
SOP 03-3
and HomeSaver Advance fair value
losses(2)
|
|
|
(2,165
|
)
|
|
|
(28.5
|
)
|
|
|
(494
|
)
|
|
|
(6.9
|
)
|
|
|
(3,690
|
)
|
|
|
(24.5
|
)
|
|
|
(1,231
|
)
|
|
|
(8.7
|
)
|
Plus: Impact of
SOP 03-3
on charge-offs and foreclosed property
expense(3)
|
|
|
139
|
|
|
|
1.8
|
|
|
|
129
|
|
|
|
1.8
|
|
|
|
228
|
|
|
|
1.5
|
|
|
|
298
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
losses(4)
|
|
$
|
3,343
|
|
|
|
44.1
|
bp
|
|
$
|
1,253
|
|
|
|
17.5
|
bp
|
|
$
|
5,826
|
|
|
|
38.6
|
bp
|
|
$
|
2,124
|
|
|
|
15.1
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the annualized amount for
each line item presented divided by the average guaranty book of
business during the period.
|
|
(2) |
|
Represents the amount recorded as a
loss when the acquisition cost of a delinquent loan purchased
from an MBS trust that is subject to
SOP 03-3
exceeds the fair value of the loan at acquisition. Also includes
the difference between the unpaid principal balance of unsecured
HomeSaver Advance loans at origination and the estimated fair
value of these loans that we record in our consolidated balance
sheets.
|
|
(3) |
|
For delinquent loans purchased from
MBS trusts that are recorded at a fair value amount at
acquisition that is lower than the acquisition cost, any loss
recorded at foreclosure is less than it would have been if we
had recorded the loan at its acquisition cost instead of at fair
value. Accordingly, we have added back to our credit losses the
amount of
|
41
|
|
|
|
|
charge-offs and foreclosed property
expense that we would have recorded if we had calculated these
amounts based on the purchase price.
|
|
(4) |
|
Interest forgone on nonperforming
loans in our mortgage portfolio, which is presented in Table 42,
reduces our net interest income but is not reflected in our
credit losses total. In addition,
other-than-temporary
impairment losses resulting from deterioration in the credit
quality of our mortgage-related securities and accretion of
interest income on loans subject to
SOP 03-3
are excluded from credit losses.
|
Our credit loss ratio increased to 44.1 basis points and
38.6 basis points in the second quarter and first six
months of 2009, respectively, from 17.5 basis points and
15.1 basis points in the second quarter and first six
months of 2008, respectively. Our credit loss ratio including
the effect of
SOP 03-3
and HomeSaver Advance fair value losses would have been
70.8 basis points and 61.6 basis points for the second
quarter and first six months of 2009, respectively, compared
with 22.6 basis points and 21.7 basis points for the
second quarter and first six months of 2008, respectively. The
substantial increase in our credit losses in the second quarter
and first six months of 2009 from the second quarter and first
six months of 2008 reflected the adverse impact of the decline
in home prices, as well as the economic recession. These
conditions have resulted in an increase in delinquencies,
defaults and loss severities across our entire guaranty book of
business as we are also now experiencing deterioration in the
credit performance of loans with fewer risk layers.
Additionally, certain higher risk loan categories, loan vintages
and loans within certain states that have had the greatest home
price depreciation from their recent peaks continue to account
for a disproportionate share of our credit losses.
Specific credit loss statistics related to loans within certain
states that have had the greatest home price declines; loans
within states in the Midwest which have experienced a prolonged
economic recession; and certain higher risk loan categories and
loan vintages include the following:
|
|
|
|
|
California, Florida, Arizona and Nevada, which represented 28%
and 27% of our single-family conventional mortgage credit book
of business as of June 30, 2009 and 2008, respectively,
accounted for 57% and 48% of our single-family credit losses for
the second quarter of 2009 and 2008, respectively, and 57% and
42% of our single-family credit losses for the first six months
of 2009 and 2008, respectively.
|
|
|
|
Michigan and Ohio, two key states driving credit losses in the
Midwest, represented 5% and 6% of our single-family conventional
mortgage credit book of business as of June 30, 2009 and
2008, respectively, but accounted for 10% and 18% of our
single-family credit losses for the second quarter of 2009 and
2008, respectively, and 10% and 23% of our single-family credit
losses for the first six months of 2009 and 2008, respectively.
|
|
|
|
Certain higher risk loan categories, including Alt-A loans,
interest-only loans, loans to borrowers with low FICO credit
scores and loans with high
loan-to-value
ratios, represented 26% and 29% of our single-family
conventional mortgage credit book of business as of
June 30, 2009 and 2008, respectively, but accounted for
approximately 63% and 72% of our single-family credit losses for
the second quarter of 2009 and 2008, respectively, and 64% and
70% of our single-family credit losses for the first six months
of 2009 and 2008, respectively. A significant portion of these
higher risk loan categories were originated in 2006 and 2007 in
states that have experienced the steepest declines in home
prices, such as California, Florida, Arizona and Nevada.
|
The suspension of foreclosure sales on occupied single-family
properties between the periods November 26, 2008 through
January 31, 2009 and February 17, 2009 through
March 6, 2009 and our directive to delay foreclosure sales
until the loan servicer has exhausted all other foreclosure
prevention alternatives reduced our foreclosure activity in the
first six months of 2009, which resulted in a reduction in our
charge-offs and credit losses below what we believe we would
have otherwise recorded in the first six months of 2009 had the
moratorium not been in place. We record a charge-off upon
foreclosure for loans subject to the foreclosure moratorium that
we are not able to modify and that ultimately result in
foreclosure. While the foreclosure moratorium affects the timing
of when we incur a credit loss, it does not necessarily affect
the credit-related expenses recognized in our consolidated
statements of operations because we estimate probable losses
inherent in our guaranty book of business as of each balance
sheet date in determining our loss reserves. See Critical
Accounting Policies and EstimatesAllowance for Loan Losses
and Reserve for Guaranty Losses for a
42
discussion of changes we made in our loss reserve estimation
process to address the impact of the foreclosure moratorium and
the change in our foreclosure requirements.
We provide more detailed credit performance information,
including serious delinquency rates by geographic region,
statistics on nonperforming loans and foreclosure activity, in
Risk ManagementCredit Risk ManagementMortgage
Credit Risk Management.
Regulatory
Hypothetical Stress Test Scenario
Under a September 2005 agreement with the Office of Federal
Housing Enterprise Oversight (OFHEO), the
predecessor to FHFA, we are required to disclose on a quarterly
basis the present value of the change in future expected credit
losses from our existing single-family guaranty book of business
from an immediate 5% decline in single-family home prices for
the entire United States. Although this agreement was suspended
on March 18, 2009 by FHFA until further notice, we are
continuing to provide this disclosure. For purposes of this
calculation, we assume that, after the initial 5% shock, home
price growth rates return to the average of the possible growth
rate paths used in our internal credit pricing models. The
sensitivity results represent the difference between future
expected credit losses under our base case scenario, which is
derived from our internal home price path forecast, and a
scenario that assumes an instantaneous nationwide 5% decline in
home prices.
Table 13 compares the credit loss sensitivities as of
June 30, 2009 and December 31, 2008 for first lien
single-family whole loans we own or that back Fannie Mae MBS,
before and after consideration of projected credit risk sharing
proceeds, such as private mortgage insurance claims and other
credit enhancement.
Table
13: Single-Family Credit Loss
Sensitivity(1)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Gross single-family credit loss sensitivity
|
|
$
|
22,910
|
|
|
$
|
13,232
|
|
Less: Projected credit risk sharing proceeds
|
|
|
(3,520
|
)
|
|
|
(3,478
|
)
|
|
|
|
|
|
|
|
|
|
Net single-family credit loss sensitivity
|
|
$
|
19,390
|
|
|
$
|
9,754
|
|
|
|
|
|
|
|
|
|
|
Outstanding single-family whole loans and Fannie Mae MBS
|
|
$
|
2,793,295
|
|
|
$
|
2,724,253
|
|
Single-family net credit loss sensitivity as a percentage of
outstanding single-family whole loans and Fannie Mae MBS
|
|
|
0.69
|
%
|
|
|
0.36
|
%
|
|
|
|
(1) |
|
Represents total economic credit
losses, which consist of credit losses and forgone interest.
Calculations are based on approximately 97% of our total
single-family guaranty book of business as of both June 30,
2009 and December 31, 2008. The mortgage loans and
mortgage-related securities that are included in these estimates
consist of: (i) single-family Fannie Mae MBS (whether held
in our mortgage portfolio or held by third parties), excluding
certain whole loan Real Estate Mortgage Investment Conduits
(REMICs) and private-label wraps;
(ii) single-family mortgage loans, excluding mortgages
secured only by second liens, subprime mortgages, manufactured
housing chattel loans and reverse mortgages; and
(iii) long-term standby commitments. We expect the
inclusion in our estimates of the excluded products may impact
the estimated sensitivities set forth in this table.
|
The increase in the projected credit loss sensitivities during
the first six months of 2009 reflected the continued decline in
home prices and the current negative outlook for the housing and
credit markets. Because these sensitivities represent
hypothetical scenarios, they should be used with caution. Our
regulatory stress test scenario is limited in that it assumes an
instantaneous uniform 5% nationwide decline in home prices,
which is not representative of the historical pattern of changes
in home prices. Changes in home prices generally vary on a
regional, as well as a local, basis. In addition, these stress
test scenarios are calculated independently without considering
changes in other interrelated assumptions, such as unemployment
rates or other economic factors, which are likely to have a
significant impact on our future expected credit losses.
43
Other
Non-Interest Expenses
Other non-interest expenses consist of credit enhancement
expenses, which reflect the amortization of the credit
enhancement asset we record at the inception of guaranty
contracts, costs associated with the purchase of additional
mortgage insurance to protect against credit losses, net gains
and losses on the extinguishment of debt, and other
miscellaneous expenses. Other non-interest expenses increased to
$508 million and $866 million for the second quarter
and first six months of 2009, respectively, from
$283 million and $788 million for the second quarter
and first six months of 2008, respectively. The increase in each
period was largely due to an increase in net losses recorded on
the extinguishment of debt offset by a reduction in interest
expense associated with unrecognized tax benefits related to
certain unresolved tax positions.
Federal
Income Taxes
We recorded a tax provision for federal income taxes of
$23 million and a benefit of $600 million for the
second quarter and first six months of 2009, respectively. The
provision for income taxes in the second quarter of 2009
reflects our current estimate of our annual effective tax rate,
which we update each quarter based on actual historical
information and forward-looking estimates. The tax benefit for
the first six months of 2009 represents the benefit of carrying
back a portion of our expected current year tax loss, net of the
reversal of the use of certain tax credits, to prior years. We
were not able to recognize a net tax benefit associated with the
majority of our pre-tax loss of $14.8 billion and
$38.6 billion in the second quarter and first six months of
2009, respectively, as there has been no change in the
conclusion we reached in 2008 that it was more likely than not
that we would not generate sufficient taxable income in the
foreseeable future to realize our net deferred tax assets. As a
result, we recorded an increase in our valuation allowance of
$5.3 billion and $14.1 billion in our condensed
consolidated statements of operations in the second quarter and
first six months of 2009, respectively, which represented the
tax effect associated with the majority of the pre-tax losses we
recorded in the second quarter and first six months. The
valuation allowance recorded against our deferred tax assets
totaled $41.9 billion as of June 30, 2009, resulting
in a net deferred tax asset of $3.8 billion as of
June 30, 2009 and includes the reversal of
$3.0 billion of previously recorded valuation allowance as
a result of our adoption of FSP
FAS 115-2.
Our net deferred tax asset totaled $3.9 billion as of
December 31, 2008. We discuss the factors that led us to
record a partial valuation allowance against our net deferred
tax assets in
Part IIItem 7MD&ACritical
Accounting Policies and EstimatesDeferred Tax Assets
and Notes to Consolidated Financial
StatementsNote 12, Income Taxes of our 2008
Form 10-K.
In comparison, we recorded a net tax benefit of
$476 million and $3.4 billion for the second quarter
and first six months of 2008, respectively, due in part to the
pre-tax loss for the period as well as the tax credits generated
from our LIHTC partnership investments.
BUSINESS
SEGMENT RESULTS
Results of our three business segments are intended to reflect
each segment as if it were a stand-alone business. We describe
the management reporting and allocation process used to generate
our segment results in our 2008
Form 10-K
in Notes to Consolidated Financial
StatementsNote 16, Segment Reporting. We
summarize our segment results for the three and six months ended
June 30, 2009 and 2008 in the tables below and provide a
comparative discussion of these results. See Notes to
Condensed Consolidated Financial StatementsNote 15,
Segment Reporting of this report for additional
information on our segment results.
Single-Family
Business
Our Single-Family business recorded a net loss of
$16.6 billion and $34.7 billion for the second quarter
and first six months of 2009, respectively, compared with a net
loss of $2.4 billion and $3.4 billion for the second
quarter and first six months of 2008, respectively. Table 14
summarizes the financial results for our Single-Family business
for the periods indicated. The primary source of revenue for our
Single-Family business is guaranty fee income. Other sources of
revenue include trust management income and other fee income,
primarily related to technology fees. Expenses primarily include
credit-related expenses and administrative expenses.
44
Table
14: Single-Family Business Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
|
|
$
|
1,865
|
|
|
$
|
1,819
|
|
|
$
|
3,831
|
|
|
$
|
3,761
|
|
|
$
|
46
|
|
|
|
3
|
%
|
|
$
|
70
|
|
|
|
2
|
%
|
Trust management income
|
|
|
13
|
|
|
|
74
|
|
|
|
24
|
|
|
|
179
|
|
|
|
(61
|
)
|
|
|
(82
|
)
|
|
|
(155
|
)
|
|
|
(87
|
)
|
Other
income(1)
|
|
|
264
|
|
|
|
197
|
|
|
|
437
|
|
|
|
385
|
|
|
|
67
|
|
|
|
34
|
|
|
|
52
|
|
|
|
14
|
|
Credit-related
expenses(2)
|
|
|
(18,391
|
)
|
|
|
(5,339
|
)
|
|
|
(38,721
|
)
|
|
|
(8,593
|
)
|
|
|
(13,052
|
)
|
|
|
(244
|
)
|
|
|
(30,128
|
)
|
|
|
(351
|
)
|
Other
expenses(3)
|
|
|
(529
|
)
|
|
|
(461
|
)
|
|
|
(1,052
|
)
|
|
|
(994
|
)
|
|
|
(68
|
)
|
|
|
(15
|
)
|
|
|
(58
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes
|
|
|
(16,778
|
)
|
|
|
(3,710
|
)
|
|
|
(35,481
|
)
|
|
|
(5,262
|
)
|
|
|
(13,068
|
)
|
|
|
(352
|
)
|
|
|
(30,219
|
)
|
|
|
(574
|
)
|
Benefit for federal income taxes
|
|
|
138
|
|
|
|
1,304
|
|
|
|
783
|
|
|
|
1,848
|
|
|
|
(1,166
|
)
|
|
|
(89
|
)
|
|
|
(1,065
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
$
|
(16,640
|
)
|
|
$
|
(2,406
|
)
|
|
$
|
(34,698
|
)
|
|
$
|
(3,414
|
)
|
|
$
|
(14,234
|
)
|
|
|
(592
|
)%
|
|
$
|
(31,284
|
)
|
|
|
(916
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other key performance data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average single-family guaranty book of
business(4)
|
|
$
|
2,855,504
|
|
|
$
|
2,704,345
|
|
|
$
|
2,837,800
|
|
|
$
|
2,668,099
|
|
|
$
|
151,159
|
|
|
|
6
|
%
|
|
$
|
169,701
|
|
|
|
6
|
%
|
|
|
|
(1) |
|
Consists of net interest income,
investment gains and losses, and fee and other income.
|
|
(2) |
|
Consists of the provision for
credit losses and foreclosed property expense.
|
|
(3) |
|
Consists of administrative expenses
and other expenses.
|
|
(4) |
|
The single-family guaranty book of
business consists of single-family mortgage loans held in our
mortgage portfolio, single-family Fannie Mae MBS held in our
mortgage portfolio, single-family Fannie Mae MBS held by third
parties, and other credit enhancements that we provide on
single-family mortgage assets. Excludes non-Fannie Mae
mortgage-related securities held in our investment portfolio for
which we do not provide a guarantee.
|
Key factors affecting the results of our Single-Family business
for the second quarter and first six months of 2009 compared
with the second quarter and first six months of 2008 included
the following.
|
|
|
|
|
A modest increase in guaranty fee income, primarily attributable
to growth in the average single-family guaranty book of
business, and a decrease in our average effective guaranty fee
rate.
|
|
|
|
|
|
Our average single-family guaranty book of business increased by
6% for both the second quarter and first six months of 2009,
over the second quarter and first six months of 2008. We
experienced an increase in our average outstanding Fannie Mae
MBS and other guarantees throughout 2008 and for the first six
months of 2009 as our market share of new single-family
mortgage-related securities issuances remained high and new MBS
issuances outpaced liquidations.
|
|
|
|
The decrease in our average effective guaranty fee rate for the
second quarter and first six months of 2009 was attributable to
a lower average charged guaranty fee on new business, as well as
lower fair value adjustments on
buy-ups and
certain guaranty assets. This was partially offset by the
recognition of deferred amounts into income as interest rates in
the second quarter and first six months of 2009 were lower than
comparable perior year periods. The average charged guaranty fee
on our new single-family business for the second quarter and
first six months of 2009 was 23.7 basis points and
22.5 basis points, respectively, compared with
28.0 basis points and 26.9 basis points for the second
quarter and first six months of 2008, respectively. The average
charged guaranty fee represents the average contractual fee rate
for our single-family guaranty arrangements plus the recognition
of any upfront cash payments ratably over an estimated average
life. The decrease in the average charged fee was primarily the
result of a shift in the composition of our new business given
changes in underwriting and eligibility standards. The change in
the average charged guaranty fee reflects a reduction in our
acquisition of higher risk, higher fee categories such as higher
LTV and lower FICO
|
45
|
|
|
|
|
scores. Beginning in 2009, we extended the estimated average
life used in calculating the recognition of upfront cash
payments for the purpose of determining our single-family new
business average charged guaranty fee to reflect a longer
expected duration because of the record low interest rate
environment. This change did not have a material impact on the
average charged guaranty fee on our new single-family business
in the second quarter or first six months of 2009.
|
|
|
|
|
|
A substantial increase in credit-related expenses, reflecting a
significantly higher incremental provision for credit losses as
well as higher charge-offs due to worsening credit performance
trends, including significant increases in delinquencies,
defaults and loss severities, across our entire guaranty book of
business as the credit performance of loans with fewer risk
layers has deteriorated reflecting the adverse impact of the
continued rise in unemployment and the decline in home prices.
Certain higher risk loan categories, loan vintages and loans
within certain states that have had the greatest home price
depreciation from their recent peaks continue to account for a
disproportionate share of our credit losses. We also experienced
a significant increase in
SOP 03-3
fair value losses during the second quarter and first six months
of 2009, reflecting the increase in the number of delinquent
loans we purchased from MBS trusts for loan modification as part
of our increased efforts in preventing foreclosures and the
decreases in the estimated fair value of these loans.
|
|
|
|
A significant reduction in the relative tax benefits associated
with our pre-tax losses. We recorded a tax benefit of
$138 million and $783 million on pre-tax losses of
$16.8 billion and $35.5 billion for the second quarter
and first six months of 2009, respectively, compared with a tax
benefit of $1.3 billion and $1.8 billion on pre-tax
losses of $3.7 billion and $5.3 billion for the second
quarter and first six months of 2008, respectively. We recorded
a valuation allowance for the majority of the tax benefits
associated with the pre-tax losses recognized in the second
quarter and first six months of 2009 as there has been no change
in the conclusion we reached in 2008 that it was more likely
than not that we would not generate sufficient taxable income in
the foreseeable future to realize all of the tax benefits
generated from these losses.
|
HCD
Business
Our HCD business recorded a net loss attributable to Fannie Mae
of $930 million and $2.0 billion for the second
quarter and first six months of 2009, respectively, compared
with net income of $72 million and $222 million for
the second quarter and first six months of 2008, respectively.
Table 15 summarizes the financial results for our HCD business
for the periods indicated. The primary sources of revenue for
our HCD business are guaranty fee income and other income,
consisting of transaction fees associated with our multifamily
business. Expenses primarily include administrative expenses,
credit-related expenses and net operating losses associated with
our partnership investments, the majority of which generate tax
benefits that may reduce our federal income tax liability.
However, as with the second half of 2008 and first quarter of
2009, we are currently unable to recognize tax benefits
generated from our partnership investments.
46
Table
15: HCD Business Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Quarterly
|
|
|
Year-to-Date
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Statement of operations
data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
|
|
$
|
164
|
|
|
$
|
134
|
|
|
$
|
322
|
|
|
$
|
282
|
|
|
$
|
30
|
|
|
|
22
|
%
|
|
$
|
40
|
|
|
|
14
|
%
|
Other
income(2)
|
|
|
20
|
|
|
|
52
|
|
|
|
47
|
|
|
|
116
|
|
|
|
(32
|
)
|
|
|
(62
|
)
|
|
|
(69
|
)
|
|
|
(59
|
)
|
Losses on partnership investments
|
|
|
(571
|
)
|
|
|
(195
|
)
|
|
|
(928
|
)
|
|
|
(336
|
)
|
|
|
(376
|
)
|
|
|
(193
|
)
|
|
|
(592
|
)
|
|
|
(176
|
)
|
Credit-related income
(expenses)(3)
|
|
|
(393
|
)
|
|
|
(10
|
)
|
|
|
(935
|
)
|
|
|
1
|
|
|
|
(383
|
)
|
|
|
(3,830
|
)
|
|
|
(936
|
)
|
|
|
(93,600
|
)
|
Other
expenses(4)
|
|
|
(133
|
)
|
|
|
(222
|
)
|
|
|
(302
|
)
|
|
|
(476
|
)
|
|
|
89
|
|
|
|
40
|
|
|
|
174
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes
|
|
|
(913
|
)
|
|
|
(241
|
)
|
|
|
(1,796
|
)
|
|
|
(413
|
)
|
|
|
(672
|
)
|
|
|
(279
|
)
|
|
|
(1,383
|
)
|
|
|
(335
|
)
|
Benefit (provision) for federal income taxes
|
|
|
(43
|
)
|
|
|
316
|
|
|
|
(211
|
)
|
|
|
638
|
|
|
|
(359
|
)
|
|
|
(114
|
)
|
|
|
(849
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(956
|
)
|
|
|
75
|
|
|
|
(2,007
|
)
|
|
|
225
|
|
|
|
(1,031
|
)
|
|
|
(1,375
|
)%
|
|
|
(2,232
|
)
|
|
|
(992
|
)%
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
|
|
26
|
|
|
|
(3
|
)
|
|
|
43
|
|
|
|
(3
|
)
|
|
|
29
|
|
|
|
967
|
|
|
|
46
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
(930
|
)
|
|
$
|
72
|
|
|
$
|
(1,964
|
)
|
|
$
|
222
|
|
|
$
|
(1,002
|
)
|
|
|
(1,392
|
)%
|
|
$
|
(2,186
|
)
|
|
|
(985
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other key performance data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average multifamily guaranty book of
business(5)
|
|
$
|
177,475
|
|
|
$
|
158,444
|
|
|
$
|
176,089
|
|
|
$
|
155,173
|
|
|
$
|
19,031
|
|
|
|
12
|
%
|
|
$
|
20,916
|
|
|
|
13
|
%
|
|
|
|
(1) |
|
Certain prior period amounts have
been reclassified to conform to the current period presentation.
|
|
(2) |
|
Consists of trust management income
and fee and other income.
|
|
(3) |
|
Consists of the provision for
credit losses and foreclosed property income/expense.
|
|
(4) |
|
Consists of net interest expense,
administrative expenses and other expenses.
|
|
(5) |
|
The multifamily guaranty book of
business consists of multifamily mortgage loans held in our
mortgage portfolio, multifamily Fannie Mae MBS held in our
mortgage portfolio, multifamily Fannie Mae MBS held by third
parties and other credit enhancements that we provide on
multifamily mortgage assets. Excludes non-Fannie Mae
mortgage-related securities held in our investment portfolio for
which we do not provide a guarantee.
|
Key factors affecting the results of our HCD business for the
second quarter and first six months of 2009 compared with the
second quarter and first six months of 2008 included the
following.
|
|
|
|
|
An increase in guaranty fee income, which was attributable to
growth in the average multifamily guaranty book of business, and
an increase in the average effective multifamily guaranty fee
rate. The increases in our book of business and guaranty fee
rate reflected the investment and liquidity we provided to the
multifamily mortgage market.
|
|
|
|
A $383 million and $936 million increase in
credit-related expenses, as we increased our multifamily
combined loss reserves by $345 million and
$865 million during the second quarter and first six months
of 2009, respectively. This increase reflects the continuing
stress on our multifamily guaranty book of business due to the
economic recession and lack of liquidity in the market, which
has adversely affected multifamily property values, vacancy
rates and rent levels, the cash flows generated from these
investments and refinancing options.
|
|
|
|
A $376 million and $592 million increase in losses on
partnership investments for the second quarter and first six
months of 2009, respectively, largely due to the recognition of
other-than-temporary
impairment of $302 million and $449 million,
respectively, on a portion of our LIHTC partnership investments
and other affordable housing investments. In addition, our
partnership losses for both the second quarter and first six
months of 2008 were partially reduced by a gain on the sale of
some of our LIHTC investments. We did not have any sales of
LIHTC investments during the first six months of 2009. If we
determine that in the future a market for our LIHTC investments
does not exist or that we do not have both the intent and
ability to participate in the LIHTC market, we may not be able
to realize the full value of this
|
47
|
|
|
|
|
asset. This would result in significant additional
other-than-temporary
impairment on our LIHTC investments.
|
|
|
|
|
|
A provision for federal income taxes of $43 million and
$211 million for the second quarter and first six months of
2009, respectively, compared with a tax benefit of
$316 million and $638 million for the second quarter
and first six months of 2008, respectively. The tax provision
recognized in the second quarter and first six months of 2009
was attributable to the reversal of previously utilized tax
credits because of our ability to carry back, for tax purposes,
to prior years net operating losses expected to be generated in
the current year. In addition, we recorded a valuation allowance
for the majority of the tax benefits associated with the pre-tax
losses and tax credits generated by our partnership investments
in the second quarter and first six months of 2009.
|
Capital
Markets Group
Our Capital Markets group recorded net income of
$2.8 billion and a net loss of $1.3 billion for the
second quarter and first six months of 2009, respectively,
compared with net income of $34 million and a net loss of
$1.3 billion for the second quarter and first six months of
2008, respectively. Table 16 summarizes the financial results
for our Capital Markets group for the periods indicated. The
primary source of revenue for our Capital Markets group is net
interest income. Expenses primarily consist of administrative
expenses and allocated guaranty fee expense. Fair value gains
and losses, investment gains and losses, and debt extinguishment
gains and losses also have a significant impact on the financial
performance of our Capital Markets group.
Table
16: Capital Markets Group Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Quarterly
|
|
|
Year-to-date
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Variance
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Statement of operations
data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
3,600
|
|
|
$
|
2,003
|
|
|
$
|
6,895
|
|
|
$
|
3,662
|
|
|
$
|
1,597
|
|
|
|
80
|
%
|
|
$
|
3,233
|
|
|
|
88
|
%
|
Investment gains (losses), net
|
|
|
(30
|
)
|
|
|
(339
|
)
|
|
|
120
|
|
|
|
(347
|
)
|
|
|
309
|
|
|
|
91
|
|
|
|
467
|
|
|
|
135
|
|
Net
other-than-temporary
impairments
|
|
|
(753
|
)
|
|
|
(507
|
)
|
|
|
(6,406
|
)
|
|
|
(562
|
)
|
|
|
(246
|
)
|
|
|
(49
|
)
|
|
|
(5,844
|
)
|
|
|
(1,040
|
)
|
Fair value gains (losses), net
|
|
|
823
|
|
|
|
517
|
|
|
|
(637
|
)
|
|
|
(3,860
|
)
|
|
|
306
|
|
|
|
59
|
|
|
|
3,223
|
|
|
|
83
|
|
Fee and other income, net
|
|
|
71
|
|
|
|
82
|
|
|
|
140
|
|
|
|
145
|
|
|
|
(11
|
)
|
|
|
(13
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
Other
expenses(2)
|
|
|
(777
|
)
|
|
|
(545
|
)
|
|
|
(1,400
|
)
|
|
|
(1,216
|
)
|
|
|
(232
|
)
|
|
|
(43
|
)
|
|
|
(184
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary
losses, net of tax effect
|
|
|
2,934
|
|
|
|
1,211
|
|
|
|
(1,288
|
)
|
|
|
(2,178
|
)
|
|
|
1,723
|
|
|
|
142
|
|
|
|
890
|
|
|
|
41
|
|
Benefit (provision) for federal income taxes
|
|
|
(118
|
)
|
|
|
(1,144
|
)
|
|
|
28
|
|
|
|
918
|
|
|
|
1,026
|
|
|
|
90
|
|
|
|
(890
|
)
|
|
|
(97
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(34
|
)
|
|
|
33
|
|
|
|
100
|
|
|
|
34
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
2,816
|
|
|
$
|
34
|
|
|
$
|
(1,260
|
)
|
|
$
|
(1,294
|
)
|
|
$
|
2,782
|
|
|
|
8,182
|
%
|
|
$
|
34
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain prior period amounts have
been reclassified to conform to the current period presentation.
|
|
(2) |
|
Consists of debt extinguishment
losses, allocated guaranty fee expense, administrative expenses
and other expenses.
|
Key factors affecting the results of our Capital Markets group
for the second quarter and first six months of 2009 compared
with the second quarter and first six months of 2008 included
the following.
|
|
|
|
|
An increase in net interest income, primarily attributable to an
expansion of our net interest yield driven by a reduction in the
average cost of our debt that more than offset a decline in the
average yield on our interest-earning assets.
|
48
|
|
|
|
|
The significant reduction in the average cost of our debt during
the second quarter and first six months of 2009 from the
comparable prior year periods was primarily attributable to a
decline in borrowing rates, a shift in our funding mix in the
second half of 2008 to more short-term debt because of the
reduced demand for our longer-term and callable debt securities,
and significant repurchasing activity of callable debt. Due to
the improved demand and attractive pricing for our non-callable
and callable long-term debt during the first half of 2009, we
issued a significant amount of long-term debt during this
period, which we then used to repay maturing short-term debt and
prepay more expensive long-term debt. Our net interest yield for
the second quarter and first six months of 2008 reflected a
benefit from the redemption of step-rate debt securities, which
reduced the average cost of our debt.
|
|
|
|
Our net interest income does not include the effect of the
periodic net contractual interest accruals on our interest rate
swaps, which increased to an expense of $779 million and
$1.7 billion in the second quarter and first six months of
2009, respectively, from an expense of $304 million and
$330 million in the second quarter and first six months of
2008, respectively. These amounts are included in derivatives
gains (losses) and reflected in our condensed consolidated
statements of operations as a component of Fair value
gains (losses), net.
|
|
|
|
|
|
An increase in fair value gains for the second quarter of 2009
and a decrease in fair value losses in the first six months of
2009.
|
|
|
|
|
|
The gains on our trading securities during the second quarter
and first six months of 2009 were primarily attributable to the
narrowing of spreads CMBS asset-backed securities and corporate
debt securities. Narrowing of spreads on agency MBS also
contributed to the gains in the first six months. The losses on
our trading securities during the second quarter and first six
months of 2008 were attributable to an increase in long-term
interest rates during the second quarter of 2008 and a
significant widening of credit spreads during the first six
months of 2008.
|
|
|
|
We recorded derivatives fair value losses of $537 million
and $2.2 billion in the second quarter and first six months
of 2009, respectively, compared with a gain of $2.3 billion
and a loss of $710 million in the second quarter and first
six months of 2008, respectively. During the second quarter and
first six months of 2009, increases in swap rates resulted in
gains on our net pay-fixed swap position. These gains were more
than offset by losses on our option-based derivatives as swap
rate increases drove losses on our receive-fixed swaptions. The
derivatives fair value gain of $2.3 billion in the second
quarter of 2008 was attributable to our interest rate swaps due
to a considerable increase in the
5-year swap
interest rate during the quarter and was offset by
$803 million of losses on our hedged mortgage assets. The
derivatives fair value loss of $710 million in the first
six months of 2008 was attributable to our interest rate swaps
due to a decrease in the
5-year swap
interest rate during the six months period.
|
|
|
|
Due to our discontinuation of hedge accounting in the fourth
quarter of 2008, we had no losses on hedged mortgage assets
during the second quarter and first six months of 2009 compared
with $803 million in losses on hedged mortgage assets in
the second quarter and first six months of 2008.
|
|
|
|
|
|
A decrease in investment losses in the second quarter of 2009
and a shift from losses to gains in the first six months of 2009
from increased gains on securitizations as a result of increased
whole loan conduit activity as we focus on providing liquidity
to the market, as well as realized gains on sales of
available-for-sale
securities, partially offset by higher lower of cost or market
adjustments on loans.
|
|
|
|
A significant increase in net
other-than-temporary
impairment, attributable to
other-than-temporary
impairment on
available-for-sale
securities totaling $753 million and $6.4 billion in
the second quarter and first six months of 2009, respectively,
compared with $507 million and $562 million in the
second quarter and first six months of 2008, respectively. The
other-than-temporary
impairment losses that we recognized in the second quarter and
first six months of 2009 included additional impairment losses
on some of our Alt-A and subprime private-label securities that
we had previously impaired, as well as impairment losses on
other Alt-A and subprime securities attributable to continued
deterioration in the
|
49
|
|
|
|
|
credit quality of the loans underlying these securities and
further declines in the expected cash flows. Beginning in the
second quarter of 2009, only the credit portion of our
other-than-temporary
impairment is recognized in our condensed consolidated statement
of operations as a result of our adoption of FSP
FAS 115-2.
|
|
|
|
|
|
We recorded a tax provision of $118 million and a tax
benefit of $28 million on pre-tax income of
$2.9 billion and a pre-tax loss of $1.3 billion for
the second quarter and first six months of 2009, respectively,
compared with a tax provision of $1.1 billion and a tax
benefit of $918 million on pre-tax income of
$1.2 billion and a pre-tax loss of $2.2 billion for
the second quarter and first six months of 2008, respectively.
We recorded a valuation allowance for the majority of the tax
benefits associated with the pre-tax income or losses recognized
in the second quarter or first six months of 2009 as there has
been no change in the conclusion we reached in 2008 that it was
more likely than not that we would not generate sufficient
taxable income in the foreseeable future to realize all of the
tax benefits generated from Fannie Mae losses.
|
CONSOLIDATED
BALANCE SHEET ANALYSIS
Total assets of $911.4 billion as of June 30, 2009
decreased by $1.0 billion, or 0.1%, from December 31,
2008. Total liabilities of $922.0 billion decreased by
$5.6 billion, or 0.6%, from December 31, 2008. Total
Fannie Maes stockholders deficit decreased by
$4.6 billion during the first six months of 2009, to a
deficit of $10.7 billion as of June 30, 2009. The
decrease in total Fannie Maes stockholders deficit
was due to the $34.2 billion in funds received from
Treasury under the senior preferred stock purchase agreement,
$5.9 billion in unrealized gains on
available-for-sale
securities and a $3.0 billion reduction in our accumulated
deficit to eliminate a portion of our deferred tax asset
valuation allowance in conjunction with our April 1, 2009
adoption of the new accounting guidance for assessing
other-than-temporary
impairment, partially offset by our net loss attributable to
Fannie Mae of $37.9 billion for the first six months of
2009. Following is a discussion of material changes in the major
components of our assets and liabilities since December 31,
2008.
Mortgage
Investments
Our mortgage investment activities may be constrained by our
regulatory requirements, operational limitations, tax
classifications and our intent to hold certain temporarily
impaired securities until recovery in value, as well as risk
parameters applied to the mortgage portfolio. In addition, the
senior preferred stock purchase agreement with Treasury permits
us to increase our mortgage portfolio temporarily up to a cap of
$900 billion through December 31, 2009. Beginning in
2010, we are required to reduce the size of our mortgage
portfolio by 10% per year, until the amount of our mortgage
assets reaches $250 billion. We also are required to limit
the amount of indebtedness that we can incur to 120% of the
amount of mortgage assets we are allowed to own. Through
December 30, 2010, our debt cap equals $1,080 billion.
Beginning December 31, 2010, and on December 31 of each
year thereafter, our debt cap that will apply through December
31 of the following year will equal 120% of the amount of
mortgage assets we are allowed to own on December 31 of the
immediately preceding calendar year.
Table 17 summarizes our mortgage portfolio activity for the
three and six months ended June 30, 2009 and 2008.
Table
17: Mortgage Portfolio
Activity(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Variance
|
|
|
June 30,
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(Dollars in millions)
|
|
|
Purchases(2)
|
|
$
|
108,833
|
|
|
$
|
60,315
|
|
|
$
|
48,518
|
|
|
|
80
|
%
|
|
$
|
158,420
|
|
|
$
|
95,815
|
|
|
$
|
62,605
|
|
|
|
65
|
%
|
Sales
|
|
|
65,839
|
|
|
|
9,051
|
|
|
|
56,788
|
|
|
|
627
|
|
|
|
89,931
|
|
|
|
22,580
|
|
|
|
67,351
|
|
|
|
298
|
|
Liquidations(3)
|
|
|
37,688
|
|
|
|
25,020
|
|
|
|
12,668
|
|
|
|
51
|
|
|
|
67,073
|
|
|
|
48,591
|
|
|
|
18,482
|
|
|
|
38
|
|
|
|
|
(1) |
|
Excludes unamortized premiums,
discounts and other cost basis adjustments.
|
|
(2) |
|
Excludes advances to lenders and
mortgage-related securities acquired through the extinguishment
of debt.
|
50
|
|
|
(3) |
|
Includes scheduled repayments,
prepayments, foreclosures and lender repurchases.
|
Our recent portfolio activities have been focused on providing
liquidity to lenders through dollar roll transactions, whole
loan conduit activities and early lender funding. Our portfolio
purchase and sales activity does not include activity related to
dollar roll transactions that are accounted for as secured
financings, but it does include the settlement of dollar roll
transactions that are accounted for as purchases and sales.
These transactions often settle in different periods, which may
cause period to period fluctuations in our mortgage portfolio
balance. In the second quarter of 2009, we increased our dollar
roll activity, which resulted in more volatility in our
purchases, sales, and ending balances. Whole loan conduit
activities involve our purchase of loans principally for the
purpose of securitizing them. We may, however, from time to time
purchase loans and hold them for an extended period prior to
securitization.
Portfolio purchases and sales were significantly higher in the
second quarter and first six months of 2009, relative to the
second quarter and first six months of 2008, due to increased
mortgage originations, increased volume of loan deliveries to
us, and increased securitizations from our portfolio. The
increase in mortgage liquidations during the second quarter and
first six months of 2009 reflected the surge in the volume of
refinancings, as mortgage interest rates fell to record lows
during the second quarter of 2009.
As a result of the Federal Reserves agency MBS purchase
program, which was announced in November 2008 and expanded in
March 2009 to include the purchase of up to $1.25 trillion of
agency MBS by the end of 2009, the Federal Reserve currently is
the primary purchaser of our MBS. The Federal Reserves
agency MBS purchase program has caused spreads on agency MBS to
narrow. As a result, we significantly reduced our purchases of
agency MBS during the first six months of 2009.
Table 18 shows the composition of our mortgage portfolio by
product type and the carrying value, which reflects the net
impact of our purchases, sales and liquidations, as of
June 30, 2009 and December 31, 2008. Our net mortgage
portfolio totaled $766.2 billion as of June 30, 2009,
an increase of less than 1% from December 31, 2008.
51
Table
18: Mortgage Portfolio
Composition(1)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
loans:(2)
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Government insured or
guaranteed(3)(9)
|
|
$
|
51,173
|
|
|
$
|
43,799
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term, fixed-rate
|
|
|
180,173
|
|
|
|
186,550
|
|
Intermediate-term,
fixed-rate(4)
|
|
|
36,774
|
|
|
|
37,546
|
|
Adjustable-rate
|
|
|
37,796
|
|
|
|
44,157
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family
|
|
|
254,743
|
|
|
|
268,253
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
305,916
|
|
|
|
312,052
|
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Government insured or
guaranteed(3)
|
|
|
644
|
|
|
|
699
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term, fixed-rate
|
|
|
5,671
|
|
|
|
5,636
|
|
Intermediate-term,
fixed-rate(4)
|
|
|
92,634
|
|
|
|
90,837
|
|
Adjustable-rate
|
|
|
21,845
|
|
|
|
20,269
|
|
|
|
|
|
|
|
|
|
|
Total conventional multifamily
|
|
|
120,150
|
|
|
|
116,742
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
120,794
|
|
|
|
117,441
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
426,710
|
|
|
|
429,493
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums and other cost basis adjustments, net
|
|
|
(3,826
|
)
|
|
|
(894
|
)
|
Lower of cost or market adjustments on loans held for sale
|
|
|
(462
|
)
|
|
|
(264
|
)
|
Allowance for loan losses for loans held for investment
|
|
|
(6,841
|
)
|
|
|
(2,923
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net
|
|
|
415,581
|
|
|
|
425,412
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
|
171,160
|
|
|
|
159,712
|
|
Fannie Mae structured MBS
|
|
|
63,472
|
|
|
|
69,238
|
|
Non-Fannie Mae single-class mortgage securities
|
|
|
33,231
|
|
|
|
26,976
|
|
Non-Fannie Mae structured mortgage
securities(5)
|
|
|
58,225
|
|
|
|
62,642
|
|
Commercial mortgage backed securities
|
|
|
25,769
|
|
|
|
25,825
|
|
Mortgage revenue bonds
|
|
|
15,019
|
|
|
|
15,447
|
|
Other mortgage-related securities
|
|
|
2,670
|
|
|
|
2,863
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
369,546
|
|
|
|
362,703
|
|
|
|
|
|
|
|
|
|
|
Market value
adjustments(6)
|
|
|
(15,119
|
)
|
|
|
(15,996
|
)
|
Other-than-temporary
impairments, net of accretion
|
|
|
(4,752
|
)
|
|
|
(7,349
|
)
|
Unamortized discounts and other cost basis adjustments,
net(7)
|
|
|
920
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities, net
|
|
|
350,595
|
|
|
|
339,654
|
|
|
|
|
|
|
|
|
|
|
Mortgage portfolio,
net(8)
|
|
$
|
766,176
|
|
|
$
|
765,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Mortgage loans and mortgage-related
securities are reported at unpaid principal balance.
|
|
(2) |
|
Mortgage loans include unpaid
principal balances totaling $152.1 billion and
$65.8 billion as of June 30, 2009 and
December 31, 2008, respectively, related to
mortgage-related securities that were consolidated under FASB
Interpretation (FIN) No. 46R (revised December
2003), Consolidation of Variable Interest Entities (an
interpretation of ARB No. 51)
(FIN 46R), and mortgage-related
securities created from securitization transactions that did not
meet
|
52
|
|
|
|
|
the sales criteria under
SFAS No. 140, Accounting for Transfer and Servicing
of Financial Assets and Extinguishments of Liabilities (a
replacement of FASB Statement No. 125)
(SFAS 140), which effectively resulted in
mortgage-related securities being accounted for as loans.
|
|
(3) |
|
Refers to mortgage loans that are
guaranteed or insured by the U.S. government or its agencies,
such as the Department of Veterans Affairs, Federal Housing
Administration or the Rural Development Housing and Community
Facilities Program of the Department of Agriculture.
|
|
(4) |
|
Intermediate-term, fixed-rate
consists of mortgage loans with contractual maturities at
purchase equal to or less than 15 years.
|
|
(5) |
|
Includes private-label
mortgage-related securities backed by subprime or Alt-A mortgage
loans totaling $48.7 billion and $52.4 billion as of
June 30, 2009 and December 31, 2008, respectively.
Refer to Trading and
Available-for-Sale
Investment SecuritiesInvestments in Private-Label
Mortgage-Related SecuritiesInvestments in Alt-A and
Subprime Private-Label Mortgage-Related Securities for a
description of our investments in subprime and Alt-A securities.
|
|
(6) |
|
Includes unrealized gains and
losses on mortgage-related securities and securities commitments
classified as trading and available for sale.
|
|
(7) |
|
Includes the impact of
other-than-temporary
impairments of cost basis adjustments.
|
|
(8) |
|
Includes consolidated
mortgage-related assets acquired through the assumption of debt.
Also includes $1.4 billion and $720 million as of
June 30, 2009 and December 31, 2008, respectively, of
mortgage loans and mortgage-related securities that we have
pledged as collateral and that counterparties have the right to
sell or repledge.
|
|
(9) |
|
Includes reverse mortgages with an
outstanding unpaid principal balance of approximately
$48.6 billion and $41.2 billion as of June 30,
2009 and December 31, 2008, respectively.
|
Cash and
Other Investments Portfolio
Our cash and other investments portfolio consists of cash and
cash equivalents, federal funds sold and securities purchased
under agreements to resell and non-mortgage investment
securities. Our cash and other investments portfolio totaled
$69.8 billion as of June 30, 2009, compared with
$93.0 billion as of December 31, 2008. See
Liquidity and Capital ManagementLiquidity
ManagementLiquidity Contingency PlanningCash and
Other Investments Portfolio for additional information on
our cash and other investments portfolio.
Trading
and
Available-for-Sale
Investment Securities
Our mortgage investment securities are classified in our
condensed consolidated balance sheets as either trading or
available for sale and reported at fair value. Table 19 shows
the composition of our trading and
available-for-sale
securities at amortized cost and fair value as of June 30,
2009, which totaled $381.8 billion and $366.3 billion,
respectively. We also disclose the gross unrealized gains and
gross unrealized losses related to our
available-for-sale
securities as of June 30, 2009, and a stratification of the
gross unrealized losses based on securities that have been in a
continuous unrealized loss position for less than 12 months
and for 12 months or longer.
53
Table
19: Trading and
Available-for-Sale
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12
|
|
|
12 Consecutive
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Consecutive
Months(3)
|
|
|
Months or
Longer(3)
|
|
|
|
Total
|
|
|
Gross
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Total
|
|
|
Gross
|
|
|
Total
|
|
|
Gross
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Losses
|
|
|
Losses
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
OTTI(2)
|
|
|
Other
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
40,886
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,973
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Fannie Mae structured MBS
|
|
|
8,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Fannie Mae single-class
mortgage-related
securities
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Fannie Mae structured mortgage-related securities
|
|
|
8,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Fannie Mae structured multifamily mortgage-related
securities
(CMBS)(4)
|
|
|
11,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bonds
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
10,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-mortgage-related
securities(5)
|
|
|
5,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading
|
|
$
|
86,895
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
82,400
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
|
130,623
|
|
|
|
3,856
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
134,400
|
|
|
|
(79
|
)
|
|
|
16,104
|
|
|
|
|
|
|
|
26
|
|
Fannie Mae structured MBS
|
|
|
54,300
|
|
|
|
1,984
|
|
|
|
(41
|
)
|
|
|
(52
|
)
|
|
|
56,191
|
|
|
|
(57
|
)
|
|
|
1,718
|
|
|
|
(36
|
)
|
|
|
572
|
|
Non-Fannie Mae single-class mortgage-related securities
|
|
|
32,117
|
|
|
|
1,100
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
33,209
|
|
|
|
(7
|
)
|
|
|
551
|
|
|
|
(1
|
)
|
|
|
48
|
|
Non-Fannie Mae structured mortgage-related securities
|
|
|
45,219
|
|
|
|
252
|
|
|
|
(7,971
|
)
|
|
|
(4,089
|
)
|
|
|
33,411
|
|
|
|
(6,991
|
)
|
|
|
13,412
|
|
|
|
(5,069
|
)
|
|
|
14,152
|
|
Non-Fannie Mae structured multifamily mortgage-related
securities
(CMBS)(4)
|
|
|
15,918
|
|
|
|
|
|
|
|
|
|
|
|
(4,123
|
)
|
|
|
11,795
|
|
|
|
|
|
|
|
|
|
|
|
(4,123
|
)
|
|
|
11,795
|
|
Mortgage revenue bonds
|
|
|
14,241
|
|
|
|
40
|
|
|
|
(53
|
)
|
|
|
(1,187
|
)
|
|
|
13,041
|
|
|
|
(85
|
)
|
|
|
1,786
|
|
|
|
(1,155
|
)
|
|
|
8,516
|
|
Other mortgage-related securities
|
|
|
2,494
|
|
|
|
25
|
|
|
|
(560
|
)
|
|
|
(65
|
)
|
|
|
1,894
|
|
|
|
(457
|
)
|
|
|
1,259
|
|
|
|
(168
|
)
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
294,912
|
|
|
$
|
7,257
|
|
|
$
|
(8,625
|
)
|
|
$
|
(9,603
|
)
|
|
$
|
283,941
|
|
|
$
|
(7,676
|
)
|
|
$
|
34,830
|
|
|
$
|
(10,552
|
)
|
|
$
|
35,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
$
|
381,807
|
|
|
$
|
7,257
|
|
|
$
|
(8,625
|
)
|
|
$
|
(9,603
|
)
|
|
$
|
366,341
|
|
|
$
|
(7,676
|
)
|
|
$
|
34,830
|
|
|
$
|
(10,552
|
)
|
|
$
|
35,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortized cost includes unamortized
premiums, discounts and other cost basis adjustments, and is
adjusted to reflect net
other-than-temporary
impairment write downs recognized in our condensed consolidated
statements of operations.
|
|
(2) |
|
Reflects the noncredit component of
other-than-temporary
losses recorded in OCI as of June 30, 2009.
|
|
(3) |
|
Reflects total gross unrealized
losses, including the noncredit component of
other-than-temporary
impairment, and the related fair value of securities that are in
a loss position as of June 30, 2009.
|
|
(4) |
|
Consists of non-Fannie Mae CMBS.
Prior to June 30, 2009, we reported these securities as a
component of non-Fannie Mae structured mortgage-related
securities.
|
|
(5) |
|
Includes a certificate of deposit
issued by Bank of America that had a fair value of
$5.0 billion as of June 30, 2009, which exceeded 10%
of our stockholders deficit as of June 30, 2009.
|
Gross unrealized losses on our
available-for-sale
securities increased to $18.2 billion as of June 30,
2009, from $16.7 billion as of December 31, 2008. The
increase in gross unrealized losses was primarily attributable
to the continued deterioration in the performance of the
underlying collateral of non-agency private-label
mortgage-related securities and the weakened financial condition
of our mortgage insurer and financial guarantor counterparties.
We had previously recognized
other-than-temporary
impairment in earnings on some of these securities, a portion of
which was reclassified to AOCI as a result of our April 1,
2009 adoption of the new
other-than-temporary
impairment accounting guidance. See Critical Accounting
Policies and
EstimatesOther-Than-Temporary
Impairment of Investment Securities for additional
information. Included in the $18.2 billion of gross
unrealized losses as of June 30, 2009 was
$10.6 billion of losses that have existed
54
for 12 months or longer. These losses relate to securities
that we do not intend to sell and it is not more likely than not
that we will be required to sell these securities before
recovery of their amortized cost basis.
Investments
in Private-Label Mortgage-Related Securities
The non-Fannie Mae mortgage-related security categories
presented in Table 19 above include agency mortgage-related
securities issued or guaranteed by Freddie Mac or Ginnie Mae and
private-label mortgage-related securities backed by Alt-A,
subprime, multifamily, manufactured housing or other mortgage
loans. We have no exposure to collateralized debt obligations,
or CDOs. We classify private-label securities as Alt-A,
subprime, multifamily or manufactured housing if the securities
were labeled as such when issued. We also have invested in
private-label subprime mortgage-related securities that we have
resecuritized to include our guaranty (wraps). We
report these wraps in Table 19 above as a component of Fannie
Mae structured MBS. We generally focused our purchases of these
securities on the highest-rated tranches available at the time
of acquisition. Higher-rated tranches typically are supported by
credit enhancements to reduce the exposure to losses. The credit
enhancements on our private-label security investments generally
are in the form of initial subordination provided by lower level
tranches of these securities. In addition, monoline financial
guarantors have provided secondary guarantees on some of our
holdings that are based on specific performance triggers. Based
on the stressed financial condition of our financial guarantor
counterparties, we do not believe these counterparties will
fully meet their obligations to us in the future. See Risk
ManagementCredit Risk ManagementInstitutional
Counterparty Credit Risk ManagementFinancial
Guarantors for additional information on our financial
guarantor exposure and the counterparty risk associated with our
financial guarantors.
The unpaid principal balance of private-label mortgage-related
securities backed by Alt-A, subprime, multifamily, manufactured
housing and other mortgage loans and mortgage revenue bonds held
in our mortgage portfolio was $94.4 billion as of
June 30, 2009, down from $98.9 billion as of
December 31, 2008, primarily due to principal payments.
Table 20 summarizes, by the underlying loan type, the
composition of our investments in private-label securities,
excluding wraps, and mortgage revenue bonds as of June 30,
2009 and the average credit enhancement. The average credit
enhancement generally reflects the level of cumulative losses
that must be incurred before we experience a loss of principal
on the tranche of securities that we own. Table 20 also provides
information on the credit ratings of our private-label
securities as of July 28, 2009. The credit rating reflects
the lowest rating reported by Standard & Poors
(Standard & Poors), Moodys
Investors Service, Inc. (Moodys), Fitch
Ratings Ltd. (Fitch) or DBRS Limited, each of which
is a nationally recognized statistical rating organization.
Table
20: Investments in Private-Label Mortgage-Related
Securities, Excluding Wraps, and Mortgage Revenue
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
As of July 28, 2009
|
|
|
|
Unpaid
|
|
|
Average
|
|
|
|
|
|
|
|
|
% Below
|
|
|
|
|
|
|
Principal
|
|
|
Credit
|
|
|
|
|
|
% AA
|
|
|
Investment
|
|
|
Current %
|
|
|
|
Balance
|
|
|
Enhancement(1)
|
|
|
%
AAA(2)
|
|
|
to
BBB-(2)
|
|
|
Grade(2)
|
|
|
Watchlist(3)
|
|
|
|
(Dollars in millions)
|
|
|
Private-label mortgage-related securities backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option ARM Alt-A mortgage loans
|
|
$
|
6,421
|
|
|
|
52
|
%
|
|
|
3
|
%
|
|
|
20
|
%
|
|
|
77
|
%
|
|
|
11
|
%
|
Other Alt-A mortgage loans
|
|
|
19,709
|
|
|
|
13
|
|
|
|
22
|
|
|
|
26
|
|
|
|
52
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A mortgage loans
|
|
|
26,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime mortgage
loans(4)
|
|
|
22,603
|
|
|
|
33
|
|
|
|
11
|
|
|
|
9
|
|
|
|
80
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A and subprime mortgage loans
|
|
|
48,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily mortgage loans (CMBS)
|
|
|
25,769
|
|
|
|
30
|
|
|
|
96
|
|
|
|
4
|
|
|
|
|
|
|
|
75
|
|
Manufactured housing mortgage loans
|
|
|
2,647
|
|
|
|
36
|
|
|
|
2
|
|
|
|
21
|
|
|
|
77
|
|
|
|
1
|
|
Other mortgage loans
|
|
|
2,226
|
|
|
|
6
|
|
|
|
53
|
|
|
|
28
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private-label mortgage-related securities
|
|
|
79,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue
bonds(5)
|
|
|
15,019
|
|
|
|
35
|
|
|
|
36
|
|
|
|
61
|
|
|
|
3
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
(1) |
|
Average credit enhancement
percentage reflects both subordination and financial guarantees.
Reflects the ratio of the current amount of the securities that
will incur losses in the securitization structure before any
losses are allocated to securities that we own. Percentage
generally calculated based on the quotient of the total unpaid
principal balance of all credit enhancement in the form of
subordination or financial guarantee of the security divided by
the total unpaid principal balance of all of the tranches of
collateral pools from which credit support is drawn for the
security that we own.
|
|
(2) |
|
Reflects credit ratings as of
July 28, 2009, calculated based on unpaid principal balance
as of June 30, 2009. Investment securities that have a
credit rating below BBB- or its equivalent or that have not been
rated are classified as below investment grade.
|
|
(3) |
|
Reflects percentage of investment
securities, calculated based on unpaid principal balance as of
June 30, 2009, that have been placed under review by either
Standard & Poors, Moodys, Fitch or DBRS
Limited.
|
|
(4) |
|
Excludes resecuritizations, or
wraps, of private-label securities backed by subprime loans that
we have guaranteed and hold in our mortgage portfolio. These
wraps totaled $6.5 billion as of June 30, 2009.
|
|
(5) |
|
Reflects that 35% of the
outstanding unpaid principal balance of our mortgage revenue
bonds are guaranteed by third parties. See Risk
ManagementCredit Risk ManagementInstitutional
Counterparty Credit Risk ManagementFinancial
Guarantors for additional information on our financial
guarantor exposure and the counterparty exposure associated with
our financial guarantors.
|
Investments
in Alt-A and Subprime Private-Label Mortgage-Related
Securities
The unpaid principal balance of our investments in Alt-A and
subprime private-label securities, excluding wraps, totaled
$48.7 billion as of June 30, 2009, compared with
$52.4 billion as of December 31, 2008. The current
market pricing of Alt-A and subprime securities has been
adversely affected by the increasing level of defaults on the
mortgages underlying these securities and the uncertainty as to
the extent of further deterioration in the housing market. In
addition, market participants are requiring a significant risk
premium, which can be measured as a significant increase in the
required yield on the investment, for taking on the increased
uncertainty related to cash flows. Further, there continues to
be less liquidity for these securities than was available prior
to the onset of the housing and credit liquidity crises, which
has also contributed to lower prices. Although our portfolio of
Alt-A and subprime private-label mortgage-related securities
primarily consists of senior level tranches, we have recorded
significant losses on these securities.
Table 21 presents the fair value of our investments in Alt-A and
subprime private-label securities, excluding wraps, as of
June 30, 2009 and an analysis of the cumulative losses on
these investments as of June 30, 2009. The total cumulative
losses presented for our Alt-A and subprime private-label
securities classified as trading represent the cumulative fair
value losses recognized in our condensed consolidated statements
of operations, while the total cumulative losses presented for
our Alt-A and subprime private-label securities classified as
available for sale represent the total
other-than-temporary
impairment related to these securities. As discussed in
Critical Accounting Policies and
EstimatesOther-Than-Temporary
Impairment of Investment Securities, we adopted the new
accounting rules for
other-than-temporary
impairment effective April 1, 2009, which changed our
method for assessing, measuring and recognizing
other-than-temporary
impairment and resulted in a cumulative-effect pre-tax reduction
of $8.5 billion ($5.6 billion after tax) in our
accumulated deficit to reclassify to AOCI the noncredit
component of
other-than-temporary
impairment losses previously recognized in earnings. As a result
of this change, we no longer record in earnings the noncredit
component of
other-than-temporary
impairment on our
available-for-sale
securities that we do not intend to sell and will not be
required to sell prior to recovery of the amortized cost basis.
Instead, we record this amount in OCI. Table 21 displays the
estimated noncredit and credit-related components of the fair
value losses on our trading securities and our
available-for-sale
securities.
56
Table
21: Analysis of Losses on Alt-A and Subprime
Private-Label Mortgage-Related Securities, Excluding
Wraps(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Unpaid
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Fair
|
|
|
Cumulative
|
|
|
Noncredit
|
|
|
Net
|
|
|
|
Balance
|
|
|
Value
|
|
|
Losses(2)
|
|
|
Component(3)
|
|
|
Losses(4)
|
|
|
|
(Dollars in millions)
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A private-label securities
|
|
$
|
3,468
|
|
|
$
|
1,232
|
|
|
$
|
2,225
|
|
|
$
|
1,330
|
|
|
$
|
895
|
|
Subprime private-label securities
|
|
|
3,667
|
|
|
|
2,121
|
|
|
|
1,551
|
|
|
|
654
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A and subprime private-label securities classified as
trading
|
|
$
|
7,135
|
|
|
$
|
3,353
|
|
|
$
|
3,776
|
|
|
$
|
1,984
|
|
|
$
|
1,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A private-label securities
|
|
|
22,662
|
|
|
|
13,635
|
|
|
|
9,067
|
|
|
|
6,479
|
|
|
|
2,588
|
|
Subprime private-label securities
|
|
|
18,936
|
|
|
|
11,927
|
|
|
|
7,045
|
|
|
|
5,097
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A and subprime private-label securities classified as
available for sale
|
|
$
|
41,598
|
|
|
$
|
25,562
|
|
|
$
|
16,112
|
|
|
$
|
11,576
|
|
|
$
|
4,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes resecuritizations, or
wraps, of private-label securities backed by subprime loans that
we have guaranteed and hold in our mortgage portfolio. These
wraps totaled $6.5 billion as of June 30, 2009.
|
|
(2) |
|
Amounts reflect the difference
between the amortized cost basis (unpaid principal balance net
of unamortized premiums, discounts and cost basis adjustments),
excluding
other-than-temporary
impairment losses recorded in earnings and the fair value.
|
|
(3) |
|
Represents the estimated portion of
the total cumulative losses that is noncredit related. We have
calculated the credit component based on the difference between
the amortized cost basis of the securities and the present value
of expected future cash flows. The remaining difference between
the fair value and the present value of expected future cash
flows is classified as noncredit-related.
|
|
(4) |
|
For securities classified as
trading, net loss amounts reflect the estimated portion of the
total cumulative losses that is credit-related. For securities
classified as available for sale, net loss amounts reflect the
portion of
other-than-temporary
impairment losses that is recognized in earnings in accordance
with the new
other-than-temporary
impairment accounting guidance that we adopted on April 1,
2009.
|
The gross unrealized losses on our Alt-A and subprime
private-label securities classified as
available-for-sale
and included in AOCI totaled $7.5 billion, net of tax, as
of June 30, 2009. Approximately $3.1 billion, net of
tax, of these unrealized losses relate to securities that have
been in a loss position for 12 months or longer as of
June 30, 2009. For those
available-for-sale
securities for which we have not recognized
other-than-temporary
impairment in earnings, we believe that the performance of the
underlying collateral will still allow us to recover our initial
investment, although at significantly lower yields than what is
being required currently by new investors.
The current economic environment, including the continued
weakness in the housing market and rising unemployment, have had
an adverse effect on the performance of the loans underlying our
Alt-A and subprime private-label securities. These securities
reflect increasing delinquencies, a sharp rise in expected
defaults and loss severities, and slower voluntary prepayment
rates, particularly for the 2006 and 2007 loan vintages, which
were originated in an environment of significant increases in
home prices and relaxed underwriting criteria and eligibility
standards. Table 22 presents the 60 days or more
delinquency rates and average loss severities for the loans
underlying our Alt-A and subprime private-label mortgage-related
securities for the most recent remittance period of the current
reporting quarter. The delinquency rates and average loss
severities are based on available data provided by Intex
Solutions, Inc. (Intex) and First American
CoreLogic, LoanPerformance (First American
CoreLogic). We also present the average credit enhancement
and monoline financial guaranteed amount for these securities as
of June 30, 2009.
57
|
|
Table
22:
|
Credit
Statistics of Loans Underlying Alt-A and Subprime Private-Label
Mortgage-Related Securities, Including Wraps
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As of June 30, 2009
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Unpaid Principal Balance
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Monoline
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Available
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Average
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Average
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Financial
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for
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³
60 Days
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Loss
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Credit
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Guaranteed
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Trading
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Sale
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Wraps(1)
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Delinquent(2)(3)
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Severity(3)(4)
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Enhancement(3)(5)
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Amount(6)
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Dollars in Millions
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Private-label mortgage-related securities backed
by:(7)
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Alt-A mortgage loans:
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Option ARM Alt-A mortgage loans:
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2004 and prior
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$
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$
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618
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$
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28.8
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%
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53.6
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%
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22.7
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%
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$
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2005
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1,609
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36.8
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57.3
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47.3
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312
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2006
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1,734
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43.5
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62.6
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51.4
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384
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2007
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2,460
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37.6
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61.8
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62.8
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892
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Other Alt-A mortgage loans:
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2004 and prior
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7,990
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6.7
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54.5
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12.0
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21
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2005
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5,226
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190
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19.6
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53.6
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12.1
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2006
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78
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5,331
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28.2
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56.9
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10.5
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2007
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930
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263
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42.3
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64.5
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37.1
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384
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2008(8)
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154
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Total Alt-A mortgage loans:
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3,468
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22,662
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453
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1,993
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Subprime mortgage loans:
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2004 and
prior(9)
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2,759
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694
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21.6
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74.7
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57.7
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671
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2005(8)
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319
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2,080
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43.8
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73.6
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58.8
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243
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2006
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15,080
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49.1
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73.2
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27.0
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52
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2007
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3,667
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778
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6,899
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44.2
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71.0
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27.6
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205
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Total subprime mortgage loans:
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3,667
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18,936
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9,673
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1,171
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Total Alt-A and subprime mortgage loans:
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$
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7,135
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$
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41,598
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$
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10,126
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$
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3,164
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(1) |
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Represents our exposure to
private-label Alt-A and subprime mortgage-related securities
that have been resecuritized (or wrapped) to include our
guarantee. The unpaid principal balance of these Fannie Mae
guaranteed securities held by third parties is included in
outstanding and unconsolidated Fannie Mae MBS held by third
parties. We include incurred credit losses related to these
wraps in our reserve for guaranty losses.
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(2) |
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Delinquency data provided by Intex,
where available, for loans backing Alt-A and subprime
private-label securities that we own or guarantee. The reported
Intex delinquency data reflects information from June 2009
remittances for May 2009 payments. For consistency purposes, we
have adjusted the Intex delinquency data, where appropriate, to
include all bankruptcies, foreclosures and real estate owned in
the delinquency rates.
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(3) |
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The average delinquency, severity
and credit enhancement metrics are calculated for each loan pool
associated with securities where Fannie Mae has exposure and are
weighted based on the unpaid principal balance of those
securities.
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(4) |
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Severity data obtained from First
American CoreLogic, where available, for loans backing Alt-A and
subprime private-label mortgage-related securities that we own
or guarantee. The First American CoreLogic severity data
reflects information from June 2009 remittances for May 2009
payments. For consistency purposes, we have adjusted the
severity data, where appropriate.
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(5) |
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Average credit enhancement
percentage reflects both subordination and financial guarantees.
Reflects the ratio of the current amount of the securities that
will incur losses in the securitization structure before any
losses are allocated to securities that we own or guarantee.
Percentage generally calculated based on the quotient of the
total unpaid principal balance of all credit enhancement in the
form of subordination or financial guarantee of the security
divided by the total unpaid principal balance of all of the
tranches of collateral pools from which credit support is drawn
for the security that we own or guarantee.
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(6) |
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Reflects amount of unpaid principal
balance supported by financial guarantees from monoline
financial guarantors.
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(7) |
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Vintages are based on series date
and not loan origination date.
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58
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(8) |
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The unpaid principal balance
includes private-label REMIC securities that have been
resecuritized totaling $154 million for the 2008 vintage of
other Alt-A loans and $50 million for the 2005 vintage of
subprime loans. These securities are excluded from the
delinquency, severity and credit enhancement statistics reported
in this table.
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(9) |
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Includes a wrap transaction that
has been consolidated on our balance sheet under FIN 46R,
which effectively resulted in the underlying structure of the
transaction being accounted for and reported as
available-for-sale
securities. Although the wrap transaction is supported by
financial guarantees that cover all of our credit risk, we have
not included the amount of these financial guarantees in this
table.
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Debt
Instruments
We issue debt instruments as the primary means to fund our
mortgage investments and manage our interest rate risk exposure.
Our total outstanding debt, which consists of federal funds
purchased and securities sold under agreements to repurchase,
short-term debt and long-term debt decreased to
$833.1 billion as of June 30, 2009, from
$870.5 billion as of December 31, 2008. We provide a
summary of our debt activity for the second quarters and first
six months of 2009 and 2008 and a comparison of the mix between
our outstanding short-term and long-term debt as of
June 30, 2009 and December 31, 2008 in Liquidity
and Capital ManagementLiquidity ManagementDebt
FundingDebt Funding Activity. Also see Notes
to Condensed Consolidated Financial
StatementsNote 10, Short-term Borrowings and
Long-term Debt for additional detail on our outstanding
debt.
Derivative
Instruments
We supplement our issuance of debt with interest rate-related
derivatives to manage the prepayment and duration risk inherent
in our mortgage investments. We aggregate, by derivative
counterparty, the net fair value gain or loss, less any cash
collateral paid or received, and report these amounts in our
consolidated balance sheets as either assets or liabilities. We
present, by derivative instrument type, the estimated fair value
of derivatives recorded in our consolidated balance sheets and
the related outstanding notional amount as of June 30, 2009
and December 31, 2008 in Notes to Condensed
Consolidated Financial StatementsNote 11, Derivative
Instruments and Hedging Activities.
We refer to the difference between the derivative assets and
derivative liabilities recorded on our consolidated balance
sheets as our net derivative asset or liability. As shown in
Table 23, the net fair value of our risk management derivatives,
excluding mortgage commitments, resulted in a net derivative
liability of $444 million as of June 30, 2009,
compared with a net derivative liability of $1.8 billion as
of December 31, 2008. Table 23 provides an analysis of the
factors driving the change in the estimated fair value of our
net derivative liability, excluding mortgage commitments,
recorded in our consolidated balance sheets between
December 31, 2008 and June 30, 2009.
59
Table
23: Changes in Risk Management Derivative Assets
(Liabilities) at Fair Value,
Net(1)
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For the
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Six Months
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Ended
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June 30,
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2009
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(Dollars in
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Millions)
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Net derivative liability as of December 31,
2008(2)
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$
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(1,761
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)
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Effect of cash payments:
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Fair value at inception of contracts entered into during the
period(3)
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752
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Fair value at date of termination of contracts settled during
the
period(4)
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630
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Net collateral posted
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43
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Periodic net cash contractual interest payments
(receipts)(5)
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1,884
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Total cash payments (receipts)
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3,309
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Statement of operations impact of recognized amounts:
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Periodic net contractual interest income (expense) accruals on
interest rate swaps
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(1,719
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)
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Net change in fair value of terminated derivative contracts from
end of prior year to date of termination
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(1,825
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)
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Net change in fair value of outstanding derivative contracts,
including derivative contracts entered into during the period
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1,552
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Derivatives fair value losses,
net(6)
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(1,992
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)
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Net derivative liability as of June 30,
2009(2)
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$
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(444
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)
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(1) |
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Excludes mortgage commitments.
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(2) |
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Reflects the net amount of
Derivative liabilities at fair value recorded in our
condensed consolidated balance sheets, excluding mortgage
commitments.
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(3) |
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Cash payments made to purchase
derivative option contracts (purchased options premiums)
increase the derivative asset recorded in the condensed
consolidated balance sheets. Primarily includes upfront premiums
paid or received on option contracts. Also includes upfront cash
paid or received on other derivative contracts.
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(4) |
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Cash payments to terminate and/or
sell derivative contracts reduce the derivative liability
recorded in the condensed consolidated balance sheets. Primarily
represents cash paid (received) upon termination of derivative
contracts.
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(5) |
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We accrue interest on our interest
rate swap contracts based on the contractual terms and recognize
the accrual as an increase to the net derivative liability
recorded in the condensed consolidated balance sheets. The
corresponding offsetting amount is recorded as an expense and
included as a component of derivatives fair value losses in the
condensed consolidated statements of operations. Net periodic
interest payments on our interest rate swap contracts reduce the
derivative liability.
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(6) |
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Reflects net derivatives fair value
losses, excluding mortgage commitments, recognized in the
condensed consolidated statements of operations.
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For additional information on our derivative instruments, see
Consolidated Results of OperationsFair Value Gains
(Losses), Net, Risk ManagementInterest Rate
Risk Management and Other Market Risks and Notes to
Condensed Consolidated Financial StatementsNote 11,
Derivative Instruments and Hedging Activities.
60
SUPPLEMENTAL
NON-GAAP INFORMATIONFAIR VALUE BALANCE
SHEETS
As part of our disclosure requirements with FHFA, we disclose on
a quarterly basis a supplemental non-GAAP fair value balance
sheet, which reflects our assets and liabilities at estimated
fair value. Table 25, which we provide at the end of this
section, presents our non-GAAP fair value balance sheets as of
June 30, 2009 and December 31, 2008, and the non-GAAP
estimated fair value of our net assets. The estimated fair value
of our net assets, which is derived from our non-GAAP fair value
balance sheets, is calculated based on the difference between
the fair value of our assets and the fair value of our
liabilities. We present a summary of the changes in the fair
value of our net assets for the first six months of 2009 in
Table 26 at the end of this section.
The fair value of our net assets is not a measure defined within
GAAP and may not be comparable to similarly titled measures
reported by other companies. It is not intended as a substitute
for Fannie Maes stockholders deficit or for the
total deficit reported in our GAAP condensed consolidated
financial statements, which represents the net worth measure
that is used to determine whether it is necessary to request
additional funds from Treasury under the senior preferred stock
purchase agreement. Instead, the fair value of our net assets
reflects a point in time estimate of the fair value of our
existing assets and liabilities. The ultimate amount of realized
credit losses and realized values we receive from holding our
assets and liabilities, however, is likely to differ materially
from the current estimated fair values, which reflect
significant liquidity and risk premiums.
Table 24 below compares Fannie Maes stockholders
deficit reported in our GAAP consolidated balance sheets and the
fair value of our net assets derived from our non-GAAP fair
value balance sheets as of June 30, 2009.
Table
24: Comparative MeasuresGAAP Consolidated
Balance Sheets and Non-GAAP Fair Value Balance
Sheets
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For the Six
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Months Ended
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June 30, 2009
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(Dollars in
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millions)
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GAAP consolidated balance sheets:
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Fannie Mae stockholders deficit as of January
1(1)
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$
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(15,314
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)
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Change in Fannie Mae stockholders deficit
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4,604
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Fannie Mae stockholders deficit as of June
30(1)
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$
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(10,710
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)
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|
Non-GAAP fair value balance sheets:
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Estimated fair value of net assets as of January 1
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$
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(105,150
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)
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Change in estimated fair value of net assets
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|
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3,114
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|
|
|
|
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|
Estimated fair value of net assets as of June 30
|
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$
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(102,036
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)
|
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(1) |
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Our net worth, as defined under the
Treasury senior preferred stock purchase agreement, is
equivalent to the Total deficit amount reported in
our condensed consolidated balance sheets. Our net worth, or
total deficit, is comprised of Fannie Maes
stockholders equity (deficit) and
Noncontrolling interests reported in our condensed
consolidated balance sheets.
|
The fair value of our net assets, including capital
transactions, increased by $3.1 billion during the first
six months of 2009, which resulted in a fair value net asset
deficit of $102.0 billion as of June 30, 2009.
Included in this increase was $34.2 billion of capital
received from Treasury under the senior preferred stock purchase
agreement. The fair value of our net assets, excluding capital
transactions, decreased by $30.6 billion during the first
six months of 2009. This decrease reflected the adverse impact
on our net guaranty assets from the continued weakness in the
housing market and increases in unemployment resulting from the
economic recession, which contributed to a significant increase
in the fair value of our guaranty obligations. We experienced a
favorable impact on the fair value of our net assets
attributable to an increase in the fair value of our net
portfolio primarily due to changes in the net spread between our
mortgage assets and our debt.
61
Below we provide additional information that we believe may be
useful in understanding our fair value balance sheets,
including: (1) an explanation of how fair value is defined
and measured; (2) the primary factors driving the decline
in the fair value of net assets during the first six months of
2009; and (3) the limitations of our non-GAAP fair value
balance sheet and related measures.
Fair
Value Measurement
As discussed more fully in Critical Accounting Policies
and EstimatesFair Value of Financial Instruments, we
use various valuation techniques to estimate fair value, some of
which incorporate internal assumptions that are subjective and
involve a high degree of management judgment. We describe the
specific valuation techniques used to determine the fair value
of our financial instruments and disclose the carrying value and
fair value of our financial assets and liabilities in
Notes to Condensed Consolidated Financial
StatementsNote 18, Fair Value of Financial
Instruments.
Fair value as defined under SFAS 157 represents the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date (also referred to as an exit price).
Fair value is intended to convey the current value of an asset
or liability as of the measurement date, not the potential value
of the asset or liability that may be realized from future cash
flows associated with the asset or liability. Fair value
generally incorporates the markets current view of the
future, which is reflected in the current price of the asset or
liability. Future market conditions, however, may be more
adverse than what the market has currently estimated and priced
into these fair value measures. Moreover, the fair value balance
sheet reflects only the value of the assets and liabilities of
the enterprise as of a point in time (the balance sheet date)
and does not reflect the value of new assets or liabilities the
company may generate in the future. Because our intent generally
has been to hold the majority of our mortgage investments until
maturity, the amounts we ultimately realize from the maturity,
settlement or disposition of these assets may vary significantly
from the estimated fair value of these assets as of
June 30, 2009.
Our GAAP consolidated balance sheets include a combination of
amortized historical cost, fair value and the lower of cost or
fair value as the basis for accounting and for reporting our
assets and liabilities. The principal items that we carry at
fair value in our GAAP consolidated balance sheets include our
trading and
available-for-sale
securities and derivative instruments. The substantial majority
of our mortgage loans and liabilities, however, are carried at
historical cost. Another significant difference between our GAAP
consolidated balance sheets and our non-GAAP fair value balance
sheets is the manner in which credit losses are reflected. A
summary of the key measurement differences follows:
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Credit Losses under GAAP: In our GAAP
condensed consolidated financial statements, we may only
recognize those credit losses that we believe have been actually
incurred as of each balance sheet date. A loss is considered to
have been incurred when the event triggering the loss, such as a
borrowers loss of employment or a decline in home prices,
actually happens. Expected credit losses that may arise as a
result of future anticipated changes in market conditions, such
as further declines in home prices or increases in unemployment,
can only be recognized in our condensed consolidated financial
statements if and when the anticipated loss triggering event
occurs. For additional information, see
Part IIItem 7MD&ACritical
Accounting Policies and EstimatesAllowance for Loan Losses
and Reserve for Guaranty Losses and Notes to
Consolidated Financial StatementsNote 2, Summary of
Significant Accounting Policies of our 2008
Form 10-K
and Consolidated Results of OperationsCredit-Related
Expenses in this report.
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Credit Losses in Fair Value Balance Sheet: The
credit losses incorporated into the estimated fair values in our
fair value balance sheet reflect future expected credit losses
plus a current market-based risk premium, or profit amount. The
fair value of our guaranty obligations as of each balance sheet
date is greater than our estimate of future expected credit
losses in our existing guaranty book of business as of that date
because the fair value of our guaranty obligations includes an
estimated market risk premium. We provide additional information
on the components of our guaranty obligations and how we
estimate the fair value of these obligations in
Part IIItem 7MD&ACritical
Accounting Policies and
|
62
|
|
|
|
|
EstimatesFair Value of Financial InstrumentsFair
Value of Guaranty Obligations of our 2008
Form 10-K.
|
These differences in measurement methods result in significant
differences between our GAAP balance sheets and our non-GAAP
fair value balance sheets.
Primary
Factors Driving Changes in Non-GAAP Fair Value of Net
Assets
Changes in the fair value of our assets and liabilities are
primarily attributable to our investment activities and credit
guaranty business activities. Some of our assets and liabilities
may be related to both of these activities. Our attribution of
changes in the fair value of net assets relies on models,
assumptions, and other measurement techniques that evolve over
time. We expect periodic fluctuations in the fair value of our
net assets due to our business activities, as well as changes in
market conditions, such as home prices, unemployment rates,
interest rates, spreads, and implied volatility. The decline in
home prices and increase in unemployment continued to have an
adverse impact on the fair value of our net assets during the
first six months of 2009. The following attribution of the
decrease of $30.6 billion in the fair value of our net
assets, excluding capital transactions, during the first six
months of 2009 reflects our current estimate of the items
presented (on a pre-tax basis).
|
|
|
|
|
A pre-tax increase of approximately $12.4 billion in the
fair value of the net portfolio attributable to the positive
impact of changes in the net spread between our mortgage assets
and our debt. We provide additional information on the
composition and estimated fair value of our mortgage investments
in Consolidated Balance Sheet AnalysisMortgage
Investments.
|
|
|
|
A pre-tax decrease of approximately $44.8 billion in the
fair value of our net guaranty assets, driven by a substantial
increase in the estimated fair value of our guaranty
obligations, largely attributable to an increase in expected
credit losses as a result of continued weakness in the housing
market and general economy. In addition, but to a smaller
degree, the fair value of our net guaranty assets was affected
by a change we made in the first quarter of 2009 in how we
estimate the fair value of certain of our guaranty obligations,
which is more fully described in Critical Accounting
Policies and Estimates.
|
Cautionary
Language Relating to Supplemental Non-GAAP Financial
Measures
In reviewing our non-GAAP fair value balance sheets, there are a
number of important factors and limitations to consider. The
estimated fair value of our net assets is calculated as of a
particular point in time based on our existing assets and
liabilities. It does not incorporate other factors that may have
a significant impact on our long-term fair value, including
revenues generated from future business activities in which we
expect to engage, the value from our foreclosure and loss
mitigation efforts or the impact that potential regulatory
actions may have on us. As a result, the estimated fair value of
our net assets presented in our non-GAAP fair value balance
sheets does not represent an estimate of our net realizable
value, liquidation value or our market value as a whole. Amounts
we ultimately realize from the disposition of assets or
settlement of liabilities may vary significantly from the
estimated fair values presented in our non-GAAP consolidated
fair value balance sheets.
Supplemental
Non-GAAP Fair Value Balance Sheet Report
We present our non-GAAP fair value balance sheet report in Table
25 below.
63
Table
25: Supplemental Non-GAAP Consolidated Fair
Value Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
GAAP
|
|
|
|
|
|
|
|
|
GAAP
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair Value
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Fair Value
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
Value
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,991
|
|
|
$
|
|
|
|
$
|
28,991
|
(2)
|
|
$
|
18,462
|
|
|
$
|
|
|
|
$
|
18,462
|
(2)
|
Federal funds sold and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchased under agreements to resell
|
|
|
25,810
|
|
|
|
|
|
|
|
25,810
|
(2)
|
|
|
57,418
|
|
|
|
2
|
|
|
|
57,420
|
(2)
|
Trading securities
|
|
|
82,400
|
|
|
|
|
|
|
|
82,400
|
(2)
|
|
|
90,806
|
|
|
|
|
|
|
|
90,806
|
(2)
|
Available-for-sale
securities
|
|
|
283,941
|
|
|
|
|
|
|
|
283,941
|
(2)
|
|
|
266,488
|
|
|
|
|
|
|
|
266,488
|
(2)
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
29,174
|
|
|
|
902
|
|
|
|
30,076
|
(3)
|
|
|
13,270
|
|
|
|
351
|
|
|
|
13,621
|
(3)
|
Mortgage loans held for investment, net of allowance for loan
losses
|
|
|
386,407
|
|
|
|
6,196
|
|
|
|
392,603
|
(3)
|
|
|
412,142
|
|
|
|
3,069
|
|
|
|
415,211
|
(3)
|
Guaranty assets of mortgage loans held in portfolio
|
|
|
|
|
|
|
2,283
|
|
|
|
2,283
|
(3)(4)
|
|
|
|
|
|
|
2,255
|
|
|
|
2,255
|
(3)(4)
|
Guaranty obligations of mortgage loans held in portfolio
|
|
|
|
|
|
|
(18,053
|
)
|
|
|
(18,053
|
)(3)(4)
|
|
|
|
|
|
|
(11,396
|
)
|
|
|
(11,396
|
)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
415,581
|
|
|
|
(8,672
|
)
|
|
|
406,909
|
(2)(3)
|
|
|
425,412
|
|
|
|
(5,721
|
)
|
|
|
419,691
|
(2)(3)
|
Advances to lenders
|
|
|
18,938
|
|
|
|
(411
|
)
|
|
|
18,527
|
(2)
|
|
|
5,766
|
|
|
|
(354
|
)
|
|
|
5,412
|
(2)
|
Derivative assets at fair value
|
|
|
1,406
|
|
|
|
|
|
|
|
1,406
|
(2)
|
|
|
869
|
|
|
|
|
|
|
|
869
|
(2)
|
Guaranty assets and
buy-ups, net
|
|
|
7,799
|
|
|
|
1,853
|
|
|
|
9,652
|
(2)(4)
|
|
|
7,688
|
|
|
|
1,336
|
|
|
|
9,024
|
(2)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
|
864,866
|
|
|
|
(7,230
|
)
|
|
|
857,636
|
(2)
|
|
|
872,909
|
|
|
|
(4,737
|
)
|
|
|
868,172
|
(2)
|
Master servicing assets and credit enhancements
|
|
|
797
|
|
|
|
4,834
|
|
|
|
5,631
|
(4)(5)
|
|
|
1,232
|
|
|
|
7,035
|
|
|
|
8,267
|
(4)(5)
|
Other assets
|
|
|
45,719
|
|
|
|
51
|
|
|
|
45,770
|
(5)(6)
|
|
|
38,263
|
|
|
|
(2
|
)
|
|
|
38,261
|
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
911,382
|
|
|
$
|
(2,345
|
)
|
|
$
|
909,037
|
|
|
$
|
912,404
|
|
|
$
|
2,296
|
|
|
$
|
914,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
(2)
|
|
$
|
77
|
|
|
$
|
|
|
|
$
|
77
|
(2)
|
Short-term debt
|
|
|
259,781
|
(7)
|
|
|
326
|
|
|
|
260,107
|
(2)
|
|
|
330,991
|
(7)
|
|
|
1,299
|
|
|
|
332,290
|
(2)
|
Long-term debt
|
|
|
573,329
|
(7)
|
|
|
22,859
|
|
|
|
596,188
|
(2)
|
|
|
539,402
|
(7)
|
|
|
34,879
|
|
|
|
574,281
|
(2)
|
Derivative liabilities at fair value
|
|
|
2,047
|
|
|
|
|
|
|
|
2,047
|
(2)
|
|
|
2,715
|
|
|
|
|
|
|
|
2,715
|
(2)
|
Guaranty obligations
|
|
|
12,358
|
|
|
|
114,729
|
|
|
|
127,087
|
(2)
|
|
|
12,147
|
|
|
|
78,728
|
|
|
|
90,875
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
|
847,515
|
|
|
|
137,914
|
|
|
|
985,429
|
(2)
|
|
|
885,332
|
|
|
|
114,906
|
|
|
|
1,000,238
|
(2)
|
Other liabilities
|
|
|
74,469
|
|
|
|
(48,933
|
)
|
|
|
25,536
|
(8)
|
|
|
42,229
|
|
|
|
(22,774
|
)
|
|
|
19,455
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
921,984
|
|
|
|
88,981
|
|
|
|
1,010,965
|
|
|
|
927,561
|
|
|
|
92,132
|
|
|
|
1,019,693
|
|
Equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
preferred(9)
|
|
|
35,200
|
|
|
|
|
|
|
|
35,200
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
Preferred
|
|
|
20,486
|
|
|
|
(19,665
|
)
|
|
|
821
|
|
|
|
21,222
|
|
|
|
(20,674
|
)
|
|
|
548
|
|
Common
|
|
|
(66,396
|
)
|
|
|
(71,661
|
)
|
|
|
(138,057
|
)
|
|
|
(37,536
|
)
|
|
|
(69,162
|
)
|
|
|
(106,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fannie Mae stockholders deficit/non-GAAP fair
value of net assets
|
|
$
|
(10,710
|
)
|
|
$
|
(91,326
|
)
|
|
$
|
(102,036
|
)
|
|
$
|
(15,314
|
)
|
|
$
|
(89,836
|
)
|
|
$
|
(105,150
|
)
|
Noncontrolling interests
|
|
|
108
|
|
|
|
|
|
|
|
108
|
|
|
|
157
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deficit
|
|
|
(10,602
|
)
|
|
|
(91,326
|
)
|
|
|
(101,928
|
)
|
|
|
(15,157
|
)
|
|
|
(89,836
|
)
|
|
|
(104,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
911,382
|
|
|
$
|
(2,345
|
)
|
|
$
|
909,037
|
|
|
$
|
912,404
|
|
|
$
|
2,296
|
|
|
$
|
914,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Explanation
and Reconciliation of Non-GAAP Measures to
GAAP Measures
|
|
|
(1) |
|
Each of the amounts listed as a
fair value adjustment represents the difference
between the carrying value included in our GAAP consolidated
balance sheets and our best judgment of the estimated fair value
of the listed item.
|
|
(2) |
|
We determined the estimated fair
value of these financial instruments in accordance with the fair
value guidelines outlined in SFAS 157, as described in
Notes to Condensed Consolidated Financial
StatementsNote 18, Fair Value of Financial
Instruments.
|
|
(3) |
|
For business segment reporting
purposes, we allocate intra-company guaranty fee income to our
Single-Family and HCD businesses for managing the credit risk on
mortgage loans held in portfolio by our Capital Markets group
and charge a corresponding fee to our Capital Markets group. In
computing this intra-company allocation, we disaggregate
|
64
|
|
|
|
|
the total mortgage loans reported
in our GAAP condensed consolidated balance sheets, which
consists of Mortgage loans held for sale and
Mortgage loans held for investment, net of allowance for
loan losses into components that separately reflect the
value associated with credit risk, which is managed by our
guaranty businesses, and the interest rate risk, which is
managed by our Capital Markets group. We report the estimated
fair value of the credit risk components separately in our
supplemental non-GAAP consolidated fair value balance sheets as
Guaranty assets of mortgage loans held in portfolio
and Guaranty obligations of mortgage loans held in
portfolio. We report the estimated fair value of the
interest rate risk components in our supplemental non-GAAP
consolidated fair value balance sheets as Mortgage loans
held for sale and Mortgage loans held for
investment, net of allowance for loan losses. Taken
together, these four components represent the estimated fair
value of the total mortgage loans reported in our GAAP condensed
consolidated balance sheets. We believe this presentation
provides transparency into the components of the fair value of
the mortgage loans associated with the activities of our
guaranty businesses and the components of the activities of our
Capital Markets group, which is consistent with the way we
manage risks and allocate revenues and expenses for segment
reporting purposes. While the carrying values and estimated fair
values of the individual line items may differ from the amounts
presented in Notes to Condensed Consolidated Financial
StatementsNote 18, Fair Value of Financial
Instruments of the condensed consolidated financial
statements in this report, the combined amounts together equal
the carrying value and estimated fair value amounts of total
mortgage loans in Note 18.
|
|
(4) |
|
In our GAAP condensed consolidated
balance sheets, we report the guaranty assets associated with
our outstanding Fannie Mae MBS and other guarantees as a
separate line item and include
buy-ups,
master servicing assets and credit enhancements associated with
our guaranty assets in Other assets. On a GAAP
basis, our guaranty assets totaled $7.1 billion and
$7.0 billion as of June 30, 2009 and December 31,
2008, respectively. The associated
buy-ups
totaled $708 million and $645 million as of
June 30, 2009 and December 31, 2008, respectively. In
our non-GAAP fair value balance sheets, we also disclose the
estimated guaranty assets and obligations related to mortgage
loans held in our portfolio. The aggregate estimated fair value
of the guaranty asset-related components totaled
$(0.5) billion and $8.2 billion as of June 30,
2009 and December 31, 2008, respectively. These components
represent the sum of the following line items in this table:
(i) Guaranty assets of mortgage loans held in portfolio;
(ii) Guaranty obligations of mortgage loans held in
portfolio, (iii) Guaranty assets and
buy-ups; and
(iv) Master servicing assets and credit enhancements. See
Part IIItem 7MD&ACritical
Accounting Policies and EstimatesFair Value of Financial
InstrumentsFair Value of Guaranty Obligations of our
2008
Form 10-K.
|
|
(5) |
|
The line items Master
servicing assets and credit enhancements and Other
assets together consist of the assets presented on the
following six line items in our GAAP condensed consolidated
balance sheets: (i) Accrued interest receivable;
(ii) Acquired property, net; (iii) Deferred tax
assets, net; (iv) Partnership investments;
(v) Servicer and MBS trust receivable and (vi) Other
assets. The carrying value of these items in our GAAP condensed
consolidated balance sheets together totaled $47.2 billion
and $40.1 billion as of June 30, 2009 and
December 31, 2008, respectively. We deduct the carrying
value of the
buy-ups
associated with our guaranty obligation, which totaled
$708 million and $645 million as of June 30, 2009
and December 31, 2008, respectively, from Other
assets reported in our GAAP condensed consolidated balance
sheets because
buy-ups are
a financial instrument that we combine with guaranty assets in
our disclosure in Note 18. We have estimated the fair value
of master servicing assets and credit enhancements based on our
fair value methodologies described in Notes to
Consolidated Financial StatementsNote 20, Fair Value
of Financial Instruments of our 2008 Form
10-K.
|
|
(6) |
|
With the exception of LIHTC
partnership investments, the GAAP carrying values of other
assets generally approximate fair value. Our LIHTC partnership
investments had a carrying value of $5.8 billion and
$6.3 billion and an estimated fair value of
$5.9 billion and $6.5 billion as of June 30, 2009
and December 31, 2008, respectively. We assume that certain
other assets, consisting primarily of prepaid expenses, have no
fair value.
|
|
(7) |
|
Includes certain short-term debt
and long-term debt instruments that we elected to report at fair
value under SFAS No. 159, The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115, in our GAAP
condensed consolidated balance sheets. We did not elect to
report any short-term debt instruments at fair value as of
June 30, 2009. Includes long-term debt with a reported fair
value of $22.4 billion as of June 30, 2009. Includes
short-term and long-term debt instruments with a reported fair
value of $4.5 billion and $21.6 billion, respectively,
as of December 31, 2008.
|
|
(8) |
|
The line item Other
liabilities consists of the liabilities presented on the
following five line items in our GAAP condensed consolidated
balance sheets: (i) Accrued interest payable;
(ii) Reserve for guaranty losses; (iii) Partnership
liabilities; (iv) Servicer and MBS trust payable; and
(v) Other liabilities. The carrying value of these items in
our GAAP condensed consolidated balance sheets together totaled
$74.5 billion and $42.2 billion as of June 30,
2009 and December 31, 2008, respectively. The GAAP carrying
values of these other liabilities generally approximate fair
value. We assume that certain other liabilities, such as
deferred revenues, have no fair value. Although we report the
Reserve for guaranty losses as a separate line item
on our condensed consolidated balance sheets, it is incorporated
into and reported as part of the fair value of our guaranty
obligations in our non-GAAP supplemental consolidated fair value
balance sheets.
|
|
(9) |
|
The estimated fair value of the
senior preferred stock is the same as the carrying value, as the
fair value is based on the liquidation preference.
|
65
Table
26: Change in Fair Value of Net Assets (Net of Tax
Effect)
|
|
|
|
|
|
|
For the Six
|
|
|
|
Months
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
|
(Dollars in
|
|
|
|
millions)
|
|
|
Estimated fair value of net assets as of January
1(1)
|
|
$
|
(105,150
|
)
|
Capital
transactions:(2)
|
|
|
|
|
Common stock issuances and repurchases, net
|
|
|
732
|
|
Preferred stock conversion
|
|
|
(736
|
)
|
Investments by Treasury under senior preferred stock purchase
agreement(3)
|
|
|
33,766
|
|
|
|
|
|
|
Capital transactions, net
|
|
|
33,762
|
|
Change in estimated fair value of net assets, excluding effect
of capital transactions
|
|
|
(30,648
|
)
|
|
|
|
|
|
Increase in estimated fair value of net assets, net
|
|
|
3,114
|
|
|
|
|
|
|
Estimated fair value of net assets as of June
30(1)
|
|
$
|
(102,036
|
)
|
|
|
|
|
|
|
|
|
(1) |
|
Represents estimated fair value of
net assets (net of tax effect) presented in Table 25:
Supplemental Non-GAAP Consolidated Fair Value Balance Sheets.
|
|
(2) |
|
Represents net capital
transactions, which are reflected in the condensed consolidated
statements of changes in equity.
|
|
(3) |
|
Net of senior preferred stock
dividends.
|
Our business activities require that we maintain adequate
liquidity to fund our operations. We have liquidity risk
management policies that are intended to ensure appropriate
liquidity during normal and stress periods. Our senior
management establishes our overall liquidity policies through
various risk and control committees.
Liquidity
Management
Liquidity risk is the risk that we will not be able to meet our
funding obligations in a timely manner. Liquidity management
involves forecasting funding requirements and maintaining
sufficient capacity to meet these needs while accommodating
fluctuations in asset and liability levels due to changes in our
business operations or unanticipated events. Our Treasury group
is responsible for our liquidity and contingency planning
strategies.
Primary
Sources and Uses of Funds
Our primary source of funds is proceeds from the issuance of
short-term and long-term debt securities. Accordingly, our
liquidity depends largely on our ability to issue unsecured debt
in the capital markets. Our status as a GSE and federal
government support of our business continue to be essential to
maintaining our access to the unsecured debt market. Our senior
unsecured debt obligations are rated AAA by the major rating
agencies.
In addition to funding we obtain from the issuance of debt
securities, our other sources of cash include:
|
|
|
|
|
principal and interest payments received on mortgage loans,
mortgage-related securities and non-mortgage investments we own;
|
|
|
|
proceeds from the sale of mortgage loans, mortgage-related
securities and non-mortgage assets;
|
|
|
|
equity funding received from Treasury pursuant to the senior
preferred stock purchase agreement;
|
|
|
|
borrowings under secured and unsecured intraday funding lines of
credit we have established with several large financial
institutions;
|
|
|
|
guaranty fees received on Fannie Mae MBS;
|
66
|
|
|
|
|
borrowings against mortgage-related securities and other
investment securities we hold pursuant to repurchase agreements
and loan agreements;
|
|
|
|
payments received from mortgage insurance
counterparties; and
|
|
|
|
net receipts on derivative instruments.
|
We also may request loans from Treasury pursuant to the Treasury
credit facility described below under Liquidity
Contingency PlanTreasury Credit Facility; however,
as of the date of this filing, we have not borrowed amounts
under this facility and we have not conducted a test draw from
the facility.
Our primary funding needs include:
|
|
|
|
|
the repayment of matured, paid off and repurchased debt;
|
|
|
|
the purchase of mortgage loans, mortgage-related securities and
other investments;
|
|
|
|
interest payments on outstanding debt;
|
|
|
|
dividend payments made to Treasury pursuant to the senior
preferred stock purchase agreement;
|
|
|
|
net payments on derivative instruments;
|
|
|
|
the pledging of collateral under derivative instruments;
|
|
|
|
administrative expenses; and
|
|
|
|
losses incurred in connection with our Fannie Mae MBS guaranty
obligations.
|
An increasing proportion of our cash funding during the first
six months of 2009, as compared to previous periods, has come
from principal repayments on liquidating mortgage assets as a
result of an increase in refinancing activity as compared with
2008, as well as the payments we received from Treasury under
the senior preferred stock purchase agreement. In addition, in
2009, we began paying cash dividend payments to Treasury under
the senior preferred stock purchase agreement. To the extent
that we continue to pay the dividend on a quarterly basis,
rather than allowing the dividend to accrue and be added to the
liquidation preference of the senior preferred stock, we expect
these cash dividend payments to continue to increase in future
periods as we draw more funds pursuant to the senior preferred
stock purchase agreement.
Debt
Funding
We fund our business primarily through the issuance of
short-term and long-term debt securities in the domestic and
international capital markets. We have a diversified funding
base of domestic and international investors. Purchasers of our
debt securities include fund managers, commercial banks, pension
funds, insurance companies, foreign central banks, corporations,
state and local governments, and other municipal authorities.
During 2009, the Federal Reserve has been supporting the
liquidity of our debt as an active and significant purchaser of
our non-callable long-term debt in the secondary market.
Purchasers of our debt securities are also geographically
diversified, with a significant portion of our investors
historically located in the United States, Europe and Asia.
67
Debt
Funding Activity
Table 27 below summarizes our debt activity for the three and
six months ended June 30, 2009 and 2008.
Table
27: Debt Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Issued during the
period:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
388,028
|
|
|
$
|
404,431
|
|
|
$
|
689,848
|
|
|
$
|
840,884
|
|
Weighted average interest rate
|
|
|
0.37
|
%
|
|
|
2.07
|
%
|
|
|
0.33
|
%
|
|
|
2.50
|
%
|
Long-term:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
83,982
|
|
|
$
|
83,589
|
|
|
$
|
192,483
|
|
|
$
|
171,867
|
|
Weighted average interest rate
|
|
|
2.40
|
%
|
|
|
3.71
|
%
|
|
|
2.35
|
%
|
|
|
3.88
|
%
|
Total issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
472,010
|
|
|
$
|
488,020
|
|
|
$
|
882,331
|
|
|
$
|
1,012,751
|
|
Weighted average interest rate
|
|
|
0.72
|
%
|
|
|
2.35
|
%
|
|
|
0.76
|
%
|
|
|
2.73
|
%
|
Paid off during the
period:(1)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
403,310
|
|
|
$
|
380,417
|
|
|
$
|
762,200
|
|
|
$
|
836,047
|
|
Weighted average interest rate
|
|
|
0.47
|
%
|
|
|
2.58
|
%
|
|
|
0.71
|
%
|
|
|
3.07
|
%
|
Long-term:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
91,866
|
|
|
$
|
65,730
|
|
|
$
|
157,104
|
|
|
$
|
171,869
|
|
Weighted average interest rate
|
|
|
4.76
|
%
|
|
|
4.90
|
%
|
|
|
4.54
|
%
|
|
|
5.00
|
%
|
Total paid off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
495,176
|
|
|
$
|
446,147
|
|
|
$
|
919,304
|
|
|
$
|
1,007,916
|
|
Weighted average interest rate
|
|
|
1.26
|
%
|
|
|
2.92
|
%
|
|
|
1.37
|
%
|
|
|
3.40
|
%
|
|
|
|
(1) |
|
Excludes debt activity resulting
from consolidations and intraday loans.
|
|
(2) |
|
Short-term debt consists of
borrowings with an original contractual maturity of one year or
less. Includes Federal funds purchased and securities sold under
agreements to repurchase.
|
|
(3) |
|
Represents the face amount at
issuance or redemption.
|
|
(4) |
|
Long-term debt consists of
borrowings with an original contractual maturity of greater than
one year.
|
|
(5) |
|
Represents all payments on debt,
including regularly scheduled principal payments, payments at
maturity, payments as the result of a call and payments for any
other repurchases.
|
We experienced strong demand for our debt securities in the
first half of 2009. In order to meet our ongoing funding needs,
during the first half of 2009 we issued a variety of
non-callable and callable debt securities in a wide range of
maturities to achieve cost efficient funding and an appropriate
debt maturity profile. Due to the improved demand and attractive
pricing for our non-callable and callable long-term debt during
the first half of 2009, we issued $192.5 billion in
long-term debt during this period, which we then used to repay
maturing short-term debt and prepay more expensive long-term
debt. As a result, our outstanding short-term debt decreased as
a percentage of our total outstanding debt to 31% as of
June 30, 2009 from 38% as of December 31, 2008, and
the average interest rate on our long-term debt (excluding debt
from consolidations) decreased to 3.81% as of June 30, 2009
from 4.66% as of December 31, 2008.
Our issuances of debt securities in 2009 have seen favorable
demand from a broad and diverse group of domestic and
international investors. Demand was particularly strong from
U.S. institutional investors; however, the portion of our
debt securities placed with international investors continued to
remain lower in the first half of 2009 than it had been during
the past two years. We have experienced strong demand for our
callable long-term debt and medium-term notes during 2009. In
addition, we completed Benchmark Note
68
offerings in excess of $4 billion each, with terms ranging
from two to five years, in each month from January through May
of 2009. In June 2009, we elected not to issue any Benchmark
Notes due to our reduced need for debt funding and our ability
to issue medium-term notes at attractive prices.
Although our funding needs may vary from quarter to quarter
depending on market conditions, we currently expect our debt
funding needs will generally decline in future periods as we
reduce the size of our mortgage portfolio in compliance with the
requirement of the senior preferred stock purchase agreement
that we reduce our mortgage portfolio by 10% per year beginning
in 2010 until it reaches $250 billion.
Because we fund our business and operations primarily through
the issuance of debt, we are subject to
roll-over,
or refinancing, risk on our outstanding debt. Our roll-over risk
increases when our outstanding short-term debt increases as a
percentage of our total outstanding debt, as it did when we
experienced significant deterioration in our access to the
unsecured debt markets, particularly for our callable and
non-callable
long-term debt, from July through November 2008. Our access to
callable and non-callable long-term debt funding improved
significantly during the first half of 2009, however, due to a
variety of actions taken by the federal government to support us
and the financial markets. Due to the combination of our
improved access to long-term debt funding, improved market
conditions, the reduced proportion of our outstanding debt that
consists of short-term debt, and our expected reduced debt
funding needs in the future, our debt roll-over risk has
significantly declined since November 2008.
As noted above, we believe that the improvement in our access to
long-term debt funding since November 2008 stems from actions
taken by the federal government to support us and the financial
markets. Actions the government has taken to support us include:
|
|
|
|
|
Treasurys $200 billion funding commitment to us under
the senior preferred stock purchase agreement;
|
|
|
|
making the Treasury credit facility available to us;
|
|
|
|
the Federal Reserves active program to purchase up to
$200 billion in debt securities of Fannie Mae, Freddie Mac
and the Federal Home Loan Banks, as well as up to $1.25 trillion
in Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed
securities; and
|
|
|
|
Treasurys agency MBS purchase program.
|
In addition, the Federal Reserve and Treasury have implemented a
number of programs to support the liquidity of the financial
markets overall, including several asset purchase programs and
several asset financing programs. These programs have improved
overall financial market conditions, which has contributed to
the improvement in our access to debt funding.
Accordingly, we believe that our status as a GSE and continued
federal government support of our business and the financial
markets are essential to maintaining our access to debt funding,
and changes or perceived changes in the governments
support of us or the markets could lead to an increase in our
debt roll-over risk in future periods and have a material
adverse effect on our ability to fund our operations. The Obama
Administration has stated that recommendations on the future of
Fannie Mae, Freddie Mac and the Federal Home Loan Bank system
will be provided at the time of the Presidents 2011
budget, which is currently expected to be released in February
2010. These recommendations may have a material impact on our
ability to issue debt or refinance existing debt as it becomes
due.
Demand for our debt securities could decline if the government
does not extend or replace the Treasury credit facility and the
Federal Reserves agency debt and MBS purchase programs,
each of which expire on December 31, 2009. As of the date
of this filing, demand for our long-term debt securities
continues to be strong. In the first half of 2009, we issued
$192.5 billion in long-term debt securities with maturities
that extend beyond December 31, 2009. If demand for our
debt securities were to decline substantially from current
levels, it could increase our roll-over risk and materially
adversely affect our ability to refinance our debt as it becomes
due, which could have a material adverse impact on our
liquidity, financial condition and results of operations. In
addition, future changes or disruptions in the financial markets
could significantly change the amount, mix and cost of funds we
obtain, which also could increase our roll-over risk and have a
material adverse impact on our liquidity, financial condition
and results of operations. See Part II
69
Item 1ARisk Factors in this report and
Part IItem 1ARisk Factors of
our 2008
Form 10-K
for a discussion of the risks to our business related to our
ability to obtain funds for our operations through the issuance
of debt securities, the relative cost at which we are able to
obtain these funds and our liquidity contingency plans.
Outstanding
Debt
Table 28 provides information on our outstanding short-term and
long-term debt as of June 30, 2009 and December 31,
2008. Our total outstanding debt, which consists of federal
funds purchased and securities sold under agreements to
repurchase, short-term debt and long-term debt, decreased to
$833.1 billion as of June 30, 2009, from
$870.5 billion as of December 31, 2008. Short-term
debt represented 31% of our total outstanding debt as of
June 30, 2009, compared with 38% of our total outstanding
debt as of December 31, 2008, reflecting our improved
access to long-term debt funding during the first half of 2009.
Pursuant to the terms of the senior preferred stock purchase
agreement, we are prohibited from issuing debt in an amount
greater than 120% of the amount of mortgage assets we are
allowed to own. Through December 30, 2010, our debt cap
equals $1,080 billion. Beginning December 31, 2010,
and on December 31 of each year thereafter, our debt cap that
will apply through December 31 of the following year will equal
120% of the amount of mortgage assets we are allowed to own on
December 31 of the immediately preceding calendar year. As of
June 30, 2009, we estimate that our aggregate indebtedness
totaled $846.2 billion, which was approximately
$233.8 billion below our debt limit. Our calculation of our
indebtedness for purposes of complying with our debt cap, which
has not been confirmed by Treasury, reflects the unpaid
principal balance of our debt outstanding or, in the case of
long-term zero coupon bonds, the unpaid principal balance at
maturity. Our calculation excludes debt basis adjustments and
debt recorded from consolidations. Because of our debt limit, we
may be restricted in the amount of debt we issue to fund our
operations.
Table
28: Outstanding Short-Term Borrowings and Long-Term
Debt(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
$
|
77
|
|
|
|
0.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
|
|
|
|
$
|
256,266
|
|
|
|
0.74
|
%
|
|
|
|
|
|
$
|
322,932
|
|
|
|
1.75
|
%
|
Foreign exchange discount notes
|
|
|
|
|
|
|
189
|
|
|
|
1.18
|
|
|
|
|
|
|
|
141
|
|
|
|
2.50
|
|
Other short-term debt
|
|
|
|
|
|
|
224
|
|
|
|
1.35
|
|
|
|
|
|
|
|
333
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed rate short-term debt
|
|
|
|
|
|
|
256,679
|
|
|
|
0.74
|
|
|
|
|
|
|
|
323,406
|
|
|
|
1.75
|
|
Floating-rate short-term
debt(4)
|
|
|
|
|
|
|
3,102
|
|
|
|
1.17
|
|
|
|
|
|
|
|
7,585
|
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
|
|
|
$
|
259,781
|
|
|
|
0.74
|
%
|
|
|
|
|
|
$
|
330,991
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior fixed rate long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark notes and bonds
|
|
|
2009-2030
|
|
|
$
|
277,360
|
|
|
|
4.39
|
%
|
|
|
2009-2030
|
|
|
$
|
251,063
|
|
|
|
4.92
|
%
|
Medium-term notes
|
|
|
2009-2019
|
|
|
|
153,146
|
|
|
|
3.13
|
|
|
|
2009-2018
|
|
|
|
151,277
|
|
|
|
4.20
|
|
Foreign exchange notes and bonds
|
|
|
2010-2028
|
|
|
|
1,204
|
|
|
|
5.57
|
|
|
|
2009-2028
|
|
|
|
1,513
|
|
|
|
4.70
|
|
Other long-term
debt(4)
|
|
|
2009-2039
|
|
|
|
57,200
|
|
|
|
5.76
|
|
|
|
2009-2038
|
|
|
|
73,061
|
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior fixed rate debt
|
|
|
|
|
|
|
488,910
|
|
|
|
4.16
|
|
|
|
|
|
|
|
476,914
|
|
|
|
4.85
|
|
Senior floating rate long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2009-2013
|
|
|
|
67,556
|
|
|
|
0.83
|
|
|
|
2009-2017
|
|
|
|
45,737
|
|
|
|
2.21
|
|
Other long-term
debt(4)
|
|
|
2020-2037
|
|
|
|
1,210
|
|
|
|
6.38
|
|
|
|
2020-2037
|
|
|
|
874
|
|
|
|
7.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior floating rate debt
|
|
|
|
|
|
|
68,766
|
|
|
|
0.93
|
|
|
|
|
|
|
|
46,611
|
|
|
|
2.30
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Subordinated fixed rate long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2011-2011
|
|
|
|
2,500
|
|
|
|
6.29
|
|
|
|
2011-2011
|
|
|
|
2,500
|
|
|
|
6.24
|
|
Other subordinated debt
|
|
|
2012-2019
|
|
|
|
7,217
|
|
|
|
6.65
|
|
|
|
2012-2019
|
|
|
|
7,116
|
|
|
|
6.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subordinated fixed rate long-term debt
|
|
|
|
|
|
|
9,717
|
|
|
|
6.56
|
|
|
|
|
|
|
|
9,616
|
|
|
|
6.50
|
|
Debt from consolidations
|
|
|
2009-2039
|
|
|
|
5,936
|
|
|
|
5.76
|
|
|
|
2009-2039
|
|
|
|
6,261
|
|
|
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
$
|
573,329
|
|
|
|
3.83
|
%
|
|
|
|
|
|
$
|
539,402
|
|
|
|
4.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding callable
debt(5)
|
|
|
|
|
|
$
|
186,729
|
|
|
|
3.58
|
%
|
|
|
|
|
|
$
|
192,480
|
|
|
|
4.71
|
%
|
|
|
|
(1) |
|
Outstanding debt amounts and
weighted average interest rates reported in this table include
the effect of unamortized discounts, premiums and other cost
basis adjustments. Reported amounts as of June 30, 2009 and
December 31, 2008 include fair value gains and losses
associated with debt that we elected to carry at fair value.
|
|
(2) |
|
Short-term debt consists of
borrowings with an original contractual maturity of one year or
less and, therefore, does not include the current portion of
long-term debt. Includes unamortized discounts, premiums and
other cost basis adjustments of $476 million as of
June 30, 2009.
|
|
(3) |
|
Long-term debt consists of
borrowings with an original contractual maturity of greater than
one year. Included is the current portion of long-term debt that
is due within one year, which totaled $107.2 billion and
$86.5 billion as of June 30, 2009 and
December 31, 2008, respectively. Reported amounts include
net discount and other cost basis adjustments of
$16.8 billion and $15.5 billion as of June 30,
2009 and December 31, 2008, respectively. The unpaid
principal balance of long-term debt, which excludes unamortized
discounts, premiums and other cost basis adjustments and amounts
related to debt from consolidation, totaled $584.1 billion
and $548.6 billion as June 30, 2009 and
December 31, 2008, respectively.
|
|
(4) |
|
Includes a portion of structured
debt instruments that are reported at fair value.
|
|
(5) |
|
Consists of long-term callable debt
that can be paid off in whole or in part at our option at any
time on or after a specified date. Includes the unpaid principal
balance, and excludes unamortized discounts, premiums and other
cost basis adjustments.
|
Maturity
Profile of Outstanding Debt
Table 29 presents the maturity profile, on a monthly basis, of
our outstanding short-term debt as of June 30, 2009 based
on the contractual maturity dates of our short-term debt
securities. The current portion of our long-term debt (that is,
the total amount of our long-term debt that must be paid within
the next year) is not included in Table 29, but it is included
in Table 30. The weighted average maturity of our outstanding
short-term debt, based on the remaining contractual term, was
89 days as of June 30, 2009, compared with
102 days as of December 31, 2008.
Table
29: Maturity Profile of Outstanding Short-Term
Debt(1)
|
|
|
|
|
|
(1) Includes
unamortized discounts, premiums and other cost basis adjustments
of $476 million as of June 30, 2009.
|
|
71
Table 30 presents the maturity profile, on a quarterly basis for
two years and on an annual basis thereafter, of our long-term
debt as of June 30, 2009 based on the contractual maturity
dates of our long-term debt securities. The weighted average
maturity of our outstanding long-term debt, based on the
remaining contractual term, was approximately 60 months as
of June 30, 2009, compared with approximately
66 months as of December 31, 2008.
Table
30: Maturity Profile of Outstanding Long-Term
Debt(1)
|
|
|
|
|
|
(1) Includes
unamortized discounts, premiums and other cost basis adjustments
of $16.8 billion as of June 30, 2009. Excludes debt
from consolidations of $5.9 billion as of June 30,
2009.
|
|
We intend to repay our short-term and long-term debt obligations
as they become due primarily through proceeds from the issuance
of additional debt securities. We also intend to use funds we
receive from Treasury under the senior preferred stock purchase
agreement to repay our debt obligations and to pay dividends on
the senior preferred stock.
Equity
Funding
As a result of the covenants under the senior preferred stock
purchase agreement, which generally prohibit us from issuing
equity securities or paying dividends on our common or preferred
stock (other than the senior preferred stock) without
Treasurys consent, and Treasurys ownership of the
warrant to purchase, for a nominal price, shares of common stock
equal to 79.9% of the total number of shares of our common stock
outstanding on a fully diluted basis at the time the warrant is
exercised, we no longer have access to equity funding except
through draws under the senior preferred stock purchase
agreement. For a description of the covenants under the senior
preferred stock purchase agreement, see
Part IItem 2MD&AExecutive
SummaryAmendment to Senior Preferred Stock Purchase
Agreement in our First Quarter 2009
Form 10-Q
and
Part IItem 1BusinessConservatorship,
Treasury Agreements, Our Charter and Regulation of our
ActivitiesTreasury AgreementsCovenants Under
Treasury Agreements in our 2008
Form 10-K.
We have received a total of $34.2 billion from Treasury
pursuant to the senior preferred stock purchase agreement as of
June 30, 2009. These funds allowed us to eliminate our net
worth deficits as of March 31, 2009 and December 31,
2008. As a result of our $14.8 billion net loss for the
quarter ended June 30, 2009, we had a net worth deficit of
$10.6 billion as of that date. The Director of FHFA
submitted a request on August 6, 2009 for
$10.7 billion from Treasury under the senior preferred
stock purchase agreement to eliminate our net worth deficit as
of June 30, 2009 and avoid mandatory receivership, and
requested receipt of those funds on or prior to
September 30, 2009. Upon receipt of the requested funds,
the aggregate liquidation preference of the senior preferred
stock, including the initial aggregate liquidation preference of
$1.0 billion, will equal $45.9 billion. Due to current
trends in the housing and financial markets, we expect to have a
net worth deficit in future periods, and therefore will be
required to obtain additional equity funding from Treasury
pursuant to the senior preferred stock purchase agreement.
Unlike the Treasury credit facility, which we discuss below
under Liquidity Contingency PlanningTreasury Credit
Facility, the senior preferred stock purchase agreement
does not terminate as of a particular time; however, we may no
longer obtain new funds under the agreement once we have
received a total of $200 billion under the agreement.
72
Liquidity
Management Policies
Our liquidity position could be adversely affected by many
causes, both internal and external to our business, including:
actions taken by the conservator, the Federal Reserve, Treasury
or other government agencies; legislation relating to our
business; an unexpected systemic event leading to the withdrawal
of liquidity from the market; an extreme market-wide widening of
credit spreads; a downgrade of our credit ratings from the major
ratings organizations; a significant further decline in our net
worth; loss of demand for our debt, or certain types of our
debt, from a major group of investors; a significant credit
event involving one of our major institutional counterparties; a
sudden catastrophic operational failure in the financial sector
due to a terrorist attack or other event; or elimination of our
GSE status. See Part IIItem 1ARisk
Factors of this report and
Part IItem 1ARisk Factors of
our 2008
Form 10-K
for a description of factors that could adversely affect our
liquidity.
We conduct daily liquidity governance and monitoring activities
to achieve the goals of our liquidity risk policy, including:
|
|
|
|
|
daily monitoring and reporting of our liquidity position;
|
|
|
|
daily forecasting of our ability to meet our liquidity needs
over a
90-day
period without relying upon the issuance of long-term or
short-term unsecured debt securities;
|
|
|
|
daily forecasting and statistical analysis of our daily cash
needs over a 28-business-day period;
|
|
|
|
routine operational testing of our ability to rely upon
identified sources of liquidity, such as mortgage repurchase
agreements;
|
|
|
|
periodic reporting to management and the conservator regarding
our liquidity position; and
|
|
|
|
periodic review and testing of our liquidity management controls
by our Internal Audit department.
|
As noted above, we periodically conduct operational tests of our
ability to enter into mortgage repurchase arrangements with
counterparties. One method we use to conduct these tests
involves entering into a relatively small mortgage repurchase
agreement (approximately $100 million) with a counterparty
in order to confirm that we have the operational and systems
capability to enter into repurchase arrangements. In addition,
we have provided collateral in advance to a number of clearing
banks in the event we seek to enter into mortgage repurchase
arrangements in the future. We do not, however, have committed
repurchase arrangements with specific counterparties, as
historically we have not relied on this form of funding. As a
result, our use of such facilities and our ability to enter into
them in significant dollar amounts may be challenging in the
current market environment.
In addition, we run daily
90-day
liquidity simulations in which we consider all sources of cash
inflows (including debt sold but not settled, mortgage loan
principal and interest, MBS principal and interest, net
derivatives receipts, sale or maturity of assets, and repurchase
arrangements), and all sources of cash outflows (including
maturing debt, principal and interest due on debt, principal and
interest due on MBS, net derivative payments, dividends,
mortgage commitments, administrative costs and taxes) during the
following 90 days to determine whether there are sufficient
inflows to cover the outflows. FHFA regularly reviews our
monitoring and testing requirements under our liquidity policy.
Liquidity
Contingency Planning
We conduct liquidity contingency planning in the event our
access to the unsecured debt markets becomes limited. We plan
for alternative sources of liquidity that are designed to allow
us to meet our cash obligations for 90 days without relying
upon the issuance of unsecured debt. We believe that market
conditions over the last 12 to 18 months, however, have had
an adverse impact on our ability to effectively plan for a
liquidity crisis and we may be unable to find sufficient
alternative sources of liquidity for a
90-day
period, particularly after the expiration of the Treasury credit
facility on December 31, 2009. While our liquidity
contingency planning attempts to address current market
conditions, the conservatorship and Treasury arrangements, and
the more fundamental changes in the longer-term credit market
environment, we believe that effective liquidity
73
contingency plans may be difficult or impossible to execute
under current market conditions for a company of our size in our
circumstances. As a result, our liquidity contingency planning
will rely significantly on the Treasury credit facility for so
long as it is available.
In the event our access to the unsecured debt market becomes
impaired, we would seek to access one or more of the following
alternative sources of liquidity:
|
|
|
|
|
the Treasury credit facility;
|
|
|
|
our cash and other investments portfolio; and
|
|
|
|
our unencumbered mortgage portfolio.
|
Treasury
Credit Facility
The Treasury credit facility provides a significant source of
liquidity in the event we cannot adequately access the unsecured
debt markets; however, we may only request loans under this
facility through December 31, 2009. As of June 30,
2009, we had approximately $375.0 billion in unpaid
principal balance of agency mortgage-backed securities available
as collateral to secure loans under the Treasury credit
facility. Treasury has discretion to determine the securities
that constitute acceptable collateral. In addition, the Federal
Reserve Bank of New York, as collateral valuation agent for
Treasury, has discretion to value these securities as it
considers appropriate, and they could apply a
haircut reducing the value it assigns to these
securities from their unpaid principal balance. Accordingly, the
amount that we could borrow under the Treasury credit facility
using those securities as collateral could be less than their
unpaid principal balance. Further, unless amended or waived by
Treasury, the amount we may borrow under the Treasury credit
facility is subject to the restriction under the senior
preferred stock purchase agreement on incurring debt in excess
of 120% of the amount of mortgage assets we are allowed to own,
as described in
Part IItem 2MD&AExecutive
SummaryAmendment to Senior Preferred Stock Purchase
Agreement in our First Quarter 2009
Form 10-Q.
As noted above, as of June 30, 2009, we estimate that our
aggregate indebtedness was approximately $233.8 billion
below our debt limit. The terms of the Treasury credit facility
are described in our 2008
Form 10-K
in
Part IItem 1BusinessConservatorship,
Treasury Agreements, Our Charter and Regulation of Our
ActivitiesTreasury Agreements. As of August 6,
2009, we have not requested any loans or borrowed any amounts
under the Treasury credit facility and we have not conducted a
test draw from the facility.
It would require action from Congress to extend the term of this
credit facility beyond December 31, 2009, the date on which
Treasurys temporary authority to purchase our obligations
and other securities, granted by the Regulatory Reform Act,
expires. After December 31, 2009, Treasury may purchase up
to $2.25 billion of our obligations under its permanent
authority, as originally set forth in the Charter Act.
Cash
and Other Investments Portfolio
Another source of liquidity in the event our access to the
unsecured debt market is restricted is the sale or maturation of
assets in our cash and other investments portfolio. Table 31
below provides information on the composition of our cash and
other investments portfolio as of June 30, 2009 and
December 31, 2008.
74
Table
31: Cash and Other Investments Portfolio
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Cash and cash equivalents
|
|
$
|
28,234
|
|
|
$
|
17,933
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
25,810
|
|
|
|
57,418
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
9,808
|
|
|
|
10,598
|
|
Corporate debt securities
|
|
|
935
|
|
|
|
6,037
|
|
Other
|
|
|
5,003
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,790
|
|
|
$
|
92,991
|
|
|
|
|
|
|
|
|
|
|
We have maintained a significant amount of liquidity during the
first half of 2009, as required by FHFA. Our cash and other
investments portfolio decreased from December 31, 2008 due
to the reduction in our short-term debt balances, which reduced
the amount of cash we needed on hand as of June 30, 2009 to
repay maturing short-term debt. As described in Debt
Funding Activity, due to the improved demand and
attractive pricing for our non-callable and callable long-term
debt during the first half of 2009, we issued a significant
amount of long-term debt funding and reduced the proportion of
our short-term debt as a percentage of our total debt.
We no longer purchase longer-term corporate debt securities or
longer-term asset-backed securities for liquidity purposes, as
we determined that we could not rely on our ability to sell
these securities when we needed liquidity. We sell these
securities from time to time as market conditions permit or
allow them to mature, depending on which we believe will deliver
a better economic return. During the first six months of 2009,
the amount of these securities we held was reduced by
$5.9 billion due to the sale or maturity of the securities.
Approximately $10.7 billion of our cash and other
investments portfolio as of June 30, 2009 consisted of
these securities. There can be no assurance that we could
liquidate these assets if and when we need access to liquidity.
The remaining $59.1 billion of our cash and other
investments portfolio as of June 30, 2009 consisted of cash
and cash equivalents and short-term, liquid investments such as
federal funds, repurchase agreements, short-term bank deposits
and bank certificates of deposit.
See Risk ManagementCredit Risk
ManagementInstitutional Counterparty Credit Risk
ManagementIssuers of Securities Held in our Cash and Other
Investments Portfolio for additional information on the
risks associated with the assets in our cash and other
investments portfolio.
Unencumbered
Mortgage Portfolio
Another source of liquidity in the event our access to the
unsecured debt market becomes impaired is the unencumbered
mortgage assets in our mortgage portfolio, which could be used
as collateral for secured borrowing.
During the second quarter of 2009, we implemented enhancements
to our systems that have enabled us to securitize a significant
portion of the single-family whole loans in our mortgage
portfolio. As a result, in the second quarter we securitized
approximately $94.6 billion of whole loans held for
investment in our mortgage portfolio into Fannie Mae MBS, which
are typically more liquid than whole loans. These
mortgage-related securities could be used as collateral in
repurchase or other lending arrangements or as collateral for
loans under our Treasury credit facility. Despite these
enhancements to our systems, we do not have the capability to
securitize all of the single-family whole loans in our
unencumbered mortgage portfolio. See Risk
ManagementOperational Risk Management for a
description of the limitations of, and risks associated with,
our systems. Moreover, other mortgage investments we hold, such
as multifamily whole loans and reverse mortgage loans, are
generally illiquid and therefore currently cannot be relied upon
to use as collateral for lending arrangements.
We believe that the amount of mortgage-related securities that
we could successfully borrow against in the event of a liquidity
crisis or significant market disruption is substantially lower
than the amount of mortgage-
75
related securities we hold. Due to the large size of our
portfolio of mortgage-related securities and current market
conditions, it is unlikely that there would be sufficient market
demand for large amounts of these securities over a prolonged
period of time, particularly during a liquidity crisis, which
could limit our ability to borrow against these securities. To
the extent that we would be able to obtain funding by pledging
mortgage-related securities as collateral, we anticipate that a
haircut would be applied that would reduce the value
assigned to those securities. Depending on market conditions at
the time, this haircut would result in proceeds
significantly lower than the current market value of these
assets and would thereby reduce the amount of financing we can
obtain. In addition, our primary source of collateral is Fannie
Mae MBS that we have issued. In the event of a liquidity crisis
in which the future of our company is uncertain, counterparties
may be unwilling to accept Fannie Mae MBS as collateral and
therefore we may not be able to borrow against these securities
in sufficient amounts to meet our liquidity needs.
Credit
Ratings
Our ability to access the capital markets and other sources of
funding, as well as our cost of funds, is highly dependent on
our credit ratings from the major ratings organizations. In
addition, our credit ratings are important when we seek to
engage in certain long-term transactions, such as derivative
transactions. Factors that influence our credit ratings include
our status as a GSE, Treasurys funding commitment under
the senior preferred stock purchase agreement, the rating
agencies assessment of the general operating and
regulatory environment, our relative position in the market, our
financial condition, our reputation, our liquidity position, the
level and volatility of our earnings, and our corporate
governance and risk management policies. Management maintains an
active dialogue with the major ratings organizations.
Our senior unsecured debt (both long-term and short-term),
benchmark subordinated debt and preferred stock are rated and
continuously monitored by Standard & Poors,
Moodys and Fitch. During 2008, the rating of our senior
unsecured debt remained constant, but the ratings of our
subordinated debt and preferred stock, as well as our bank
financial strength rating, deteriorated significantly. There
have been no changes in our credit ratings from
December 31, 2008 to August 1, 2009. Table 32 below
presents the credit ratings issued by each of these rating
agencies as of August 1, 2009.
Table
32: Fannie Mae Credit Ratings
|
|
|
|
|
|
|
|
|
As of August 1, 2009
|
|
|
Standard &
|
|
|
|
|
|
|
Poors
|
|
Moodys
|
|
Fitch
|
|
Long-term senior debt
|
|
AAA
|
|
Aaa
|
|
AAA
|
Short-term senior debt
|
|
A-1+
|
|
P-1
|
|
F1+
|
Subordinated debt
|
|
A
|
|
Aa2
|
|
AA-
|
Preferred stock
|
|
C
|
|
Ca
|
|
C/RR6
|
Bank financial strength rating
|
|
|
|
E+
|
|
|
Outlook
|
|
Stable (for Long Term Senior Debt and Subordinated Debt)
|
|
Stable (for all ratings)
|
|
Stable (for AAA rated Long Term Issue Default Rating)
|
We have no covenants in our existing debt agreements that would
be violated by a downgrade in our credit ratings. However, in
connection with certain derivatives counterparties, we could be
required to provide additional collateral to or terminate
transactions with certain counterparties in the event that our
senior unsecured debt ratings are downgraded. The amount of
additional collateral required depends on the contract and is
usually a fixed incremental amount, the market value of the
exposure, or both. See Notes to Condensed Consolidated
Financial StatementsNote 11, Derivative Instruments
and Hedging Activities for additional information on
collateral we are required to provide to our derivatives
counterparties in the event of downgrades in our credit ratings.
76
Cash
Flows
Six Months Ended June 30, 2009. Cash and
cash equivalents of $28.2 billion as of June 30, 2009
increased by $10.3 billion from December 31, 2008. Net
cash generated from investing activities totaled
$84.0 billion, resulting primarily from proceeds received
from the sale of
available-for-sale
securities. These net cash inflows were partially offset by net
cash outflows used in operating activities of
$67.5 billion, largely attributable to our purchases of
loans held for sale due to a significant increase in whole loan
conduit activity, and net cash outflows used in financing
activities of $6.2 billion. The net cash used in financing
activities was attributable to the redemption of a significant
amount of short-term debt, which was partially offset by the
issuance of long-term debt in excess of amounts redeemed and the
funds received from Treasury under the senior preferred stock
purchase agreement.
Six Months Ended June 30, 2008. Cash and
cash equivalents of $13.5 billion as of June 30, 2008
increased by $9.6 billion from December 31, 2007. Net
cash generated from operating activities totaled
$29.9 billion, resulting primarily from the proceeds from
maturities or sales of our short-term investments, which are
classified as trading securities. We also generated net cash
from financing activities of $3.7 billion, reflecting the
proceeds from the issuance of common and preferred stock, which
was partially offset by the redemption of a significant amount
of long-term debt as interest rates fell during the period. Net
cash used in investing activities was $24.1 billion,
attributable to our purchases of
available-for-sale
securities and loans held for investment.
Capital
Management
Regulatory
Capital
On October 9, 2008, FHFA announced that our existing
statutory and FHFA-directed regulatory capital requirements will
not be binding during the conservatorship, and that FHFA will
not issue quarterly capital classifications during the
conservatorship. We continue to submit capital reports to FHFA
during the conservatorship and FHFA continues to closely monitor
our capital levels. We report our minimum capital requirement,
core capital and GAAP net worth in our periodic reports on
Form 10-Q
and
Form 10-K,
and FHFA has indicated it will report them on its website. FHFA
has stated that it does not intend to report our critical
capital, risk-based capital or subordinated debt levels during
the conservatorship.
Pursuant to its authority under the Regulatory Reform Act, FHFA
has announced that it will be revising our minimum capital and
risk-based capital requirements.
Table 33 displays our core capital and our statutory minimum
capital requirement as of June 30, 2009 and
December 31, 2008. The amounts for June 30, 2009 are
our estimates as submitted to FHFA.
Table
33: Regulatory Capital Measures
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
|
(Dollars in millions)
|
|
|
Core
capital(2)
|
|
$
|
(38,480
|
)
|
|
$
|
(8,641
|
)
|
Statutory minimum capital
requirement(3)
|
|
|
33,878
|
|
|
|
33,552
|
|
|
|
|
|
|
|
|
|
|
Deficit of core capital over statutory minimum capital
requirement
|
|
$
|
(72,358
|
)
|
|
$
|
(42,193
|
)
|
|
|
|
|
|
|
|
|
|
Deficit of core capital percentage over statutory minimum
capital requirement
|
|
|
(213.6
|
)%
|
|
|
(125.8
|
)%
|
|
|
|
(1) |
|
Amounts as of June 30, 2009
represent estimates that have been submitted to FHFA. Amounts as
of December 31, 2008 are as published by FHFA on its
website. As noted above, FHFA is not issuing capital
classifications during conservatorship.
|
|
(2) |
|
The sum of (a) the stated
value of our outstanding common stock (common stock less
treasury stock); (b) the stated value of our outstanding
non-cumulative perpetual preferred stock; (c) our paid-in
capital; and (d) our retained earnings (accumulated
deficit). Core capital does not include: (a) accumulated
other comprehensive income (loss) or (b) senior preferred
stock.
|
77
|
|
|
(3) |
|
Generally, the sum of
(a) 2.50% of on-balance sheet assets; (b) 0.45% of the
unpaid principal balance of outstanding Fannie Mae MBS held by
third parties; and (c) up to 0.45% of other off-balance
sheet obligations, which may be adjusted by the Director of FHFA
under certain circumstances (See 12 CFR 1750.4 for existing
adjustments made by the Director).
|
The reduction in our core capital during the first half of 2009
was attributable to the net loss we incurred during the period.
See Consolidated Results of Operations for factors
that affected our results of operations for the six months ended
June 30, 2009. The senior preferred stock is not included
in core capital due to its cumulative dividend provision.
Capital
Activity
Following our entry into conservatorship, FHFA advised us to
focus our capital management efforts on managing to a positive
net worth, which is represented as the total deficit
line item on our consolidated balance sheet. See Executive
SummaryOur Business Objectives and Strategy for a
discussion of other objectives that may conflict with this goal
of managing to a positive net worth. Our total deficit decreased
by $4.6 billion during the six months ended June 30,
2009, to a total deficit of $10.6 billion as of
June 30, 2009. The decrease in our total deficit was
primarily attributable to the receipt of funds from Treasury
under the senior preferred stock purchase agreement as described
in Equity Funding above, unrealized gains on
available-for-sale
securities and a reduction in our accumulated deficit to reverse
a portion of our deferred tax asset valuation allowance in
conjunction with our April 1, 2009 adoption of the new
accounting guidance for assessing
other-than-temporary
impairment, partially offset by the net loss we incurred during
the period. See Consolidated Results of Operations
for a discussion of the factors that affected our results of
operations for the six months ended June 30, 2009.
Our ability to manage our net worth continues to be very
limited. We are effectively unable to raise equity capital from
private sources at this time and, therefore, are reliant on the
senior preferred stock purchase agreement to address any net
worth deficit.
Senior
Preferred Stock and Common Stock Warrant
On September 7, 2008, we, through FHFA, in its capacity as
conservator, and Treasury entered into the senior preferred
stock purchase agreement. Pursuant to the agreement, we issued
to Treasury: (1) on September 8, 2008, one million
shares of senior preferred stock with an initial liquidation
preference equal to $1,000 per share (for an initial aggregate
liquidation preference of $1 billion); and (2) on
September 7, 2008, a warrant for the purchase of up to
79.9% of the total number of shares of our common stock
outstanding on a fully diluted basis on the date of exercise,
which is exercisable until September 7, 2028. We did not
receive any cash proceeds when we issued the senior preferred
stock or the warrant but have subsequently received funds as
described above in Equity Funding. Drawing on
Treasurys funding commitment under the senior preferred
stock purchase agreement allows us to eliminate our net worth
deficit and thereby avoid triggering mandatory receivership
under the Regulatory Reform Act.
The senior preferred stock purchase agreement contains covenants
that significantly restrict our business activities. These
covenants include prohibitions on the following activities
unless we have prior written consent from Treasury: the issuance
of additional equity securities (except in limited instances);
the payment of dividends or other distributions on our equity
securities (other than the senior preferred stock or the
warrant); the issuance of subordinated debt; and the issuance of
debt securities in excess of a specified limit. As a result,
unless we obtain Treasurys approval, we can no longer
obtain additional equity financing (other than pursuant to the
senior preferred stock purchase agreement) and we are limited in
the amount and type of debt financing we may obtain. For a more
detailed description of these covenants, please see
Part IItem 2MD&AExecutive
SummaryAmendment to Senior Preferred Stock Purchase
Agreement in our First Quarter 2009
Form 10-Q
and
Part IItem 1BusinessConservatorship,
Treasury Agreements, Our Charter and Regulation of Our
ActivitiesTreasury AgreementsCovenants Under
Treasury Agreements in our 2008
Form 10-K.
See Equity Funding above for a discussion of the
amounts requested and received under the senior preferred stock
purchase agreement.
78
Dividends
The conservator announced on September 7, 2008 that we
would not pay any dividends on the common stock or on any series
of outstanding preferred stock. In addition, the senior
preferred stock purchase agreement prohibits us from declaring
or paying any dividends on Fannie Mae equity securities (other
than the senior preferred stock) without the prior written
consent of Treasury. Dividends on our outstanding preferred
stock (other than the senior preferred stock) are
non-cumulative; therefore, holders of this preferred stock are
not entitled to receive any forgone dividends in the future.
Holders of the senior preferred stock are entitled to receive,
when, as and if declared by our Board of Directors, out of
legally available funds, cumulative quarterly cash dividends at
the annual rate of 10% per year on the then-current liquidation
preference of the senior preferred stock. As conservator and
under our charter, FHFA also has authority to declare and
approve dividends on the senior preferred stock. If at any time
we fail to pay cash dividends in a timely manner, then
immediately following such failure and for all dividend periods
thereafter until the dividend period following the date on which
we have paid in cash full cumulative dividends (including any
unpaid dividends added to the liquidation preference), the
dividend rate will be 12% per year. Dividends on the senior
preferred stock that are not paid in cash for any dividend
period will accrue and be added to the liquidation preference of
the senior preferred stock. A dividend of $409 million was
declared by the conservator and paid by us on June 30,
2009, for the period from but not including April 1, 2009
through and including June 30, 2009.
When Treasury provides the additional funds that FHFA requested
on our behalf, the aggregate liquidation preference of our
senior preferred stock will total $45.9 billion and the
annualized dividend on the senior preferred stock will be
$4.6 billion based on the 10% dividend rate. The level of
dividends on the senior preferred stock will increase in future
periods if, as we expect, we request additional funds from
Treasury under the senior preferred stock purchase agreement.
Subordinated
Debt
We had $7.4 billion in outstanding qualifying subordinated
debt as of June 30, 2009. As of June 30, 2009, our
core capital was below 125% of our critical capital requirement.
The terms of these securities state that, under these
circumstances, we will defer interest payments on these
securities. FHFA has directed us, however, to continue paying
principal and interest on our outstanding subordinated debt
during the conservatorship and thereafter until directed
otherwise, regardless of our existing capital levels.
We entered into an agreement with OFHEO in September 2005, under
which we agreed to issue and maintain qualifying subordinated
debt in a quantity such that the sum of our total capital plus
the outstanding balance of our qualifying subordinated debt
equals or exceeds the sum of (1) outstanding Fannie Mae MBS
held by third parties times 0.45% and (2) total on-balance
sheet assets times 4%, which we refer to as our
subordinated debt requirement. We also agreed to
certain maintenance, reporting and disclosure requirements
relating to our qualifying subordinated debt. On October 9,
2008, FHFA announced that it will no longer report on our
subordinated debt levels. On November 8, 2008, FHFA advised
us that, during the conservatorship and thereafter until we are
directed otherwise, it was suspending the requirements of the
September 2005 agreement with respect to the issuance,
maintenance, and reporting and disclosure of our qualifying
subordinated debt. FHFA further advised us that, during
conservatorship, we must continue to submit to FHFA quarterly
calculations of our subordinated debt and total capital.
Under the senior preferred stock purchase agreement, we are
prohibited from issuing additional subordinated debt without the
written consent of Treasury.
We enter into certain business arrangements to facilitate our
statutory purpose of providing liquidity to the secondary
mortgage market and to reduce our exposure to interest rate
fluctuations. Some of these arrangements are not recorded in the
consolidated balance sheets or may be recorded in amounts
different from the full contract or notional amount of the
transaction, depending on the nature or structure of, and
79
accounting required to be applied to, the arrangement. These
arrangements are commonly referred to as off-balance sheet
arrangements and expose us to potential losses in excess
of the amounts recorded in the consolidated balance sheets.
Our most significant off-balance sheet arrangements result from
the mortgage loan securitization and resecuritization
transactions that we routinely enter into as part of the normal
course of our guaranty business operations. We also enter into
other guaranty transactions, liquidity support transactions and
hold LIHTC and other partnership interests that may involve
off-balance sheet arrangements. Currently, most trusts created
as part of our guaranteed securitizations are not consolidated
by the company for financial reporting purposes because the
trusts are considered qualified special purpose entities
(QSPEs) under SFAS No. 140, Accounting
for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement
No. 125) (SFAS 140).
Fannie
Mae MBS Transactions and Other Financial Guarantees
Although we hold some Fannie Mae MBS in our mortgage portfolio,
most outstanding Fannie Mae MBS are held by third parties and
therefore not reflected in our consolidated balance sheets.
Table 34 summarizes the amounts of both our on- and off-balance
sheet Fannie Mae MBS and other guaranty obligations as of
June 30, 2009 and December 31, 2008.
Table
34: On- and Off-Balance Sheet MBS and Other Guaranty
Arrangements
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae MBS and other guarantees
outstanding(1)
|
|
$
|
2,627,382
|
|
|
$
|
2,546,217
|
|
Less: Fannie Mae MBS held in
portfolio(2)
|
|
|
(234,632
|
)
|
|
|
(228,949
|
)
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS held by third parties and other guarantees
|
|
$
|
2,392,750
|
|
|
$
|
2,317,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $26.1 billion and
$27.8 billion in unpaid principal balance of other
guarantees as of June 30, 2009 and December 31, 2008,
respectively. Excludes $151.5 billion and
$65.3 billion in unpaid principal balance of consolidated
Fannie Mae MBS as of June 30, 2009 and December 31,
2008, respectively.
|
|
(2) |
|
Amounts represent unpaid principal
balance and are recorded in Investments in
Securities in the condensed consolidated balance sheets.
|
Our maximum potential exposure to credit losses relating to our
outstanding and unconsolidated Fannie Mae MBS held by third
parties and our other financial guarantees is significantly
higher than the carrying amount of the guaranty obligations and
reserve for guaranty losses that are reflected in the
consolidated balance sheets. In the case of outstanding and
unconsolidated Fannie Mae MBS held by third parties, our maximum
potential exposure arising from these guarantees is primarily
represented by the unpaid principal balance of the mortgage
loans underlying these Fannie Mae MBS, which totaled $2.4
trillion and $2.3 trillion as of June 30, 2009 and
December 31, 2008, respectively. In the case of the other
financial guarantees that we provide, our maximum potential
exposure arising from these guarantees is primarily represented
by the unpaid principal balance of the underlying bonds and
loans, which totaled $26.1 billion and $27.8 billion
as of June 30, 2009 and December 31, 2008,
respectively.
For additional information on our securitization transactions,
see Notes to Condensed Consolidated Financial
StatementsNote 3, Consolidations, Notes
to Condensed Consolidated Financial StatementsNote 7,
Portfolio Securitizations and Notes to Condensed
Consolidated Financial StatementsNote 8, Financial
Guarantees and Master Servicing. For information on the
mortgage loans underlying both our on- and off-balance sheet
Fannie Mae MBS, as well as whole mortgage loans that we own, see
Risk ManagementCredit Risk ManagementMortgage
Credit Risk Management.
80
Partnership
Investment Interests
The carrying value of our partnership investments, which
primarily include investments in LIHTC investments as well as
investments in other affordable rental and for-sale housing
partnerships, totaled $8.3 billion as of June 30,
2009, compared with $9.3 billion as of December 31,
2008. For additional information regarding our holdings in
off-balance sheet limited partnerships, see Notes to
Condensed Consolidated Financial StatementsNote 3,
Consolidations.
Elimination
of QSPEs and Changes in the FIN 46R Consolidation
Model
On June 12, 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets, an amendment of
FASB Statement No. 140 (SFAS 166) and
SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167). These two new
accounting statements eliminate the concept of QSPEs and amend
the accounting for transfers of financial assets and the
consolidation guidance related to variable interest entities
(VIEs). As a result, the consolidation exemption for
QSPEs under FIN 46R has been removed and all former QSPEs
must be evaluated for consolidation in accordance with the
provisions of SFAS 167. SFAS 167 amends the method of
analyzing which party to a VIE should consolidate the VIE.
Calendar year-end companies must adopt the statements as of
January 1, 2010. Accordingly, we intend to adopt these new
accounting statements effective January 1, 2010.
The adoption of this new accounting guidance will have a major
impact on our consolidated financial statements. Because the
concept of a QSPE is eliminated, our existing QSPEs will be
subject to the new consolidation guidance. We currently expect
to consolidate the substantial majority of our existing MBS
trusts and record the underlying loans in these trusts as assets
on our balance sheet. The outstanding unpaid principal balance
of our MBS trusts was approximately $2.8 trillion as of
June 30, 2009. The consolidation of these MBS trusts onto
our balance sheet will significantly increase the amount of
total assets of $911 billion and total liabilities of
$922 billion recorded in our condensed consolidated balance
sheet as of June 30, 2009. In addition, consolidation of
these MBS trusts will have a material impact on our statements
of operations and cash flows, including a significant increase
in our interest income, interest expense and cash flows from
investing and financing activities.
We continue to evaluate the impact of the adoption of this new
accounting guidance, including the impact on our net worth and
capital. We also are in the process of making major operational
and system changes to implement these new standards by the
effective date. We provide more detailed information on the
impact of these new standards on our accounting and financial
statements in Notes to Condensed Consolidated
StatementsNote 2, Summary of Significant Accounting
Policies. See Risk ManagementOperational Risk
Management for additional information on the system
changes we are making to implement these new accounting
standards and the operational risks associated with these
changes. Also refer to
Part IIItem 1ARisk Factors.
Our businesses expose us to the following four major categories
of risks: credit risk, market risk, operational risk and
liquidity risk. Effective management of risks is an integral
part of our business and critical to our safety and soundness.
Our risk governance framework is intended to provide the basis
for the principles that govern our risk management activities.
Our Enterprise Risk Management organization, previously referred
to as our Enterprise Risk Office, is responsible for
establishing our overall risk governance structure and providing
independent evaluation and oversight of our risk management
activities. Our risk management activities encompass policies
and control processes that serve four primary objectives: risk
identification, risk assessment, risk mitigation and control,
and reporting and monitoring.
During the second quarter of 2009, we appointed a new Chief Risk
Officer and made some organizational changes to our risk
governance structure to better align the risk oversight function
to risk within each of our business units. These changes include
integration of the market risk and market risk oversight
functions within the Enterprise Risk Management organization,
which is intended to eliminate redundancy in functional
81
responsibilities. In addition, our Enterprise Risk Management
organization has designated divisional chief risk officers for
each business unit. These divisional chief risk officers are
responsible for oversight and approvals of all risks within
their respective business unit, including credit risk, market
risk, operational risk and risk policy and reporting.
Credit
Risk Management
We are generally subject to two types of credit risk: mortgage
credit risk and institutional counterparty credit risk. The
deterioration in the mortgage and credit markets and severe
economic downturn have resulted in a significant increase in our
exposure to mortgage and institutional counterparty credit risk.
Mortgage
Credit Risk Management
Mortgage credit risk is the risk that a borrower will fail to
make required mortgage payments. We are exposed to credit risk
on our mortgage credit book of business because we either hold
the mortgage assets or have issued a guaranty in connection with
the creation of Fannie Mae MBS backed by mortgage assets. Our
strategy in managing mortgage credit risk consists of four
primary components: (1) acquisition policy and standards,
including the use of credit enhancements; (2) portfolio
diversification and monitoring; (3) management of problem
loans and foreclosure prevention; and (4) REO loss
management. These strategies, which we discuss in detail in our
2008
Form 10-K
in
Part IIItem 7MD&A Risk
ManagementCredit Risk ManagementMortgage Credit Risk
Management, may increase our expenses and may not be
effective in reducing our credit-related expenses or credit
losses. We provide information on our credit-related expenses
and credit losses in Consolidated Results of
OperationsCredit-Related Expenses.
In evaluating our mortgage credit risk, we closely monitor
changes in housing and economic conditions and the impact of
those changes on the credit risk profile of our mortgage credit
book of business. The credit risk profile of our mortgage credit
book of business is influenced by, among other things, the
credit profile of the borrower, features of the loan and the
loan product type, the type of property securing the loan and
the housing market and general economy. We focus our efforts
more aggressively on loans that we believe pose a higher risk of
default, such as loans with high
mark-to-market
LTV ratios, loans to borrowers with lower FICO credit scores and
certain higher risk loan product categories, including Alt-A and
subprime loans.
Recent
Developments
We regularly review and provide updates to our underwriting and
eligibility guidelines based on our assessment of default risk
due to changes in market conditions. During the second quarter
of 2009, we made a number of policy changes, particularly with
regard to the verification and documentation of borrower and
property information. These policy changes are intended to
reduce the potential for mortgage fraud and promote the
borrowers ability to sustain long-term homeownership. In
addition, as part of our ongoing efforts to improve the credit
quality of loans that we acquire and to capture additional
mortgage-related data required by FHFA, we announced that,
effective March 1, 2010, we will require submission of
electronic appraisal reports.
As part of our public mission, we have been implementing several
recently announced strategies that are intended to help in the
housing recovery. These strategies involve efforts to promote
liquidity and housing affordability, to expand our foreclosure
prevention efforts and to set market standards. In March 2009,
we announced our participation in the Obama
Administrations Making Home Affordable Program with the
launching of two new programsHome Affordable Refinance and
Home Affordable Modification. These programs are designed to
expand the eligibility criteria to allow more borrowers to
refinance or modify their mortgage to a more affordable monthly
payment or a more stable product. Our loan servicers have been
directed to delay foreclosure sales from occurring on our loans
until they verify that the borrower is ineligible for a Home
Affordable Modification and other foreclosure prevention
alternatives have been exhausted. During the second quarter of
2009, we announced several updates to these programs that
clarify the eligibility criteria and provide more detailed
information to assist lenders in executing these programs and
ensure that the programs reach as many eligible borrowers as
possible. We also have broadened the eligibility criteria under
82
the Home Affordable Refinance Program from a maximum allowable
LTV ratio of 105% to a maximum of 125%; placed a 2% cap on the
cumulative loan level price adjustments and adverse market
delivery charge we apply as part of our pricing structure for
Refi Plus initiatives; and eased the restrictions on the type of
credit enhancement our existing loans are subject to in order to
allow more of these loans to qualify for refinancing.
Mortgage
Credit Book of Business
Table 35 displays the composition of our entire mortgage credit
book of business as of June 30, 2009 and December 31,
2008. Our single-family mortgage credit book of business
accounted for approximately 93% of our entire mortgage credit
book of business as of both June 30, 2009 and
December 31, 2008.
Table
35: Composition of Mortgage Credit Book of
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Single-Family(1)
|
|
|
Multifamily(2)
|
|
|
Total
|
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(6)
|
|
$
|
254,743
|
|
|
$
|
51,173
|
|
|
$
|
120,150
|
|
|
$
|
644
|
|
|
$
|
374,893
|
|
|
$
|
51,817
|
|
Fannie Mae
MBS(7)
|
|
|
232,325
|
|
|
|
1,905
|
|
|
|
387
|
|
|
|
15
|
|
|
|
232,712
|
|
|
|
1,920
|
|
Agency mortgage-related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities(7)(8)
|
|
|
39,061
|
|
|
|
1,438
|
|
|
|
|
|
|
|
21
|
|
|
|
39,061
|
|
|
|
1,459
|
|
Mortgage revenue
bonds(7)
|
|
|
2,879
|
|
|
|
2,316
|
|
|
|
7,800
|
|
|
|
2,024
|
|
|
|
10,679
|
|
|
|
4,340
|
|
Other mortgage-related
securities(7)(9)
|
|
|
51,708
|
|
|
|
1,875
|
|
|
|
25,769
|
|
|
|
23
|
|
|
|
77,477
|
|
|
|
1,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
580,716
|
|
|
|
58,707
|
|
|
|
154,106
|
|
|
|
2,727
|
|
|
|
734,822
|
|
|
|
61,434
|
|
Fannie Mae MBS held by third
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
parties(10)
|
|
|
2,313,101
|
|
|
|
12,383
|
|
|
|
40,443
|
|
|
|
706
|
|
|
|
2,353,544
|
|
|
|
13,089
|
|
Other credit
guarantees(11)
|
|
|
8,853
|
|
|
|
|
|
|
|
17,236
|
|
|
|
28
|
|
|
|
26,089
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage credit book of business
|
|
$
|
2,902,670
|
|
|
$
|
71,090
|
|
|
$
|
211,785
|
|
|
$
|
3,461
|
|
|
$
|
3,114,455
|
|
|
$
|
74,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty book of business
|
|
$
|
2,809,022
|
|
|
$
|
65,461
|
|
|
$
|
178,216
|
|
|
$
|
1,393
|
|
|
$
|
2,987,238
|
|
|
$
|
66,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Single-Family(1)
|
|
|
Multifamily(2)
|
|
|
Total
|
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
Conventional(3)
|
|
|
Government(4)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(6)
|
|
$
|
268,253
|
|
|
$
|
43,799
|
|
|
$
|
116,742
|
|
|
$
|
699
|
|
|
$
|
384,995
|
|
|
$
|
44,498
|
|
Fannie Mae
MBS(7)
|
|
|
226,654
|
|
|
|
1,850
|
|
|
|
376
|
|
|
|
69
|
|
|
|
227,030
|
|
|
|
1,919
|
|
Agency mortgage-related
securities(7)(8)
|
|
|
33,320
|
|
|
|
1,559
|
|
|
|
|
|
|
|
22
|
|
|
|
33,320
|
|
|
|
1,581
|
|
Mortgage revenue
bonds(7)
|
|
|
2,951
|
|
|
|
2,480
|
|
|
|
7,938
|
|
|
|
2,078
|
|
|
|
10,889
|
|
|
|
4,558
|
|
Other mortgage-related
securities(7)(9)
|
|
|
55,597
|
|
|
|
1,960
|
|
|
|
25,825
|
|
|
|
24
|
|
|
|
81,422
|
|
|
|
1,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
586,775
|
|
|
|
51,648
|
|
|
|
150,881
|
|
|
|
2,892
|
|
|
|
737,656
|
|
|
|
54,540
|
|
Fannie Mae MBS held by third
parties(10)
|
|
|
2,238,257
|
|
|
|
13,117
|
|
|
|
37,298
|
|
|
|
787
|
|
|
|
2,275,555
|
|
|
|
13,904
|
|
Other credit
guarantees(11)
|
|
|
10,464
|
|
|
|
|
|
|
|
17,311
|
|
|
|
34
|
|
|
|
27,775
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage credit book of business
|
|
$
|
2,835,496
|
|
|
$
|
64,765
|
|
|
$
|
205,490
|
|
|
$
|
3,713
|
|
|
$
|
3,040,986
|
|
|
$
|
68,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty book of business
|
|
$
|
2,743,628
|
|
|
$
|
58,766
|
|
|
$
|
171,727
|
|
|
$
|
1,589
|
|
|
$
|
2,915,355
|
|
|
$
|
60,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts reported above reflect
our total single-family mortgage credit book of business. Of
these amounts, the portion of our single-family mortgage credit
book of business for which we have access to detailed loan-level
information represented approximately 95% and 96% of our total
conventional single-family mortgage credit book of business as
of June 30, 2009 and December 31, 2008, respectively.
Unless otherwise noted, the credit statistics we provide in the
discussion that follows relate only to this specific portion of
our conventional single-family mortgage credit book of business.
The remaining portion of our conventional single-family mortgage
credit book of business consists of Freddie Mac securities,
Ginnie Mae securities, private-label mortgage-related
securities, Fannie Mae MBS backed by private-label
mortgage-related securities, housing-related municipal revenue
bonds, other single-family government related loans and
securities, and credit enhancements that we provide on
single-family mortgage assets.
|
83
|
|
|
|
|
See Consolidated Balance
Sheet AnalysisTrading and
Available-For-Sale
Investment SecuritiesInvestments in Private-Label
Mortgage-Related Securities for additional information on
our private-label mortgage securities.
|
|
(2) |
|
The amounts reported above reflect
our total multifamily mortgage credit book of business. Of these
amounts, the portion of our multifamily mortgage credit book of
business for which we have access to detailed loan-level
information represented approximately 83% and 82% of our total
multifamily mortgage credit book of business as of June 30,
2009 and December 31, 2008, respectively. Unless otherwise
noted, the credit statistics we provide in the discussion that
follows relate only to this specific portion of our multifamily
mortgage credit book of business.
|
|
(3) |
|
Refers to mortgage loans and
mortgage-related securities that are not guaranteed or insured
by the U.S. government or any of its agencies.
|
|
(4) |
|
Refers to mortgage loans and
mortgage-related securities guaranteed or insured by the U.S.
government or one of its agencies.
|
|
(5) |
|
Mortgage portfolio data is reported
based on unpaid principal balance.
|
|
(6) |
|
Includes unpaid principal balance
totaling $152.1 billion and $65.8 billion as of
June 30, 2009 and December 31, 2008, respectively,
related to mortgage-related securities that were consolidated
under FIN 46R and mortgage-related securities created from
securitization transactions that did not meet the sales criteria
under SFAS 140, which effectively resulted in these
mortgage-related securities being accounted for as loans.
|
|
(7) |
|
Includes unpaid principal balance
totaling $12.2 billion and $13.3 billion as of
June 30, 2009 and December 31, 2008, respectively,
related to mortgage-related securities that were consolidated
under FIN 46R and mortgage-related securities created from
securitization transactions that did not meet the sales criteria
under SFAS 140, which effectively resulted in these
mortgage-related securities being accounted for as securities.
|
|
(8) |
|
Consists of mortgage-related
securities issued by Freddie Mac and Ginnie Mae. As of
June 30, 2009, we held mortgage-related securities issued
by Freddie Mac with both a carrying value and a fair value of
$40.1 billion, which exceeded 10% of our stockholders
equity as of June 30, 2009.
|
|
(9) |
|
Includes mortgage-related
securities issued by entities other than Fannie Mae, Freddie Mac
or Ginnie Mae.
|
|
(10) |
|
Includes Fannie Mae MBS held by
third-party investors. The principal balance of resecuritized
Fannie Mae MBS is included only once in the reported amount.
|
|
(11) |
|
Includes single-family and
multifamily credit enhancements that we have provided and that
are not otherwise reflected in the table.
|
Table 36 presents our conventional single-family business
volumes for the first and second quarters of 2009 and for the
six months ended June 30, 2009 and 2008, and our
conventional single-family mortgage credit book of business as
of June 30, 2009 and December 31, 2008, based on
certain key risk characteristics that we use to evaluate the
risk profile and credit quality of our loans.
|
|
Table
36:
|
Risk
Characteristics of Conventional Single-Family Business Volume
and Mortgage Credit Book of
Business(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Conventional
|
|
|
|
|
|
|
Single-Family Business
Volume(2)
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
Percent of Conventional
|
|
|
|
For the
|
|
|
Six Months
|
|
|
Single-Family
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
Book of
Business(3)
|
|
|
|
Ended
|
|
|
June 30,
|
|
|
As of
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Original LTV
ratio:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 60%
|
|
|
36
|
%
|
|
|
30
|
%
|
|
|
33
|
%
|
|
|
22
|
%
|
|
|
23
|
%
|
|
|
22
|
%
|
60.01% to 70%
|
|
|
18
|
|
|
|
18
|
|
|
|
18
|
|
|
|
17
|
|
|
|
16
|
|
|
|
16
|
|
70.01% to 80%
|
|
|
39
|
|
|
|
42
|
|
|
|
40
|
|
|
|
38
|
|
|
|
42
|
|
|
|
43
|
|
80.01% to
90%(5)
|
|
|
5
|
|
|
|
7
|
|
|
|
6
|
|
|
|
11
|
|
|
|
9
|
|
|
|
9
|
|
90.01% to
100%(5)
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
|
12
|
|
|
|
10
|
|
|
|
10
|
|
Greater than
100%(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
65
|
%
|
|
|
67
|
%
|
|
|
66
|
%
|
|
|
72
|
%
|
|
|
72
|
%
|
|
|
72
|
%
|
Average loan amount
|
|
$
|
214,413
|
|
|
$
|
218,185
|
|
|
$
|
215,999
|
|
|
$
|
207,593
|
|
|
$
|
150,966
|
|
|
$
|
148,824
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Conventional
|
|
|
|
|
|
|
Single-Family Business
Volume(2)
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
Percent of Conventional
|
|
|
|
For the
|
|
|
Six Months
|
|
|
Single-Family
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
Book of
Business(3)
|
|
|
|
Ended
|
|
|
June 30,
|
|
|
As of
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Estimated
mark-to-market
LTV
ratio:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 60%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
%
|
|
|
36
|
%
|
60.01% to 70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
13
|
|
70.01% to 80%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
17
|
|
80.01% to 90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
90.01% to 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
8
|
|
Greater than 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
%
|
|
|
70
|
%
|
Product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
83
|
%
|
|
|
86
|
%
|
|
|
84
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
74
|
%
|
Intermediate-term
|
|
|
15
|
|
|
|
13
|
|
|
|
14
|
|
|
|
13
|
|
|
|
13
|
|
|
|
13
|
|
Interest-only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate
|
|
|
98
|
|
|
|
99
|
|
|
|
98
|
|
|
|
90
|
|
|
|
91
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
5
|
|
|
|
4
|
|
|
|
5
|
|
Negative-amortizing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Other ARMs
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable-rate
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of property units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 unit
|
|
|
99
|
%
|
|
|
99
|
%
|
|
|
99
|
%
|
|
|
97
|
%
|
|
|
96
|
%
|
|
|
96
|
%
|
2-4 units
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family homes
|
|
|
93
|
%
|
|
|
93
|
%
|
|
|
93
|
%
|
|
|
90
|
%
|
|
|
91
|
%
|
|
|
91
|
%
|
Condo/Co-op
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
|
10
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
94
|
%
|
|
|
94
|
%
|
|
|
94
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
Second/vacation home
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
Investor
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Conventional
|
|
|
|
|
|
|
Single-Family Business
Volume(2)
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
Percent of Conventional
|
|
|
|
For the
|
|
|
Six Months
|
|
|
Single-Family
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
Book of
Business(3)
|
|
|
|
Ended
|
|
|
June 30,
|
|
|
As of
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
FICO credit score:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
620 to < 660
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
7
|
|
|
|
9
|
|
|
|
9
|
|
660 to < 700
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
|
|
16
|
|
|
|
17
|
|
|
|
17
|
|
700 to < 740
|
|
|
17
|
|
|
|
17
|
|
|
|
17
|
|
|
|
22
|
|
|
|
22
|
|
|
|
23
|
|
>= 740
|
|
|
76
|
|
|
|
74
|
|
|
|
75
|
|
|
|
52
|
|
|
|
47
|
|
|
|
45
|
|
Not available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
763
|
|
|
|
761
|
|
|
|
762
|
|
|
|
733
|
|
|
|
727
|
|
|
|
724
|
|
Loan purpose:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
34
|
%
|
|
|
37
|
%
|
|
|
41
|
%
|
Cash-out refinance
|
|
|
30
|
|
|
|
31
|
|
|
|
30
|
|
|
|
34
|
|
|
|
32
|
|
|
|
32
|
|
Other refinance
|
|
|
54
|
|
|
|
53
|
|
|
|
54
|
|
|
|
32
|
|
|
|
31
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
concentration:(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
17
|
%
|
|
|
19
|
%
|
|
|
18
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
Northeast
|
|
|
19
|
|
|
|
17
|
|
|
|
18
|
|
|
|
18
|
|
|
|
19
|
|
|
|
19
|
|
Southeast
|
|
|
20
|
|
|
|
21
|
|
|
|
20
|
|
|
|
24
|
|
|
|
24
|
|
|
|
25
|
|
Southwest
|
|
|
15
|
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
West
|
|
|
29
|
|
|
|
27
|
|
|
|
28
|
|
|
|
26
|
|
|
|
25
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<=1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
2
|
%
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
18
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
10
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
13
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
14
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
20
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
16
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As noted in Table 35 above, we
generally have access to detailed loan-level statistics only on
conventional single-family mortgage loans held in our portfolio
and backing Fannie Mae MBS. We typically obtain the data for the
statistics presented in this table from the sellers or servicers
of the mortgage loans and receive representations and warranties
from them as to the accuracy of the information. While we
perform various quality assurance checks by sampling loans to
assess compliance with our underwriting and eligibility
criteria, we do not independently verify all reported
information. We reflect second lien loans in the original LTV
ratio calculation only when we own both the
|
86
|
|
|
|
|
first and second mortgage liens or
we only own the second mortgage lien. Second lien mortgage loans
represented less than 0.5% of our conventional single-family
business volume for each of the three months ended June 30,
2009 and 2008, and less than 0.5% of our single-family mortgage
credit book of business as of June 30, 2009 and
December 31, 2008. Second lien loans held by third parties
are not reflected in the original LTV or
mark-to-market
LTV ratios in this table.
|
|
(2) |
|
Percentages calculated based on
unpaid principal balance of loans at time of acquisition.
Single-family business volume refers to both single-family
mortgage loans we purchase for our mortgage portfolio and
single-family mortgage loans we securitize into Fannie Mae MBS.
|
|
(3) |
|
Percentages calculated based on
unpaid principal balance of loans as of the end of each period.
|
|
(4) |
|
The original
loan-to-value
ratio generally is based on the appraised property value
reported to us at the time of acquisition of the loan and the
original unpaid principal balance of the loan. Excludes loans
for which this information is not readily available.
|
|
(5) |
|
We purchase loans with original
loan-to-value
ratios above 80% to fulfill our mission to serve the primary
mortgage market and provide liquidity to the housing system.
Except as permitted under the Home Affordable Refinance Program,
our charter generally requires primary mortgage insurance or
other credit enhancement for loans that we acquire that has a
LTV ratio over 80%.
|
|
(6) |
|
The aggregate estimated
mark-to-market
loan-to-value
ratio is based on the estimated current value of the property,
calculated using an internal valuation model that estimates
periodic changes in home value, and the unpaid principal balance
of the loan as of the date of each reported period. Excludes
loans for which this information is not readily available.
|
|
(7) |
|
Long-term fixed-rate consists of
mortgage loans with maturities greater than 15 years, while
intermediate-term fixed-rate have maturities equal to or less
than 15 years. Loans with interest-only terms are included
in the interest-only category regardless of their maturities.
|
|
(8) |
|
Midwest consists of IL, IN, IA, MI,
MN, NE, ND, OH, SD and WI. Northeast includes CT, DE, ME, MA,
NH, NJ, NY, PA, PR, RI, VT and VI. Southeast consists of AL, DC,
FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of
AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK,
CA, GU, HI, ID, MT, NV, OR, WA and WY.
|
Credit risk profile summary. We experienced a
significant increase in refinancing volume during the first six
months of 2009 relative to the first six months of 2008, largely
due to the decline in mortgage interest rates to record lows.
The composition of our new business continues to reflect an
overall improvement in credit quality due in large part to
changes made in underwriting and eligibility criteria that
became effective during 2008 and early 2009. These changes have
resulted in our discontinuance of the purchase of newly
originated Alt-A loans, an increase in the percentage of loans
with higher FICO credit scores, a decrease in the percentage of
loans with higher original LTV ratios, and a shift in product
type to more traditional, fully amortizing fixed-rate mortgage
loans. Despite improvements in the credit risk profile of our
new business, we expect that we will continue to experience
significant credit losses due to the extreme pressures on the
housing market and the severe economic downturn. Also, if
mortgage interest rates remain low, we expect our refinancing
activity will remain high during the second half of 2009.
As a result of the prolonged decline in home prices, we are
experiencing an increase in the overall estimated weighted
average
mark-to-market
LTV ratio of our conventional single-family mortgage credit book
of business to 74% as of June 30, 2009, from 70% as of
December 31, 2008. The portion of our conventional
single-family mortgage credit book of business with an estimated
mark-to-market
LTV ratio greater than 100% increased to 14% as of June 30,
2009, from 12% as of the end of 2008. If home prices continue to
decline, more loans will have
mark-to-market
LTV ratios greater than 100%, which increases the risk of
delinquency and default.
We provide information below on our exposure to Alt-A and
subprime loans. We have classified mortgage loans as Alt-A if
the lender that delivered the mortgage loan to us had classified
the loan as Alt-A based on documentation or other features. We
have classified mortgage loans as subprime if the mortgage loan
was originated by a lender specializing in subprime business or
by subprime divisions of large lenders. We apply these
classification criteria in order to determine our Alt-A and
subprime loan exposures; however, we have other loans with some
features that are similar to Alt-A and subprime loans that we
have not classified as Alt-A or subprime because they do not
meet our classification criteria. We also provide information on
our jumbo-conforming mortgage product, high balance loans and
reverse mortgages.
87
Table
37: Exposure to Selected Mortgage Product
Features
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Conventional
|
|
|
|
|
|
|
Single-Family
|
|
|
|
Outstanding
|
|
|
Mortgage Credit
|
|
|
|
Unpaid Principal Balance
|
|
|
Book of Business
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
loans(1)
|
|
$
|
269,290
|
|
|
$
|
292,355
|
|
|
|
9.8
|
%
|
|
|
10.7
|
%
|
Subprime
loans(2)
|
|
|
7,918
|
|
|
|
8,415
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Jumbo-conforming and high-balance
loans(3)
|
|
|
35,986
|
|
|
|
19,653
|
|
|
|
1.3
|
|
|
|
0.7
|
|
|
|
|
(1) |
|
Consists of Alt-A mortgage loans
held in our portfolio or backing Fannie Mae MBS, excluding
resecuritized private-label mortgage-related securities backed
by Alt-A mortgage loans.
|
|
(2) |
|
Consists of subprime mortgage loans
held in our portfolio or backing Fannie Mae MBS, excluding
resecuritized private-label mortgage-related securities backed
by subprime mortgage loans.
|
|
(3) |
|
Refers to high-balance loans we
acquired pursuant to the Economic Stimulus Act of 2008, HERA and
the American Recovery and Reinvestment Act of 2009, which
together, among other things, increased our conforming loan
limits in certain high-cost areas above our standard conforming
loan limit. The standard conforming loan limit for a
one-unit
property was $417,000 in 2009 and 2008. See Part
IItem 1BusinessConservatorship, Treasury
Agreements, Our Charter and Regulation of Our
ActivitiesCharter ActLoan Standards of our
2008
Form 10-K
for additional information on our loan limits.
|
The outstanding unpaid principal balance of reverse mortgages
included in our mortgage portfolio was $49.0 billion and
$41.6 billion as of June 30, 2009 and
December 31, 2008, respectively. The majority of these
loans are Home Equity Conversion Mortgages (HECM), a
type of reverse mortgage product that has been in existence
since 1989 and accounts for approximately 90% of the total
market share of reverse mortgages. Our market share was
approximately 90% of the total market of reverse mortgages as of
December 31, 2008. Because HECMs are insured by the federal
government through the Federal Housing Administration, we have
limited exposure to losses on these loans.
As a result of our decision to discontinue the purchase of newly
originated Alt-A loans effective January 1, 2009, we expect
our acquisitions of Alt-A mortgage loans to be minimal in future
periods. We currently are not acquiring mortgages that are
classified as subprime. See Consolidated Results of
OperationsCredit-Related ExpensesCredit Loss
Performance Metrics for information on the portion of our
credit losses attributable to Alt-A loans and certain other
higher risk loan categories. These loans, in particular our
Alt-A loans, have accounted for a disproportionate share of our
credit losses relative to the share of these loans as a
percentage of our single-family guaranty book of business. We
provide additional information on our investments in Alt-A and
subprime private-label mortgage-related securities, including
other-than-temporary
impairment losses recognized on these investments, in
Consolidated Balance Sheet AnalysisTrading and
Available-for-Sale
Investment SecuritiesInvestments in Private-Label
Mortgage-Related Securities.
Problem
Loan Management and Foreclosure Prevention
We generally define single-family problem loans as loans that
have been identified as being at imminent risk of payment
default; early stage delinquent loans that are either
30 days or 60 days past due; and seriously delinquent
loans, which generally are loans that are three or more monthly
payments past due or in the foreclosure process.
Our problem loan management strategies are intended to keep
borrowers in their homes and minimize foreclosures, which
furthers our public mission and may also help in reducing our
long-term credit losses. We have been working with our servicers
to ensure the guidelines of the Home Affordable Modification
Program are understood and properly implemented. For loans that
do not qualify for the Home Affordable Modification Program,
borrowers may be considered for other workout solutions.
88
In the following section, we present statistics on our problem
loans, describe specific efforts undertaken to manage these
loans and prevent foreclosures and provide metrics that are
useful in evaluating the performance of our loan workout
activities.
Problem
Loan Statistics
|
|
|
Early Stage Delinquency
|
The prolonged deterioration in the housing market, as evidenced
by the decline in home prices, and the sharp rise in
unemployment, have caused an increase since June 2008 in the
number of delinquencies that are less than three monthly
payments past due and a potential increase in the number of
loans at imminent risk of payment default. The following table
displays the delinquency status of conventional single-family
loans in our single-family guaranty book of business as of
June 30, 2009, December 31, 2008 and June 30,
2008.
Table
38: Delinquency Status of Conventional Single-Family
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
Delinquency
status:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 59 days delinquent
|
|
|
2.39
|
%
|
|
|
2.52
|
%
|
|
|
2.05
|
%
|
60 to 89 days delinquent
|
|
|
0.96
|
|
|
|
1.00
|
|
|
|
0.62
|
|
Seriously
delinquent(2)
|
|
|
3.94
|
|
|
|
2.42
|
|
|
|
1.36
|
|
|
|
|
(1) |
|
Calculated based on the number of
conventional single-family loans that are delinquent divided by
the number of loans in our conventional single-family guaranty
book of business. We include conventional single-family loans
that we own and that back Fannie Mae MBS in the calculation of
the single-family delinquency rate.
|
|
(2) |
|
Includes conventional single-family
loans that are three or more monthly payments past due and loans
that have been referred to foreclosure but not yet foreclosed
upon.
|
We classify single family loans as seriously delinquent when a
borrower is three or more monthly payments past due or the loan
has been referred to foreclosure but not yet foreclosed upon. We
classify multifamily loans as seriously delinquent when payment
is 60 days or more past due. Table 39 provides a
comparison, by geographic region and by loans with and without
credit enhancement, of the serious delinquency rates as of
June 30, 2009, December 31, 2008 and June 30,
2008 for conventional single-family loans in our single-family
guaranty book of business. Table 39 also provides a comparison
of the serious delinquency rates for multifamily by loans with
and without credit enhancement.
89
Table
39: Serious Delinquency Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
|
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
|
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
|
|
|
Conventional single-family delinquency rates by geographic
region:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
16
|
%
|
|
|
3.71
|
%
|
|
|
16
|
%
|
|
|
2.44
|
%
|
|
|
16
|
%
|
|
|
1.57
|
%
|
|
|
|
|
Northeast
|
|
|
19
|
|
|
|
3.20
|
|
|
|
19
|
|
|
|
1.97
|
|
|
|
19
|
|
|
|
1.21
|
|
|
|
|
|
Southeast
|
|
|
24
|
|
|
|
5.21
|
|
|
|
25
|
|
|
|
3.27
|
|
|
|
25
|
|
|
|
1.80
|
|
|
|
|
|
Southwest
|
|
|
16
|
|
|
|
3.07
|
|
|
|
16
|
|
|
|
1.98
|
|
|
|
16
|
|
|
|
1.08
|
|
|
|
|
|
West
|
|
|
25
|
|
|
|
3.96
|
|
|
|
24
|
|
|
|
2.10
|
|
|
|
24
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single- family loans
|
|
|
100
|
%
|
|
|
3.94
|
%
|
|
|
100
|
%
|
|
|
2.42
|
%
|
|
|
100
|
%
|
|
|
1.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional single-family loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
19
|
%
|
|
|
10.25
|
%
|
|
|
21
|
%
|
|
|
6.42
|
%
|
|
|
21
|
%
|
|
|
3.74
|
%
|
|
|
|
|
Non-credit enhanced
|
|
|
81
|
|
|
|
2.47
|
|
|
|
79
|
|
|
|
1.40
|
|
|
|
79
|
|
|
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single- family loans
|
|
|
100
|
%
|
|
|
3.94
|
%
|
|
|
100
|
%
|
|
|
2.42
|
%
|
|
|
100
|
%
|
|
|
1.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
90
|
%
|
|
|
0.43
|
%
|
|
|
86
|
%
|
|
|
0.26
|
%
|
|
|
87
|
%
|
|
|
0.09
|
%
|
|
|
|
|
Non-credit enhanced
|
|
|
10
|
|
|
|
1.23
|
|
|
|
14
|
|
|
|
0.54
|
|
|
|
13
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily loans
|
|
|
100
|
%
|
|
|
0.51
|
%
|
|
|
100
|
%
|
|
|
0.30
|
%
|
|
|
100
|
%
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Calculated based on unpaid
principal balance of loans, where we have detailed loan-level
information.
|
|
(2) |
|
Calculated based on number of loans
for single-family and unpaid principal balance for multifamily.
We include conventional single-family loans that we own and that
back Fannie Mae MBS in the calculation of the single-family
delinquency rate. We include the unpaid principal balance of all
multifamily loans that we own or that back Fannie Mae MBS and
any housing bonds for which we provide credit enhancement in the
calculation of the multifamily serious delinquency rate.
|
|
(3) |
|
See footnote 8 to Table 36 for
states included in each geographic region.
|
The serious delinquency rate for our conventional single-family
guaranty book of business rose to 3.94% as of June 30,
2009, from 2.42% as of December 31, 2008, and 1.36% as of
June 30, 2008. As discussed in Consolidated Results
of OperationsCredit-Related Expenses, the current
economic environment, including the continued weakness in the
housing market and rising unemployment, has resulted in an
increase in the serious delinquency rates across our
single-family guaranty book of business, particularly within the
following categories: (1) certain states that are
experiencing the most significant home price declines and
unemployment rates that generally are near or above the national
average and states that have suffered from prolonged, severe
economic weakness; (2) certain higher risk loan categories,
such as Alt-A and subprime loans; and (3) certain loan
vintages. Table 40 below presents the serious delinquency rates
as of June 30, 2009, December 31, 2008 and
June 30, 2008 for our single-family loans with these risk
characteristics and for loans with
mark-to-market
LTV ratios greater than 100%. Our foreclosure moratorium on
occupied single-family properties between the periods of
November 26, 2008 through January 31, 2009 and
February 17, 2009 through March 6, 2009, and our
directive to delay foreclosure sales until the loan servicer
exhausts other foreclosure prevention alternatives also have
contributed to the increase in our serious delinquency rates
from June 30, 2008 to June 30, 2009, as these loans
are remaining in our single-family guaranty book of business for
a longer period of time.
90
Table
40: Single-Family Serious Delinquency Rates by
Selected Risk Attributes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
|
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
|
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
Outstanding(1)
|
|
|
Rate(2)
|
|
|
|
|
|
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
|
|
|
3
|
%
|
|
|
6.54
|
%
|
|
|
3
|
%
|
|
|
3.41
|
%
|
|
|
3
|
%
|
|
|
1.51
|
%
|
|
|
|
|
California
|
|
|
17
|
|
|
|
4.23
|
|
|
|
16
|
|
|
|
2.30
|
|
|
|
16
|
|
|
|
1.05
|
|
|
|
|
|
Florida
|
|
|
7
|
|
|
|
9.71
|
|
|
|
7
|
|
|
|
6.14
|
|
|
|
7
|
|
|
|
3.21
|
|
|
|
|
|
Nevada
|
|
|
1
|
|
|
|
9.33
|
|
|
|
1
|
|
|
|
4.74
|
|
|
|
1
|
|
|
|
2.25
|
|
|
|
|
|
Select Midwest
states(3)
|
|
|
11
|
|
|
|
4.16
|
|
|
|
11
|
|
|
|
2.70
|
|
|
|
12
|
|
|
|
1.73
|
|
|
|
|
|
All other states
|
|
|
61
|
|
|
|
2.95
|
|
|
|
62
|
|
|
|
1.86
|
|
|
|
61
|
|
|
|
1.10
|
|
|
|
|
|
Product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
10
|
|
|
|
11.91
|
|
|
|
11
|
|
|
|
7.03
|
|
|
|
12
|
|
|
|
3.79
|
|
|
|
|
|
Subprime
|
|
|
|
|
|
|
21.75
|
|
|
|
|
|
|
|
14.29
|
|
|
|
|
|
|
|
9.08
|
|
|
|
|
|
Vintages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
12
|
|
|
|
9.05
|
|
|
|
14
|
|
|
|
5.11
|
|
|
|
15
|
|
|
|
2.79
|
|
|
|
|
|
2007
|
|
|
17
|
|
|
|
9.22
|
|
|
|
20
|
|
|
|
4.70
|
|
|
|
21
|
|
|
|
2.01
|
|
|
|
|
|
Estimated
mark-to-market
LTV ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 100%
|
|
|
14
|
|
|
|
16.63
|
|
|
|
12
|
|
|
|
10.98
|
|
|
|
6
|
|
|
|
7.33
|
|
|
|
|
|
|
|
|
(1) |
|
Reported based on unpaid principal of loans. |
|
(2) |
|
Calculated based on number of seriously delinquent single-family
loans within each specified category divided by the total number
of single-family loans within the specified category. |
|
(3) |
|
Consists of Illinois, Indiana, Michigan and Ohio. |
Also see Notes to Condensed Consolidated Financial
StatementsNote 8, Financial Guarantees and Master
Servicing for additional information on the serious
delinquency rates for these and other risk categories that we
monitor and assess in evaluating the credit performance risk of
the loans in our guaranty book of business. We expect our
single-family serious delinquency rates to continue to increase
in 2009 and into 2010 due to the prolonged downturn in the
housing market, which has resulted in higher
mark-to-market
LTV ratios that, in turn, have produced negative home equity for
some borrowers, and the economic recession, which has resulted
in a sharp increase in unemployment. In addition, we expect our
single-family serious delinquency rates to be adversely affected
by our requirement that servicers must pursue modification
options before proceeding to foreclosure.
The multifamily serious delinquency rate rose to 0.51% as of
June 30, 2009, from 0.30% as of December 31, 2008, and
0.11% as of June 30, 2008. The increase in our multifamily
seriously delinquent rate is attributable to the economic
recession, which initially had a negative impact on smaller
borrowers, but more recently has also begun to have a negative
impact on larger borrowers. Many of our seriously delinquent
multifamily loans are loans we acquired in 2007, which
represented approximately 24% of our multifamily guaranty book
of business as of June 30, 2009, but accounted for
approximately 48% of our seriously delinquent rate. Our 2007
acquisitions, which we acquired during favorable economic
conditions, has shown increased stress as a result of the
economic recession and lack of liquidity in the market, which
has adversely affected multifamily property values, vacancy
rates and rent levels, the cash flows generated from multifamily
investments and refinancing options.
Table 41 presents the unpaid balance of nonperforming
single-family and multifamily loans as of June 30, 2009 and
December 31, 2008 and other information related to these
loans. We classify loans as nonperforming and place them on
nonaccrual status when we believe collectability of interest or
principal on the loan is not reasonably assured. We generally
consider a loan to be nonperforming if it is two or more monthly
payments past due. We classify troubled debt restructurings and
HomeSaver Advance first-lien loans as nonperforming
91
loans throughout the life of the loan regardless of whether the
restructured or first-lien loan returns to a performing status
after the workout intervention. A troubled debt restructuring is
a restructuring of a mortgage loan in which a concession is
granted to a borrower experiencing financing difficulty. The
increase in the amount of nonperforming loans during the first
six months of 2009 reflected the significant increase in our
single-family serious delinquency rates during the period due to
the prolonged downturn in the housing market, as well as the
economic recession.
Table
41: Nonperforming Single-Family and Multifamily
Loans(1)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
On-balance sheet nonperforming loans:
|
|
|
|
|
|
|
|
|
Nonaccrual
loans(2)
|
|
$
|
22,449
|
|
|
$
|
17,634
|
|
Troubled debt
restructurings(3)
|
|
|
3,162
|
|
|
|
1,931
|
|
HomeSaver Advance first-lien
loans(4)
|
|
|
1,032
|
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet nonperforming loans
|
|
|
26,643
|
|
|
|
20,686
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet nonperforming
loans:(5)
|
|
|
|
|
|
|
|
|
Off-balance sheet nonperforming loans, excluding HomeSaver
Advance first-lien
loans(6)
|
|
|
131,343
|
|
|
|
89,617
|
|
HomeSaver Advance first-lien
loans(7)
|
|
|
12,978
|
|
|
|
8,929
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet nonperforming loans
|
|
|
144,321
|
|
|
|
98,546
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
170,964
|
|
|
$
|
119,232
|
|
|
|
|
|
|
|
|
|
|
Accruing on-balance sheet loans past due 90 days or
more(8)
|
|
$
|
474
|
|
|
$
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Interest related to on-balance sheet nonperforming loans:
|
|
|
|
|
|
|
|
|
Interest income
forgone(9)
|
|
$
|
569
|
|
|
$
|
401
|
|
Interest income recognized for the
period(10)
|
|
|
522
|
|
|
|
771
|
|
|
|
|
(1) |
|
We classify conventional
single-family and multifamily loans held in our mortgage
portfolio, including delinquent single-family loans purchased
from MBS trusts, as nonperforming and place them on nonaccrual
status when we believe collectability of principal or interest
on the loan is not reasonably assured. We generally conclude
that collectability is not reasonably assured when a loan is two
payments or more past due. We continue to accrue interest on
nonperforming loans that are federally insured or guaranteed by
the U.S. government.
|
|
(2) |
|
Includes all nonaccrual loans
inclusive of troubled debt restructurings and on-balance sheet
first-lien loans on nonaccrual status associated with unsecured
HomeSaver Advance loans.
|
|
(3) |
|
A troubled debt restructuring is a
restructuring of a mortgage loan in which a concession is
granted to a borrower experiencing financing difficulty. The
reported amounts represent troubled debt restructurings that are
on accrual status.
|
|
(4) |
|
Represents the amount of on-balance
sheet first-lien loans on accrual status associated with
unsecured HomeSaver Advance loans.
|
|
(5) |
|
Represents unpaid principal balance
of nonperforming loans in our outstanding and unconsolidated
Fannie Mae MBS trusts held by third parties.
|
|
(6) |
|
Represents loans that would meet
our criteria for nonaccrual status if the loans had been
on-balance sheet.
|
|
(7) |
|
Represents all off-balance sheet
first-lien loans associated with unsecured HomeSaver Advance
loans, including first-lien loans that are not seriously
delinquent.
|
|
(8) |
|
Recorded investment of loans as of
the end of each period that are 90 days or more past due
and continuing to accrue interest, including loans insured or
guaranteed by the U.S. government and loans where we have
recourse against the seller of the loan in the event of a
default.
|
92
|
|
|
(9) |
|
Forgone interest income represents
the amount of interest income that would have been recorded
during the period for on-balance sheet nonperforming loans as of
the end of each period had the loans performed according to
their contractual terms.
|
|
(10) |
|
Represents interest income
recognized during the period for on-balance sheet loans
classified as nonperforming as of the end of each period.
|
Management
of Problem Loans
In our experience, early intervention for a potential or
existing problem is critical to helping borrowers avoid
foreclosure and stay in their homes. If a borrower does not make
the required payments, we work in partnership with the servicers
of our loans to offer workout solutions to minimize the
likelihood of foreclosure as well as the severity of loss. Our
loan management strategy includes payment collection and workout
guidelines designed to minimize the number of borrowers who fall
behind on their payment obligations and to prevent delinquent
borrowers from falling further behind.
We refer to actions taken by servicers with a borrower to
resolve the problem of delinquent loan payments as
workouts. Our problem loan workouts reflect our
various types of home retention strategies, including loan
modifications, repayment plans, forbearance, and HomeSaver
Advance loans. If we are unable to provide a viable home
retention option, we provide foreclosure avoidance alternatives
that include preforeclosure sales or acceptance of
deeds-in-lieu
of foreclosure. These foreclosure alternatives may be more
appropriate if the borrower has experienced a significant
adverse change in financial condition due to events such as
unemployment, divorce, job change, or medical issues and is
therefore no longer able to make the required mortgage payments.
We have increasingly relied on these foreclosure alternatives as
a growing number of borrowers have been adversely affected by
the economic recession.
Our HCD business has further tightened its underwriting
standards and implemented more proactive asset management and
portfolio monitoring. These efforts are part of our early
intervention efforts to address problem multifamily loans and
reduce the refinance risk concentrated in multifamily loans
maturing in 2012 and 2013.
Problem
Loan Workout Metrics
Table 42 provides statistics on our single-family selected
problem loan workouts, by type, for the six months ended
June 30, 2009 and for the year ended December 31,
2008. These statistics do not include trial modifications under
the Home Affordable Modification Program or repayment and
forbearance plans that have been initiated but not completed.
93
Table
42: Statistics on Single-Family Problem Loan
Workouts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
|
(Dollars in millions)
|
|
|
Home retention strategies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications(1)
|
|
$
|
5,433
|
|
|
|
29,130
|
|
|
$
|
5,119
|
|
|
|
33,388
|
|
Repayment plans and forbearances
completed(2)
|
|
|
1,511
|
|
|
|
12,197
|
|
|
|
936
|
|
|
|
7,892
|
|
HomeSaver Advance first-lien
loans(3)
|
|
|
5,078
|
|
|
|
32,093
|
|
|
|
11,196
|
|
|
|
70,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,022
|
|
|
|
73,420
|
|
|
$
|
17,251
|
|
|
|
112,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure alternatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preforeclosure sales
|
|
|
2,997
|
|
|
|
13,086
|
|
|
|
2,212
|
|
|
|
10,355
|
|
Deeds in lieu of foreclosure
|
|
|
233
|
|
|
|
1,245
|
|
|
|
252
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,230
|
|
|
|
14,331
|
|
|
$
|
2,464
|
|
|
|
11,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total problem loan workouts
|
|
$
|
15,252
|
|
|
|
87,751
|
|
|
$
|
19,715
|
|
|
|
123,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Problem loan workouts as a percent of single-family guaranty
book of
business(4)
|
|
|
1.06
|
%
|
|
|
0.96
|
%
|
|
|
0.70
|
%
|
|
|
0.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Modifications include troubled debt
restructurings, as well as other modifications to the terms of
the loan. A troubled debt restructuring is a restructuring of a
mortgage loan in which a concession is granted to the borrower
and is the only form of modification in which we do not expect
to collect the full original contractual principal and interest
due under the loan. Other resolutions and modifications may
result in our receiving the full amount due, or certain
installments due, under the loan over a period of time that is
longer than the period of time originally provided for under the
terms of the loan.
|
|
(2) |
|
For the six months ended
June 30, 2009, repayment plans reflected only those plans
associated with loans that were 60 days or more delinquent.
For the year ended December 31, 2008, repayment plans
reflected only those plans associated with loans that were
90 days or more delinquent. Had we included repayment plans
associated with loans that were 60 days or more delinquent
for the year ended December 31, 2008, the unpaid principal
balance and number of loans that had repayment plans and
forbearances completed would have been $2.8 billion and
22,337 loans, respectively.
|
|
(3) |
|
Reflects unpaid principal balance
and the number of first-lien loans associated with unsecured
HomeSaver Advance loans.
|
|
(4) |
|
Calculated based on annualized
problem loan workouts during the period as a percent of our
single-family guaranty book of business as of the end of the
period.
|
We significantly increased the number of problem loan workouts
during the first six months of 2009. In addition, we initiated a
significant number of trial modifications under the Home
Affordable Modification Program, as well as repayment and
forbearance plans, which are scheduled to be completed
subsequent to June 30, 2009. It is difficult to predict how
many of these trial modifications and initiated plans, which are
not reported above, will be completed.
The majority of our recent loan modifications are designed to
help distressed borrowers by reducing their monthly principal
and interest payment through term extensions, interest rate
reductions or a combination of both. Because we did not launch
the Home Affordable Modification Program until March 2009, there
was limited activity under this program during the first quarter
of 2009. The activity under this program increased during the
second quarter of 2009; however, there have been only a limited
number of completed modifications because the program requires a
three or four month trial period to allow the loan servicer to
evaluate the borrowers ability to make the modified loan
payment before making the modification effective. Accordingly,
our disclosed modification statistics substantially pertain to
modifications that were not made under the Home Affordable
Modification Program.
94
The proportion of modifications of single-family delinquent
loans that resulted in a term extension or rate reduction
increased to approximately 91% during the first six months of
2009, compared with approximately 64% for full year 2008. The
proportion of modifications that resulted in an initial lower
monthly principal and interest payment for the borrower at the
modification effective date increased to approximately 86%
during the first six months of 2009, compared with approximately
38% for full year 2008. Approximately 37% of loans modified
during 2008, the majority of which resulted in an increase in
the borrowers monthly principal and interest payment, were
current or had paid off as of six months following the loan
modification date. However, during the fourth quarter of 2008,
the majority of our loan modifications resulted in lower monthly
principal and interest payments, as we began to increase our
foreclosure prevention efforts. Approximately 41% of loans
modified during the fourth quarter 2008 were current or had paid
off as of six months following the loan modification date. The
monthly principal and interest payments on modified loans may
vary, and may increase, during the remaining life of the loan.
As a result of the substantial decline in home prices,
approximately 47% of the modifications that we made during the
first six months of 2009 related to loans that had a
mark-to-market
LTV ratio greater than 100%, compared with 22% for the full year
of 2008. Because these modifications generally resulted in
economic concessions to the borrower, we expect to collect less
than the contractual principal and interest specified in the
original loan. Troubled debt restructurings represented
approximately 87% and 88% of our modifications during the second
and first quarters of 2009, respectively, compared with
approximately 82% of our modifications during the fourth quarter
of 2008. These modification statistics do not include subprime
adjustable-rate mortgage loans that were modified to a fixed
rate loan and were current at the time of the modification.
We purchased approximately 32,000 unsecured HomeSaver Advance
loans during the first six months of 2009. We expect to
significantly reduce the number of HomeSaver Advance loans we
purchase during the second half of 2009 because all potential
loan workouts must first be evaluated against the Home
Affordable Modification Program criteria before being considered
for other foreclosure prevention and workout alternatives, such
as HomeSaver Advance. In comparison, we purchased approximately
71,000 HomeSaver Advance loans during the full year 2008. The
average HomeSaver advance during the first six months of 2009
was $7,300, compared with an average advance of approximately
$6,500 for loans purchased during 2008. The aggregate unpaid
principal balance and carrying value of our HomeSaver Advances
were $497 million and $3 million, respectively, as of
June 30, 2009, compared with $461 million and
$8 million, respectively, as of December 31, 2008.
Approximately 27% of the first lien mortgage loans associated
with HomeSaver Advance purchased during 2008 were current or had
paid off as of six months following the funding date of the
unsecured HomeSaver Advance loan.
Our experience indicates that it generally takes at least 18 to
24 months to assess the re-performance of a problem loan
that has been resolved through workout alternatives. For
example, modifications that result in a reduced monthly payment
generally are more sustainable and result in fewer re-defaults.
There is significant uncertainty, however, regarding the
ultimate long-term success of our current modification efforts
because of the pressures on borrowers and household wealth
caused by declines in home values, declines in the stock market
and rising unemployment due to the prolonged downturn in the
housing market and economic recession. We believe that the
performance of workouts in 2009 will be highly dependent on
economic factors, such as unemployment rates and home prices.
There currently are a significant number of uncertainties
associated with the Home Affordable Refinance and Home
Affordable Modification Programs, including borrower response
rates. Therefore, it is difficult to predict the full extent of
our activities under these programs. However, because of the
continued increase in the number of loans at risk of
foreclosure, we expect to substantially increase our loan
workout activity through the remainder of 2009 and into 2010, as
part of our goal of preventing foreclosures and helping
borrowers stay in their homes.
REO
Management
Foreclosure and REO activity affects the level of credit losses.
Table 43 compares our foreclosure activity, by region, for the
six months ended June 30, 2009 and 2008. Regional REO
acquisition and charge-off trends generally follow a pattern
that is similar to, but lags, that of regional delinquency
trends.
95
Table
43: Single-Family and Multifamily Foreclosed
Properties
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Single-family foreclosed properties (number of properties):
|
|
|
|
|
|
|
|
|
Beginning of period inventory of single-family foreclosed
properties
(REO)(1)
|
|
|
63,538
|
|
|
|
33,729
|
|
Acquisitions by geographic
area:(2)
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
14,626
|
|
|
|
15,265
|
|
Northeast
|
|
|
2,948
|
|
|
|
2,916
|
|
Southeast
|
|
|
14,480
|
|
|
|
11,347
|
|
Southwest
|
|
|
12,711
|
|
|
|
8,377
|
|
West
|
|
|
12,704
|
|
|
|
6,166
|
|
|
|
|
|
|
|
|
|
|
Total properties acquired through foreclosure
|
|
|
57,469
|
|
|
|
44,071
|
|
Dispositions of REO
|
|
|
(58,392
|
)
|
|
|
(23,627
|
)
|
|
|
|
|
|
|
|
|
|
End of period inventory of single-family foreclosed properties
(REO)(1)
|
|
|
62,615
|
|
|
|
54,173
|
|
|
|
|
|
|
|
|
|
|
Carrying value of single-family foreclosed properties (dollars
in
millions)(3)
|
|
$
|
6,002
|
|
|
$
|
5,808
|
|
|
|
|
|
|
|
|
|
|
Single-family foreclosure
rate(4)
|
|
|
0.63
|
%
|
|
|
0.48
|
%
|
|
|
|
|
|
|
|
|
|
Multifamily foreclosed properties (number of properties):
|
|
|
|
|
|
|
|
|
Ending inventory of multifamily foreclosed properties (REO)
|
|
|
49
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Carrying value of multifamily foreclosed properties (dollars in
millions)(3)
|
|
$
|
192
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes deeds in lieu of
foreclosure.
|
|
(2) |
|
See footnote 8 to Table 36 for
states included in each geographic region.
|
|
(3) |
|
Excludes foreclosed property claims
receivables, which are reported in our consolidated balance
sheets as a component of Acquired property, net.
|
|
(4) |
|
Estimated based on annualized total
number of properties acquired through foreclosure as a
percentage of the total number of loans in our conventional
single-family mortgage credit book of business as of the end of
each respective period.
|
Our annualized single-family foreclosure rate increased to 0.63%
for the first six months of 2009, from 0.48% for the first six
months of 2008. Our single-family foreclosure rate was 0.52% for
full year 2008. Despite the increase in our foreclosure rate
during the first six months of 2009, foreclosure levels during
this period were less than what they otherwise would have been
because of our foreclosure moratorium and directive to delay
foreclosure sales until the loan servicer verifies that the
borrower is ineligible for a Home Affordable Modification and
all other foreclosure prevention alternatives have been
exhausted. However, the economic recession and rise in
unemployment rates, as well as the decline in home prices on a
national basis, have resulted in an increase in the percentage
of our mortgage loans that transition from delinquent to
foreclosure status and a significant reduction in the values of
our foreclosed single-family properties. Although we have
expanded our loan workout initiatives to keep borrowers in their
homes, we expect our foreclosures to increase in 2009 and into
2010 as a result of the adverse impact that the economic
recession and sharp rise in unemployment has had and is expected
to have on the financial condition of borrowers.
Our multifamily foreclosed property inventory increased by 20
properties during the first six months of 2009, to 49 properties
as of June 30, 2009 from 29 properties as of
December 31, 2008. This increase reflects the continuing
stress on our multifamily guaranty book of business due to the
economic recession and lack of liquidity in the market, which
has adversely affected multifamily property values, vacancy
rates and rent levels, the cash flows generated from these
investments and refinancing options.
96
Institutional
Counterparty Credit Risk Management
We rely on our institutional counterparties to provide services
and credit enhancements that are critical to our business.
Institutional counterparty risk is the risk that these
institutional counterparties may fail to fulfill their
contractual obligations to us. Defaults by a counterparty with
significant obligations to us could result in significant
financial losses to us.
We have exposure primarily to the following types of
institutional counterparties:
|
|
|
|
|
mortgage servicers that service the loans we hold in our
investment portfolio or that back our Fannie Mae MBS;
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third-party providers of credit enhancement on the mortgage
assets that we hold in our investment portfolio or that back our
Fannie Mae MBS, including mortgage insurers, financial
guarantors and lenders with risk sharing arrangements;
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custodial depository institutions that hold principal and
interest payments for Fannie Mae portfolio loans and MBS
certificateholders, as well as collateral posted by derivatives
counterparties, repurchase transaction counterparties and
mortgage originators or servicers;
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issuers of securities held in our cash and other investments
portfolio;
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derivatives counterparties;
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mortgage originators and investors;
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debt security and mortgage dealers; and
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document custodians.
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We routinely enter into a high volume of transactions with
counterparties in the financial services industry, including
brokers and dealers, mortgage lenders and commercial banks, and
mortgage insurers, resulting in a significant credit
concentration with respect to this industry. We also have
significant concentrations of credit risk with particular
counterparties. Many of our institutional counterparties provide
several types of services for us. For example, many of our
lender customers or their affiliates act as mortgage servicers,
derivatives counterparties, custodial depository institutions
and document custodians on our behalf.
Unfavorable financial market conditions have adversely affected,
and are expected to continue to adversely affect, the liquidity
and financial condition of many of our institutional
counterparties, which has significantly increased the risk to
our business of defaults by these counterparties due to
bankruptcy or receivership, lack of liquidity, insufficient
capital, operational failure or other reasons. Although we
believe that recent government actions to provide liquidity and
other support to specified financial market participants has
initially helped and may continue to help improve the financial
condition and liquidity position of a number of our
institutional counterparties, there can be no assurance that
these actions will continue to be effective or will be
sufficient. As described in
Part IIItem 1ARisk Factors,
the financial difficulties that our institutional counterparties
are experiencing may negatively affect their ability to meet
their obligations to us and the amount or quality of the
products or services they provide to us.
In the event of a bankruptcy or receivership of one of our
mortgage servicers, custodial depository institutions or
document custodians, we may be required to establish our
ownership rights to the assets these counterparties hold on our
behalf to the satisfaction of the bankruptcy court or receiver,
which could result in a delay in accessing these assets causing
a decline in value of these assets. Due to the current
environment, we may be unable to recover on outstanding loan
repurchase and reimbursement obligations resulting from breaches
of seller representations and warranties. We could experience
further losses relating to the securities in our cash and other
investments portfolio. In addition, if we are unable to replace
a defaulting counterparty that performs services that are
critical to our business with another counterparty, it could
materially adversely affect our ability to conduct our
operations.
We took a number of steps in 2008 to mitigate our potential loss
exposure to our institutional counterparties. Our 2008
Form 10-K
provides additional information on the risk mitigation steps we
have taken in Part II
97
Item 7MD&ARisk ManagementCredit Risk
ManagementInstitutional Counterparty Credit Risk
Management. We are continually evaluating the
effectiveness of these actions and additional steps we might
take to mitigate our potential loss exposure further.
In June 2009, the Obama Administration announced a comprehensive
financial regulatory reform plan that proposes significantly
altering the current regulatory framework applicable to the
financial services industry. If these proposals are implemented,
it will result in increased supervision and more comprehensive
regulation of our counterparties in this industry, which may
have a significant impact on our counterparty credit risk. See
Legislative and Regulatory MattersObama
Administration Financial Regulatory Reform Plan and
Congressional Hearing for more information about these
proposals.
Mortgage
Servicers
Our business with our mortgage servicers is concentrated. Our
ten largest single-family mortgage servicers, including their
affiliates, serviced 81% of our single-family mortgage credit
book of business as of both June 30, 2009 and
December 31, 2008. Our largest mortgage servicer is Bank of
America Corporation, which, together with its affiliates,
serviced approximately 27% of our single-family mortgage credit
book of business as of both June 30, 2009 and
December 31, 2008. In addition, we had three other mortgage
servicers, Wells Fargo Bank, CitiMortgage and JP Morgan, that,
with their affiliates, each serviced over 10% of our
single-family mortgage credit book of business as of
June 30, 2009.
Due to the current challenging market conditions, the financial
condition and performance of many of our mortgage servicers has
deteriorated, with several experiencing ratings downgrades and
liquidity constraints. To date, our primary mortgage servicer
counterparties generally have continued to meet their
obligations to us; however, the financial difficulties that
several of our mortgage servicers are experiencing, coupled with
growth in the number of delinquent loans on their books of
business, may negatively affect the ability of these
counterparties to continue to meet their obligations to us. We
are also relying on our mortgage servicers to play a significant
role in the implementation of our homeownership assistance
programs, and the broad scope of some of these programs, as well
as current challenging market conditions, may limit their
capacity to support these programs.
If a significant mortgage servicer counterparty is placed into
conservatorship or taken over by the Federal Deposit Insurance
Corporation (FDIC), and its mortgage servicing
obligations are not transferred to a company with the ability
and intent to fulfill all of these obligations, we could incur
credit losses associated with loan delinquencies, as well as
penalties for late payment of taxes and insurance on the
properties that secure the mortgage loans serviced by that
mortgage servicer. In addition, we likely would be forced to
incur the costs and potential increases in servicing fees
necessary to replace the defaulting mortgage servicer. Also,
because we delegate the servicing of our mortgage loans to
mortgage servicers and do not have our own servicing function,
the loss of business from a significant mortgage servicer
counterparty could pose significant risks to our ability to
conduct our business effectively.
We could also be required to absorb losses on defaulted loans
that a failed servicer is obligated to repurchase from us if we
determine there was an underwriting or eligibility breach. For
example, in 2008, IndyMac Bank, F.S.B., one of our single-family
mortgage servicers, was closed by the Office of Thrift
Supervision, and the FDIC became its conservator. In March 2009,
in connection with the FDICs sale of the IndyMac servicing
rights related to our servicing portfolio to another mortgage
servicer, we reached a settlement with the FDIC. In exchange for
a payment, we agreed to waive enforcement against the FDIC and
the buyer of certain of our repurchase and indemnity rights. The
payment we received in the settlement with the FDIC was
significantly less than the amount for which we filed a claim in
the IndyMac Bank receivership for existing and projected future
losses related to repurchases.
In addition, if we decide to replace a mortgage servicer due to
our assessment of its financial condition or for other reasons,
we could incur costs and potential increases in servicing fees
and could also face operational risks associated with the
transfer.
98
Our mortgage servicers are obligated to repurchase loans or
foreclosed properties, or reimburse us for losses if the
foreclosed property has been sold, if it is determined that the
mortgage loan did not meet our requirements. Beginning in 2008,
there has been a substantial increase in the amount of
repurchase and reimbursement requests that we have made to our
mortgage servicers, a significant number of which remain
outstanding. The amount of these outstanding repurchase and
reimbursement requests has continued to increase significantly
in the first six months of 2009. The amount of our outstanding
repurchase and reimbursement requests is increasing primarily
due to increases in the number of our delinquent and defaulted
mortgage loans, which has resulted in a corresponding increase
in the number of these mortgage loans that we review for
compliance with our requirements. In addition, mortgage insurers
have significantly increased the number of mortgage loans for
which they have rescinded coverage. In these cases, we require
the servicer to repurchase the loan or indemnify us against loss
resulting from the rescission of mortgage insurance coverage.
We expect the amount of our outstanding repurchase and
reimbursement requests to remain high in 2009 and into 2010. We
continue to work with our mortgage servicers to fulfill these
outstanding repurchase and reimbursement requests; however, as
the volume of servicer repurchases and reimbursements increases,
the risk increases that affected servicers will not be able to
meet the terms of their repurchase and reimbursement
obligations. If a significant servicer counterparty, or a number
of servicer counterparties, failed to fulfill their repurchase
and reimbursement obligations to us, it could result in a
substantial increase in our credit losses and have a material
adverse effect on our results of operations and financial
condition.
We also are exposed to the risk that a mortgage servicer or
another party involved in a mortgage loan transaction will
engage in mortgage fraud by misrepresenting the facts about the
loan. We have experienced financial losses in the past and may
experience significant financial losses and reputational damage
in the future as a result of mortgage fraud.
Mortgage
Insurers
We use several types of credit enhancement to manage our
mortgage credit risk, including primary and pool mortgage
insurance coverage, risk sharing agreements with lenders and
financial guaranty contracts. Mortgage insurance risk in
force represents our maximum potential loss recovery under
the applicable mortgage insurance policies. We had total
mortgage insurance coverage risk in force of $112.5 billion
on the single-family mortgage loans in our guaranty book of
business as of June 30, 2009, which represented
approximately 4% of our single-family guaranty book of business
as of June 30, 2009. Primary mortgage insurance represented
$104.1 billion of this total, and pool mortgage insurance
was $8.4 billion. We had total mortgage insurance coverage
risk in force of $118.7 billion on the single-family
mortgage loans in our guaranty book of business as of
December 31, 2008, which represented approximately 4% of
our single-family guaranty book of business as of
December 31, 2008. Primary mortgage insurance represented
$109.0 billion of this total, and pool mortgage insurance
was $9.7 billion.
We received proceeds under our primary and pool mortgage
insurance policies for single-family loans of $1.3 billion
for the six months ended June 30, 2009 and
$1.8 billion for the year ended December 31, 2008. We had
outstanding receivables from mortgage insurers of
$1.4 billion as of June 30, 2009 and $1.1 billion
as of December 31, 2008, related to amounts claimed on
insured, defaulted loans that we have not yet received.
Increases in mortgage insurance claims due to higher defaults
and credit losses in recent periods have adversely affected the
financial results and condition of many mortgage insurers. Since
January 1, 2009, Standard & Poors, Fitch
and Moodys have downgraded, in some cases more than once,
the insurer financial strength ratings of each of our top eight
mortgage insurer counterparties that continues to be rated. As a
result of the downgrades, our mortgage insurer
counterparties current insurer financial strength ratings
are below the AA- level that we require under our
qualified mortgage insurer approval requirements to be
considered qualified as a Type 1 mortgage insurer.
Table 44 presents our maximum potential loss recovery for the
primary and pool mortgage insurance coverage on single-family
loans in our guaranty book of business by mortgage insurer for
our top eight mortgage insurer counterparties as of
June 30, 2009, as well as the insurer financial strength
ratings of each of these
99
counterparties as of July 27, 2009. These mortgage insurers
provided 99% of our total mortgage insurance coverage on
single-family loans in our guaranty book of business as of
June 30, 2009.
Table
44: Mortgage Insurance Coverage
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As of June 30, 2009
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As of July 27, 2009
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Maximum
Coverage(2)
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Insurer Financial Strength Ratings
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Counterparty:(1)
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Primary
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Pool
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Total
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Moodys
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S&P
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Fitch
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(Dollars in millions)
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Mortgage Guaranty Insurance Corporation
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$
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24,639
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$
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2,396
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$
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27,035
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Ba2
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BB
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BBB-
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Radian Guaranty, Inc.
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16,152
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809
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16,961
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Ba3
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BB-
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NR
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Genworth Mortgage Insurance Corporation
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16,411
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420
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16,831
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Baa2
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BBB+
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NR
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PMI Mortgage Insurance Co.
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14,317
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1,593
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15,910
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Ba3
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BB-
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NR
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United Guaranty Residential Insurance Company
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15,273
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269
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15,542
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A3
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BBB+
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BBB
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Republic Mortgage Insurance Company
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11,416
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1,610
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13,026
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Baa2
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A-
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BBB
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Triad Guaranty Insurance
Corporation(3)
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3,763
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1,283
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5,046
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NR
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NR
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NR
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CMG Mortgage Insurance
Company(4)
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2,029
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2,029
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NR
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BBB+
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A+
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(1) |
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Insurance coverage amounts provided
for each counterparty may include coverage provided by
consolidated subsidiaries of the counterparty.
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(2) |
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Maximum coverage refers to the
aggregate dollar amount of insurance coverage (i.e., risk
in force) on single-family loans in our guaranty book of
business and represents our maximum potential loss recovery
under the applicable mortgage insurance policies.
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(3) |
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In June 2008, we suspended Triad
Guaranty Insurance Corporation as a qualified Fannie Mae
mortgage insurer for loans not closed prior to July 15,
2008. In April 2009, Triads regulator issued an order
under which claims will be paid 60% in cash and 40% by the
creation of a deferred payment obligation, as discussed below.
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(4) |
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CMG Mortgage Insurance Company is a
joint venture owned by PMI Mortgage Insurance Co. and CUNA
Mutual Investment Corporation.
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The current weakened financial condition of our mortgage insurer
counterparties creates an increased risk that these
counterparties will fail to fulfill their obligations to
reimburse us for claims under insurance policies. A number of
our mortgage insurers have publicly disclosed that they may
exceed the state-imposed
risk-to-capital
limits under which they operate some time during 2009 and they
may not have access to sufficient capital to continue to write
new business in accordance with state regulatory requirements.
In addition, many mortgage insurers have been exploring and
continue to explore capital raising opportunities with little
success. If mortgage insurers are not able to raise capital and
exceed their
risk-to-capital
limits, they will likely be forced into run-off or receivership.
A mortgage insurer that is in run-off continues to collect
premiums and pay claims on its existing insurance business, but
no longer writes new insurance. This would increase the risk
that the mortgage insurer will fail to reimburse us for claims
under insurance policies, and could also cause the quality and
speed of their claims processing to deteriorate. In addition, if
we are no longer willing or able to conduct business with one or
more of our mortgage insurer counterparties, it is likely we
would further increase our concentration risk with the remaining
mortgage insurers in the industry.
In July 2009, Mortgage Guaranty Insurance Corporation
(MGIC), our largest mortgage insurer counterparty,
announced that its regulator had approved a restructuring plan
under which MGIC would contribute up to $1 billion to MGIC
Indemnity Corporation (MIC), a wholly-owned
subsidiary, in order to enable MIC to write new mortgage
guaranty insurance beginning in January 2010. Generally, the
plan provided for MGIC to make an initial capital contribution
of $500 million to MIC in July 2009 and an additional
$500 million contribution to MIC in January 2011. Under the
plan, MGIC would have continued to write new business in each
jurisdiction in which it currently operates until such time as
MIC could begin operations there. MGICs plan required
additional regulatory and GSE approvals before it could take
effect. On August 3, 2009, MGIC announced that: it had
delayed the date on which it plans to make its first
contribution of capital to MIC; it expects that the amount of
capital to be contributed to MIC by MGIC will be reduced; and,
as part of obtaining GSE approval of MIC, it is possible that
MIC would write new business only in states where MGIC does not
meet regulatory capital requirements and MGIC would continue to
write new business in the
100
remaining states. As of August 5, 2009, we have not
approved MIC as a qualified mortgage insurer, but we remain in
discussions with MGIC. Any capital contribution by MGIC to a
subsidiary would result in less liquidity available to MGIC to
pay claims on its existing book of business, resulting in an
increased risk that MGIC might not pay its claims in full in the
future.
In June 2008, Triad Guaranty Insurance Corporation announced it
would cease issuing commitments in July 2008 for new mortgage
insurance and would run-off its existing business. In April
2009, Triad received an order from its regulator that changes
the way it will pay all policyholder claims. Under the order,
unless the order is subsequently rescinded or modified by the
regulator, all valid claims under Triads mortgage guaranty
insurance policies will be paid 60% in cash and 40% by the
creation of a deferred payment obligation. Triad began paying
claims through this combination of cash and deferred payment
obligations in June 2009. When, and if, Triads financial
position permits, Triads regulator will allow Triad to
begin paying its deferred payment obligations
and/or
increase the amount of cash Triad pays on claims. Because it is
uncertain that these claims will be paid in full and based on
our assessment that we have incurred probable losses as a result
of Triads claims deferral program, we have established a
loss reserve of $293 million associated with Triads
claims deferral program.
From time to time, we may enter into negotiated transactions
with mortgage insurer counterparties pursuant to which we agree
to cancellation of insurance coverage in exchange for a
cancellation fee. For example, in July 2009, we agreed to cancel
mortgage guaranty insurance coverage provided by a mortgage
insurer counterparty on a number of mortgage pools in exchange
for a termination fee that represented an acceleration of, and
discount on, claims expected to be paid pursuant to the coverage.
If our assessment of one or more of our mortgage insurer
counterpartys ability to fulfill its obligations to us
worsens or its credit rating is significantly downgraded, it
could result in a significant increase in our loss reserves.
Except for Triads claims deferral program discussed above,
our mortgage insurer counterparties have continued to pay claims
owed to us. As noted above, our mortgage insurer counterparties
have significantly increased the number of mortgage loans for
which they have rescinded coverage. In these cases, we require
the servicer to repurchase the loan or indemnify us against loss
resulting from the rescission of mortgage insurance coverage.
Our analysis of the financial condition of our mortgage insurer
counterparties also could result in a significant increase in
the fair value of our guaranty obligation. As our internal
credit ratings of our mortgage insurer counterparties decreases,
we reduce the amount of benefits we expect to receive from the
insurance they provide, which in turn increases the fair value
of our guaranty obligation. A portion of the increase in the
fair value of our guaranty obligation in the first six months of
2009 was attributable to downgrades in our internal credit
ratings of our mortgage insurer counterparties.
We monitor our risk exposure to mortgage insurers through
frequent discussions with the insurers management, the
rating agencies and insurance regulators, and in-depth financial
reviews and stress analyses of the insurers portfolios,
cash flow solvency and capital adequacy. Besides evaluating
their condition to assess whether we have incurred probable
losses in connection with our coverage, we also evaluate these
counterparties individually to determine whether or under what
conditions they will remain eligible to insure new mortgages
sold to us. Factors we consider in our evaluations include the
risk profile of the insurers existing portfolios, the
insurers liquidity and capital adequacy to pay expected
claims, the insurers plans to maintain capital within the
insuring entity, the insurers success in controlling
capital outflows to their holding companies and affiliates, as
well as the current market environment and our alternative
sources of credit enhancement.
Except for Triad, which ceased issuing commitments for mortgage
insurance in July 2008, as of August 5, 2009, our mortgage
insurer counterparties remain qualified to conduct business with
us. However, based on our evaluation of them, we may impose
additional terms and conditions of approval on some of our
mortgage insurers, including: limiting the volume and types of
loans they may insure for us; requiring them to obtain our
consent prior to providing risk sharing arrangements with
mortgage lenders; and requiring them to meet certain financial
conditions, such as maintaining a minimum level of
policyholders surplus, a maximum
101
risk-to-capital
ratio, a maximum combined ratio, parental or other capital
support agreements and limitations on the types and volumes of
certain assets that may be considered as liquid assets.
We generally are required pursuant to our charter to obtain
credit enhancement on conventional single-family mortgage loans
that we purchase or securitize with
loan-to-value
ratios over 80% at the time of purchase. In the current
environment, many mortgage insurers have stopped insuring new
mortgages with higher
loan-to-value
ratios or with lower borrower FICO credit scores or on select
property types, which has contributed to the reduction in our
business volumes for high
loan-to-value
ratio loans. If our mortgage insurer counterparties further
restrict their eligibility requirements or new business volumes
for high
loan-to-value
ratio loans, or if we are no longer willing or able to obtain
mortgage insurance from these counterparties, and we are not
able to find suitable alternative methods of obtaining credit
enhancement for these loans, we may be further restricted in our
ability to purchase or securitize loans with
loan-to-value
ratios over 80% at the time of purchase. Approximately 22% of
our conventional single-family business volume for 2008
consisted of loans with a
loan-to-value
ratio higher than 80% at the time of purchase. For the first six
months of 2009, these loans accounted for 9% our single-family
business volume.
In connection with the Home Affordable Refinance Program, we are
generally able to purchase an eligible loan if the loan has
mortgage insurance in an amount at least equal to the amount of
mortgage insurance that existed on the loan that was refinanced.
As a result, these loans with
loan-to-value
ratios above 80% may have no mortgage insurance or less
insurance than we would otherwise require for a loan not
originated under this program.
Financial
Guarantors
We were the beneficiary of financial guarantees totaling
approximately $9.8 billion and $10.2 billion as of
June 30, 2009 and December 31, 2008, respectively, on
securities held in our investment portfolio or on securities
that have been resecuritized to include a Fannie Mae guaranty
and sold to third parties. The securities covered by these
guarantees consist primarily of private-label mortgage-related
securities and mortgage revenue bonds. We are also the
beneficiary of financial guarantees obtained from Freddie Mac,
the federal government and its agencies that totaled
approximately $49.6 billion and $43.5 billion as of
June 30, 2009 and December 31, 2008, respectively.
Eight of our nine financial guarantors had their financial
strength ratings downgraded in the first six months of 2009.
These ratings downgrades have resulted in reduced liquidity and
prices for our securities for which we have obtained financial
guarantees. These ratings downgrades also imply an increased
risk that these financial guarantors will fail to fulfill their
obligations to reimburse us for claims under their guaranty
contracts. Although none of our financial guarantor
counterparties has failed to repay us for claims under guaranty
contracts, based on the stressed financial condition of our
financial guarantor counterparties, we do not believe that our
financial guarantor counterparties will fully meet their
obligations to us in the future.
From time to time, we may enter into negotiated transactions
with financial guarantor counterparties pursuant to which we
agree to cancellation of their guaranty in exchange for a
cancellation fee. For example, in July 2009, we accepted an
offer from one of our financial guarantor counterparties to
cancel its guarantee of one bond in exchange for a payment
representing a small fraction of the guaranteed amount.
As described in
Part IIItem 7MD&ACritical
Accounting Policies and
EstimatesOther-than-temporary
Impairment of Investment Securities of our 2008
Form 10-K,
we consider the financial strength of our financial guarantors
in assessing our securities for
other-than-temporary
impairment. For the quarter ended June 30, 2009, we
recognized
other-than-temporary
impairments of $9 million related to securities for which
we had obtained financial guarantees. We continue to monitor the
effects that our financial guarantor counterparties
financial condition and downgrades in their insurer financial
strength ratings may have on the value of the securities in our
investment portfolio. Further downgrades in the ratings of our
financial guarantor counterparties could result in a reduction
in the fair value of, and additional
other-than-temporary
impairments on, the securities they guarantee. See
Consolidated Balance Sheet AnalysisTrading and
Available-for-Sale
Investment SecuritiesInvestments in Private-Label Mortgage-
102
Related Securities for more information on our investments
in private-label mortgage-related securities and municipal bonds.
Lenders
with Risk Sharing
We enter into risk sharing agreements with lenders pursuant to
which the lenders agree to bear all or some portion of the
credit losses on the covered loans. Our maximum potential loss
recovery from lenders under these risk sharing agreements on
single-family loans was $20.8 billion as of June 30,
2009 and $24.2 billion as of December 31, 2008. Our
maximum potential loss recovery from lenders under these risk
sharing agreements on multifamily loans was $28.0 billion
and $27.2 billion as of June 30, 2009 and
December 31, 2008, respectively.
Unfavorable market conditions have adversely affected, and are
expected to continue to adversely affect, the liquidity and
financial condition of our lender counterparties. The percentage
of single-family recourse obligations to lenders with investment
grade credit ratings (based on the lower of Standard &
Poors, Moodys and Fitch ratings) decreased to 45% as
of June 30, 2009 from 50% as of December 31, 2008. The
percentage of these recourse obligations to lender
counterparties rated below investment grade increased to 20% as
of June 30, 2009, from 13% as of December 31, 2008.
The remaining 35% and 36% of these recourse obligations were to
lender counterparties that were not rated by rating agencies as
of June 30, 2009 and December 31, 2008, respectively.
Given the stressed financial condition of many of our lenders
with risk sharing, we expect in some cases we will recover less,
perhaps significantly less, than the amount the lender is
obligated to provide us under our arrangement with them.
Depending on the financial strength of the counterparty, we may
require a lender to pledge collateral to secure its recourse
obligations. In addition, in September 2008 we began requiring
that single-family lenders taking on recourse obligations to us
have a minimum credit rating of AA- or provide us with
equivalent credit enhancement.
Unfavorable conditions in the multifamily mortgage market
potentially could result in growing losses for both us and our
lender partners. Our primary multifamily delivery channel is the
Delegated Underwriting and Servicing, or
DUS®,
program, which is comprised of multiple lenders that span the
spectrum from large sophisticated banks to smaller independent
multifamily lenders. Several of our DUS lenders and their parent
companies have come under stress due to overall market
conditions. Given the recourse nature of the DUS program, these
lenders are bound by higher eligibility standards that dictate,
among other items, minimum capital and liquidity levels, and the
posting of collateral with us to support a portion of the
lenders loss sharing obligations. To help ensure the level
of risk that is being taken with these lenders remains
appropriate, we actively monitor the financial condition of
these lenders.
Custodial
Depository Institutions
A total of $68.5 billion and $28.8 billion in deposits
for single-family payments were received and held by 289 and 298
institutions in the months of June 2009 and December 2008,
respectively. Of these total deposits, 95% and 96% were held by
institutions rated as investment grade by Standard &
Poors, Moodys and Fitch as of June 30, 2009 and
December 31, 2008, respectively. Our ten largest custodial
depository institutions held 92% and 93% of these deposits as of
June 30, 2009 and December 31, 2008, respectively.
If a custodial depository institution were to fail while holding
remittances of borrower payments of principal and interest due
to us in our custodial account, we would be an unsecured
creditor of the depository for balances in excess of the deposit
insurance protection and might not be able to recover all of the
principal and interest payments being held by the depository on
our behalf, or there might be a substantial delay in receiving
these amounts. If this were to occur, we would be required to
replace these amounts with our own funds to make payments that
are due to Fannie Mae MBS certificateholders. Accordingly, the
insolvency of one of our principal custodial depository
counterparties could result in significant financial losses to
us.
In October 2008, the FDIC published an interim rule announcing
changes to its deposit insurance rules that govern how funds in
accounts maintained by a custodial depository, consisting of
principal and interest payments made by a borrower, are insured.
Pursuant to the Emergency Economic Stabilization Act of 2008
(the Stabilization Act), the rule also temporarily
increased the amount of deposit insurance available from
103
$100,000 to $250,000 per depositor through December 31,
2009. In May 2009, the Helping Families Save Their Homes Act
extended this temporary increase in the FDICs standard
maximum deposit insurance amount through December 31, 2013.
Under the FDIC rule implemented in October 2008, borrower
principal and interest payments are not aggregated with any
other accounts owned by the borrower for the purpose of
determining the full amount of deposit insurance coverage. The
FDICs rule also provided that the FDIC would insure on a
per-mortgagor basis for principal and interest payments held in
mortgage servicing accounts. These rule changes substantially
lowered our counterparty exposure relating to principal and
interest payments held on our behalf in custodial depository
accounts.
Issuers
of Securities Held in our Cash and Other Investments
Portfolio
Our cash and other investments portfolio consists of cash and
cash equivalents, federal funds sold and securities purchased
under agreements to resell, asset-backed securities, corporate
debt securities, and other non-mortgage related securities. See
Liquidity and Capital ManagementLiquidity
ManagementLiquidity Contingency Planning for more
detailed information on our cash and other investments
portfolio. Our counterparty risk is primarily with the issuers
of unsecured corporate debt and financial institutions with
short-term deposits.
Our cash and other investments portfolio, which totaled
$69.8 billion and $93.0 billion as of June 30,
2009 and December 31, 2008, respectively, included
$45.7 billion and $56.7 billion, respectively, of
unsecured positions with issuers of corporate debt securities or
short-term deposits with financial institutions. Of these
unsecured amounts, approximately 95% and 93% as of June 30,
2009 and December 31, 2008, respectively, were with issuers
who had a credit rating of AA (or its equivalent) or higher,
based on the lowest of Standard & Poors,
Moodys and Fitch ratings.
Due to adverse financial market conditions, substantially all of
the issuers of non-mortgage related securities in our cash and
other investments portfolio have experienced financial
difficulties, ratings downgrades
and/or
liquidity constraints, which have significantly reduced, and may
cause further reduction in, the market value and liquidity of
these investments. We no longer purchase and intend to either
continue to sell these non-mortgage-related securities from time
to time as market conditions permit or allow them to mature,
depending on which alternative we believe will deliver a better
economic return.
We monitor the credit risk position of our cash and other
investments portfolio by duration and rating level. In addition,
we monitor the financial position and any downgrades of these
counterparties. The outcome of our monitoring could result in a
range of events, including selling some of these investments. In
recent months we have reduced the number of counterparties in
our cash and other investments portfolio. If one of our primary
cash and other investments portfolio counterparties fails to
meet its obligations to us under the terms of the securities, it
could result in financial losses to us and have a material
adverse effect on our earnings, liquidity, financial condition
and net worth.
Derivatives
Counterparties
Our derivative credit exposure relates principally to interest
rate and foreign currency derivatives contracts. We estimate our
exposure to credit loss on derivative instruments by calculating
the replacement cost, on a present value basis, to settle at
current market prices all outstanding derivative contracts in a
net gain position by counterparty where the right of legal
offset exists, such as master netting agreements, and by
transaction where the right of legal offset does not exist.
Derivatives in a gain position are reported in our condensed
consolidated balance sheets as Derivative assets at fair
value.
We present our credit loss exposure for our outstanding risk
management derivative contracts, by counterparty credit rating,
as of June 30, 2009 and December 31, 2008 in
Notes to Condensed Consolidated Financial
StatementsNote 11, Derivative Instruments and Hedging
Activities. We expect our credit exposure on derivative
contracts to fluctuate with changes in interest rates, implied
volatility and the collateral thresholds of the counterparties.
Typically, we seek to manage this exposure by contracting with
experienced counterparties that are rated A- (or its equivalent)
or better. These counterparties consist of large banks,
104
broker-dealers and other financial institutions that have a
significant presence in the derivatives market, most of which
are based in the United States.
We also manage our exposure to derivatives counterparties by
requiring collateral in specified instances. We have a
collateral management policy with provisions for requiring
collateral on interest rate and foreign currency derivative
contracts in net gain positions based upon the
counterpartys credit rating. The collateral includes cash,
U.S. Treasury securities, agency debt and agency
mortgage-related securities. Cash collateral posted to us prior
to July 10, 2009 and non-cash collateral posted to us is
held and monitored daily by a third-party custodian. Beginning
July 10, 2009, cash collateral posted to us is held and
monitored by us. We analyze credit exposure on our derivative
instruments daily and make collateral calls as appropriate based
on the results of internal pricing models and dealer quotes. In
the case of a bankruptcy filing by an interest rate or foreign
currency derivative counterparty or other default by the
counterparty under the derivative contract, we would have the
right to terminate all outstanding derivative contracts with
that counterparty and we may retain collateral previously posted
by that counterparty to the extent that we are in a net gain
position on the termination date.
Our net credit exposure on derivatives contracts increased to
$219 million as of June 30, 2009, from
$207 million as of December 31, 2008. To reduce our
credit risk concentration, we seek to diversify our derivative
contracts among different counterparties. Since the majority of
our derivative transactions netted by counterparty are in a net
loss position, our risk exposure is smaller and more
concentrated than in recent years. For the second quarter of
2009, we had exposure to only four interest-rate and foreign
currency derivatives counterparties in a net gain position.
Approximately $97.8 million, or 45%, of our net derivatives
exposure as of June 30, 2009 was with two interest-rate and
foreign currency derivative counterparties rated AA- or better
by Standard & Poors and Aa3 or better by
Moodys. The two remaining interest-rate and foreign
currency derivative counterparties accounted for
$58.0 million, or 26%, of our net derivatives exposure as
of June 30, 2009, and were rated A or better by
Standard & Poors and A1 or better by
Moodys. Of the $63.3 million of net exposure in other
derivatives as of June 30, 2009, approximately 94%
consisted of mortgage insurance contracts.
The concentration of our derivatives exposure among our interest
rate and foreign currency derivatives counterparties has
increased since 2008, and may increase with further industry
consolidation. Current adverse conditions in the financial
markets also may result in further ratings downgrades of our
derivatives counterparties that may cause us to cease entering
into new arrangements with those counterparties or that may
result in more limited interest from derivatives counterparties
in entering into new transactions with us, either of which would
further increase the concentration of our business with our
remaining derivatives counterparties and could adversely affect
our ability to manage our interest rate risk. The increasing
concentration of our derivatives counterparties may require us
to rebalance our derivatives contracts among different
counterparties. We had outstanding interest rate and foreign
currency derivative transactions with 17 counterparties as of
June 30, 2009 and 19 counterparties as of December 31,
2008. Derivatives transactions with 9 of our counterparties
accounted for approximately 94% of our total outstanding
notional amount as of June 30, 2009, with each of these
counterparties accounting for between approximately 5% and 24%
of the total outstanding notional amount. In addition to the 17
counterparties with whom we had outstanding notional amounts as
of June 30, 2009, we had master netting agreements with 2
additional counterparties with whom we may enter into interest
rate derivative or foreign currency derivative transactions in
the future. See Part IIItem 1ARisk
Factors for a discussion of the risks to our business as a
result of the increasing concentration of our derivatives
counterparties.
As a result of current adverse financial market conditions, we
may experience further losses relating to our derivative
contracts. In addition, if a derivative counterparty were to
default on payments due under a derivative contract, we could be
required to acquire a replacement derivative from a different
counterparty at a higher cost. Alternatively, we could be unable
to find a suitable replacement, which could adversely affect our
ability to manage our interest rate risk. See Interest
Rate Risk Management and Other Market Risks for
information on the outstanding notional amount of our risk
management derivative contracts as of June 30, 2009 and
December 31, 2008 and for a discussion of how we use
derivatives to manage our interest rate risk.
105
See Part IItem 1ARisk Factors
of our 2008
Form 10-K
for a discussion of the risks to our business posed by interest
rate risk.
Other
Counterparty Risks
For a more detailed discussion of our counterparty risks,
including counterparty risk we face from mortgage originators
and investors, from debt security and mortgage dealers, and from
document custodians, please see
Part IIItem 7MD&ARisk
ManagementCredit Risk ManagementInstitutional
Counterparty Credit Risk Management and
Part IItem 1ARisk Factors in
our 2008
Form 10-K.
Interest
Rate Risk Management and Other Market Risks
Our most significant market risks are interest rate risk and
spread risk, which primarily arise from our mortgage asset
investments. Our exposure to interest rate risk relates to the
cash flow
and/or
market price variability of our assets and liabilities
attributable to movements in market interest rates. Our exposure
to spread risk relates to the possibility that interest rates in
different market sectors, such as the mortgage and debt markets,
will not move in tandem.
Our overall goal is to manage interest rate risk by maintaining
a close match between the duration of our assets and
liabilities. We employ an integrated interest rate risk
management strategy that allows for informed risk taking within
pre-defined corporate risk limits. We historically have actively
managed the interest rate risk of our net portfolio,
which is defined below, through the following techniques:
(i) through asset selection and structuring (that is, by
identifying or structuring mortgage assets with attractive
prepayment and other risk characteristics), (ii) by issuing
a broad range of both callable and non-callable debt instruments
and (iii) by using LIBOR-based interest-rate derivatives.
We historically, however, have not actively managed or hedged
our spread risk, or the impact of changes in the spread between
our mortgage assets and debt (referred to as
mortgage-to-debt
spreads) after we purchase mortgage assets, other than through
asset monitoring and disposition. Because we intend to hold the
majority of our mortgage assets to maturity to realize the
contractual cash flows, we accept
period-to-period
volatility in our financial performance attributable to changes
in
mortgage-to-debt
spreads that occur after our purchase of mortgage assets.
We regularly disclose two interest rate risk metrics that
estimate our overall interest rate exposure: (i) fair value
sensitivity to changes in interest rate levels and the slope of
the yield curve and (ii) duration gap. The metrics used to
measure our interest rate exposure are generated using internal
models that require numerous assumptions. There are inherent
limitations in any methodology used to estimate the exposure to
changes in market interest rates. When market conditions change
rapidly and dramatically, as they did during the financial
market crisis, the assumptions that we use in our models to
measure our interest rate exposure may not keep pace with
changing conditions. For example, the tightening of credit and
underwriting standards and decline in home prices have reduced
refinancing options and have generally caused mortgage
prepayment models based on historical data to overestimate the
responsiveness, or rate, of mortgage refinancings, particularly
for credit-impaired borrowers or borrowers with limited or no
equity in their home. Accordingly, we believe that the existing
prepayment models used to generate our interest rate risk
disclosures reflect a higher level of responsiveness to changes
in mortgage rates for our Alt-A and subprime private-label
mortgage-related securities than we believe is reasonable given
current market conditions. As a result, beginning in December
2008, we have relied on adjusted interest rate risk metrics that
exclude the sensitivity associated with our Alt-A and subprime
private-label mortgage-related securities to manage our interest
rate risk.
We provide additional detail on our interest rate risk and our
strategies for managing this risk in this section, including:
(1) the primary sources of our interest rate risk;
(2) our current interest rate risk management strategies;
and (3) our interest rate risk metrics.
Sources
of Interest Rate Risk
The primary source of our interest rate risk is our net
portfolio. Our net portfolio consists of our existing
investments in mortgage assets, investments in non-mortgage
securities, our outstanding debt used to fund
106
those assets and the derivatives used to supplement our debt
instruments and manage interest rate risk, and any fixed-price
asset, liability or derivative commitments. It also includes our
LIHTC partnership investment assets and preferred stock, but
excludes our existing guaranty business.
Our mortgage assets consist mainly of single-family fixed-rate
mortgage loans that give borrowers the option to prepay at any
time before the scheduled maturity date or continue paying until
the stated maturity. Given this prepayment option held by the
borrower, we are exposed to uncertainty as to when or at what
rate prepayments will occur, which affects the length of time
our mortgage assets will remain outstanding and the timing of
the cash flows related to these assets. This prepayment
uncertainty results in a potential mismatch between the timing
of receipt of cash flows related to our assets and the timing of
payment of cash flows related to our liabilities.
Interest
Rate Risk Management Strategies
Our strategy for managing the interest rate risk of our net
portfolio involves asset selection and structuring of our
liabilities to match and offset the interest rate
characteristics of our balance sheet assets and liabilities as
much as possible. Our strategy consists of the following
principal elements:
|
|
|
|
|
Debt Instruments. We issue a broad range of
both callable and non-callable debt instruments to manage the
duration and prepayment risk of expected cash flows of the
mortgage assets we own.
|
|
|
|
Derivative Instruments. We supplement our
issuance of debt with derivative instruments to further reduce
duration and prepayment risks.
|
|
|
|
Monitoring and Active Portfolio
Rebalancing. We continually monitor our risk
positions and actively rebalance our portfolio of interest
rate-sensitive financial instruments to maintain a close match
between the duration of our assets and liabilities.
|
We provide additional information on our interest rate risk
management strategies in
Part IIItem 7MD&ARisk
ManagementInterest Rate Risk Management and Other Market
RisksInterest Rate Risk Management Strategies of our
2008
Form 10-K.
Although the fair value of our guaranty assets and our guaranty
obligations is highly sensitive to changes in interest rates and
the markets perception of future credit performance, we do
not actively manage the change in the fair value of our guaranty
business that is attributable to changes in interest rates. We
do not believe that periodic changes in fair value due to
movements in interest rates are the best indication of the
long-term value of our guaranty business because these changes
do not take into account future guaranty business activity. To
assess the value of our underlying guaranty business, we focus
primarily on changes in the fair value of our net guaranty
assets resulting from business growth, changes in the credit
quality of existing guaranty arrangements and changes in
anticipated future credit performance. Based on our historical
experience, we expect that the guaranty fee income generated
from future business activity would largely replace any guaranty
fee income lost as a result of mortgage prepayments that result
from changes in interest rates. We are in the process of
re-evaluating whether this expectation is appropriate given the
current mortgage market environment and the uncertainties
related to recent government policy actions. See
Part IIItem 7Critical Accounting
Policies and EstimatesFair Value of Financial
Instruments of our 2008
Form 10-K
for information on how we determine the fair value of our
guaranty assets and guaranty obligations. Also see Notes
to Condensed Consolidated Financial
StatementsNote 18, Fair Value of Financial
Instruments.
Derivatives
Activity
Derivative instruments also are an integral part of our strategy
in managing interest rate risk. Decisions regarding the
repositioning of our derivatives portfolio are based upon
current assessments of our interest rate risk profile and
economic conditions, including the composition of our
consolidated balance sheets and relative mix of our debt and
derivative positions, the interest rate environment and expected
trends.
107
Table 45 presents, by derivative instrument type, our risk
management derivative activity for the six months ended
June 30, 2009, along with the stated maturities of
derivatives outstanding as of June 30, 2009.
Table
45: Activity and Maturity Data for Risk Management
Derivatives(1)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Swaptions
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive-
|
|
|
|
|
|
Foreign
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|
|
Pay-
|
|
|
Receive-
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Pay-Fixed(2)
|
|
|
Fixed(3)
|
|
|
Basis(4)
|
|
|
Currency(5)
|
|
|
Fixed
|
|
|
Fixed
|
|
|
Rate Caps
|
|
|
Other(6)
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|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
546,916
|
|
|
$
|
451,081
|
|
|
$
|
24,560
|
|
|
$
|
1,652
|
|
|
$
|
79,500
|
|
|
$
|
93,560
|
|
|
$
|
500
|
|
|
$
|
827
|
|
|
$
|
1,198,596
|
|
Additions
|
|
|
177,444
|
|
|
|
184,638
|
|
|
|
2,565
|
|
|
|
324
|
|
|
|
13,850
|
|
|
|
6,700
|
|
|
|
2,500
|
|
|
|
13
|
|
|
|
388,034
|
|
Terminations(7)
|
|
|
(73,913
|
)
|
|
|
(63,917
|
)
|
|
|
(4,925
|
)
|
|
|
(546
|
)
|
|
|
(7,000
|
)
|
|
|
(15,580
|
)
|
|
|
|
|
|
|
(92
|
)
|
|
|
(165,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of June 30, 2009
|
|
$
|
650,447
|
|
|
$
|
571,802
|
|
|
$
|
22,200
|
|
|
$
|
1,430
|
|
|
$
|
86,350
|
|
|
$
|
84,680
|
|
|
$
|
3,000
|
|
|
$
|
748
|
|
|
$
|
1,420,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
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Future maturities of notional amounts:
(8)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1 year
|
|
$
|
74,746
|
|
|
$
|
57,986
|
|
|
$
|
18,700
|
|
|
$
|
327
|
|
|
$
|
2,700
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
154,459
|
|
1 year to 5 years
|
|
|
306,920
|
|
|
|
309,968
|
|
|
|
2,265
|
|
|
|
|
|
|
|
42,000
|
|
|
|
|
|
|
|
3,000
|
|
|
|
466
|
|
|
|
664,619
|
|
5 years to 10 years
|
|
|
232,913
|
|
|
|
188,624
|
|
|
|
|
|
|
|
403
|
|
|
|
19,150
|
|
|
|
23,695
|
|
|
|
|
|
|
|
282
|
|
|
|
465,067
|
|
Over 10 years
|
|
|
35,868
|
|
|
|
15,224
|
|
|
|
1,235
|
|
|
|
700
|
|
|
|
22,500
|
|
|
|
60,985
|
|
|
|
|
|
|
|
|
|
|
|
136,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
650,447
|
|
|
$
|
571,802
|
|
|
$
|
22,200
|
|
|
$
|
1,430
|
|
|
$
|
86,350
|
|
|
$
|
84,680
|
|
|
$
|
3,000
|
|
|
$
|
748
|
|
|
$
|
1,420,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay rate
|
|
|
3.92
|
%
|
|
|
0.83
|
%
|
|
|
0.57
|
%
|
|
|
|
|
|
|
5.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
0.83
|
%
|
|
|
3.71
|
%
|
|
|
0.78
|
%
|
|
|
|
|
|
|
|
|
|
|
4.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
Weighted-average interest rate as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay rate
|
|
|
4.66
|
%
|
|
|
2.54
|
%
|
|
|
2.68
|
%
|
|
|
|
|
|
|
5.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
2.79
|
%
|
|
|
4.24
|
%
|
|
|
0.77
|
%
|
|
|
|
|
|
|
|
|
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes mortgage commitments
accounted for as derivatives. Dollars represent notional amounts
that indicate only the amount on which payments are being
calculated and do not represent the amount at risk of loss.
|
|
(2) |
|
Notional amounts include swaps
callable by Fannie Mae of $1.7 billion as of June 30,
2009 and December 31, 2008.
|
|
(3) |
|
Notional amounts include swaps
callable by derivatives counterparties of $25 million and
$10.4 billion as of June 30, 2009 and
December 31, 2008, respectively.
|
|
(4) |
|
Notional amounts include swaps
callable by derivatives counterparties of $885 million and
$925 million as of June 30, 2009 and December 31,
2008, respectively.
|
|
(5) |
|
Exchange rate adjustments to
revalue foreign currency swaps existing at both the beginning
and the end of the period are included in terminations.
Beginning in the second quarter of 2009, exchange rate
adjustments for foreign currency swaps that are added or
terminated during the period are reflected in the respective
categories. Terminations include foreign currency exchange rate
gains of $158 million and $102 million for the three
and six months ended June 30, 2009, respectively. Additions
for the first quarter of 2009 were not reclassified from
terminations.
|
|
(6) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts.
|
|
(7) |
|
Includes matured, called,
exercised, assigned and terminated amounts.
|
|
(8) |
|
Based on contractual maturities.
|
The outstanding notional balance of our risk management
derivatives increased by $222.1 billion during the first
six months of 2009, to $1.4 trillion as of June 30, 2009.
This increase was attributable to the regular
108
rebalancing activities that we engage in as part of our overall
interest rate risk management strategy, as well as transactions
we entered into to reduce our overall derivatives counterparty
risk exposure.
Interest
Rate Risk Metrics
Below we present two metrics that provide useful estimates of
our interest rate exposure: (i) fair value sensitivity of
net portfolio to changes in interest rate levels and slope of
yield curve and (ii) duration gap. We also provide
additional information that may be useful in evaluating our
interest rate exposure. Our fair value sensitivity and duration
gap metrics are based on our net portfolio defined above and are
calculated using internal models that require numerous
assumptions, such as interest rates and future prepayments of
principal over the remaining life of our mortgage assets. These
assumptions are derived based on the characteristics of the
underlying structure of the securities and historical prepayment
rates experienced at specified interest rate levels, taking into
account current market conditions, the current mortgage rates of
our existing outstanding loans, loan age and other factors.
Changes in interest rates typically have the most significant
effect on the extent to which mortgage loans may prepay. The
reliability of our prepayment estimates and interest rate risk
metrics depends on the availability and quality of historical
data for each of the types of securities in our net portfolio.
In light of the extreme impact of the market dislocation on the
performance of Alt-A and subprime mortgage-related securities,
we conducted a review of the assumptions and methodologies used
in calculating our interest rate risk metrics. Based on this
review, we determined that it was necessary to enhance our risk
models to better capture borrower refinancing and prepayment
constraints, such as declines in credit-worthiness or declining
home prices, which have resulted from the stressed housing
market. In the interim, we have been using the adjusted interest
rate risk metrics that we disclose below under the without
PLS column to manage our interest rate risk exposure. We
also have disclosed for comparative purposes our unadjusted
model-generated interest rate risk metrics, which include
prepayment sensitivities for our Alt-A and subprime securities.
We expect to discontinue reporting the unadjusted risk metrics
once the enhancements to our risk metric systems have been
completed, stress tests have been conducted to validate model
results and our Enterprise Risk Office approves our revised risk
metric system. See
Part IIItem 1ARisk Factors for
a discussion of the risks associated with our use of models.
Fair
Value Sensitivity of Net Portfolio to Changes in Level and Slope
of Yield Curve
As part of our disclosure commitments with FHFA, we disclose on
a monthly basis the estimated adverse impact on the fair value
of our net portfolio that would result from a hypothetical
50 basis point shift in interest rates and from a
hypothetical 25 basis point change in the slope of the
yield curve. We calculate on a daily basis the estimated adverse
impact on our net portfolio that would result from an
instantaneous 50 basis point parallel shift in the level of
interest rates and from an instantaneous 25 basis point
change in the slope of the yield curve, calculated as described
below. In measuring the estimated impact of changes in the level
of interest rates, we assume a parallel shift in all maturities
of the U.S. LIBOR interest rate swap curve. In measuring
the estimated impact of changes in the slope of the yield curve,
we assume a constant
7-year rate
and a shift in the
1-year and
30-year
rates of 16.7 basis points and 8.3 basis points,
respectively. We believe the selected interest rate shocks for
our monthly disclosures represent moderate movements in interest
rates over a one-month period.
The daily average adverse impact from a 50 basis point
change in interest rates and from a 25 basis point change
in the slope of the yield curve, adjusted to exclude the
interest rate sensitivities of our Alt-A and subprime
private-label securities, was $(0.5) billion and
$(0.2) billion, respectively, for the month of June 2009,
compared with $(1.1) billion for a 50 basis point
change in interest rates and $(0.3) billion for a
25 basis point change in the slope of the yield curve for
the month of December 2008. The unadjusted daily average adverse
impact from a 50 basis point change in interest rates and
from a 25 basis point change in the slope of the yield
curve was $(0.8) billion and $(0.2) billion,
respectively, for June 2009, compared with $(1.0) billion
and $(0.2) billion, respectively, for December 2008.
109
The sensitivity measures presented in Table 46 below, which we
disclose on a quarterly basis as part of our disclosure
commitments with FHFA, are an extension of our monthly
sensitivity measures. There are three primary differences
between our monthly sensitivity disclosure and the quarterly
sensitivity disclosure presented below: (1) the quarterly
disclosure is expanded to include the sensitivity results for
larger rate level shocks of plus or minus 100 basis points;
(2) the monthly disclosure reflects the estimated pre-tax
impact on the fair value of our net portfolio calculated based
on a daily average, while the quarterly disclosure reflects the
estimated pre-tax impact calculated based on the estimated
financial position of our net portfolio and the market
environment as of the last business day of the quarter based on
values used for financial reporting; and (3) the monthly
disclosure shows the most adverse pre-tax impact on the fair
value of our net portfolio from the hypothetical interest rate
shocks, while the quarterly disclosure includes the estimated
pre-tax impact of both up and down interest rate shocks.
Table
46: Fair Value Sensitivity of Net Portfolio to
Changes in Level and Slope of Yield
Curve(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Without
PLS(2)(4)
|
|
|
With
PLS(3)(4)
|
|
|
Without
PLS(2)(4)(5)
|
|
|
With
PLS(3)(4)(5)
|
|
|
|
(Dollars in billions)
|
|
|
Rate level shock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
−100 basis points
|
|
$
|
(1.4
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(0.4
|
)
|
−50 basis points
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
0.1
|
|
+50 basis points
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(0.7
|
)
|
|
|
(1.6
|
)
|
+100 basis points
|
|
|
(0.3
|
)
|
|
|
(1.1
|
)
|
|
|
(1.6
|
)
|
|
|
(3.3
|
)
|
Rate slope shock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
−25 basis points
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
|
|
(0.4
|
)
|
+25 basis points
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
(1) |
|
Computed based on changes in LIBOR
swap rates.
|
|
(2) |
|
Calculated excluding the
sensitivities of our Alt-A and subprime private-label
mortgage-related investment securities to changes in interest
rates.
|
|
(3) |
|
Calculated including the interest
rate sensitivities for our Alt-A and subprime private-label
mortgage-related investment securities generated by our existing
internal models.
|
|
(4) |
|
Amounts include the sensitivities
of our LIHTC partnership investments.
|
|
(5) |
|
Amounts include the sensitivities
of our preferred stock.
|
Duration
Gap
Duration measures the price sensitivity of our assets and
liabilities to changes in interest rates by quantifying the
difference between the estimated durations of our assets and
liabilities. Our duration gap reflects the extent to which the
estimated maturity and repricing cash flows for our assets are
matched, on average, over time and across interest rate
scenarios, to the estimated cash flows of our liabilities. A
positive duration indicates that the duration of our assets
exceeds the duration of our liabilities. Table 47 below presents
our monthly effective duration gap, excluding and including the
interest rate sensitivities of our Alt-A and subprime
private-label securities, for December 2008 and for each of the
first six months of 2009. For comparative purposes, we present
the historical average daily duration for the
30-year
Fannie Mae MBS component of the Barclays Capital
U.S. Aggregate index, for the same months. As indicated in
Table 47 below, the duration of the mortgage index as calculated
by Barclays Capital is both higher and more volatile than our
duration gap, which is attributable to several factors,
including the following:
|
|
|
|
(1)
|
We use duration hedges, including longer term debt and interest
rate swaps, to reduce the duration of our net portfolio.
|
|
|
(2)
|
We use option-based hedges, including callable debt and interest
rate swaptions, to reduce the convexity or the duration changes
of our net portfolio as interest rates move.
|
|
|
(3)
|
We take rebalancing actions to adjust our net portfolio position
in response to movements in interest rates.
|
110
|
|
|
|
(4)
|
Our mortgage portfolio includes not only
30-year
fixed rate mortgage assets, but also other mortgage assets that
typically have a shorter duration, such as adjustable-rate
mortgage loans, and mortgage assets that generally have a
somewhat longer duration, such as multifamily loans and CMBS.
|
(5) The models used by Barclays Capital and Fannie Mae to
estimate durations are different.
Table
47: Duration Gap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Capital
|
|
|
|
Fannie Mae
|
|
|
Fannie Mae
|
|
|
30-Year Fannie Mae
|
|
|
|
Effective
|
|
|
Effective
|
|
|
Mortgage Index
|
|
|
|
Duration Gap
|
|
|
Duration Gap
|
|
|
Option Adjusted
|
|
Month
|
|
without
PLS(1)
|
|
|
with PLS
|
|
|
Duration(2)
|
|
|
|
(In months)
|
|
|
December 2008
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
21
|
|
January 2009
|
|
|
0
|
|
|
|
2
|
|
|
|
13
|
|
February 2009
|
|
|
1
|
|
|
|
3
|
|
|
|
30
|
|
March 2009
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
26
|
|
April 2009
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
23
|
|
May 2009
|
|
|
1
|
|
|
|
3
|
|
|
|
30
|
|
June 2009
|
|
|
1
|
|
|
|
2
|
|
|
|
41
|
|
|
|
|
(1) |
|
Calculated excluding the
sensitivities of our Alt-A and subprime private-label
mortgage-related investment securities to changes in interest
rates.
|
|
(2) |
|
Reflects average daily
option-adjusted duration, expressed in months, based on the
30-year
Fannie Mae MBS component of the Barclays Capital U.S. Aggregate
index obtained from Barclays Capital Live.
|
As discussed in Executive Summary, the actions we
are taking and the initiatives we have introduced to assist
homeowners and limit foreclosures are significantly different
from our historical approach to delinquencies, defaults and
problem loans. As a result, it is difficult for us to predict
the full extent of our activities under the initiatives and the
impact of these activities on us, including borrower response
rates, which increases the uncertainty of the timing of the cash
flows from our mortgage assets.
Other
Interest Rate Risk Information
The above interest rate risk measures exclude the impact of
changes in the fair value of our net guaranty assets resulting
from changes in interest rates. As previously noted, we exclude
our guaranty business from these sensitivity measures based on
our current assumption that the guaranty fee income generated
from future business activity will largely replace guaranty fee
income lost due to mortgage prepayments that result from changes
in interest rates. We provide additional interest rate
sensitivities below in Table 48, including separate disclosure
of the potential impact on the fair value of our trading assets,
our net guaranty assets and obligations, and our other financial
instruments as of June 30, 2009 and December 31, 2008,
from the same hypothetical changes in the level of interest
rates as presented above in Table 48. We also assume a parallel
shift in all maturities along the interest rate swap curve in
calculating these sensitivities. We believe these interest rate
changes represent reasonably possible near-term changes in
interest rates over the next twelve months.
Table
48: Interest Rate Sensitivity of Financial
Instruments(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
Pre-tax Effect on Estimated Fair Value
|
|
|
|
Estimated
|
|
|
Change in Interest Rates (in basis points)
|
|
|
|
Fair Value
|
|
|
−100
|
|
|
−50
|
|
|
+50
|
|
|
+100
|
|
|
|
(Dollars in millions)
|
|
|
Trading financial instruments
|
|
$
|
82,400
|
|
|
$
|
1,566
|
|
|
$
|
857
|
|
|
$
|
(941
|
)
|
|
$
|
(1,941
|
)
|
Guaranty assets and guaranty obligations,
net(2)
|
|
|
(133,205
|
)
|
|
|
7,520
|
|
|
|
3,593
|
|
|
|
(3,321
|
)
|
|
|
(5,347
|
)
|
Other financial instruments,
net(3)
|
|
|
(76,988
|
)
|
|
|
(1,368
|
)
|
|
|
(629
|
)
|
|
|
295
|
|
|
|
457
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
Pre-tax Effect on Estimated Fair Value
|
|
|
|
Estimated
|
|
|
Change in Interest Rates (in basis points)
|
|
|
|
Fair Value
|
|
|
−100
|
|
|
−50
|
|
|
+50
|
|
|
+100
|
|
|
|
(Dollars in millions)
|
|
|
Trading financial instruments
|
|
$
|
90,806
|
|
|
$
|
1,425
|
|
|
$
|
758
|
|
|
$
|
(962
|
)
|
|
$
|
(1,983
|
)
|
Guaranty assets and guaranty obligations,
net(2)
|
|
|
(90,992
|
)
|
|
|
11,934
|
|
|
|
5,620
|
|
|
|
(6,739
|
)
|
|
|
(7,603
|
)
|
Other financial instruments,
net(3)
|
|
|
(131,881
|
)
|
|
|
(1,589
|
)
|
|
|
(445
|
)
|
|
|
(893
|
)
|
|
|
(1,829
|
)
|
|
|
|
(1) |
|
Excludes some instruments that we
believe have interest rate risk exposure, such as LIHTC
partnership assets and preferred stock. However, we include the
interest rate sensitivities of LIHTC partnership assets in
calculating the fair value sensitivities of our net portfolio to
changes in the level and slope of the yield curve and in
calculating our duration gap.
|
|
(2) |
|
Consists of the net of
Guaranty assets and Guaranty obligations
reported in our condensed consolidated balance sheets. In
addition, includes certain amounts that have been reclassified
from Mortgage loans reported in our condensed
consolidated balance sheets to reflect how the risk of the
interest rate and credit risk components of these loans is
managed by our business segments.
|
|
(3) |
|
Consists of the net of all other
financial instruments reported in Notes to Condensed
Consolidated Financial StatementsNote 18, Fair Value
of Financial Instruments.
|
The interest rate sensitivity of our financial instruments
generally decreased as of June 30, 2009 from
December 31, 2008. Both our guaranty assets and our
guaranty obligations generally increase in fair value when
interest rates increase and decrease in fair value when interest
rates decline. Changes in the combined sensitivity of the
guaranty asset and obligation over this period were largely
driven by the significant increase in the fair value of our
guaranty obligations.
Operational
Risk Management
Operational risk is defined as the risk of loss resulting from
inadequately designed or failed execution of internal processes,
people or systems, or from external events. Given this broad
definition, operational risk can manifest itself in many ways,
including accounting or operational errors, business
disruptions, fraud, human errors, technological failures and
other operational challenges. Similar to other large and complex
institutions, we rely upon business processes that are highly
dependent on people, technology and the use of numerous complex
systems and business models to manage our business and produce
books and records upon which our financial statements are
prepared. Moreover, these systems and models are required to
operate efficiently in an environment where extremely large
volumes of data are processed on a daily basis and in which
changes to our core processes are frequently necessary to
respond to changing external conditions. We have made a number
of changes in our structure, business focus and operations
during the past year, as well as changes to our risk management
processes, to keep pace with the changing external conditions.
These changes, in turn, have necessitated modifications to or
development of new business models, processes, systems,
policies, standards and controls.
Our operational risk management framework includes policies,
tools and operational standards designed to identify, assess,
mitigate, control, report and monitor operational risks across
the company with the goal of identifying and mitigating systemic
operational risks. However, individual operational risk events
and process failures do occur, and limitations in our systems
exist, which individually or in the aggregate could result in
financial losses or damage to our business and reputation. For
example, we are working to correct the design of our controls
for certain inputs to models used in measuring expected cash
flows for the
other-than-temporary
impairment assessment process for private-label mortgage-related
securities. As another example, in July 2009, we announced that
we had identified and were in the process of reviewing an issue
affecting calculated prepayment speeds for certain single-family
Fannie Mae MBS pools that were formed with loans previously
purchased by us and held in our portfolio for future pooling and
securitization. In some cases, full or partial principal
prepayments made on these loans in the month prior to the month
of MBS issuance were included in the principal balance of the
MBS pools on their respective issue dates. The inadvertent
inclusion of those prepayments affected the calculated
prepayment speeds for these pools. On July 28, 2009, we
announced completion of our review and published a list of
pooled-from-portfolio pools
112
issued between February 1 and June 1, 2009 that were
affected. We are continuing to take steps to modify our pooling
process, technology and procedures with the goal of preventing
this issue in the future.
Also, as discussed in Off-Balance Sheet Arrangements and
Variable Interest EntitiesElimination of QSPEs and Changes
in the FIN 46R Consolidation Model, we are in the
process of making major operational and system changes to
implement the new consolidation accounting rules, which will
result in consolidating on our balance sheet the substantial
majority of our outstanding MBS, effective January 1, 2010.
As a result, we expect to reflect approximately 18 million
loans on our consolidated balance sheet, compared with
approximately 2 million loans as of June 30, 2009. We
have devoted significant effort to this project, which involves
several divisions within our company, hundreds of employees and
contractors and a tremendous amount of work across our company.
We expect the operational and system changes we are making to
implement these new accounting rules will have a substantial
impact on our overall internal control environment. Based on our
current assessment, we believe that we will be able to implement
these new accounting rules by the January 1, 2010 effective
date. However, because of the magnitude and complexity of the
operational and system changes that we are making and the
limited amount of time to complete and test our systems
development, unexpected developments could preclude us from
implementing all of the necessary system changes and internal
control processes by the effective date.
See Part IIItem 1ARisk Factors
for additional information on the risks associated with the
implementation of these new accounting rules.
New accounting pronouncements or changes in existing accounting
pronouncements may have a significant effect on our results of
operations, our financial condition, our net worth or our
business operations. We identify and discuss the expected impact
on our consolidated financial statements of recently issued or
proposed accounting pronouncements in Notes to Condensed
Consolidated Financial StatementsNote 2, Summary of
Significant Accounting Policies. Also see
Off-Balance Sheet Arrangements and Variable Interest
Entities for additional discussion of the significant
impact on our financial statements of the recently issued
accounting guidance that eliminates the concept of QSPEs and
changes the FIN 46R consolidation model.
This report includes statements that constitute forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (Exchange Act). In
addition, our senior management may from time to time make
forward-looking statements orally to analysts, investors, the
news media and others. Forward-looking statements often include
words such as expect, anticipate,
intend, plan, believe,
seek, estimate, forecast,
project, would, should,
could, likely, may, or
similar words.
Among the forward-looking statements in this report are
statements relating to:
|
|
|
|
|
Our pursuit of our mission creating conflicts in strategic and
day-to-day
decision-making that could hamper achievement of some or all of
our objectives;
|
|
|
|
Our belief that our financial results are likely to suffer, at
least in the short term, as we expand our efforts to assist the
mortgage market, thereby increasing the amount of funds that
Treasury is required to provide to us and further limiting our
ability to return to long-term profitability;
|
|
|
|
The likelihood that concentrating our efforts on keeping people
in their homes and preventing foreclosures while continuing to
be active in the secondary mortgage market, rather than
concentrating solely on returning to long-term profitability,
will contribute, at least in the short term, to additional
financial losses and declines in our net worth;
|
|
|
|
The likelihood that continuing deterioration in the housing and
mortgage markets, along with the continuing deterioration in our
book of business and the costs associated with our efforts to
assist the
|
113
|
|
|
|
|
mortgage market pursuant to our mission, will increase the
amount of funds that Treasury is required to provide to us;
|
|
|
|
|
|
The possibility that if the Making Home Affordable Program is
successful in reducing foreclosures and keeping borrowers in
their homes, it may benefit the overall housing market and help
in reducing our long-term credit losses;
|
|
|
|
Our expectation that, due to current trends in the housing and
financial markets, we will have a net worth deficit in future
periods, and therefore will be required to obtain additional
funding from Treasury pursuant to the senior preferred stock
purchase agreement;
|
|
|
|
Our expectation that our senior preferred stock dividend
obligation, combined with potentially substantial commitment
fees payable to Treasury starting in 2010 and our effective
inability to pay down draws under the senior preferred stock
purchase agreement, will have an adverse impact on our future
financial position and net worth;
|
|
|
|
Our belief that the most significant factor that will affect the
number of borrowers refinancing under the Home Affordable
Refinance Program is mortgage rates;
|
|
|
|
The likelihood that the number of borrowers who refinance under
the Home Affordable Refinance Program will also be constrained
by a number of other factors, including lack of borrower
awareness, lack of borrower action to initiate a refinancing,
and borrower ineligibility;
|
|
|
|
Our expectation that increased activity will occur under the
Home Affordable Modification Program in the coming months as
servicers gain experience with the program, borrower awareness
grows, and new updates aimed at expanding the programs
reach are implemented;
|
|
|
|
Our expectations that modifications under the Home Affordable
Modification Program of loans we own or guarantee will adversely
affect our financial condition and results of operations;
|
|
|
|
Our expectation that we will incur significant additional
operational expenses associated with the Making Home Affordable
Program;
|
|
|
|
The likelihood that the Making Home Affordable Program will have
a material adverse effect on our business, results of operations
and financial condition, including our net worth;
|
|
|
|
Our expectation that adverse conditions in the financial markets
will continue through 2009, and that adverse market dynamics and
certain of our activities undertaken, pursuant to our mission,
to stabilize and support the housing and mortgage markets will
continue to negatively affect our credit results, financial
condition and performance through the remainder of 2009 and into
2010;
|
|
|
|
Our expectation that there will be further home price declines
and rising default and severity rates, all of which may worsen
if unemployment rates continue to increase and if the
U.S. continues to experience a broad-based economic
recession;
|
|
|
|
Our expectation that there will be further increases in the
level of foreclosures and single-family delinquency rates in
2009 and into 2010, as well as in the level of multifamily
defaults and loss severity;
|
|
|
|
Our expectation that growth in residential mortgage debt
outstanding will be flat in 2009 and 2010;
|
|
|
|
Our expectation that home prices will decline another 7% to 12%
on a national basis in 2009, and 20% to 30% on a national basis
peak-to-trough
(with significant regional variation in home price decline
percentages), based on our home price index, and that future
home price declines will be on the lower end of our estimated
ranges;
|
|
|
|
Our expectation that our credit losses and our credit loss ratio
in 2009 will exceed our credit losses and our credit loss ratio
in 2008 by a significant amount;
|
|
|
|
Our expectation that our
SOP 03-3
fair value losses will significantly increase in 2009 as we
increase the number of loans we repurchase from MBS trusts in
order to modify them, particularly as more servicers participate
in the Home Affordable Modification Program;
|
114
|
|
|
|
|
Our expectation that our credit-related expenses will be higher
in 2009 than they were in 2008;
|
|
|
|
Our expectation that we will continue to have losses as our
guaranty book of business continues to deteriorate and as we
continue to incur ongoing costs in our efforts to keep people in
homes and provide liquidity to the mortgage market pursuant to
our mission;
|
|
|
|
Our expectation that we will not operate profitably in the
foreseeable future;
|
|
|
|
The possibility that future activities that our regulators,
other U.S. government agencies or Congress may request or
require us to take to support the mortgage market and help
borrowers pursuant to our mission may adversely affect our
business, results of operations, financial condition, liquidity
and net worth;
|
|
|
|
Our belief that additional GSE reform legislation is likely to
be introduced in the future;
|
|
|
|
Our belief that FHFAs interim final rule on the review of
new products and activities could have an adverse impact on our
ability to develop and introduce new products and activities to
the marketplace that may be beneficial to our business and
customers;
|
|
|
|
Our expectation that, for the foreseeable future, the earnings
of the company, if any, will not be sufficient to pay the
dividends on the senior preferred stock;
|
|
|
|
Our expectation that we will experience high levels of
period-to-period
volatility in our results of operations and financial condition,
principally due to changes in market conditions that result in
periodic fluctuations in our earnings as a result of changes in
the estimated fair value of financial instruments that we
mark-to-market;
|
|
|
|
Our belief that the performance of the underlying collateral for
the Alt-A and subprime securities that we have not impaired will
still allow us to recover our initial investment, although at
significantly lower yields than what is being required currently
by new investors;
|
|
|
|
Our current expectation that our debt funding needs will
generally decline in future periods;
|
|
|
|
Our belief that changes or perceived changes in the
governments support of us or the markets could lead to an
increase in our debt roll-over risk in future periods and have a
material adverse effect on our ability to fund our operations;
|
|
|
|
The possibility that demand for our debt securities could
decline if the government does not extend or replace the
Treasury credit facility and the Federal Reserves agency
debt and MBS purchase programs, or for other reasons;
|
|
|
|
Our belief that we may be unable to find sufficient alternative
sources of liquidity for a
90-day
period, particularly after the expiration of the Treasury credit
facility on December 31, 2009;
|
|
|
|
The possibility that we could use our unencumbered mortgage
assets in our mortgage portfolio as a source of liquidity in the
event our access to the unsecured debt market becomes impaired,
by using these assets as collateral for secured borrowing;
|
|
|
|
Our expectations that we will consolidate the substantial
majority of our existing off-balance sheet MBS trusts and record
the underlying loans in these trusts as assets on our balance
sheet upon our adoption of new accounting guidance effective
January 1, 2010;
|
|
|
|
Our belief that recent government actions to provide liquidity
and other support to specified financial market participants may
continue to help improve the financial condition and liquidity
position of a number of our institutional counterparties;
|
|
|
|
The possibility that the financial difficulties that a number of
our institutional counterparties, including mortgage insurers
and mortgage servicers, are currently experiencing may
negatively affect the ability of these counterparties to meet
their obligations to us and the amount or quality of the
products or services they provide to us;
|
115
|
|
|
|
|
The possibility that a default by a counterparty with
significant obligations to us could result in significant
financial losses to us and could materially adversely affect our
ability to conduct our operations, which would adversely affect
our business, results of operations, financial condition,
liquidity and net worth;
|
|
|
|
Our belief that our financial guarantor counterparties will not
fully meet their obligations to us in the future;
|
|
|
|
The possibilities that we may further increase the concentration
of our business with our derivatives counterparties, experience
further losses relating to our derivative contracts, or find
that our ability to manage our interest rate risk is adversely
affected by ratings downgrades of or a payment default by a
derivatives counterparty;
|
|
|
|
Our expectation that the operational and system changes we are
making to implement new consolidation accounting rules will have
a substantial impact on our overall internal control environment
and our belief that we will be able to implement these new
accounting rules by the January 1, 2010 effective date;
|
|
|
|
Our belief that the deferred tax asset amount that is related to
unrealized losses recorded through AOCI for certain
available-for-sale
securities is recoverable;
|
|
|
|
Our intention to complete implementation and remediation of our
material weakness related to the data inputs into the models
used in measuring expected cash flows for the
other-than-temporary
impairment assessment process for private-label mortgage-related
securities by September 30, 2009; and
|
|
|
|
Our expectation that potential limitations on, and uncertainty
regarding, employee compensation will continue to adversely
affect our ability to recruit and retain well-qualified
employees.
|
Forward-looking statements reflect our managements
expectations or predictions of future conditions, events or
results based on various assumptions and managements
estimates of trends and economic factors in the markets in which
we are active, as well as our business plans. They are not
guarantees of future performance. By their nature,
forward-looking statements are subject to risks and
uncertainties. Our actual results and financial condition may
differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking
statements. There are a number of factors that could cause
actual conditions, events or results to differ materially from
those described in the forward-looking statements contained in
this report, including, but not limited to the following:
|
|
|
|
|
legislative or other governmental actions relating to our
business or the financial markets;
|
|
|
|
our ability to manage our business to positive net worth;
|
|
|
|
adverse effects from activities we undertake, such as the Making
Home Affordable Program and other federal government
initiatives, to support the mortgage market and help borrowers;
|
|
|
|
the investment by Treasury and its effect on our business;
|
|
|
|
future amendments and guidance by the FASB;
|
|
|
|
changes in the structure and regulation of the financial
services industry, including government efforts to bring about
an economic recovery;
|
|
|
|
our ability to access the debt capital markets;
|
|
|
|
the conservatorship and its effect on our business (including
our business strategies and practices);
|
|
|
|
further disruptions in the housing, credit and stock markets;
|
|
|
|
the depth and duration of the housing market downturn, including
the extent of home price declines on a national and regional
basis;
|
|
|
|
the depth and duration of the economic recession, including
unemployment rates;
|
116
|
|
|
|
|
the level and volatility of interest rates and credit spreads;
|
|
|
|
the adequacy of our combined loss reserves;
|
|
|
|
pending government investigations and litigation;
|
|
|
|
changes in management;
|
|
|
|
the accuracy of subjective estimates used in critical accounting
policies; and
|
|
|
|
other factors described in
Part IItem 1ARisk Factors of
our 2008
Form 10-K,
as updated by Part IIItem 1ARisk
Factors of this report.
|
Readers are cautioned to place forward-looking statements in
this report or that we make from time to time into proper
context by carefully considering the factors discussed in
Part IItem 1ARisk Factors of
our 2008
Form 10-K
and in Part IIItem 1ARisk
Factors of this report. These forward-looking statements
are representative only as of the date they are made, and we
undertake no obligation to update any forward-looking statement
as a result of new information, future events or otherwise,
except as required under the federal securities laws.
117
|
|
Item 1.
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
28,234
|
|
|
$
|
17,933
|
|
Restricted cash
|
|
|
757
|
|
|
|
529
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
25,810
|
|
|
|
57,418
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
Trading, at fair value (includes Fannie Mae MBS of $52,103 and
$58,006, respectively)
|
|
|
82,400
|
|
|
|
90,806
|
|
Available-for-sale,
at fair value (includes Fannie Mae MBS of $190,591 and $176,244,
respectively)
|
|
|
283,941
|
|
|
|
266,488
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
366,341
|
|
|
|
357,294
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or fair value
|
|
|
29,174
|
|
|
|
13,270
|
|
Loans held for investment, at amortized cost
|
|
|
393,248
|
|
|
|
415,065
|
|
Allowance for loan losses
|
|
|
(6,841
|
)
|
|
|
(2,923
|
)
|
|
|
|
|
|
|
|
|
|
Total loans held for investment, net of allowance
|
|
|
386,407
|
|
|
|
412,142
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
415,581
|
|
|
|
425,412
|
|
Advances to lenders
|
|
|
18,938
|
|
|
|
5,766
|
|
Accrued interest receivable
|
|
|
3,786
|
|
|
|
3,816
|
|
Acquired property, net
|
|
|
6,608
|
|
|
|
6,918
|
|
Derivative assets at fair value
|
|
|
1,406
|
|
|
|
869
|
|
Guaranty assets
|
|
|
7,091
|
|
|
|
7,043
|
|
Deferred tax assets, net
|
|
|
3,791
|
|
|
|
3,926
|
|
Partnership investments
|
|
|
8,304
|
|
|
|
9,314
|
|
Servicer and MBS trust receivable
|
|
|
13,817
|
|
|
|
6,482
|
|
Other assets
|
|
|
10,918
|
|
|
|
9,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
911,382
|
|
|
$
|
912,404
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY (DEFICIT)
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
5,115
|
|
|
|
5,947
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
|
|
|
|
77
|
|
Short-term debt (includes debt at fair value of $- and $4,500,
respectively)
|
|
|
259,781
|
|
|
|
330,991
|
|
Long-term debt (includes debt at fair value of $22,437 and
$21,565, respectively)
|
|
|
573,329
|
|
|
|
539,402
|
|
Derivative liabilities at fair value
|
|
|
2,047
|
|
|
|
2,715
|
|
Reserve for guaranty losses (includes $4,238 and $1,946,
respectively,
|
|
|
|
|
|
|
|
|
related to Fannie Mae MBS included in Investments in securities)
|
|
|
48,280
|
|
|
|
21,830
|
|
Guaranty obligations (includes $755 and $755, respectively,
|
|
|
|
|
|
|
|
|
related to Fannie Mae MBS included in Investments in securities)
|
|
|
12,358
|
|
|
|
12,147
|
|
Partnership liabilities
|
|
|
2,855
|
|
|
|
3,243
|
|
Servicer and MBS trust payable
|
|
|
12,909
|
|
|
|
6,350
|
|
Other liabilities
|
|
|
5,310
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
921,984
|
|
|
|
927,561
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
|
|
|
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Fannie Mae stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Senior preferred stock, 1,000,000 shares issued and
outstanding as of June 30, 2009 and December 31, 2008
|
|
|
35,200
|
|
|
|
1,000
|
|
Preferred stock, 700,000,000 shares are
authorized 582,508,752 and 597,071,401 shares
issued
|
|
|
|
|
|
|
|
|
and outstanding as of June 30, 2009 and December 31,
2008, respectively
|
|
|
20,486
|
|
|
|
21,222
|
|
Common stock, no par value, no maximum authorization
1,261,401,675 and 1,238,880,988 shares issued as of
June 30, 2009 and December 31, 2008, respectively;
1,109,063,047 shares and 1,085,424,213 shares
outstanding as of June 30, 2009 and December 31, 2008,
respectively
|
|
|
662
|
|
|
|
650
|
|
Additional paid-in capital
|
|
|
3,947
|
|
|
|
3,621
|
|
Accumulated deficit
|
|
|
(56,191
|
)
|
|
|
(26,790
|
)
|
Accumulated other comprehensive loss
|
|
|
(7,429
|
)
|
|
|
(7,673
|
)
|
Treasury stock, at cost, 152,338,628 shares and
153,456,775 shares as of June 30, 2009 and
December 31, 2008, respectively
|
|
|
(7,385
|
)
|
|
|
(7,344
|
)
|
|
|
|
|
|
|
|
|
|
Total Fannie Mae stockholders deficit
|
|
|
(10,710
|
)
|
|
|
(15,314
|
)
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
108
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
Total deficit
|
|
|
(10,602
|
)
|
|
|
(15,157
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit)
|
|
$
|
911,382
|
|
|
$
|
912,404
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
For the
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
923
|
|
|
$
|
1,376
|
|
|
$
|
1,913
|
|
|
$
|
3,113
|
|
Available-for-sale
securities
|
|
|
3,307
|
|
|
|
3,087
|
|
|
|
7,028
|
|
|
|
6,172
|
|
Mortgage loans
|
|
|
5,611
|
|
|
|
5,769
|
|
|
|
11,209
|
|
|
|
11,431
|
|
Other
|
|
|
139
|
|
|
|
232
|
|
|
|
266
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
9,980
|
|
|
|
10,464
|
|
|
|
20,416
|
|
|
|
21,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
600
|
|
|
|
1,687
|
|
|
|
1,707
|
|
|
|
4,248
|
|
Long-term debt
|
|
|
5,645
|
|
|
|
6,720
|
|
|
|
11,726
|
|
|
|
13,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
6,245
|
|
|
|
8,407
|
|
|
|
13,433
|
|
|
|
17,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
3,735
|
|
|
|
2,057
|
|
|
|
6,983
|
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income (includes imputed interest of $321 and $319,
for the three months ended June 30, 2009 and 2008,
respectively, and $471 and $554 for the six months ended
June 30, 2009 and 2008, respectively)
|
|
|
1,659
|
|
|
|
1,608
|
|
|
|
3,411
|
|
|
|
3,360
|
|
Trust management income
|
|
|
13
|
|
|
|
75
|
|
|
|
24
|
|
|
|
182
|
|
Investment gains (losses), net
|
|
|
(45
|
)
|
|
|
(376
|
)
|
|
|
178
|
|
|
|
(432
|
)
|
Other-than-temporary
impairments
|
|
|
(1,097
|
)
|
|
|
(507
|
)
|
|
|
(6,750
|
)
|
|
|
(562
|
)
|
Less: Noncredit portion of
other-than-temporary
impairments recognized in other comprehensive loss
|
|
|
344
|
|
|
|
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
other-than-temporary
impairments
|
|
|
(753
|
)
|
|
|
(507
|
)
|
|
|
(6,406
|
)
|
|
|
(562
|
)
|
Fair value gains (losses), net
|
|
|
823
|
|
|
|
517
|
|
|
|
(637
|
)
|
|
|
(3,860
|
)
|
Debt extinguishment losses, net
|
|
|
(190
|
)
|
|
|
(36
|
)
|
|
|
(269
|
)
|
|
|
(181
|
)
|
Losses from partnership investments
|
|
|
(571
|
)
|
|
|
(195
|
)
|
|
|
(928
|
)
|
|
|
(336
|
)
|
Fee and other income
|
|
|
184
|
|
|
|
225
|
|
|
|
365
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
1,120
|
|
|
|
1,311
|
|
|
|
(4,262
|
)
|
|
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
245
|
|
|
|
304
|
|
|
|
538
|
|
|
|
590
|
|
Professional services
|
|
|
180
|
|
|
|
114
|
|
|
|
323
|
|
|
|
250
|
|
Occupancy expenses
|
|
|
46
|
|
|
|
55
|
|
|
|
94
|
|
|
|
109
|
|
Other administrative expenses
|
|
|
39
|
|
|
|
39
|
|
|
|
78
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
510
|
|
|
|
512
|
|
|
|
1,033
|
|
|
|
1,024
|
|
Provision for credit losses
|
|
|
18,225
|
|
|
|
5,085
|
|
|
|
38,559
|
|
|
|
8,158
|
|
Foreclosed property expense
|
|
|
559
|
|
|
|
264
|
|
|
|
1,097
|
|
|
|
434
|
|
Other expenses
|
|
|
318
|
|
|
|
247
|
|
|
|
597
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
19,612
|
|
|
|
6,108
|
|
|
|
41,286
|
|
|
|
10,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary losses
|
|
|
(14,757
|
)
|
|
|
(2,740
|
)
|
|
|
(38,565
|
)
|
|
|
(7,853
|
)
|
Provision (benefit) for federal income taxes
|
|
|
23
|
|
|
|
(476
|
)
|
|
|
(600
|
)
|
|
|
(3,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary losses
|
|
|
(14,780
|
)
|
|
|
(2,264
|
)
|
|
|
(37,965
|
)
|
|
|
(4,449
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,780
|
)
|
|
|
(2,297
|
)
|
|
|
(37,965
|
)
|
|
|
(4,483
|
)
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
|
|
26
|
|
|
|
(3
|
)
|
|
|
43
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
|
(14,754
|
)
|
|
|
(2,300
|
)
|
|
|
(37,922
|
)
|
|
|
(4,486
|
)
|
Preferred stock dividends
|
|
|
(411
|
)
|
|
|
(303
|
)
|
|
|
(440
|
)
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(15,165
|
)
|
|
$
|
(2,603
|
)
|
|
$
|
(38,362
|
)
|
|
$
|
(5,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.67
|
)
|
|
$
|
(2.54
|
)
|
|
$
|
(6.76
|
)
|
|
$
|
(5.11
|
)
|
Diluted
|
|
|
(2.67
|
)
|
|
|
(2.54
|
)
|
|
|
(6.76
|
)
|
|
|
(5.11
|
)
|
Cash dividends per common share
|
|
$
|
|
|
|
$
|
0.35
|
|
|
$
|
|
|
|
$
|
0.70
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
5,681
|
|
|
|
1,025
|
|
|
|
5,674
|
|
|
|
1,000
|
|
See Notes to Condensed Consolidated Financial Statements
119
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(37,965
|
)
|
|
$
|
(4,483
|
)
|
Amortization of debt cost basis adjustments
|
|
|
2,172
|
|
|
|
4,609
|
|
Provision for credit losses
|
|
|
38,559
|
|
|
|
8,158
|
|
Valuation losses
|
|
|
4,537
|
|
|
|
2,941
|
|
Derivatives fair value adjustments
|
|
|
(1,045
|
)
|
|
|
399
|
|
Current and deferred federal income taxes
|
|
|
(1,690
|
)
|
|
|
(4,249
|
)
|
Purchases of loans held for sale
|
|
|
(72,172
|
)
|
|
|
(27,426
|
)
|
Proceeds from repayments of loans held for sale
|
|
|
1,204
|
|
|
|
288
|
|
Net change in trading securities
|
|
|
3,165
|
|
|
|
50,952
|
|
Other, net
|
|
|
(4,302
|
)
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(67,537
|
)
|
|
|
29,933
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Purchases of trading securities held for investment
|
|
|
|
|
|
|
(833
|
)
|
Proceeds from maturities of trading securities held for
investment
|
|
|
6,076
|
|
|
|
5,069
|
|
Proceeds from sales of trading securities held for investment
|
|
|
1,313
|
|
|
|
2,481
|
|
Purchases of
available-for-sale
securities
|
|
|
(108,105
|
)
|
|
|
(79,331
|
)
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
23,705
|
|
|
|
17,689
|
|
Proceeds from sales of
available-for-sale
securities
|
|
|
168,933
|
|
|
|
76,937
|
|
Purchases of loans held for investment
|
|
|
(19,322
|
)
|
|
|
(37,645
|
)
|
Proceeds from repayments of loans held for investment
|
|
|
32,427
|
|
|
|
30,997
|
|
Advances to lenders
|
|
|
(53,646
|
)
|
|
|
(51,573
|
)
|
Proceeds from disposition of acquired property
|
|
|
9,873
|
|
|
|
4,191
|
|
Reimbursements to servicers for loan advances
|
|
|
(9,024
|
)
|
|
|
(5,588
|
)
|
Net change in federal funds sold and securities purchased under
agreements to resell
|
|
|
32,147
|
|
|
|
13,315
|
|
Other, net
|
|
|
(356
|
)
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
84,021
|
|
|
|
(24,069
|
)
|
Cash flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
747,971
|
|
|
|
1,009,691
|
|
Payments to redeem short-term debt
|
|
|
(820,868
|
)
|
|
|
(1,007,819
|
)
|
Proceeds from issuance of long-term debt
|
|
|
187,277
|
|
|
|
168,545
|
|
Payments to redeem long-term debt
|
|
|
(154,264
|
)
|
|
|
(172,191
|
)
|
Proceeds from issuance of common stock and preferred stock
|
|
|
|
|
|
|
7,211
|
|
Proceeds from senior preferred stock agreement with Treasury
|
|
|
34,200
|
|
|
|
|
|
Net change in federal funds purchased and securities sold under
agreements to repurchase
|
|
|
(65
|
)
|
|
|
(442
|
)
|
Other, net
|
|
|
(434
|
)
|
|
|
(1,307
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(6,183
|
)
|
|
|
3,688
|
|
Net increase in cash and cash equivalents
|
|
|
10,301
|
|
|
|
9,552
|
|
Cash and cash equivalents at beginning of period
|
|
|
17,933
|
|
|
|
3,941
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
28,234
|
|
|
$
|
13,493
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
15,430
|
|
|
$
|
19,371
|
|
Income taxes
|
|
|
848
|
|
|
|
845
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Securitization-related transfers from mortgage loans held for
sale to investments in securities
|
|
$
|
63,172
|
|
|
$
|
23,551
|
|
Net transfers of mortgage loans held for investments to mortgage
loans held for sale
|
|
|
7,765
|
|
|
|
(4,441
|
)
|
Net consolidation transfers from investments in securities to
mortgage loans held for sale
|
|
|
527
|
|
|
|
671
|
|
Net transfers from
available-for-sale
securities to mortgage loans held for sale
|
|
|
867
|
|
|
|
616
|
|
Transfers from advances to lenders to investments in securities
(including transfers to trading securities of $ and
$28,877 for the six months ended June 30, 2009 and 2008,
respectively)
|
|
|
38,943
|
|
|
|
52,114
|
|
Net consolidation-related transfers from investments in
securities to mortgage loans held for investment
|
|
|
2,308
|
|
|
|
5,628
|
|
Net transfers from mortgage loans to acquired property
|
|
|
2,211
|
|
|
|
2,103
|
|
Transfers to trading securities from the effect of adopting
SFAS 159
|
|
|
|
|
|
|
56,217
|
|
See Notes to Condensed Consolidated Financial Statements
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
Non
|
|
|
Total
|
|
|
|
Senior
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Controlling
|
|
|
Equity
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Loss(1)
|
|
|
Stock
|
|
|
Interest
|
|
|
(Deficit)
|
|
|
Balance as of December 31, 2007
|
|
|
|
|
|
|
466
|
|
|
|
974
|
|
|
$
|
|
|
|
$
|
16,913
|
|
|
$
|
593
|
|
|
$
|
1,831
|
|
|
$
|
33,548
|
|
|
$
|
(1,362
|
)
|
|
$
|
(7,512
|
)
|
|
$
|
107
|
|
|
$
|
44,118
|
|
Cumulative effect from the adoption of SFAS 157 and
SFAS 159, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2008, adjusted
|
|
|
|
|
|
|
466
|
|
|
|
974
|
|
|
|
|
|
|
|
16,913
|
|
|
|
593
|
|
|
|
1,831
|
|
|
|
33,696
|
|
|
|
(1,455
|
)
|
|
|
(7,512
|
)
|
|
|
107
|
|
|
|
44,173
|
|
Change in Investment in noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
54
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,486
|
)
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
(4,483
|
)
|
Other comprehensive loss, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on
available-for-sale
securities (net of tax of $2,299)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,270
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,270
|
)
|
Reclassification adjustment for gains included in net loss (net
of tax of $11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Unrealized gains on guaranty assets and guaranty fee
buy-ups (net
of tax of $4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Net cash flow hedging gains (net of tax of $1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,766
|
)
|
Common stock dividends ($0.70 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(687
|
)
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,526
|
|
Preferred stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(625
|
)
|
Preferred stock issued
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
4,812
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,685
|
|
Other, employee benefit plans
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
217
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
|
|
|
|
|
|
607
|
|
|
|
1,070
|
|
|
$
|
|
|
|
$
|
21,725
|
|
|
$
|
642
|
|
|
$
|
3,994
|
|
|
$
|
27,898
|
|
|
$
|
(5,738
|
)
|
|
$
|
(7,295
|
)
|
|
$
|
164
|
|
|
$
|
41,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009
|
|
|
1
|
|
|
|
597
|
|
|
|
1,085
|
|
|
|
1,000
|
|
|
|
21,222
|
|
|
|
650
|
|
|
|
3,621
|
|
|
|
(26,790
|
)
|
|
|
(7,673
|
)
|
|
|
(7,344
|
)
|
|
|
157
|
|
|
|
(15,157
|
)
|
Cumulative effect from the adoption of FSP
FAS 115-2,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,520
|
|
|
|
(5,556
|
)
|
|
|
|
|
|
|
|
|
|
|
2,964
|
|
Change in investment in noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,922
|
)
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
(37,965
|
)
|
Other comprehensive loss, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
available-for-sale
securities (net of tax of $3,152)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,854
|
|
|
|
|
|
|
|
|
|
|
|
5,854
|
|
Unrealized
other-than-temporary
impairment losses (net of tax of $99)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
|
(245
|
)
|
Reclassification adjustment for gains included in net loss (net
of tax of $46)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
Write-off of pre-2001 cash flow hedging gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Unrealized gains on guaranty assets and guaranty fee
buy-ups
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Prior service cost and actuarial gains, net of amortization for
defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,165
|
)
|
Senior preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
Increase to senior preferred liquidation preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,200
|
|
Conversion of convertible preferred stock into common stock
|
|
|
|
|
|
|
(15
|
)
|
|
|
23
|
|
|
|
|
|
|
|
(736
|
)
|
|
|
12
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, employee benefit plans
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
1
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009
|
|
|
1
|
|
|
|
582
|
|
|
|
1,109
|
|
|
$
|
35,200
|
|
|
$
|
20,486
|
|
|
$
|
662
|
|
|
$
|
3,947
|
|
|
$
|
(56,191
|
)
|
|
$
|
(7,429
|
)
|
|
$
|
(7,385
|
)
|
|
$
|
108
|
|
|
$
|
(10,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Accumulated other comprehensive
loss is comprised of $1.5 billion and $6.0 billion in
net unrealized losses on
available-for-sale
securities, net of tax, and $(342) million and
$291 million in net unrealized gains (losses) on all other
components, net of tax, as of June 30, 2009 and 2008,
respectively. Also included in accumulated other comprehensive
loss is a $5.6 billion transition adjustment associated
with the adoption of FSP
FAS 115-2,
net of tax.
|
See Notes to Condensed Consolidated Financial Statements
121
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
1.
|
Organization
and Conservatorship
|
We are a stockholder-owned corporation organized and existing
under the Federal National Mortgage Association Charter Act
(The Charter Act or our charter). We are
a government-sponsored enterprise (GSE), and we are
subject to government oversight and regulation. Our regulators
include the Federal Housing Finance Agency (FHFA),
the U.S. Department of Housing and Urban Development
(HUD), the U.S. Securities and Exchange
Commission (SEC), and the U.S. Department of
Treasury (Treasury). Through July 29, 2008, we
were regulated by the Office of Federal Housing Enterprise
Oversight (OFHEO), which was replaced on
July 30, 2008 with FHFA upon the enactment of the Federal
Housing Finance Regulatory Reform Act of 2008 (Regulatory
Reform Act). On September 6, 2008, we were placed
into conservatorship by the Director of FHFA. See
Conservatorship below in this note. The
U.S. government does not guarantee, directly or indirectly,
our securities or other obligations.
We operate in the secondary mortgage market by purchasing
mortgage loans and mortgage-related securities, including
mortgage-related securities guaranteed by us, from primary
mortgage market institutions, such as commercial banks, savings
and loan associations, mortgage banking companies, securities
dealers and other investors. We do not lend money directly to
consumers in the primary mortgage market. We provide additional
liquidity in the secondary mortgage market by issuing guaranteed
mortgage-related securities.
We operate under three business segments: Single-Family Credit
Guaranty (Single-Family), Housing and Community
Development (HCD) and Capital Markets. Our
Single-Family segment generates revenue primarily from the
guaranty fees on the mortgage loans underlying guaranteed
single-family Fannie Mae mortgage-backed securities
(Fannie Mae MBS). Our HCD segment generates revenue
from a variety of sources, including guaranty fees on the
mortgage loans underlying multifamily Fannie Mae MBS and on the
multifamily mortgage loans held in our portfolio, transaction
fees associated with the multifamily business and bond credit
enhancement fees. In addition, HCD investments in rental housing
projects eligible for the federal low-income housing tax credit
(LIHTC) generate both tax credits and net operating
losses. As described in Note 12, Income Taxes,
we determined that it is more likely than not that we will not
realize a portion of our deferred tax assets in the future. As a
result, we are not recognizing a majority of the tax benefits
associated with tax credits and net operating losses in our
condensed consolidated financial statements. Other investments
in affordable rental and for-sale housing generate revenue and
losses from operations and the eventual sale of the assets. Our
Capital Markets segment invests in mortgage loans,
mortgage-related securities and other investments, and generates
income primarily from the difference, or spread, between the
yield on the mortgage assets we own and the interest we pay on
the debt we issue in the global capital markets to fund the
purchases of these mortgage assets. Changes in the fair value of
the derivative instruments and trading securities and the
impairments on
available-for-sale
securities also affect the net income of our Capital Market
segment.
On September 7, 2008, the Secretary of the Treasury and the
Director of FHFA announced several actions taken by Treasury and
FHFA regarding Fannie Mae, which included: (1) placing us
in conservatorship; (2) the execution of a senior preferred
stock purchase agreement by our conservator, on our behalf, and
Treasury, pursuant to which we issued to Treasury both senior
preferred stock and a warrant to purchase common stock; and
(3) Treasurys agreement to establish a temporary
secured lending credit facility that is available to us and the
other GSEs regulated by FHFA under identical terms. We entered
into a lending agreement with Treasury pursuant to which
Treasury established this secured lending credit facility on
September 19, 2008.
Conservatorship
On September 6, 2008, at the request of the Secretary of
the Treasury, the Chairman of the Board of Governors of the
Federal Reserve and the Director of FHFA, our Board of Directors
adopted a resolution
122
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
consenting to the companys placement into conservatorship.
After obtaining this consent, the Director of FHFA appointed
FHFA as our conservator on September 6, 2008, in accordance
with the Regulatory Reform Act and the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992.
Upon its appointment, the conservator immediately succeeded to
all rights, titles, powers and privileges of Fannie Mae, and of
any stockholder, officer or director of Fannie Mae with respect
to Fannie Mae and its assets, and succeeded to the title to the
books, records and assets of any other legal custodian of Fannie
Mae. The conservator has the power to take over our assets and
operate our business with all the powers of our stockholders,
directors and officers, and to conduct all business of the
company.
FHFA, in its role as conservator, has overall management
authority over our business. The conservator has since delegated
specified authorities to our Board of Directors and has
delegated to management the authority to conduct our
day-to-day
operations. The conservator retains the authority to withdraw
its delegations at any time.
As of August 6, 2009, the conservator has advised us that
it has not disaffirmed or repudiated any contracts we entered
into prior to its appointment as conservator. The Regulatory
Reform Act requires FHFA to exercise its right to disaffirm or
repudiate most contracts within a reasonable period of time
after its appointment as conservator. Additionally, the
conservator had not determined whether or not a reasonable
period of time had passed for purposes of the applicable
provisions of the Regulatory Reform Act and, therefore, the
conservator may still possess this right.
The conservator also has the power to transfer or sell any asset
or liability of Fannie Mae (subject to limitations and
post-transfer notice provisions for transfers of qualified
financial contracts) without any approval, assignment of rights
or consent of any party. The Regulatory Reform Act, however,
provides that mortgage loans and mortgage-related assets that
have been transferred to a Fannie Mae MBS trust must be held by
the conservator for the beneficial owners of the Fannie Mae MBS
and cannot be used to satisfy the general creditors of the
company. As of August 6, 2009, FHFA has not exercised this
power.
Neither the conservatorship nor the terms of our agreements with
Treasury changes our obligation to make required payments on our
debt securities or perform under our mortgage guaranty
obligations.
The conservatorship has no specified termination date. There can
be no assurance as to when or how the conservatorship will be
terminated, whether we will continue to exist following the
conservatorship or what our business structure will be during or
following the conservatorship.
Treasury and FHFA, acting on our behalf in its capacity as our
conservator, entered into an amendment to the senior preferred
stock purchase agreement between us and Treasury on May 6,
2009. The financial terms of the amendment to the senior
preferred stock purchase agreement are as follows:
|
|
|
|
|
Treasurys maximum funding commitment to us under the
agreement was increased from $100 billion to
$200 billion.
|
|
|
|
The covenant limiting the amount of mortgage assets we can own
on December 31, 2009 was increased from $850 billion
to $900 billion. We continue to be required to reduce our
mortgage assets, beginning on December 31, 2010 and each
year thereafter, to 90% of the amount of our mortgage assets as
of December 31 of the immediately preceding calendar year, until
the amount of our mortgage assets reaches $250 billion.
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The covenant limiting the amount of our indebtedness was
changed. Prior to the amendment, our debt cap was equal to 110%
of our indebtedness as of June 30, 2008. As amended, our
debt cap through December 30, 2010 equals
$1,080 billion. Beginning December 31, 2010, and on
December 31 of each
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123
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
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year thereafter, our debt cap that will apply through December
31 of the following year will equal 120% of the amount of
mortgage assets we are allowed to hold on December 31 of the
immediately preceding calendar year.
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The agreement continues to provide that, for purposes of
evaluating our compliance with the limitation on the amount of
mortgage assets we may own, the effect of changes in generally
accepted accounting principles that occur subsequent to the date
of the agreement and that require us to recognize additional
mortgage assets on our consolidated balance sheet (Statement of
Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (a replacement of FASB
Statement No. 125) (SFAS 140)), will
not be considered. In addition, the definition of indebtedness
in the agreement was revised to clarify that it also does not
give effect to any change that may be made in respect of
SFAS 140 or any similar accounting standard.
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We received $19.0 billion from Treasury on June 30,
2009 under the terms of the senior preferred stock purchase
agreement. We also received $15.2 billion from Treasury on
March 31, 2009. As a result, the aggregate liquidation
preference of the senior preferred stock has increased to
$35.2 billion.
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2.
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Summary
of Significant Accounting Policies
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Basis
of Presentation
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP) for the interim financial information
and with the SECs instructions to
Form 10-Q
and Article 10 of Regulations
S-X.
Accordingly, they do not include all of the information and note
disclosures required by GAAP for complete consolidated financial
statements. In the opinion of management, all adjustments of a
normal recurring nature considered necessary for a fair
presentation have been included. Results for the three and six
months ended June 30, 2009 may not necessarily be
indicative of the results for the year ending December 31,
2009. The unaudited interim condensed consolidated financial
statements as of June 30, 2009 and our condensed
consolidated financial statements as of December 31, 2008
should be read in conjunction with our audited consolidated
financial statements and related notes included in our Annual
Report on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
February 26, 2009. We have completed our analysis of
subsequent events related to our condensed consolidated
financial statements through August 6, 2009.
We are currently in conservatorship, with FHFA acting as our
conservator. As conservator, FHFA succeeded to all rights,
titles, powers and privileges of the company and of any
shareholder, officer or director of the company with respect to
the company and its assets. As a result, we are currently under
the control of our conservator. FHFA, in its role as
conservator, has overall management authority over our business.
We receive, directly and indirectly, substantial support from
various agencies of the United States Government, including the
Federal Reserve, Treasury, and FHFA, as our conservator and
regulator. We are dependent upon the continued support of the
U.S. Government and these agencies in order to maintain a
positive net worth, which avoids our being placed into
receivership. We also believe that our improved access to the
debt markets is due to federal government support. Based on
consideration of all the relevant conditions and events
affecting our operations, including our dependence on the
U.S. Government, we continue to operate as a going concern
and in accordance with our delegation of authority from FHFA.
The conservatorship has no specified termination date and the
future structure of our business following termination of the
conservatorship is uncertain. We do not know when or how the
conservatorship will be terminated or what changes to our
business structure will be made during or following the
termination of the conservatorship. We do not know whether we
will exist in the same or a similar form or continue to conduct
124
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
our business as we did before the conservatorship, or whether
the conservatorship will end in receivership. Under the
Regulatory Reform Act, FHFA must place us into receivership if
the Director of FHFA makes a written determination that our
assets are less than our obligations or if we have not been
paying our debts, in either case, for a period of 60 days.
In addition, we could be put in receivership at the discretion
of the Director of FHFA at any time for other reasons, including
conditions that FHFA has already asserted existed at the time
the Director of FHFA placed us into conservatorship. Placement
into receivership would have a material adverse effect on
holders of our common stock, preferred stock, debt securities
and Fannie Mae MBS. Should we be placed in receivership,
different assumptions would be required to determine the
carrying value of our assets, which could lead to substantially
different financial results.
Because we fund our business and operations primarily through
the issuance of debt, we are subject to roll-over,
or refinancing, risk on our outstanding debt. Our roll-over risk
increases when our outstanding short-term debt increases as a
percentage of our total outstanding debt, as it did when we
experienced significant deterioration in our access to the
unsecured debt markets, particularly for our callable and
non-callable long-term debt, from July through November 2008.
Our access to callable and non-callable long-term debt funding
improved significantly during the first half of 2009, however,
due to a variety of actions taken by the federal government to
support us and the financial markets. Due to the combination of
our improved access to long-term debt funding, improved market
conditions, the reduced proportion of our outstanding debt that
consists of short-term debt, and our expected reduced debt
funding needs in the future, our debt roll-over risk has
significantly declined since November 2008.
As noted above, we believe that the improvement in our access to
long-term debt funding since November 2008 stems from actions
taken by the federal government to support us and the financial
markets. Actions the government has taken to support us include:
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Treasurys $200 billion funding commitment to us under
the senior preferred stock purchase agreement;
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making the Treasury credit facility available to us;
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the Federal Reserves active program to purchase up to
$200 billion in debt securities of Fannie Mae, Freddie Mac
and the Federal Home Loan Banks, as well as up to $1.25 trillion
in Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed
securities; and
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Treasurys agency MBS purchase program.
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In addition, the Federal Reserve and Treasury have implemented a
number of programs to support the liquidity of the financial
markets overall, including several asset purchase programs and
several asset financing programs. These programs have improved
overall financial market conditions, which has contributed to
the improvement in our access to debt funding.
Accordingly, we believe that our status as a GSE and continued
federal government support of our business and the financial
markets is essential to maintaining our access to debt funding,
and changes or perceived changes in the governments
support of us or the markets could lead to an increase in our
debt roll-over risk in future periods and have a material
adverse effect on our ability to fund our operations.
Additionally, demand for our debt securities could decline if
the government does not extend or replace the Treasury credit
facility and the Federal Reserves agency debt and MBS
purchase programs, each of which expire on December 31,
2009. The Obama Administration has stated that recommendations
on the future of Fannie Mae, Freddie Mac and the Federal Home
Loan Bank system will be provided at the time of the
Presidents 2011 budget release, which is currently
expected to be in February 2010. These recommendations may have
a material impact on our ability to issue debt or refinance
existing debt as it becomes due.
125
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The Treasury credit facility and the senior preferred stock
purchase agreement with Treasury may provide additional sources
of funding in the event that we cannot adequately access the
unsecured debt markets. There are limitations on our ability to
use either of these sources of funding, however.
Agencies of the U.S. Government continue to provide active
and ongoing support to Fannie Maes operations consistent
with their objective of stabilizing the housing market and the
economy. Under our senior preferred stock purchase agreement
with Treasury, as amended on May 6, 2009, Treasury
generally has committed to provide us, on a quarterly basis,
funds of up to a total of $200 billion in the amount, if
any, by which our total liabilities exceed our total assets, as
reflected on our condensed consolidated balance sheet, prepared
in accordance with GAAP, for the applicable fiscal quarter. To
the extent of its unused portion, this funding commitment is
available to us (as specified in the agreement) or, in the event
of our default on payments with respect to our debt securities
or guaranteed Fannie Mae MBS, to the holders of that debt and
MBS. In the six months ended June 30, 2009, Treasury began
purchasing Fannie Mae and Freddie Mac mortgage-backed securities
to promote stability and liquidity in the marketplace.
The accompanying unaudited interim condensed consolidated
financial statements include our accounts as well as the
accounts of other entities in which we have a controlling
financial interest. All intercompany balances and transactions
have been eliminated.
As a result of our issuance to Treasury of a warrant to purchase
shares of Fannie Mae common stock equal to 79.9% of the total
number of shares of Fannie Mae common stock, on a fully diluted
basis, that is exercisable at any time through September 7,
2028, we and the Treasury are deemed related parties. No
transactions outside of normal business activities have occurred
between us and Treasury during the six months ended
June 30, 2009, excluding Treasurys $34.2 billion
investment in senior preferred stock and Treasurys
engagement of us to serve as program administrator for the Home
Affordable Modification Program.
In addition, FHFAs common control of both us and Freddie
Mac has caused us to be related parties. No transactions outside
of normal business activities have occurred between us and
Freddie Mac. As of June 30, 2009 and December 31,
2008, we held Freddie Mac mortgage-related securities with an
unpaid principal balance of $39.1 billion and
$33.9 billion, respectively, and accrued interest
receivable of $215 million and $198 million,
respectively. We recognized interest income on Freddie Mac
mortgage-related securities held by us of $408 million and
$409 million for the three months ended June 30, 2009
and 2008, respectively, and $815 million and
$803 million for the six months ended June 30, 2009,
and 2008, respectively. In addition, Freddie Mac may be an
investor in variable interest entities that we have
consolidated, and we may be an investor in variable interest
entities that Freddie Mac has consolidated.
Use of
Estimates
The preparation of consolidated financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of our consolidated financial statements and the
amounts of revenues and expenses during the reporting period.
Management has made significant estimates in a variety of areas,
including but not limited to, valuation of certain financial
instruments and other assets and liabilities, the allowance for
loan losses and reserve for guaranty losses,
other-than-temporary
impairment of investment securities and LIHTC partnerships, and
our assessment of realizing our deferred tax assets. Actual
results could be different from these estimates.
126
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Principles
of Consolidation
The typical condition for a controlling financial interest is
ownership of a majority of the voting interests of an entity. A
controlling financial interest may also exist in entities
through arrangements that do not involve voting interests. We
evaluate entities deemed to be variable interest entities
(VIEs) under Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 46
(revised December 2003), Consolidation of Variable Interest
Entities (an interpretation of ARB No. 51)
(FIN 46R), to determine when we must
consolidate the assets, liabilities and noncontrolling interests
of a VIE.
We are required to evaluate whether to consolidate a VIE when we
first become involved and upon subsequent reconsideration events
(e.g., a purchase of additional beneficial interests).
Generally, if we are the primary beneficiary of a VIE, then we
initially record the assets and liabilities of the VIE in our
condensed consolidated financial statements at fair value.
With our adoption of SFAS No. 141 (revised 2007),
Business Combinations (SFAS 141(R)), on
January 1, 2009, we began recording any difference between
the fair value and the previous carrying amount of our interests
in a VIE that holds only financial assets as Investment
losses, net in our condensed consolidated statements of
operations, as required by FIN 46R. Prior to our adoption
of SFAS 141(R), such differences were classified as
Extraordinary losses, net of tax effect in our
condensed consolidated statements of operations.
If a consolidated VIE subsequently should not be consolidated
because we cease to be deemed the primary beneficiary or we
qualify for one of the scope exceptions of FIN 46R (for
example, the entity is a qualifying special purpose entity
(QSPE) that we no longer have the unilateral ability
to liquidate), we deconsolidate the VIE. With our adoption of
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements
(SFAS 160), which amended Accounting
Research Bulletin No. 51, Consolidated Financial
Statements, on January, 1, 2009, we began recording any
retained interests in a deconsolidated VIE at their respective
fair values. Any difference between the fair values and the
previous carrying amounts of our investment in the VIE is
recorded as Investment losses in our condensed
consolidated statements of operations. Prior to our adoption of
SFAS 160, we deconsolidated the VIE by carrying over our
net basis in the consolidated assets and liabilities to our
investment in the VIE.
Other-Than-Temporary
Impairment of Debt Securities
On April 1, 2009, we adopted FASB Staff Position
No. FAS 115-2
and 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (FSP
FAS 115-2),
which applies to existing and new debt securities held by us as
of April 1, 2009. Under this FSP, an
other-than-temporary
impairment is considered to have occurred when the fair value of
a debt security is below its amortized cost basis and we intend
to sell or it is more likely than not that we will be required
to sell the security before recovery. In this case, the entire
difference between the amortized cost basis of the security and
its fair value is recognized in earnings. An
other-than-temporary
impairment is also considered to have occurred if we do not
expect to recover the entire amortized cost basis of a debt
security even if we do not intend and it is not more likely than
not we will be required to sell the security before recovery. In
this case, the entire difference between the amortized cost
basis of the security and its fair value is separated into the
amount representing the credit loss, which is recognized in our
condensed consolidated statement of operations, and the amount
related to all other factors, which is recognized in Other
comprehensive loss, net of applicable taxes. In
determining whether a credit loss exists, we use the present
value of our best estimate of cash flows expected to be
collected from the debt security.
127
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
As a result of adopting FSP
FAS 115-2,
we recorded a cumulative-effect adjustment at April 1, 2009
of $8.5 billion on a pre-tax basis ($5.6 billion after
tax) to reclassify the noncredit portion of previously
recognized
other-than-temporary
impairments from Accumulated deficit to
Accumulated other comprehensive loss. We also
reduced the Accumulated deficit and valuation
allowance by $3.0 billion for the deferred tax asset
related to the amounts previously recognized as
other-than-temporary
impairments in our condensed consolidated statement of
operations based upon the assertion of our intent and ability to
hold certain of these securities until recovery. The adoption of
FSP
FAS 115-2
resulted in $344 million of noncredit related losses for
the three months ended June 30, 2009 being recognized in
Other comprehensive loss instead of being recorded
in our condensed consolidated statement of operation, as
previously required. Refer to Note 6, Investments in
Securities for disclosures related to our investments in
securities and
other-than-temporary
impairments and Note 12, Income Taxes for
disclosures related to our deferred tax assets and related
valuation allowance.
Allowance
for Loan Losses and Reserve for Guaranty Losses
The allowance for loan losses is a valuation allowance that
reflects an estimate of incurred credit losses related to our
recorded investment in HFI loans. The reserve for guaranty
losses is a liability account in our condensed consolidated
balance sheets that reflects an estimate of incurred credit
losses related to our guaranty to each Fannie Mae MBS trust that
we will supplement amounts received by the Fannie Mae MBS trust
as required to permit timely payment of principal and interest
on the related Fannie Mae MBS. We recognize incurred losses by
recording a charge to the Provision for credit
losses in our condensed consolidated statements of
operations.
Credit losses related to groups of similar single-family and
multifamily HFI loans that are not individually impaired, or
those that are collateral for Fannie Mae MBS, are recognized
when (i) available information as of each balance sheet
date indicates that it is probable a loss has occurred and
(ii) the amount of the loss can be reasonably estimated in
accordance with SFAS No. 5, Accounting for
Contingencies. Single-family and multifamily loans that we
evaluate for individual impairment are measured in accordance
with the provisions of SFAS No. 114, Accounting by
Creditors for Impairment of a Loan (an amendment of FASB
Statement No. 5 and 15). When making an assessment as
to whether a loan is individually impaired, we also take into
account insignificant delays in payments. Determination of
whether a delay in payment or shortfall of amount is
insignificant requires managements judgment as to the
facts and circumstances surrounding the loan. 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 such as cash in a preforeclosure sale or
the underlying collateral in full satisfaction of the mortgage
loan upon foreclosure.
Collateral
We enter into various transactions where we pledge and accept
collateral, the most common of which are our derivative
transactions. Required collateral levels vary depending on the
credit rating and type of counterparty. We also pledge and
receive collateral under our repurchase and reverse repurchase
agreements. In order to reduce potential exposure to repurchase
counterparties, a third party custodian typically maintains the
collateral and any margin. The fair value of the collateral
received from our counterparties is monitored, and we may
require additional collateral from those counterparties, as
deemed appropriate. Collateral received under early funding
agreements with lenders, whereby we advance funds to lenders
prior to the settlement of a security commitment, must meet our
standard underwriting guidelines for the purchase or guarantee
of mortgage loans.
128
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Cash
Collateral
For derivative positions with the same counterparty under master
netting arrangements to the extent that we pledge cash
collateral and give up control to a counterparty, we remove it
from Cash and cash equivalents and reclassify it as
part of Derivative liabilities at fair value in our
condensed consolidated balance sheets as a part of our
counterparty netting calculation. We pledged $19.9 billion
and $20.3 billion in cash collateral as of June 30,
2009 and December 31, 2008, respectively, related primarily
to our derivatives and other operating activities. Cash
collateral accepted from a counterparty that we have the right
to use is recorded as Cash and cash equivalents in
our condensed consolidated balance sheets. Cash collateral
accepted from a counterparty that we do not have the right to
use is recorded as Restricted cash in our condensed
consolidated balance sheets. Our obligation to return cash
collateral pledged to us is recorded as part of Derivative
assets at fair value in our condensed consolidated balance
sheets as a part of our counterparty netting calculation. We
accepted cash collateral of $2.7 billion and
$4.0 billion as of June 30, 2009 and December 31,
2008, respectively, of which $510 million and
$330 million, respectively, was restricted.
Pledged
Non-Cash Collateral
Securities pledged to counterparties are classified as either
Investments in securities or Cash and cash
equivalents in our condensed consolidated balance sheets.
Securities pledged to counterparties that have been consolidated
under FIN 46R as loans are included as Mortgage
loans in our condensed consolidated balance sheets. As of
June 30, 2009, we pledged $1.4 billion
available-for-sale
(AFS) securities, which the counterparty had the
right to sell or repledge. As of December 31, 2008, we
pledged $720 million of AFS securities, which the
counterparty had the right to sell or repledge.
The fair value of non-cash collateral accepted that we were
permitted to sell or repledge was $2.1 billion and
$141 million as of June 30, 2009 and December 31,
2008, respectively, none of which was sold or repledged. The
fair value of non-cash collateral accepted that we were not
permitted to sell or repledge was $9.7 billion and
$13.3 billion as of June 30, 2009 and
December 31, 2008, respectively. Additionally, non-cash
collateral was accepted related to our HCD business of
$8.1 billion and $10.6 billion as of June 30,
2009 and December 31, 2008 that we were not permitted to
sell or repledge.
Our liability to third-party holders of Fannie Mae MBS that
arises as the result of a consolidation of a securitization
trust is fully collateralized by underlying loans
and/or
mortgage-related securities.
When securities sold under agreements to repurchase meet all of
the conditions of a secured financing, the collateral of the
transferred securities is reported at fair value, excluding
accrued interest. We did not have any repurchase agreements of
this type outstanding as of June 30, 2009 and
December 31, 2008.
129
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Fair
Value Losses, Net
Fair value losses, net, consists of fair value gains and losses
on derivatives, trading securities, debt carried at fair value,
foreign currency debt, and adjustments to the carrying amount of
hedged mortgage assets. The following table displays the
composition of Fair value losses, net for the three
and six months ended June 30, 2009 and 2008.
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For the
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For the
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Three Months
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Six Months
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Ended
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Ended
|
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June 30,
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June 30,
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2009
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2008
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2009
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2008
|
|
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(Dollars in millions)
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Derivatives fair value gains (losses), net
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$
|
(537
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)
|
|
$
|
2,293
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|
|
$
|
(2,243
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)
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|
$
|
(710
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)
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Trading securities gains (losses), net
|
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1,561
|
|
|
|
(965
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)
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1,728
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|
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|
(2,192
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)
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Hedged mortgage asset (losses),
net(1)
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(803
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)
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(803
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)
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Debt foreign exchange losses, net
|
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(169
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)
|
|
|
(12
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)
|
|
|
(114
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)
|
|
|
(169
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)
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Debt fair value gains (losses), net
|
|
|
(32
|
)
|
|
|
4
|
|
|
|
(8
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)
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|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Fair value gains (losses), net
|
|
$
|
823
|
|
|
$
|
517
|
|
|
$
|
(637
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)
|
|
$
|
(3,860
|
)
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(1) |
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Represents fair value losses, net
on mortgage assets designated for hedge accounting that are
attributable to changes in interest rates and will be accreted
through interest income over the life of the hedged assets.
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Servicer
and MBS trust receivable and payable
When servicers advance payments to MBS trusts for delinquent
loans, we record a receivable from MBS trusts and a
corresponding liability to reimburse the servicers. We recover
these amounts from MBS trusts when the loans subsequently become
current, or we include the amount as part of our loan basis upon
purchase of the loan from the MBS trust or our acquired property
basis upon foreclosure.
When principal and interest remittances and prepayments have
been received from borrowers by servicers but not yet remitted
to us or MBS trusts, we record a receivable from servicers and a
corresponding liability to MBS trusts. The unscheduled payments
are remitted to the MBS trusts in subsequent months.
We record a liability to fund the purchase of delinquent loans
or acquired property from MBS trusts. For MBS trusts where we
are considered the transferor, when the contingency on our
option to purchase loans from the trust has been met and we
regain effective control over the transferred loan, we recognize
the loan on our condensed consolidated balance sheets at fair
value and record a corresponding liability to the MBS trust.
Fair
Value Measurements
On April 1, 2009, we adopted FASB Staff Position
No. FAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP
FAS 157-4),
which reaffirms that (1) the objective of fair value when
the market for an asset is not active is the price that would be
received to sell the asset in an orderly transaction at the date
of the financial statements under current market conditions; and
(2) the need to use judgment to ascertain if a formerly
active market has become inactive and in determining fair values
when markets have become inactive. The application of the FSP
did not have an impact on our condensed consolidated financial
statements.
130
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Reclassification
and Adoption of a New Accounting Pronouncement
Pursuant to our January 1, 2009 adoption of SFAS 160
to require noncontrolling interests to be classified as a
separate component of equity, we reclassified amounts in our
condensed consolidated balance sheet as of December 31,
2008 related to noncontrolling interests. Amounts previously
reported as Minority interests in consolidated
subsidiaries are now reported as Noncontrolling
interest. Additionally, amounts reported in our condensed
consolidated statement of operations for the three months and
six months ended June 30, 2008 as Minority interest
in losses of consolidated subsidiaries are now reported as
Net income/loss attributable to the noncontrolling
interest.
Additionally, we reclassified $6.5 billion from Other
assets to Servicer and MBS trust receivable
and $6.4 billion from Other liabilities to
Servicer and MBS trust payable as of
December 31, 2008 in our condensed consolidated balance
sheet to conform to the current period presentation. Also, we
reclassified $507 million and $562 million for the
three and six months ended June 30, 2008, respectively,
from Investment gains (losses), net to Net
other-than-temporary
impairments in our condensed consolidated statements of
operations to conform to the current period presentation.
New
Accounting Pronouncements
SFAS No. 166, Accounting for Transfer of Financial
Assets-an amendment of SFAS Statement No. 140
(SFAS 166), and
SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167)
On June 12, 2009, the FASB issued SFAS 166 and 167.
These two new accounting statements amend the accounting for
transfers of financial assets and the consolidation guidance
related to variable interest entities. SFAS 166 eliminates
the concept of QSPEs. As a result, the consolidation exemption
for QSPEs has been removed and all former QSPEs must be
evaluated for consolidation in accordance with the provisions of
SFAS 167. Additionally, SFAS 167 replaces the current
consolidation model with a qualitative evaluation that requires
consolidation of an entity when the reporting enterprise both
(a) has the power to direct matters which significantly
impact the activities and success of the entity, and
(b) has exposure to benefits
and/or
losses that could potentially be significant to the entity. Our
adoption of these new accounting standards will have a
significant impact on our consolidated financial statements.
Although we are still assessing the impact of these new
accounting standards, we currently expect that we will be
required to consolidate the assets and liabilities of the
substantial majority of our outstanding MBS trusts that are
currently not consolidated. We will apply SFAS 166 to new
transfers of financial assets and SFAS 167 to all new and
existing variable interest entities on or after January 1,
2010. Earlier application is prohibited.
SFAS 167 requires the incremental assets and liabilities
consolidated upon the adoption to initially be reported at their
carrying values. If determining the carrying amounts is not
practicable, the assets and liabilities of the variable interest
entity shall be measured at fair value at the date SFAS 167
first applies. However, if determining the carrying amounts is
not practicable, and if the activities of the consolidated
entity are primarily related to securitizations or other forms
of asset-backed financings and the assets of the entity can be
used only to settle obligations of the consolidated entity, then
the assets and liabilities of the consolidated entity may be
measured at their unpaid principal balances at the date
SFAS 167 first applies. For the currently outstanding MBS
trusts expected to be consolidated upon adoption of
SFAS 167, we expect to initially record the assets and
liabilities on our consolidated balance sheet at their unpaid
principal balances as it is not practicable to determine their
carrying values. Accrued interest, an allowance for credit
losses, and
other-than-temporary
impairments will also be recognized as appropriate. The assets
and liabilities of all consolidated variable interest entities
will be separately presented on the face of our consolidated
balance sheet. As of June 30, 2009, the unpaid principal
balance of our MBS trusts totaled approximately $2.8 trillion.
131
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
In addition to the significant increase in assets and
liabilities recorded on our consolidated balance sheet, we also
expect significant changes to our consolidated statement of
operations. Currently, the fees we receive from non-consolidated
MBS trusts for trust management and the guaranty of timely
payment of principal and interest is recorded on our
consolidated statement of operations. However, to the extent
these currently non-consolidated MBS trusts are consolidated
upon adoption of SFAS 167, such fees will be eliminated and
the interest income and interest expense related to the assets
and liabilities of the newly consolidated MBS trusts will be
reflected in our consolidated statement of operations.
We are continuing to evaluate the impact of this guidance and
the actual impact of adopting these new accounting standards
could differ materially from our current expectations.
FSP
No. FAS 132R-1,
Employers Disclosures about Postretirement Benefit Plan
Assets (FSP FAS 132R-1)
In December 2008, the FASB issued FASB staff positions
(FSP)
FAS 132R-1
that amends FASB Statement No. 132R, Employers
Disclosures about Pension and Other Postretirement Benefits
and requires more detailed disclosures about employers
plan assets, including employers investment strategies,
major categories of plan assets, concentrations of risk within
plan assets, and valuation techniques used to measure the fair
value of plan assets. FSP
FAS 132R-1
also requires the disclosure of fair value of plan assets at the
reporting date by the fair value hierarchy in
SFAS No. 157, Fair Value Measurements
(SFAS 157), and a reconciliation of the
beginning and ending balances of plan assets with fair value
measured using significant unobservable inputs (Level 3).
FSP
FAS 132R-1
is effective for fiscal years ending after December 15,
2009. Early application is permitted. As FSP
FAS 132R-1
only requires additional note disclosures, it will affect the
notes to our condensed consolidated financial statements, but
have no impact to our condensed consolidated financial
statements.
We have interests in various entities that are considered to be
VIEs, as defined by FIN 46R. These interests include
investments in securities issued by VIEs, such as Fannie Mae MBS
created pursuant to our securitization transactions, mortgage
and asset-backed trusts that were not created by us, and limited
partnership interests in LIHTC and other housing partnerships
that are established to finance the acquisition, construction,
development or rehabilitation of affordable multifamily and
single-family housing. These interests may also include our
guaranty to the entity.
As of June 30, 2009 and December 31, 2008, we had
LIHTC partnership investments of $5.8 billion and
$6.3 billion, respectively. As a result of our tax
position, we did not make any LIHTC investments in the first six
months of 2009 other than pursuant to commitments existing prior
to 2008 and are not currently recognizing a majority of the tax
benefits associated with tax credits and net operating losses in
our condensed consolidated financial statements.
We recorded $302 million and $33 million for the three
months ended June 30, 2009 and 2008, respectively, and
$449 million and $47 million for the six months ended
June 30, 2009 and 2008, respectively, of impairment related
to our limited partnerships in Losses from partnership
investments in our condensed consolidated statements of
operations.
132
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Consolidated
VIEs
The following table displays the carrying amount and
classification of assets and liabilities of consolidated VIEs as
of June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
MBS trusts:
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
54,809
|
|
|
$
|
59,126
|
|
Available-for-sale
securities(1)
|
|
|
1,992
|
|
|
|
2,208
|
|
Loans held for sale
|
|
|
1,488
|
|
|
|
1,429
|
|
Trading securities
|
|
|
901
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
Total MBS
trusts(2)
|
|
|
59,190
|
|
|
|
63,756
|
|
Limited partnerships:
|
|
|
|
|
|
|
|
|
Partnership
investment(3)
|
|
|
5,053
|
|
|
|
5,697
|
|
Cash, cash equivalents and restricted cash
|
|
|
170
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
Total limited partnership investments
|
|
|
5,223
|
|
|
|
5,843
|
|
|
|
|
|
|
|
|
|
|
Total assets of consolidated VIEs
|
|
$
|
64,413
|
|
|
$
|
69,599
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
4,906
|
|
|
|
5,094
|
|
Partnership liabilities
|
|
|
2,359
|
|
|
|
2,585
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of consolidated VIEs
|
|
$
|
7,265
|
|
|
$
|
7,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes assets of consolidated
mortgage revenue bonds of $23 million and $54 million
as of June 30, 2009 and December 31, 2008,
respectively.
|
|
(2) |
|
The assets of consolidated MBS
trusts are restricted solely for the purpose of servicing the
related MBS.
|
|
(3) |
|
Includes LIHTC partnerships of
$2.8 billion and $3.0 billion as of June 30, 2009
and December 31, 2008, respectively.
|
As of June 30, 2009, we consolidated $565 million in
assets which were not consolidated as of December 31, 2008.
These assets were not consolidated as of December 31, 2008
because we did not have the unilateral ability to liquidate the
trusts. These assets were consolidated because we purchased
additional MBS during the period such that we owned 100% of the
trusts as of June 30, 2009.
As of December 31, 2008, we consolidated $3.6 billion
in assets which were no longer consolidated as of June 30,
2009 because we sold all or a portion of our ownership interests
in the related MBS trusts such that we no longer have the
unilateral ability to liquidate these trusts. For the three and
six months ended June 30, 2009, we recognized a loss of
$240 million and $285 million upon deconsolidation of
VIEs, respectively. The portion of this loss related to the
remeasurement of retained investment in the trust to its fair
value was $8 million and $9 million for the three and
six months ended June 30, 2009, respectively.
133
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Non-consolidated
VIEs
We consolidated our investments in certain LIHTC funds that were
structured as limited partnerships. The funds that were
consolidated, in turn, own a majority of the limited partnership
interests in other LIHTC operating partnerships, which did not
require consolidation under FIN 46R and are, therefore,
accounted for using the equity method. Such investments, which
are generally funded through a combination of debt and equity,
have a recorded investment of $2.6 billion and
$2.9 billion as of June 30, 2009 and December 31,
2008, respectively. In addition, such unconsolidated operating
partnerships had $181 million and $171 million in
mortgage debt that we own or guarantee as of June 30, 2009
and December 31, 2008, respectively.
The following table displays the total assets as of
June 30, 2009 and December 31, 2008 of
non-consolidated VIEs with which we are involved and QSPEs for
which we are the sponsor or servicer but not the transferor.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Assets of Non-consolidated VIEs and
QSPEs:(1)
|
|
|
|
|
|
|
|
|
Mortgage-backed
trusts(2)
|
|
$
|
3,042,983
|
|
|
$
|
3,017,030
|
|
Asset-backed trusts
|
|
|
510,681
|
|
|
|
563,633
|
|
Limited partnership investments
|
|
|
13,410
|
|
|
|
12,884
|
|
Other(3)
|
|
|
8,040
|
|
|
|
5,701
|
|
|
|
|
|
|
|
|
|
|
Total assets of non-consolidated VIEs and QSPEs
|
|
$
|
3,575,114
|
|
|
$
|
3,599,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not include QSPEs for
which we are the transferor.
|
|
(2) |
|
Includes $588.5 billion and
$604.4 billion of assets of non-QSPE securitization trusts
as of June 30, 2009 and December 31, 2008,
respectively.
|
|
(3) |
|
Includes mortgage revenue bonds of
$8.0 billion and $5.7 billion as of June 30, 2009
and December 31, 2008, respectively, and the unpaid
principal balance of credit enhanced bonds of $17 million
and $19 million as of June 30, 2009 and
December 31, 2008, respectively.
|
134
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the carrying amount and
classification of the assets and liabilities as of June 30,
2009 and December 31, 2008 related to our variable
interests in non-consolidated VIEs and QSPEs where we have
variable interests in the entities or where we are a
nontransferor sponsor or servicer of the entities.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,(1)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
200,390
|
|
|
$
|
180,694
|
|
Trading securities
|
|
|
56,708
|
|
|
|
63,265
|
|
Guaranty assets
|
|
|
6,176
|
|
|
|
6,431
|
|
Partnership investments
|
|
|
3,052
|
|
|
|
3,405
|
|
Servicer and MBS trust receivable
|
|
|
10,988
|
|
|
|
6,111
|
|
Other assets
|
|
|
993
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
Total carrying amount of assets related to our interests in
non-consolidated VIEs and QSPEs
|
|
$
|
278,307
|
|
|
$
|
261,232
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses
|
|
$
|
46,742
|
|
|
$
|
21,614
|
|
Guaranty obligations
|
|
|
10,893
|
|
|
|
10,823
|
|
Partnership liabilities
|
|
|
460
|
|
|
|
617
|
|
Servicer and MBS trust payable
|
|
|
9,778
|
|
|
|
4,259
|
|
Other liabilities
|
|
|
530
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
Total carrying amount of liabilities related to our interests in
non-consolidated VIEs and QSPEs
|
|
$
|
68,403
|
|
|
$
|
38,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period amounts include
additional categories to conform to the current period
presentation.
|
The following table displays the maximum exposure to loss as a
result of our involvement with non-consolidated VIEs and QSPEs,
where we have variable interests in the entities or where we are
a nontransferor sponsor or servicer of the entities, as well as
the liabilities recognized in our condensed consolidated balance
sheets related to our variable interests in those entities as of
June 30, 2009 and December 31, 2008. Refer to
Note 8, Financial Guarantees and Master
Servicing for additional discussion of our maximum
exposure to loss resulting from our guaranty arrangements.
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
Exposure
|
|
|
Recognized
|
|
|
|
to
Loss(1)
|
|
|
Liabilities(2)
|
|
|
|
(Dollars in millions)
|
|
|
As of June 30, 2009
|
|
$
|
2,586,551
|
|
|
$
|
67,943
|
|
As of December 31,
2008(3)
|
|
|
2,536,469
|
|
|
|
37,463
|
|
|
|
|
(1) |
|
Represents the greater of our
recorded investment in the entity or the unpaid principal
balance of the assets that are covered by our guaranty. Includes
$98.0 billion and $95.9 billion related to non-QSPE
securitization trusts as of June 30, 2009 and
December 31, 2008, respectively.
|
|
(2) |
|
Amounts consist of guaranty
obligations, reserve for guaranty losses, servicer and MBS trust
payable, and other liabilities recognized for the respective
periods.
|
|
(3) |
|
Prior period amounts include
additional categories to conform to the current period
presentation.
|
135
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the loans in our mortgage portfolio
as of June 30, 2009 and December 31, 2008 and does not
include loans underlying securities that are not consolidated,
since in those instances the mortgage loans are not included in
our condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Single-family
|
|
$
|
305,916
|
|
|
$
|
312,052
|
|
Multifamily
|
|
|
120,794
|
|
|
|
117,441
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of mortgage
loans(1)(2)
|
|
|
426,710
|
|
|
|
429,493
|
|
Unamortized premiums (discounts) and other cost basis
adjustments, net
|
|
|
(3,826
|
)
|
|
|
(894
|
)
|
Lower of cost or market adjustments on loans held for sale
|
|
|
(462
|
)
|
|
|
(264
|
)
|
Allowance for loan losses for loans held for investment
|
|
|
(6,841
|
)
|
|
|
(2,923
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
$
|
415,581
|
|
|
$
|
425,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes construction to permanent
loans with an unpaid principal balance of $76 million and
$125 million as of June 30, 2009 and December 31,
2008, respectively.
|
|
(2) |
|
Includes unpaid principal balance
totaling $152.1 billion and $65.8 billion as of
June 30, 2009 and December 31, 2008, respectively,
related to mortgage-related securities that were consolidated
under FIN 46R and mortgage-related securities created from
securitization transactions that did not meet the sales criteria
under SFAS 140, which effectively resulted in
mortgage-related securities being accounted for as loans.
|
Loans
Acquired in a Transfer
If a loan underlying a Fannie Mae MBS is in default, we have the
option to purchase the loan from the MBS trust, at the unpaid
principal balance of that mortgage loan plus accrued interest,
after four or more consecutive monthly payments due under the
loan are delinquent in whole or in part. With respect to
Single-family mortgage loans in MBS trusts with issue dates on
or after January 1, 2009, we also have the option to
purchase the loan from the trust after the loan has been
delinquent for at least one monthly payment, if the delinquency
has not been fully cured on or before the next payment date
(i.e., 30 days delinquent), and it is determined
that it is appropriate to execute a loss mitigation activity
that is not permissible while the loan is held in an MBS trust.
Loans can be acquired either through purchase or consolidation.
We acquired delinquent loans with an unpaid principal balance
plus accrued interest of $3.7 billion and $807 million
for the three months ended June 30, 2009 and 2008,
respectively, and $6.3 billion and $2.5 billion for
the six months ended June 30, 2009 and 2008, respectively.
Under long-term standby commitments, we purchase loans from
lenders when the loans subject to these commitments meet certain
delinquency criteria. We also acquire loans upon consolidating
MBS trusts when the underlying collateral of these trusts
includes loans.
We account for such acquired loans in accordance with American
Institute of Certified Public Accountants Statement of Position
03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
(SOP 03-3),
if, at acquisition, (i) there has been evidence of
deterioration in the loans credit quality subsequent to
origination; and (ii) it is probable that we will be unable
to collect all cash flows, in accordance with the terms of the
contractual agreement, from the borrower, ignoring insignificant
delays. Determination of whether a delay in payment or shortfall
in amount is considered more than insignificant is based on the
facts and circumstances surrounding the loan. Acquired loans
include loans purchased as well as loans acquired through
consolidation of MBS trusts.
136
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the outstanding balance and
carrying amount of acquired loans accounted for in accordance
with
SOP 03-3
as of June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Outstanding contractual balance
|
|
$
|
8,586
|
|
|
$
|
7,206
|
|
Carrying amount:
|
|
|
|
|
|
|
|
|
Loans on accrual status
|
|
|
2,592
|
|
|
|
2,902
|
|
Loans on nonaccrual status
|
|
|
3,089
|
|
|
|
2,708
|
|
|
|
|
|
|
|
|
|
|
Total carrying amount of loans
|
|
$
|
5,681
|
|
|
$
|
5,610
|
|
|
|
|
|
|
|
|
|
|
The following table displays details on acquired loans accounted
for in accordance with
SOP 03-3
at their acquisition dates for the three and six months ended
June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
For the
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Contractually required principal and interest payments at
acquisition(1)
|
|
$
|
3,938
|
|
|
$
|
892
|
|
|
$
|
6,798
|
|
|
$
|
2,786
|
|
Nonaccretable difference
|
|
|
1,038
|
|
|
|
97
|
|
|
|
1,719
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected at
acquisition(1)
|
|
|
2,900
|
|
|
|
795
|
|
|
|
5,079
|
|
|
|
2,510
|
|
Accretable yield
|
|
|
1,288
|
|
|
|
368
|
|
|
|
2,241
|
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial investment in acquired loans at acquisition
|
|
$
|
1,612
|
|
|
$
|
427
|
|
|
$
|
2,838
|
|
|
$
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contractually required principal
and interest payments at acquisition and cash flows expected to
be collected at acquisition are adjusted for the estimated
timing and amount of prepayments.
|
We estimate the cash flows expected to be collected at
acquisition using internal prepayment, interest rate and credit
risk models that incorporate managements best estimate of
certain key assumptions, such as default rates, loss severity
and prepayment speeds. The following table displays activity for
the accretable yield of all outstanding loans accounted for
under
SOP 03-3
for the three and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
For the
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Beginning balance
|
|
$
|
1,799
|
|
|
$
|
2,245
|
|
|
$
|
1,559
|
|
|
$
|
2,252
|
|
Additions
|
|
|
1,288
|
|
|
|
368
|
|
|
|
2,241
|
|
|
|
1,107
|
|
Accretion
|
|
|
(50
|
)
|
|
|
(73
|
)
|
|
|
(106
|
)
|
|
|
(145
|
)
|
Reductions(1)
|
|
|
(1,461
|
)
|
|
|
(569
|
)
|
|
|
(2,484
|
)
|
|
|
(1,159
|
)
|
Change in estimated cash
flows(2)
|
|
|
907
|
|
|
|
508
|
|
|
|
1,214
|
|
|
|
511
|
|
Reclassifications to nonaccretable
difference(3)
|
|
|
(187
|
)
|
|
|
(154
|
)
|
|
|
(128
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,296
|
|
|
$
|
2,325
|
|
|
$
|
2,296
|
|
|
$
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reductions are the result of
liquidations and loan modifications due to troubled debt
restructurings (TDRs).
|
137
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
(2) |
|
Represents changes in expected cash
flows due to changes in prepayment assumptions.
|
|
(3) |
|
Represents changes in expected cash
flows due to changes in credit quality or credit assumptions.
|
The table above only includes accreted effective interest for
those loans that are still being accounted for under
SOP 03-3
and does not include
SOP 03-3
loans that were modified subsequent to their acquisition from
MBS trusts.
The following table displays interest income recognized and the
increase in the Provision for credit losses related
to loans that are still being accounted for under
SOP 03-3,
as well as
SOP 03-3
loans that have been subsequently modified as a TDR, for the
three and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Accretion of
SOP 03-3
fair value
losses(1)
|
|
$
|
198
|
|
|
$
|
53
|
|
|
$
|
263
|
|
|
$
|
88
|
|
Interest income on
SOP 03-3
loans returned to accrual status or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsequently modified as TDRs
|
|
|
58
|
|
|
|
115
|
|
|
|
146
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
SOP 03-3
interest income recognized
|
|
$
|
256
|
|
|
$
|
168
|
|
|
$
|
409
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Provision for credit losses subsequent
to the acquisition of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOP 03-3
loans
|
|
$
|
137
|
|
|
$
|
86
|
|
|
$
|
200
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents accretion of the fair
value discount that was recorded upon acquisition of SOP 03-3
loans.
|
Other
Loans
In 2008, we implemented a program, HomeSaver Advance, to permit
servicers to provide qualified borrowers with a
15-year
unsecured personal loan in an amount equal to all past due
payments on their first mortgage loan. Each loan is limited to a
maximum amount generally up to the lesser of $15,000 or 15% of
the unpaid principal balance of the delinquent first mortgage
loan. This program allows borrowers to cure their payment
defaults without requiring modification of their first mortgage
loans.
The following table displays the unpaid principal balance and
carrying value of our HomeSaver Advance loans as of
June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Unpaid principal balance
|
|
$
|
497
|
|
|
$
|
461
|
|
Carrying value
|
|
|
3
|
|
|
|
8
|
|
We recorded a fair value loss and impairment of $90 million
and $114 million for the three months ended June 30,
2009 and 2008, respectively, for these loans. We recorded a fair
value loss and impairment of $233 million and
$123 million for the six months ended June 30, 2009
and 2008, respectively, for these loans. The fair value discount
on these loans will accrete into income based on the contractual
term of the loan.
138
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
5.
|
Allowance
for Loan Losses and Reserve for Guaranty Losses
|
We maintain an allowance for loan losses for loans held for
investment in our mortgage portfolio and a reserve for guaranty
losses related to loans backing Fannie Mae MBS and loans that we
have guaranteed under long-term standby commitments. The
allowance and reserve are calculated based on our estimate of
incurred losses as of the balance sheet date. Determining the
adequacy of our allowance for loan losses and reserve for
guaranty losses is complex and requires judgment about the
effect of matters that are inherently uncertain. Although our
loss models include extensive historical loan performance data,
our loss reserve process is subject to risks and uncertainties
particularly in the rapidly changing credit environment. We have
experienced higher default and loan loss severity rates during
the three and six months ended June 30, 2009 as compared to
the three and six months ended June 30, 2008, which has
increased our estimates of incurred losses resulting in a
significant increase to our allowance for loan losses and
reserve for guaranty losses as of June 30, 2009.
The following table displays changes in the allowance for loan
losses and reserve for guaranty losses for the three and six
months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1
|
|
$
|
4,830
|
|
|
$
|
993
|
|
|
$
|
2,923
|
|
|
$
|
698
|
|
Provision
|
|
|
2,615
|
|
|
|
880
|
|
|
|
5,124
|
|
|
|
1,424
|
|
Charge-offs(1)
|
|
|
(672
|
)
|
|
|
(495
|
)
|
|
|
(1,309
|
)
|
|
|
(774
|
)
|
Recoveries
|
|
|
68
|
|
|
|
98
|
|
|
|
103
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June
30(2)
|
|
$
|
6,841
|
|
|
$
|
1,476
|
|
|
$
|
6,841
|
|
|
$
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1
|
|
$
|
36,876
|
|
|
$
|
4,202
|
|
|
$
|
21,830
|
|
|
$
|
2,693
|
|
Provision
|
|
|
15,610
|
|
|
|
4,205
|
|
|
|
33,435
|
|
|
|
6,734
|
|
Charge-offs(3)(4)
|
|
|
(4,314
|
)
|
|
|
(989
|
)
|
|
|
(7,258
|
)
|
|
|
(2,026
|
)
|
Recoveries
|
|
|
108
|
|
|
|
32
|
|
|
|
273
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June 30
|
|
$
|
48,280
|
|
|
$
|
7,450
|
|
|
$
|
48,280
|
|
|
$
|
7,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes accrued interest of
$328 million and $161 million for the three months
ended June 30, 2009 and 2008, respectively, and
$575 million and $239 million for the six months ended
June 30, 2009 and 2008, respectively.
|
|
(2) |
|
Includes $309 million and
$114 million as of June 30, 2009 and 2008,
respectively, associated with acquired loans subject to
SOP 03-3.
|
|
(3) |
|
Includes charges of
$73 million and $114 million for the three months
ended June 30, 2009 and 2008, respectively, and
$188 million and $123 million for the six months ended
June 30, 2009 and 2008, respectively, related to unsecured
HomeSaver Advance loans.
|
|
(4) |
|
Includes charges recorded at the
date of acquisition of $2.1 billion and $380 million
for the three months ended June 30, 2009 and 2008,
respectively, and $3.5 billion and $1.1 billion for
the six months ended June 30, 2009 and 2008, respectively
for acquired loans subject to
SOP 03-3
where the acquisition cost exceeded the fair value of the
acquired loan.
|
139
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
6.
|
Investments
in Securities
|
Our securities portfolio contains mortgage-related and
non-mortgage-related securities. The following table displays
our investments in trading and AFS securities, which are
presented at fair value as of June 30, 2009 and
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
177,373
|
|
|
$
|
164,241
|
|
Fannie Mae structured MBS
|
|
|
65,321
|
|
|
|
70,009
|
|
Non-Fannie Mae single-class
|
|
|
34,168
|
|
|
|
27,497
|
|
Non-Fannie Mae structured
|
|
|
38,037
|
|
|
|
43,119
|
|
Non-Fannie Mae structured multifamily (CMBS)
|
|
|
20,144
|
|
|
|
19,691
|
|
Mortgage revenue bonds
|
|
|
13,658
|
|
|
|
13,183
|
|
Other
|
|
|
1,894
|
|
|
|
1,914
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
350,595
|
|
|
|
339,654
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
9,808
|
|
|
|
10,598
|
|
Corporate debt securities
|
|
|
935
|
|
|
|
6,037
|
|
Other
|
|
|
5,003
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,746
|
|
|
|
17,640
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
$
|
366,341
|
|
|
$
|
357,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current period presentation.
|
140
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Trading
Securities
Trading securities are recorded at fair value with subsequent
changes in fair value recorded as Fair value gains
(losses), net in our condensed consolidated statements of
operations. The following table displays our investments in
trading securities and the cumulative amount of net losses
recognized from holding these securities as of June 30,
2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
42,973
|
|
|
$
|
48,134
|
|
Fannie Mae structured MBS
|
|
|
9,130
|
|
|
|
9,872
|
|
Non-Fannie Mae single-class
|
|
|
959
|
|
|
|
1,061
|
|
Non-Fannie Mae structured
|
|
|
4,626
|
|
|
|
5,199
|
|
Non-Fannie Mae structured multifamily (CMBS)
|
|
|
8,349
|
|
|
|
8,205
|
|
Mortgage revenue bonds
|
|
|
617
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
66,654
|
|
|
|
73,166
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
9,808
|
|
|
|
10,598
|
|
Corporate debt securities
|
|
|
935
|
|
|
|
6,037
|
|
Other
|
|
|
5,003
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,746
|
|
|
|
17,640
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
82,400
|
|
|
$
|
90,806
|
|
|
|
|
|
|
|
|
|
|
Losses in trading securities held in our portfolio, net
|
|
$
|
4,494
|
|
|
$
|
7,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current period presentation.
|
The following table displays information about our net trading
gains and losses for the three and six months ended
June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Net trading gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
$
|
811
|
|
|
$
|
(1,104
|
)
|
|
$
|
690
|
|
|
$
|
(1,767
|
)
|
Non-mortgage-related securities
|
|
|
750
|
|
|
|
139
|
|
|
|
1,038
|
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,561
|
|
|
$
|
(965
|
)
|
|
$
|
1,728
|
|
|
$
|
(2,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net trading gains (losses) recorded in the period related to
securities still held at period end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
$
|
787
|
|
|
$
|
(1,093
|
)
|
|
$
|
655
|
|
|
$
|
(1,911
|
)
|
Non-mortgage-related securities
|
|
|
694
|
|
|
|
156
|
|
|
|
1,028
|
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,481
|
|
|
$
|
(937
|
)
|
|
$
|
1,683
|
|
|
$
|
(2,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Available-for-Sale
Securities
AFS securities are measured at fair value with unrealized gains
and losses recorded as a component of Accumulated other
comprehensive loss (AOCI), net of deferred
taxes, in Fannie Mae stockholders deficit in
our condensed consolidated balance sheets. Realized gains and
losses from the sale of AFS securities are recorded in
Investment gains (losses), net in our condensed
consolidated statements of operations.
The following table displays the gross realized gains, losses
and proceeds on sales of AFS securities for the three and six
months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Gross realized gains
|
|
$
|
1,370
|
|
|
$
|
1,398
|
|
|
$
|
2,169
|
|
|
$
|
1,473
|
|
Gross realized losses
|
|
|
1,283
|
|
|
|
1,418
|
|
|
|
1,946
|
|
|
|
1,460
|
|
Total proceeds
|
|
|
75,821
|
|
|
|
66,545
|
|
|
|
107,731
|
|
|
|
69,600
|
|
The following tables display the amortized cost, gross
unrealized gains and losses and fair value by major security
type for AFS securities held as of June 30, 2009 and
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Total
|
|
|
Gross
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Losses-
|
|
|
Losses-
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
OTTI(2)
|
|
|
Other
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae single-class MBS
|
|
$
|
130,623
|
|
|
$
|
3,856
|
|
|
$
|
|
|
|
$
|
(79
|
)
|
|
$
|
134,400
|
|
Fannie Mae structured MBS
|
|
|
54,300
|
|
|
|
1,984
|
|
|
|
(41
|
)
|
|
|
(52
|
)
|
|
|
56,191
|
|
Non-Fannie Mae single-class mortgage- related securities
|
|
|
32,117
|
|
|
|
1,100
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
33,209
|
|
Non-Fannie Mae structured mortgage-related securities
|
|
|
45,219
|
|
|
|
252
|
|
|
|
(7,971
|
)
|
|
|
(4,089
|
)
|
|
|
33,411
|
|
Non-Fannie Mae structured mortgage-related securities (CMBS)
|
|
|
15,918
|
|
|
|
|
|
|
|
|
|
|
|
(4,123
|
)
|
|
|
11,795
|
|
Mortgage revenue bonds
|
|
|
14,241
|
|
|
|
40
|
|
|
|
(53
|
)
|
|
|
(1,187
|
)
|
|
|
13,041
|
|
Other mortgage-related securities
|
|
|
2,494
|
|
|
|
25
|
|
|
|
(560
|
)
|
|
|
(65
|
)
|
|
|
1,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
294,912
|
|
|
$
|
7,257
|
|
|
$
|
(8,625
|
)
|
|
$
|
(9,603
|
)
|
|
$
|
283,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2008(3)
|
|
|
|
Total
|
|
|
Gross
|
|
|
Gross
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae single-class MBS
|
|
$
|
112,943
|
|
|
$
|
3,231
|
|
|
$
|
(67
|
)
|
|
$
|
116,107
|
|
Fannie Mae structured MBS
|
|
|
59,002
|
|
|
|
1,333
|
|
|
|
(198
|
)
|
|
|
60,137
|
|
Non-Fannie Mae single-class mortgage-related securities
|
|
|
25,798
|
|
|
|
665
|
|
|
|
(27
|
)
|
|
|
26,436
|
|
Non-Fannie Mae structured mortgage-related securities
|
|
|
46,972
|
|
|
|
195
|
|
|
|
(9,247
|
)
|
|
|
37,920
|
|
Non-Fannie Mae structured multifamily mortgage-related
securities (CMBS)
|
|
|
16,036
|
|
|
|
|
|
|
|
(4,550
|
)
|
|
|
11,486
|
|
Mortgage revenue bonds
|
|
|
14,636
|
|
|
|
29
|
|
|
|
(2,177
|
)
|
|
|
12,488
|
|
Other mortgage-related securities
|
|
|
2,319
|
|
|
|
29
|
|
|
|
(434
|
)
|
|
|
1,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
277,706
|
|
|
$
|
5,482
|
|
|
$
|
(16,700
|
)
|
|
$
|
266,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortized cost includes unamortized
premiums, discounts and other cost basis adjustments, as well as
other-than-temporary
impairments recognized in our condensed consolidated statements
of operations.
|
|
(2) |
|
Reflects the noncredit component of
other-than-temporary
impairment losses recorded in other comprehensive loss as well
as subsequent changes in fair value for which an
other-than-temporary
impairment has previously occured.
|
|
(3) |
|
Certain amounts have been
reclasssified to conform to the current period presentation.
|
The following tables display additional information regarding
gross unrealized losses by major security type for AFS
securities held as of June 30, 2009 and December 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Less than 12
|
|
|
12 Consecutive
|
|
|
|
Consecutive Months
|
|
|
Months or Longer
|
|
|
|
Gross
|
|
|
Total
|
|
|
Gross
|
|
|
Total
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
(79
|
)
|
|
$
|
16,104
|
|
|
$
|
|
|
|
$
|
26
|
|
Fannie Mae structured MBS
|
|
|
(57
|
)
|
|
|
1,718
|
|
|
|
(36
|
)
|
|
|
572
|
|
Non-Fannie Mae single-class mortgage-related securities
|
|
|
(7
|
)
|
|
|
551
|
|
|
|
(1
|
)
|
|
|
48
|
|
Non-Fannie Mae structured mortgage-related securities
|
|
|
(6,991
|
)
|
|
|
13,412
|
|
|
|
(5,069
|
)
|
|
|
14,152
|
|
Non-Fannie Mae structured multifamily mortgage-related
securities (CMBS)
|
|
|
|
|
|
|
|
|
|
|
(4,123
|
)
|
|
|
11,795
|
|
Mortgage revenue bonds
|
|
|
(85
|
)
|
|
|
1,786
|
|
|
|
(1,155
|
)
|
|
|
8,516
|
|
Other mortgage-related securities
|
|
|
(457
|
)
|
|
|
1,259
|
|
|
|
(168
|
)
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily-impaired
available-for-sale
securities
|
|
$
|
(7,676
|
)
|
|
$
|
34,830
|
|
|
$
|
(10,552
|
)
|
|
$
|
35,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2008(1)
|
|
|
|
Less than 12
|
|
|
12 Consecutive
|
|
|
|
Consecutive Months
|
|
|
Months or Longer
|
|
|
|
Gross
|
|
|
Total
|
|
|
Gross
|
|
|
Total
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
(64
|
)
|
|
$
|
4,842
|
|
|
$
|
(3
|
)
|
|
$
|
330
|
|
Fannie Mae structured MBS
|
|
|
(105
|
)
|
|
|
2,471
|
|
|
|
(93
|
)
|
|
|
2,514
|
|
Non-Fannie Mae single-class mortgage-related securities
|
|
|
(23
|
)
|
|
|
1,775
|
|
|
|
(4
|
)
|
|
|
643
|
|
Non-Fannie Mae structured mortgage-related securities
|
|
|
(1,259
|
)
|
|
|
4,567
|
|
|
|
(7,989
|
)
|
|
|
18,170
|
|
Non-Fannie Mae structured multifamily mortgage-related
securities (CMBS)
|
|
|
(2,533
|
)
|
|
|
6,821
|
|
|
|
(2,016
|
)
|
|
|
4,666
|
|
Mortgage revenue bonds
|
|
|
(854
|
)
|
|
|
6,230
|
|
|
|
(1,323
|
)
|
|
|
4,890
|
|
Other mortgage-related Securities
|
|
|
(388
|
)
|
|
|
1,313
|
|
|
|
(46
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily-impaired
available-for-sale
securities
|
|
$
|
(5,226
|
)
|
|
$
|
28,019
|
|
|
$
|
(11,474
|
)
|
|
$
|
31,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current presentation.
|
Other-Than-Temporary
Impairments
We adopted the provisions of FSP
FAS 115-2
as of April 1, 2009. As prescribed by FSP
FAS 115-2,
for the three months ended June 30, 2009, we recognized the
credit component of
other-than-temporary
impairments of our debt securities in our condensed consolidated
statement of operation and the noncredit component in
Other comprehensive loss for those securities for
which we do not intend to sell and it is not more likely than
not that we will be required to sell before recovery. For the
three months ended June 30, 2009, we recognized
other-than-temporary
impairments of $753 million in our condensed consolidated
statement of operations.
The fair value of our securities varies from period to period
due to changes in interest rates, changes in performance of the
underlying collateral and changes in credit performance of the
underlying issuer, among other factors. Included in the
$18.2 billion of gross unrealized losses on AFS securities
as of June 30, 2009, which includes unrealized losses on
securities with
other-than-temporary
impairment in which a portion of the impairment remains in
accumulated other comprehensive loss, were unrealized losses of
$10.6 billion that have existed for a period of 12
consecutive months or longer. The securities with unrealized
losses for 12 consecutive months or longer had a market value as
of June 30, 2009 that was on average 77% of their amortized
cost basis. Based on our review for impairments of AFS
securities, which includes an evaluation of the collectability
of cash flows and any intent or requirement to sell the
securities, we have concluded that we do not have an intent to
sell and we believe it is not more likely than not we will be
required to sell the securities. Additionally, our projections
of cash flows indicate that we will recover these unrealized
losses over the lives of the securities.
144
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays activity related to the credit
component recognized in earnings on debt securities held by us
for which a portion of
other-than-temporary
impairment was recognized in AOCI for the three months ended
June 30, 2009.
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Balance, March 31, 2009
|
|
$
|
|
|
Credit component of
other-than-temporary
impairment not reclassified to AOCI in conjunction with the
cumulative effect transition adjustment
|
|
|
4,265
|
|
Additions for the credit component on debt securities for which
OTTI was not previously recognized
|
|
|
222
|
|
Increase for credit losses related to securities for which
credit-related OTTI was previously recognized
|
|
|
531
|
|
Reductions for increases in cash flows expected to be collected
over the remaining life of the security
|
|
|
(64
|
)
|
|
|
|
|
|
Balance, June 30, 2009
|
|
$
|
4,954
|
|
|
|
|
|
|
As of June 30, 2009, those debt securities with
other-than-temporary
impairment in which only the amount of loss related to credit
was recognized in our condensed consolidated statement of
operations consisted predominantly of non-Fannie Mae structured
mortgage-related securities. For these residential
mortgage-related
securities, we estimate the portion of loss attributable to
credit using discounted cash flow models. The models were
created based on the performance of first-lien loans in a loan
performance asset-backed securities database and reflect the
average performance of all
private-label
mortgage-related
securities. There are separate models to project regional home
prices, interest rates, prepayment speeds, conditional default
rates, severity, delinquency rates and early payment defaults on
a loan-level
basis by product type.
Loan-level
performance projections are aggregated by pool and then
prepayment, default, severity and delinquency vectors for these
pools are passed to cash flow modeling software, which has
detailed information on security-level subordination levels and
cash flow priority of payments in order to project our bond cash
flows, including projections of bond principal losses and
interest shortfalls.
Other-than-temporary
impairments have been recorded based on this analysis for the
three months ended June 30, 2009, with amounts related to
credit loss recognized in our condensed consolidated statement
of operations.
Outside of residential mortgage-related securities, other models
are used that incorporate historical performance information and
other relevant public data to run cash flows and assess for
other-than-temporary
impairment. In cases where credit-sensitized cash flows cannot
be run, a qualitative and quantitative analysis is performed to
assess whether the bond is
other-than-temporarily
impaired. If it is deemed to be
other-than-temporarily
impaired, a credit holdback is assessed to the projected
no loss cash flows of the security.
Our cash flow projections are derived from internal models that
consider particular attributes of the loans underlying our
securities and assumptions about changes in the economic
environment, such as home prices and interest rates, to predict
borrower behavior and the impact on default frequency, loss
severity and remaining credit enhancement.
The following table displays the modeled attributes for
securities that were
other-than-temporarily
impaired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
|
Weighted Average
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Prepayment rates
|
|
|
4.0
|
%
|
|
|
0.5
|
%
|
|
|
10.4
|
%
|
Default rates
|
|
|
68.8
|
|
|
|
16.2
|
|
|
|
83.0
|
|
Loss severity
|
|
|
60.8
|
|
|
|
29.2
|
|
|
|
93.6
|
|
145
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the amortized cost and fair value
of our AFS securities by investment classification and remaining
maturity, assuming no principal prepayments, as of June 30,
2009. Contractual maturity of mortgage-backed securities is not
a reliable indicator of their expected life because borrowers
generally have the right to prepay their obligations at any time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One Year
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
One Year or Less
|
|
|
Through Five Years
|
|
|
Through Ten Years
|
|
|
After Ten Years
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
single-class MBS(2)
|
|
$
|
130,623
|
|
|
$
|
134,400
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
720
|
|
|
$
|
753
|
|
|
$
|
18,378
|
|
|
$
|
19,022
|
|
|
$
|
111,524
|
|
|
$
|
114,624
|
|
Fannie Mae structured
MBS(2)
|
|
|
54,300
|
|
|
|
56,191
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
85
|
|
|
|
7,063
|
|
|
|
7,325
|
|
|
|
47,157
|
|
|
|
48,781
|
|
Non-Fannie Mae single-class mortgage-related
securities(2)
|
|
|
32,117
|
|
|
|
33,209
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
100
|
|
|
|
858
|
|
|
|
892
|
|
|
|
31,161
|
|
|
|
32,217
|
|
Non-Fannie Mae structured mortgage-related
securities(2)
|
|
|
45,219
|
|
|
|
33,411
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
13
|
|
|
|
1,426
|
|
|
|
1,437
|
|
|
|
43,780
|
|
|
|
31,961
|
|
Non-Fannie Mae structured mortgage-related securities (CMBS)
|
|
|
15,918
|
|
|
|
11,795
|
|
|
|
200
|
|
|
|
140
|
|
|
|
377
|
|
|
|
352
|
|
|
|
15,171
|
|
|
|
11,243
|
|
|
|
170
|
|
|
|
60
|
|
Mortgage revenue bonds
|
|
|
14,241
|
|
|
|
13,041
|
|
|
|
27
|
|
|
|
27
|
|
|
|
316
|
|
|
|
321
|
|
|
|
780
|
|
|
|
777
|
|
|
|
13,118
|
|
|
|
11,916
|
|
Other mortgage-related securities
|
|
|
2,494
|
|
|
|
1,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
2,494
|
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
294,912
|
|
|
$
|
283,941
|
|
|
$
|
228
|
|
|
$
|
168
|
|
|
$
|
1,604
|
|
|
$
|
1,624
|
|
|
$
|
43,676
|
|
|
$
|
40,721
|
|
|
$
|
249,404
|
|
|
$
|
241,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortized cost includes unamortized
premiums, discounts and other cost basis adjustments, as well as
other-than-temporary
impairments recognized in our consolidated statements of
operations.
|
|
(2) |
|
Mortgage-backed securities are
reported based on contractual maturities assuming no prepayments.
|
|
|
7.
|
Portfolio
Securitizations
|
We issue Fannie Mae MBS through securitization transactions by
transferring pools of mortgage loans or mortgage-related
securities to one or more trusts or special purpose entities. We
are considered to be the transferor when we transfer assets from
our own portfolio in a portfolio securitization. For the three
months ended June 30, 2009 and June 30, 2008, the
unpaid principal balance of portfolio securitizations was
$135.5 billion and $13.4 billion, respectively. For
the six months ended June 30, 2009 and June 30, 2008,
the unpaid principal balance of portfolio securitizations was
$158.4 billion and $24.6 billion, respectively.
For the transfers that were recorded as sales, we have
continuing involvement in the assets transferred to a trust as a
result of our investments in securities issued by the trusts and
our guaranty and master servicing relationships. The following
table displays our continuing involvement in the form of Fannie
Mae MBS,
146
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
guaranty asset, guaranty obligation and master servicing asset
(MSA) or master servicing liability
(MSL) as of June 30, 2009 and December 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae MBS
|
|
$
|
46,096
|
|
|
$
|
45,705
|
|
Guaranty asset
|
|
|
775
|
|
|
|
438
|
|
MSA
|
|
|
8
|
|
|
|
10
|
|
Guaranty obligation (excluding deferred profit)
|
|
|
(976
|
)
|
|
|
(769
|
)
|
MSL
|
|
|
(28
|
)
|
|
|
(27
|
)
|
Our exposure to credit losses on the loans underlying our Fannie
Mae MBS resulting from our guaranty has been recorded in our
condensed consolidated balance sheets in Guaranty
obligations, as it relates to our obligation to stand
ready to perform on our guaranty, and Reserve for guaranty
losses, as it relates to incurred losses.
Since our guaranty asset and MSA or MSL do not trade in active
financial markets, we estimate their fair value by using
internally developed models and market inputs for securities
with similar characteristics. The key assumptions are discount
rate, or yield, derived using a projected interest rate path, or
paths, consistent with the observed yield curve at the valuation
date (forward rates), and the prepayment speed based on our
proprietary models that are consistent with the projected
interest rate path, or paths, and expressed as a
12-month
constant prepayment rate (CPR).
The fair value of all guaranty obligations measured subsequent
to their initial recognition is our estimate of a hypothetical
transaction price we would receive if we were to issue our
guaranty to an unrelated party in a stand-alone arms
length transaction at the measurement date. The key assumptions
associated with the fair value of the guaranty obligations are
future home prices and current loan to-value ratios.
Our investments in Fannie Mae single-class MBS, Fannie Mae
Megas, real estate mortgage investments conduits
(REMICs) and stripped mortgage-backed securities
(SMBS) are interests in securities with active
markets. We primarily rely on third party prices to estimate the
fair value of these interests. For the purpose of this
disclosure, we aggregate similar securities in order to measure
the key assumptions associated with the fair values of our
interests, which are approximated by solving for the estimated
discount rate, or yield, using a projected interest rate path
consistent with the observed yield curve at the valuation date
(forward rates), and the prepayment speed based on either our
proprietary models that are consistent with the projected
interest rate path, the pricing speed for newly issued REMICs,
or lagging
12-month
actual prepayment speed. All prepayment speeds are expressed as
a 12-month
CPR.
To determine the fair value of our securities created via
portfolio securitizations, we utilize several independent
pricing services. The prices that we receive from pricing
services are based on information they obtain on current trading
activity, but may be based partly on models where trading
activity is not observed. The fair value estimates that we
obtain from pricing services are evaluated for reasonableness
through multiple means, including our internal price
verification organization that uses alternate forms of pricing
information to validate the prices. Given that the prices for
the retained securities are not based on internal models, but
rather are based on observable market inputs obtained by our
pricing services, we do not believe that it is meaningful to
provide sensitivities to the fair value of the retained
securities to changes in assumptions.
147
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays some key characteristics of the
securities retained in portfolio securitizations.
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
|
|
|
|
|
Single-class
|
|
|
|
|
|
|
MBS & Fannie
|
|
|
REMICS &
|
|
|
|
Mae Megas
|
|
|
SMBS
|
|
|
|
(Dollars in millions)
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
19,460
|
|
|
$
|
25,109
|
|
Fair value
|
|
|
20,282
|
|
|
|
25,814
|
|
Impact on value from a 10% adverse change
|
|
|
(2,028
|
)
|
|
|
(2,581
|
)
|
Impact on value from a 20% adverse change
|
|
|
(4,056
|
)
|
|
|
(5,163
|
)
|
Weighted-average coupon
|
|
|
5.86
|
%
|
|
|
6.91
|
%
|
Weighted-average loan age
|
|
|
2.9 years
|
|
|
|
4.5 years
|
|
Weighted-average maturity
|
|
|
24.7 years
|
|
|
|
26.7 years
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
17,872
|
|
|
$
|
27,117
|
|
Fair value
|
|
|
18,360
|
|
|
|
27,345
|
|
Impact on value from a 10% adverse change
|
|
|
(1,836
|
)
|
|
|
(2,735
|
)
|
Impact on value from a 20% adverse change
|
|
|
(3,672
|
)
|
|
|
(5,469
|
)
|
Weighted-average coupon
|
|
|
5.92
|
%
|
|
|
7.03
|
%
|
Weighted-average loan age
|
|
|
2.9 years
|
|
|
|
4.2 years
|
|
Weighted-average maturity
|
|
|
24.5 years
|
|
|
|
27.0 years
|
|
The following table displays the key assumptions used in
measuring the fair value at the time of portfolio securitization
of our continuing involvement with the assets we transferred
into trusts in the form of our guaranty assets for the six
months ended June 30, 2009.
|
|
|
|
|
|
|
Guaranty
|
|
|
|
Assets(4)
|
|
|
For the six months ended June 30, 2009
|
|
|
|
|
Weighted-average
life(1)
|
|
|
5.2 years
|
|
Average
12-month
CPR(2)
|
|
|
28.8
|
%
|
Average discount rate
assumption(3)
|
|
|
4.26
|
%
|
|
|
|
(1) |
|
The average number of years for
which each dollar of unpaid principal on a loan or
mortgage-related security remains outstanding.
|
|
(2) |
|
Represents the expected
12-month
average payment rate, which is based on the constant annualized
prepayment rate for mortgage loans.
|
|
(3) |
|
The interest rate used in
determining the present value of future cash flows, derived for
the forward curve based on interest rate swaps, excluding the
option adjusted spreads.
|
|
(4) |
|
The weighted-average life and
average
12-month CPR
assumptions for our guaranty asset approximate the assumptions
used for our guaranty obligation at time of securitization.
|
148
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the key assumptions used in
measuring the fair value of our continuing involvement,
excluding our MSA and MSL, which is not significant, related to
portfolio securitization transactions as of June 30, 2009
and December 31, 2008, and a sensitivity analysis showing
the impact of changes in key assumptions.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Guaranty Assets
|
|
|
|
|
|
|
|
|
Valuation at period end:
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
778
|
|
|
$
|
440
|
|
Weighted-average
life(1)
|
|
|
4.9 years
|
|
|
|
2.2 years
|
|
Prepayment speed assumptions:
|
|
|
|
|
|
|
|
|
Average
12-month CPR
prepayment speed
assumption(2)
|
|
|
29.3
|
%
|
|
|
59.30
|
%
|
Impact on value from a 10% adverse change
|
|
$
|
(31
|
)
|
|
$
|
(38
|
)
|
Impact on value from a 20% adverse change
|
|
|
(60
|
)
|
|
|
(71
|
)
|
Discount rate assumptions:
|
|
|
|
|
|
|
|
|
Average discount rate
assumption(3)
|
|
|
4.06
|
%
|
|
|
5.69
|
%
|
Impact on value from a 10% adverse change
|
|
$
|
(26
|
)
|
|
$
|
(10
|
)
|
Impact on value from a 20% adverse change
|
|
|
(50
|
)
|
|
|
(19
|
)
|
Guaranty Obligations
|
|
|
|
|
|
|
|
|
Valuation at period end:
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
4,364
|
|
|
$
|
2,703
|
|
Anticipated credit
losses(4)
|
|
|
3,472
|
|
|
|
2,246
|
|
Weighted-average
life(1)
|
|
|
4.9 years
|
|
|
|
2.2 years
|
|
Home price assumptions:
|
|
|
|
|
|
|
|
|
24 month average home price assumption
|
|
|
(5.6
|
)%
|
|
|
(5.0
|
)%
|
Impact on credit losses due to a 2.5% decline in home prices
|
|
$
|
319
|
|
|
$
|
454
|
|
Impact on credit losses due to a 5% decline in home prices
|
|
|
649
|
|
|
|
723
|
|
Loan-to-value
assumptions:
|
|
|
|
|
|
|
|
|
Average estimated current
loan-to-value
ratio
|
|
|
72.9
|
%
|
|
|
72.3
|
%
|
Impact on credit losses due to a 2.5% increase in
loan-to-value
|
|
$
|
328
|
|
|
$
|
585
|
|
Impact on credit losses due to a 5% increase in
loan-to-value
|
|
|
669
|
|
|
|
905
|
|
|
|
|
(1) |
|
The average number of years for
which each dollar of unpaid principal on a loan or
mortgage-related security remains outstanding.
|
|
(2) |
|
Represents the
12-month
average payment rate, which is based on the constant annualized
prepayment rate for mortgage loans.
|
|
(3) |
|
The interest rate used in
determining the present value of future cash flows, derived from
the forward curve based on interest rate swaps, excluding the
option adjusted spreads.
|
|
(4) |
|
The present value of anticipated
credit losses is calculated as the average across a distribution
of possible outcomes and may not be indicative of actual future
losses such that actual results may vary materially.
|
The preceding sensitivity analysis is hypothetical and may not
be indicative of actual results. The effect of a variation in a
particular assumption on the fair value of the interest is
calculated independently of changes in any other assumption.
Changes in one factor may result in changes in another, which
might magnify or counteract the impact of the change. Further,
changes in fair value based on a 10% or 20% variation in an
149
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
assumption or parameter generally cannot be extrapolated because
the relationship of the change in the assumption to the change
in fair value may not be linear.
The gain or loss on a portfolio securitization that qualifies as
a sale depends, in part, on the carrying amount of the financial
assets sold. The carrying amount of the financial assets sold is
allocated between the assets sold and the interests retained, if
any, based on their relative fair value at the date of sale.
Further, our recourse obligations are recognized at their full
fair value at the date of sale, which serves as a reduction of
sale proceeds in the gain or loss calculation. We recorded a net
gain on portfolio securitizations of $310 million and a net
loss on portfolio securitizations of $67 million for the
three months ended June 30, 2009 and 2008, respectively. We
recorded a net gain on portfolio securitizations of
$630 million and a net loss on portfolio securitizations of
$25 million for the six months ended June 30, 2009 and
2008, respectively. These amounts are recognized as a component
of Investment losses, net in our condensed
consolidated statements of operations.
The following table displays cash flows from our securitization
trusts related to portfolio securitizations accounted for as
sales for the three and six months ended June 30, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Proceeds from new securitizations
|
|
$
|
39,276
|
|
|
$
|
7,350
|
|
|
$
|
61,339
|
|
|
$
|
17,923
|
|
Guaranty and other income
|
|
|
89
|
|
|
|
37
|
|
|
|
152
|
|
|
|
81
|
|
Principal and interest received on retained interests
|
|
|
2,543
|
|
|
|
2,045
|
|
|
|
4,836
|
|
|
|
4,042
|
|
Purchases of previously transferred financial asstes
|
|
|
(182
|
)
|
|
|
(21
|
)
|
|
|
(305
|
)
|
|
|
(55
|
)
|
Managed loans are defined as on-balance sheet
mortgage loans as well as mortgage loans that have been
securitized in portfolio securitizations that have qualified as
sales pursuant to SFAS 140. The following table displays
the unpaid principal balances of managed loans as well as the
unpaid principal balances of those managed loans that are
delinquent as of June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
Principal Amount of
|
|
|
|
Balance
|
|
|
Delinquent
Loans(1)
|
|
|
|
(Dollars in millions)
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
395,666
|
|
|
$
|
26,752
|
|
Loans held for sale
|
|
|
31,044
|
|
|
|
119
|
|
Securitized loans
|
|
|
153,105
|
|
|
|
6,334
|
|
|
|
|
|
|
|
|
|
|
Total loans managed
|
|
$
|
579,815
|
|
|
$
|
33,205
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
415,485
|
|
|
$
|
19,363
|
|
Loans held for sale
|
|
|
14,008
|
|
|
|
79
|
|
Securitized loans
|
|
|
114,163
|
|
|
|
2,560
|
|
|
|
|
|
|
|
|
|
|
Total loans managed
|
|
$
|
543,656
|
|
|
$
|
22,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the unpaid principal
balance of loans held for investment and loans held for sale for
which interest is no longer being accrued. We discontinue
accruing interest when payment of principal and interest in full
is not reasonably assured.
|
150
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Net credit losses incurred during the three months ended
June 30, 2009 and 2008 related to loans held in our
portfolio and loans underlying Fannie Mae MBS issued from our
portfolio were $896 million and $556 million,
respectively. For the six months ended June 30, 2009 and
2008, net credit losses related to loans held in our portfolio
and loans underlying Fannie Mae MBS issued from our portfolio
were $1.8 billion and $996 million, respectively.
The following table displays the carrying amount and
classification of assets and associated liabilities recognized
as of June 30, 2009 and December 31, 2008, as a result
of transfers of financial assets in portfolio securitization
transactions that did not qualify as sales and have been
accounted for as secured borrowings. The assets have been
transferred to MBS trusts and are restricted solely for the
purpose of servicing the related MBS.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
89,445
|
|
|
$
|
83
|
|
Available-for-sale
securities
|
|
|
8,897
|
|
|
|
9,660
|
|
Loans held for sale
|
|
|
2,015
|
|
|
|
2,383
|
|
Trading securities
|
|
|
562
|
|
|
|
593
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,919
|
|
|
$
|
12,719
|
|
|
|
|
|
|
|
|
|
|
LiabilitiesLong-term debt
|
|
$
|
1,029
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Financial
Guarantees and Master Servicing
|
We generate revenue by absorbing the credit risk of mortgage
loans and mortgage-related securities backing our Fannie Mae MBS
in exchange for a guaranty fee. We primarily issue single-class
and multi-class Fannie Mae MBS and guarantee to the
respective MBS trusts that we will supplement amounts received
by the MBS trusts as required to permit timely payment of
principal and interest on the related Fannie Mae MBS,
irrespective of the cash flows received from borrowers. We also
provide credit enhancements on taxable or tax-exempt mortgage
revenue bonds issued by state and local governmental entities to
finance multifamily housing for low- and moderate-income
families. Additionally, we issue long-term standby commitments
that require us to purchase loans from lenders if the loans meet
certain delinquency criteria.
We record a guaranty obligation for (i) guarantees on
lender swap transactions issued or modified on or after
January 1, 2003, pursuant to FIN No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (an interpretation of FASB Statements No. 5, 57 and
107 and rescission of FIN No. 34)
(FIN 45), (ii) guarantees on portfolio
securitization transactions, (iii) credit enhancements on
mortgage revenue bonds, and (iv) our obligation to absorb
losses under long-term standby commitments. Our guaranty
obligation represents our obligation to stand ready to perform
on these guarantees. Our guaranty obligation is recorded at fair
value at inception. The carrying amount of the guaranty
obligation, excluding deferred profit, was $10.4 billion
and $9.7 billion as of June 30, 2009 and
December 31, 2008, respectively. We also record an estimate
of incurred credit losses on these guarantees in the
Reserve for guaranty losses in our condensed
consolidated balance sheets, as discussed further in
Note 5, Allowance for Loan Losses and Reserve for
Guaranty Losses.
We have a portion of our guarantees reflected in our condensed
consolidated balance sheets. For those guarantees recorded in
our condensed consolidated balance sheets, our maximum potential
exposure under
151
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
these guarantees is primarily comprised of the unpaid principal
balance of the underlying mortgage loans, which totaled $2.5
trillion and $2.4 trillion as of June 30, 2009 and
December 31, 2008, respectively. In addition, we had
exposure of $152.5 billion and $172.2 billion for
other guarantees not recorded in our condensed consolidated
balance sheets as of June 30, 2009 and December 31,
2008, respectively, which primarily represents the unpaid
principal balance of loans underlying guarantees issued prior to
the effective date of FIN 45.
The maximum exposure from our guarantees is not representative
of the actual loss we are likely to incur, based on our
historical loss experience. In the event we were required to
make payments under our guarantees, we would pursue recovery of
these payments by exercising our rights to the collateral
backing the underlying loans and through available credit
enhancements, which includes all recourse with third parties and
mortgage insurance. The maximum amount we could recover through
available credit enhancements and recourse with third parties on
guarantees recorded in our condensed consolidated balance sheets
was $120.8 billion and $124.4 billion as of
June 30, 2009 and December 31, 2008, respectively. The
maximum amount we could recover through available credit
enhancements and recourse with all third parties on guarantees
not recorded in our condensed consolidated balance sheets was
$15.4 billion and $17.6 billion as of June 30,
2009 and December 31, 2008, respectively. Recoverability of
such credit enhancements and recourse is subject to, but not
limited to, our mortgage insurers and financial
guarantors ability to meet their obligations to us. Refer
to Note 17, Concentrations of Credit Risk for
additional information.
Risk
Characteristics of our Book of Business
We gauge our performance risk under our guaranty based on the
delinquency status of the mortgage loans we hold in portfolio,
or in the case of mortgage-backed securities, the underlying
mortgage loans of the related securities. Management also
monitors the serious delinquency rate, which is the percentage
of single-family loans three or more months past due and the
percentage of multifamily loans two or more months past due, of
loans with certain risk characteristics such as
mark-to-market,
loan-to-value
ratio, vintage and operating debt service coverage. We use this
information, in conjunction with housing market and economic
conditions, to ensure that our pricing and our eligibility and
underwriting criteria accurately reflect the current risk of
loans with these high-risk characteristics, and in some cases we
decide to significantly reduce our participation in riskier loan
product categories. Management also uses this data together with
other credit risk measures to identify key trends that guide the
development of our loss mitigation strategies.
The following tables display the current delinquency status and
certain risk characteristics of our conventional single-family
and total multifamily book of business as of June 30, 2009
and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
2009(1)
|
|
|
As of December 31,
2008(1)
|
|
|
|
30 days
|
|
|
60 days
|
|
|
Seriously
|
|
|
30 days
|
|
|
60 days
|
|
|
Seriously
|
|
|
|
Delinquent
|
|
|
Delinquent
|
|
|
Delinquent(2)
|
|
|
Delinquent
|
|
|
Delinquent
|
|
|
Delinquent(2)
|
|
|
Percentage of single-family conventional guaranty book of
business(3)
|
|
|
2.37
|
%
|
|
|
1.06
|
%
|
|
|
4.97
|
%
|
|
|
2.53
|
%
|
|
|
1.10
|
%
|
|
|
2.96
|
%
|
Percentage of single-family conventional
loans(4)
|
|
|
2.39
|
|
|
|
0.96
|
|
|
|
3.94
|
|
|
|
2.52
|
|
|
|
1.00
|
|
|
|
2.42
|
|
152
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
2009(1)
|
|
|
As of December 31,
2008(1)
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Single-family
|
|
|
Percentage
|
|
|
Single-family
|
|
|
Percentage
|
|
|
|
Guaranty Book
|
|
|
Seriously
|
|
|
Guaranty Book
|
|
|
Seriously
|
|
|
|
of
Business(3)
|
|
|
Delinquent(2)(5)
|
|
|
of
Business(3)
|
|
|
Delinquent(2)(5)
|
|
|
Estimated
mark-to-market
loan-to-value
ratio:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.01% to 110%
|
|
|
5
|
%
|
|
|
10.68
|
%
|
|
|
5
|
%
|
|
|
7.12
|
%
|
110.01% to 120%
|
|
|
3
|
|
|
|
13.60
|
|
|
|
3
|
|
|
|
9.91
|
|
120.01% to 125%
|
|
|
1
|
|
|
|
15.67
|
|
|
|
1
|
|
|
|
11.79
|
|
Greater than 125%
|
|
|
5
|
|
|
|
25.20
|
|
|
|
3
|
|
|
|
18.43
|
|
Geographical Distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
|
|
|
3
|
|
|
|
6.54
|
|
|
|
3
|
|
|
|
3.41
|
|
California
|
|
|
17
|
|
|
|
4.23
|
|
|
|
16
|
|
|
|
2.30
|
|
Florida
|
|
|
7
|
|
|
|
9.71
|
|
|
|
7
|
|
|
|
6.14
|
|
Nevada
|
|
|
1
|
|
|
|
9.33
|
|
|
|
1
|
|
|
|
4.74
|
|
Midwest(8)
|
|
|
11
|
|
|
|
4.16
|
|
|
|
11
|
|
|
|
2.70
|
|
All other states
|
|
|
61
|
|
|
|
2.95
|
|
|
|
62
|
|
|
|
1.86
|
|
Product Distribution (not mutually
exclusive):(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
10
|
|
|
|
11.91
|
|
|
|
11
|
|
|
|
7.03
|
|
Subprime(9)
|
|
|
|
|
|
|
21.75
|
|
|
|
|
|
|
|
14.29
|
|
Negatively amortizing adjustable rate
|
|
|
1
|
|
|
|
8.48
|
|
|
|
1
|
|
|
|
5.61
|
|
Interest only
|
|
|
7
|
|
|
|
15.09
|
|
|
|
8
|
|
|
|
8.42
|
|
Investor property
|
|
|
6
|
|
|
|
4.65
|
|
|
|
6
|
|
|
|
2.95
|
|
Condo/Coop
|
|
|
9
|
|
|
|
4.58
|
|
|
|
9
|
|
|
|
2.73
|
|
Original
loan-to-value
ratio
>90%(6)
|
|
|
10
|
|
|
|
9.66
|
|
|
|
10
|
|
|
|
6.33
|
|
FICO score
<620(6)
|
|
|
4
|
|
|
|
13.07
|
|
|
|
5
|
|
|
|
9.03
|
|
Original
loan-to-value
ratio >90% and FICO score
<620(6)
|
|
|
1
|
|
|
|
21.37
|
|
|
|
1
|
|
|
|
15.97
|
|
Vintages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
12
|
|
|
|
5.09
|
|
|
|
13
|
|
|
|
2.99
|
|
2006
|
|
|
12
|
|
|
|
9.05
|
|
|
|
14
|
|
|
|
5.11
|
|
2007
|
|
|
17
|
|
|
|
9.22
|
|
|
|
20
|
|
|
|
4.70
|
|
2008
|
|
|
14
|
|
|
|
1.95
|
|
|
|
16
|
|
|
|
0.67
|
|
All other vintages
|
|
|
45
|
|
|
|
1.78
|
|
|
|
37
|
|
|
|
1.35
|
|
|
|
|
(1)
|
|
Consists of the portion of our
conventional single-family mortgage credit book of business for
which we have access to detailed loan level information, which
constitutes approximately 95% and 96% of our total conventional
single-family mortgage credit book of business as of
June 30, 2009 and December 31, 2008, respectively.
|
|
(2) |
|
Includes single-family loans that
are three months or more past due or in foreclosure.
|
|
(3) |
|
Percentage based on unpaid
principal balance.
|
|
(4) |
|
Percentage based on loan amount.
|
|
(5) |
|
Represents percentage of each
respective category based on loan count of seriously delinquent
loans divided by total loan count of respective category.
|
|
(6) |
|
Includes housing goals oriented
loans such as
MyCommunityMortgage®
and Expanded
Approval®.
|
|
(7) |
|
The aggregate estimated
mark-to-market
loan-to value ratio is based on the estimated periodic changes
in home value, and the unpaid principal balance of the loan as
of the date of each reported period. Excludes loans for which
this information is not readily available.
|
153
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
(8) |
|
Selected midwest states include
Illinois, Indiana, Michigan, and Ohio.
|
|
(9) |
|
Due to rounding, the percentage of
the Single-Family book represented by Subprime is below one half
of one percent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
2009(1)
|
|
|
As of December 31,
2008(1)
|
|
|
|
30 days
|
|
|
Seriously
|
|
|
30 days
|
|
|
Seriously
|
|
|
|
Delinquent(2)
|
|
|
Delinquent(1)(2)
|
|
|
Delinquent(2)
|
|
|
Delinquent(1)
|
|
|
Percentage of multifamily guaranty book of business
|
|
|
0.22
|
%
|
|
|
0.51
|
%
|
|
|
0.12
|
%
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Multifamily
|
|
|
Percentage
|
|
|
Multifamily
|
|
|
Percentage
|
|
|
|
Guaranty
|
|
|
Seriously
|
|
|
Guaranty
|
|
|
Seriously
|
|
|
|
Book of Business
|
|
|
Delinquent(2)(3)
|
|
|
Book of Business
|
|
|
Delinquent(2)(3)
|
|
|
Originating
loan-to-value
ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 80%
|
|
|
5
|
%
|
|
|
0.50
|
%
|
|
|
5
|
%
|
|
|
0.92
|
%
|
Less than or equal to 80%
|
|
|
95
|
|
|
|
0.51
|
|
|
|
95
|
|
|
|
0.27
|
|
Operating debt service coverage ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to 1.10%
|
|
|
11
|
|
|
|
0.09
|
|
|
|
11
|
|
|
|
|
|
Greater than 1.10%
|
|
|
89
|
|
|
|
0.56
|
|
|
|
89
|
|
|
|
0.33
|
|
Originating loan size distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to $750,000
|
|
|
3
|
|
|
|
0.81
|
|
|
|
3
|
|
|
|
0.55
|
|
Greater than $750,000 and less than or equal to $3 million
|
|
|
13
|
|
|
|
0.79
|
|
|
|
13
|
|
|
|
0.52
|
|
Greater than $3 million and less than or equal to
$5 million
|
|
|
10
|
|
|
|
0.90
|
|
|
|
10
|
|
|
|
0.39
|
|
Greater than $5 million and less than or equal to
$25 million
|
|
|
40
|
|
|
|
0.53
|
|
|
|
41
|
|
|
|
0.43
|
|
Greater than $25 million
|
|
|
34
|
|
|
|
0.26
|
|
|
|
33
|
|
|
|
|
|
Maturing dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in 2009
|
|
|
5
|
|
|
|
0.55
|
|
|
|
6
|
|
|
|
0.10
|
|
Maturing in 2010
|
|
|
3
|
|
|
|
0.31
|
|
|
|
3
|
|
|
|
0.32
|
|
Maturing in 2011
|
|
|
5
|
|
|
|
0.32
|
|
|
|
5
|
|
|
|
0.37
|
|
Maturing in 2012
|
|
|
9
|
|
|
|
1.21
|
|
|
|
10
|
|
|
|
0.16
|
|
Maturing in 2013
|
|
|
11
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of the portion of our
multifamily mortgage credit book of business for which we have
access to detailed loan level information, which constitutes
approximately 83% and 82% of our total multifamily mortgage
credit book of business as of June 30, 2009 and
December 31, 2008, respectively.
|
|
(2) |
|
Percentage based on unpaid
principal balance.
|
|
(3) |
|
Includes multifamily loans that are
two months or more past due.
|
154
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Guaranty
Obligations
The following table displays changes in our Guaranty
obligations in our condensed consolidated balance sheets
for the three and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Balance as of beginning of period
|
|
$
|
11,673
|
|
|
$
|
15,521
|
|
|
$
|
12,147
|
|
|
$
|
15,393
|
|
Additions to guaranty
obligations(1)
|
|
|
2,079
|
|
|
|
2,347
|
|
|
|
3,414
|
|
|
|
4,470
|
|
Amortization of guaranty obligation into guaranty fee income
|
|
|
(1,265
|
)
|
|
|
(1,140
|
)
|
|
|
(3,028
|
)
|
|
|
(2,979
|
)
|
Impact of consolidation
activity(2)
|
|
|
(129
|
)
|
|
|
(287
|
)
|
|
|
(175
|
)
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
12,358
|
|
|
$
|
16,441
|
|
|
$
|
12,358
|
|
|
$
|
16,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the fair value of the
contractual obligation and deferred profit at issuance of new
guarantees.
|
|
(2) |
|
Upon consolidation of MBS trusts,
we derecognize our guaranty obligation to the respective trusts.
|
Deferred profit is a component of Guaranty
obligations in our condensed consolidated balance sheets
and is included in the table above. We recorded deferred profit
on guarantees issued or modified on or after the adoption date
of FIN 45 and before the adoption of SFAS 157 if the
consideration we expected to receive for our guaranty exceeded
the estimated fair value of the guaranty obligation at issuance.
Deferred profit had a carrying amount of $1.9 billion and
$2.5 billion as of June 30, 2009 and December 31,
2008, respectively. For the three months ended June 30,
2009 and 2008, we recognized deferred profit amortization of
$226 million and $417 million, respectively. For the
six months ended June 30, 2009 and 2008, we recognized
deferred profit amortization of $509 million and
$731 million, respectively.
The fair value of the guaranty obligation, net of deferred
profit, associated with the Fannie Mae MBS included in
Investments in securities was $5.3 billion and
$3.8 billion as of June 30, 2009 and December 31,
2008, respectively.
Master
Servicing
We do not perform the
day-to-day
servicing of mortgage loans in a MBS trust in a Fannie Mae
securitization transaction; however, we are compensated to carry
out administrative functions for the trust and oversee the
primary servicers performance of the
day-to-day
servicing of the trusts mortgage assets. This arrangement
gives rise to either a MSA or a MSL.
155
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the carrying value and fair value
of our MSA for the three and six months ended June 30, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Cost basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
650
|
|
|
$
|
1,083
|
|
|
$
|
764
|
|
|
$
|
1,171
|
|
Additions
|
|
|
12
|
|
|
|
102
|
|
|
|
37
|
|
|
|
203
|
|
Amortization
|
|
|
(9
|
)
|
|
|
(47
|
)
|
|
|
(39
|
)
|
|
|
(118
|
)
|
Other-than-temporary
impairments
|
|
|
(276
|
)
|
|
|
(76
|
)
|
|
|
(385
|
)
|
|
|
(186
|
)
|
Reductions for MBS trusts paid-off and impact of consolidation
activity
|
|
|
(1
|
)
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
376
|
|
|
|
1,052
|
|
|
|
376
|
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
103
|
|
|
|
74
|
|
|
|
73
|
|
|
|
10
|
|
LOCOM adjustments
|
|
|
248
|
|
|
|
177
|
|
|
|
517
|
|
|
|
412
|
|
LOCOM recoveries
|
|
|
(268
|
)
|
|
|
(165
|
)
|
|
|
(507
|
)
|
|
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
83
|
|
|
|
86
|
|
|
|
83
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
293
|
|
|
$
|
966
|
|
|
$
|
293
|
|
|
$
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, beginning of period
|
|
$
|
617
|
|
|
$
|
1,319
|
|
|
$
|
855
|
|
|
$
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period
|
|
$
|
319
|
|
|
$
|
1,261
|
|
|
$
|
319
|
|
|
$
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of our MSL, which approximates its fair
value, was $76 million and $42 million as of
June 30, 2009 and December 31, 2008, respectively.
We recognized servicing income, referred to as Trust
management income in our condensed consolidated statements
of operations, of $13 million and $75 million for the
three months ended June 30, 2009 and 2008, respectively,
and $24 million and $182 million for the six months
ended June 30, 2009 and 2008, respectively.
156
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
9.
|
Acquired
Property, Net
|
Acquired property, net consists of foreclosed property received
in full satisfaction of a loan net of a valuation allowance for
declines in the fair value of foreclosed properties after
initial acquisition. The following table displays the activity
in acquired property and the related valuation allowance for the
three and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
|
|
Acquired
|
|
|
Valuation
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Valuation
|
|
|
Acquired
|
|
|
|
Property
|
|
|
Allowance(1)
|
|
|
Property, Net
|
|
|
Property
|
|
|
Allowance(1)
|
|
|
Property, Net
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Balance as of beginning of period
|
|
$
|
7,759
|
|
|
$
|
(1,129
|
)
|
|
$
|
6,630
|
|
|
$
|
8,040
|
|
|
$
|
(1,122
|
)
|
|
$
|
6,918
|
|
Additions
|
|
|
3,009
|
|
|
|
(15
|
)
|
|
|
2,994
|
|
|
|
5,551
|
|
|
|
(31
|
)
|
|
|
5,520
|
|
Disposals
|
|
|
(3,388
|
)
|
|
|
479
|
|
|
|
(2,909
|
)
|
|
|
(6,211
|
)
|
|
|
852
|
|
|
|
(5,359
|
)
|
Write-downs, net of recoveries
|
|
|
|
|
|
|
(107
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
(471
|
)
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
7,380
|
|
|
$
|
(772
|
)
|
|
$
|
6,608
|
|
|
$
|
7,380
|
|
|
$
|
(772
|
)
|
|
$
|
6,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
Acquired
|
|
|
Valuation
|
|
|
Acquired
|
|
|
Acquired
|
|
|
Valuation
|
|
|
Acquired
|
|
|
|
Property
|
|
|
Allowance(1)
|
|
|
Property, Net
|
|
|
Property
|
|
|
Allowance(1)
|
|
|
Property, Net
|
|
|
|
(Dollars in millions)
|
|
|
Balance as of beginning of period
|
|
$
|
5,069
|
|
|
$
|
(348
|
)
|
|
$
|
4,721
|
|
|
$
|
3,853
|
|
|
$
|
(251
|
)
|
|
$
|
3,602
|
|
Additions
|
|
|
2,756
|
|
|
|
(8
|
)
|
|
|
2,748
|
|
|
|
5,026
|
|
|
|
(16
|
)
|
|
|
5,010
|
|
Disposals
|
|
|
(1,372
|
)
|
|
|
129
|
|
|
|
(1,243
|
)
|
|
|
(2,426
|
)
|
|
|
231
|
|
|
|
(2,195
|
)
|
Write-downs, net of recoveries
|
|
|
|
|
|
|
(231
|
)
|
|
|
(231
|
)
|
|
|
|
|
|
|
(422
|
)
|
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
6,453
|
|
|
$
|
(458
|
)
|
|
$
|
5,995
|
|
|
$
|
6,453
|
|
|
$
|
(458
|
)
|
|
$
|
5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects activities in the
valuation allowance for acquired properties held primarily by
our Single-family segment.
|
157
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
10.
|
Short-term
Borrowings and Long-term Debt
|
Short-term
Borrowings
Our short-term borrowings (borrowings with an original
contractual maturity of one year or less) consist of both
Federal funds purchased and securities sold under
agreements to repurchase and Short-term debt
in our condensed consolidated balance sheets. The following
table displays our outstanding short-term borrowings and
weighted-average interest rates as of June 30, 2009 and
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
$
|
|
|
|
|
|
%
|
|
$
|
77
|
|
|
|
0.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
$
|
256,266
|
|
|
|
0.74
|
%
|
|
$
|
322,932
|
|
|
|
1.75
|
%
|
Foreign exchange discount notes
|
|
|
189
|
|
|
|
1.18
|
|
|
|
141
|
|
|
|
2.50
|
|
Other short-term debt
|
|
|
224
|
|
|
|
1.35
|
|
|
|
333
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed short-term debt
|
|
|
256,679
|
|
|
|
0.74
|
|
|
|
323,406
|
|
|
|
1.75
|
|
Floating-rate short-term
debt(2)
|
|
|
3,102
|
|
|
|
1.17
|
|
|
|
7,585
|
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
259,781
|
|
|
|
0.74
|
%
|
|
$
|
330,991
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discounts, premiums and
other cost basis adjustments.
|
|
(2) |
|
Includes a portion of structured
debt instruments that is reported at fair value as of
December 31, 2008.
|
158
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Long-term
Debt
Long-term debt represents borrowings with an original
contractual maturity of greater than one year. The following
table displays our outstanding long-term debt as of
June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(1)
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Senior fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark notes and bonds
|
|
|
2009-2030
|
|
|
$
|
277,360
|
|
|
|
4.39
|
%
|
|
|
2009-2030
|
|
|
$
|
251,063
|
|
|
|
4.92
|
%
|
Medium-term notes
|
|
|
2009-2019
|
|
|
|
153,146
|
|
|
|
3.13
|
|
|
|
2009-2018
|
|
|
|
151,277
|
|
|
|
4.20
|
|
Foreign exchange notes and bonds
|
|
|
2010-2028
|
|
|
|
1,204
|
|
|
|
5.57
|
|
|
|
2009-2028
|
|
|
|
1,513
|
|
|
|
4.70
|
|
Other long-term
debt(2)
|
|
|
2009-2039
|
|
|
|
57,200
|
|
|
|
5.76
|
|
|
|
2009-2038
|
|
|
|
73,061
|
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior fixed
|
|
|
|
|
|
|
488,910
|
|
|
|
4.16
|
|
|
|
|
|
|
|
476,914
|
|
|
|
4.85
|
|
Senior floating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2009-2013
|
|
|
|
67,556
|
|
|
|
0.83
|
|
|
|
2009-2017
|
|
|
|
45,737
|
|
|
|
2.21
|
|
Other long-term
debt(2)
|
|
|
2020-2037
|
|
|
|
1,210
|
|
|
|
6.38
|
|
|
|
2020-2037
|
|
|
|
874
|
|
|
|
7.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior floating
|
|
|
|
|
|
|
68,766
|
|
|
|
0.93
|
|
|
|
|
|
|
|
46,611
|
|
|
|
2.30
|
|
Subordinated fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2011-2011
|
|
|
|
2,500
|
|
|
|
6.29
|
|
|
|
2011-2011
|
|
|
|
2,500
|
|
|
|
6.24
|
|
Other subordinated debt
|
|
|
2012-2019
|
|
|
|
7,217
|
|
|
|
6.65
|
|
|
|
2012-2019
|
|
|
|
7,116
|
|
|
|
6.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subordinated fixed
|
|
|
|
|
|
|
9,717
|
|
|
|
6.56
|
|
|
|
|
|
|
|
9,616
|
|
|
|
6.50
|
|
Debt from consolidations
|
|
|
2009-2039
|
|
|
|
5,936
|
|
|
|
5.76
|
|
|
|
2009-2039
|
|
|
|
6,261
|
|
|
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
debt(3)
|
|
|
|
|
|
$
|
573,329
|
|
|
|
3.83
|
%
|
|
|
|
|
|
$
|
539,402
|
|
|
|
4.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discounts, premiums and
other cost basis adjustments.
|
|
(2) |
|
Includes a portion of structured
debt instruments that is reported at fair value.
|
|
(3) |
|
Reported amounts include a net
discount and other cost basis adjustments of $16.8 billion
and $15.5 billion as of June 30, 2009 and
December 31, 2008, respectively.
|
Intraday
Lines of Credit
We periodically use secured and unsecured intraday funding lines
of credit provided by several large financial institutions. We
post collateral which, in some circumstances, the secured party
has the right to repledge to third parties. As these lines of
credit are uncommitted intraday loan facilities, we may not be
able to draw on them if and when needed. As of June 30,
2009 and December 31, 2008, we had secured uncommitted lines of
credit of $30.0 billion and unsecured uncommitted lines of
credit of $500 million. No amounts were drawn on these
lines of credit as of June 30, 2009 or December 31,
2008.
Credit
Facility with Treasury
On September 19, 2008, we entered into a lending agreement
with Treasury under which we may request loans until
December 31, 2009. Loans under the Treasury credit facility
require approval from Treasury at the
159
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
time of request. Treasury is not obligated under the credit
facility to make, increase, renew or extend any loan to us. The
credit facility does not specify a maximum amount that may be
borrowed under the credit facility, but any loans made to us by
Treasury pursuant to the credit facility must be collateralized
by Fannie Mae MBS or Freddie Mac MBS.
The credit facility does not specify the maturities or interest
rate of loans that may be made by Treasury under the credit
facility. In a Fact Sheet regarding the credit facility
published by Treasury on September 7, 2008, Treasury
indicated that loans made pursuant to the credit facility will
be for short-term durations and would in general be expected to
be for less than one month but no shorter than one week. The
Fact Sheet further indicated that the interest rate on loans
made pursuant to the credit facility ordinarily will be based on
the daily London Interbank Offered Rate (LIBOR) for
a similar term of the loan plus 50 basis points. As of
August 6, 2009, we have not drawn on this credit facility.
If we borrow under this credit facility, we will account for the
draw as a secured borrowing.
|
|
11.
|
Derivative
Instruments and Hedging Activities
|
We adopted SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (SFAS 161),
effective January 1, 2009. SFAS 161 amends and expands
the disclosure provisions in SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), for derivative instruments and
hedging activities. As SFAS 161 only requires additional
note disclosures, it impacts the notes to our condensed
consolidated financial statements, but has no impact to our
condensed consolidated financial statements themselves.
We account for our derivatives pursuant to SFAS 133, as
amended and interpreted, and recognize all derivatives as either
assets or liabilities in our condensed consolidated balance
sheets at their fair value on a trade date basis. Fair value
amounts are recorded in Derivative assets at fair
value or Derivative liabilities at fair value
in our condensed consolidated balance sheets. With the exception
of commitments accounted for as derivatives, we do not settle
the notional amount of our derivative instruments. Notional
amounts, therefore, simply provide the basis for calculating
actual payments or settlement amounts.
The derivatives we use for interest rate risk management
purposes consist primarily of
over-the-counter
contracts that fall into three broad categories:
|
|
|
|
|
Interest rate swap contracts. An interest rate
swap is a transaction between two parties in which each agrees
to exchange payments tied to different interest rates or indices
for a specified period of time, generally based on a notional
amount of principal. The types of interest rate swaps we use
include pay-fixed swaps, receive-fixed swaps, and basis swaps.
|
|
|
|
Interest rate option contracts. These
contracts primarily include pay-fixed swaptions, receive-fixed
swaptions, cancelable swaps and interest rate caps.
|
|
|
|
Foreign currency swaps. These swaps convert
debt that we issue in foreign-denominated currencies into
U.S. dollars. We enter into foreign currency swaps only to
the extent that we issue foreign currency debt.
|
Although derivative instruments are critical to our interest
rate risk management strategy, we did not apply hedge accounting
during 2009. In the three months ended June 30, 2008, we
employed fair value hedge accounting for some of our interest
rate risk management activities by designating hedging
relationships between certain of our interest rate derivatives
and mortgage assets. We achieved hedge accounting by designating
all or a fixed percentage of a pay-fixed receive variable
interest rate swap as a hedge of the changes in the fair value
attributable to the changes in LIBOR for a specific mortgage
asset. All derivative
160
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
gains and losses, including accrued interest, are recorded in
Fair value gains (losses), net in our condensed
consolidated statements of operations.
When we determined that a hedging relationship was highly
effective, changes in the fair value of the hedged item
attributable to changes in the benchmark interest rate were
recorded as an adjustment to the carrying value of the hedged
item. These adjustments are amortized into earnings over the
remaining life of the hedged item in accordance with our
policies for amortization of carrying value adjustments. For the
three and six months ended June 30, 2008, we recorded
$803 million of decreases in the carrying value of the
hedged assets before related amortization due to hedge
accounting. This loss on the hedged asset was partially offset
by fair value gains of $789 million on the pay-fixed swaps
designated as hedging instruments for the three and six months
ended June 30, 2008. During the three and six months ended
June 30, 2008, we recorded a loss for the ineffective
portion of our hedges of $14 million. Our assessment of
hedge effectiveness excluded a derivative loss of
$35 million, which was not related to changes in the
benchmark interest rate for the three and six months ended
June 30, 2008.
We enter into forward purchase and sale commitments that lock in
the future delivery of mortgage loans and mortgage-related
securities at a fixed price or yield. Certain commitments to
purchase mortgage loans and purchase or sell mortgage-related
securities meet the criteria of a derivative. Typically, we
settle the notional amount of our mortgage commitments.
Notional
and Fair Value Position of our Derivatives
The following table displays the notional amount and estimated
fair value of our asset and liability derivative instruments on
a gross basis, before the application of master netting
agreements, as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Notional
|
|
|
Estimated
|
|
|
Notional
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed(1)
|
|
$
|
67,920
|
|
|
$
|
2,840
|
|
|
$
|
582,527
|
|
|
$
|
(37,988
|
)
|
Receive-fixed(2)
|
|
|
398,652
|
|
|
|
22,961
|
|
|
|
173,150
|
|
|
|
(6,877
|
)
|
Basis
|
|
|
6,705
|
|
|
|
31
|
|
|
|
15,495
|
|
|
|
(14
|
)
|
Foreign currency
|
|
|
657
|
|
|
|
117
|
|
|
|
774
|
|
|
|
(85
|
)
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
83,300
|
|
|
|
1,876
|
|
|
|
3,050
|
|
|
|
(3
|
)
|
Receive-fixed
|
|
|
84,680
|
|
|
|
5,568
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
|
3,000
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
Other(3)
|
|
|
739
|
|
|
|
63
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross risk management derivatives
|
|
|
645,653
|
|
|
|
33,520
|
|
|
|
775,004
|
|
|
|
(44,967
|
)
|
Collateral receivable
(payable)(4)
|
|
|
|
|
|
|
13,545
|
|
|
|
|
|
|
|
(2,214
|
)
|
Accrued interest receivable (payable)
|
|
|
|
|
|
|
6,200
|
|
|
|
|
|
|
|
(6,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net risk management derivatives
|
|
$
|
645,653
|
|
|
$
|
53,265
|
|
|
$
|
775,004
|
|
|
$
|
(53,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitment derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitments to purchase whole loans
|
|
$
|
3,290
|
|
|
$
|
26
|
|
|
$
|
4,568
|
|
|
$
|
(56
|
)
|
Forward contracts to purchase mortgage-related securities
|
|
|
31,284
|
|
|
|
381
|
|
|
|
24,322
|
|
|
|
(355
|
)
|
Forward contracts to sell mortgage-related securities
|
|
|
38,554
|
|
|
|
533
|
|
|
|
72,165
|
|
|
|
(726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage commitment derivatives
|
|
$
|
73,128
|
|
|
$
|
940
|
|
|
$
|
101,055
|
|
|
$
|
(1,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives at fair value
|
|
$
|
718,781
|
|
|
$
|
54,205
|
|
|
$
|
876,059
|
|
|
$
|
(54,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
(1) |
|
Estimated fair value amount
includes approximately $60 million of fees on unsettled
swap terminations related to liability derivatives.
|
|
(2) |
|
Estimated fair value amount
includes approximately $24 million of fees on unsettled
swap terminations related to asset derivatives, and
approximately $7 million of fees on unsettled swap
terminations related to liability derivatives.
|
|
(3) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts that are accounted
for as derivatives. The mortgage insurance contracts have
payment provisions that are not based on a notional amount.
|
|
(4) |
|
Collateral receivable represents
collateral posted by us for derivatives in a loss position.
Collateral payable represents collateral posted by
counterparties to reduce our exposure for derivatives in a gain
position.
|
A majority of our derivative instruments contain provisions that
require our debt to maintain a minimum credit rating from each
of the major credit rating agencies. If our debt were to fall
below established thresholds in our governing agreements, which
range from A- to BBB+, we would be in violation of these
provisions, and the counterparties to the derivative instruments
could request immediate payment or demand immediate
collateralization on derivative instruments in net liability
positions. The aggregate fair value of all derivatives with
credit-risk-related contingent features that are in a net
liability position as of June 30, 2009 is
$14.0 billion for which we have posted collateral of
$13.5 billion in the normal course of business. If the
credit-risk-related contingency features underlying these
agreements were triggered on June 30, 2009, we would be
required to post an additional $652 million of collateral
to our counterparties.
The following table displays the outstanding notional balances
and the estimated fair value of our derivative instruments as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Notional
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
546,916
|
|
|
$
|
(68,379
|
)
|
Receive-fixed
|
|
|
451,081
|
|
|
|
42,246
|
|
Basis
|
|
|
24,560
|
|
|
|
(57
|
)
|
Foreign currency
|
|
|
1,652
|
|
|
|
(12
|
)
|
Swaptions:
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
79,500
|
|
|
|
506
|
|
Receive-fixed
|
|
|
93,560
|
|
|
|
13,039
|
|
Interest rate caps
|
|
|
500
|
|
|
|
1
|
|
Other(1)
|
|
|
827
|
|
|
|
100
|
|
Net collateral receivable
|
|
|
|
|
|
|
11,286
|
|
Accrued interest payable, net
|
|
|
|
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
Total risk management derivatives
|
|
$
|
1,198,596
|
|
|
$
|
(1,761
|
)
|
|
|
|
|
|
|
|
|
|
Mortgage commitment derivatives:
|
|
|
|
|
|
|
|
|
Mortgage commitments to purchase whole loans
|
|
$
|
9,256
|
|
|
$
|
27
|
|
Forward contracts to purchase mortgage-related securities
|
|
|
25,748
|
|
|
|
239
|
|
Forward contracts to sell mortgage-related securities
|
|
|
36,232
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage commitment derivatives
|
|
$
|
71,236
|
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts that are accounted
for as derivatives. The mortgage insurance contracts have
payment provisions that are not based on a notional amount.
|
162
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays, by type of derivative instrument,
the fair value gains and losses on our derivatives for the three
and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
19,430
|
|
|
$
|
15,782
|
|
|
$
|
22,744
|
|
|
$
|
(113
|
)
|
Receive-fixed
|
|
|
(16,877
|
)
|
|
|
(11,092
|
)
|
|
|
(18,239
|
)
|
|
|
1,700
|
|
Basis
|
|
|
45
|
|
|
|
(73
|
)
|
|
|
22
|
|
|
|
(68
|
)
|
Foreign
currency(1)
|
|
|
159
|
|
|
|
(20
|
)
|
|
|
86
|
|
|
|
126
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
900
|
|
|
|
270
|
|
|
|
885
|
|
|
|
81
|
|
Receive-fixed
|
|
|
(4,250
|
)
|
|
|
(2,499
|
)
|
|
|
(7,488
|
)
|
|
|
(2,226
|
)
|
Interest rate caps
|
|
|
21
|
|
|
|
4
|
|
|
|
21
|
|
|
|
3
|
|
Other(2)
|
|
|
(52
|
)
|
|
|
(13
|
)
|
|
|
(23
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk management fair value gains (losses),
net(3)
|
|
|
(624
|
)
|
|
|
2,359
|
|
|
|
(1,992
|
)
|
|
|
(446
|
)
|
Mortgage commitment derivatives fair value gains (losses), net
|
|
|
87
|
|
|
|
(66
|
)
|
|
|
(251
|
)
|
|
|
(264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives fair value gains (losses), net
|
|
$
|
(537
|
)
|
|
$
|
2,293
|
|
|
$
|
(2,243
|
)
|
|
$
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the effect of net
contractual interest income accruals of $9 million and
$6 million for the three months ended June 30, 2009
and 2008, respectively, and interest income accruals of
$15 million and $3 million for the six months ended
June 30, 2009 and 2008, respectively. The change in fair
value of foreign currency swaps excluding this item resulted in
a net gain of $150 million and a net loss of
$26 million for the three months ended June 30, 2009
and 2008, respectively, and a net gain of $71 million and
$123 million for the six months ended June 30, 2009
and 2008, respectively.
|
|
(2) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts.
|
|
(3) |
|
Reflects net derivatives fair value
gains (losses), excluding mortgage commitments, recognized in
our condensed consolidated statements of operations.
|
Volume
and Activity of our Derivatives
Risk
Management Derivatives
The following tables display, by derivative instrument type, our
risk management derivative activity for the three and six months
ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2009
|
|
|
|
Interest Rate Swaps
|
|
|
Interest Rate Swaptions
|
|
|
|
Pay-
|
|
|
Receive-
|
|
|
|
|
|
Foreign
|
|
|
Pay-
|
|
|
Receive-
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Fixed(1)
|
|
|
Fixed(2)
|
|
|
Basis(3)
|
|
|
Currency(4)
|
|
|
Fixed
|
|
|
Fixed
|
|
|
Rate Caps
|
|
|
Other(5)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of April 1, 2009
|
|
$
|
620,850
|
|
|
$
|
549,823
|
|
|
$
|
19,815
|
|
|
$
|
1,222
|
|
|
$
|
85,150
|
|
|
$
|
89,630
|
|
|
$
|
500
|
|
|
$
|
748
|
|
|
$
|
1,367,738
|
|
Additions
|
|
|
78,509
|
|
|
|
56,680
|
|
|
|
2,385
|
|
|
|
126
|
|
|
|
8,200
|
|
|
|
4,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
152,900
|
|
Terminations(6)
|
|
|
(48,912
|
)
|
|
|
(34,701
|
)
|
|
|
|
|
|
|
82
|
|
|
|
(7,000
|
)
|
|
|
(9,450
|
)
|
|
|
|
|
|
|
|
|
|
|
(99,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of June 30, 2009
|
|
$
|
650,447
|
|
|
$
|
571,802
|
|
|
$
|
22,200
|
|
|
$
|
1,430
|
|
|
$
|
86,350
|
|
|
$
|
84,680
|
|
|
$
|
3,000
|
|
|
$
|
748
|
|
|
$
|
1,420,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2009
|
|
|
|
Interest Rate Swaps
|
|
|
Interest Rate Swaptions
|
|
|
|
Pay-
|
|
|
Receive-
|
|
|
|
|
|
Foreign
|
|
|
Pay-
|
|
|
Receive-
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Fixed(1)
|
|
|
Fixed(2)
|
|
|
Basis(3)
|
|
|
Currency(4)
|
|
|
Fixed
|
|
|
Fixed
|
|
|
Rate Caps
|
|
|
Other(5)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of January 1, 2009
|
|
$
|
546,916
|
|
|
$
|
451,081
|
|
|
$
|
24,560
|
|
|
$
|
1,652
|
|
|
$
|
79,500
|
|
|
$
|
93,560
|
|
|
$
|
500
|
|
|
$
|
827
|
|
|
$
|
1,198,596
|
|
Additions
|
|
|
177,444
|
|
|
|
184,638
|
|
|
|
2,565
|
|
|
|
324
|
|
|
|
13,850
|
|
|
|
6,700
|
|
|
|
2,500
|
|
|
|
13
|
|
|
|
388,034
|
|
Terminations(6)
|
|
|
(73,913
|
)
|
|
|
(63,917
|
)
|
|
|
(4,925
|
)
|
|
|
(546
|
)
|
|
|
(7,000
|
)
|
|
|
(15,580
|
)
|
|
|
|
|
|
|
(92
|
)
|
|
|
(165,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of June 30, 2009
|
|
$
|
650,447
|
|
|
$
|
571,802
|
|
|
$
|
22,200
|
|
|
$
|
1,430
|
|
|
$
|
86,350
|
|
|
$
|
84,680
|
|
|
$
|
3,000
|
|
|
$
|
748
|
|
|
$
|
1,420,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Notional amounts include swaps
callable by us of $1.7 billion as of June 30, 2009,
March 31, 2009 and December 31, 2008.
|
|
(2) |
|
Notional amounts include swaps
callable by derivatives counterparties of $25 million,
$1.0 billion and $10.4 billion as of June 30,
2009, March 31, 2009 and December 31, 2008,
respectively.
|
|
(3) |
|
Notional amounts include swaps
callable by derivatives counterparties of $885 million,
$500 million and $925 million as of June 30,
2009, March 31, 2009 and December 31, 2008,
respectively.
|
|
(4) |
|
Exchange rate adjustments to
revalue foreign currency swaps existing at both the beginning
and the end of the period are included in terminations.
Beginning in the three month period ended June 30, 2009,
exchange rate adjustments for foreign currency swaps that are
added or terminated during the period are reflected in the
respective categories. Terminations include foreign exchange
rate gains of $158 million and $102 million for the
three and six months ended June 30, 2009, respectively.
|
|
(5) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts.
|
|
(6) |
|
Includes matured, called,
exercised, assigned and terminated amounts.
|
Mortgage
Commitment Derivatives
The following tables display, by commitment type, our mortgage
commitment derivative activity for the three and six months
ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
|
|
Purchase
|
|
|
Sale
|
|
|
Purchase
|
|
|
Sale
|
|
|
|
Commitments
|
|
|
Commitments
|
|
|
Commitments
|
|
|
Commitments
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of the beginning of the
period(1)
|
|
$
|
55,922
|
|
|
$
|
71,984
|
|
|
$
|
35,004
|
|
|
$
|
36,232
|
|
Mortgage related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
commitments(2)
|
|
|
268,085
|
|
|
|
296,829
|
|
|
|
392,519
|
|
|
|
462,414
|
|
Settled
commitments(3)
|
|
|
(254,654
|
)
|
|
|
(258,094
|
)
|
|
|
(362,662
|
)
|
|
|
(387,927
|
)
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
commitments(2)
|
|
|
35,669
|
|
|
|
|
|
|
|
76,435
|
|
|
|
|
|
Settled
commitments(3)
|
|
|
(41,558
|
)
|
|
|
|
|
|
|
(77,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of the end of the
period(1)
|
|
$
|
63,464
|
|
|
$
|
110,719
|
|
|
$
|
63,464
|
|
|
$
|
110,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the balance of open
mortgage commitment derivatives.
|
|
(2) |
|
Represents open mortgage commitment
derivatives traded during the three and six months ended
June 30, 2009.
|
|
(3) |
|
Represents mortgage commitment
derivatives settled during the three and six months ended
June 30, 2009.
|
164
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Derivatives
Counterparties and Credit Exposure
The risk associated with a derivative transaction is that a
counterparty will default on payments due to us. If there is a
default, we may have to acquire a replacement derivative from a
different counterparty at a higher cost or may be unable to find
a suitable replacement. Our derivative credit exposure relates
principally to interest rate and foreign currency derivative
contracts. Typically, we seek to manage these exposures by
contracting with experienced counterparties that are rated A-
(or its equivalent) or better. These counterparties consist of
large banks, broker-dealers and other financial institutions
that have a significant presence in the derivatives market, most
of which are based in the United States.
We also manage our exposure to derivatives counterparties by
requiring collateral to limit our counterparty credit risk
exposure. We have a collateral management policy with provisions
for requiring collateral on interest rate and foreign currency
derivative contracts in net gain positions based upon the
counterpartys credit rating. The collateral includes cash,
U.S. Treasury securities, agency debt and agency
mortgage-related securities. Cash collateral posted by us prior
to July 10, 2009 and non-cash collateral posted to us is
held and monitored daily by a third-party custodian. Beginning
July 10, 2009, cash collateral posted to us is held and
monitored by us. We analyze credit exposure on our derivative
instruments daily and make collateral calls as appropriate based
on the results of internal pricing models and dealer quotes.
The table below displays the credit exposure on outstanding risk
management derivative instruments by counterparty credit
ratings, as well as the notional amount outstanding and the
number of counterparties as of June 30, 2009 and
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Credit
Rating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA+/AA/AA-
|
|
|
A+/A/A-
|
|
|
Subtotal
|
|
|
Other(2)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Credit loss
exposure(3)
|
|
$
|
|
|
|
$
|
1,544
|
|
|
$
|
868
|
|
|
$
|
2,412
|
|
|
$
|
63
|
|
|
$
|
2,475
|
|
Less: Collateral
held(4)
|
|
|
|
|
|
|
1,446
|
|
|
|
810
|
|
|
|
2,256
|
|
|
|
|
|
|
|
2,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure net of collateral
|
|
$
|
|
|
|
$
|
98
|
|
|
$
|
58
|
|
|
$
|
156
|
|
|
$
|
63
|
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount(5)
|
|
$
|
250
|
|
|
$
|
295,914
|
|
|
$
|
1,123,703
|
|
|
$
|
1,419,867
|
|
|
$
|
790
|
|
|
$
|
1,420,657
|
|
Number of
counterparties(5)
|
|
|
1
|
|
|
|
6
|
|
|
|
10
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Credit
Rating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA+/AA/AA-
|
|
|
A+/A/A-
|
|
|
Subtotal
|
|
|
Other(2)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Credit loss
exposure(3)
|
|
$
|
|
|
|
$
|
3,044
|
|
|
$
|
686
|
|
|
$
|
3,730
|
|
|
$
|
101
|
|
|
$
|
3,831
|
|
Less: Collateral
held(4)
|
|
|
|
|
|
|
2,951
|
|
|
|
673
|
|
|
|
3,624
|
|
|
|
|
|
|
|
3,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure net of collateral
|
|
$
|
|
|
|
$
|
93
|
|
|
$
|
13
|
|
|
$
|
106
|
|
|
$
|
101
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount(5)
|
|
$
|
250
|
|
|
$
|
533,317
|
|
|
$
|
664,155
|
|
|
$
|
1,197,722
|
|
|
$
|
874
|
|
|
$
|
1,198,596
|
|
Number of
counterparties(5)
|
|
|
1
|
|
|
|
8
|
|
|
|
10
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We manage collateral requirements
based on the lower credit rating of the legal entity, as issued
by Standard & Poors and Moodys. The credit
rating reflects the equivalent Standard & Poors
rating for any ratings based on Moodys scale.
|
165
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
(2) |
|
Includes defined benefit mortgage
insurance contracts, guaranteed guarantor trust swaps and swap
credit enhancements accounted for as derivatives where the right
of legal offset does not exist.
|
|
(3) |
|
Represents the exposure to credit
loss on derivative instruments, which is estimated by
approximating the fair value of all outstanding derivative
contracts in a gain position. Derivative gains and losses with
the same counterparty are netted where a legal right of offset
exists under an enforceable master netting agreement. This table
excludes mortgage commitments accounted for as derivatives.
|
|
(4) |
|
Represents both cash and noncash
collateral posted by our counterparties to us as of
June 30, 2009 and December 31, 2008. The value of the
non-cash collateral is reduced in accordance with the
counterparty agreements to help ensure recovery of any loss
through the disposition of the collateral. We posted cash
collateral of $13.5 billion related to our
counterparties credit exposure to us as of June 30,
2009 and $15.0 billion related to our counterparties
credit exposure to us as of December 31, 2008.
|
|
(5) |
|
Interest rate and foreign currency
derivatives in a net gain position had a total notional amount
of $271.8 billion and $103.1 billion as of
June 30, 2009 and December 31, 2008, respectively.
Total number of interest rate and foreign currency
counterparties in a net gain position was 4 and 2 as of
June 30, 2009 and December 31, 2008, respectively.
|
Our effective tax rate is the provision (benefit) for federal
income taxes, excluding the tax effect of extraordinary items,
expressed as a percentage of income or loss before federal
income taxes. The effective tax rate for the three months ended
June 30, 2009 and 2008 was less than 1% and 17%,
respectively, and 2% and 43% for the six months ended
June 30, 2009 and 2008 respectively. Our effective tax
rates were different from the federal statutory rate of 35% due
to the benefits of our holdings of tax-exempt investments. In
addition, our effective tax rates for the three and six months
ended June 30, 2009 were also impacted by a valuation
allowance of $5.3 billion and $14.1 billion,
respectively, as well as a benefit for our ability to carry back
net operating losses expected to be generated in the current
year to prior years. Our effective tax rates for the three and
six months ended June 30, 2008 were also impacted by the
benefits of our investments in housing projects eligible for the
low-income housing tax credit and other equity investments that
provide tax credits.
We recognize deferred tax assets and liabilities for the future
tax consequences related to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases, and for tax credits. Our
deferred tax assets, net of a valuation allowance, totaled
$3.8 billion and $3.9 billion as of June 30, 2009
and December 31, 2008, respectively. We evaluate our
deferred tax assets for recoverability using a consistent
approach which considers the relative impact of negative and
positive evidence, including our historical profitability and
projections of future taxable income. We are required to
establish a valuation allowance for deferred tax assets and
record a charge in our condensed consolidated statements of
operations or Fannie Mae stockholders equity (deficit) if
we determine, based on available evidence at the time the
determination is made, that it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
In evaluating the need for a valuation allowance, we estimate
future taxable income based on management-approved business
plans and ongoing tax planning strategies. This process involves
significant management judgment about assumptions that are
subject to change from period to period based on changes in tax
laws or variances between our projected operating performance,
our actual results and other factors.
We are in a cumulative book taxable loss position and have been
for more than a twelve-quarter period. For purposes of
establishing a deferred tax valuation allowance, this cumulative
book taxable loss position is considered significant, objective
evidence that we may not be able to realize some portion of our
deferred tax assets in the future. Our cumulative book taxable
loss position was caused by the negative impact on our results
from the weak housing and credit market conditions. These
conditions deteriorated dramatically during 2008, causing a
significant increase in our pre-tax loss, due in part to much
higher credit losses, and downward revisions to our projections
of future results. Because of the volatile economic conditions,
our projections of future credit losses have become more
uncertain.
166
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
During the third quarter of 2008, we concluded that it was more
likely than not that we would not generate sufficient future
taxable income in the foreseeable future to realize all of our
deferred tax assets. Our conclusion was based on our
consideration of the relative weight of the available evidence,
including the rapid deterioration of market conditions discussed
above, the uncertainty of future market conditions on our
results of operations and significant uncertainty surrounding
our future business model as a result of the placement of the
company into conservatorship by FHFA. As a result, we recorded a
valuation allowance on our deferred tax asset for the portion of
the future tax benefit that more likely than not will not be
utilized in the future. We did not, however, establish a
valuation allowance for the deferred tax asset amount that is
related to unrealized losses recorded through AOCI for certain
available-for-sale
securities. We believe this deferred tax amount is recoverable
because we have the intent and ability to hold these securities
until recovery of the unrealized loss amounts. There have been
no changes to our conclusion as of June 30, 2009. For the
three and six months ended June 30, 2009, we also did not
establish a valuation allowance for the benefit recognized
related to our ability to carry back net operating losses
expected to be generated in the current year to prior years.
As a result of adopting FSP
FAS 115-2,
we recorded a cumulative-effect adjustment at April 1, 2009
of $8.5 billion on a pre-tax basis ($5.6 billion after
tax) to reclassify the noncredit portion of previously
recognized
other-than-temporary
impairments from Accumulated deficit to
Accumulated other comprehensive loss. We also
reduced the Accumulated deficit and valuation
allowance by $3.0 billion for the deferred tax asset
related to the amounts previously recognized as
other-than-temporary
impairments in our condensed consolidated statements of
operations based upon the assertion of our intent and ability to
hold certain
available-for-sale
securities until recovery.
The Internal Revenue Service (IRS) has completed the
field audit of our 2005 and 2006 federal income tax returns. We
have reached a settlement with the IRS with an expected
conclusion in the third quarter of 2009. We and the IRS appeals
division have reached a tentative settlement for issues related
to the tax years
1999-2004
with an expected conclusion in the fourth quarter of 2009.
Unrecognized
Tax Benefits
We had $169 million and $1.7 billion of unrecognized
tax benefits as of June 30, 2009 and December 31,
2008, respectively. Of these amounts, we had $8 million as
of both June 30, 2009 and December 31, 2008, which, if
resolved favorably, would reduce our effective tax rate in
future periods. We have reached a settlement with the IRS with
an expected conclusion in the third quarter of 2009 for the
field audit of our 2005 and 2006 federal income tax returns. We
and the IRS appeals division have reached a tentative settlement
for issues related to the tax years
1999-2004
with an expected conclusion in the fourth quarter of 2009. As a
result, it is reasonably possible that changes in our gross
balance of unrecognized tax benefits may occur within the next
12 months of $20 million to $30 million for the
tax years 2005 and 2006 and $90 million to
$110 million for the tax years
1999-2004.
The decrease in our unrecognized tax benefit during the six
months ended June 30, 2009 is due to our settlement reached
with the IRS regarding certain tax positions related to fair
market value losses. The decrease in our unrecognized tax
benefit represents a temporary difference; therefore, it does
not result in a change to our effective tax rate.
167
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the changes in our unrecognized tax
benefits for the three and six months ended June 30, 2009
and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Unrecognized tax benefit as of beginning of period
|
|
$
|
169
|
|
|
$
|
668
|
|
|
$
|
1,745
|
|
|
$
|
124
|
|
Gross increasestax positions in prior years
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
|
|
1,844
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(1,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit as of end of
period(1)
|
|
$
|
169
|
|
|
$
|
1,968
|
|
|
$
|
169
|
|
|
$
|
1,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts exclude tax credits of
$30 million and $540 million as of June 30, 2009
and 2008, respectively.
|
The following table displays the computation of basic and
diluted loss per share of common stock for the three and six
months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net loss attributable to Fannie Mae
|
|
$
|
(14,754
|
)
|
|
$
|
(2,300
|
)
|
|
$
|
(37,922
|
)
|
|
$
|
(4,486
|
)
|
Preferred stock
dividends(1)
|
|
|
(411
|
)
|
|
|
(303
|
)
|
|
|
(440
|
)
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholdersbasic and
diluted
|
|
$
|
(15,165
|
)
|
|
$
|
(2,603
|
)
|
|
$
|
(38,362
|
)
|
|
$
|
(5,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingbasic and
diluted(2)
|
|
|
5,681
|
|
|
|
1,025
|
|
|
|
5,674
|
|
|
|
1,000
|
|
Basic and diluted loss per share
|
|
$
|
(2.67
|
)
|
|
$
|
(2.54
|
)
|
|
$
|
(6.76
|
)
|
|
$
|
(5.11
|
)
|
|
|
|
(1) |
|
Amounts for the three and six
months ended June 30, 2009 include approximately
$409 million and $434 million, respectively, of
dividends declared and paid as of June 30, 2009 on our
outstanding cumulative senior preferred stock and
$6 million of dividends accumulated, but undeclared, on our
outstanding cumulative senior preferred stock.
|
|
(2) |
|
Amount for the three and six months
ended June 30, 2009 include 4.6 billion
weighted-average shares of common stock that would be issued
upon the full exercise of the warrant issued to Treasury from
the date the warrant was issued through June 30, 2009.
There were no dilutive potential common shares for the three and
six months ended June 30, 2009 and 2008.
|
168
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
14.
|
Employee
Retirement Benefits
|
The following table displays components of our net periodic
benefit cost for our qualified and nonqualified pension plans
and other postretirement plan for the three and six months ended
June 30, 2009 and 2008. The net periodic benefit cost for
each period is calculated based on assumptions at the end of the
prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
|
|
14
|
|
|
|
2
|
|
|
|
3
|
|
|
|
12
|
|
|
|
3
|
|
|
|
2
|
|
Expected return on plan assets
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial (gain) loss
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Amortization of net prior service credit
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Special termination benefit charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
15
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
18
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
22
|
|
|
$
|
4
|
|
|
$
|
3
|
|
Interest cost
|
|
|
27
|
|
|
|
4
|
|
|
|
5
|
|
|
|
25
|
|
|
|
5
|
|
|
|
4
|
|
Expected return on plan assets
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial (gain) loss
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Amortization of net prior service cost (credit)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
1
|
|
|
|
(3
|
)
|
Amortization of initial transition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligation
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Curtailment gain
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefit charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
35
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
18
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2009, we
contributed $1 million and $3 million to our
nonqualified pension plans and $3 million and
$5 million to other postretirement benefit plans,
respectively. During the remaining period of 2009, we anticipate
contributing an additional $83 million to our benefit
plans, $76 million to our qualified pension plan,
$3 million to our nonqualified pension plans and
$4 million to our postretirement benefit plan.
Our three reportable segments are: Single-Family, HCD, and
Capital Markets. We use these three segments to generate revenue
and manage business risk, and each segment is based on the type
of business activities it performs.
169
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Our segment financial results include directly attributable
revenues and expenses. Additionally, we allocate to each of our
segments: (i) capital using FHFA minimum capital
requirements adjusted for over- or under-capitalization;
(ii) indirect administrative costs; and (iii) a
provision (benefit) for federal income taxes. In addition, we
allocate intercompany guaranty fee income as a charge to Capital
Markets from the Single-Family and HCD segments for managing the
credit risk on mortgage loans held by the Capital Markets
segment.
The following table displays our segment results for the three
and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Single-Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
186
|
|
|
$
|
(51
|
)
|
|
$
|
3,600
|
|
|
$
|
3,735
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,865
|
|
|
|
164
|
|
|
|
(370
|
)
|
|
|
1,659
|
|
Trust management income
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Investment losses, net
|
|
|
(15
|
)
|
|
|
|
|
|
|
(30
|
)
|
|
|
(45
|
)
|
Net
other-than-temporary
impairments
|
|
|
|
|
|
|
|
|
|
|
(753
|
)
|
|
|
(753
|
)
|
Fair value gains, net
|
|
|
|
|
|
|
|
|
|
|
823
|
|
|
|
823
|
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(190
|
)
|
|
|
(190
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(571
|
)
|
|
|
|
|
|
|
(571
|
)
|
Fee and other income
|
|
|
93
|
|
|
|
20
|
|
|
|
71
|
|
|
|
184
|
|
Administrative expenses
|
|
|
(338
|
)
|
|
|
(80
|
)
|
|
|
(92
|
)
|
|
|
(510
|
)
|
Provision for credit losses
|
|
|
(17,844
|
)
|
|
|
(381
|
)
|
|
|
|
|
|
|
(18,225
|
)
|
Other expenses
|
|
|
(738
|
)
|
|
|
(14
|
)
|
|
|
(125
|
)
|
|
|
(877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes
|
|
|
(16,778
|
)
|
|
|
(913
|
)
|
|
|
2,934
|
|
|
|
(14,757
|
)
|
Provision (benefit) for federal income taxes
|
|
|
(138
|
)
|
|
|
43
|
|
|
|
118
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(16,640
|
)
|
|
|
(956
|
)
|
|
|
2,816
|
|
|
|
(14,780
|
)
|
Less: Net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
(16,640
|
)
|
|
$
|
(930
|
)
|
|
$
|
2,816
|
|
|
$
|
(14,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Single-Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
201
|
|
|
$
|
(113
|
)
|
|
$
|
6,895
|
|
|
$
|
6,983
|
|
Guaranty fee income
(expense)(2)
|
|
|
3,831
|
|
|
|
322
|
|
|
|
(742
|
)
|
|
|
3,411
|
|
Trust management income
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Investment gains, net
|
|
|
58
|
|
|
|
|
|
|
|
120
|
|
|
|
178
|
|
Net
other-than-temporary
impairments
|
|
|
|
|
|
|
|
|
|
|
(6,406
|
)
|
|
|
(6,406
|
)
|
Fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(637
|
)
|
|
|
(637
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
(269
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(928
|
)
|
|
|
|
|
|
|
(928
|
)
|
Fee and other income
|
|
|
178
|
|
|
|
47
|
|
|
|
140
|
|
|
|
365
|
|
Administrative expenses
|
|
|
(658
|
)
|
|
|
(171
|
)
|
|
|
(204
|
)
|
|
|
(1,033
|
)
|
Provision for credit losses
|
|
|
(37,635
|
)
|
|
|
(924
|
)
|
|
|
|
|
|
|
(38,559
|
)
|
Other expenses
|
|
|
(1,480
|
)
|
|
|
(29
|
)
|
|
|
(185
|
)
|
|
|
(1,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes
|
|
|
(35,481
|
)
|
|
|
(1,796
|
)
|
|
|
(1,288
|
)
|
|
|
(38,565
|
)
|
Provision (benefit) for federal income taxes
|
|
|
(783
|
)
|
|
|
211
|
|
|
|
(28
|
)
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(34,698
|
)
|
|
|
(2,007
|
)
|
|
|
(1,260
|
)
|
|
|
(37,965
|
)
|
Less: Net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
$
|
(34,698
|
)
|
|
$
|
(1,964
|
)
|
|
$
|
(1,260
|
)
|
|
$
|
(37,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
The charge to Capital Markets
represents an intercompany guaranty fee expense allocated to
Capital Markets from Single-Family and HCD for absorbing the
credit risk on mortgage loans held in our portfolio.
|
171
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Single-Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
142
|
|
|
$
|
(88
|
)
|
|
$
|
2,003
|
|
|
$
|
2,057
|
|
Guaranty fee income
(expense)(2)
|
|
|
1,819
|
|
|
|
134
|
|
|
|
(345
|
)
|
|
|
1,608
|
|
Trust management income
|
|
|
74
|
|
|
|
1
|
|
|
|
|
|
|
|
75
|
|
Investment losses,
net(3)
|
|
|
(37
|
)
|
|
|
|
|
|
|
(339
|
)
|
|
|
(376
|
)
|
Net
other-than-temporary
impairments(3)
|
|
|
|
|
|
|
|
|
|
|
(507
|
)
|
|
|
(507
|
)
|
Fair value gains, net
|
|
|
|
|
|
|
|
|
|
|
517
|
|
|
|
517
|
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
(36
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(195
|
)
|
|
|
|
|
|
|
(195
|
)
|
Fee and other income
|
|
|
92
|
|
|
|
51
|
|
|
|
82
|
|
|
|
225
|
|
Administrative expenses
|
|
|
(288
|
)
|
|
|
(104
|
)
|
|
|
(120
|
)
|
|
|
(512
|
)
|
Provision for credit losses
|
|
|
(5,077
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(5,085
|
)
|
Other
expenses(3)
|
|
|
(435
|
)
|
|
|
(32
|
)
|
|
|
(44
|
)
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary
losses
|
|
|
(3,710
|
)
|
|
|
(241
|
)
|
|
|
1,211
|
|
|
|
(2,740
|
)
|
Provision (benefit) for federal income taxes
|
|
|
(1,304
|
)
|
|
|
(316
|
)
|
|
|
1,144
|
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary losses
|
|
|
(2,406
|
)
|
|
|
75
|
|
|
|
67
|
|
|
|
(2,264
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,406
|
)
|
|
|
75
|
|
|
|
34
|
|
|
|
(2,297
|
)
|
Less: Net income attributable to the noncontrolling
interest(3)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
(2,406
|
)
|
|
$
|
72
|
|
|
$
|
34
|
|
|
$
|
(2,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Single-Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
276
|
|
|
$
|
(191
|
)
|
|
$
|
3,662
|
|
|
$
|
3,747
|
|
Guaranty fee income
(expense)(2)
|
|
|
3,761
|
|
|
|
282
|
|
|
|
(683
|
)
|
|
|
3,360
|
|
Trust management income
|
|
|
179
|
|
|
|
3
|
|
|
|
|
|
|
|
182
|
|
Investment losses,
net(3)
|
|
|
(85
|
)
|
|
|
|
|
|
|
(347
|
)
|
|
|
(432
|
)
|
Net
other-than-temporary
impairments(3)
|
|
|
|
|
|
|
|
|
|
|
(562
|
)
|
|
|
(562
|
)
|
Fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(3,860
|
)
|
|
|
(3,860
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
(181
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(336
|
)
|
|
|
|
|
|
|
(336
|
)
|
Fee and other income
|
|
|
194
|
|
|
|
113
|
|
|
|
145
|
|
|
|
452
|
|
Administrative expenses
|
|
|
(574
|
)
|
|
|
(212
|
)
|
|
|
(238
|
)
|
|
|
(1,024
|
)
|
Provision for credit losses
|
|
|
(8,158
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,158
|
)
|
Other
expenses(3)
|
|
|
(855
|
)
|
|
|
(72
|
)
|
|
|
(114
|
)
|
|
|
(1,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary events
|
|
|
(5,262
|
)
|
|
|
(413
|
)
|
|
|
(2,178
|
)
|
|
|
(7,853
|
)
|
Benefit for federal income taxes
|
|
|
(1,848
|
)
|
|
|
(638
|
)
|
|
|
(918
|
)
|
|
|
(3,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary losses
|
|
|
(3,414
|
)
|
|
|
225
|
|
|
|
(1,260
|
)
|
|
|
(4,449
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(3,414
|
)
|
|
|
225
|
|
|
|
(1,294
|
)
|
|
|
(4,483
|
)
|
Less: Net income attributable to noncontrolling
interest(3)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
(3,414
|
)
|
|
$
|
222
|
|
|
$
|
(1,294
|
)
|
|
$
|
(4,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cost of capital charge.
|
|
(2) |
|
Includes intercompany guaranty fee
income (expense) allocated to Single-Family and HCD from Capital
Markets for absorbing the credit risk on mortgage loans held in
our portfolio.
|
|
(3) |
|
Certain prior period amounts have
been reclassified to conform to the current period presentation.
|
|
|
16.
|
Regulatory
Capital Requirements
|
In October 2008, FHFA announced that our existing statutory and
FHFA-directed regulatory capital requirements will not be
binding during the conservatorship, and that FHFA will not issue
quarterly capital classifications during the conservatorship. We
will continue to submit capital reports to FHFA during the
conservatorship and FHFA will continue to closely monitor our
capital levels. FHFA has stated that it does not intend to
report our critical capital, risk-based capital or subordinated
debt levels during the conservatorship. As of June 30, 2009
and December 31, 2008, we had a minimum capital deficiency
of $72.4 billion and $42.2 billion, respectively.
These amounts exclude the funds provided to us by Treasury
pursuant to the senior preferred stock purchase agreement, since
senior preferred stock is not included in core capital due to
its cumulative dividend provisions.
FHFA has directed us, during the time we are under
conservatorship, to focus on managing to a positive net worth.
As of June 30, 2009 and December 31, 2008, we had a
net worth deficit of $10.6 billion and $15.2 billion,
respectively.
Pursuant to the Regulatory Reform Act, if our total assets are
less than our total obligations for a period of 60 days,
FHFA will be mandated by law to appoint a receiver for Fannie
Mae. Treasurys funding commitment under the senior
preferred stock purchase agreement is intended to ensure that we
avoid a net worth deficit, in
173
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
order to avoid this mandatory trigger of receivership under the
Regulatory Reform Act. In order to avoid a net worth deficit, we
may draw up to $200 billion in funds from Treasury under
the senior preferred stock purchase agreement as amended on
May 6, 2009.
Under the senior preferred stock purchase agreement, we are
restricted from engaging in certain capital transactions, such
as the declaration of dividends (other than on the senior
preferred stock), without the prior written consent of Treasury,
until the senior preferred stock is repaid or redeemed in full.
|
|
17.
|
Concentrations
of Credit Risk
|
Non-traditional
Loans; Alt-A and Subprime Loans and Securities
We own and guarantee loans with non-traditional features, such
as interest-only loans and
negative-amortizing
loans. We also own and guarantee Alt-A and subprime mortgage
loans and mortgage-related securities. An Alt-A mortgage loan
generally refers to a mortgage loan that can be underwritten
with reduced or alternative documentation than that required for
a full documentation mortgage loan but may also include other
alternative product features. As a result, Alt-A mortgage loans
generally have a higher risk of default than non-Alt-A mortgage
loans. In reporting our Alt-A exposure, we have classified
mortgage loans as Alt-A if the lenders that deliver the mortgage
loans to us have classified the loans as Alt-A based on
documentation or other product features. We have classified
private-label mortgage-related securities held in our investment
portfolio as Alt-A if the securities were labeled as such when
issued. A subprime mortgage loan generally refers to a mortgage
loan made to a borrower with a weaker credit profile than that
of a prime borrower. As a result of the weaker credit profile,
subprime borrowers have a higher likelihood of default than
prime borrowers. Subprime mortgage loans are typically
originated by lenders specializing in this type of business or
by subprime divisions of large lenders, using processes unique
to subprime loans. In reporting our subprime exposure, we have
classified mortgage loans as subprime if the mortgage loans are
originated by one of these specialty lenders or a subprime
division of a large lender. We have classified private-label
mortgage-related securities held in our investment portfolio as
subprime if the securities were labeled as such when issued. We
reduce our risk associated with these loans through credit
enhancements, as described below under Mortgage
Insurers.
The following table displays the percentage of our conventional
single-family mortgage credit book of business that consists of
interest-only loans,
negative-amortizing
adjustable rate mortgages (ARMs) and loans with an
estimated
mark-to-market
loan to value (LTV) ratio of greater than 80% as of
June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
Percentage of Conventional
|
|
|
|
Single-Family Mortgage Credit
|
|
|
|
Book of Business
|
|
|
|
As of
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Interest-only loans
|
|
|
7
|
%
|
|
|
8
|
%
|
Negative-amortizing
ARMs
|
|
|
1
|
|
|
|
1
|
|
80%+ LTV loans
|
|
|
38
|
|
|
|
34
|
|
174
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays information regarding the Alt-A and
subprime mortgage loans and mortgage-related securities in our
single-family mortgage credit book of business as of
June 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Unpaid
|
|
|
Percent of
|
|
|
Unpaid
|
|
|
Percent of
|
|
|
|
Principal
|
|
|
Book of
|
|
|
Principal
|
|
|
Book of
|
|
|
|
Balance
|
|
|
Business(1)
|
|
|
Balance
|
|
|
Business(1)
|
|
|
|
(Dollars in millions)
|
|
|
Loans and Fannie Mae MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A(2)
|
|
$
|
272,303
|
|
|
|
9
|
%
|
|
$
|
295,622
|
|
|
|
10
|
%
|
Subprime(3)
|
|
|
17,591
|
|
|
|
1
|
|
|
|
19,086
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
289,894
|
|
|
|
10
|
%
|
|
$
|
314,708
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A(4)
|
|
$
|
26,130
|
|
|
|
1
|
%
|
|
$
|
27,858
|
|
|
|
1
|
%
|
Subprime(5)
|
|
|
22,603
|
|
|
|
1
|
|
|
|
24,551
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,733
|
|
|
|
2
|
%
|
|
$
|
52,409
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Calculated based on total unpaid
principal balance of our single-family mortgage credit book of
business.
|
|
(2) |
|
Represents Alt-A mortgage loans
held in our portfolio and Fannie Mae MBS backed by Alt-A
mortgage loans.
|
|
(3) |
|
Represents subprime mortgage loans
held in our portfolio and Fannie Mae MBS backed by subprime
mortgage loans.
|
|
(4) |
|
Represents private-label
mortgage-related securities backed by Alt-A mortgage loans.
|
|
(5) |
|
Represents private-label
mortgage-related securities backed by subprime mortgage loans.
|
Other
Concentrations
Mortgage Servicers. Mortgage servicers collect
mortgage and escrow payments from borrowers, pay taxes and
insurance costs from escrow accounts, monitor and report
delinquencies, and perform other required activities on our
behalf. Our business with our mortgage servicers is
concentrated. Our ten largest single-family mortgage servicers,
including their affiliates, serviced 81% of our single-family
mortgage credit book of business as of June 30, 2009 and
December 31, 2008. Our ten largest multifamily mortgage
servicers including their affiliates serviced 76% and 75% of our
multifamily mortgage credit book of business as of June 30,
2009 and December 31, 2008, respectively.
If one of our principal mortgage servicers fails to meet its
obligations to us, it could increase our credit-related expenses
and credit losses, result in financial losses to us and have a
material adverse effect on our earnings, liquidity, financial
condition and net worth.
Mortgage Insurers. Mortgage insurance
risk in force represents our maximum potential loss
recovery under the applicable mortgage insurance policies. We
had primary and pool mortgage insurance coverage risk in force
on single-family mortgage loans in our guaranty book of business
of $104.1 billion and $8.4 billion, respectively, as
of June 30, 2009, compared with $109.0 billion and
$9.7 billion, respectively, as of December 31, 2008.
Over 99% of our mortgage insurance was provided by eight
mortgage insurance companies as of both June 30, 2009 and
December 31, 2008.
Increases in mortgage insurance claims due to higher defaults
and credit losses in recent periods have adversely affected the
financial results and financial condition of many mortgage
insurers. We had total mortgage insurance coverage risk in force
of $112.5 billion on the single-family mortgage loans in
our
175
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
guaranty book of business as of June 30, 2009, which
represented approximately 4% of our single-family guaranty book
of business as of June 30, 2009. The current weakened
financial condition of our mortgage insurer counterparties
creates an increased risk that these counterparties will fail to
fulfill their obligations to reimburse us for claims under
insurance policies. If we determine that it is probable that we
will not collect all of our claims from one or more of these
mortgage insurer counterparties, it could result in an increase
in our loss reserves, which could adversely affect our earnings,
liquidity, financial condition and net worth. We had outstanding
receivables from mortgage insurers of $1.4 billion as of
June 30, 2009 and $1.1 billion as of December 31,
2008, related to amounts claimed on insured, defaulted loans
that we have not yet received. We have included a reserve for
probable losses from one mortgage insurer counterparty of
$293 million in our loss reserves as of June 30, 2009
due to their inability to fully pay claims. We did not record a
reserve for probable losses from our mortgage insurer
counterparties in the three or six months ended June 30,
2008.
Financial Guarantors. We were the beneficiary
of financial guarantees totaling approximately $9.8 billion
and $10.2 billion as of June 30, 2009 and
December 31, 2008, respectively, on securities held in our
investment portfolio or on securities that have been
resecuritized to include a Fannie Mae guaranty and sold to third
parties. The securities covered by these guarantees consist
primarily of private-label mortgage-related securities and
mortgage revenue bonds. We obtained these guarantees from nine
financial guaranty insurance companies. In addition, we are the
beneficiary of financial guarantees totaling $49.6 billion
and $43.5 billion as of June 30, 2009 and
December 31, 2008, respectively, obtained from Freddie Mac,
the federal government, and its agencies. These financial
guaranty contracts assure the collectability of timely interest
and ultimate principal payments on the guaranteed securities if
the cash flows generated by the underlying collateral are not
sufficient to fully support these payments.
If a financial guarantor fails to meet its obligations to us
with respect to the securities for which we have obtained
financial guarantees, it could reduce the fair value of our
mortgage-related securities and result in financial losses to
us, which could have a material adverse effect on our earnings,
liquidity, financial condition and net worth. During the first
six months of 2009, we noted a decline in the financial strength
of some of our financial guarantors. We considered the financial
strength of our financial guarantors in assessing our securities
for
other-than-temporary
impairment.
Derivatives Counterparties. For information on
credit risk associated with our derivatives transactions refer
to Note 11, Derivative Instruments and Hedging
Activities.
|
|
18.
|
Fair
Value of Financial Instruments
|
The fair value of financial instruments disclosure required by
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, includes commitments to purchase
multifamily mortgage loans and single-family reverse mortgage
loans, which are off-balance sheet financial instruments that
are not recorded in our condensed consolidated balance sheets.
The fair values of these commitments are included as
Mortgage loans held for investment, net of allowance for
loan losses. The disclosure excludes certain financial
instruments, such as plan obligations for pension and other
postretirement benefits, employee stock option and stock
purchase plans, and also excludes all non-financial instruments.
As a result, the fair value of our financial assets and
liabilities does not represent the underlying fair value of our
total consolidated assets and liabilities.
176
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following table displays the carrying value and estimated
fair value of our financial instruments as of June 30, 2009
and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(1)
|
|
$
|
28,991
|
|
|
$
|
28,991
|
|
|
$
|
18,462
|
|
|
$
|
18,462
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
25,810
|
|
|
|
25,810
|
|
|
|
57,418
|
|
|
|
57,420
|
|
Trading securities
|
|
|
82,400
|
|
|
|
82,400
|
|
|
|
90,806
|
|
|
|
90,806
|
|
Available-for-sale
securities
|
|
|
283,941
|
|
|
|
283,941
|
|
|
|
266,488
|
|
|
|
266,488
|
|
Mortgage loans held for sale
|
|
|
29,174
|
|
|
|
29,782
|
|
|
|
13,270
|
|
|
|
13,458
|
|
Mortgage loans held for investment, net of allowance for loan
losses
|
|
|
386,407
|
|
|
|
377,127
|
|
|
|
412,142
|
|
|
|
406,233
|
|
Advances to lenders
|
|
|
18,938
|
|
|
|
18,527
|
|
|
|
5,766
|
|
|
|
5,412
|
|
Derivative assets
|
|
|
1,406
|
|
|
|
1,406
|
|
|
|
869
|
|
|
|
869
|
|
Guaranty assets and
buy-ups
|
|
|
7,799
|
|
|
|
9,652
|
|
|
|
7,688
|
|
|
|
9,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
864,866
|
|
|
$
|
857,636
|
|
|
$
|
872,909
|
|
|
$
|
868,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
|
|
|
$
|
|
|
|
$
|
77
|
|
|
$
|
77
|
|
Short-term debt
|
|
|
259,781
|
|
|
|
260,107
|
|
|
|
330,991
|
|
|
|
332,290
|
|
Long-term debt
|
|
|
573,329
|
|
|
|
596,188
|
|
|
|
539,402
|
|
|
|
574,281
|
|
Derivative liabilities
|
|
|
2,047
|
|
|
|
2,047
|
|
|
|
2,715
|
|
|
|
2,715
|
|
Guaranty obligations
|
|
|
12,358
|
|
|
|
127,087
|
|
|
|
12,147
|
|
|
|
90,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
847,515
|
|
|
$
|
985,429
|
|
|
$
|
885,332
|
|
|
$
|
1,000,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes restricted cash of
$757 million and $529 million as of June 30, 2009
and December 31, 2008, respectively.
|
Notes
to Fair Value of Financial Instruments
Cash and Cash EquivalentsThe carrying value of cash
and cash equivalents is a reasonable estimate of their
approximate fair value.
Federal Funds Sold and Securities Purchased Under Agreements
to ResellThe carrying value of our federal funds sold
and securities purchased under agreements to resell approximates
the fair value of these instruments due to their short-term
nature, exclusive of dollar roll resell transactions. The fair
value of our dollar roll resell transactions reflects prices for
similar securities in the market.
Trading Securities and
Available-for-Sale
SecuritiesOur investments in securities are recognized
at fair value in our condensed consolidated financial
statements. Fair values of securities are primarily based on
observable market prices or prices obtained from third parties.
Details of these estimated fair values by type are displayed in
Note 6, Investments in Securities.
Mortgage Loans Held for SaleHeld for sale
(HFS) loans are reported at the lower of cost or
fair value in our condensed consolidated balance sheets. We
determine the fair value of our mortgage loans based on
comparisons to Fannie Mae MBS with similar characteristics.
Specifically, we use the observable market value
177
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
of our Fannie Mae MBS as a base value, from which we subtract or
add the fair value of the associated guaranty asset, guaranty
obligation and master servicing arrangements.
Mortgage Loans Held for InvestmentHeld for
investment (HFI) loans are recorded in our condensed
consolidated balance sheets at the principal amount outstanding,
net of unamortized premiums and discounts, cost basis
adjustments and an allowance for loan losses. We determine the
fair value of our mortgage loans based on comparisons to Fannie
Mae MBS with similar characteristics. Specifically, we use the
observable market value of our Fannie Mae MBS as a base value,
from which we subtract or add the fair value of the associated
guaranty asset, guaranty obligation and master servicing
arrangements. Certain loans that do not qualify for Fannie Mae
MBS securitization are valued using market based data for
similar loans or through a model approach that simulates a loan
sale via a synthetic structure.
Advances to LendersThe carrying value of the
majority of our advances to lenders approximates the fair value
of these instruments due to their short-term nature. Advances to
lenders for which the carrying value does not approximate fair
value are valued based on comparisons to Fannie Mae MBS with
similar characteristics, and applying the same pricing
methodology as used for HFI loans as described above.
Derivatives Assets and Liabilities (collectively,
Derivatives)Our risk management
derivatives and mortgage commitment derivatives are recognized
in our condensed consolidated balance sheets at fair value,
taking into consideration the effects of any legally enforceable
master netting agreements that allow us to settle derivative
asset and liability positions with the same counterparty on a
net basis, as well as cash collateral. We use observable market
prices or market prices obtained from third parties for
derivatives, when available. For derivative instruments where
market prices are not readily available, we estimate fair value
using model-based interpolation based on direct market inputs.
Direct market inputs include prices of instruments with similar
maturities and characteristics, interest rate yield curves and
measures of interest rate volatility. Details of these estimated
fair values by type are displayed in Note 11,
Derivative Instruments and Hedging Activities.
Guaranty Assets and
Buy-upsWe
estimate the fair value of guaranty assets based on the present
value of expected future cash flows of the underlying mortgage
assets using managements best estimate of certain key
assumptions, which include prepayment speeds, forward yield
curves, and discount rates commensurate with the risks involved.
These cash flows are projected using proprietary prepayment,
interest rate and credit risk models. Because guaranty assets
are like an interest-only income stream, the projected cash
flows from our guaranty assets are discounted using one month
LIBOR plus the option-adjusted spread (OAS) for
interest-only trust securities. The interest-only OAS is
calibrated using prices of a representative sample of
interest-only trust securities. We believe the remitted fee
income is less liquid than interest-only trust securities and
more like an excess servicing strip. We take a further haircut
of the present value for liquidity considerations. The haircut
is based on market quotes from dealers. The fair value of the
guaranty assets as presented in the table above and the
recurring fair value measurement table below include the fair
value of any associated
buy-ups,
which is estimated in the same manner as guaranty assets but is
recorded separately as a component of Other assets
in our condensed consolidated balance sheets. While the fair
value of the guaranty assets reflect all guaranty arrangements,
the carrying value primarily reflects only those arrangements
entered into subsequent to our adoption of FIN 45.
Federal Funds Purchased and Securities Sold Under Agreements
to RepurchaseThe carrying value of our federal funds
purchased and securities sold under agreements to repurchase
approximates the fair value of these instruments due to the
short-term nature of these liabilities, exclusive of dollar roll
repurchase transactions.
Short-Term Debt and Long-Term DebtWe value the
majority of our short-term and long-term debt using pricing
services. Where third-party pricing is not available on
non-callable debt, we use a discounted cash flow approach based
on the Fannie Mae yield curve with an adjustment to reflect fair
values at the offer side
178
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
of the market. When third-party pricing is not available for
callable bonds, we use internally-developed models calibrated to
market to price these bonds. To estimate the fair value of
structured notes, cash flows are evaluated taking into
consideration any derivatives through which we have swapped out
of the structured features of the notes. We continue to use
third-party prices to value our subordinated debt.
Guaranty ObligationsThe fair value of all guaranty
obligations (GO), measured subsequent to their
initial recognition, is our estimate of a hypothetical
transaction price we would receive if we were to issue our
guaranty to an unrelated party in a standalone arms-length
transaction at the measurement date. We estimate the fair value
of the GO using our internal GO valuation models which calculate
the present value of expected cash flows based on
managements best estimate of certain key assumptions such
as default rates, severity rates and required rate of return. We
further adjust the model values based on our current market
pricing when such transactions reflect credit characteristics
that are similar to our outstanding guaranty obligations. While
the fair value of the GO reflects all guaranty arrangements, the
carrying value primarily reflects only those arrangements
entered into subsequent to our adoption of FIN 45.
Fair
Value Measurement
The inputs used to determine fair value can be readily
observable, market corroborated or unobservable. We use
valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs.
Valuation
Hierarchy
The fair value hierarchy ranks the quality and reliability of
the information used to determine fair values. We perform a
detailed analysis of the assets and liabilities that are subject
to SFAS 157 to determine the appropriate level based on the
observability of the inputs used in the valuation techniques.
Assets and liabilities carried at fair value will be classified
and disclosed in one of the following three categories based on
the lowest level input that is significant to the fair value
measurement in its entirety:
|
|
|
|
Level 1:
|
Quoted prices (unadjusted) in active markets for identical
assets or liabilities.
|
|
|
Level 2:
|
Observable market-based inputs other than quoted prices in
active markets for identical assets or liabilities.
|
|
|
Level 3:
|
Unobservable inputs.
|
Level 1 consists of instruments whose value is based on
quoted market prices in active markets, such as
U.S. Treasuries.
Level 2 includes instruments that are primarily valued
using valuation techniques that use observable market-based
inputs or unobservable inputs that are corroborated by market
data. These inputs consider various assumptions, including time
value, yield curve, volatility factors, prepayment speeds,
default rates, loss severity, current market and contractual
prices for the underlying financial instruments, as well as
other relevant economic measures. Substantially all of these
assumptions are observable in the marketplace, can be derived
from observable market data or are supported by observable
levels at which transactions are executed in the marketplace.
This category also includes instruments whose values are based
on quoted market prices provided by a single dealer that is
corroborated by a recent transaction. Instruments in this
category include mortgage and non-mortgage-related securities,
mortgage loans held for sale, debt and derivatives.
Level 3 is comprised of instruments whose fair value is
estimated based on a market approach using alternate techniques
or internally developed models using significant inputs that are
generally less readily observable because of limited market
activity or little or no price transparency. We include
instruments whose value is based on a single source such as a
dealer, broker or pricing service which cannot be corroborated
by recent market
179
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
transactions. Included in this category are guaranty assets and
buy-ups,
master servicing assets and liabilities, mortgage loans,
mortgage and non-mortgage-related securities, long-term debt,
derivatives, and acquired property.
Recurring
Change in Fair Value
The following tables display our assets and liabilities measured
on our condensed consolidated balance sheets at fair value on a
recurring basis subsequent to initial recognition, including
instruments for which we have elected the fair value option as
of June 30, 2009 and December 31, 2008. Specifically,
as disclosed under SFAS 157 requirements, total assets
measured at fair value on a recurring basis and classified as
level 3 were $51.4 billion, or 6% of Total
assets and $62.0 billion, or 7% of Total
assets in our condensed consolidated balance sheets as of
June 30, 2009 and December 31, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2009
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Netting
|
|
|
Estimated
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
|
|
|
$
|
42,971
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
42,973
|
|
Fannie Mae structured MBS
|
|
|
|
|
|
|
2,732
|
|
|
|
6,398
|
|
|
|
|
|
|
|
9,130
|
|
Non-Fannie Mae single-class
|
|
|
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
|
959
|
|
Non-Fannie Mae structured
|
|
|
|
|
|
|
1,934
|
|
|
|
2,692
|
|
|
|
|
|
|
|
4,626
|
|
Non-Fannie Mae structured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily (CMBS)
|
|
|
|
|
|
|
8,349
|
|
|
|
|
|
|
|
|
|
|
|
8,349
|
|
Mortgage revenue bonds
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
617
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
9,789
|
|
|
|
19
|
|
|
|
|
|
|
|
9,808
|
|
Corporate debt securities
|
|
|
|
|
|
|
935
|
|
|
|
|
|
|
|
|
|
|
|
935
|
|
Other
|
|
|
3
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
5,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
3
|
|
|
|
72,669
|
|
|
|
9,728
|
|
|
|
|
|
|
|
82,400
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
|
|
|
|
|
134,246
|
|
|
|
154
|
|
|
|
|
|
|
|
134,400
|
|
Fannie Mae structured MBS
|
|
|
|
|
|
|
52,692
|
|
|
|
3,499
|
|
|
|
|
|
|
|
56,191
|
|
Non-Fannie Mae single-class
|
|
|
|
|
|
|
33,054
|
|
|
|
155
|
|
|
|
|
|
|
|
33,209
|
|
Non-Fannie Mae structured
|
|
|
|
|
|
|
12,188
|
|
|
|
21,223
|
|
|
|
|
|
|
|
33,411
|
|
Non-Fannie Mae structured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
multifamily (CMBS)
|
|
|
|
|
|
|
11,795
|
|
|
|
|
|
|
|
|
|
|
|
11,795
|
|
Mortgage revenue bonds
|
|
|
|
|
|
|
26
|
|
|
|
13,015
|
|
|
|
|
|
|
|
13,041
|
|
Other
|
|
|
|
|
|
|
25
|
|
|
|
1,869
|
|
|
|
|
|
|
|
1,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
|
|
|
|
244,026
|
|
|
|
39,915
|
|
|
|
|
|
|
|
283,941
|
|
Derivative
assets(2)
|
|
|
|
|
|
|
40,380
|
|
|
|
256
|
|
|
|
(39,255
|
)
|
|
|
1,381
|
|
Guaranty assets and
buy-ups
|
|
|
|
|
|
|
|
|
|
|
1,483
|
|
|
|
|
|
|
|
1,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
3
|
|
|
$
|
357,075
|
|
|
$
|
51,382
|
|
|
$
|
(39,255
|
)
|
|
$
|
369,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
21,413
|
|
|
$
|
1,024
|
|
|
$
|
|
|
|
$
|
22,437
|
|
Derivative
liabilities(2)
|
|
|
|
|
|
|
52,541
|
|
|
|
24
|
|
|
|
(50,586
|
)
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
73,954
|
|
|
$
|
1,048
|
|
|
$
|
(50,586
|
)
|
|
$
|
24,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2008
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Netting
|
|
|
Estimated
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Adjustment(1)
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
6
|
|
|
$
|
78,035
|
|
|
$
|
12,765
|
|
|
$
|
|
|
|
$
|
90,806
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
218,651
|
|
|
|
47,837
|
|
|
|
|
|
|
|
266,488
|
|
Derivative
assets(2)
|
|
|
|
|
|
|
62,969
|
|
|
|
362
|
|
|
|
(62,462
|
)
|
|
|
869
|
|
Guaranty assets and
buy-ups
|
|
|
|
|
|
|
|
|
|
|
1,083
|
|
|
|
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
6
|
|
|
$
|
359,655
|
|
|
$
|
62,047
|
|
|
$
|
(62,462
|
)
|
|
$
|
359,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
|
|
|
$
|
4,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,500
|
|
Long-term debt
|
|
|
|
|
|
|
18,667
|
|
|
|
2,898
|
|
|
|
|
|
|
|
21,565
|
|
Derivative
liabilities(2)
|
|
|
|
|
|
|
76,412
|
|
|
|
52
|
|
|
|
(73,749
|
)
|
|
|
2,715
|
|
Other liabilities
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
99,641
|
|
|
$
|
2,950
|
|
|
$
|
(73,749
|
)
|
|
$
|
28,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Derivative contracts are reported
on a gross basis by level. The netting adjustment represents the
effect of the legal right to offset under legally enforceable
master netting agreements to settle with the same counterparty
on a net basis, as well as cash collateral.
|
|
(2) |
|
Excludes accrued fees related to
the termination of derivative contracts.
|
181
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following tables display a reconciliation of all assets and
liabilities measured at fair value on a recurring basis using
significant unobservable inputs (level 3) for the
three and six months ended June 30, 2009 and 2008. The
tables also display gains and losses due to changes in fair
value, including both realized and unrealized gains and losses,
recorded in our condensed consolidated statement of operations
for level 3 assets and liabilities for the three and six
months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable
Inputs
|
|
|
|
(Level 3)
|
|
|
|
For the Three Months Ended June 30, 2009
|
|
|
|
|
|
|
Total Gains or (Losses)
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
Net Unrealized Gains
|
|
|
|
|
|
|
(Realized/Unrealized)
|
|
|
Sales,
|
|
|
|
|
|
|
|
|
(Losses) Included in
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
Issuances,
|
|
|
Transfers
|
|
|
|
|
|
Net Loss Related to
|
|
|
|
Balance,
|
|
|
|
|
|
Other
|
|
|
and
|
|
|
in (out) of
|
|
|
Balance,
|
|
|
Assets and Liabilities
|
|
|
|
April 1,
|
|
|
Included
|
|
|
Comprehensive
|
|
|
Settlements,
|
|
|
Level 3,
|
|
|
June 30,
|
|
|
Still Held as of
|
|
|
|
2009
|
|
|
in Net Loss
|
|
|
Loss
|
|
|
Net
|
|
|
Net(1)
|
|
|
2009
|
|
|
June 30,
2009(2)
|
|
|
|
(Dollars in millions)
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
Fannie Mae structured MBS
|
|
|
6,558
|
|
|
|
77
|
|
|
|
|
|
|
|
(310
|
)
|
|
|
73
|
|
|
|
6,398
|
|
|
|
95
|
|
Non-Fannie Mae structured
|
|
|
2,887
|
|
|
|
169
|
|
|
|
|
|
|
|
(164
|
)
|
|
|
(200
|
)
|
|
|
2,692
|
|
|
|
124
|
|
Mortgage revenue bonds
|
|
|
653
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
617
|
|
|
|
(29
|
)
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
(64
|
)
|
|
|
19
|
|
|
|
1
|
|
Corporate debt securities
|
|
|
116
|
|
|
|
1
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Securities
|
|
$
|
10,308
|
|
|
$
|
218
|
|
|
$
|
|
|
|
$
|
(547
|
)
|
|
$
|
(251
|
)
|
|
$
|
9,728
|
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
166
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(9
|
)
|
|
$
|
(3
|
)
|
|
$
|
154
|
|
|
$
|
|
|
Fannie Mae structured MBS
|
|
|
3,410
|
|
|
|
(38
|
)
|
|
|
6
|
|
|
|
(111
|
)
|
|
|
232
|
|
|
|
3,499
|
|
|
|
|
|
Non-Fannie Mae single-class
|
|
|
161
|
|
|
|
1
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
155
|
|
|
|
|
|
Non-Fannie Mae structured
|
|
|
21,647
|
|
|
|
(485
|
)
|
|
|
1,037
|
|
|
|
(1,233
|
)
|
|
|
257
|
|
|
|
21,223
|
|
|
|
|
|
Mortgage revenue bonds
|
|
|
13,185
|
|
|
|
(2
|
)
|
|
|
84
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
13,015
|
|
|
|
|
|
Other
|
|
|
1,843
|
|
|
|
(24
|
)
|
|
|
148
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS Securities
|
|
$
|
40,412
|
|
|
$
|
(548
|
)
|
|
$
|
1,275
|
|
|
$
|
(1,710
|
)
|
|
$
|
486
|
|
|
$
|
39,915
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Derivatives
|
|
|
308
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
25
|
|
|
|
2
|
|
|
|
232
|
|
|
|
(23
|
)
|
Guaranty assets &
buy-ups
|
|
|
1,179
|
|
|
|
(90
|
)
|
|
|
49
|
|
|
|
345
|
|
|
|
|
|
|
|
1,483
|
|
|
|
115
|
|
Long-term debt
|
|
|
(867
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
(1,024
|
)
|
|
|
(22
|
)
|
182
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable
Inputs
|
|
|
|
(Level 3)
|
|
|
|
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
Total Gains or (Losses)
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
Net Unrealized Gains
|
|
|
|
|
|
|
(realized/unrealized)
|
|
|
Sales,
|
|
|
|
|
|
|
|
|
(Losses) Included in
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
Issuances,
|
|
|
Transfers
|
|
|
|
|
|
Net Loss Related to
|
|
|
|
Balance,
|
|
|
|
|
|
Other
|
|
|
and
|
|
|
in (out)
|
|
|
Balance,
|
|
|
Assets and Liabilities
|
|
|
|
January 1,
|
|
|
Included
|
|
|
Comprehensive
|
|
|
Settlements,
|
|
|
of Level 3,
|
|
|
June 30,
|
|
|
Still Held as of
|
|
|
|
2009
|
|
|
in Net Loss
|
|
|
Loss
|
|
|
Net
|
|
|
Net(1)
|
|
|
2009
|
|
|
June 30,
2009(2)
|
|
|
|
(Dollars in millions)
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
Fannie Mae structured MBS
|
|
|
6,933
|
|
|
|
230
|
|
|
|
|
|
|
|
(709
|
)
|
|
|
(56
|
)
|
|
|
6,398
|
|
|
|
248
|
|
Non-Fannie Mae single-class
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Fannie Mae structured
|
|
|
3,602
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
(330
|
)
|
|
|
(516
|
)
|
|
|
2,692
|
|
|
|
(37
|
)
|
Mortgage revenue bonds
|
|
|
695
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
617
|
|
|
|
(71
|
)
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
1,475
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
(1,369
|
)
|
|
|
19
|
|
|
|
1
|
|
Corporate debt securities
|
|
|
57
|
|
|
|
3
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Securities
|
|
$
|
12,765
|
|
|
$
|
53
|
|
|
$
|
|
|
|
$
|
(1,205
|
)
|
|
$
|
(1,885
|
)
|
|
$
|
9,728
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae single-class MBS
|
|
$
|
2,355
|
|
|
$
|
|
|
|
$
|
60
|
|
|
$
|
(229
|
)
|
|
$
|
(2,032
|
)
|
|
$
|
154
|
|
|
$
|
|
|
Fannie Mae structured MBS
|
|
|
3,254
|
|
|
|
(37
|
)
|
|
|
60
|
|
|
|
(216
|
)
|
|
|
438
|
|
|
|
3,499
|
|
|
|
|
|
Non-Fannie Mae single-class
|
|
|
178
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(11
|
)
|
|
|
(6
|
)
|
|
|
155
|
|
|
|
|
|
Non-Fannie Mae structured
|
|
|
27,707
|
|
|
|
(4,386
|
)
|
|
|
3,383
|
|
|
|
(2,704
|
)
|
|
|
(2,777
|
)
|
|
|
21,223
|
|
|
|
|
|
Mortgage revenue bonds
|
|
|
12,456
|
|
|
|
(7
|
)
|
|
|
981
|
|
|
|
(415
|
)
|
|
|
|
|
|
|
13,015
|
|
|
|
|
|
Other
|
|
|
1,887
|
|
|
|
(62
|
)
|
|
|
236
|
|
|
|
(192
|
)
|
|
|
|
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS Securities
|
|
$
|
47,837
|
|
|
$
|
(4,492
|
)
|
|
$
|
4,714
|
|
|
$
|
(3,767
|
)
|
|
$
|
(4,377
|
)
|
|
$
|
39,915
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Derivatives
|
|
|
310
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
28
|
|
|
|
1
|
|
|
|
232
|
|
|
|
(43
|
)
|
Guaranty assets &
buy-ups
|
|
|
1,083
|
|
|
|
(51
|
)
|
|
|
78
|
|
|
|
373
|
|
|
|
|
|
|
|
1,483
|
|
|
|
159
|
|
Long-term debt
|
|
|
(2,898
|
)
|
|
|
36
|
|
|
|
|
|
|
|
1,315
|
|
|
|
523
|
|
|
|
(1,024
|
)
|
|
|
23
|
|
183
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
|
|
|
For the Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Trading
|
|
|
Available-for-sale
|
|
|
Net
|
|
|
and
|
|
|
Long-Term
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Buy-ups
|
|
|
Debt
|
|
|
|
(Dollars in millions)
|
|
|
Beginning balance as of April 1, 2008
|
|
$
|
17,972
|
|
|
$
|
36,183
|
|
|
$
|
252
|
|
|
$
|
1,628
|
|
|
$
|
(3,399
|
)
|
Realized/unrealized gains (losses) included in net loss
|
|
|
357
|
|
|
|
(110
|
)
|
|
|
(60
|
)
|
|
|
181
|
|
|
|
(10
|
)
|
Unrealized gains included in other comprehensive loss
|
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
69
|
|
|
|
|
|
Purchases, sales, issuances, and settlements, net
|
|
|
(1,586
|
)
|
|
|
(1,134
|
)
|
|
|
(28
|
)
|
|
|
69
|
|
|
|
100
|
|
Transfers in/out of level 3,
net(3)
|
|
|
(2,418
|
)
|
|
|
5,279
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance as of June 30, 2008
|
|
$
|
14,325
|
|
|
$
|
40,033
|
|
|
$
|
163
|
|
|
$
|
1,947
|
|
|
$
|
(3,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) included in net loss related to
assets and liabilities still held as of June 30,
2008(2)
|
|
$
|
394
|
|
|
$
|
|
|
|
$
|
(100
|
)
|
|
$
|
149
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable
Inputs
|
|
|
|
(Level 3)
|
|
|
|
For the Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Trading
|
|
|
Available-for-sale
|
|
|
Net
|
|
|
and
|
|
|
Long-Term
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Buy-ups
|
|
|
Debt
|
|
|
|
(Dollars in millions)
|
|
|
Beginning balance as of January 1, 2008
|
|
$
|
18,508
|
|
|
$
|
20,920
|
|
|
$
|
161
|
|
|
$
|
1,568
|
|
|
$
|
(7,888
|
)
|
Realized/unrealized gains (losses) included in net loss
|
|
|
(443
|
)
|
|
|
(97
|
)
|
|
|
(8
|
)
|
|
|
201
|
|
|
|
6
|
|
Unrealized gains included in other comprehensive loss
|
|
|
|
|
|
|
(1,081
|
)
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Purchases, sales, issuances, and settlements, net
|
|
|
(2,400
|
)
|
|
|
(1,829
|
)
|
|
|
(92
|
)
|
|
|
168
|
|
|
|
4,375
|
|
Transfers in/out of level 3,
net(3)
|
|
|
(1,340
|
)
|
|
|
22,120
|
|
|
|
102
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance as of June 30, 2008
|
|
$
|
14,325
|
|
|
$
|
40,033
|
|
|
$
|
163
|
|
|
$
|
1,947
|
|
|
$
|
(3,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) included in net loss related to
assets and liabilities still held as of June 30,
2008(2)
|
|
$
|
(168
|
)
|
|
$
|
|
|
|
$
|
(45
|
)
|
|
$
|
208
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The net transfers to level 2
from level 3 are due to improvements in pricing
transparency from recent transactions, which provided some
convergence in prices obtained by third party vendors for
certain products, including private-label securities backed by
non-fixed rate Alt-A securities.
|
|
(2) |
|
Amount represents temporary changes
in fair value. Amortization, accretion and
other-than-temporary
impairments are not considered unrealized and are not included
in this amount.
|
|
(3) |
|
During the three and six months
ended June 30, 2008, transfers into level 3 consisted
primarily of private-label mortgage-related securities backed by
Alt-A and subprime mortgage loans.
|
184
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
The following tables display gains and losses (realized and
unrealized) recorded in our condensed consolidated statement of
operations for the three and six months ended June 30, 2009
and 2008, for assets and liabilities transferred into
level 3 and measured in our condensed consolidated balance
sheets at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
|
|
Trading
|
|
|
Available-for-sale
|
|
|
Trading
|
|
|
Available-for-sale
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
(Dollars in millions)
|
|
|
Realized and unrealized losses included in net loss
|
|
$
|
6
|
|
|
$
|
328
|
|
|
$
|
(2
|
)
|
|
$
|
131
|
|
Unrealized gains included in other comprehensive loss
|
|
|
|
|
|
|
(235
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses)
|
|
$
|
6
|
|
|
$
|
93
|
|
|
$
|
(2
|
)
|
|
$
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of level 3 transfers in
|
|
$
|
129
|
|
|
$
|
3,260
|
|
|
$
|
365
|
|
|
$
|
4,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
Trading
|
|
|
Available-for-sale
|
|
|
Trading
|
|
|
Available-for-sale
|
|
|
Net
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
Derivtives
|
|
|
|
(Dollars in millions)
|
|
|
Realized and unrealized gains (losses) included in net loss
|
|
$
|
(19
|
)
|
|
$
|
(208
|
)
|
|
$
|
(179
|
)
|
|
$
|
(219
|
)
|
|
$
|
13
|
|
Unrealized losses included in other comprehensive loss
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
(2,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses)
|
|
$
|
(19
|
)
|
|
$
|
(282
|
)
|
|
$
|
(179
|
)
|
|
$
|
(2,468
|
)
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of level 3 transfers in
|
|
$
|
1,842
|
|
|
$
|
11,764
|
|
|
$
|
5,661
|
|
|
$
|
30,043
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables display pre-tax gains and losses (realized
and unrealized) included in our condensed consolidated
statements of operations for the three and six months ended
June 30, 2009 and 2008, for our level 3 assets and
liabilities measured in our condensed consolidated balance
sheets at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2009
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Income
|
|
|
Guaranty
|
|
|
Investment
|
|
|
Fair Value
|
|
|
than
|
|
|
|
|
|
|
Investment in
|
|
|
Fee
|
|
|
Gains
|
|
|
Gains
|
|
|
Temporary
|
|
|
|
|
|
|
Securities
|
|
|
Income
|
|
|
(Losses), Net
|
|
|
(Losses), net
|
|
|
Impairments
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Total realized and unrealized gains (losses) included in net
loss as of June 30, 2009
|
|
$
|
55
|
|
|
$
|
157
|
|
|
$
|
(249
|
)
|
|
$
|
97
|
|
|
$
|
(605
|
)
|
|
$
|
(545
|
)
|
Net unrealized gains (losses) related to level 3 assets and
liabilities still held as of June 30, 2009
|
|
$
|
|
|
|
$
|
115
|
|
|
$
|
|
|
|
$
|
146
|
|
|
$
|
|
|
|
$
|
261
|
|
185
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2009
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Other
|
|
|
|
|
|
|
Income
|
|
|
Guaranty
|
|
|
Investment
|
|
|
Gains
|
|
|
than
|
|
|
|
|
|
|
Investment in
|
|
|
Fee
|
|
|
Gains
|
|
|
(Losses),
|
|
|
Temporary
|
|
|
|
|
|
|
Securities
|
|
|
Income
|
|
|
(Losses), Net
|
|
|
net
|
|
|
Impairments
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Total realized and unrealized gains (losses) included in net
loss as of June 30, 2009
|
|
$
|
390
|
|
|
$
|
(51
|
)
|
|
$
|
(1
|
)
|
|
$
|
(12
|
)
|
|
$
|
(4,887
|
)
|
|
$
|
(4,561
|
)
|
Net unrealized gains (losses) related to level 3 assets and
liabilities still held as of June 30, 2009
|
|
$
|
|
|
|
$
|
159
|
|
|
$
|
|
|
|
$
|
121
|
|
|
$
|
|
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2008
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Income
|
|
|
Guaranty
|
|
|
Investment
|
|
|
Value Gains
|
|
|
|
|
|
|
Investment in
|
|
|
Fee
|
|
|
Gains (Losses),
|
|
|
(Losses),
|
|
|
|
|
|
|
Securities
|
|
|
Income
|
|
|
Net
|
|
|
net
|
|
|
Total
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses) included in net
loss as of June 30, 2008
|
|
$
|
(1
|
)
|
|
$
|
82
|
|
|
$
|
(11
|
)
|
|
$
|
288
|
|
|
$
|
358
|
|
Net unrealized gains (losses) related to level 3 assets and
liabilities still held as of June 30, 2008
|
|
$
|
|
|
|
$
|
149
|
|
|
$
|
|
|
|
$
|
289
|
|
|
$
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2008
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Income
|
|
|
Guaranty
|
|
|
Investment
|
|
|
Value Gains
|
|
|
|
|
|
|
Investment in
|
|
|
Fee
|
|
|
Gains (Losses),
|
|
|
(Losses),
|
|
|
|
|
|
|
Securities
|
|
|
Income
|
|
|
Net
|
|
|
net
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Total realized and unrealized gains (losses) included in net
loss as of June 30, 2008
|
|
$
|
(5
|
)
|
|
$
|
12
|
|
|
$
|
88
|
|
|
$
|
(436
|
)
|
|
$
|
(341
|
)
|
Net unrealized gains (losses) related to level 3 assets and
liabilities still held as of June 30, 2008
|
|
$
|
|
|
|
$
|
208
|
|
|
$
|
|
|
|
$
|
(165
|
)
|
|
$
|
43
|
|
186
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Non-recurring
Change in Fair Value
The following tables display assets and liabilities measured at
fair value on a non-recurring basis; that is, the instruments
are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for
example, when we evaluate for impairment), and the gains or
losses recognized for these assets and liabilities for the three
and six months ended June 30, 2009 and 2008, as a result of
fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Fair Value Measurements
|
|
|
Ended
|
|
|
Ended
|
|
|
|
As of June 30, 2009
|
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Estimated
|
|
|
Total Gains
|
|
|
Total Gains
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
(Losses)
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale, at lower of cost or fair value
|
|
$
|
|
|
|
$
|
14,828
|
|
|
$
|
2,409
|
|
|
$
|
17,237
|
(1)
|
|
$
|
(359
|
)
|
|
$
|
(564
|
)
|
Mortgage loans held for investment, at amortized cost
|
|
|
|
|
|
|
330
|
|
|
|
2,364
|
|
|
|
2,694
|
(2)
|
|
|
(478
|
)
|
|
|
(534
|
)
|
Acquired property, net
|
|
|
|
|
|
|
|
|
|
|
8,769
|
|
|
|
8,769
|
(3)
|
|
|
49
|
|
|
|
(289
|
)
|
Guaranty assets
|
|
|
|
|
|
|
|
|
|
|
1,882
|
|
|
|
1,882
|
|
|
|
(47
|
)
|
|
|
(183
|
)
|
Master servicing assets
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
|
280
|
|
|
|
(256
|
)
|
|
|
(395
|
)
|
Partnership investments
|
|
|
|
|
|
|
|
|
|
|
4,808
|
|
|
|
4,808
|
|
|
|
(302
|
)
|
|
|
(449
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
|
|
|
$
|
15,158
|
|
|
$
|
20,512
|
|
|
$
|
35,670
|
|
|
$
|
(1,393
|
)
|
|
$
|
(2,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master servicing liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
2
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
2
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Fair Value Measurements
|
|
|
Ended
|
|
|
Ended
|
|
|
|
As of June 30, 2008
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Estimated
|
|
|
Total
|
|
|
Total
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Losses
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale, at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
lower of cost or fair value
|
|
$
|
|
|
|
$
|
13,524
|
|
|
$
|
812
|
|
|
$
|
14,336
|
(1)
|
|
$
|
(240
|
)
|
|
$
|
(315
|
)
|
Mortgage loans held for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment, at amortized cost
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
257
|
(2)
|
|
|
(21
|
)
|
|
|
(35
|
)
|
Acquired property, net
|
|
|
|
|
|
|
|
|
|
|
3,832
|
|
|
|
3,832
|
(3)
|
|
|
(271
|
)
|
|
|
(479
|
)
|
Guaranty assets
|
|
|
|
|
|
|
|
|
|
|
3,480
|
|
|
|
3,480
|
|
|
|
(31
|
)
|
|
|
(300
|
)
|
Master servicing assets
|
|
|
|
|
|
|
|
|
|
|
615
|
|
|
|
615
|
|
|
|
(88
|
)
|
|
|
(262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
|
|
|
$
|
13,524
|
|
|
$
|
8,996
|
|
|
$
|
22,520
|
|
|
$
|
(651
|
)
|
|
$
|
(1,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master servicing liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $14.2 billion and
$10.4 billion of mortgage loans held for sale that were
sold, retained as a mortgage-related security or redesignated to
mortgage loans held for investment as of June 30, 2009 and
2008, respectively.
|
|
(2) |
|
Includes $465 million and
$247 million of mortgage loans held for investment that
were liquidated or transferred to foreclosed properties as of
June 30, 2009 and 2008, respectively.
|
|
(3) |
|
Includes $4.1 billion and
$1.5 billion of foreclosed properties that were sold as of
June 30, 2009 and 2008, respectively.
|
|
(4) |
|
Represents impairment charge
related to LIHTC partnerships and other equity investments in
multifamily properties as of June 30, 2009.
|
Valuation
Classification
The following is a description of the fair value techniques used
for instruments measured at fair value under SFAS 157 as
well as the general classification of such instruments pursuant
to the valuation hierarchy described above under SFAS 157.
Trading Securities and
Available-for-Sale
SecuritiesFair value is determined using quoted market
prices in active markets for identical assets, when available.
Securities, such as U.S. Treasuries, whose value is based
on quoted market prices in active markets for identical assets
are classified as level 1. If quoted market prices in
active markets for identical assets are not available, we use
quoted market prices in active markets for similar securities
that we adjust for observable or corroborated pricing services
market information. A significant amount of the population is
valued using prices provided by four pricing services for
identical assets. In the absence of observable or corroborated
market data, we use internally developed estimates,
incorporating
188
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
market-based assumptions wherever such information is available.
The fair values are estimated by using pricing models, quoted
prices of securities with similar characteristics, or discounted
cash flows. Such instruments may generally be classified within
level 2 of the valuation hierarchy. Where there is limited
activity or less transparency around inputs to the valuation,
securities are classified as level 3.
Mortgage Loans Held for SaleIncludes loans where
fair value is determined on a pool level, loan level or product
and interest rate basis. Level 2 inputs include MBS values.
Level 3 inputs include MBS values where price is influenced
significantly by extrapolation from observable market data,
products in inactive markets or unobservable inputs.
Mortgage Loans Held for InvestmentRepresents
individually impaired loans, classified as level 3, where
fair value is less than carrying value. Includes modified and
delinquent loans acquired from MBS trusts under
SOP 03-3.
Valuations are based on indicative dealer prices and
level 3 inputs include the estimated value of primary
mortgage insurance on loans that have coverage.
Acquired Property, NetIncludes foreclosed property
received in full satisfaction of a loan. The fair value of our
foreclosed properties is determined by third-party appraisals,
when available. When third-party appraisals are not available,
we estimate fair value based on factors such as prices for
similar properties in similar geographical areas
and/or
assessment through observation of such properties. Our acquired
property is classified within level 3 of the valuation
hierarchy because significant inputs are unobservable.
Derivatives Assets and Liabilities (collectively,
Derivatives)The valuation of risk
management derivatives uses observable market data provided by
third-party sources where available, resulting in level 2
classification. Certain highly complex derivatives use only a
single source of price information due to lack of transparency
in the market and may be modeled using significant assumptions,
resulting in level 3 classification. Mortgage commitment
derivatives use observable market data, quotes and actual
transaction levels adjusted for market movement and are
typically classified as level 2. Adjustments for market
movement that require internal model results and cannot be
corroborated by observable market data are classified as
level 3.
Guaranty Assets and
Buy-upsGuaranty
assets related to our portfolio securitizations are measured at
fair value on a recurring basis and are classified within
level 3 of the valuation hierarchy. Guaranty assets in a
lender swap transactions that are impaired under
EITF 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interest and Beneficial Interests That Continue to Be
Held by a Transferor in Securitized Financial Assets are
measured at fair value on a non-recurring basis and are
classified within level 3 of the fair value hierarchy. As
described above, level 3 inputs include managements
best estimate of certain key assumptions.
Master Servicing Assets and LiabilitiesWe value our
master servicing assets and liabilities based on the present
value of expected cash flows of the underlying mortgage assets
using managements best estimates of certain key
assumptions, which include prepayment speeds, forward yield
curves, adequate compensation, and discount rates commensurate
with the risks involved. Changes in anticipated prepayment
speeds, in particular, result in fluctuations in the estimated
fair values of our master servicing assets and liabilities. If
actual prepayment experience differs from the anticipated rates
used in our model, this difference may result in a material
change in the fair value. Our master servicing assets and
liabilities are classified within level 3 of the valuation
hierarchy.
Partnership InvestmentsOur investments in LIHTC
partnerships trade in a market with limited observable
transactions. We determine fair value based on internal models
designed to estimate the present value of expected future tax
benefits (tax credits and tax deductions for net operating
losses) of the underlying operating properties using
managements assumptions about significant inputs,
including discount rates and projections related to the amount
and timing of tax benefits, used by market participants. We
compare the
189
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
model results to the limited number of observed market
transactions and make adjustments to reflect differences between
the risk profiles of the LIHTC investments and that of the
observed market transactions. Our equity investments in LIHTC
limited partnerships are classified within the level 3
hierarchy of fair value measurement.
Short-Term Debt and Long-Term DebtThe majority of
our debt instruments are priced using pricing services. When
third-party pricing is not available on non-callable debt, we
use a discounted cash flow approach based on the Fannie Mae
yield curve with an adjustment to reflect fair values at the
offer side of the market. When third-party pricing is not
available for callable bonds, we use internally-developed models
calibrated to market to price these bonds. Included within
short-term debt and long-term debt are structured notes for
which we elected the fair value option under
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). To estimate the fair value of
structured notes, cash flows are evaluated taking into
consideration any derivatives through which we have swapped out
of the structured features of the notes. Where the inputs into
the valuation are primarily based upon observable market data,
our debt is classified within level 2 of the valuation
hierarchy. Where significant inputs are unobservable or valued
with a quote from a single source, our debt is classified within
level 3 of the valuation hierarchy.
Other LiabilitiesRepresents dollar roll repurchase
transactions that reflect prices for similar securities in the
market. Valuations are based on observable market-based inputs,
quoted market prices and actual transaction levels adjusted for
market movement and are typically classified as level 2.
Adjustments for market movement that require internal model
results that cannot be corroborated by observable market data
are classified as level 3.
Fair
Value Option
SFAS 159 allows companies the irrevocable option to elect
fair value for the initial and subsequent measurement for
certain financial assets and liabilities, and requires that the
difference between the carrying value before election of the
fair value option and the fair value of these instruments be
recorded as an adjustment to beginning retained earnings in the
period of adoption on a
contract-by-contract
basis.
Elections
The following is a discussion of the primary financial
instruments for which we made fair value elections and the basis
for those elections.
Non-mortgage-related
securities
We elected the fair value option for all non-mortgage-related
securities, as these securities are held primarily for liquidity
risk management purposes. The fair value of these instruments
reflects the most transparent basis of reporting. Instruments
which were held at adoption had an aggregate fair value of
$10.7 billion and $16.5 billion as of June 30,
2009 and December 31, 2008, respectively.
Prior to the adoption of SFAS 159, these available-for-sale
securities were recorded at fair value in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS 115), with
changes in fair value recorded in AOCI. Following the election
of the fair value option, these securities were reclassified to
Trading securities in our condensed consolidated
balance sheet and are now recorded at fair value with subsequent
changes in fair value recorded in Fair value losses,
net in our condensed consolidated statements of operations.
190
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Mortgage-related
securities
We elected the fair value option for certain
15-year and
30-year
agency mortgage-related securities that were previously
classified as available-for-sale securities in our mortgage
portfolio. These securities were selected for the fair value
option primarily in order to reduce the volatility in earnings
that results from accounting asymmetry between our derivatives
that are accounted for at fair value through earnings and our
available-for-sale securities that are accounted for at fair
value through AOCI. Instruments which were held at adoption had
an aggregate fair value of $14.8 billion and
$16.4 billion as of June 30, 2009 and
December 31, 2008, respectively.
Prior to the adoption of SFAS 159, these available-for-sale
securities were recorded at fair value in accordance with
SFAS 115 with changes recorded in AOCI. Following the
election of the fair value option, these securities were
reclassified to Trading securities in our condensed
consolidated balance sheet and are now recorded at fair value
with subsequent changes in fair value recorded in Fair
value losses, net in our condensed consolidated statements
of operations.
Structured
debt instruments
We elected the fair value option for short-term and long-term
structured debt instruments that are issued in response to
specific investor demand and have interest rates that are based
on a calculated index or formula and that are economically
hedged with derivatives at the time of issuance. By electing the
fair value option for these instruments, we are able to
eliminate the volatility in our results of operations that would
otherwise result from the accounting asymmetry created by the
accounting for these structured debt instruments at cost while
accounting for the related derivatives at fair value.
As of June 30, 2009, these instruments had both an
aggregate fair value and unpaid principal balance of
$22.4 billion recorded in Long-term debt, in
our condensed consolidated balance sheet. There were no
outstanding short-term structured debt instruments elected under
the fair value option remaining as of June 30, 2009.
As of December 31, 2008, these instruments had both an
aggregate fair value and unpaid principal balance of
$4.5 billion recorded in Short-term debt, and
an aggregate fair value and unpaid principal balance of
$21.6 billion and $21.5 billion, respectively,
recorded in Long-term debt, in our condensed
consolidated balance sheet.
Following the election of the fair value option, these debt
instruments are recorded at fair value with subsequent changes
in fair value recorded in Fair value losses, net.
These structured debt instruments continue to be classified as
either Short-term debt or Long-term debt
in our condensed consolidated balance sheets based on their
original maturities. Interest accrued on these short-term and
long-term debt instruments continues to be recorded in
Interest expense in our condensed consolidated
statements of operations.
Changes
in Fair Value under the Fair Value Option Election
The following tables display debt fair value losses, net,
including changes attributable to instrument-specific credit
risk. Amounts are recorded as a component of Fair value
losses, net in our condensed consolidated
191
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
statements of operations for the three and six months ended
June 30, 2009 and 2008 for which the fair value election
was made.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total Gains
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total Gains
|
|
|
|
Debt
|
|
|
Debt
|
|
|
(Losses)
|
|
|
Debt
|
|
|
Debt
|
|
|
(Losses)
|
|
|
|
(Dollars in millions)
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Changes in instrument-specific credit risk
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
(3
|
)
|
|
$
|
(29
|
)
|
|
$
|
(32
|
)
|
Other changes in fair value
|
|
|
|
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
4
|
|
|
|
32
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt fair value gains (losses), net
|
|
$
|
|
|
|
$
|
(32
|
)
|
|
$
|
(32
|
)
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total Gains
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total Gains
|
|
|
|
Debt
|
|
|
Debt
|
|
|
(Losses)
|
|
|
Debt
|
|
|
Debt
|
|
|
(Losses)
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Changes in instrument-specific credit risk
|
|
$
|
|
|
|
$
|
32
|
|
|
$
|
32
|
|
|
$
|
5
|
|
|
$
|
63
|
|
|
$
|
68
|
|
Other changes in fair value
|
|
|
|
|
|
|
(40
|
)
|
|
|
(40
|
)
|
|
|
(6
|
)
|
|
|
(48
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt fair value gains (losses), net
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
(8
|
)
|
|
$
|
(1
|
)
|
|
$
|
15
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In determining the instrument-specific risk, the changes in
Fannie Mae debt spreads to LIBOR that occurred during the period
were taken into consideration with the overall change in the
fair value of the debt for which we elected the fair value
option under SFAS 159. Specifically, cash flows are
evaluated taking into consideration any derivatives through
which Fannie Mae has swapped out of the structured features of
the notes and thus created a floating rate LIBOR-based debt
instrument. The change in value of these LIBOR-based cash flows
based on the Fannie Mae yield curve at the beginning and end of
the period represents the instrument-specific risk.
|
|
19.
|
Commitments
and Contingencies
|
Legal
Contingencies
We are party to various types of legal proceedings. Litigation
claims and proceedings of all types are subject to many
uncertain factors that generally cannot be predicted with
assurance. The following describes our material legal
proceedings, investigations and other matters. An unfavorable
outcome in certain of these legal proceedings could have a
material adverse effect on our business, financial condition,
results of operations, cash flows, and net worth. In view of the
inherent difficulty of predicting the outcome of these
proceedings, we cannot state with confidence what the eventual
outcome of the pending matters will be and we may ultimately pay
amounts that differ materially from our estimates. Reserves are
established for legal claims when losses associated with the
claims become probable and the amounts can be reasonably
estimated. In the first quarter of 2009, we recorded a reserve
for legal claims related to matters for which we were able to
determine a loss was probable and reasonably estimable. We did
not record any additional reserves for such matters in the
second quarter of 2009. For all other pending matters, we have
concluded that a loss was not both probable and reasonably
estimable as of August 6, 2009; therefore, we have not
recorded a reserve for those matters. With respect to the
lawsuits described below, whether or not we have recorded a
reserve, we believe we have valid defenses to the claims in
these lawsuits and intend to defend these lawsuits vigorously.
192
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
In addition to the matters specifically described herein, we are
involved in a number of legal and regulatory proceedings that
arise in the ordinary course of business that we do not expect
will have a material impact on our business.
During 2009 and 2008, we advanced fees and expenses of certain
current and former officers and directors in connection with
various legal proceedings pursuant to indemnification
agreements. None of these amounts was material.
Securities
Class Action Lawsuits
In re
Fannie Mae Securities Litigation
Beginning on September 23, 2004, 13 separate complaints
were filed by holders of certain of our securities against us,
as well as certain of our former officers, in three federal
district courts. All of the cases were consolidated
and/or
transferred to the U.S. District Court for the District of
Columbia. The court entered an order naming the Ohio Public
Employees Retirement System and State Teachers Retirement System
of Ohio as lead plaintiffs. The lead plaintiffs filed a
consolidated complaint on March 4, 2005 against us and
certain of our former officers, which complaint was subsequently
amended on April 17, 2006 and on August 14, 2006. The
lead plaintiffs second amended complaint added KPMG LLP
and Goldman, Sachs & Co. as additional defendants. The
lead plaintiffs allege that the defendants made materially false
and misleading statements in violation of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and SEC
Rule 10b-5
promulgated thereunder, largely with respect to accounting
statements that were inconsistent with the GAAP requirements
relating to hedge accounting and the amortization of premiums
and discounts. The lead plaintiffs contend that the alleged
fraud resulted in artificially inflated prices for our common
stock and seek unspecified compensatory damages, attorneys
fees, and other fees and costs.
On January 7, 2008, the court issued an order that
certified the action as a class action, and appointed the lead
plaintiffs as class representatives and their counsel as lead
counsel. The court defined the class as all purchasers of Fannie
Mae common stock and call options and all sellers of publicly
traded Fannie Mae put options during the period from
April 17, 2001 through December 22, 2004.
On April 16, 2007, KPMG LLP, our former outside auditor and
a co-defendant in the shareholder class action suit, filed
cross-claims against us in this action for breach of contract,
fraudulent misrepresentation, fraudulent inducement, negligent
misrepresentation and contribution. KPMG amended these
cross-claims on February 25, 2008. KPMG is seeking
unspecified compensatory, consequential, restitutionary,
rescissory and punitive damages, including purported damages
related to legal costs, exposure to legal liability, costs and
expenses of responding to investigations related to our
accounting, lost fees, attorneys fees, costs and expenses.
On October 17, 2008, FHFA, as conservator for Fannie Mae,
intervened in the consolidated shareholder class action.
In re
Fannie Mae 2008 Securities Litigation
Beginning on August 7, 2008, a series of shareholder
lawsuits were filed against underwriters of issuances of certain
Fannie Mae common and preferred stock. Several of these lawsuits
were also filed against us
and/or
against certain current and former Fannie Mae officers and
directors. Most of these lawsuits were filed in the
U.S. District Court for the Southern District of New York.
While the factual allegations in these cases vary to some
degree, these plaintiffs generally allege that defendants misled
investors by understating the companys need for capital,
causing putative class members to purchase shares at
artificially inflated prices. The various complaints allege
violations of Section 12(a)(2) of the Securities Act of
1933 and/or
violations of Sections 10(b) (and
Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934
193
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
and seek various forms of relief, including rescission, damages,
interest, costs, attorneys and experts fees, and
other equitable and injunctive relief.
On February 11, 2009, the Judicial Panel on Multidistrict
Litigation granted our motion to transfer and coordinate each of
the actions filed outside the U.S. District Court for the
Southern District of New York with the other recently filed
section 10(b) and section 12(a)(2) actions filed in
that court and the ERISA actions filed in the U.S. District
Court for the District of Columbia. As a result, the following
cases reported individually in our 2008
Form 10-K
were transferred to the U.S. District Court for the
Southern District of New York for coordinated or consolidated
pretrial proceedings: Krausz v. Fannie Mae, et al.;
Kramer v. Fannie Mae, et al.; Genovese v. Ashley, et
al.; Gordon v. Ashley, et al.; Crisafi v. Merrill
Lynch, et al.; Fogel Capital Mgmt. v. Fannie Mae, et al.;
Jesteadt v. Ashley, et al.; Sandman v.
J.P. Morgan Securities, Inc., et al.; Frankfurt v.
Lehman Bros., Inc., et al.; Schweitzer v. Merrill Lynch, et
al.; Williams v. Ashley, et al.; and Jarmain v.
Merrill Lynch, et al.
On April 16, 2009, the district court entered an order
consolidating all of the section 10(b) and
section 12(a)(2) actions; appointing Tennessee Consolidated
Retirement System as lead plaintiff on behalf of purchasers of
preferred stock; and appointing the Massachusetts Pension
Reserves Investment Management Board and the Boston Retirement
Board as lead plaintiffs on behalf of common stockholders. The
consolidation order further provided that all individual
complaints would be dismissed ten business days after the filing
of an amended consolidated complaint unless a plaintiff that
initially filed a complaint shows cause before then why their
individual complaint should not be dismissed. On May 19,
2009, the U.S. Court of Appeals for the Second Circuit
denied Horizon Asset Management, Inc.s petition for a writ
of mandamus seeking to be named lead plaintiff on behalf of the
common stockholders.
On June 22, 2009, the lead plaintiffs filed a joint
consolidated complaint. The new complaint alleges violations of
Sections 12(a)(2) and 15 of the Securities Act of 1933 and
violations of Sections 10(b) (and
Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934 and seeks various forms of relief, including rescission,
damages, interest, costs, attorneys and experts
fees, and other equitable and injunctive relief. The complaint
asserts Securities Act claims against Fannie Mae, certain
current and former Fannie Mae officers, Banc of America
Securities, Barclays Capital, Bear Stearns, Citigroup,
Deutsche Bank, E*Trade Securities, Goldman
Sachs & Co., J.P. Morgan, Merrill Lynch, Morgan
Stanley, UBS, Wachovia Capital, Wachovia Securities, and Wells
Fargo. The complaint also asserts Securities Exchange Act claims
against Fannie Mae, certain former Fannie Mae officers and
Deloitte & Touche.
On July 2, 2009, plaintiff Malka Krausz filed a motion for
relief from the district courts April 16, 2009
consolidation order requiring the dismissal of her individual
complaint. Lead plaintiffs and the defendants have filed
oppositions to this motion.
On July 13, 2009, we and the other defendants against whom
the Securities Act claims were asserted filed a motion to
dismiss those claims.
On August 5, 2009, plaintiff Daniel Kramer filed a motion
to remand his individual complaint back to state court.
Comprehensive
Investment Services v. Mudd, et al.
On May 13, 2009, Comprehensive Investment Services, Inc.
filed an individual securities action against certain former
Fannie Mae officers and directors, Merrill Lynch, Citigroup,
Morgan Stanley, UBS, and Wachovia Capital Markets in the
Southern District of Texas. Plaintiff alleges violations of
Section 12(a)(2) of the Securities Act of 1933; violation
of § 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5
promulgated thereunder; violation of § 20(a) of the
Securities Exchange Act of 1934; and violations of the
194
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Texas Business and Commerce Code, common law fraud, and
negligent misrepresentation in connection with Fannie Maes
May 2008 $2 billion offering of 8.25% non-cumulative
preferred Series T stock. The complaint seeks various forms
of relief, including rescission, damages, interest, costs,
attorneys and experts fees, and other equitable and
injunctive relief. On May 15, 2009, we filed a Notice of
Potential Tag-Along Action with the Judicial Panel on
Multidistrict Litigation. The Panel issued a conditional
transfer order on June 17, 2009, plaintiff did not oppose
and this case was transferred to the Southern District of New
York on July 7, 2009.
ERISA
Actions
In re Fannie Mae ERISA Litigation (formerly David
Gwyer v. Fannie Mae)
On October 14, 2004, David Gwyer filed a proposed class
action complaint in the U.S. District Court for the
District of Columbia. Two additional proposed class action
complaints were filed by other plaintiffs on May 5, 2005
and May 10, 2005. These cases are based on the Employee
Retirement Income Security Act of 1974 (ERISA) and
name us, our Board of Directors Compensation Committee and
certain of our former and current officers and directors as
defendants. These cases were consolidated on May 24, 2005
in the U.S. District Court for the District of Columbia and
a consolidated complaint was filed on June 16, 2005. The
plaintiffs in this consolidated ERISA-based lawsuit purport to
represent a class of participants in our Employee Stock
Ownership Plan (ESOP) between January 1, 2001
and the present. Their claims are based on alleged breaches of
fiduciary duty relating to accounting matters. The plaintiffs
seek unspecified damages, attorneys fees, and other fees
and costs, and other injunctive and equitable relief.
On October 17, 2008, FHFA, as conservator for Fannie Mae,
intervened in this case.
Gwyer v.
Fannie Mae Compensation Committee, et al. (Gwyer II);
Moore v. Fannie Mae, et al.
On October 23, 2008, Mary P. Moore filed a proposed class
action complaint in the U.S. District Court for the
District of Columbia against our Board of Directors
Compensation Committee, our Benefits Plans Committee, and
certain current and former Fannie Mae officers and directors.
Similarly, on November 25, 2008, David Gwyer filed a nearly
identical lawsuit in that same court. Both cases are based on
ERISA. Plaintiffs allege that defendants, as fiduciaries of
Fannie Maes ESOP, breached their duties to ESOP
participants and beneficiaries with regards to the ESOPs
investment in Fannie Mae common stock when it was no longer
prudent to continue to do so. Plaintiffs purport to represent a
class of participants and beneficiaries of the ESOP whose
accounts invested in Fannie Mae common stock beginning
April 17, 2007. The complaints allege that the defendants
breached purported fiduciary duties with respect to the ESOP.
The plaintiffs seek unspecified damages, attorneys fees,
and other fees and costs and injunctive and other equitable
relief.
On February 11, 2009, the Judicial Panel of Multidistrict
Litigation entered an order transferring the Moore case
to the U.S. District Court for the Southern District of New
York for coordinated or consolidated pretrial proceedings with
the other recently filed section 10(b) and
section 12(a)(2) suits. Similarly, on March 10, 2009,
the Panel transferred the Gwyer II case to the
U.S. District Court for the Southern District of New York.
On May 15, 2009, the Court granted plaintiffs motion
for consolidation of their cases, for appointment on an interim
basis of co-lead counsel, and for leave to file an amended
consolidated complaint.
Antitrust
Lawsuits
In re
G-Fees Antitrust Litigation
Since January 18, 2005, we have been served with 11
proposed class action complaints filed by single-family
borrowers that allege that we and Freddie Mac violated federal
and state antitrust and consumer protection
195
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
statutes by agreeing to artificially fix, raise, maintain or
stabilize the price of our and Freddie Macs guaranty fees.
The actions were consolidated in the U.S. District Court
for the District of Columbia. Plaintiffs filed a consolidated
amended complaint on August 5, 2005. Plaintiffs in the
consolidated action seek to represent a class of consumers whose
loans allegedly contain a guarantee fee set by us or
Freddie Mac between January 1, 2001 and the present. The
plaintiffs seek unspecified damages, treble damages, punitive
damages, and declaratory and injunctive relief, as well as
attorneys fees and costs.
On June 26, 2009, the parties filed a Stipulation of
Dismissal and the Court issued an order dismissing the case
without prejudice.
Fees
Litigation
Okrem v.
Fannie Mae, et al.
A complaint was filed on January 2, 2009 against us,
Washington Mutual, FSB, the law firm of Zucker,
Goldberg & Ackerman and other unnamed parties in the
U.S. District Court for the District of New Jersey, in
which plaintiffs purport to represent a class of borrowers who
had home loans that were foreclosed upon and were either held or
serviced by Fannie Mae or Washington Mutual and were charged
attorneys fees and other costs, which they contend were in
excess of amounts actually incurred
and/or in
excess of the amount permitted by law. An amended complaint was
filed on February 1, 2009, which made some technical
amendments and substituted Washington Mutual Bank for Washington
Mutual, FSB. Plaintiffs contend that the defendants were engaged
in a scheme to overcharge defaulting borrowers of residential
mortgages. The amended complaint contains claims under theories
of breach of contract, negligence, breach of duty of good faith
and fair dealing, unjust enrichment, unfair and deceptive acts
or practices, violations of the New Jersey Consumer Fraud Act,
violations of New Jersey state court rules, and violations of
the New Jersey
Truth-In-Consumer
Contract, Warranty and Notice Act. The plaintiffs seek
$15 million in damages as well as punitive, exemplary,
enhanced and treble damages, restitution, disgorgement, certain
equitable relief and their fees and costs. A second amended
complaint was filed on June 19, 2009, adding an additional
defendant, the law firm of Brice, Vander, Linden &
Wernick. On July 2, 2009, the court struck the second
amended complaint for filing without leave. On July 30,
2009, we filed a motion to dismiss the first amended complaint.
Former
CFO Arbitration
On July 8, 2008, our former Chief Financial Officer and
Vice Chairman, J. Timothy Howard, initiated an arbitration
proceeding against Fannie Mae before a Federal Arbitration, Inc.
panelist. Mr. Howard claimed that he was entitled to salary
continuation under his employment agreement because, in December
2004, he allegedly terminated his employment with Fannie Mae for
Good Reason, as defined in his employment agreement,
effective January 31, 2005. The parties stipulated that
should Mr. Howard prevail on his salary continuation claim,
the damages awarded on that claim would be approximately
$1.7 million plus any interest deemed appropriate by the
arbitrator under applicable law. On December 11, 2008, the
arbitrator ruled in favor of Mr. Howard, and awarded him
the stipulated amount with interest from the date of the award.
On January 23, 2009, Fannie Mae filed a counterclaim
seeking recovery of Mr. Howards 2003 annual incentive
plan bonus of approximately $1.2 million plus prejudgment
interest. On February 5, 2009, the arbitrator issued an
order granting Mr. Howard prejudgment interest on the
award. On April 21, 2009, the arbitrator issued an order
dismissing Fannie Maes counterclaim.
196
FANNIE
MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(UNAUDITED)
Investigation
by the Securities and Exchange Commission
On September 26, 2008, we received notice of an ongoing
investigation into Fannie Mae by the SEC regarding certain
accounting and disclosure matters. On January 8, 2009, the
SEC issued a formal order of investigation. We are cooperating
fully with this investigation.
Investigation
by the Department of Justice
On September 26, 2008, we received notice of an ongoing
federal investigation by the U.S. Attorney for the Southern
District of New York into certain accounting, disclosure and
corporate governance matters. In connection with that
investigation, Fannie Mae received a Grand Jury subpoena for
documents. That subpoena was subsequently withdrawn. However, we
have been informed that the Department of Justice is continuing
an investigation. We are cooperating fully with this
investigation.
Escrow
Litigation
Casa Orlando Apartments, Ltd., et al. v. Federal
National Mortgage Association (formerly known as Medlock
Southwest Management Corp., et al. v. Federal National
Mortgage Association)
A complaint was filed against us in the U.S. District Court
for the Eastern District of Texas (Texarkana Division) on
June 2, 2004, in which plaintiffs purport to represent a
class of multifamily borrowers whose mortgages are insured under
Sections 221(d)(3), 236 and other sections of the National
Housing Act and are held or serviced by us. The complaint
identified as a proposed class low- and moderate-income
apartment building developers who maintained uninvested escrow
accounts with us or our servicer. Plaintiffs Casa Orlando
Apartments, Ltd., Jasper Housing Development Company and the
Porkolab Family Trust No. 1 allege that we violated
fiduciary obligations that they contend we owed to borrowers
with respect to certain escrow accounts and that we were
unjustly enriched. In particular, plaintiffs contend that,
starting in 1969, we misused these escrow funds and are
therefore liable for any economic benefit we received from the
use of these funds. The plaintiffs seek a return of any profits,
with accrued interest, earned by us related to the escrow
accounts at issue, as well as attorneys fees and costs.
Our motions to dismiss and for summary judgment with respect to
the statute of limitations were denied. Plaintiffs filed an
amended complaint on December 16, 2005. On July 13,
2009, the Court denied plaintiffs motion for class
certification. On July 27, 2009, plaintiffs filed a
petition for permission to appeal the Courts order.
197
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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Quantitative and qualitative disclosure about market risk is set
forth in
Part IItem 2MD&ARisk
ManagementInterest Rate Risk Management and Other Market
Risks.
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Item 4.
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Controls
and Procedures
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OVERVIEW
We are required under applicable laws and regulations to
maintain controls and procedures, which include disclosure
controls and procedures as well as internal control over
financial reporting, as further described below.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Disclosure controls and procedures refer to controls and other
procedures designed to provide reasonable assurance that
information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and
forms of the SEC. Disclosure controls and procedures include,
without limitation, controls and procedures designed to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding our required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management was required to apply its
judgment in evaluating and implementing possible controls and
procedures.
Evaluation
of Disclosure Controls and Procedures
As required by
Rule 13a-15
under the Exchange Act, management has evaluated, with the
participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and
procedures as in effect as of June 30, 2009, the end of the
period covered by this report. As a result of managements
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were not effective at a reasonable assurance level as of
June 30, 2009 or as of the date of filing this report.
Our disclosure controls and procedures were not effective as of
June 30, 2009 or as of the date of filing this report for
two reasons:
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our disclosure controls and procedures did not adequately ensure
the accumulation and communication to management of information
known to FHFA that is needed to meet our disclosure obligations
under the federal securities laws; and
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we had a material weakness in our internal control over
financial reporting relating to the design of our controls over
certain inputs to models used in measuring expected cash flows
for the
other-than-temporary
impairment assessment process for private-label mortgage-related
securities.
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As a result, we were not able to rely upon the disclosure
controls and procedures that were in place as of June 30,
2009 or as of the date of this filing, and we have two material
weaknesses in our internal control over financial reporting.
These material weaknesses are described in more detail below
under Material Weaknesses in Internal Control Over
Financial Reporting.
Based on discussions with FHFA and the structural nature of the
weakness in our disclosure controls and procedures relating to
information known by FHFA, it is likely that we will not
remediate the weakness in our disclosure controls and procedures
while we are under conservatorship. We are taking steps to
design, implement and test new controls to remediate the
material weakness in the design of our controls over certain
198
inputs to models used in measuring expected cash flows for the
other-than-temporary
impairment assessment process for private-label mortgage-related
securities by September 30, 2009.
MATERIAL
WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
The Public Company Accounting Oversight Boards Auditing
Standard No. 5 defines a material weakness as a deficiency
or a combination of deficiencies in internal control over
financial reporting, such that there is a reasonable possibility
that a material misstatement of the companys annual or
interim financial statements will not be prevented or detected
on a timely basis. Management has determined that we continued
to have the following material weaknesses as of June 30,
2009 and as of the date of filing this report:
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Disclosure Controls and Procedures. We have
been under the conservatorship of FHFA since September 6,
2008. Under the Regulatory Reform Act, FHFA is an independent
agency that currently functions as both our conservator and our
regulator with respect to our safety, soundness and mission.
Because of the nature of the conservatorship under the
Regulatory Reform Act, which places us under the
control of FHFA (as that term is defined by
securities laws), some of the information that we may need to
meet our disclosure obligations may be solely within the
knowledge of FHFA. As our conservator, FHFA has the power to
take actions without our knowledge that could be material to our
shareholders and other stakeholders, and could significantly
affect our financial performance or our continued existence as
an ongoing business. Although we and FHFA attempted to design
and implement disclosure policies and procedures that would
account for the conservatorship and accomplish the same
objectives as a disclosure controls and procedures policy of a
typical reporting company, there are inherent structural
limitations on our ability to design, implement, test or operate
effective disclosure controls and procedures. As both our
regulator and our conservator under the Regulatory Reform Act,
FHFA is limited in its ability to design and implement a
complete set of disclosure controls and procedures relating to
Fannie Mae, particularly with respect to current reporting
pursuant to
Form 8-K.
Similarly, as a regulated entity, we are limited in our ability
to design, implement, operate and test the controls and
procedures for which FHFA is responsible.
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Due to these circumstances, we have not been able to update our
disclosure controls and procedures in a manner that adequately
ensures the accumulation and communication to management of
information known to FHFA that is needed to meet our disclosure
obligations under the federal securities laws, including
disclosures affecting our consolidated financial statements. As
a result, we did not maintain effective controls and procedures
designed to ensure complete and accurate disclosure as required
by GAAP as of June 30, 2009 or as of the date of filing
this report. Based on discussions with FHFA and the structural
nature of this weakness, it is likely that we will not remediate
this material weakness while we are under conservatorship.
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Model Inputs Used in
Other-than-temporary-Impairment
Process for Private-label Mortgage-related
Securities. We employ models to assess the
expected performance of our securities under hypothetical
scenarios. These models consider particular attributes of the
loans underlying our securities and assumptions about changes in
the economic environment, such as home prices and interest
rates, to predict borrower behavior and the impact on default
frequency, loss severity and remaining credit enhancement. These
models were primarily implemented in the fourth quarter of 2007.
Beginning in the second quarter of 2009 with the implementation
of FSP
FAS 115-2,
the results of these models became the primary source of
expected cash flows used in determining whether a private-label
mortgage-related security is
other-than-temporarily
impaired. The models we use in creating the expected cash flows
for assessing
other-than-temporary
impairment are not used by us for determining the fair value of
private-label mortgage-related securities.
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We did not maintain effective internal control over financial
reporting with respect to the design of our controls over
certain inputs to models used in measuring expected cash flows
for the
other-than-temporary-impairment
assessment process for private-label mortgage-related
securities. Specifically, the design of the controls over these
model inputs do not require full testing or proper validation
for accuracy of modifications prior to use in our
other-than-temporary
impairment assessment. As a result, an incorrect
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modification to a model input was made in the fourth quarter of
2008 and initially used in our
other-than-temporary
impairment assessment in connection with the preparation of our
2008
Form 10-K.
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CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Overview
Management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that
occurred during our last fiscal quarter have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Changes in our
internal control over financial reporting since March 31,
2009 that management believes have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting are described below.
Remediation
Activities Relating to Material Weakness
During the first quarter of 2009, management identified a
material weakness in our internal control over financial
reporting relating to the design of our controls over certain
inputs to models used in measuring expected cash flows for the
other-than-temporary-impairment
assessment process for private-label mortgage-related
securities. This material weakness is described above under
Material Weaknesses in Internal Control Over Financial
Reporting.
Although we have not yet remediated this material weakness, we
continued to implement additional business and technology
controls during the second quarter of 2009 over the data inputs
into the models used in measuring expected cash flows for the
other-than-temporary
impairment assessment process for private-label mortgage-related
securities. Further, during the second quarter of 2009, we
continued to implement newly re-designed processes and controls
to provide for adequate testing and validation of modifications
to these models and their inputs prior to use in our
other-than-temporary
impairment assessment. We intend to complete this implementation
and the remediation of this material weakness by
September 30, 2009. For a description of mitigating actions
we have taken relating to this material weakness, see
Mitigating Actions Relating to Material
WeaknessesModel Inputs Used in
Other-than-temporary
Impairment Process for Private-label Mortgage-related
Securities below.
Other
Changes in Internal Control Over Financial Reporting
Change
in Chief Executive Officer
In April 2009, Michael J. Williams was appointed President and
Chief Executive Officer of Fannie Mae and as a member of the
Board of Directors of Fannie Mae. Mr. Williams succeeded
Herbert M. Allison, Jr., who resigned as the companys
President and Chief Executive Officer and as a member of its
Board of Directors in April 2009 following his nomination for
the position of Assistant Secretary for Financial Stability and
Counselor to the Secretary at the U.S. Department of
Treasury.
MITIGATING
ACTIONS RELATING TO MATERIAL WEAKNESSES
Disclosure
Controls and Procedures
As described above under Material Weaknesses in Internal
Control Over Financial Reporting, we continue to have a
material weakness in our internal control over financial
reporting relating to our disclosure controls and procedures.
However, we and FHFA have engaged in the following practices
intended to permit accumulation and communication to management
of information needed to meet our disclosure obligations under
the federal securities laws:
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FHFA has established the Office of Conservatorship Operations,
which is intended to facilitate operation of the company with
the oversight of the conservator.
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200
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We have provided drafts of our SEC filings to FHFA personnel for
their review and comment prior to filing. We also have provided
drafts of external press releases, statements and speeches to
FHFA personnel for their review and comment prior to release.
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FHFA personnel, including senior officials, have reviewed our
SEC filings prior to filing, including this quarterly report on
Form 10-Q
for the quarter ended June 30, 2009 (Second Quarter
2009
Form 10-Q),
and engaged in discussions regarding issues associated with the
information contained in those filings. Prior to filing our
Second Quarter 2009
Form 10-Q,
FHFA provided Fannie Mae management with a written
acknowledgement that it had reviewed the Second Quarter 2009
Form 10-Q,
was not aware of any material misstatements or omissions in the
Second Quarter 2009
Form 10-Q,
and had no objection to our filing the Second Quarter 2009
Form 10-Q.
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The Director of FHFA and our Chief Executive Officer have been
in frequent communication, typically meeting on a weekly basis.
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FHFA representatives have held frequent meetings, typically
weekly, with various groups within the company to enhance the
flow of information and to provide oversight on a variety of
matters, including accounting, capital markets management,
external communications and legal matters.
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Senior officials within FHFAs Office of the Chief
Accountant have met frequently with our senior finance
executives regarding our accounting policies, practices and
procedures.
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Model
Inputs Used in
Other-than-temporary
Impairment Process for Private-label Mortgage-related
Securities
As described above under Material Weaknesses in Internal
Control Over Financial Reporting, we continue to have a
material weakness in our internal control over financial
reporting relating to the design of our controls over certain
inputs to models used in measuring expected cash flows for the
other-than-temporary-impairment
assessment process for private-label mortgage-related
securities. Specifically, the design of the controls over these
model inputs do not require full testing or proper validation
for accuracy of modifications prior to use in our
other-than-temporary
impairment assessment. As a result, an incorrect modification to
a model input was made in the fourth quarter of 2008 and
initially used in our
other-than-temporary
impairment assessment in connection with the preparation of our
2008
Form 10-K.
Once management identified this weakness, it reviewed and
corrected the applicable model inputs, and re-performed the
other-than-temporary
impairment assessment using the correct model inputs. We have
not yet remediated this material weakness; however, as a result
of the additional procedures management conducted, we believe we
recorded an appropriate amount of
other-than-temporary
impairment on our private-label mortgage-related securities in
our condensed consolidated financial statements for the quarter
ended June 30, 2009 that are included in this report. As
described above, we are taking steps to remediate this material
weakness.
PART IIOTHER
INFORMATION
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Item 1.
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Legal
Proceedings
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The following information supplements and amends our discussion
set forth in Part IItem 3Legal
Proceedings of our 2008
Form 10-K
and in Part IIItem 1Legal
Proceedings of our First Quarter 2009
Form 10-Q.
In addition to the matters specifically described or
incorporated by reference in this item, we are involved in a
number of legal and regulatory proceedings that arise in the
ordinary course of business that do not have a material impact
on our business.
We record reserves for legal claims when losses associated with
the claims become probable and the amounts can reasonably be
estimated. The actual costs of resolving legal claims may be
substantially higher or lower than the amounts reserved for
those claims. We presently cannot determine the ultimate
resolution of the matters described or incorporated by reference
below or in our 2008
Form 10-K
or First Quarter 2009
201
Form 10-Q.
We have recorded a reserve for legal claims related to matters
for which we were able to determine a loss was both probable and
reasonably estimable. For matters where the likelihood or extent
of a loss is not probable or cannot be reasonably estimated, we
have not recognized in our condensed consolidated financial
statements the potential liability that may result from these
matters. If certain of these matters are determined against us,
it could have a material adverse effect on our earnings,
liquidity and financial condition, including our net worth.
In re
Fannie Mae 2008 Securities Action
On May 19, 2009, the U.S. Court of Appeals for the
Second Circuit denied Horizon Asset Management, Inc.s
petition for a writ of mandamus seeking to be named lead
plaintiff on behalf of the common stockholders.
The lead plaintiffs filed a joint consolidated complaint on
June 22, 2009. The new complaint alleges violations of
Sections 12(a)(2) and 15 of the Securities Act of 1933 and
violations of Sections 10(b) (and
Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934 and seeks various forms of relief, including rescission,
damages, interest, costs, attorneys and experts
fees, and other equitable and injunctive relief. The complaint
asserts Securities Act claims against Fannie Mae, certain
current and former Fannie Mae officers, Banc of America
Securities, Barclays Capital, Bear Stearns, Citigroup,
Deutche Bank, E*Trade Securities, Goldman Sachs & Co.,
J.P. Morgan, Merrill Lynch, Morgan Stanley, UBS, Wachovia
Capital, Wachovia Securities, and Wells Fargo. The complaint
also asserts Securities Exchange Act claims against Fannie Mae,
certain former Fannie Mae officers and Deloitte &
Touche.
On July 2, 2009, plaintiff Malka Krausz filed a motion for
relief from the Courts April 16, 2009 consolidation
order requiring the dismissal of her individual complaint. Lead
plaintiffs and the defendants have filed oppositions to this
motion.
On July 13, 2009, we and the other defendants against whom
the Securities Act claims were asserted filed a motion to
dismiss those claims.
On August 5, 2009, plaintiff Daniel Kramer filed a motion
to remand his individual complaint back to state court.
Comprehensive
Investment Services v. Mudd, et al.
On May 13, 2009, Comprehensive Investment Services, Inc.
filed an individual securities action against certain former
Fannie Mae officers and directors, Merrill Lynch, Citigroup,
Morgan Stanley, UBS, and Wachovia Capital Markets in the
Southern District of Texas. Plaintiff alleges violations of
Section 12(a)(2) of the Securities Act of 1933; violation
of § 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5
promulgated thereunder; violation of § 20(a) of the
Securities Exchange Act of 1934; and violations of the Texas
Business and Commerce Code, common law fraud, and negligent
misrepresentation in connection with Fannie Maes May 2008
$2 billion offering of 8.25% non-cumulative preferred
Series T stock. The complaint seeks various forms of
relief, including rescission, damages, interest, costs,
attorneys and experts fees, and other equitable and
injunctive relief. On May 15, 2009, we filed a Notice of
Potential Tag-Along Action with the Judicial Panel on
Multidistrict Litigation. The Panel issued a conditional
transfer order on June 17, 2009, plaintiff did not oppose,
and this case was transferred to the Southern District of New
York on July 7, 2009.
Kellmer,
Middleton, Arthur, and Agnes Derivative Litigation:
In these shareholder derivative actions against certain of our
former officers and directors and us as nominal defendant, on
June 25, 2009, the Court granted FHFAs motion to
substitute itself for the shareholder derivative plaintiffs. On
July 2, 2009, Kellmer and Agnes filed notices of appeal to
the U.S. Court of Appeals for the District of Columbia of
the district courts substitution order.
Gwyer v.
Fannie Mae Compensation Committee, et al. (Gwyer II);
Moore v. Fannie Mae, et al.
On May 15, 2009, the Court granted plaintiffs motion
for consolidation of their cases, for appointment on an interim
basis of co-lead counsel, and for leave to file an amended
consolidated complaint.
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In re
G-Fees Antitrust Litigation
On June 26, 2009, the parties filed a Stipulation of
Dismissal and the Court issued an order dismissing the case
without prejudice.
Former
CFO Arbitration
On April 21, 2009, the arbitrator issued an order
dismissing Fannie Maes counterclaim.
Casa Orlando Apartments, Ltd., et al. v. Federal
National Mortgage Association (formerly known as Medlock
Southwest Management Corp., et al. v. Federal National
Mortgage Association)
On July 13, 2009, the Court denied plaintiffs motion
for class certification. On July 27, 2009, plaintiffs filed
a petition for permission to appeal the Courts order.
Additional
Legal Proceedings
We describe additional legal proceedings in Notes to
Condensed Consolidated Financial StatementsNote 19,
Commitments and Contingencies. The information in that
section under the headings Securities Class Action
Lawsuits, ERISA Actions, Antitrust
Lawsuits, Fees Litigation, Former CFO
Arbitration, Investigation by Securities and
Exchange Commission, Investigation by the Department
of Justice, and Escrow Litigation is
incorporated herein by reference.
In addition to the other information in this report you should
carefully consider the risks relating to our business that we
include in our 2008
Form 10-K
in Part IItem 1ARisk Factors.
This section supplements and updates that discussion and, for a
more complete understanding of the subject, you should read both
together.
The risks we face could materially adversely affect us and could
cause our actual results to differ materially from our
historical results or the results contemplated by the
forward-looking statements contained in this report. These risks
are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently
believe are immaterial may also materially adversely affect our
business, our results of operations, financial condition or net
worth, or our investors.
Risks
Relating to Our Business
The
future structure of our business following termination of the
conservatorship is uncertain.
We do not know when or how the conservatorship will be
terminated or what changes to our business structure will be
made during or following the termination of the conservatorship.
We do not know whether we will exist in the same or a similar
form or whether the conservatorship will end in receivership or
in some other manner. As described in Legislative and
Regulatory MattersObama Administration Financial
Regulatory Reform Plan and Congressional Hearing, the
Obama Administrations June 2009 white paper on financial
regulatory reform stated that Treasury and HUD, in consultation
with other government agencies, will engage in a wide-ranging
initiative to develop recommendations on the future of Fannie
Mae, Freddie Mac and the Federal Home Loan Bank system. The
Administration has stated that it expects to provide these
recommendations in February 2010. In June 2009, a Congressional
subcommittee held a hearing to discuss the present condition and
future status of Fannie Mae and Freddie Mac. The subcommittee
Chairman indicated that this was the first of many hearings
regarding the roles and functions of Fannie Mae and Freddie Mac.
Accordingly, there continues to be significant uncertainty
regarding the future of our company, including whether we will
continue to exist. The options for reform of the GSEs include
options that would result in a substantial change to our
business structure or in the liquidation or dissolution of our
company.
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We
expect FHFA will request additional funds from Treasury on our
behalf to ensure we maintain a positive net worth and avoid
mandatory receivership. The dividends we pay or that accrue on
Treasurys investments, particularly as the amount of these
funds increases, will continue to adversely affect our results
of operations, financial condition, liquidity and net worth,
both in the short term and over the longer term.
Our ability to maintain a positive net worth (which means that
our assets are greater than our obligations) has been and
continues to be adversely affected by market conditions. To the
extent we have a negative net worth as of the end of future
fiscal quarters, we expect that FHFA will request additional
funds from Treasury under the senior preferred stock purchase
agreement because, under the Regulatory Reform Act, FHFA must
place us into receivership if the Director of FHFA determines
that we have a net worth deficit for a period of 60 days.
Obtaining funds from Treasury under the senior preferred stock
purchase agreement increases the aggregate liquidation
preference of the senior preferred stock and our dividend
obligations on the senior preferred stock. In addition,
beginning in 2010, the senior preferred stock purchase agreement
requires that we pay a quarterly commitment fee to Treasury, the
amounts of which have not yet been determined, unless Treasury
waives this fee. The aggregate liquidation preference and
dividend obligations will also increase by the amount of any
required dividend we fail to pay in cash and by any required
quarterly commitment fee that we fail to pay.
When Treasury provides the additional $10.7 billion FHFA
has already requested on our behalf, the aggregate liquidation
preference on the senior preferred stock will be
$45.9 billion, and will require an annualized dividend of
$4.6 billion. This dividend obligation exceeds our reported
annual net income for four of the past seven years and will
contribute to increasingly negative cash flows in future periods
if we continue to pay the dividends in cash. Further funds from
Treasury under the senior preferred stock purchase agreement may
substantially increase the liquidation preference of and the
dividends we owe on the senior preferred stock and, therefore,
we may need additional funds from Treasury in order to meet our
dividend obligation. If the total liquidation preference of the
senior preferred stock exceeds $81 billion in the future,
the annual dividends payable on the senior preferred stock would
be greater than the annual net income we have reported for each
of the last seven years. These substantial dividend obligations
and potentially substantial quarterly commitment fees, coupled
with our effective inability to pay down draws under the senior
preferred stock purchase agreement, will continue to have an
adverse impact on our results of operations, financial
condition, liquidity and net worth, both in the short and long
term.
We are
subject to mortgage credit risk. We expect increases in borrower
delinquencies and defaults on mortgage loans that we own or that
back our guaranteed Fannie Mae MBS to continue to materially and
adversely affect our business, results of operations, financial
condition, liquidity and net worth.
We are exposed to mortgage credit risk relating to the mortgage
loans that we hold in our investment portfolio and the mortgage
loans that back our guaranteed Fannie Mae MBS. When borrowers
fail to make required payments of principal and interest on
their mortgage loans, we are exposed to the risk of credit
losses and credit-related expenses.
Conditions in the housing and financial markets worsened
dramatically during 2008 and have remained stressed in the first
half of 2009, contributing to a deterioration in the credit
performance of our book of business, including higher serious
delinquency rates, default rates and average loan loss severity
on the mortgage loans we hold or that back our guaranteed Fannie
Mae MBS, as well as a substantial increase in our inventory of
foreclosed properties. Increases in delinquencies, default rates
and loss severity cause us to experience higher credit-related
expenses. The credit performance of our book of business has
also been negatively affected by the economic recession and
rising unemployment. These worsening credit performance trends
have been most notable in certain of our higher risk loan
categories, states and vintages, although current market and
economic conditions, particularly increasing unemployment, have
also increasingly affected the credit performance of our broader
book of business. We present detailed information about the risk
characteristics of our conventional single-family mortgage
credit book of business in
Part IItem 2MD&ARisk
ManagementCredit Risk ManagementMortgage Credit Risk
Management, and we present detailed information on our
credit-related expenses, credit losses and results of operations
for the second quarter and first six months of 2009 in
Part IItem 2MD&AConsolidated
Results of Operations.
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We expect that these adverse credit performance trends will
continue and may accelerate, particularly if we continue to
experience national and regional declines in home prices, a
recessionary economic environment and rising unemployment in the
United States.
We
expect to experience further losses and write-downs relating to
our investment securities, which could materially adversely
affect our business, results of operations, financial condition,
liquidity and net worth.
We experienced significant fair value losses and
other-than-temporary
impairment write-downs relating to our investment securities in
2008. We also recorded significant
other-than-temporary
write-downs of some of our
available-for-sale
securities in the first half of 2009. A substantial portion of
these fair value losses and write-downs related to our
investments in private-label mortgage-related securities backed
by Alt-A and subprime mortgage loans and CMBS due to the
continued decline in home prices and the economic recession. We
implemented a new accounting standard in April 2009 that changes
the manner in which we assess and record
other-than-temporary
impairment of our investment securities. Notwithstanding this
change in accounting standard, we continue to expect to
experience additional
other-than-temporary
impairment write-downs of our investments in private-label
mortgage-related securities, including those that continue to be
AAA-rated. See
Part IItem 2MD&AConsolidated
Balance Sheet AnalysisTrading and
Available-for-Sale
Investment SecuritiesInvestments in Private-Label
Mortgage-Related Securities for detailed information on
our investments in private-label securities backed by Alt-A and
subprime loans.
We also have incurred significant losses relating to the
non-mortgage investment securities in our cash and other
investments portfolio, primarily as a result of a substantial
decline in the market value of these assets due to the financial
market crisis. The fair value of the investment securities we
hold may be further adversely affected by continued
deterioration in the housing market and economy, additional
ratings downgrades or other events. Further losses and
write-downs relating to our investment securities could
materially adversely affect our business, results of operations,
financial condition, liquidity and net worth.
Market illiquidity also has increased the amount of management
judgment required to value certain of our securities. Further,
if we were to sell any of these securities, the price we
ultimately would realize would depend on the demand and
liquidity in the market at that time, and could be materially
lower than the estimated fair value at which we carry these
securities on our balance sheet. Any of these factors could
require us to record additional write-downs in the value of our
investment portfolio, which would have a material adverse effect
on our business, results of operations, financial condition,
liquidity and net worth.
The
credit losses we experience in future periods as a result of the
ongoing deterioration in the housing and mortgage markets, the
economic recession and rising unemployment are likely to be
larger, and perhaps substantially larger, than our current
combined loss reserves and will adversely affect our business,
results of operations, financial condition, liquidity and net
worth.
In accordance with GAAP, our combined loss reserves, as
reflected on our condensed consolidated balance sheets, do not
reflect our estimate of the future credit losses inherent in our
existing guaranty book of business. Rather, they reflect only
the probable losses that we believe we have already incurred as
of the balance sheet date. Accordingly, although we believe that
our credit losses will increase in the future due to the ongoing
deterioration in the housing and mortgage markets, the economic
recession, the costs of our activities under various programs
designed to keep borrowers in homes, rising unemployment and
other negative trends, we are not permitted under GAAP to
reflect these future trends in our loss reserve calculations.
Because of these negative trends, there is significant
uncertainty regarding the full extent of our future credit
losses. The credit losses we experience in future periods will
adversely affect our business, results of operations, financial
condition, liquidity and net worth.
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We are
in conservatorship and the senior preferred stock purchase
agreement significantly restricts our business activities. The
impact of the conservatorship and the senior preferred stock
purchase agreement on the management of our business may
materially and adversely affect our business, financial
condition, results of operations, liquidity and net
worth.
When FHFA was appointed as our conservator, it immediately
succeeded to: (1) all of our rights, titles, powers and
privileges, and that of any shareholder, officer or director of
Fannie Mae with respect to us and our assets; and (2) title
to the books, records and assets of any other legal custodian of
Fannie Mae. As a result, we are currently under the control of
our conservator. The conservatorship has no specified
termination date; we do not know when or how it will be
terminated. In addition, our directors do not have any duties to
any person or entity except to the conservator. Accordingly, our
directors are not obligated to consider the interests of the
company, the holders of our equity or debt securities or the
holders of Fannie Mae MBS unless specifically directed to do so
by the conservator. Under the Regulatory Reform Act, FHFA can
direct us to enter into contracts or enter into contracts on our
behalf. Further, FHFA, as conservator, generally has the power
to transfer or sell any of our assets or liabilities and may do
so without the approval, assignment or consent of any party.
The senior preferred stock purchase agreement with Treasury
includes a number of covenants that significantly restrict our
business activities. We cannot, without the prior written
consent of Treasury: pay dividends; sell, issue, purchase or
redeem Fannie Mae equity securities; sell, transfer, lease or
otherwise dispose of assets other than for fair market value in
specified situations; engage in transactions with affiliates
other than on arms-length terms or in the ordinary course
of business; issue subordinated debt; or incur indebtedness that
would result in our aggregate indebtedness exceeding 120% of the
amount of mortgage assets we are allowed to own. Through
December 30, 2010, our debt cap equals $1,080 billion.
Beginning December 31, 2010, and on December 31 of each
year thereafter, our debt cap that will apply through December
31 of the following year will equal 120% of the amount of
mortgage assets we are allowed to own on December 31 of the
immediately preceding calendar year. Pursuant to the senior
preferred stock purchase agreement, we also are not permitted to
increase the size of our mortgage portfolio to more than
$900 billion through the end of 2009, and beginning in 2010
we are required to reduce the size of our mortgage portfolio by
10% per year (based on the size of the portfolio on December 31
of the prior year) until it reaches $250 billion.
In our 2008
Form 10-K,
we describe the powers of the conservator in
Part IItem 1BusinessConservatorship,
Treasury Agreements, Our Charter and Regulation of Our
ActivitiesConservatorship, the terms of the senior
preferred stock purchase agreement prior to its May 2009
amendment in
Part IItem 1BusinessConservatorship,
Treasury Agreements, Our Charter and Regulation of Our
ActivitiesTreasury AgreementsSenior Preferred Stock
Purchase Agreement and Related Issuance of Senior Preferred
Stock and Common Stock Warrant and the covenants contained
in the senior preferred stock purchase agreement prior to its
May 2009 amendment in
Part IItem 1BusinessConservatorship,
Treasury Agreements, Our Charter and Regulation of Our
ActivitiesTreasury AgreementsCovenants Under
Treasury AgreementsSenior Preferred Stock Purchase
Agreement Covenants. We describe the May 2009 amendment to
the senior preferred stock purchase agreement in
Part IItem 2MD&AExecutive
SummaryAmendment to Senior Preferred Stock Purchase
Agreement of our First Quarter 2009
Form 10-Q.
These factors may adversely affect our business, financial
condition, results of operations, liquidity and net worth.
FHFA,
other government agencies or Congress may ask or require us to
undertake significant efforts in pursuit of providing liquidity,
stability and affordability to the mortgage market and providing
assistance to struggling homeowners, or in pursuit of other
goals, which may adversely affect our business, results of
operations, financial condition, liquidity and net
worth.
Prior to the conservatorship, our business was managed with a
strategy to maximize shareholder returns, while fulfilling our
mission. However, in this time of economic uncertainty, our
conservator has directed us to focus primarily on fulfilling our
mission of providing liquidity, stability and affordability to
the mortgage market and to provide assistance to struggling
homeowners to help them remain in their homes. As a result, we
may take a variety of actions designed to address this focus
that could adversely affect our economic returns, possibly
significantly, such as: increasing our purchase of loans that
pose a higher credit risk; reducing our guaranty
206
fees; refraining from foreclosing on seriously delinquent loans;
increasing our purchases of loans out of MBS trusts in order to
modify them; and modifying loans to extend the maturity, lower
the interest rate or defer the amount of principal owed by the
borrower. Activities of that type may adversely affect our
economic returns, in both the short term and long term. These
activities also create risks to our business and are likely to
have short- and long-term adverse effects on our business,
results of operations, financial condition, liquidity and net
worth.
Other agencies of the U.S. government or Congress may also
ask us to undertake significant efforts in pursuit of our
mission. For example, under the Making Home Affordable Program,
which was announced by the Obama Administration in March 2009,
we are offering the Home Affordable Refinance Program and the
Home Affordable Modification Program. The Home Affordable
Refinance Program allows certain eligible borrowers to carry
forward mortgage insurance and refinance their mortgage loan at
up to 125% of the homes value. Under the Home Affordable
Modification Program, we are working with loan servicers to
assist borrowers with modifications of their current mortgage
loan to reduce interest rates, lengthen the payment time or take
actions such as principal forbearance to bring monthly payments
down to as low as 31% of a borrowers pre-tax income. If
our borrowers participate in this program in large numbers, we
expect to incur substantial costs as a result of modifications
of loans we own or have securitized, including as a result of
the incentive fees we will provide our servicers and borrowers
and fair value loss charge-offs under
SOP 03-3
against the Reserve for guaranty losses at the time
we acquire loans, which we must do prior to any modification.
This program will therefore likely have a material adverse
effect, at least in the short term, on our business, results of
operations, financial condition and net worth. We do not know
how additional actions FHFA, other agencies of the
U.S. government or Congress may direct us to take in the
future will affect, on a short- or long-term basis, our
business, results of operations, liquidity, financial condition
or net worth.
In addition, we are subject to housing goals which require that
a specified portion of our mortgage purchases during each
calendar year relate to the purchase or securitization of
mortgage loans that finance housing for low- and moderate-income
households, housing in underserved areas and qualified housing
under the definition of special affordable housing. FHFA issued
a final rule setting forth our 2009 housing goals on
July 30, 2009. The final rule lowers our base housing goals
and home purchase subgoals, and raises our multifamily special
affordable housing subgoal. We expect the base housing goals and
the multifamily special affordable subgoal will be difficult for
us to achieve given current market conditions, which include:
tighter underwriting practices; the sharply increased standards
of private mortgage insurers; the reduction in the amount of
high
loan-to-value
ratio and low FICO score loans that mortgage insurers are
willing to insure; increasing unemployment; the increased role
of the Federal Housing Administration in acquiring
goals-qualifying mortgage loans; the collapse of the
private-label securities market; multifamily market volatility;
and the high levels of refinancings thus far in 2009. These
conditions contribute to fewer goals-qualifying mortgages being
available for purchase by us. We are also closely watching the
home purchase mortgage market to monitor the impact of market
conditions on the home purchase subgoals, but the impact is
difficult to predict. If our efforts to meet the housing goals
and special affordable housing subgoals prove to be insufficient
and FHFA finds that the goals were feasible, we may become
subject to a housing plan that could require us to take
additional steps that could have an adverse effect on our
profitability. The potential penalties for failure to comply
with housing plan requirements are a
cease-and-desist
order and civil money penalties. In addition, our efforts to
meet our housing goals and subgoals could contribute to further
increases in our credit losses because these efforts often
result in our purchase of higher risk loans, on which we
typically incur proportionately more credit losses than on other
types of loans.
Treasurys
funding commitment may not be sufficient to keep us in a solvent
condition or prevent us from being placed into
receivership.
Under the senior preferred stock purchase agreement, Treasury
has made a commitment to provide up to $200 billion in
funding as needed to help us maintain a positive net worth. We
have received a total of $34.2 billion to date under
Treasurys funding commitment and the Director of FHFA has
submitted a request for an additional $10.7 billion from
Treasury to eliminate our net worth deficit as of June 30,
2009. These draws reduce the amount of Treasurys remaining
funding commitment to $155.1 billion, and we expect to
207
continue to have losses and net worth deficits resulting in our
obtaining additional funds from Treasury. Any dividends or
quarterly commitment fees that we do not pay in cash will
further reduce the amounts available to us under the senior
preferred stock purchase agreement. When Treasury provides the
additional funds that have been requested, the annualized
dividend on the senior preferred stock will be
$4.6 billion. We expect that it is likely that we will need
to seek additional funds from Treasury merely to allow us to pay
the quarterly dividends due on the senior preferred stock in
cash and thereby avoid an increase in the dividend rate from 10%
to 12%. Treasurys commitment may not be sufficient to keep
us in solvent condition or prevent us from being placed into
receivership, particularly if we continue to experience
substantial losses in future periods.
The commitment also may be insufficient to accomplish these
objectives if we experience a liquidity crisis that prevents us
from accessing the unsecured debt markets. Moreover, the cost of
our debt funding is likely to increase if debt investors become
concerned about a growing risk that we could be placed into
receivership, and those increased costs would materially and
adversely affect our results of operations, financial condition,
liquidity and net worth.
Limitations
in future periods on our ability to access the debt capital
markets could have a material adverse effect on our ability to
fund our operations and on our costs, liquidity, business,
results of operations, financial condition and net
worth.
Our ability to operate our business, meet our obligations and
generate net interest income depends primarily on our ability to
issue substantial amounts of debt frequently, with a variety of
maturities and call features and at attractive rates. Market
concerns about matters such as the extent of government support
for our business and the future of our business (including
future profitability, future structure, regulatory actions and
GSE status) could have a severe negative effect on our access to
the unsecured debt markets, particularly for callable and
non-callable long-term debt. We believe that the improvements
since November 2008 in our debt funding stem from federal
government support of us and the financial markets, including
the availability of the Treasury credit facility and the Federal
Reserves purchases of our debt and MBS. As a result, we
believe that our status as a GSE and continued federal
government support of our business and the financial markets are
essential to maintaining our access to debt funding, and changes
or perceived changes in the governments support of us or
the markets could lead to an increase in our roll-over risk in
future periods and have a material adverse effect on our ability
to fund our operations. Demand for our debt securities could
decline, perhaps significantly, if the government does not
extend or replace the Treasury credit facility and the Federal
Reserves agency debt and MBS purchase programs, each of
which expire on December 31, 2009. There can be no
assurance that the government will continue to supply us with
its current level of support or that our current level of access
to debt funding will continue.
If demand for our debt securities declines substantially from
current levels, it likely would increase our roll-over risk and
materially adversely affect our ability to refinance our debt as
it becomes due. This would increase the likelihood that we would
need to rely on our liquidity contingency plans, to the extent
possible, or possibly be unable to repay our debt obligations as
they become due. In the current market environment, we have
significant uncertainty regarding our ability to carry out fully
our liquidity contingency plans.
In addition, future changes or disruptions in the financial
markets could significantly change the amount, mix and cost of
funds we obtain, as well as our liquidity position. If we are
unable to issue both short- and long-term debt securities at
attractive rates and in amounts sufficient to operate our
business and meet our obligations, it likely would interfere
with or prevent the operation of our business and would have a
continuing material adverse effect on our liquidity, results of
operations, financial condition and net worth.
Our
adoption of new accounting standards relating to the elimination
of QSPEs could have a material adverse effect on our operations
and net worth.
On June 12, 2009, the FASB issued two new accounting rules
that amend the accounting for transfers of financial assets and
the consolidation guidance related to variable interest
entities. We must apply these new standards effective
January 1, 2010, and implementation of these standards
requires us to make major
208
operational and system changes. We expect that these changes,
which will involve the efforts of hundreds of our employees and
contractors, will have a substantial impact on our overall
internal control environment.
Although we are still assessing the impact of these new
accounting standards, we currently expect that the adoption of
these accounting standards will require that we consolidate onto
our balance sheet the assets and liabilities of the substantial
majority of our MBS trusts. As of June 30, 2009, the unpaid
principal balance of our MBS trusts was approximately $2.8
trillion. In addition, the number of loans on our balance sheet
is expected to increase as a result of this consolidation to
approximately 18 million, from approximately 2 million
as of June 30, 2009. Because of the magnitude and
complexity of the operational and system changes that we are
making and the limited amount of time available to complete and
test our systems development, there is a risk that unexpected
developments could make it difficult for us to implement all of
the necessary system changes and internal control processes by
the January 1, 2010 effective date. Failure to make these
changes by the effective date could have a material adverse
impact on us, including on our ability to produce financial
reports on a timely basis. In addition, making the necessary
operational and system changes in a compressed time frame
diverts resources from our other business requirements and
corporate initiatives, which could have a material adverse
impact on our operations. This consolidation could also
significantly increase our required level of capital under
existing minimum capital rules, which have been suspended by our
conservator and are currently in the process of being revised by
our regulator.
Failure
to effect a reverse stock split for our common stock could
result in the delisting of our common and preferred stock from
the NYSE.
Since our common stock has traded at less than $1.00 per share
for more than 30 consecutive trading days, our common stock is
subject to delisting from the New York Stock Exchange
(NYSE) by October 15, 2009. If the NYSE were to
delist our common and preferred stock, it likely would result in
a significant decline in the trading volume and liquidity of our
common stock and of the classes of our preferred stock listed on
the NYSE. As a result, it could become more difficult for our
shareholders to sell their shares at prices comparable to those
in effect prior to delisting, or at all.
One means of increasing the trading price of common stock, at
least temporarily, is to effect a reverse stock split by
combining multiple shares of the common stock into a single
common share. If we were to effect a reverse stock split, there
is no assurance that the trading price of our common stock over
the long term would continue to satisfy the NYSEs minimum
price listing standard. For example, from June 30, 2009,
the date on which American International Group, Inc.s
shareholders approved a
20-for-1
reverse stock split, through July 31, 2009, the trading
price of its common stock has decreased by approximately 43%. We
will seek the approval of our conservator with respect to any
alternative the company pursues with regard to its listing on
the NYSE. Although management currently does not believe that a
reverse stock split should be effected, the Board of Directors
has not made a determination. For a reverse stock split to be
effected, the approval of Treasury under the senior preferred
stock purchase agreement also would be required. Moreover, our
conservator, in consultation with Treasury, may determine to
maintain our listing on the NYSE, and therefore require us to
effect a reverse stock split. We currently are consulting with
our conservator with regard to our continued listing on the NYSE.
Our
business with many of our institutional counterparties is
critical and heavily concentrated. If one or more of these
institutional counterparties defaults on its obligations to us
or becomes insolvent, we could experience substantial losses and
it could materially adversely affect our business, results of
operations, financial condition, liquidity and net
worth.
We face the risk that one or more of our institutional
counterparties may fail to fulfill their contractual obligations
to us. That risk has escalated significantly as a result of
current adverse financial market conditions. Our primary
exposures to institutional counterparty risk are with: mortgage
servicers that service the loans we hold in our mortgage
portfolio or that back our Fannie Mae MBS; third-party providers
of credit enhancement on the mortgage assets that we hold in our
mortgage portfolio or that back our Fannie Mae MBS, including
mortgage insurers, lenders with risk sharing arrangements, and
financial guarantors; issuers of securities held in our cash and
other investments portfolio; and derivatives counterparties.
209
The challenging mortgage and credit market conditions have
adversely affected, and will likely continue to adversely
affect, the liquidity and financial condition of our
institutional counterparties. One or more of these institutions
may default in its obligations to us for a number of reasons,
such as changes in financial condition that affect their credit
ratings, a reduction in liquidity, operational failures or
insolvency. The financial difficulties that a number of our
institutional counterparties are currently experiencing may
negatively affect the ability of these counterparties to meet
their obligations to us and the amount or quality of the
products or services they provide to us. A default by a
counterparty with significant obligations to us could result in
significant financial losses to us and could materially
adversely affect our ability to conduct our operations, which
would adversely affect our business, results of operations,
financial condition, liquidity and net worth.
We routinely execute a high volume of transactions with
counterparties in the financial services industry. Many of these
transactions expose us to credit risk relating to the
possibility of a default by our counterparties. In addition, to
the extent these transactions are secured, our credit risk may
be exacerbated to the extent that the collateral held by us
cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the loan or derivative
exposure due to it. We have exposure to these financial
institutions in the form of unsecured debt instruments,
derivative transactions and equity investments. As a result, we
could incur losses relating to defaults under these instruments
or relating to impairments to the carrying value of our assets
represented by these instruments. These losses could materially
and adversely affect our business, results of operations,
financial condition, liquidity and net worth.
Many of our counterparties provide several types of services to
us. Our lender customers or their affiliates also act as
derivatives counterparties, mortgage servicers, custodial
depository institutions and document custodians for us.
Accordingly, if one of these counterparties were to become
insolvent or otherwise default on its obligations to us, it
could harm our business and financial results in a variety of
ways.
We depend on our ability to enter into derivatives transactions
in order to manage the duration and prepayment risk of our
mortgage portfolio. If we lose access to our derivatives
counterparties, it could adversely affect our ability to manage
these risks, which could have a material adverse effect on our
business, results of operations, financial condition, liquidity
and net worth.
We consider the credit ratings by rating agencies of our
counterparties in managing and monitoring our counterparty risk.
These ratings may be inaccurate, which could undermine our risk
management efforts and result in increased credit losses.
We
depend on our mortgage insurer counterparties to provide
insurance against borrower default that is critical to our
business. If one or more of these counterparties defaults on its
obligations to us or becomes insolvent, it could materially
adversely affect our business, results of operations, financial
condition, liquidity and net worth.
The current weakened financial condition of our mortgage insurer
counterparties creates a risk that these counterparties will
fail to fulfill their obligations to reimburse us for claims
under insurance policies, and could also cause the quality and
speed of their claims processing to deteriorate. Since
January 1, 2008, the insurer financial strength ratings of
all of our major mortgage insurer counterparties have been
downgraded to reflect their weakened financial condition, in
some cases more than once. In 2008, one of our mortgage insurer
counterparties announced it would cease issuing commitments for
new mortgage insurance and would run-off its existing business.
In June 2009, that insurer, under an order received from its
regulator, began paying all valid claims 60% in cash and 40% by
the creation of a deferred payment obligation, which may be paid
in the future.
A number of our mortgage insurers have publicly disclosed that
they may exceed the state-imposed
risk-to-capital
limits under which they operate some time during 2009 and they
may not have access to sufficient capital to continue to write
new business in accordance with state regulatory requirements.
In addition, many mortgage insurers have been exploring and
continue to explore capital raising opportunities with little
success. If mortgage insurers are not able to raise capital and
exceed their
risk-to-capital
limits, they will likely be forced into run-off or receivership.
This would increase the risk that they will fail to reimburse us
for claims under insurance policies, and could also cause the
quality and speed of their claims processing to
210
deteriorate. In addition, our largest mortgage insurer
counterparty has announced that it plans to implement a
restructuring plan that would involve contributing capital to a
subsidiary that would enable the subsidiary to write new
business, and result in less liquidity available to its parent
company to pay claims on its existing book of business,
resulting in an increased risk this counterparty will not pay
its claims in full in the future. If our assessment of one or
more of our mortgage insurer counterpartys ability to
fulfill its obligations to us worsens or its credit rating is
downgraded, it could result in a significant increase in our
loss reserves and a significant increase in the fair value of
our guaranty obligations.
If we are no longer willing or able to conduct business with one
or more of our mortgage insurer counterparties, it is likely we
would further increase our concentration risk with the remaining
mortgage insurers in the industry or, as discussed in the
following paragraph, we may need to reduce the amount or types
of mortgage loans we purchase or guarantee.
We generally are required pursuant to our charter to obtain
credit enhancement on conventional single-family mortgage loans
that we purchase or securitize with
loan-to-value
ratios over 80% at the time of purchase. In the current
environment, many mortgage insurers have stopped insuring new
mortgages with higher
loan-to-value
ratios or with lower borrower FICO credit scores or on select
property types, which has contributed to the reduction in our
business volumes for high
loan-to-value
ratio loans. If our mortgage insurer counterparties further
restrict their eligibility requirements or new business volumes
for high
loan-to-value
ratio loans, or if we are no longer willing or able to obtain
mortgage insurance from these counterparties, and we are not
able to find suitable alternative methods of obtaining credit
enhancement for these loans, we may be further restricted in our
ability to purchase or securitize loans with
loan-to-value
ratios over 80% at the time of purchase. For example, where
mortgage insurance or other credit enhancement is not available,
we may be hindered in our ability to refinance borrowers whose
loans we do not own or guarantee into more affordable loans. The
unavailability of suitable credit enhancement could also
negatively impact our ability to pursue new business
opportunities relating to high
loan-to-value
ratio and other higher risk loans and therefore harm our
competitive position and our earnings, and our ability to meet
our housing goals.
The
success of our efforts to keep people in their homes, as well as
the re-performance rate of loans we modify, may be limited by
our reliance on third parties to service our mortgage
loans.
We enter into servicing agreements with mortgage servicers,
pursuant to which we delegate the servicing of our mortgage
loans. These mortgage servicers, or their agents and
contractors, typically are the primary point of contact for
borrowers, and we rely on these mortgage servicers to identify
and contact troubled borrowers as early as possible, to assess
the situation and offer appropriate options for resolving the
problem and to successfully implement a solution for the
borrower. The demands placed on experienced mortgage loan
servicers to service delinquent loans have increased
significantly across the industry, straining servicer capacity.
The Making Home Affordable Program is also impacting servicer
resources. To the extent that mortgage servicers are hampered by
limited resources or other factors, they may not be successful
in conducting their servicing activities in a manner that fully
accomplishes our objectives within the timeframe we desire. As a
practical matter, however, our ability to augment our
servicers efforts is limited; we do not have any
significant internal ability to assist servicers and, at this
time, we have been unable to identify additional external
servicing capacity. Further, in some circumstances, our
servicers have advised us that they have not been able to reach
many of the borrowers who need help or may need help with their
mortgage loans even when repeated efforts have been made to
contact the borrower.
For these reasons, our ability to actively manage the troubled
loans that we own or guarantee, and to implement our
homeownership assistance and foreclosure prevention efforts
quickly and effectively, may be limited by our reliance on our
mortgage servicers.
211
Our
role as program administrator for the Home Affordable
Modification Program is likely to increase our costs and place
burdens on our resources and exposes us to reputational risk if
the program is not determined to be successful.
We expect our role as program administrator for the Home
Affordable Modification Program to be substantial, requiring
significant levels of internal resources and management
attention, which may therefore be shifted away from other
corporate initiatives. This shift could have a material adverse
effect on our business, results of operations, financial
condition and net worth. Further, to the extent that we devote
our efforts to the Home Affordable Modification Program and it
does not achieve the desired results for any reason, we may
experience reputational loss, which could adversely affect the
extent to which the government continues to support our business
and activities. We also expect to incur additional operational
expenses associated with our role as program administrator for
the Making Home Affordable Program.
We
rely on internal models to manage risk and to make business
decisions. Our business could be adversely affected if those
models fail to produce reliable results.
We make significant use of business and financial models to
measure and monitor our risk exposures and to manage our
business. For example, we use models to measure and monitor our
exposures to interest rate, credit and other market risks, and
to forecast credit losses. The information provided by these
models is used in making business decisions relating to
strategies, initiatives, transactions, pricing and products.
Models are inherently imperfect predictors of actual results
because they are based on historical data available to us and
our assumptions about factors such as future loan demand,
prepayment speeds, default rates, severity rates, home price
trends and other factors that may overstate or understate future
experience. Our models could produce unreliable results for a
number of reasons, including limitations on historical data to
predict results due to unprecedented events or circumstances,
invalid or incorrect assumptions underlying the models, the need
for manual adjustments in response to rapid changes in economic
conditions, incorrect coding of the models, incorrect data being
used by the models or inappropriate application of a model to
products or events outside of the models intended use. In
particular, models are less dependable when the economic
environment is outside of historical experience, as has been the
case recently.
The dramatic changes in the housing, credit and capital markets
have required frequent adjustments to our models and the
application of greater management judgment in the interpretation
and adjustment of the results produced by our models.
In addition, we continually receive new economic and mortgage
market data, such as housing starts and sales and home price
changes. Our critical accounting estimates, such as our loss
reserves and
other-than-temporary
impairment, are subject to change, often significantly, due to
the nature and magnitude of changes in market conditions.
However, there is generally a lag between the availability of
this market information and the preparation of our financial
statements. When market conditions change quickly and in
unforeseen ways, there is an increased risk that the assumptions
and inputs reflected in our models are not representative of
current market conditions.
Actions we may take to assist the mortgage market may also
require adjustments to our models and the application of greater
management judgment. This application of greater management
judgment reflects the need to take into account updated
information while continuing to maintain controlled processes
for model updates, including model development, testing,
independent validation and implementation. As a result of the
time and resources, including technical and staffing resources,
that are required to perform these processes effectively, it may
not be possible to replace existing models quickly enough to
ensure that they will always properly account for the impacts of
recent information and actions.
If our models fail to produce reliable results on an ongoing
basis, we may not make appropriate risk management decisions,
including decisions affecting loan purchases, management of
credit losses and risk, guaranty fee pricing, asset and
liability management and the management of our net worth, and
any of those decisions could adversely affect our business,
results of operations, liquidity, net worth and financial
condition.
212
Furthermore, any strategies we employ to attempt to manage the
risks associated with our use of models may not be effective.
We
continue to experience significant management changes and losses
of significant numbers of valuable employees, which could have a
material adverse effect on our ability to do business and our
results of operations.
Since August 2008, we have had a total of three Chief Executive
Officers, three Chief Financial Officers, two General Counsels
and an interim General Counsel, three Chief Risk Officers, two
Executive Vice Presidents leading our Capital Markets group, and
two Chief Technology Officers, as well as significant departures
by various other members of senior management. Our Chief
Executive Officer, Chief Risk Officer, General Counsel and Chief
Technology Officer were appointed to their present roles after
April 15, 2009 and each of them other than our Chief
Executive Officer is new to Fannie Mae. It may take time for our
new management team to become sufficiently familiar with our
business and each other to effectively develop and implement our
business strategies. This turnover in key management positions
could harm our financial performance and results of operations.
Potential limitations on, and uncertainty regarding, employee
compensation have adversely affected, and we expect will
continue to adversely affect, our ability to recruit and retain
well-qualified employees. In addition, as of the date of this
filing, we do not have in place a 2009 compensation program for
our senior executives, which could adversely affect our ability
to retain and recruit our senior management team. Changes in
public policy or opinion also may affect our ability to hire and
retain qualified employees.
If we lose a significant number of employees and are not able to
quickly recruit and train new employees, it could negatively
affect customer relationships and goodwill, and could have a
material adverse effect on our ability to do business and our
results of operations. In addition, the success of our business
strategy depends on the continuing service of our employees.
Mortgage
fraud could result in significant financial losses and harm to
our reputation.
Because we use a process of delegated underwriting in which
lenders make specific representations and warranties about the
characteristics of the single-family mortgage loans we purchase
and securitize, we do not independently verify most borrower
information that is provided to us. This exposes us to the risk
that one or more of the parties involved in a transaction (the
borrower, seller, broker, appraiser, title agent, lender or
servicer) will engage in fraud by misrepresenting facts about a
mortgage loan. We have experienced financial losses resulting
from mortgage fraud, including institutional fraud perpetrated
by counterparties. In the future, we may experience additional
financial losses and reputational damage as a result of mortgage
fraud.
Risks
Relating to Our Industry
The
financial services industry is undergoing significant structural
and regulatory changes, and is subject to significant and
changing regulation. We do not know how these changes will
affect our business.
The financial services industry is undergoing significant
structural changes. In light of current conditions in the
financial markets and economy, regulators and legislatures have
increased their focus on the regulation of the financial
services industry. A number of proposals for legislation
regulating the financial services industry are being introduced
in Congress and in state legislatures and the number may
increase. Several of these proposals specifically relate to
housing finance and consumer mortgage practices, which could
result in our becoming liable for statutory violations by
mortgage originators. The Obama Administration issued a white
paper in June 2009 that proposes significantly altering the
current regulatory framework applicable to the financial
services industry, with enhanced and more comprehensive
regulation of financial firms and markets. If implemented, the
plans proposals would directly and indirectly affect many
aspects of our business and that of our business partners. The
plan includes proposals relating to the enhanced regulation of
securitization markets, changes to existing capital and
liquidity requirements for financial firms, additional
regulation of the
over-the-counter
derivatives market, stronger consumer protection regulations,
regulations on compensation practices and changes in accounting
standards.
213
We are unable to predict whether these proposals will be
implemented or in what form, or whether any additional or
similar changes to statutes or regulations, including the
interpretation or implementation thereof, will occur in the
future. Actions by regulators of the financial services
industry, including actions related to limits on executive
compensation, impact the retention and recruitment of
management. In addition, the actions of Treasury, the FDIC, the
Federal Reserve and international central banking authorities
directly impact financial institutions cost of funds for
lending, capital raising and investment activities, which could
increase our borrowing costs or make borrowing more difficult
for us. Changes in monetary policy are beyond our control and
difficult to anticipate.
The financial market crisis has also resulted in mergers of some
of our most significant institutional counterparties.
Consolidation of the financial services industry has increased
and may continue to increase our concentration risk to
counterparties in this industry, and we are and may become more
reliant on a smaller number of institutional counterparties,
which both increases our risk exposure to any individual
counterparty and decreases our negotiating leverage with these
counterparties.
The structural changes in the financial services industry and
any legislative or regulatory changes could affect us in
substantial and unforeseeable ways and could have a material
adverse effect on our business, results of operations, financial
condition, liquidity and net worth. In particular, these changes
could affect our ability to issue debt and may reduce our
customer base.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Recent
Sales of Unregistered Securities
We previously provided stock compensation to employees and
members of the Board of Directors under the Fannie Mae Stock
Compensation Plan of 1993 and the Fannie Mae Stock Compensation
Plan of 2003 (the Plans).
Under the terms of the senior preferred stock purchase
agreement, we are prohibited from selling or issuing our equity
interests other than as required by (and pursuant to) the terms
of a binding agreement in effect on September 7, 2008
without the prior written consent of Treasury. During the
quarter ended June 30, 2009, 13,648 restricted stock units
vested, as a result of which 4,014 shares of common stock
were issued and 9,634 shares of common stock that otherwise
would have been issued were deferred until after termination of
service on the Board of Directors under an irrevocable election
made in 2008 by two members of our Board of Directors. All of
these restricted stock units were granted prior to
September 7, 2008. Restricted stock units granted under the
Plans typically vest in equal annual installments over three or
four years beginning on the first anniversary of the date of
grant. Each restricted stock unit represents the right to
receive a share of common stock at the time of vesting. As a
result, restricted stock units are generally similar to
restricted stock, except that restricted stock units do not
confer voting rights on their holders. All restricted stock
units were granted to persons who were employees or members of
the Board of Directors of Fannie Mae.
During the quarter ended June 30, 2009,
4,406,901 shares of common stock were issued upon
conversion of 2,860,143 shares of 8.75% Non-Cumulative
Mandatory Convertible Preferred Stock,
Series 2008-1,
at the option of the holders pursuant to the terms of the
preferred stock. All series of preferred stock, other than the
senior preferred stock, were issued prior to September 7,
2008.
The securities we issue are exempted securities
under laws administered by the SEC to the same extent as
securities that are obligations of, or are guaranteed as to
principal and interest by, the United States, except that, under
the Regulatory Reform Act, our equity securities are not treated
as exempted securities for purposes of Section 12, 13, 14
or 16 of the Exchange Act. As a result, our securities offerings
are exempt from SEC registration requirements and we do not file
registration statements or prospectuses with the SEC under the
Securities Act with respect to our securities offerings.
Information
about Certain Securities Issuances by Fannie Mae
Pursuant to SEC regulations, public companies are required to
disclose certain information when they incur a material direct
financial obligation or become directly or contingently liable
for a material obligation under an
214
off-balance sheet arrangement. The disclosure must be made in a
current report on
Form 8-K
under Item 2.03 or, if the obligation is incurred in
connection with certain types of securities offerings, in
prospectuses for that offering that are filed with the SEC.
To comply with the disclosure requirements of
Form 8-K
relating to the incurrence of material financial obligations, we
report our incurrence of these types of obligations either in
offering circulars or prospectuses (or supplements thereto) that
we post on our Web site or in a current report on
Form 8-K,
in accordance with a no-action letter we received
from the SEC staff in 2004. In cases where the information is
disclosed in a prospectus or offering circular posted on our Web
site, the document will be posted on our Web site within the
same time period that a prospectus for a non-exempt securities
offering would be required to be filed with the SEC.
The Web site address for disclosure about our debt securities is
www.fanniemae.com/debtsearch. From this address, investors can
access the offering circular and related supplements for debt
securities offerings under Fannie Maes universal debt
facility, including pricing supplements for individual issuances
of debt securities.
Disclosure about our off-balance sheet obligations pursuant to
some of the MBS we issue can be found at
www.fanniemae.com/mbsdisclosure. From this address, investors
can access information and documents about our MBS, including
prospectuses and related prospectus supplements.
We are providing our Web site address solely for your
information. Information appearing on our Web site is not
incorporated into this report.
Our
Purchases of Equity Securities
The following table shows shares of our common stock we
repurchased during the second quarter of 2009.
Issuer
Purchases of Equity Securities
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Maximum Number
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Total Number of
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of Shares that
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Total Number
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Average
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Shares Purchased
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May Yet be
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of Shares
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Price Paid
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as Part of Publicly
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Purchased Under
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Period
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Purchased(1)
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per Share
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Announced
Program(2)
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the
Program(3)
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(Shares in thousands)
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2009
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April 1-30
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6
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$
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0.75
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49,054
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May 1-31
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4
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0.79
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48,524
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June 1-30
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4
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0.69
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48,469
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Total
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14
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(1) |
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Consists of shares of common stock
reacquired from employees to pay an aggregate of approximately
$10,400 in withholding taxes due upon the vesting of previously
issued restricted stock. Does not include 2,860,143 shares
of 8.75% Non-Cumulative Mandatory Convertible
Series 2008-1
Preferred Stock received from holders upon conversion of the
preferred shares.
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(2) |
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On January 21, 2003, we
publicly announced that the Board of Directors had approved a
share repurchase program (the General Repurchase
Authority) under which we could purchase in open market
transactions the sum of (a) up to 5% of the shares of
common stock outstanding as of December 31, 2002
(49.4 million shares) and (b) additional shares to
offset stock issued or expected to be issued under our employee
benefit plans. No shares were repurchased during the second
quarter of 2009 pursuant to the General Repurchase Authority.
The General Repurchase Authority has no specified expiration
date. Under the terms of the senior preferred stock purchase
agreement, we are prohibited from purchasing Fannie Mae common
stock without the prior written consent of Treasury. As a result
of this prohibition, we do not intend to make further purchases
under the General Repurchase Authority at this time.
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(3) |
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Consists of the total number of
shares that may yet be purchased under the General Repurchase
Authority as of the end of the month, including the number of
shares that may be repurchased to offset stock that may be
issued pursuant to awards outstanding under our employee benefit
plans. Repurchased shares are first offset against any issuances
of stock under our employee benefit plans. To the extent that we
repurchase more shares in a given month than have been issued
under our plans, the excess number of shares is deducted from
the 49.4 million shares approved for repurchase under the
General Repurchase Authority. See Notes to Consolidated
Financial StatementsNote 14, Stock-Based Compensation
Plans of our 2008 Form
10-K, for
information about shares issued, shares expected to be issued,
and
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215
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shares remaining available for
grant under our employee benefit plans. Shares that remain
available for grant under our employee benefit plans are not
included in the amount of shares that may yet be purchased
reflected in the table above.
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Dividend
Restrictions
Our payment of dividends is subject to the following
restrictions:
Restrictions Relating to Conservatorship. Our
conservator announced on September 7, 2008 that we would
not pay any dividends on the common stock or on any series of
preferred stock, other than the senior preferred stock.
Restrictions Under Senior Preferred Stock Purchase
Agreement. The senior preferred stock purchase
agreement prohibits us from declaring or paying any dividends on
Fannie Mae equity securities without the prior written consent
of Treasury.
Restrictions Under Regulatory Reform
Act. Under the Regulatory Reform Act, FHFA has
authority to prohibit capital distributions, including payment
of dividends, if we fail to meet our capital requirements. If
FHFA classifies us as significantly undercapitalized, approval
of the Director of FHFA is required for any dividend payment.
Under the Regulatory Reform Act, we are not permitted to make a
capital distribution if, after making the distribution, we would
be undercapitalized, except the Director of FHFA may permit us
to repurchase shares if the repurchase is made in connection
with the issuance of additional shares or obligations in at
least an equivalent amount and will reduce our financial
obligations or otherwise improve our financial condition.
Restrictions Relating to Subordinated
Debt. During any period in which we defer payment
of interest on qualifying subordinated debt, we may not declare
or pay dividends on, or redeem, purchase or acquire, our common
stock or preferred stock.
Restrictions Relating to Preferred
Stock. Payment of dividends on our common stock
is also subject to the prior payment of dividends on our
preferred stock and our senior preferred stock. Payment of
dividends on all outstanding preferred stock, other than the
senior preferred stock, is also subject to the prior payment of
dividends on the senior preferred stock.
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Item 3.
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Defaults
Upon Senior Securities
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None.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
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Item 5.
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Other
Information
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None.
An index to exhibits has been filed as part of this report
beginning on
page E-1
and is incorporated herein by reference.
216
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Federal National Mortgage Association
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By:
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/s/ Michael
J. Williams
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Michael J. Williams
President and Chief Executive Officer
Date: August 6, 2009
David M. Johnson
Executive Vice President and
Chief Financial Officer
Date: August 6, 2009
217
INDEX TO
EXHIBITS
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Item
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Description
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3
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.1
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Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as
amended through July 30, 2008 (Incorporated by reference to
Exhibit 3.1 to Fannie Maes Quarterly Report on
Form 10-Q,
filed August 8, 2008.)
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3
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.2
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Fannie Mae Bylaws, as amended through January 30, 2009
(Incorporated by reference to Exhibit 3.2 to Fannie
Maes Annual Report on
Form 10-K
for the year ended December 31, 2008, filed
February 26, 2009.)
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4
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.1
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series D (Incorporated by reference to
Exhibit 4.1 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.2
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series E (Incorporated by reference to
Exhibit 4.2 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.3
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series F (Incorporated by reference to
Exhibit 4.3 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.4
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series G (Incorporated by reference to
Exhibit 4.4 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.5
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series H (Incorporated by reference to
Exhibit 4.5 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.6
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series I (Incorporated by reference to
Exhibit 4.6 to Fannie Maes registration statement on
Form 10, filed March 31, 2003.)
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4
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.7
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Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series L (Incorporated by reference to
Exhibit 4.7 to Fannie Maes Quarterly Report on
Form 10-Q,
filed August 8, 2008.)
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|
4
|
.8
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series M (Incorporated by reference to
Exhibit 4.8 to Fannie Maes Quarterly Report on
Form 10-Q,
filed August 8, 2008.)
|
|
4
|
.9
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series N (Incorporated by reference to
Exhibit 4.9 to Fannie Maes Quarterly Report on
Form 10-Q,
filed August 8, 2008.)
|
|
4
|
.10
|
|
Certificate of Designation of Terms of Fannie Mae Non-Cumulative
Convertible Preferred Stock,
Series 2004-1
(Incorporated by reference to Exhibit 4.1 to Fannie
Maes Current Report on
Form 8-K,
filed January 4, 2005.)
|
|
4
|
.11
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series O (Incorporated by reference to
Exhibit 4.2 to Fannie Maes Current Report on
Form 8-K,
filed January 4, 2005.)
|
|
4
|
.12
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series P (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed September 28, 2007.)
|
|
4
|
.13
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series Q (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed October 5, 2007.)
|
|
4
|
.14
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series R (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed November 21, 2007.)
|
|
4
|
.15
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series S (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed December 11, 2007.)
|
|
4
|
.16
|
|
Certificate of Designation of Terms of Fannie Mae Non-Cumulative
Mandatory Convertible Preferred Stock,
Series 2008-1
(Incorporated by reference to Exhibit 4.1 to Fannie
Maes Current Report on
Form 8-K,
filed May 14, 2008.)
|
|
4
|
.17
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series T (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed May 19, 2008.)
|
|
4
|
.18
|
|
Certificate of Designation of Terms of Variable Liquidation
Preference Senior Preferred Stock,
Series 2008-2
(Incorporated by reference to Exhibit 4.2 to Fannie
Maes Current Report on
Form 8-K,
filed September 11, 2008.)
|
|
4
|
.19
|
|
Warrant to Purchase Common Stock, dated September 7, 2008
conservator (Incorporated by reference to Exhibit 4.3 to
Fannie Maes Current Report on
Form 8-K,
filed September 11, 2008.)
|
E-1
|
|
|
|
|
Item
|
|
Description
|
|
|
4
|
.20
|
|
Amended and Restated Senior Preferred Stock Purchase Agreement,
dated as of September 26, 2008, between the United States
Department of the Treasury and Federal National Mortgage
Association, acting through the Federal Housing Finance Agency
as its duly appointed conservator (Incorporated by reference to
Exhibit 4.1 to Fannie Maes Current Report on
Form 8-K,
filed October 2, 2008.)
|
|
4
|
.21
|
|
Amendment to Amended and Restated Senior Preferred Stock
Purchase Agreement, dated as of May 6, 2009, between the
United States Department of the Treasury and Federal National
Mortgage Association, acting through the Federal Housing Finance
Agency as its duly appointed conservator (Incorporated by
reference to Exhibit 4.21 to Fannie Maes Quarterly
Report on
Form 10-Q,
filed May 8, 2009.)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to Securities
Exchange Act
Rule 13a-14(a)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to Securities
Exchange Act
Rule 13a-14(a)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350
|
|
101
|
.INS
|
|
XBRL Instance Document*
|
|
101
|
.SCH
|
|
XBRL Taxonomy Extension Schema*
|
|
101
|
.CAL
|
|
XBRL Taxonomy Extension Calculation*
|
|
101
|
.LAB
|
|
XBRL Taxonomy Extension Labels*
|
|
101
|
.PRE
|
|
XBRL Taxonomy Extension Presentation*
|
|
101
|
.DEF
|
|
XBRL Taxonomy Extension Definition*
|
|
|
|
* |
|
The financial information contained in these XBRL documents is
unaudited. The information in these exhibits shall not be deemed
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the
liabilities of Section 18, nor shall they be deemed
incorporated by reference into any disclosure document relating
to Fannie Mae, except to the extent, if any, expressly set forth
by specific reference in such filing. |
E-2