e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2009
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
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, without par value
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New York Stock Exchange
Chicago Stock Exchange
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8.25% Non-Cumulative Preferred Stock,
Series T, stated value $25 per share
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New York Stock Exchange
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8.75% Non-Cumulative Mandatory Convertible
Preferred Stock,
Series 2008-1,
stated value $50 per share
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New York Stock Exchange
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Fixed-to-Floating
Rate Non-Cumulative
Preferred Stock, Series S,
stated value $25 per share
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New York Stock Exchange
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7.625% Non-Cumulative Preferred Stock,
Series R, stated value $25 per share
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New York Stock Exchange
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6.75% Non-Cumulative Preferred Stock,
Series Q, stated value $25 per share
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New York Stock Exchange
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Variable Rate Non-Cumulative Preferred Stock,
Series P, stated value $25 per share
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New York Stock Exchange
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5.50% Non-Cumulative Preferred Stock,
Series N, stated value $50 per share
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New York Stock Exchange
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4.75% Non-Cumulative Preferred Stock,
Series M, stated value $50 per share
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New York Stock Exchange
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5.125% Non-Cumulative Preferred Stock,
Series L, stated value $50 per share
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New York Stock Exchange
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5.375% Non-Cumulative Preferred Stock,
Series I, stated value $50 per share
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New York Stock Exchange
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5.81% Non-Cumulative Preferred Stock,
Series H, stated value $50 per share
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New York Stock Exchange
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Variable Rate Non-Cumulative Preferred Stock,
Series G, stated value $50 per share
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New York Stock Exchange
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Variable Rate Non-Cumulative Preferred Stock,
Series F, stated value $50 per share
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New York Stock Exchange
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Securities registered pursuant
to Section 12(g) of the Act:
Variable Rate Non-Cumulative
Preferred Stock, Series O, stated value $50 per
share
(Title of class)
5.375% Non-Cumulative
Convertible
Series 2004-1
Preferred Stock, stated value $100,000 per share
(Title of class)
5.10% Non-Cumulative Preferred
Stock, Series E, stated value $50 per share
(Title of class)
5.25% Non-Cumulative Preferred
Stock, Series D, stated value $50 per share
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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
(§ 232.405 of this chapter) 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant computed by reference to the
price at which the common stock was last sold on June 30,
2009 (the last business day of the registrants most
recently completed second fiscal quarter) was approximately
$645 million.
As of January 31, 2010, there were
1,116,805,764 shares of common stock of the registrant
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
None
MD&A
TABLE REFERENCE
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Table
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Description
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Page
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Selected Financial Data
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69
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1
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Credit Statistics, Single-Family Guaranty Book of Business
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10
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2
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Level 3 Recurring Financial Assets at Fair Value
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74
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3
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Summary of Consolidated Results of Operations
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83
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4
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Analysis of Net Interest Income and Yield
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84
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5
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Rate/Volume Analysis of Changes in Net Interest Income
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85
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6
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Guaranty Fee Income and Average Effective Guaranty Fee Rate
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87
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7
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Fair Value Gains (Losses), Net
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89
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8
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Credit-Related Expenses
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92
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9
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Allowance for Loan Losses and Reserve for Guaranty Losses
(Combined Loss Reserves)
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94
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10
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Nonperforming Single-Family and Multifamily Loans
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97
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11
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Statistics on Credit-Impaired Loans Acquired from MBS Trusts
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98
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12
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Activity of Credit-Impaired Loans Acquired from MBS Trusts
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99
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13
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Credit Loss Performance Metrics
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100
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14
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Credit Loss Concentration Analysis
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101
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15
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Single-Family Credit Loss Sensitivity
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102
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16
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Impairments and Fair Value Losses on Loans in HAMP
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104
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17
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Business Segment Summary
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105
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18
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Single-Family Business Results
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106
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19
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HCD Business Results
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108
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20
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Capital Markets Group Results
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109
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21
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Mortgage Portfolio Activity
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111
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22
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Mortgage Portfolio Composition
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112
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23
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Amortized Cost, Fair Value, Maturity and Average Yield of
Investments in
Available-for-Sale
Securities
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114
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24
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Investments in Private-Label Mortgage-Related Securities
(Excluding Wraps), CMBS, and Mortgage Revenue Bonds
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115
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25
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Analysis of Losses on Alt-A and Subprime Private-Label
Mortgage-Related Securities (Excluding Wraps)
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116
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26
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Credit Statistics of Loans Underlying Alt-A and Subprime
Private-Label Mortgage-Related Securities (Including Wraps)
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117
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27
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Changes in Risk Management Derivative Assets (Liabilities) at
Fair Value, Net
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119
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28
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Comparative MeasuresGAAP Change in Stockholders
Deficit and Non-GAAP Change in Fair Value of Net Assets
(Net of Tax Effect)
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120
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29
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Supplemental Non-GAAP Consolidated Fair Value Balance Sheets
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123
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30
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Debt Activity
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127
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31
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Outstanding Short-Term Borrowings and Long-Term Debt
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129
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32
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Outstanding Short-Term Borrowings
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130
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iii
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Table
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Description
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Page
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33
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Maturity Profile of Outstanding Debt Maturing Within One Year
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131
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34
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Maturity Profile of Outstanding Debt Maturing in More Than One
Year
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132
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35
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Contractual Obligations
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132
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36
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Cash and Other Investments Portfolio
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135
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37
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Fannie Mae Credit Ratings
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136
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38
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Regulatory Capital Measures
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137
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39
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On- and Off-Balance Sheet MBS and Other Guaranty Arrangements
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140
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40
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LIHTC Partnership Investments
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143
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41
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Composition of Mortgage Credit Book of Business
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147
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42
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Risk Characteristics of Conventional Single-Family Business
Volume and Guaranty Book of Business
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151
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43
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Delinquency Status, Default Rate and Loss Severity of
Conventional Single-Family Loans
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155
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44
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Serious Delinquency Rates
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156
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45
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Conventional Single-Family Serious Delinquency Rate
Concentration Analysis
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157
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46
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Statistics on Single-Family Loan Workouts
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159
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47
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Loan Modification Profile
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161
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48
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Single-Family Foreclosed Properties
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162
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49
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Single-Family Acquired Property Concentration Analysis
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162
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50
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Multifamily Serious Delinquency Rates
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165
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51
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Multifamily Foreclosed Properties
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165
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52
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Mortgage Insurance Coverage
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169
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53
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Activity and Maturity Data for Risk Management Derivatives
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179
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54
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Fair Value Sensitivity of Net Portfolio to Changes in Interest
Rate Level and Slope of Yield Curve
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181
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55
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Duration Gap
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182
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56
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Interest Rate Sensitivity of Financial Instruments
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183
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iv
PART I
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, key provisions of our agreements with the
U.S. Department of the Treasury (Treasury), and
their impact on shareholders in Conservatorship and
Treasury Agreements.
This report contains forward-looking statements, which are
statements about matters that are not historical facts.
Forward-looking statements often include words like
expects, anticipates,
intends, plans, believes,
seeks, estimates, would,
should, could, may, or
similar words. Actual results could differ materially from those
projected in the forward-looking statements as a result of a
number of factors including those discussed in Risk
Factors and elsewhere in this report. Please review
Forward-Looking Statements for more information on
the forward-looking statements in this report.
We provide a glossary of terms in Managements
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A)Glossary of Terms Used
in This Report.
OVERVIEW
Fannie Mae is a government-sponsored enterprise that was
chartered by Congress in 1938 to support liquidity, stability
and affordability in the secondary mortgage market, where
existing mortgage-related assets are purchased and sold. Our
charter does not permit us to originate loans and lend money
directly to consumers in the primary mortgage market. Our most
significant activities include providing market liquidity by
securitizing mortgage loans originated by lenders in the primary
mortgage market into Fannie Mae mortgage-backed securities,
which we refer to as Fannie Mae MBS, and purchasing mortgage
loans and mortgage-related securities in the secondary market
for our mortgage portfolio. We acquire funds to purchase
mortgage-related assets for our mortgage portfolio by issuing a
variety of debt securities in the domestic and international
capital markets. We also make other investments that increase
the supply of affordable housing. During 2009, we concentrated
much of our efforts on preventing foreclosures and helping keep
families in their homes, including through our role in the Obama
Administrations initiatives to protect and stabilize the
housing and mortgage markets. We describe our business
activities below. We also provide information on the
governments housing stability initiatives and our role in
those initiatives.
As a federally chartered corporation, we are subject to
extensive regulation, supervision and examination by FHFA, and
regulation by other federal agencies, including Treasury, the
Department of Housing and Urban Development (HUD),
and the Securities and Exchange Commission (SEC).
Although we are a corporation chartered by the
U.S. Congress, our conservator is a U.S. government
agency, Treasury owns our senior preferred stock and a warrant
to purchase 79.9% of our common stock, and Treasury has made a
commitment under a senior preferred stock purchase agreement to
provide us with funds under specified conditions to maintain a
positive net worth, the U.S. government does not guarantee
our securities or other obligations. Our common stock is listed
on the New York Stock Exchange (NYSE) and traded
under the symbol FNM. Our debt securities are
actively traded in the
over-the-counter
market.
We have been under conservatorship, with 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. FHFA
delegated specified authorities to our Board of Directors and
has delegated to management the authority to conduct our
day-to-day
operations. 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
1
conservatorship, or what changes to our business structure will
be made during or following the conservatorship.
Since our entry into conservatorship, we have entered into
agreements with Treasury that include covenants that
significantly restrict our business activities and provide for
substantial U.S. government financial support. We provide
additional information on the conservatorship, the provisions of
our agreements with the Treasury, and its impact on our business
below under Conservatorship and Treasury Agreements
and Risk Factors.
RESIDENTIAL
MORTGAGE MARKET
The U.S.
Residential Mortgage Market
We conduct business in the U.S. residential mortgage market
and the global securities market. In response to the financial
crisis and severe economic recession that began in December
2007, accelerated in late 2008 and continued to deepen in 2009,
the U.S. government took a number of extraordinary measures
designed to provide fiscal stimulus, improve liquidity and
protect and support the housing and financial markets. Examples
of these measures include: (1) the Federal Reserves
temporary program to purchase up to $1.25 trillion of GSE
mortgage-backed securities by March 31, 2010, which is
intended to provide support to mortgage lending and the housing
market and to improve overall conditions in private credit
markets; (2) the Administrations Making Home
Affordable Program, which is intended to stabilize the housing
market by providing assistance to homeowners and preventing
foreclosures; and (3) the first-time and
move-up
homebuyer tax credits, enacted to help increase home sales and
stabilize home prices.
Total U.S. residential mortgage debt outstanding, which
includes $10.9 trillion of single-family mortgage debt
outstanding, was estimated to be approximately $11.8 trillion as
of September 30, 2009, the latest date for which
information was available, according to the Federal Reserve.
After increasing every quarter since record keeping began in
1952 until the second quarter of 2008, single-family mortgage
debt outstanding has been steadily declining since then. We
owned or guaranteed mortgage assets representing approximately
27.5% of total U.S. residential mortgage debt outstanding
as of September 30, 2009.
We operate our business solely in the United States and its
territories, and accordingly, we generate no revenue from and
have no assets in geographic locations other than the United
States and its territories.
Housing
and Mortgage Market and Economic Conditions
The housing sector, while still fragile, began to show some
signs of stabilization and improvement in the second half of
2009, due in part to the governments policy initiatives
and programs to provide fiscal stimulus, improve liquidity and
protect and support the housing and financial markets, and the
U.S. economy began to emerge from the financial crisis and
severe economic recession that began at the end of 2007. Home
price declines began to moderate and deterioration in the labor
market began to abate as payroll job losses diminished and
weekly claims for unemployment fell steadily as 2009 progressed.
Mortgage interest rates began to decline in late 2008 when the
Federal Reserve announced that it would purchase $1.25 trillion
of GSE mortgage-backed securities in an effort to lower rates,
increase credit availability and bolster the housing market.
Mortgage interest rates remained low throughout 2009, falling to
record lows in the spring of 2009 and again in the fall.
2
The table below presents several key indicators related to the
total U.S. residential mortgage market.
Housing
and Mortgage Market
Indicators(1)
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% Change
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2009
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2008
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2007
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2009
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2008
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Home sales (units in thousands)
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5,530
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5,398
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6,428
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2.4
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%
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(16.0
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)%
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New home sales
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374
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485
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776
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(22.9
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(37.5
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)
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Existing home sales
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5,156
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4,913
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5,652
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4.9
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(13.1
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)
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Home price appreciation (depreciation) based on Fannie Mae House
Price Index
(HPI)(2)
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(2.2
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)%
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(10.1
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)%
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(4.0
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)%
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Home price appreciation (depreciation) based on FHFA Purchase
Only
Index(3)
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(1.2
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)%
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(8.2
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)%
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(1.1
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)%
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Annual average fixed-rate mortgage interest
rate(4)
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5.0
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%
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6.0
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%
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6.3
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%
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Single-family mortgage originations (in billions)
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$
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1,976
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$
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1,580
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$
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2,380
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25.1
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(33.6
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)
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Type of single-family mortgage origination:
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Refinance share
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67
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%
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52
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%
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51
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%
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Adjustable-rate mortgage share
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4
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%
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11
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%
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20
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%
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Total U.S. residential mortgage debt outstanding (in
billions)(5)
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$
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11,764
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$
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11,915
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$
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11,957
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(1.3
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(0.4
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)
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(1) |
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The sources of the housing and
mortgage market data in this table are the Federal Reserve
Board, the Bureau of the Census, HUD, the National Association
of Realtors, the Mortgage Bankers Association and FHFA.
Single-family mortgage originations, as well as the
adjustable-rate mortgage and refinance shares, are based on
February 2010 estimates from Fannie Maes
Economics & Mortgage Market Analysis Group. Certain
previously reported data may have been changed to reflect
revised historical data from any or all of these organizations.
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(2) |
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Calculated internally using
property data information on loans purchased by Fannie Mae,
Freddie Mac and other third-party home sales data. Fannie
Maes HPI is a weighted repeat transactions index, meaning
that it measures average price changes in repeat sales on the
same properties. Fannie Maes HPI excludes prices on
properties sold in foreclosure. The reported home price
appreciation (depreciation) reflects the percentage change in
Fannie Maes HPI from the fourth quarter of the prior year
to the fourth quarter of the reported year.
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(3) |
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FHFA publishes a purchase-only
House Price Index quarterly that is based solely on Fannie Mae
and Freddie Mac loans. As a result, it excludes loans in excess
of conforming loan amounts and includes only a portion of total
subprime and Alt-A loans outstanding in the overall market.
FHFAs HPI is also a weighted repeat transactions index.
The reported home price appreciation (depreciation) reflects the
percentage change in FHFAs HPI from the fourth quarter of
the prior year to the fourth quarter of the reported year.
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(4) |
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Based on the annual average
30-year
fixed-rate mortgage interest rate reported by Freddie Mac.
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(5) |
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Information for 2009 is through
September 30, 2009 and has been obtained from The Federal
Reserves September 2009 mortgage debt outstanding release.
|
Home prices, which rose slightly but consistently in the spring
and summer, were relatively flat in the fourth quarter of 2009.
On average, national home prices declined by approximately 2.2%
in 2009. We estimate that home prices on a national basis have
declined by approximately 16.4% from their peak in the third
quarter of 2006. New home sales and housing starts remained
sluggish throughout 2009. New home sales accounted for just 5.6%
of total home sales in the fourth quarter of 2009, down from a
peak of more than 19% at the beginning of 2005. Existing home
sales rose throughout 2009, particularly during the third and
fourth quarters of 2009, boosted by government support,
including the first-time and move up homebuyer tax credit, as
well as low mortgage interest rates and reduced home prices. The
National Association of Realtors reported that existing home
sales increased by 13.9% in the fourth quarter of 2009the
highest level in nearly three years.
As a result of the increase in existing home sales, the number
of unsold single-family homes in inventory began to drop in the
fourth quarter of 2009. However, the supply of homes as measured
by the inventory/sales ratio remains above long-term average
levels. According to the National Association of Realtors, there
was a 7.2 month average supply of existing unsold homes as
of December 31, 2009, compared with a 9.4 month
average supply as of June 30, 2009 and as of
December 31, 2008. This national average inventory/sales
ratio
3
masks significant regional variation as some regions, such as
Florida, struggle with large inventory overhang while others,
such as California, experience nearly depleted inventories.
An additional factor weighing on the market will be the elevated
level of vacant properties, as reported by the Census Bureau. As
of the fourth quarter of 2009, vacancy rates are above long-term
average levels, with vacant and for-sale properties at an
estimated 780,000 above the long-term average, vacant and
for-rent properties at an estimated 1.2 million above the
long-term average, and properties held off the market for other
reasons at an estimated 500,000 above the long-term average.
These vacant units held off the market, as well as about
5 million mortgages that are seriously delinquent
(90 days or more past due or in the foreclosure process),
represent a shadow inventory weighing on the market and its
return to stability.
We estimate that total single-family mortgage originations
increased by 25% in 2009 to $1.98 trillion, with a purchase
share of 33% and a refinance share of 67%. However, the expected
modest increase in mortgage rates will likely reduce the share
of refinance loans to approximately 45% and, even accounting for
the increase in home purchase loans, total single-family
originations are expected to decline to about $1.3 trillion in
2010.
After increasing every quarter since record keeping began in
1952 until the second quarter of 2008, single-family mortgage
debt outstanding has been steadily declining due to several
factors including rising foreclosures, declining house prices,
increasing
loan-to-value
ratios, increased cash sales, reduced household formation, and
reduced home equity extraction. Total U.S. residential
mortgage debt outstanding fell by approximately 3.1% in the
third quarter of 2009 on an annualized basis, compared with a
decrease of 1.6% in the second quarter of 2009 on an annualized
basis. We anticipate another 1.7% decline in mortgage debt
outstanding in 2010.
Despite signs of stabilization and improvement one out of seven
borrowers was delinquent or in foreclosure during the fourth
quarter of 2009, according to the Mortgage Bankers Association
National Delinquency Survey. The housing market remains under
pressure due to the high level of unemployment, which was the
primary driver of the significant increase in mortgage
delinquencies and defaults in 2009. At the start of the
recession in December 2007, the unemployment rate was
5.0%, based on data from the U.S. Bureau of Labor
Statistics. The unemployment rate rose to 7.7% by the start of
2009 and continued rising during the year, reaching a
26-year high
of 10.1% in October 2009, and falling to 9.7% in January 2010.
We expect the unemployment rate to decline modestly yet remain
elevated throughout 2010.
The most comprehensive measure of the unemployment rate, which
includes those working part-time who would rather work full-time
(part-time workers for economic reasons) and those not looking
for work but who want to work and are available for work
(discouraged workers), was 17.3% in December 2009, close to the
record high of 17.4% in October 2009.
Furthermore, the median time that unemployed workers are
unemployed is at near record levels. Also, there are an
increasing number of households that have exhausted their
unemployment benefits. All of these factors place additional
stress on the ability of homeowners to meet their mortgage and
other consumer debt obligations.
The decline in house prices both nationally and regionally has
left many homeowners with negative equity in their
mortgages, which means their principal balance exceeds the
current market value of their home. This provides an incentive
for borrowers to walk away from their mortgage obligations and
for the loans to become delinquent and proceed to foreclosure.
According to First American CoreLogic, Inc. approximately
11 million, or 24%, of all residential properties with
mortgages were in negative equity in the fourth quarter of 2009,
which contributes to the current estimate of 5 million
seriously delinquent loans based on the Mortgage Bankers
Association National Delinquency Survey. This potential supply
also weighs on the supply/demand balance putting downward
pressure on both house prices and rents. See Risk
Factors for a description of risks to our business
associated with the weak economy and housing market.
Multifamily housing fundamentals remained stressed throughout
2009, primarily due to high unemployment. As a result of the
high unemployment, it is also expected that new household
formations will remain well below average, which in turn has
negatively affected vacancy rates and rent levels. While
apartment property
4
sales increased slightly during the second half of 2009 from the
first half of 2009, we believe the increase in sales was likely
due to sellers reducing sales prices. We believe that there is
likely to be an increase in the supply of multifamily properties
for sale in the near term because of the currently high number
of distressed multifamily properties. In addition, we believe
that exposure to refinancing risk may be higher for multifamily
loans that are due to mature during the next several years.
EXECUTIVE
SUMMARY
Please read this Executive Summary together with our
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) and our
consolidated financial statements as of December 31, 2009
and related notes. This discussion contains forward-looking
statements that are based upon managements current
expectations and are subject to significant uncertainties and
changes in circumstances. Please review Forward-Looking
Statements for more information on the forward-looking
statements in this report and Risk Factors for a
discussion of factors that could cause our actual results to
differ, perhaps materially, from our forward-looking statements.
Please also see MD&AGlossary of Terms Used in
This Report.
Our
Mission
Our public mission is to support liquidity and stability in the
secondary mortgage market and increase the supply of affordable
housing. In connection with our public mission, 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 and elsewhere in
Business, 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. FHFA has approved our business objectives. We face a
variety of different, and potentially conflicting, objectives
including:
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minimizing our credit losses from delinquent mortgages;
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providing liquidity, stability and affordability in the mortgage
market;
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providing 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;
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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.
We currently are concentrating our efforts on minimizing our
credit losses by using foreclosure alternatives to address
delinquent mortgages, starting with alternatives, such as
modifications, that permit people to stay in their homes. Where
there is no available, lower-cost alternative, our goal is to
move to foreclosure expeditiously. We also are continuing our
significant role in the secondary mortgage market through our
guaranty and capital markets businesses. These efforts are
intended to support liquidity and affordability in the mortgage
market, while we continue our foreclosure prevention activities.
Currently, one of the principal ways in which we are working to
minimize foreclosures and delinquent mortgages is through our
participation in the Obama Administrations Making Home
Affordable Program. If the Making Home Affordable Program is
successful in reducing foreclosures and keeping borrowers in
their homes, it may benefit the overall housing
5
market and help in reducing our long-term credit losses. We
provide an update on our participation in the program below
under the heading Homeowner Assistance Initiatives.
The ongoing adverse conditions in the housing and mortgage
markets, along with the continuing credit deterioration
throughout our mortgage credit book of business and the costs
associated with our efforts pursuant to our mission, will
increase the amount of funds that Treasury is required to
provide to us. In turn, these factors make it exceedingly
unlikely that we will be able to return to long-term
profitability anytime in the foreseeable future. Further, there
is significant uncertainty regarding the future of our business.
In addition, our regulators, the Administration and Congress are
considering options for the future state of Fannie Mae, Freddie
Mac and the Federal Home Loan Bank system.
Summary
of our Financial Performance for 2009
Our financial results for 2009 reflected the continued adverse
impact of the weak economy and housing market, which has
resulted in record mortgage delinquencies and contributed to our
recording significant credit-related expenses and net losses
during each quarter of the year. We recorded a net loss
attributable to common stockholders, which includes dividends on
senior preferred stock, of $74.4 billion and a diluted loss
per share of $13.11 in 2009, compared with a net loss
attributable to common stockholders of $59.8 billion and a
diluted loss per share of $24.04 in 2008. The $14.7 billion
increase in our net loss in 2009 from 2008 was primarily due to
the increase in our credit-related expenses, which totaled
$73.5 billion in 2009 and were more than double our
credit-related expenses for 2008, and to our recognition of
$5.5 billion in 2009 in
other-than-temporary
impairment losses on our federal low-income housing tax credit
(LIHTC) investments. Our credit-related expenses and
other-than-temporary
impairment losses were partially offset by a lower level of fair
value losses of $17.3 billion and a $5.7 billion
increase in net interest income. In addition, we recorded a tax
benefit of $985 million in 2009, compared with a tax
expense of $13.7 billion in 2008 due to the carryback in
2009 of a portion of our current year tax loss to prior years
and recognition of expense for a net deferred tax asset
valuation allowance of $25.7 billion in 2009 as compared to
$30.8 billion in 2008. The decrease in diluted loss per
share from 2008 to 2009 is primarily due to the issuance of a
common stock warrant to Treasury in September 2008 that resulted
in a substantial increase in our weighted-average shares
outstanding during 2009 over 2008.
For the fourth quarter of 2009, we recorded a net loss
attributable to common stockholders of $16.3 billion and a
diluted loss per share of $2.87, compared with a net loss
attributable to common stockholders of $19.8 billion and a
diluted loss per share of $3.47 for the third quarter of 2009.
The $3.4 billion decrease in our net loss for the fourth
quarter of 2009 from the third quarter of 2009 was driven
principally by a lower level of credit-related expenses of
$10.0 billion, which was offset by the recognition of
$5.0 billion in the fourth quarter of 2009 in
other-than-temporary
impairment losses on our LIHTC investments.
Because of our significant net losses, we have not been able to
maintain a positive net worth without government funding since
September 30, 2008. We had a net worth deficit of
$15.3 billion as of December 31, 2009, compared with a
net worth deficit of $15.0 billion as of September 30,
2009, and $15.2 billion as of December 31, 2008. Our
net worth deficit as of December 31, 2009 was negatively
impacted by the recognition of our net loss of
$72.0 billion and senior preferred stock dividends of
$2.5 billion. These reductions in our net worth were offset
by our receipt of $59.9 billion in funds from Treasury
under the senior preferred stock purchase agreement, as well as
from a reduction in unrealized losses on
available-for-sale
securities of $4.9 billion and the reversal of a portion of
our deferred tax asset valuation allowance, in the amount of
$3.0 billion, in connection with our April 1, 2009
adoption of the new accounting standard for assessing
other-than-temporary
impairments. We also reclassified $6.4 billion in
unrealized losses on
available-for-sale
securities to
other-than-temporary
impairments, which were recognized as part of our net loss for
2009. Our net worth, which is the basis for determining the
amount that Treasury has committed to provide us under the
senior preferred stock purchase agreement, reflects the
Total deficit reported in our consolidated balance
sheets prepared in accordance with GAAP as of the end of each
period.
We generally may request funds under Treasurys commitment
on a quarterly basis in order to maintain a positive net worth.
We had received an aggregate of $59.9 billion in funding
from Treasury as of
6
December 31, 2009. In February of 2010, the Acting Director
of FHFA submitted a request to Treasury on our behalf for an
additional $15.3 billion to eliminate our net worth deficit
as of December 31, 2009, and requested receipt of those
funds on or before March 31, 2010. When Treasury provides
the additional funds that have been requested, we will have
received an aggregate of $75.2 billion from Treasury. The
aggregate liquidation preference on the senior preferred stock
will be $76.2 billion, which will require an annualized
dividend of approximately $7.6 billion. This amount exceeds
our reported annual net income for all but one of the last eight
years, in most cases by a significant margin. Our senior
preferred stock dividend obligation, combined with potentially
substantial commitment fees payable to Treasury starting in 2011
(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 Risk
Factors for more information on the risks to our business
posed by our dividend obligations under the senior preferred
stock purchase agreement.
In addition to our GAAP consolidated balance sheet, we provide a
supplemental non-GAAP fair value balance sheet. While some
assets and liabilities are reported at fair value on our GAAP
consolidated balance sheet, we report all of our assets and
liabilities at estimated fair value on our non-GAAP fair value
balance sheet. We derive the fair value of our net assets, which
is different from our GAAP net worth, from our supplemental
non-GAAP fair value balance sheet. The fair value of our net
assets increased by $6.4 billion in 2009, resulting in a
deficit of $98.8 billion as of December 31, 2009,
compared with a deficit of $90.4 billion as of
September 30, 2009, and $105.2 billion as of
December 31, 2008. The $8.4 billion decrease in the
fair value of our net assets in the fourth quarter of 2009 was
primarily due to a decrease in our net guaranty assets driven by
an increase in the estimated fair value of our guaranty
obligations. The $6.4 billion increase in the fair value of
our net assets in 2009 was primarily due to $59.9 billion
in funds received from Treasury under the senior preferred stock
purchase agreement, offset by a decrease in the fair value of
our net assets, excluding capital transactions, of
$51.1 billion in 2009, primarily due to the adverse impact
on our net guaranty assets from the continued weakness in the
housing market and the increase in unemployment, which
contributed to a significant increase in the fair value of our
guaranty obligations. The Federal Reserves program to
purchase mortgage-backed securities of Fannie Mae, Freddie Mac
and Ginnie Mae and debt securities of Fannie Mae, Freddie Mac
and the Federal Home Loan Banks had a positive impact on the
fair value of our net assets. The significant purchasing of
agency MBS and debt by the Federal Reserve in 2009 helped in
narrowing the spreads between agency MBS and debt and Treasury
yields to the levels exhibited prior to the financial crisis,
which contributed to an increase in the fair value of our net
assets. We describe in greater detail the differences between
our GAAP balance sheet and supplemental non-GAAP balance sheet
in MD&ASupplemental
Non-GAAP InformationFair Value Balance Sheets.
Although there have been signs of stabilization in the housing
market and economy, we expect that our credit-related expenses
will remain high in the near term due in large part to the
stress of high unemployment and underemployment on borrowers and
the fact that many borrowers who owe more on their mortgages
than their houses are worth are defaulting. As a result, we
expect to continue to have losses and net worth deficits in
2010, which will require us to request additional funds from
Treasury. 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. We provide
additional detail on the terms of the senior preferred stock
purchase agreement, as amended, and the conditions under which
we may be placed into receivership in Conservatorship and
Treasury Agreements.
Effective January 1, 2010, we adopted new accounting
standards for transfers of financial assets and consolidation,
which will have a major impact on the presentation of our
consolidated financial statements. The new standards require
that we consolidate the substantial majority of our MBS trusts
and record the underlying assets (typically mortgage loans) and
debt (typically bonds issued by the trusts in the form of Fannie
Mae MBS certificates) of these trusts as assets and liabilities
on our consolidated balance sheet. Please see
MD&AOff-Balance Sheet Arrangements and Variable
Interest EntitiesElimination of QSPEs and Changes in the
Consolidation Model for Variable Interest Entities for a
discussion of the impact of these new accounting standards on
our accounting and financial statements.
7
Credit
Overview
We discuss below in this section a number of steps we have taken
to minimize our credit losses from delinquent mortgages in our
guaranty book of business. Under the heading Homeowner
Assistance Initiatives below, we provide more detailed
information on our work to expand refinance opportunities for
borrowers and to help homeowners keep their homes, or at least
avoid foreclosure.
2009
Acquisitions
In addition to our efforts, discussed below, to minimize credit
losses on loans already in our book, during 2008 and early 2009
we made changes in our pricing and eligibility standards that
helped to improve the risk profile of our new single-family
business in 2009 and support sustainable homeownership. In 2009,
we purchased or guaranteed an estimated $823.6 billion in
new business, measured by unpaid principal balance. Compared to
our 2008 acquisitions, the composition of our 2009 acquisitions
experienced a decline in the average original
loan-to-value
(LTV) ratio from 72% to 67%, an increase in the
average FICO credit score from 738 to 761, and a shift in
product mix to more fully amortizing fixed-rate mortgage loans.
The early performance of the single-family loans we acquired in
2009 appears stronger than loans acquired in any other year in
the past decade. While this early performance is strong, we
cannot yet predict how these loans will ultimately perform.
Moreover, we expect the ultimate performance of these loans will
be affected by macroeconomic trends, including unemployment, the
economy, interest rates, and house prices. As of
December 31, 2009, loans acquired in 2009 represented 23.6%
of our total single family guaranty-book of business. We expect
that these loans may have relatively slow prepayment speeds, and
therefore may remain in our book of business for a relatively
long time, due to the historically low interest rates available
throughout 2009, which resulted in our 2009 acquisitions overall
having an average interest rate of 4.9%. In addition to changes
in our pricing and eligibility standards, our 2009 acquisitions
reflect changes in the eligibility standards of mortgage
insurers, which further reduced our acquisition of loans with
higher LTV ratios. Also, the Federal Housing Administration
(FHA) has become the lower-cost option, or in some
cases the only option, for loans with higher LTV ratios, which
further reduced our acquisition of these loans. Our 2009
acquisitions profile was further enhanced by a significant
increase in our acquisition of refinanced loans, which generally
have a stronger credit profile as the act of refinancing
indicates the borrowers ability and desire to maintain
homeownership. Whether our 2010 acquisitions exhibit the same
credit profile as our 2009 acquisitions will depend on many
factors, including our future pricing and eligibility standards,
our future objectives, mortgage insurers eligibility
standards, and future activity by our competitors, including FHA.
Loss
Mitigation Efforts
The performance of loans in our guaranty book of business
deteriorated significantly during 2009 as a result of the
sustained decline in home prices, the weakened economy, and the
rise in unemployment and underemployment during the year. In
order to minimize our credit losses, we believe we must
(1) keep more borrowers current on their loan payments
through outreach programs to identify and assist borrowers on
the verge of delinquency; (2) prevent borrowers from
defaulting on their loans through home retention strategies,
including loan modifications, repayment plans and forbearances;
(3) reduce the costs associated with foreclosures by
promoting foreclosure alternatives, including preforeclosure
sales and
deeds-in-lieu
of foreclosure; (4) move to foreclosure expeditiously where
there is no available, lower-cost alternative; (5) expedite
the sales of REO properties, or real-estate owned by
Fannie Mae because we have obtained it through foreclosure or a
deed-in-lieu
of foreclosure, and transform stagnant properties into cash
generating assets through rental and leasing programs; and
(6) aggressively pursue collections on repurchase and
compensation claims due from lenders and mortgage insurers. It
will be through these strong asset management initiatives that
we will achieve our stated goal of decreasing our credit losses
and stabilizing markets. We are pursuing a reduction in our
credit losses through the following key activities.
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In support of homeowners who were current on their loans, we
began offering expanded refinance options through Refi
Plustm,
which permitted over 300,000 borrowers to reduce their monthly
mortgage payments by an average of $153, and we began offering
borrowers refinancing under the Home Affordable
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8
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Refinance Program (HARP) an opportunity to benefit
from lower levels of mortgage insurance and higher LTV ratios
than what would have been allowed under our traditional
standards.
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We strengthened our credit loss management operations by adding
214 new full-time employees and a substantial number of
contractors, and by hiring an Executive Vice
PresidentCredit Portfolio Management. We also added 82 new
full-time employees to strengthen our REO sales capabilities.
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We developed and deployed new loss mitigation techniques,
including through our activities under the Home Affordable
Modification Program (HAMP), to expand the options
available to servicers to manage delinquencies and minimize
losses.
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We have worked with some of our servicers to establish
high-touch servicing protocols designed for managing
seriously delinquent loans, and we are working to increase the
number of loans that are serviced using these
high-touch protocols.
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We introduced new lease options that permit tenants and
defaulting homeowners to continue living for a period in
properties that we obtain through foreclosure or
deed-in-lieu
of foreclosure.
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As delinquencies have increased, we have accordingly increased
our reviews of delinquent loans to uncover loans that do not
meet our underwriting and eligibility requirements. As a result,
we have increased the number of demands we make for lenders to
repurchase these loans or compensate us for losses sustained on
the loans, as well as requests for repurchase or compensation
for loans for which the mortgage insurer rescinds coverage.
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The actions we have taken to stabilize the housing market and
minimize our credit losses have had and will continue to have,
at least in the short term, a material adverse effect on our
results of operations and financial condition, including our net
worth. See MD&AConsolidated Results of
OperationsFinancial Impact of the Making Home Affordable
Program on Fannie Mae for information on our impairments
and fair value losses on loans that entered trial modifications
under HAMP during 2009. These actions have been undertaken with
the goal of reducing our future credit losses below what they
otherwise would have been. It is difficult to predict how
effective these actions ultimately will be in reducing our
credit losses and, in the future, it may be difficult to measure
the impact our actions ultimately have on our credit losses.
Credit
Performance
The comparative credit performance data for the mortgage loans
in our single-family guaranty book of business presented in
Table 1 for each quarter of 2009 illustrates the continued
deterioration in the credit quality of our overall single-family
guaranty book of business and the financial impact of this
deterioration. We also provide summarized data on our loan
workout efforts to keep people in their homes and prevent
foreclosures.
9
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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Full
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Full
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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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Year
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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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5.38
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%
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5.38
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%
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4.72
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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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Nonperforming
loans(3)
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$
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215,505
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$
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215,505
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$
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197,415
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$
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170,483
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$
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144,523
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$
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118,912
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Foreclosed property inventory
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(number of properties)
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86,155
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86,155
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72,275
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62,615
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62,371
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63,538
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Combined loss
reserves(4)
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$
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62,848
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$
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62,848
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$
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64,724
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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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During the period:
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Foreclosed property acquisitions (number of
properties)(5)
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145,617
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47,189
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40,959
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32,095
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25,374
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94,652
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Single-family credit-related
expenses(6)
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$
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71,320
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$
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10,943
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$
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21,656
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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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Single-family credit
losses(7)
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$
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13,362
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$
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3,976
|
|
|
$
|
3,620
|
|
|
$
|
3,301
|
|
|
$
|
2,465
|
|
|
$
|
6,467
|
|
Loan workout activity (number of loans):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total home retention loan
workouts(8)
|
|
|
160,722
|
|
|
|
49,871
|
|
|
|
37,431
|
|
|
|
33,098
|
|
|
|
40,322
|
|
|
|
112,247
|
|
Preforeclosure sales and
deeds-in-lieu
of foreclosure
|
|
|
39,617
|
|
|
|
13,459
|
|
|
|
11,827
|
|
|
|
8,360
|
|
|
|
5,971
|
|
|
|
11,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan workouts
|
|
|
200,339
|
|
|
|
63,330
|
|
|
|
49,258
|
|
|
|
41,458
|
|
|
|
46,293
|
|
|
|
123,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan workouts as a percentage of delinquent loans in our
single-family guaranty book of
business(9)
|
|
|
12.24
|
%
|
|
|
15.48
|
%
|
|
|
12.98
|
%
|
|
|
12.42
|
%
|
|
|
16.12
|
%
|
|
|
11.32
|
%
|
|
|
|
(1) |
|
Our single-family guaranty book of
business consists of (a) single-family mortgage loans held
in our mortgage portfolio, (b) single-family Fannie Mae MBS
held in our mortgage portfolio, (c) single-family Fannie
Mae MBS held by third parties, and (d) other credit
enhancements that we provide on single-family mortgage assets,
such as long term-standby commitments. It excludes non-Fannie
Mae mortgage-related securities held in our investment portfolio
for which we do not provide a guaranty.
|
|
(2) |
|
Calculated based on the 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.
|
|
(3) |
|
Represents the total amount of
nonperforming loans, including troubled debt restructurings and
HomeSaver Advance first-lien loans that are 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. We generally classify loans as
nonperforming when the payment of principal or interest on the
loan is two months or more past due.
|
|
(4) |
|
Consists of the allowance for loan
losses for loans held for investment in our mortgage portfolio
and the reserve for guaranty losses related to both
single-family loans backing Fannie Mae MBS and single-family
loans that we have guaranteed under long-term standby
commitments.
|
|
(5) |
|
Includes acquisitions through
deeds-in-lieu of foreclosure.
|
|
(6) |
|
Consists of the provision for
credit losses and foreclosed property expense.
|
|
(7) |
|
Consists of (a) charge-offs,
net of recoveries and (b) foreclosed property expense;
adjusted to exclude the impact of fair value losses resulting
from credit-impaired loans acquired from MBS trusts and
HomeSaver Advance loans.
|
|
(8) |
|
Consists of (a) modifications,
which do not include trial modifications under the Home
Affordable Modification Program, as well as repayment plans and
forbearances that have been initiated but not completed;
(b) repayment plans and forbearances completed and
(c) HomeSaver Advance first-lien loans. See Table 46:
Statistics on Single-Family Loan Workouts in
MD&ARisk ManagementCredit Risk
Management for additional information on our various types
of loan workouts.
|
|
(9) |
|
Calculated based on annualized
problem loan workouts during the period as a percentage of
delinquent loans in our single-family guaranty book of business
as of the end of the period.
|
10
Table 1 does not include information about trial modifications
under HAMP that have not yet become permanent modifications or
repayment and forbearance plans that have been initiated but not
completed. As of December 31, 2009, 291,053 of our loans
were in trial modification periods under HAMP, as reported by
servicers to the system of record for the program.
Our single-family serious delinquency rate of 5.38% as of
December 31, 2009 was more than double the rate of 2.42% at
the end of 2008. In addition, our seriously delinquent loan
population aged significantly during 2009. The increase in
delinquencies during 2009 was primarily driven by the duration
and depth of the decline in home prices and the rise in
unemployment and underemployment among borrowers. These factors
adversely affected not only higher risk loan categories, but
also loans traditionally considered to have a lower risk of
default, such as loans with lower original LTV ratios and higher
FICO credit scores, fixed-rate mortgages and loans past the peak
default period of two to six years. Certain loan categories,
however, continued to contribute disproportionately to the
increase in our nonperforming loans and credit losses in 2009.
These categories include: loans on properties in certain Midwest
states, 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 duration and depth of
the decline in home prices and the rise in unemployment also
contributed to the aging of our seriously delinquent loan
population. In addition, our foreclosure prevention efforts
have, by design, contributed to the rise in and aging of our
delinquencies as we have delayed some foreclosure proceedings
until the borrower has been sufficiently considered for a home
retention solution.
The decline in home prices has made it more difficult for
delinquent borrowers to sell their homes and resolve all their
mortgage delinquencies. Approximately 14% of the loans in our
guaranty book of business had
mark-to-market
LTV ratios of 100% or greater at the end of 2009, compared with
approximately 12% at the end of 2008. As a result of the decline
in home prices, our average credit loss severity, and average
initial charge-off per default, increased during 2009.
The substantial increase in our loss reserves at
December 31, 2009 compared with the prior year was driven
by further deterioration of our credit book and reflects our
estimate of the losses inherent in our guaranty book of business
as of the end of each period. Higher provisions for credit
losses, through which we maintain appropriate loss reserves,
were the major driver of the $73.5 billion in
credit-related expenses we recognized in 2009, compared with the
$29.8 billion we recognized in 2008. Our loss reserve
coverage to total nonperforming loans increased to 29.98% as of
December 31, 2009, from 20.76% as of December 31, 2008.
We experienced a significant increase in our credit losses in
2009; however, the level of our credit losses was substantially
lower than our credit-related expenses, due in part to the
delays in foreclosures (that is, charge-offs) resulting from our
home retention efforts, as well as new laws enacted in a number
of states that lengthen the time required to complete a
foreclosure. Our credit losses totaled $13.6 billion in
2009, compared with credit losses of $6.5 billion in 2008.
Our credit-related expenses, which consist of our provision for
credit losses and our foreclosed property expense, are included
in our consolidated statement of operations. Our credit losses,
by contrast, are not defined within GAAP and may not be
calculated in the same manner as similarly titled measures
reported by other companies. We measure our credit losses as our
charge-offs, net of recoveries plus our foreclosed property
expense, adjusted to eliminate the impact associated with our
HomeSaver Advance loans and our acquisition of credit-impaired
loans from MBS trusts, in the manner described in
MD&AConsolidated Results of
OperationsCredit-Related ExpensesCredit Loss
Performance Metrics.
Although our combined loss reserves increased significantly in
2009 compared with 2008, we did not add to our combined loss
reserves in the fourth quarter of 2009. The slight decline in
our loss reserves as of December 31, 2009 compared with
September 30, 2009 was due to a moderation in the pace at
which loans transitioned to seriously delinquent status and an
improvement in our loss severities due to stabilizing home
prices as well as an increase in the number of loans acquired
from our MBS trusts in order to complete workouts for the loans.
To the extent that the acquisition cost of these loans exceeded
the estimated fair value, we recorded a fair value loss
charge-off against the Reserve for guaranty losses.
Recognizing these fair value losses, which typically meet or
exceed the actual credit losses we ultimately realize, has the
effect of reducing the inherent losses that remain in our
guaranty book of business, and consequently reduces our
11
combined loss reserves. With the adoption of new accounting
standards on January 1, 2010, we will no longer recognize
the acquisition of loans from the MBS trusts that we have
consolidated as a purchase with an associated fair value loss
for the difference between the fair value of the acquired loan
and its acquisition cost, as these loans will already be
reflected on our consolidated balance sheet.
Current market and economic conditions have adversely affected
the liquidity and financial condition of many of our
institutional counterparties, particularly mortgage insurers,
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. See
MD&ARisk ManagementCredit Risk
ManagementInstitutional Counterparty Credit Risk
Management for more information about our institutional
counterparty credit risk.
Homeowner
Assistance Initiatives
In 2009, as the weak economy, home price declines and rising
unemployment led to a substantial increase in the population of
distressed borrowers, we devoted significant resources to a
variety of foreclosure prevention and refinance programs. These
programs are consistent with our mission of keeping people in
their homes and providing liquidity and affordability to the
market.
Our homeowner assistance initiatives can be grouped broadly into
three categories: (1) initiatives designed to increase the
number of borrowers eligible for mortgage refinances;
(2) home retention strategies, including loan
modifications, repayment plans and forbearances, and HomeSaver
Advance loans, which are described below; and
(3) foreclosure alternatives, including preforeclosure
sales and
deeds-in-lieu
of foreclosure. Our initiatives to increase the number of
borrowers eligible to refinance their mortgages help borrowers
obtain a monthly payment that is more affordable now and into
the future or a more stable loan product, such as a fixed-rate
mortgage loan in lieu of an adjustable-rate mortgage loan. Our
home retention strategies and foreclosure alternatives are
intended to help borrowers who have been affected by the
challenging housing and economic environment stay in their homes
or, for borrowers who are unable or unwilling to stay in their
homes, avoid the pressure and stigma associated with a
foreclosure. Additionally, sustainable home retention workouts
and foreclosure alternative strategies are designed to lead to
an overall reduction in our credit losses. Specifically,
sustainable home retention workouts reduce defaults that would
have otherwise occurred in our guaranty book, thereby reducing
costly foreclosure losses. Foreclosure alternative strategies,
while not avoiding a borrower default, reduce the severity of
the loss that we suffer from the default.
During 2009, our homeowner assistance efforts were principally
focused on the Making Home Affordable Program, including HAMP
and HARP, details of which were first announced by the Obama
Administration in March 2009. For more information on these
programs, please see Making Home Affordable Program.
In our instructions to the servicers who service our loans, we
require that all problem loans first be evaluated under HAMP
before being considered for other workout alternatives. If it is
determined that a borrower in default is not eligible for
modification under HAMP, our servicers are required to exhaust
all other workout alternatives before proceeding to foreclosure.
Refinance
Programs
We experienced a significant increase in our single-family
refinancing volume in 2009 relative to 2008, primarily due to a
sustained decline in mortgage rates to record or near-record
lows. We acquired or guaranteed approximately 2,484,000 loans
that were refinancings in 2009, a 60% increase over 2008. Our
refinancing volume includes approximately 329,000 loans
refinanced through our Refi Plus initiatives, which provide
refinance solutions for eligible Fannie Mae loans, of which
approximately 104,000 loans were refinanced under HARP. On
average, borrowers who refinanced during 2009 through our Refi
Plus initiatives reduced their monthly mortgage payments by
$153. In addition, borrowers refinancing under HARP were able to
benefit from lower levels of mortgage insurance and higher LTV
ratios than what would have been allowed under our traditional
standards.
12
Home
Retention Strategies
In 2009, we completed home retention workouts for over 160,000
loans with an aggregate unpaid principal balance of
$27.7 billion. On a loan count basis, this represented a
43% increase over home retention workouts completed in 2008.
Loan modifications were the most significant driver of the
increase in home retention workouts from 2008 to 2009 as we
experienced a shift in our approach to workouts to address the
increasing number of borrowers facing long-term, rather than
short-term, financial hardships. Our loan modifications in 2009
targeted permanent changes to loan terms to further increase the
likelihood of long-term home retention, in contrast to HomeSaver
Advance Loans, which are unsecured personal loans in the amount
of past due payments on a borrowers mortgage loan used to
bring the mortgage loan current. We provided fewer HomeSaver
Advance loans in 2009 than in 2008.
Not counting trial modifications under HAMP, in 2009 we
completed approximately 99,000 loan modifications, an increase
of 195% over 2008. Loan modifications represented 61% of home
retention workouts completed in 2009 compared with 30% in 2008.
In 2009, the characteristics of our modifications changed
notably, with 93% of modifications involving term extensions,
interest rate reductions, or a combination of both, compared
with 57% in 2008. As a result, approximately 58% of
modifications completed in 2009 resulted in a reduction in
initial monthly payments of greater than 20%, compared with 13%
for modifications completed in 2008. This level of payment
reduction should provide valuable assistance to borrowers in
sustaining home ownership and, in turn, should help us reduce
borrower defaults, which are costly for us.
Our modification statistics do not include HAMP trial
modifications until they become permanent modifications. HAMP
was our primary loan modification program in 2009; however, many
of the trial modifications entered into during 2009 have not yet
converted to a permanent modification solution due to the fact
that the trial period is still underway or the trial period has
been extended for servicers to obtain documents and perform
final modification underwriting. A borrower receives payment
relief during the HAMP trial period to the extent that the
borrower pays according to the trial modification plan. While
HAMP is the first home retention workout that servicers must
consider for borrowers, we continued to complete modifications
for those borrowers who did not qualify for HAMP, with the vast
majority of our modifications in 2009 completed through our
standard modification approaches. Including HAMP trials entered
into during 2009, our HAMP efforts represented the vast majority
of our total foreclosure prevention actions. As of
December 31, 2009, 291,053 of our loans were in trial
modification periods under HAMP, as reported by servicers to the
system of record for the program. The number of our HAMP trials
increased substantially in the third and fourth quarters of
2009, and we expect our permanent HAMP modifications to increase
significantly as trial periods are completed and permanent
modification offers are extended. However, it is difficult to
predict how many trial modifications for our loans under HAMP
will ultimately convert to permanent loan modifications.
Foreclosure
Alternatives
If we are unable to provide a viable home retention option
through HAMP or other programs, we may offer foreclosure
alternatives, including preforeclosure sales and
deeds-in-lieu
of foreclosure. In 2009, our total volume of preforeclosure
sales and
deeds-in-lieu
of foreclosures increased by 239% to approximately 40,000 in
2009 compared with approximately 12,000 in 2008. We have
increasingly relied on foreclosure alternatives, primarily
preforeclosure sales and
deeds-in-lieu
of foreclosure, as a growing number of borrowers have faced
longer-term economic hardships that cannot be solved through a
home retention solution.
Providing
Mortgage Market Liquidity
In 2009, we purchased or guaranteed an estimated
$823.6 billion in new business, measured by unpaid
principal balance, which included financing for approximately
3,125,000 conventional single-family loans and approximately
372,000 multifamily units. The $823.6 billion in new
single-family and multifamily business in 2009 consisted of
$496.0 billion in Fannie Mae MBS acquired by third parties,
and $327.6 billion in mortgage loans and mortgage-related
securities that we purchased for our mortgage investment
portfolio.
13
Our mortgage credit book of businesswhich 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
assetstotaled $3.2 trillion as of September 30, 2009,
which represented approximately 27.5% of U.S. residential
mortgage debt outstanding on September 30, 2009, the latest
date for which the Federal Reserve has estimated
U.S. residential mortgage debt outstanding. Our estimated
market share of new single-family mortgage-related securities
issuances was 38.9% in the fourth quarter of 2009 and 46.3% for
the full year, making us the largest single issuer of
mortgage-related securities in the secondary market in both
periods. In comparison, our estimated market share of new
single-family mortgage-related securities issuances was 44.0% in
the third quarter of 2009, and 41.7% a year ago in the fourth
quarter of 2008. Our estimated market share for 2009 of 46.3%
includes $94.6 billion of whole loans held for investment
in our mortgage portfolio that were securitized into Fannie Mae
MBS in the second quarter, but retained in our mortgage
portfolio and consolidated on our consolidated balance sheets.
If we exclude these Fannie Mae MBS from the estimation of our
market share, our estimated 2009 market share of new
single-family mortgage-related securities issuances was 43.2%,
still high enough to make us the largest single issuer of
mortgage-related securities in the secondary market in 2009. Our
market share remained high during 2009, primarily due to the
dramatic curtailment of issuances of private-label securities
since the end of 2007.
We remain a constant source of liquidity in the multifamily
market and we have been successful with our goal of expanding
our multifamily MBS business and broadening our multifamily
investor base. Approximately 81% of our total multifamily
production in 2009 was an MBS execution, compared with 17% in
2008.
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 whole loan conduit
activities, early funding activities, dollar roll transactions,
and REMICs and other structured securitizations, which we
describe in Business SegmentsCapital Markets
Group.
Liquidity
In response to the strong demand that we experienced for our
debt securities during 2009, we issued a variety of non-callable
and callable debt securities in a wide range of maturities to
achieve cost-efficient funding and to strengthen our debt
maturity profile. In particular, we issued a significant amount
of long-term debt during this period, which we then used to
repay maturing debt and prepay more expensive long-term debt. As
a result, as of December 31, 2009, our outstanding
short-term debt, based on its original contractual maturity,
decreased as a percentage of our total outstanding debt to 26%
from 38% as of December 31, 2008. In addition, the
weighted-average interest rate on our long-term debt (excluding
debt from consolidations) based on its original contractual
maturity, decreased to 3.71% as of December 31, 2009 from
4.66% as of December 31, 2008.
We believe that our ready access to long-term debt funding
during 2009 has been primarily due to the actions taken by the
federal government to support us and the financial markets.
Accordingly, we believe that continued federal government
support of our business and the financial markets, as well as
our status as a GSE, are essential to maintaining our access to
debt funding. Changes or perceived changes in the
governments support 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, results of operations and
ability to continue as a going concern. Demand for our debt
securities could decline in the future, as the Federal Reserve
concludes its agency debt and MBS purchase programs during the
first quarter of 2010, or for other reasons. Despite the
expiration of the credit facility we had with Treasury and a
Treasury MBS purchase program, as well as the scheduled
expiration of the Federal Reserves program to purchase
agency MBS and debt, as of the date of this filing, demand for
our long-term debt securities continues to be strong.
See MD&ALiquidity and Capital
ManagementLiquidity Management for more information
on our debt funding activities and Risk Factors for
a discussion of the risks to our business posed by our reliance
on the issuance of debt securities to fund our operations.
14
Outlook
Overall Housing and Mortgage Market
Conditions. Although the financial markets have
begun to recover, they remain weak on a historical basis. We
expect this weakness in the real estate financial markets to
continue in 2010. We expect home sales to slow somewhat in the
coming months from the fourth quarter 2009 pace; however, the
expanded homebuyer tax credit, combined with historically low
mortgage rates, should support a strong sales pace through the
first half of 2010 before slowing somewhat in the second half.
We also expect home sales to start a longer term growth path by
the end of 2010, if the labor market shows improvement. The
continued deterioration in the performance of outstanding
mortgages, however, will result in the foreclosure of troubled
loans, which is likely to add to the excess housing inventory.
If, as we expect, interest rates rise modestly, the pace at
which the excess inventory is absorbed will decline.
We expect heightened default and severity rates to continue
during 2010, and home prices, particularly in some geographic
areas, may decline further. All of these conditions may worsen
if the increase in the unemployment rate exceeds current
expectations on either a national or regional basis. We continue
to expect further increases in the level of foreclosures and
single-family delinquency in 2010, as well as in the level of
multifamily defaults and loss severity. We expect the decline in
residential mortgage debt outstanding to continue through 2010,
which would mark three consecutive annual declines.
Approximately 80% of our single-family business in 2009
consisted of refinancings. We expect a decline in total
originations as well as a potential shift of the market away
from refinance activity during 2010, to have a significant
adverse impact on our business volumes.
Home Price Declines: Home prices declined
approximately 2.2% in 2009, following a decline of approximately
10% in 2008. We expect home prices to stabilize in 2010 and that
the
peak-to-trough
home price decline on a national basis will range between 17% to
24%. 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
different percentages for comparable declines. These estimates
also contain significant inherent uncertainty in the current
market environment 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 the end of
the Federal Reserves MBS purchase program; and the impact
of those actions on home prices, unemployment and the general
economic and interest rate environment. 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 declines.
Our 17% to 24%
peak-to-trough
home price decline estimate compares with an approximately 32%
to 40%
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 not include known
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-Related Expenses. Our credit-related
expenses in 2009 were more than double our credit-related
expenses in 2008. We expect that our credit-related expenses
will remain high in 2010, as we believe that the level of our
nonperforming loans will remain elevated for a period of time.
Absent further significant economic deterioration, however, we
anticipate that our credit-related expenses will be lower in
2010 than in 2009. Our expectation is based on several factors,
including (1) the slow-down in the rate of increase in
15
average loss severities as home price declines have begun to
moderate and stabilize in some regions, (2) our current
expectation that, as 2010 progresses, credit deterioration will
continue at a slower pace, coupled with an increase in the pace
of foreclosures and problem loan workouts, and result in a
slower rate of increase in delinquencies, and (3) our
January 1, 2010 adoption of new accounting standards as a
result of which we will no longer recognize the acquisition of
loans from the MBS trusts that we have consolidated as a
purchase with an associated fair value loss for the difference
between the fair value of the acquired loan and its acquisition
cost, as these loans will already be reflected on our
consolidated balance sheet. As a result, we expect a reduction
in our provision for credit losses.
Credit Losses. We expect that our credit
losses will continue to increase during 2010 as a result of
anticipated continued high unemployment and overall economic
weakness, which will contribute to an expected increase in our
charge-offs as we pursue foreclosure alternatives and
foreclosures on seriously delinquent loans for which we are not
able to provide a sustainable home retention workout solution.
Future Losses and Preferred Stock
Dividends. We expect to continue to have losses
on our guaranty book of business in response to the dual
stresses of high unemployment and the extent and duration of the
decline in home prices. Given our expectations regarding future
losses and future draws from Treasury, we do not expect to earn
profits in excess of our annual dividend obligation to Treasury
for the indefinite future.
Uncertainty Regarding our Future Status and Long-Term
Financial Sustainability. We expect that the
actions we take to stabilize the housing market and minimize our
credit losses will continue to have, in the short term at least,
a material adverse effect on our results of operations and
financial condition, including our net worth. 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 indefinite future, the earnings of the
company, if any, will not be sufficient to pay the dividends on
the senior preferred stock. As a result, dividend payments will
be effectively paid from funds drawn from the Treasury.
There is significant uncertainty in the current market
environment, and any changes in the trends in macroeconomic
factors that we currently anticipate, such as home prices and
unemployment, may cause our future credit-related expenses,
credit losses and credit loss ratio to vary significantly from
our current expectations. In addition, there is uncertainty
regarding the future of our business after the conservatorship
is terminated, including whether we will continue in our current
form, and we expect this uncertainty to continue. In announcing
the December 24, 2009 amendments to the senior preferred
stock purchase agreement and to Treasurys preferred stock
purchase agreement with Freddie Mac, Treasury noted that the
amendments should leave no uncertainty about the
Treasurys commitment to support [Fannie Mae and Freddie
Mac] as they continue to play a vital role in the housing market
during this current crisis. On February 1, 2010, the
Obama Administration stated in its fiscal year 2011 budget
proposal that it was continuing to monitor the situation of
Fannie Mae, Freddie Mac and the Federal Home Loan Banks (the
GSEs) and would continue to provide updates on
considerations for longer-term reform of Fannie Mae and Freddie
Mac as appropriate. We cannot predict the prospects for the
enactment, timing or content of legislative proposals regarding
longer-term reform of the GSEs. Please see GSE Reform and
Pending Legislation for a discussion of legislation being
considered that could affect our business, including a list of
possible reform options for the GSEs.
MORTGAGE
SECURITIZATIONS
We support market liquidity by securitizing mortgage loans,
which means we place loans in a trust and Fannie Mae MBS backed
by the mortgage loans are then issued. We guarantee to the MBS
trust that we will supplement amounts received by the MBS trust
as required to permit timely payment of principal and interest
on the trust certificates and, in return for this guaranty, we
receive guaranty fees.
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Below we discuss (1) two broad categories of securitization
transactions: lender swaps and portfolio securitizations;
(2) features of our MBS trusts; (3) circumstances
under which we purchase loans from MBS trusts; and
(4) single-class and multi-class Fannie Mae MBS.
Lender
Swaps and Portfolio Securitizations
Our securitization transactions primarily fall within two broad
categories: lender swap transactions and portfolio
securitizations.
Our most common type of securitization transaction is our
lender swap transaction. Mortgage lenders that
operate in the primary mortgage market generally deliver pools
of mortgage loans to us in exchange for Fannie Mae MBS backed by
these mortgage loans. A pool of mortgage loans is a group of
mortgage loans with similar characteristics. After receiving the
mortgage loans in a lender swap transaction, we place them in a
trust that is established for the sole purpose of holding the
mortgage loans separate and apart from our assets. We deliver to
the lender (or its designee) Fannie Mae MBS that are backed by
the pool of mortgage loans in the trust and that represent an
undivided beneficial ownership interest in each of the mortgage
loans. We guarantee to each MBS trust that we will supplement
amounts received by the MBS trust as required to permit timely
payment of principal and interest on the related Fannie Mae MBS.
We retain a portion of the interest payment as the fee for
providing our guaranty. Then, on behalf of the trust, we make
monthly distributions to the Fannie Mae MBS certificateholders
from the principal and interest payments and other collections
on the underlying mortgage loans.
In contrast to our lender swap securitizations, in which lenders
deliver pools of mortgage loans to us that we immediately place
in a trust for securitization, our portfolio
securitization transactions involve creating and issuing
Fannie Mae MBS using mortgage loans and mortgage-related
securities that we hold in our mortgage portfolio. We currently
securitize a majority of the single-family mortgage loans we
purchase.
MBS
Trusts
We serve as trustee for our MBS trusts, each of which is
established for the sole purpose of holding mortgage loans
separate and apart from our assets. Our MBS trusts hold either
single-family or multifamily mortgage loans. Each trust operates
in accordance with a trust agreement or a trust indenture. An
MBS trust is also governed by an issue supplement documenting
the formation of that MBS trust and the issuance of the related
Fannie Mae MBS. The trust agreement or the trust indenture,
together with the issue supplement and any amendments, are the
trust documents that govern an individual MBS trust.
In January 2009, we established a new multifamily master trust
agreement that governs our multifamily MBS trusts formed on or
after February 1, 2009 and amended and restated our
previous 2007 master trust agreement to (1) establish
specific criteria for the segregation and maintenance by our
mortgage loan servicers of collateral reserve accounts,
(2) provide greater flexibility in dealing with defaulted
mortgage loans held in an MBS trust, and (3) make changes
to our multifamily MBS trusts to conform with our single-family
MBS trusts.
In 2008, we established a new single-family master trust
agreement that governs our single-family MBS trusts formed on or
after January 1, 2009 and amended and restated our previous
single-family master trust agreement, also effective
January 1, 2009. These changes are intended to facilitate
the workout process on mortgage loans included in trusts
governed by these trust documents.
Purchases
of Loans from our MBS Trusts
Under the terms of our MBS trust documents, we have the option
or, in some instances, the obligation, to purchase mortgage
loans that meet specific criteria from an MBS trust. Our
acquisition cost for these loans is the unpaid principal balance
of the loan plus accrued interest. We generally purchase from
the MBS trust any loan that we intend to modify prior to the
time that the modification becomes effective.
In deciding whether and when to purchase a loan from a
single-family MBS trust, we consider a variety of factors,
including: our legal ability or obligation to purchase loans
under the terms of the trust documents; our
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mission and public policy; our loss mitigation strategies and
the exposure to credit losses we face under our guaranty; our
cost of funds; the impact on our results of operations; relevant
market yields; the accounting impact; the administrative costs
associated with purchasing and holding the loans; counterparty
exposure to lenders that have agreed to cover losses associated
with delinquent loans; general market conditions; our statutory
obligations under our Charter Act; and other legal obligations
such as those established by consumer finance laws. The weight
we give to these factors changes depending on market
circumstances and other factors.
With the adoption of new accounting standards on January 1,
2010, we will no longer recognize the acquisition of loans from
the MBS trusts that we have consolidated as a purchase with an
associated fair value loss for the difference between the fair
value of the acquired loan and its acquisition cost, as these
loans will already be reflected on our consolidated balance
sheet. Currently, the cost of purchasing most delinquent loans
from Fannie Mae MBS trusts and holding them in our portfolio is
less than the cost of advancing delinquent payments to security
holders. In light of these factors, on February 10, 2010,
we announced that we expect to significantly increase our
purchases of delinquent loans from single-family MBS trusts. We
will begin purchasing these loans in March 2010. We expect to
purchase a significant portion of the current delinquent
population within a few months period subject to market,
servicer capacity, and other constraints, including the limit on
mortgage assets that we may own pursuant to the preferred stock
purchase agreement described in Conservatorship and
Treasury Agreements Treasury Agreements
Covenants under Treasury Agreements. As of
December 31, 2009, the total unpaid principal balance of
all loans in single-family MBS trusts that were delinquent four
or more months was approximately $127 billion. We will
continue to review the economics of purchasing loans that are
four or more months delinquent in the future and may reevaluate
our delinquent loan purchase practices and alter them if
circumstances warrant.
For our multifamily MBS trusts, we typically exercise our option
to purchase a loan from the trust if the loan is delinquent, in
whole or in part, as to four or more consecutive monthly
payments.
Single-Class
and Multi-Class Fannie Mae MBS
Fannie Mae MBS trusts may be single-class or multi-class.
Single-class MBS are MBS where the investors receive
principal and interest payments in proportion to their
percentage ownership of the MBS issuance. Multi-class MBS
are MBS, including REMICs, where the cash flows on the
underlying mortgage assets are divided, creating several classes
of securities, each of which represents a beneficial ownership
interest in a separate portion of cash flows. Terms to maturity
of some multi-class Fannie Mae MBS, particularly REMIC
classes, may match or be shorter than the maturity of the
underlying mortgage loans
and/or
mortgage-related securities. After these classes expire, cash
flows received on the underlying mortgage assets are allocated
to the remaining classes in accordance with the terms of the
securities structures. As a result, each of the classes in
a multi-class MBS may have a different coupon rate, average
life, repayment sensitivity or final maturity. Structured Fannie
Mae MBS are either multi-class MBS or single-class MBS
that are resecuritizations of other single-class Fannie Mae
MBS. In a resecuritization, pools of MBS are collected and
securitized.
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BUSINESS
SEGMENTS
We have three business segments for management reporting
purposes: Single-Family Credit Guaranty, Housing and Community
Development, and Capital Markets. Our business segments engage
in complementary business activities in pursuing our mission of
providing liquidity, stability and affordability to the
U.S. housing market. These activities are summarized in the
table below and described in more detail following this table.
We also summarize in the table below the key sources of revenue
for each of our segments and the primary expenses. See
MD&ABusiness Segment Results and
Note 15, Segment Reporting for the financial
results of each of our segments and a discussion and analysis of
the financial performance of each segment.
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Business Segment
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Primary Business Activities
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Primary Revenues
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Primary Expenses
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Single-Family Credit Guaranty, or Single-Family
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Mortgage securitizations: Works with
our lender customers to securitize single-family mortgage loans
delivered to us by lenders into Fannie Mae MBS, which we refer
to as lender swap transactions
Mortgage acquisitions: Works with our
Capital Markets group to facilitate the purchase of
single-family mortgage loans for our mortgage portfolio
Credit risk management: Prices and
manages the credit risk on loans in our single-family guaranty
book of business
Credit loss management: Works to
prevent foreclosures and reduce costs of defaulted loans through
foreclosure alternativesincluding through our role in the
Making Home Affordable Program, through management of
real-estate owned, or REO, we acquire upon foreclosure or
through a deed-in-lieu of foreclosure, and through lender
repurchase evaluations
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Guaranty fees: Compensation for
assuming and managing the credit risk on our single-family
guaranty book of business
Trust management income: Derived from
the interest earned on cash flows between the date of remittance
of mortgage payments to us by servicers and the date of
distribution of these payments to MBS certificateholders
Fee and other income: Compensation
received for providing lender services
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Credit-related expenses. Consists of
provision for credit losses and foreclosed property expense on
loans underlying our single-family guaranty book of business
Administrative expenses: Consists of
salaries and benefits, occupancy costs, professional services,
and other expenses associated with the Single-Family Credit
Guaranty business operations
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Business Segment
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Primary Business Activities
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Primary Revenues
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Primary Expenses
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Housing and Community Development Business, or HCD
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Mortgage securitizations: Works with our lender customers to securitize multifamily mortgage loans delivered to us by lenders into Fannie Mae MBS
Mortgage acquisitions: Works with our Capital Markets group to facilitate the purchase of multifamily mortgage loans for our mortgage portfolio
Affordable housing investments: Provides funding for investments in affordable multifamily rental and for-sale housing projects
Credit risk management: Prices and manages the credit risk on loans in our multifamily guaranty book of business
Credit loss management: Works to prevent foreclosures and reduce costs of defaulted loans through foreclosure alternatives, through management REO we acquire upon foreclosure or through a deed-in-lieu of foreclosure, and through lender repurchase evaluations.
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Guaranty fees: Compensation for assuming and managing the credit risk on our multifamily guaranty book of business
Fee and other income: Compensation received for multifamily transactions and bond credit enhancements
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Credit-related expenses: Consists of
provision for credit losses and foreclosed property expense on
loans underlying our multifamily guaranty book of business
Net operating losses: Generated by our
affordable housing investments, net of any tax benefits
generated by these investments that we are able to utilize
Administrative expenses: Consists of
salaries and benefits, occupancy costs, professional services,
and other expenses associated with our HCD business operations
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Capital Markets
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Mortgage and other investments:
Purchases mortgage assets and makes investments in other
non-mortgage interest-earning assets
Mortgage securitizations and other customer
services: Issues structured Fannie Mae MBS for customers in
exchange for a transaction fee and provides other fee-related
services to our lender customers
Interest rate risk management: Manages
the interest rate risk on our portfolio by issuing a variety of
debt securities in a wide range of maturities and through the
use of derivatives
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Net interest income: Generated from the
difference between the interest income earned on our
interest-earning assets and the interest expense associated with
the debt funding those assets
Fee and other income: Compensation
received for providing structured transactions and other lender
services
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Fair value gains and losses: Primarily
consists of fair value gains and losses on derivatives and
trading securities
Investment gains and losses: Primarily
consists of gains and losses on the sale or securitization of
mortgage assets
Other-than-temporary impairment:
Consists of impairment recognized on our investments
Administrative expenses: Consists of
salaries and benefits, occupancy costs, professional services,
and other expenses associated with our Capital Markets business
operations
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Single-Family
Credit Guaranty Business
Our Single-Family business works with our lender customers to
provide funds to the mortgage market by securitizing
single-family mortgage loans into Fannie Mae MBS. Our
Single-Family business issues single-class Fannie Mae MBS
from pools of loans delivered to us by mortgage lenders that are
placed immediately in a trust. Unlike MBS securitization
transactions engaged in by our Capital Markets group, our
Single-Family business securitizations are not comprised of
loans from our portfolio. Our Single-Family business also works
with our Capital Markets group to facilitate the purchase of
single-family mortgage loans for our mortgage portfolio. Our
Single-Family business has primary responsibility for pricing
and managing the credit risk on our single-family guaranty book
of business, which consists of single-family mortgage loans
underlying Fannie Mae MBS and single-family loans held in our
mortgage portfolio.
A single-family loan is secured by a property with four or fewer
residential units. Our Single-Family business and Capital
Markets group securitize and purchase primarily conventional
(not federally insured or guaranteed) single-family fixed-rate
or adjustable-rate, first lien mortgage loans, or
mortgage-related securities backed by these types of loans. We
also securitize or purchase loans insured by FHA, loans
guaranteed by the Department of Veterans Affairs
(VA), and loans guaranteed by the Rural Development
Housing and Community Facilities Program of the Department of
Agriculture, manufactured housing loans, reverse mortgage loans,
multifamily mortgage loans, subordinate lien mortgage loans (for
example, loans secured by second liens) and other
mortgage-related securities.
Revenues for our Single-Family business are derived primarily
from guaranty fees received as compensation for assuming the
credit risk on the mortgage loans underlying single-family
Fannie Mae MBS. We also allocate guaranty fee revenues to the
Single-Family business for assuming and managing the credit risk
on the single-family mortgage loans held in our portfolio. The
aggregate amount of single-family guaranty fees we receive or
that are allocated to our Single-Family business in any period
depends on the amount of single-family Fannie Mae MBS
outstanding and loans held in our mortgage portfolio during the
period and the applicable guaranty fee rates. The amount of
Fannie Mae MBS outstanding at any time is primarily determined
by the rate at which we issue new Fannie Mae MBS and by the
repayment rate for the loans underlying our outstanding Fannie
Mae MBS. Other factors affecting the amount of Fannie Mae MBS
outstanding are the extent to which we purchase loans from our
MBS trusts because of borrower defaults (with the amount of
these purchases affected by the rate of borrower defaults on the
loans and the extent of loan modification programs in which we
engage) and the extent to which sellers and servicers repurchase
loans from us upon our demand because there was a breach in the
selling representations and warranties provided upon delivery of
the loans. Our Single-Family business accounted for
approximately 39% of our net revenues in 2009, compared with 54%
in 2008 and 63% in 2007.
We describe the credit risk management process employed by our
Single-Family business, including its key strategies in managing
credit risk and key metrics used in measuring and evaluating our
single-family credit risk in MD&ARisk
ManagementCredit Risk Management.
Mortgage
Securitizations and Acquisitions
Our Single-Family business securitizes single-family mortgage
loans and issues single-class Fannie Mae MBS, which are
described above in Mortgage
SecuritizationsSingle-Class and Multi-Class Fannie
Mae MBS, for our lender customers. Unlike MBS
securitization transactions engaged in by our Capital Markets
group, our Single-Family business engages solely in lender swap
transactions, in which lenders deliver pools of mortgage loans
to us in exchange for Fannie Mae MBS backed by these loans. We
describe lender swap transactions, and how they differ from
portfolio securitizations, in Mortgage
SecuritizationsLender Swaps and Portfolio
Securitizations.
Loans from our lender customers are delivered to us through
either our flow or bulk transaction
channels. In our flow business, we enter into agreements that
generally set
agreed-upon
guaranty fee prices for a lenders future delivery of
individual loans to us over a specified time period. Our bulk
business generally consists of transactions in which a set of
loans are delivered to us in bulk, typically with guaranty fees
and other contract terms negotiated individually for each
transaction.
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Mortgage
Servicing
Servicing
Generally, the servicing of the mortgage loans held in our
mortgage portfolio or that back our Fannie Mae MBS is performed
by mortgage servicers on our behalf. Typically, lenders who sell
single-family mortgage loans to us service these loans for us.
For loans we own or guarantee, the lender or servicer must
obtain our approval before selling servicing rights to another
servicer.
Our mortgage servicers typically collect and deliver principal
and interest payments, administer escrow accounts, monitor and
report delinquencies, perform default prevention activities,
evaluate transfers of ownership interests, respond to requests
for partial releases of security, and handle proceeds from
casualty and condemnation losses. Our mortgage servicers are the
primary point of contact for borrowers and perform a key role in
the effective implementation of our homeownership assistance
initiatives, negotiation of workouts of troubled loans, and loss
mitigation activities. If necessary, mortgage servicers inspect
and preserve properties and process foreclosures and
bankruptcies. Because we delegate the servicing of our mortgage
loans to mortgage servicers and do not have our own servicing
function, our ability to actively manage troubled loans that we
own or guarantee may be limited. For more information on the
risks of our reliance on servicers, refer to Risk
Factors and MD&ARisk
ManagementCredit Risk ManagementInstitutional
Counterparty Credit Risk Management.
We compensate servicers primarily by permitting them to retain a
specified portion of each interest payment on a serviced
mortgage loan as a servicing fee. Servicers also generally
retain prepayment premiums, assumption fees, late payment
charges and other similar charges, to the extent they are
collected from borrowers, as additional servicing compensation.
We also compensate servicers for negotiating workouts on problem
loans.
REO
Management and Lender Repurchase Evaluations
In the event a loan defaults and we acquire a home through
foreclosure or a
deed-in-lieu
of foreclosure, we focus on selling the home through a national
network of real estate agents. Our primary objectives are both
to minimize the severity of loss to Fannie Mae by maximizing
sales prices and also to stabilize neighborhoodsto prevent
empty homes from depressing home values. We also continue to
seek non-traditional ways to sell properties, including by
selling homes to cities, municipalities and other public
entities, and by selling properties in bulk or through public
auctions.
We also conduct post-purchase quality control file reviews to
ensure that loans sold to and serviced for us meet our
guidelines. If we discover violations through reviews, we issue
repurchase demands to the seller and seek to collect on our
repurchase claims.
Housing
and Community Development Business
Our HCD business works with our lender customers to provide
funds to the mortgage market by securitizing multifamily
mortgage loans into Fannie Mae MBS. Our HCD business also works
with our Capital Markets group to facilitate the purchase of
multifamily mortgage loans for our mortgage portfolio.
Multifamily mortgage loans relate to properties with five or
more residential units, which may be apartment communities,
cooperative properties or manufactured housing communities. Our
HCD business also makes LIHTC partnership, debt and equity
investments to increase the supply of affordable housing. Our
HCD business has primary responsibility for pricing and managing
the credit risk on our multifamily guaranty book of business,
which consists of multifamily mortgage loans underlying Fannie
Mae MBS and multifamily loans held in our mortgage portfolio.
Revenues for our HCD business are derived from a variety of
sources, including: (1) guaranty fees received as
compensation for assuming the credit risk on the mortgage loans
underlying multifamily Fannie Mae MBS and on the multifamily
mortgage loans held in our portfolio and on other
mortgage-related securities; (2) transaction fees
associated with the multifamily business and (3) other bond
credit enhancement related fees. HCDs investments in
rental housing projects eligible for LIHTC and other investments
generate both tax
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credits and net operating losses that may reduce our federal
income tax liability. Other investments in rental and for-sale
housing generate revenue and losses from operations and the
eventual sale of the assets. Our HCD business accounted for
approximately 3% of our net revenues in 2009, compared with 3%
in 2008 and 4% in 2007.
We describe the credit risk management process employed by our
HCD business, including its key strategies in managing credit
risk and key metrics used in measuring and evaluating our
multifamily credit risk, in MD&ARisk
ManagementCredit Risk ManagementMultifamily Mortgage
Credit Risk Management.
Mortgage
Securitizations and Acquisitions
Our HCD business generally creates multifamily Fannie Mae MBS
and acquires multifamily mortgage assets in the same manner as
our Single-Family business, as described above in
Single-Family Credit Guaranty BusinessMortgage
Securitizations and Acquisitions.
Mortgage
Servicing
As with the servicing of single-family mortgages, multifamily
mortgage servicing is typically performed by the lenders who
sell the mortgages to us. In contrast to our single-family
mortgage servicers, however, many of those lenders have agreed,
as part of the multifamily delegated underwriting and servicing
relationship we have with these lenders, to accept loss sharing
under certain defined circumstances with respect to mortgages
that they have sold to us and are servicing. Thus, multifamily
loss sharing obligations are an integral part of our selling and
servicing relationships with multifamily lenders. Consequently,
transfers of multifamily servicing rights are infrequent and are
carefully monitored by us to enforce our right to approve all
servicing transfers. As a seller-servicer, the lender is also
responsible for evaluating the financial condition of property
owners, administering various types of agreements (including
agreements regarding replacement reserves, completion or repair,
and operations and maintenance), as well as conducting routine
property inspections.
Affordable
Housing Investments
Our HCD business helps to expand the supply of affordable
housing by investing in rental and for-sale housing projects.
Historically, most of these investments have been LIHTC
investments. Our HCD business also makes non-LIHTC debt and
equity investments in rental and for-sale housing. These
investments are consistent with our focus on serving communities
and improving access to affordable housing. As described in
Note 11, Income Taxes, we concluded that it is
more likely than not that we would not generate sufficient
taxable income in the foreseeable future to realize all of our
deferred tax assets. Therefore, we currently do not recognize in
our financial statements any tax benefits associated with tax
credits and net operating losses. As a result of our tax
position, we did not make any new LIHTC investments in 2009
other than pursuant to commitments existing prior to 2008. In
addition, we limited other new investments during 2009 due to
the unfavorable real estate market conditions.
Prior to September 30, 2009, we entered into a nonbinding
letter of intent to transfer equity interests in our LIHTC
investments to third-party investors at a price above carrying
value. This transaction was subject to the Treasurys
approval under the terms of our senior preferred stock purchase
agreement. In November of 2009, Treasury notified FHFA and us
that it did not consent to the proposed transaction. Treasury
stated the proposed sale would result in a loss of aggregate tax
revenues that would be greater than the savings to the federal
government from a reduction in the capital contribution
obligation of Treasury to Fannie Mae under the senior preferred
stock purchase agreement. Treasury further stated that
withholding approval of the proposed sale afforded more
protection to the taxpayers than approval would have provided.
We have continued to explore options to sell or otherwise
transfer our LIHTC investments for value consistent with our
mission; however, to date, we have not been successful. On
February 18, 2010, FHFA informed us, by letter, of its
conclusion that any sale by us of our LIHTC assets would require
Treasurys consent under the senior preferred stock
purchase agreement, and that FHFA had presented other options
for Treasury to consider, including allowing us to pay senior
preferred stock dividends by waiving the right to claim future
tax benefits of the LIHTC investments. FHFAs letter
further informed us that, after further consultation with the
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Treasury, we may not sell or transfer our LIHTC partnership
interests and that FHFA sees no disposition options. Therefore,
we no longer have both the intent and ability to sell or
otherwise transfer our LIHTC investments for value. As a result,
we recognized a loss of $5.0 billion during the fourth
quarter of 2009 to reduce the carrying value of our LIHTC
Partnership investments to zero in the consolidated
financial statements. For additional information regarding our
investments in LIHTC partnerships and their impact on our
financial results, see MD&AConsolidated Results
of OperationsLosses from Partnership Investments and
MD&AOff-Balance Sheet Arrangements and Variable
Interest Entities.
Capital
Markets
Our Capital Markets group manages our investment activity in
mortgage-related assets and other interest-earning non-mortgage
investments. We fund our investments primarily through proceeds
we receive from the issuance of debt securities in the domestic
and international capital markets. Our Capital Markets group has
primary responsibility for managing the interest rate risk
associated with our investments in mortgage assets.
The business model for our Capital Markets group continues to
evolve. Our business activity is increasingly focused on making
short-term use of our balance sheet rather than on long-term buy
and hold strategies. As a result, our Capital Markets group
increasingly works with lender customers to provide funds to the
mortgage market through short-term financing and investing
activities. Activities we are undertaking to provide
liquidity to the mortgage market include the following:
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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. Lenders who deliver whole loans
or pools of whole loans to us in exchange for MBS typically must
wait between 30 and 45 days from the closing and settlement
of the loans or pools and the issuance of the MBS. This delay
may limit lenders ability to originate new loans. Under
our early lender funding programs, we purchase whole loans or
pools of loans on an accelerated basis, allowing lenders to
receive quicker payment for the whole loans and pools, which
replenishes their funds and allows them to originate more
mortgage loans.
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Dollar Roll Transactions. We had a significant
amount of dollar roll activity in 2009 as a result of attractive
implied financing costs of the dollar roll versus our funding
levels and a desire to increase market liquidity. 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.
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REMICs and Other Structured
Securitizations. We issue structured Fannie Mae
MBS (including REMICs), typically for our lender customers or
securities dealer customers, in exchange for a transaction fee.
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Securitization
Activities
Our Capital Markets group is engaged in issuing both
single-class and multi-class Fannie Mae MBS through both
portfolio securitizations and lender swap securitizations.
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Portfolio securitizations. Our Capital Markets
group creates single-class and multi-class Fannie Mae MBS from
mortgage-related assets held in our mortgage portfolio. Our
Capital Markets group may sell these Fannie Mae MBS into the
secondary market or may retain the Fannie Mae MBS in our
investment portfolio.
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Lender swap securitizations: Our Capital
Markets group creates single-class and multi-class structured
Fannie Mae MBS, typically for our lender customers or securities
dealer customers, in exchange for a transaction fee. In these
transactions, the customer swaps a mortgage-related
asset that it owns (typically a mortgage security) in exchange
for a structured Fannie Mae MBS we issue. Our Capital Markets
group earns transaction fees for creating structured Fannie Mae
MBS for third parties.
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For more information about lender swaps and how they differ from
portfolio securitizations, please see Mortgage
SecuritizationsLender Swaps and Portfolio
Securitizations. For a description of
single-class Fannie Mae MBS, please see Mortgage
SecuritizationsSingle-Class and Multi-Class Fannie
Mae MBS.
Other
Customer Services
Our Capital Markets group provides our lender customers and
their affiliates with services that include offering to purchase
a wide variety of mortgage assets, including non-standard
mortgage loan products; segregating customer portfolios to
obtain optimal pricing for their mortgage loans; and assisting
customers with hedging their mortgage business. These activities
provide a significant flow of assets for our mortgage portfolio,
help to create a broader market for our customers and enhance
liquidity in the secondary mortgage market.
Mortgage
Asset Portfolio
Although our Capital Markets groups business activities
are increasingly focused on short-term financing and investing,
revenue from our Capital Markets group is derived primarily from
the difference, or spread, between the interest we earn on our
mortgage and non-mortgage investments and the interest we incur
on the debt we issue to fund these assets. Accordingly, our
Capital Markets revenues are primarily derived from our asset
portfolio, which is capped under our senior preferred stock
purchase agreement with Treasury at a limit that decreases each
year. See Conservatorship and Treasury
AgreementsTreasury AgreementsCovenants under
Treasury Agreements for more information on the decreasing
limits on the amount of mortgage assets we are permitted to
hold. Our Capital Markets group also earns fee and other income
on various transactions we provide as a service to our
customers, which we describe below. Our Capital Markets group
accounted for approximately 58% of our net revenues in 2009,
compared with 43% in 2008 and 33% in 2007.
We describe the interest rate risk management process employed
by our Capital Markets group, including its key strategies in
managing interest rate risk and key metrics used in measuring
and evaluating our interest rate risk in
MD&ARisk ManagementMarket Risk
Management, Including Interest Rate Risk.
Investment
and Financing Activities
Our Capital Markets group seeks to increase the liquidity of the
mortgage market by maintaining a presence as an active investor
in mortgage loans and mortgage-related securities and, in
particular, supports the liquidity and value of Fannie Mae MBS
in a variety of market conditions.
Our Capital Markets group funds its investments primarily
through the issuance of a variety of debt securities in a wide
range of maturities in the domestic and international capital
markets. The most active investors in our debt securities
include commercial bank portfolios and trust departments,
investment fund managers, insurance companies, pension funds,
state and local governments, and central banks. The approved
dealers for underwriting various types of Fannie Mae debt
securities may differ by funding program. See
MD&ALiquidity and Capital
ManagementLiquidity Management for information on
the composition of our outstanding debt and a discussion of our
liquidity.
Our Capital Markets groups investment and financing
activities are affected by market conditions and the target
rates of return that we expect to earn on the equity capital
underlying our investments. When we estimate that we can earn
returns in excess of our targets, we generally will be an active
purchaser of mortgage loans and mortgage-related securities.
When potential returns are below our investment targets, we
generally will be a less active purchaser, and may be a net
seller, of mortgage assets. The Federal Reserve agency MBS
purchase program, which we describe in Residential
Mortgage MarketHousing and Mortgage Market and Economic
Conditions, had a significant impact on our investment
activity during 2009. Our investment activities also are subject
to capital requirements, contractual limitations, and other
regulatory constraints, to the extent described below under
Conservatorship and Treasury Agreements and
Our Charter and Regulation of Our Activities.
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CONSERVATORSHIP
AND TREASURY AGREEMENTS
Conservatorship
On September 6, 2008, the Director of FHFA appointed FHFA
as our conservator in accordance with the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992, as
amended by the Federal Housing Finance Regulatory Reform Act of
2008, or 2008 Reform Act (together, the GSE Act).
The conservatorship is a statutory process designed to preserve
and conserve our assets and property, and put the company in a
sound and solvent condition. Below we summarize key powers held
by the conservator under the GSE Act.
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 in our current form
following conservatorship, or what changes to our business
structure will be made during or following the conservatorship.
For more information on the risks to our business relating to
the conservatorship and uncertainties regarding the future of
our business, see Risk Factors.
Powers
of the Conservator under the GSE Act
Upon its appointment, the conservator immediately succeeded to
all rights, titles, powers and privileges of Fannie Mae, and of
any shareholder, 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 since delegated specified authorities
to our Board of Directors, which are described in
Directors, Executive Officers and Corporate
GovernanceCorporate Governance, and has delegated to
management the authority to conduct our
day-to-day
operations. The conservator may take any actions it determines
are necessary and appropriate to carry on our business and
preserve and conserve our assets and property. The
conservators powers include the ability to transfer or
sell our assets or liabilities, generally without any approval,
assignment of rights or consent of any party. The GSE Act
provides that mortgage loans and mortgage-related assets that
have been transferred to a Fannie Mae MBS trust must be held for
the beneficial owners of the Fannie Mae MBS and cannot be used
to satisfy our general creditors.
Disaffirmance
and Repudiation of Contracts
The conservator may disaffirm or repudiate contracts (subject to
certain limitations for qualified financial contracts) that we
entered into prior to its appointment as conservator if it
determines, in its sole discretion, that performance of the
contract is burdensome and that disaffirmation or repudiation of
the contract promotes the orderly administration of our affairs.
The GSE Act requires FHFA to exercise its right to disaffirm or
repudiate most contracts within a reasonable period of time
after its appointment as conservator, and specifies the
liability of the conservator for disaffirming or repudiating a
contract. As of February 26, 2010, the conservator has
advised us that it has not disaffirmed or repudiated any
contracts we entered into prior to its appointment as
conservator.
We continue to enter into and enforce contracts with third
parties. In addition, we remain liable for all of our
obligations relating to our outstanding debt securities and
Fannie Mae MBS. The conservator has advised us that it has no
intention of repudiating any guaranty obligation relating to
Fannie Mae MBS because it views repudiation as incompatible with
the goals of the conservatorship.
Security
Interests Protected; Exercise of Rights under Qualified
Financial Contracts
Notwithstanding the conservators powers described above,
the conservator must recognize legally enforceable or perfected
security interests, except where such an interest is taken in
contemplation of our insolvency or with the intent to hinder,
delay or defraud us or our creditors. In addition, the GSE Act
provides that no person will be stayed or prohibited from
exercising specified rights in connection with qualified
financial contracts, including termination or acceleration
(other than solely by reason of, or incidental to, the
appointment of the conservator), rights of offset, and rights
under any security agreement or arrangement or other credit
enhancement relating to such contract. The term qualified
financial contract means any
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securities contract, commodity contract, forward contract,
repurchase agreement, swap agreement and any similar agreement
that FHFA determines by regulation, resolution or order to be a
qualified financial contract.
Avoidance
of Fraudulent Transfers
The conservator may avoid, or refuse to recognize, a transfer of
any property interest of Fannie Mae or of any of our debtors,
and also may avoid any obligation incurred by Fannie Mae or by
any debtor of Fannie Mae, if the transfer or obligation was made
(1) within five years of September 6, 2008, and
(2) with the intent to hinder, delay, or defraud Fannie
Mae, FHFA, the conservator or, in the case of a transfer in
connection with a qualified financial contract, our creditors.
To the extent a transfer is avoided, the conservator may
recover, for our benefit, the property or, by court order, the
value of that property from the initial or subsequent
transferee, unless the transfer was made for value and in good
faith. These rights are superior to any rights of a trustee or
any other party, other than a federal agency, under the
U.S. bankruptcy code.
Management
of the Company under Conservatorship
Upon our entry into conservatorship in September 2008, FHFA, as
conservator, succeeded to the powers of our officers and
directors. The conservator subsequently reconstituted our Board
of Directors and delegated to our management and Board of
Directors the authority to conduct our
day-to-day
operations, subject to the direction of the conservator. The
conservator retains the authority to withdraw its delegations to
the Board and to management at any time.
Our directors serve on behalf of the conservator and exercise
their authority as directed by and with the approval, where
required, of the conservator. 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. In addition, the
conservator directed the Board to consult with and obtain the
approval of the conservator before taking action in specified
areas, as described in Directors, Executive Officers and
Corporate GovernanceCorporate
GovernanceConservatorship and Delegation of Authority to
Board of Directors.
Effect
of Conservatorship on Shareholders
The conservatorship has had the following adverse effects on our
common and preferred shareholders:
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the rights of the shareholders are suspended during the
conservatorship. Accordingly, our common shareholders do not
have the ability to elect directors or to vote on other matters
during the conservatorship unless the conservator delegates this
authority to them;
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the conservator has eliminated common and preferred stock
dividends (other than dividends on the senior preferred stock
issued to Treasury) during the conservatorship; and
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because we are in conservatorship, we are no longer managed with
a strategy to maximize shareholder returns. In a letter to the
Chairmen and Ranking Members of the Congressional Banking and
Financial Services Committees dated February 2, 2010, the
Acting Director of FHFA stated that the focus of conservatorship
is on conserving assets, minimizing corporate losses, ensuring
Fannie Mae and Freddie Mac continue to serve their mission,
overseeing remediation of identified weaknesses in corporate
operations and risk management, and ensuring that sound
corporate governance principles are followed. For additional
information about our business strategy, please see
Executive SummaryOur Business Objectives and
Strategy.
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Treasury
Agreements
On September 7, 2008, we, through FHFA, in its capacity as
conservator, and Treasury entered into a senior preferred stock
purchase agreement, which was subsequently amended on
September 26, 2008, May 6, 2009 and December 24,
2009. Unless the context indicates otherwise, references in this
report to the senior preferred stock purchase agreement refer to
the agreement as amended through December 24, 2009. The
terms
27
of the senior preferred stock purchase agreement, senior
preferred stock and warrant will continue to apply to us even if
we are released from the conservatorship. Please see Risk
Factors for a description of the risks to our business
relating to the Treasury agreements.
We also entered into a lending agreement with Treasury in
September 2008 under which we were allowed to request loans from
Treasury until December 31, 2009. In this report, we refer
to this agreement as the Treasury credit facility.
On December 24, 2009, Treasury announced that the Treasury
credit facility would terminate on December 31, 2009, in
accordance with its terms. We did not request any loans or
borrow any amounts under the Treasury credit facility prior to
its termination on December 31, 2009.
Senior
Preferred Stock Purchase Agreement and Related Issuance of
Senior Preferred Stock and Common Stock Warrant
Senior
Preferred Stock Purchase Agreement
Under the senior preferred stock purchase agreement, we issued
to Treasury (1) one million shares of Variable Liquidation
Preference Senior Preferred Stock,
Series 2008-2,
which we refer to as the senior preferred stock,
with an initial liquidation preference equal to $1,000 per share
(for an aggregate liquidation preference of $1.0 billion),
and (2) a 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, which we refer to as the
warrant. We did not receive any cash proceeds from
Treasury at the time the senior preferred stock or the warrant
was issued.
The senior preferred stock and warrant were issued to Treasury
as an initial commitment fee in consideration of the commitment
from Treasury to provide funds to us under the terms and
conditions set forth in the senior preferred stock purchase
agreement. The senior preferred stock purchase agreement
provides that, on a quarterly basis, we generally may draw funds
up to the amount, if any, by which our total liabilities exceed
our total assets, as reflected on our consolidated balance
sheet, prepared in accordance with generally accepted accounting
principles (GAAP), for the applicable fiscal quarter
(referred to as the deficiency amount). More
specifically, the agreement provides that if the Director of
FHFA determines he will be mandated by law to appoint a receiver
for us, then FHFA, in its capacity as our conservator, may
request that Treasury provide funds to us in an amount up to the
deficiency amount (subject to the maximum amount that may be
funded under the agreement). The senior preferred stock purchase
agreement also provides that, if we have a deficiency amount as
of the date of completion of the liquidation of our assets, FHFA
(or our Chief Financial Officer if we are not under
conservatorship), may request funds from Treasury in an amount
up to the deficiency amount (subject to the maximum amount that
may be funded under the agreement).
On December 24, 2009, Treasurys maximum funding
commitment to us under the senior preferred stock purchase
agreement was increased pursuant to an amendment to the
agreement. The amendment provides that the cap on
Treasurys funding commitment to us under the senior
preferred stock purchase agreement will increase as necessary to
accommodate any net worth deficits for calendar quarters in 2010
through 2012. For any net worth deficits after December 31,
2012, Treasurys remaining funding commitment will be
$124.8 billion, less any positive net worth as of
December 31, 2012. In announcing the December 24, 2009
amendments to the senior preferred stock purchase agreement and
to Treasurys preferred stock purchase agreement with
Freddie Mac, Treasury noted that the amendments should
leave no uncertainty about the Treasurys commitment to
support [Fannie Mae and Freddie Mac] as they continue to play a
vital role in the housing market during this current
crisis. The senior preferred stock purchase agreement
provides that the deficiency amount will be calculated
differently if we become subject to receivership or other
liquidation process. We discuss our net worth deficits and
FHFAs requests on our behalf for funds from Treasury in
Executive SummarySummary of our Financial
Performance for 2009.
Under the senior preferred stock purchase agreement, beginning
on March 31, 2011, we are required to pay a quarterly
commitment fee to Treasury. This quarterly commitment fee will
accrue from January 1, 2011. The fee, in an amount to be
mutually agreed upon by us and Treasury and to be determined
with reference to the market value of Treasurys funding
commitment as then in effect, will be determined on or before
December 31, 2010, and will be reset every five years.
Treasury may waive the quarterly commitment fee for
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up to one year at a time, in its sole discretion, based on
adverse conditions in the U.S. mortgage market. We may
elect to pay the quarterly commitment fee in cash or add the
amount of the fee to the liquidation preference of the senior
preferred stock.
The senior preferred stock purchase agreement provides that the
Treasurys funding commitment will terminate under any of
the following circumstances: (1) the completion of our
liquidation and fulfillment of Treasurys obligations under
its funding commitment at that time, (2) the payment in
full of, or reasonable provision for, all of our liabilities
(whether or not contingent, including mortgage guaranty
obligations), or (3) the funding by Treasury of the maximum
amount that may be funded under the agreement. In addition,
Treasury may terminate its funding commitment and declare the
senior preferred stock purchase agreement null and void if a
court vacates, modifies, amends, conditions, enjoins, stays or
otherwise affects the appointment of the conservator or
otherwise curtails the conservators powers. Treasury may
not terminate its funding commitment under the agreement solely
by reason of our being in conservatorship, receivership or other
insolvency proceeding, or due to our financial condition or any
adverse change in our financial condition.
The senior preferred stock purchase agreement provides that most
provisions of the agreement may be waived or amended by mutual
written agreement of the parties; however, no waiver or
amendment of the agreement is permitted that would decrease
Treasurys aggregate funding commitment or add conditions
to Treasurys funding commitment if the waiver or amendment
would adversely affect in any material respect the holders of
our debt securities or guaranteed Fannie Mae MBS.
In the event of our default on payments with respect to our debt
securities or guaranteed Fannie Mae MBS, if Treasury fails to
perform its obligations under its funding commitment and if we
and/or the
conservator are not diligently pursuing remedies in respect of
that failure, the holders of our debt securities or Fannie Mae
MBS may file a claim in the United States Court of Federal
Claims for relief requiring Treasury to fund to us the lesser of
(1) the amount necessary to cure the payment defaults on
our debt and Fannie Mae MBS and (2) the lesser of
(a) the deficiency amount and (b) the maximum amount
that may be funded under the agreement less the aggregate amount
of funding previously provided under the commitment. Any payment
that Treasury makes under those circumstances will be treated
for all purposes as a draw under the senior preferred stock
purchase agreement that will increase the liquidation preference
of the senior preferred stock.
Senior
Preferred Stock
Pursuant to the senior preferred stock purchase agreement, we
issued one million shares of senior preferred stock to Treasury
on September 8, 2008 with an aggregate initial liquidation
preference of $1.0 billion. The stocks liquidation
preference is subject to adjustment. Dividends that are not paid
in cash for any dividend period will accrue and be added to the
liquidation preference. Any amounts Treasury pays to us pursuant
to its funding commitment under the senior preferred stock
purchase agreement and any quarterly commitment fees that are
not paid in cash to Treasury or waived by Treasury will also be
added to the liquidation preference. Accordingly, the aggregate
liquidation preference of the senior preferred stock was
$60.9 billion as of December 31, 2009 and will
increase to $76.2 billion as a result of FHFAs
request on our behalf for funds to eliminate our net worth
deficit as of December 31, 2009.
Treasury, as holder of the senior preferred stock, is 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. 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.
The senior preferred stock ranks ahead of our common stock and
all other outstanding series of our preferred stock, as well as
any capital stock we issue in the future, as to both dividends
and rights upon liquidation. The senior preferred stock provides
that we may not, at any time, declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire,
or make a liquidation payment with respect to, any common stock
or other securities ranking junior to the senior preferred stock
unless (1) full cumulative dividends on the
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outstanding senior preferred stock (including any unpaid
dividends added to the liquidation preference) have been
declared and paid in cash, and (2) all amounts required to
be paid with the net proceeds of any issuance of capital stock
for cash (as described in the following paragraph) have been
paid in cash. Shares of the senior preferred stock are not
convertible. Shares of the senior preferred stock have no
general or special voting rights, other than those set forth in
the certificate of designation for the senior preferred stock or
otherwise required by law. The consent of holders of at least
two-thirds of all outstanding shares of senior preferred stock
is generally required to amend the terms of the senior preferred
stock or to create any class or series of stock that ranks prior
to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock prior
to the termination of Treasurys funding commitment under
the senior preferred stock purchase agreement. Moreover, we are
not permitted to pay down the liquidation preference of the
outstanding shares of senior preferred stock except to the
extent of (1) accrued and unpaid dividends previously added
to the liquidation preference and not previously paid down; and
(2) quarterly commitment fees previously added to the
liquidation preference and not previously paid down. In
addition, if we issue any shares of capital stock for cash while
the senior preferred stock is outstanding, the net proceeds of
the issuance must be used to pay down the liquidation preference
of the senior preferred stock; however, the liquidation
preference of each share of senior preferred stock may not be
paid down below $1,000 per share prior to the termination of
Treasurys funding commitment. Following the termination of
Treasurys funding commitment, we may pay down the
liquidation preference of all outstanding shares of senior
preferred stock at any time, in whole or in part.
Common
Stock Warrant
Pursuant to the senior preferred stock purchase agreement, on
September 7, 2008, we, through FHFA, in its capacity as
conservator, issued a warrant to purchase common stock to
Treasury. The warrant gives Treasury the right to purchase
shares of our common stock equal to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis
on the date of exercise, for an exercise price of $0.00001 per
share. The warrant may be exercised in whole or in part at any
time on or before September 7, 2028.
Covenants
under Treasury Agreements
The senior preferred stock purchase agreement and warrant
contain covenants that significantly restrict our business
activities and require the prior written consent of Treasury
before we can take certain actions. These covenants prohibit us
from:
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paying dividends or other distributions on or repurchasing our
equity securities (other than the senior preferred stock or
warrant);
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issuing additional equity securities (except in limited
instances);
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selling, transferring, leasing or otherwise disposing of any
assets, other than dispositions for fair market value, except in
limited circumstances including if the transaction is in the
ordinary course of business and consistent with past practice;
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issuing subordinated debt; and
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entering into any new compensation arrangements or increasing
amounts or benefits payable under existing compensation
arrangements for any of our executive officers (as defined by
SEC rules) without the consent of the Director of FHFA, in
consultation with the Secretary of the Treasury.
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In November 2009, Treasury withheld its consent under these
covenants to our proposed transfer of LIHTC investments. Please
see MD&AConsolidated Results of
OperationsLosses from Partnership Investments for
information on the resulting
other-than-temporary
impairment losses we recognized during the fourth quarter of
2009.
We also are subject to limits, which are described below, on the
amount of mortgage assets that we may own and the total amount
of our indebtedness. As a result, we can no longer obtain
additional equity financing
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(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.
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Mortgage Asset Limit. We are restricted in the
amount of mortgage assets that we may own. The maximum allowable
amount was $900 billion on December 31, 2009.
Beginning on December 31, 2010 and each year thereafter, we
are required to reduce our mortgage assets to 90% of the maximum
allowable amount that we were permitted to own as of December 31
of the immediately preceding calendar year, until the amount of
our mortgage assets reaches $250 billion. Accordingly, the
maximum allowable amount of mortgage assets we may own on
December 31, 2010 is $810 billion. The definition of
mortgage asset is based on the unpaid principal balance of such
assets and does not reflect market valuation adjustments,
allowance for loan losses, impairments, unamortized premiums and
discounts and the impact of consolidation of variable interest
entities. Under this definition, our mortgage assets on
December 31, 2009 were $773 billion. We disclose the
amount of our mortgage assets on a monthly basis under the
caption Gross Mortgage Portfolio in our Monthly
Summaries, which are available on our Web site and announced in
a press release. In February 2010, FHFA informed Congress that
it expects that any net additions to our retained mortgage
portfolio would be related to the purchase of delinquent
mortgages out of Fannie Mae MBS trusts. See
MD&AConsolidated Balance Sheet
AnalysisMortgage Investments for information on our
plans to purchase delinquent loans from single-family Fannie Mae
MBS trusts.
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Debt Limit. We are subject to a limit on the
amount of our indebtedness. Our debt limit through
December 30, 2010 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. The definition of indebtedness is based
on the par value of each applicable loan for purposes of our
debt cap. Under this definition, our indebtedness as of
December 31, 2009 was $786 billion. We disclose the
amount of our indebtedness on a monthly basis under the caption
Total Debt Outstanding in our Monthly Summaries,
which are available on our Web site and announced in a press
release.
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Under the terms of the senior preferred stock purchase
agreement, mortgage assets and
indebtedness are calculated without giving effect to
changes made after May 2009 to the accounting rules governing
the transfer and servicing of financial assets and the
extinguishment of liabilities or similar accounting standards.
Accordingly, our adoption of new accounting policies regarding
consolidation and transfers of financial assets will not affect
these calculations.
Effect
of Treasury Agreements on Shareholders
The agreements with Treasury have materially limited the rights
of our common and preferred shareholders (other than Treasury as
holder of the senior preferred stock). The senior preferred
stock purchase agreement and the senior preferred stock and
warrant issued to Treasury pursuant to the agreement have had
the following adverse effects on our common and preferred
shareholders:
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the senior preferred stock ranks senior to the common stock and
all other series of preferred stock as to both dividends and
distributions upon dissolution, liquidation or winding up of the
company;
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the senior preferred stock purchase agreement prohibits the
payment of dividends on common or preferred stock (other than
the senior preferred stock) without the prior written consent of
Treasury; and
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the warrant provides Treasury with the right to purchase shares
of our common stock equal to 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 for a nominal price, thereby
substantially diluting the ownership in Fannie Mae of our common
shareholders at the time of exercise. Until Treasury exercises
its rights under the warrant or its right to exercise the
warrant expires on September 7, 2028 without having been
exercised, the holders of our common stock continue to have the
risk that, as a group, they will own no more than 20.1% of the
total voting power of the company. Under our charter, bylaws and
applicable law, 20.1% is insufficient to
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control the outcome of any vote that is presented to the common
shareholders. Accordingly, existing common shareholders have no
assurance that, as a group, they will be able to control the
election of our directors or the outcome of any other vote after
the conservatorship ends.
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As described above and in Risk Factors, the Treasury
agreements also impact our business in ways that affect our
common and preferred shareholders.
GSE
REFORM AND PENDING LEGISLATION
GSE
Reform
In June 2009, the Obama administration released a white paper on
financial regulatory reform stating that Treasury and HUD would
be developing recommendations on the future of the GSEs. The
white paper noted that there were a number of options for the
reform of Fannie Mae and Freddie Mac, 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 guaranty 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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On February 1, 2010 the administration stated in its 2011
budget proposal that it continues to monitor the situation
of the GSEs closely and will continue to provide updates on
considerations for longer-term reform of Fannie Mae and Freddie
Mac as appropriate. The same day, HUD Secretary Shaun
Donovan indicated that the administration would release a
statement on the GSEs in the very near future.
During 2009, Congress began to hold hearings on the future
status of Fannie Mae and Freddie Mac, and at least one
legislative proposal relating to the future status of the GSEs
was offered. We expect hearings to continue in 2010 and
additional proposals to be discussed. The Chairman of the House
Financial Services Committee stated in January 2010, I
believe this committee will be recommending abolishing Fannie
Mae and Freddie Mac in their current form and coming up with a
whole new system of housing finance. We cannot predict the
prospects for the enactment, timing or content of legislative
proposals regarding the future status of the GSEs. In sum, there
continues to be uncertainty regarding the future of our company,
including whether we will continue in our current form after the
conservatorship is terminated.
Pending
Legislation
On December 11, 2009, the House of Representatives passed
legislation that would significantly alter the current
regulatory framework applicable to the financial services
industry, with enhanced regulation of financial firms and
markets. The legislation 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,
requirements for the retention of credit risk by securitizers
and originators of mortgage loans, regulations on compensation
practices, and changes in accounting standards. The Senate may
consider its own financial reform legislation in 2010. If
enacted, such legislation could directly and indirectly affect
many aspects of our business and that of our business partners.
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
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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 addition, legislation has been enacted or is being considered
in some jurisdictions that would enable lending for residential
energy efficiency improvements, with loans repaid via the
homeowners real property tax bill. This structure is
designed to grant lenders of energy efficiency loans the
equivalent of a tax lien, giving them priority over all other
liens on the property, including previously recorded first lien
mortgage loans. Consequently, the legislation could increase our
credit losses, impact our business volumes and limit the size of
loans we acquire where these laws are in effect.
In May 2009, the House of Representatives passed a bill that,
among other things, would enhance consumer protections in
mortgage loan transactions, impose new servicing standards and
allow for assignee liability. Similar provisions were also
included in the House-passed financial regulation reform bill.
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 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.
We cannot predict whether any legislation will be enacted and,
if legislation is enacted, the prospects for the timing and
content of the legislation, or the impact that any enacted
legislation could have on our company or our industry.
OUR
CHARTER AND REGULATION OF OUR ACTIVITIES
Charter
Act
We are a shareholder-owned corporation, originally established
in 1938, organized and existing under the Federal National
Mortgage Association Charter Act, as amended, which we refer to
as the Charter Act or our charter. The Charter Act sets forth
the activities that we are permitted to conduct, authorizes us
to issue debt and equity securities, and describes our general
corporate powers. The Charter Act states that our purpose is to:
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provide stability in the secondary market for residential
mortgages;
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respond appropriately to the private capital market;
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provide ongoing assistance to the secondary market for
residential mortgages (including activities relating to
mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than the
return earned on other activities) by increasing the liquidity
of mortgage investments and improving the distribution of
investment capital available for residential mortgage
financing; and
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promote access to mortgage credit throughout the nation
(including central cities, rural areas and underserved areas) by
increasing the liquidity of mortgage investments and improving
the distribution of investment capital available for residential
mortgage financing.
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It is from these sections of the Charter Act that we derive our
mission of providing liquidity, increasing stability and
promoting affordability in the residential mortgage market. In
addition to the alignment of our overall strategy with these
purposes, all of our business activities must be permissible
under the Charter Act. Our charter authorizes us to: purchase,
service, sell, lend on the security of, and otherwise deal in
certain
33
mortgage loans; issue debt obligations and mortgage-related
securities; and do all things as are necessary or
incidental to the proper management of [our] affairs and the
proper conduct of [our] business.
Loan
Standards
Mortgage loans we purchase or securitize must meet the following
standards required by the Charter Act.
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Principal Balance Limitations. Our charter
permits us to purchase and securitize mortgage loans secured by
either a single-family or multifamily property. Single-family
conventional mortgage loans are subject to maximum original
principal balance limits, known as conforming loan
limits. The conforming loan limits are established each
year based on the average prices of one-family residences. In
2009, the general loan limit for mortgages that finance
one-family residences was $417,000, with higher limits for
mortgages secured by two- to four-family residences and in
certain statutorily-designated high-cost states and territories
(Alaska, Hawaii, Guam and the U.S. Virgin Islands) and
high-cost areas (counties or county-equivalent areas) that are
designated by FHFA annually up to a ceiling of 150% of our
general loan limit (for example, $625,000 for a one-family
residence, higher for two- to
four-units
and in high-cost states and territories).
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Since early 2008, a series of legislative acts have increased
our high-cost area loan limits for loans originated during
specific timeframes. The Economic Stimulus Act of 2008 and
subsequent laws set specific higher high-cost area limits
covering loans originated between July 1, 2007 and
December 31, 2010 and employing a ceiling of 175% of our
general loan limit (for example, $729,750 for a one-family
residence, higher for two- to
four-units
and in high-cost states and territories).
No statutory limits apply to the maximum original principal
balance of multifamily mortgage loans that we purchase or
securitize. In addition, the Charter Act imposes no maximum
original principal balance limits on loans we purchase or
securitize that are insured by FHA or guaranteed by the VA, home
improvement loans, or loans secured by manufactured housing.
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Loan-to-Value
and Credit Enhancement Requirements. The Charter
Act generally requires credit enhancement on any conventional
single-family mortgage loan that we purchase or securitize if it
has a
loan-to-value
ratio over 80% at the time of purchase. We also do not purchase
or securitize second lien single-family mortgage loans when the
combined
loan-to-value
ratio exceeds 80%, unless the second lien mortgage loan has
credit enhancement in accordance with the requirements of the
Charter Act. The credit enhancement required by our charter may
take the form of one or more of the following:
(1) insurance or a guaranty by a qualified insurer;
(2) a sellers agreement to repurchase or replace any
mortgage loan in default (for such period and under such
circumstances as we may require); or (3) retention by the
seller of at least a 10% participation interest in the mortgage
loans. Regardless of
loan-to-value
ratio, the Charter Act does not require us to obtain credit
enhancement to purchase or securitize loans insured by FHA or
guaranteed by the VA, home improvement loans or loans secured by
manufactured housing.
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Authority
of U.S. Treasury to Purchase GSE Securities
Pursuant to our charter, at the discretion of the Secretary of
the Treasury, Treasury may purchase our obligations up to a
maximum of $2.25 billion outstanding at any one time. In
addition, the 2008 Reform Act amended the Charter Act to give
Treasury expanded temporary authority to purchase our
obligations and other securities in unlimited amounts (up to the
national debt limit). This expanded authority expired on
December 31, 2009. On December 24, 2009, Treasury
announced that its GSE mortgage-backed securities program would
end on December 31, 2009, the expiration date of its
expanded temporary authority under our charter. We describe
Treasurys investment in our senior preferred stock and a
common stock warrant pursuant to this authority above under
Conservatorship and Treasury AgreementsTreasury
Agreements.
Other
Charter Act Provisions
The Charter Act has the following additional provisions.
34
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Issuances of Our Securities. We are
authorized, upon the approval of the Secretary of the Treasury,
to issue debt obligations and mortgage-related securities.
Neither the U.S. government nor any of its agencies
guarantees, directly or indirectly, our debt or mortgage-related
securities.
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Exemptions for Our Securities. Securities we
issue are exempted securities under laws administered by the
SEC, except that as a result of the 2008 Reform Act, our equity
securities are not treated as exempted securities for purposes
of Sections 12, 13, 14 or 16 of the Securities Exchange Act
of 1934 (the Exchange Act). Consequently, we are
required to file periodic and current reports with the SEC,
including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
However, we are not required to file registration statements
with the SEC under the Securities Act of 1933 (the
Securities Act) with respect to offerings of our
securities pursuant to this exemption.
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Exemption from Specified Taxes. We are exempt
from taxation by states, counties, municipalities and local
taxing authorities, except for taxation by those authorities on
our real property. We are not exempt from the payment of federal
corporate income taxes.
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Other Limitations and Requirements. We may not
originate mortgage loans or advance funds to a mortgage seller
on an interim basis, using mortgage loans as collateral, pending
the sale of the mortgages in the secondary market. In addition,
we may only purchase or securitize mortgages on properties
located in the United States, including the Commonwealth of
Puerto Rico, and the territories and possessions of the United
States.
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Regulation
and Oversight of Our Activities
As a federally chartered corporation, we are subject to
Congressional legislation and oversight. As a company under
conservatorship, our primary regulator has management authority
over us in its role as our conservator. The GSE Act, as amended
in 2008, establishes FHFA as an independent agency with general
supervisory and regulatory authority over Fannie Mae, Freddie
Mac and the 12 Federal Home Loan Banks (FHLBs). FHFA
assumed the duties of our former regulators, OFHEO, the
predecessor to FHFA, and HUD, with respect to safety and
soundness and mission oversight of Fannie Mae and Freddie Mac.
HUD remains our regulator with respect to fair lending matters.
We reference OFHEO in this report with respect to actions taken
by our safety and soundness regulator prior to the creation of
FHFA on July 30, 2008. As applicable, we reference HUD in
this section with respect to actions taken by our mission
regulator prior to the creation of FHFA on July 30, 2008.
Our regulators also include the SEC and Treasury.
GSE
Act
The GSE Act provides FHFA with safety and soundness authority
that is stronger than the authority that was available to OFHEO,
and that is comparable to and in some respects broader than that
of the federal banking agencies. Among other things, the
legislation gives FHFA the authority to raise capital levels
above statutory minimum levels, regulate the size and content of
our portfolio, approve new mortgage products, and place the GSEs
into conservatorship or receivership. In general, we remain
subject to regulations, orders and determinations that existed
prior to the enactment of the 2008 Reform Act until new ones are
issued or made. Below are some key provisions of the GSE Act.
Capital. FHFA has broad authority to establish
risk-based capital standards to ensure that we operate in a safe
and sound manner and maintain sufficient capital and reserves.
FHFA also has broad authority to increase the level of our
required minimum capital and to establish capital or reserve
requirements for specific products and activities, so as to
ensure that we operate in a safe and sound manner. On
October 9, 2008, FHFA announced that our capital
requirements will not be binding during the conservatorship. We
describe our capital requirements below under Capital
Adequacy Requirements.
Portfolio. FHFA is required to establish
standards governing our portfolio holdings, to ensure that they
are backed by sufficient capital and consistent with our mission
and safe and sound operations. FHFA is also required to monitor
our portfolio and, in some circumstances, may require us to
dispose of or acquire assets. On January 30, 2009, FHFA
published an interim final rule adopting, as the standard for
our portfolio
35
holdings, the portfolio cap established by the senior preferred
stock purchase agreement described under Treasury
AgreementsCovenants under Treasury Agreements, as it
may be amended from time to time. The interim final rule is
effective for as long as we remain subject to the terms and
obligations of the senior preferred stock purchase agreement.
Products and Activities. The GSE Act requires
that, with some exceptions, we must obtain FHFAs approval
before initially offering a product and provide FHFA written
notice before commencing a new activity. In July 2009, FHFA
published an interim final rule implementing this provision. In
a letter to Congress dated February 2, 2010, the Acting
Director of FHFA announced that FHFA was instructing Fannie Mae
and Freddie Mac not to submit requests for approval of new
products under the interim final rule. The letter stated that
permitting the Enterprises to engage in new products is
inconsistent with the goals of conservatorship, and
concluded, the Enterprises will be limited to continuing
their existing core business activities and taking actions
necessary to advance the goals of the conservatorship.
Conservatorship and Receivership. FHFA has
authority to place us into conservatorship, based on certain
specified grounds. Pursuant to this authority, FHFA placed us
into conservatorship on September 6, 2008. FHFA also has
authority to place us into receivership at the discretion of the
Director of FHFA, based on certain specified grounds, at any
time, including directly from conservatorship. Further, FHFA
must place us into receivership if it determines that our
liabilities have exceeded our assets for 60 days, or we
have not been paying our debts as they become due for
60 days.
Affordable Housing Allocations. We are
required to make annual allocations to fund government
affordable housing programs, based on the dollar amount of our
total new business purchases, at the rate of 4.2 basis
points per dollar. FHFA must issue regulations prohibiting us
from redirecting the cost of our allocations, through increased
charges or fees, or decreased premiums, or in any other manner,
to the originators of mortgages that we purchase or securitize.
FHFA shall temporarily suspend our allocation upon finding that
it is contributing or would contribute to our financial
instability; is causing or would cause us to be classified as
undercapitalized; or is preventing or would prevent us from
successfully completing a capital restoration plan. On
November 13, 2008, we received notice from FHFA that it was
suspending our allocation until further notice.
Affordable Housing Goals and Duty to Serve. We
discuss our affordable housing goals and our new duty to serve
underserved markets below under Housing Goals and Subgoals
and Duty to Serve Underserved Markets.
Executive Compensation. The GSE Act directs
FHFA to prohibit us from providing unreasonable or
non-comparable compensation to our executive officers. FHFA may
at any time review the reasonableness and comparability of an
executive officers compensation and may require us to
withhold any payment to the officer during such review.
FHFA is also authorized to prohibit or limit certain golden
parachute and indemnification payments to directors, officers,
and certain other parties. In January 2009, FHFA issued final
regulations relating to golden parachute payments, under which
FHFA may limit golden parachute payments as defined, and that
set forth factors to be considered by the Director of FHFA in
acting upon his authority to limit these payments.
Capital
Adequacy Requirements
The GSE Act establishes capital adequacy requirements. The
statutory capital framework incorporates two different
quantitative assessments of capitala minimum capital
requirement and a risk-based capital requirement. The minimum
capital requirement is ratio-based, while the risk-based capital
requirement is based on simulated stress test performance. The
GSE Act requires us to maintain sufficient capital to meet both
of these requirements in order to be classified as
adequately capitalized. On October 9, 2008,
however, FHFA announced that our existing statutory and
FHFA-directed regulatory capital requirements will not be
binding during the conservatorship. FHFA has directed us, during
the time we are under conservatorship, to focus on managing to a
positive net worth, provided that it is not inconsistent with
our mission objectives.
36
FHFA has advised us that, because we are under conservatorship,
we will not be subject to corrective action requirements that
would ordinarily result from our receiving a capital
classification of undercapitalized.
Minimum Capital Requirement. Under the GSE
Act, we must maintain an amount of core capital that equals or
exceeds our minimum capital requirement. The GSE Act defines
core capital as the sum of the stated value of outstanding
common stock (common stock less treasury stock), the stated
value of outstanding non-cumulative perpetual preferred stock,
paid-in capital and retained earnings, as determined in
accordance with GAAP. The GSE Act sets our statutory minimum
capital requirement equal to the sum of:
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2.50% of on-balance sheet assets;
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0.45% of the unpaid principal balance of outstanding Fannie Mae
MBS held by third parties; and
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0.45% of other off-balance sheet obligations, which may be
adjusted by FHFA under certain circumstances.
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FHFA retains authority under the GSE Act to raise the minimum
capital requirement for any of our assets or activities, as
necessary and appropriate to ensure our safe and sound
operations. For information on the amounts of our core capital
and our statutory minimum capital requirement as of
December 31, 2009 and 2008, see
MD&ALiquidity and Capital
ManagementCapital ManagementRegulatory Capital.
Risk-Based Capital Requirement. The GSE Act
requires FHFA to establish risk-based capital requirements for
Fannie Mae and Freddie Mac, to ensure that we operate in a safe
and sound manner. Existing risk-based capital regulation ties
our capital requirements to the risk in our book of business, as
measured by a stress test model. The stress test simulates our
financial performance over a ten-year period of severe economic
conditions characterized by both extreme interest rate movements
and high mortgage default rates. Simulation results indicate the
amount of capital required to survive this prolonged period of
economic stress without new business or active risk management
action. In addition to this model-based amount, the risk-based
capital requirement includes a 30% premium to cover unspecified
management and operations risks.
Our total capital base is used to meet our risk-based capital
requirement. The GSE Act defines total capital as the sum of our
core capital plus the total allowance for loan losses and
reserve for guaranty losses in connection with Fannie Mae MBS,
less the specific loss allowance (that is, the allowance
required on individually-impaired loans). Each quarter, our
regulator runs a detailed profile of our book of business
through the stress test simulation model. The model generates
cash flows and financial statements to evaluate our risk and
measure our capital adequacy during the ten-year stress horizon.
FHFA has stated that it does not intend to report our risk-based
capital level during the conservatorship.
Critical Capital Requirement. The GSE Act also
establishes a critical capital requirement, which is the amount
of core capital below which we would be classified as
critically undercapitalized. Under the GSE Act, such
classification is a discretionary ground for appointing a
conservator or receiver. Our critical capital requirement is
generally equal to the sum of:
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1.25% of on-balance sheet assets;
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0.25% of the unpaid principal balance of outstanding Fannie Mae
MBS held by third parties; and
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0.25% of other off-balance sheet obligations, which may be
adjusted by the Director of FHFA under certain circumstances.
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FHFA has stated that it does not intend to report our critical
capital level during the conservatorship.
On January 12, 2010, FHFA (1) directed us, for loans
backing Fannie Mae MBS held by third parties, to continue
reporting our minimum capital requirements based on 0.45% of the
unpaid principal balance and critical capital based on 0.25% of
the unpaid principal balance, notwithstanding our adoption
effective January 1, 2010 of new accounting standards that
resulted in our recording on our consolidated balance sheet
substantially all of the loans backing these Fannie Mae MBS, and
(2) issued a regulatory interpretation stating that our
minimum capital requirements are not automatically affected by
the new accounting standards.
37
Housing
Goals and Subgoals and Duty to Serve Underserved
Markets
Since 1993, we have been subject to housing goals, which have
been set as a percentage of the total number of dwelling units
underlying our total mortgage purchases, and have been intended
to expand housing opportunities (1) for low- and
moderate-income families, (2) in HUD-defined underserved
areas, including central cities and rural areas, and
(3) for low-income families in low-income areas and for
very low-income families, which is referred to as special
affordable housing. In addition, in 2004, HUD established
three home purchase subgoals that have been expressed as
percentages of the total number of mortgages we purchase that
finance the purchase of single-family, owner-occupied properties
located in metropolitan areas. Since 1995, we have also been
required to meet a subgoal for multifamily special affordable
housing that is expressed as a dollar amount. The 2008 Reform
Act changed the structure of the housing goals and created a new
duty for us and Freddie Mac to serve three underserved
marketsmanufactured housing, affordable housing
preservation, and rural housingbeginning in 2010. The new
goals structure establishes three single-family conforming
purchase money mortgage goals and one conforming mortgage
refinance goal. The purchase money goals target low-income
families, very low-income families, and families in low-income
areas. The refinance goal targets low-income families. The 2008
Reform Act also established a separate multifamily goal
targeting low-income families and authorized FHFA to establish
additional requirements for housing affordable to very
low-income families.
On February 17, 2010, FHFA announced its proposed rule
implementing the new housing goals structure for 2010 and 2011.
FHFA proposed benchmark goals for the purchase of single-family
purchase money mortgages as follows: 27% of our purchases of
mortgage loans backed by single-family, owner-occupied
properties must be affordable to low-income families; 8% of our
purchases of mortgage loans backed by single-family,
owner-occupied properties must be affordable to very low-income
families; and 13% of our purchases of mortgage loans backed by
single-family, owner-occupied properties must be in low-income
areas. In addition, 25% of our purchases of refinance mortgage
loans backed by single-family, owner-occupied properties must be
affordable to low-income families. FHFAs proposal
specifies that our performance will be measured against both
these benchmarks and actual goals-qualifying shares of the
primary mortgage market. We will not have failed to meet a goal
if we do not meet a benchmark but our performance meets the
actual share of the market.
FHFA also proposed a new multifamily goal and subgoal. Our
multifamily mortgage purchases must finance at least
237,000 units affordable to low-income families and
57,000 units affordable to very low-income families.
The proposed rule makes other changes to FHFAs housing
goals regulations. The proposed rule excludes private-label
mortgage-related securities and REMICs from counting toward
meeting our housing goals, broadens our ability to count
mortgage revenue bonds, extends our ability to count loan
modifications under the Making Home Affordable Program, and
permits us to count jumbo conforming mortgages toward meeting
our housing goals.
The proposed rule states that FHFA does not intend for
[Fannie Mae] to undertake uneconomic or high-risk activities in
support of the [housing] goals. Further, the fact that the
Enterprises are in conservatorship should not be a justification
for withdrawing support from these market segments. Under
FHFAs current and proposed regulations, we report our
progress toward achieving our housing goals to FHFA on a
quarterly basis, and we are required to submit a report to FHFA
and Congress on our performance in meeting our housing goals on
an annual basis. If our efforts to meet our goals prove to be
insufficient and FHFA finds that our 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
financial condition. The housing plan must describe the actions
we will take to meet the goal in the next calendar year and be
approved by FHFA. The potential penalties for failure to comply
with housing plan requirements are a
cease-and-desist
order and civil money penalties. To the extent that we purchase
higher risk loans to meet our housing goals, these purchases
could contribute to future credit losses.
With respect to the underserved markets, beginning in 2010 we
are required to provide leadership to the market in
developing loan products and flexible underwriting guidelines to
facilitate a secondary market for
38
mortgages for very low-, low-, and moderate-income
families. The 2008 Reform Act also gave FHFA the authority
to set and enforce the housing goals and the duty to serve
underserved markets. FHFA must promulgate regulations to
implement the duty to serve underserved markets.
The 2008 Reform Act provided that the housing goals established
for 2008 would remain in effect for 2009, except that FHFA was
required to review the 2009 goals to determine their feasibility
given market conditions and, after seeking public comment, FHFA
would make appropriate adjustments to the 2009 goals. Pursuant
to this requirement, in May 2009 FHFA published a proposed rule
lowering our 2009 housing goals and home purchase subgoals from
the 2008 levels. FHFA determined that, in light of market
conditions, the previously established 2009 housing goals were
not feasible unless adjusted. The adverse market conditions that
FHFA took into consideration included tighter underwriting
practices, the sharply increased standards of private mortgage
insurers, the increased role of FHA in the marketplace, the
collapse of the private-label mortgage-related securities
market, increasing unemployment, multifamily market volatility
and the prospect of a refinancing surge in 2009. These
conditions contribute to fewer goals-qualifying mortgages
available for purchase by us. The final 2009 housing goals FHFA
adopted in August 2009 lowered our base goals from the levels
proposed in May, adopted the home purchase subgoals as proposed,
and increased our multifamily special affordable subgoal.
Our 2009 housing goals were at approximately the levels that
existed in 2004 through 2006. FHFA also permitted 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. Purchases of loans on single-family
properties with a maximum original principal balance higher than
the nationwide conforming loan limit (currently set at $417,000)
are not counted toward our 2009 housing goals.
The following table presents FHFAs 2009 housing goals and
subgoals and our performance against those goals and subgoals.
We also present our performance against our housing goals and
subgoals for 2008 and 2007. Performance results for 2009 have
not yet been validated by FHFA.
Housing
Goals and Subgoals Performance
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2009
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2008
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2007
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Result(1)
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Goal
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Result
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Goal
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Result
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Goal
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Housing
goals:(2)
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Low- and moderate-income housing
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47.7
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%
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43.0
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%
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53.7
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%
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56.0
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%
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55.5
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%
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55.0
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%
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Underserved areas
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28.8
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32.0
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39.4
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39.0
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43.4
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38.0
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Special affordable housing
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20.8
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18.0
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26.4
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27.0
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26.8
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25.0
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Housing subgoals:
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Home purchase
subgoals:(3)
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Low- and moderate-income housing
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51.8
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%
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40.0
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%
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38.8
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%
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47.0
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%
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42.1
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%
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47.0
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%
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Underserved areas
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31.1
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30.0
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30.4
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34.0
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33.4
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33.0
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Special affordable housing
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23.2
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14.0
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13.6
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18.0
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15.5
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18.0
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Multifamily special affordable housing subgoal
($ in
billions)(4)
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$
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6.47
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$
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6.56
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$
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13.31
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$
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5.49
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$
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19.84
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$
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5.49
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These results may differ from the
results FHFA determines for our 2009 reporting.
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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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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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The multifamily subgoal is measured
by loan amount and expressed as a dollar amount.
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We believe we met all of our 2009 housing goals except for our
underserved areas goal and our increased
multifamily special affordable housing subgoal. We
have requested that FHFA determine, based on economic and market
conditions and our financial condition, that the
underserved areas goal and the increased
multifamily special affordable housing subgoal were
not feasible for 2009. If FHFA makes this
39
determination, there will be no enforcement action against us
for failing to meet these goals. We will file our assessment of
our performance against our housing goals with FHFA in
mid-March, and FHFA will determine our final performance numbers.
We did not meet our low- and moderate-income housing
and special affordable housing goals, or any of our
home purchase subgoals, for 2008, given declining market
conditions. In March 2009, FHFA notified us of its determination
that achievement of these housing goals and subgoals was not
feasible due to housing and economic conditions and our
financial condition in 2008.
In 2007, we met each of our three housing goals and two of the
four subgoals. However, we did not meet our low- and
moderate-income housing and special affordable
housing home purchase subgoals in 2007. In April 2008, HUD
notified us of its determination that achievement of these
subgoals was not feasible, primarily due to reduced housing
affordability and turmoil in the mortgage market, which reduced
the share of the conventional conforming primary home purchase
market that would qualify for these subgoals.
See Risk Factors for a description of how changes we
have made to our business strategies in order to meet our
housing goals and subgoals have increased our credit losses and
will adversely affect our results of operations.
MAKING
HOME AFFORDABLE PROGRAM
During 2009, the Obama Administration introduced a comprehensive
Financial Stability Plan to help protect and support the
U.S. housing and mortgage markets and stabilize the
financial markets. As part of this plan, in March 2009, the
Administration announced details of Making Home Affordable, a
program intended to provide assistance to homeowners and prevent
foreclosures. Working with our conservator, we have devoted
significant effort and resources to help distressed homeowners
through initiatives that support the Making Home Affordable
Program. Below we describe key aspects of the Making Home
Affordable Program and our role in the program. For additional
information about our activities under the program and its
financial impact on us, please see Executive
SummaryHomeowner Assistance Initiatives and
MD&AConsolidated Results of
OperationsFinancial Impact of the Making Home Affordable
Program on Fannie Mae.
The Making Home Affordable Program includes a Home Affordable
Refinance Program (HARP), under which we acquire or
guarantee loans that are refinancings of mortgage loans we own
or guarantee, and Freddie Mac does the same, and a Home
Affordable Modification Program (HAMP), which
provides for the modification of mortgage loans owned or
guaranteed by us or Freddie Mac, as well as other mortgage
loans. These two programs were designed to 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 March 2009, we announced our participation in the Making Home
Affordable Program and released guidelines for Fannie Mae
sellers and servicers in offering HARP and HAMP for Fannie Mae
borrowers. We also serve as program administrator under HAMP for
loans we do not own or guarantee.
In an effort to expand the benefits available through the Making
Home Affordable Program to more borrowers, the government
announced a number of updates to the program throughout 2009.
Key elements of HARP and HAMP are described below.
Home
Affordable Refinance Program
HARP 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 prices or the
unavailability of mortgage insurance. Loans under this program
are available only if the new mortgage loan either reduces the
monthly principal and interest payment for the borrower or
provides a more stable loan product (such as movement from an
adjustable-rate mortgage to a fixed-rate mortgage loan). Other
eligibility requirements that must be met under this program
include the following.
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Ownership. We must own or guarantee the
mortgage loan being refinanced.
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Unpaid Principal Balance. Upon HARPs
initial implementation in April 2009, the unpaid principal
balance on the mortgage loan was limited to 105% of the current
value of the property covered by the mortgage. In other words,
the maximum LTV ratio was 105%. In July 2009, FHFA authorized
expansion of the program to permit refinancings of existing
mortgage loans with an LTV of 125%.
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Mortgage Insurance. Mortgage insurance for the
new mortgage loan is only required if the existing loan had an
original LTV ratio greater than 80% and mortgage insurance is in
force on the existing loan. In that case, mortgage insurance is
required only up to the coverage level on the existing loan,
which may be less than our standard coverage requirements. FHFA
has provided guidance that permits us to implement this feature
of the program in compliance with our charter requirements for
loans originated through June 10, 2010 and acquired through
October 2010, and we have requested an extension of this
flexibility for loans originated through June 2011 and acquired
through October 2011.
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New Loan Restrictions. The new mortgage loan
cannot (1) be an adjustable-rate mortgage loan, or ARM, if
the initial fixed period is less than five years; (2) have
an interest-only feature, which permits the payment of interest
without a payment of principal; (3) be a balloon mortgage
loan; or (4) have the potential for negative amortization.
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We made the program available for newly refinanced mortgage
loans delivered to us on or after April 1, 2009. We make
refinancings under HARP through our Refi Plus initiatives, which
provide refinance solutions for eligible Fannie Mae loans. This
program replaced the streamlined refinance options we previously
offered.
Home
Affordable Modification Program
HAMP is aimed at helping borrowers whose loan either is
currently delinquent or is at imminent risk of default by
modifying their mortgage loan to make their monthly payments
more affordable. The goal is to modify a borrowers
mortgage loan to target the borrowers monthly mortgage
payment at 31% of the borrowers gross monthly income. The
program is designed to provide a uniform, consistent structure
for servicers to use in modifying mortgage loans to prevent
foreclosures, including loans owned or guaranteed by Fannie Mae
or Freddie Mac and other qualifying mortgage loans. We have
advised our servicers that we require borrowers at risk of
foreclosure who are not eligible for a loan refinance under HARP
to be evaluated for eligibility under HAMP before any other
workout alternative is considered. Borrowers ineligible for HAMP
may be considered under other workout alternatives we provide,
such as our recently introduced HomeSaver Forbearance initiative
and repayment plans. We serve as the program administrator of
HAMP for Treasury. The program includes the following features:
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Status of Mortgage Loan. The mortgage loan
must be delinquent (and may be in foreclosure) or, for loans
owned or guaranteed by Fannie Mae or Freddie Mac, a payment
default must be imminent. All borrowers must attest to a
financial hardship.
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Modifications Permitted. Servicers must apply
the permitted modification terms available in the order listed
below until the borrowers new monthly mortgage payment
achieves the target payment ratio of 31%:
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Reduction of Interest Rate. Reduce the interest rate to
as low as 2% for the first five years following modification,
increasing by 1% per year thereafter until it reaches the market
rate at the time of modification.
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Extension of Loan Term. Extend the loan term to up to
40 years.
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Deferral of Principal. Defer payment of a portion of the
principal of the loan, interest-free, until (1) the
borrower sells the property, (2) the end of the loan term,
or (3) the borrower pays off the loan, whichever occurs
first.
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Limits on Risk Features in Modified Mortgage Loans.
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ARMs and Interest-Only Loans. If a borrower has an
adjustable-rate or interest-only loan, the loan will convert to
a fixed interest rate, fully amortizing loan.
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Prohibition on Negative Amortization. Negative
amortization is prohibited following the effective date of the
modification.
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Trial Period Required before
Modification. Borrowers must satisfy the terms of
a trial modification plan for a trial payment period, typically
for at least three months. The modification will become
effective upon final execution of a modification agreement
following satisfactory completion of the trial period.
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Preforeclosure Eligibility
Evaluation. Servicers have been directed not to
proceed with a foreclosure sale until the borrower has been
evaluated for a modification under the program and, if eligible,
has been extended an offer to participate in the program.
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Incentive Payments to Servicers. For each
Fannie Mae loan for which a modification is completed under
HAMP, we pay the servicer (1) $1,000; (2) an
additional $500 if the modified loan was current when it entered
the trial period (that is, if the loan was current but a payment
default was imminent); and (3) an annual pay for
success fee of up to $1,000 if the modification reduces
the borrowers monthly payment by 6% or more, payable for
each of the first three years after the modification as long as
the borrower is continuing to make the payments due under the
modified loan.
Incentives to Borrowers. For a permanent
modification under HAMP that reduces the borrowers monthly
payment by 6% or more, we will provide the borrower an annual
reduction in the outstanding principal balance of the modified
loan of up to $1,000 for each of the first five years after the
modification as long as the borrower is continuing to make the
payments due under the modified loan.
Costs of Modifications. We bear all of the
costs of modifying our loans under the program, including any
additional amounts we are required to provide under our
guarantees for loans owned by one of our MBS trusts during a
trial payment period or any other mortgage-backed securities for
which we have provided a guaranty.
HAMP expires on December 31, 2012.
Our Role
as Program Administrator of HAMP
Treasury has engaged us to serve as program administrator for
loans modified under HAMP that are not owned or guaranteed by
us. In April 2009, Treasury released guidance to servicers for
adoption and implementation of HAMP for mortgage loans that are
not owned or guaranteed by us or Freddie Mac. Freddie Mac
maintains guidelines for modification under the program of loans
it owns or guarantees.
Our principal activities as program administrator include the
following:
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Implementing the guidelines and policies of the program;
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Preparing the requisite forms, tools and training to facilitate
efficient loan modifications by servicers;
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Creating, making available and managing the process for
servicers to report modification activity and program
performance;
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Acting as paying agent to calculate and remit subsidies and
compensation consistent with program guidelines;
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Acting as record-keeper for executed loan modifications and
program administration;
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Coordinating with Treasury and other parties toward achievement
of the programs goals, including assisting with
development and implementation of updates to the program and
initiatives expanding the programs reach; and
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Performing other tasks as directed by Treasury from time to time.
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In our capacity as program administrator for the program, we
support over 100 servicers that have signed up to offer
modifications on non-agency loans under the program. To help
servicers ramp up their operations to modify loans under HAMP,
we have provided information and resources through a Web site
dedicated to servicers under the program. We have also
communicated information about the program to servicers and
helped servicers implement and integrate the program with new
systems and processes. Our servicer support as program
administrator includes dedicating Fannie Mae personnel to
participating servicers to work closely with the servicers to
help them implement the program. We also have established a
servicer support call center, conducted weekly conference calls
with the leadership of participating servicers, and provided
training through live Web seminars, recorded tutorials,
checklists and job aids on the program Web site.
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TREASURY
HOUSING FINANCE AGENCY INITIATIVE
To assist state and local housing finance agencies
(HFAs) to continue to meet their mission of
providing affordable financing for both single-family and
multifamily housing, in October of 2009 we entered into a
memorandum of understanding with Treasury, FHFA and Freddie Mac
that established terms under which we, Freddie Mac and Treasury
would provide assistance to HFAs. Pursuant to this HFA
initiative, we, Freddie Mac and Treasury are providing
assistance to the HFAs through two primary programs: a temporary
credit and liquidity facilities program, which is intended to
improve the HFAs access to liquidity for outstanding HFA
bonds, and a new issue bond program, which is intended to
support new lending by the HFAs. Pursuant to the temporary
credit and liquidity facilities program, Treasury has purchased
participation interests in temporary credit and liquidity
facilities provided by us and Freddie Mac to the HFAs. These
facilities create a credit and liquidity backstop for the HFAs.
Pursuant to the new issue bond program, Treasury has purchased
new securities issued by us and Freddie Mac backed by new
housing bonds issued by the HFAs. Please see Certain
Relationships and Related Transactions, and Director
IndependenceTransactions with Related
PersonsTransactions with TreasuryTreasury Housing
Finance Agency Initiative for a more detailed discussion
of the HFA initiative.
OUR
CUSTOMERS
Our principal customers are lenders that operate within the
primary mortgage market where mortgage loans are originated and
funds are loaned to borrowers. Our customers include mortgage
banking companies, savings and loan associations, savings banks,
commercial banks, credit unions, community banks, insurance
companies, and state and local housing finance agencies. Lenders
originating mortgages in the primary mortgage market often sell
them in the secondary mortgage market in the form of whole loans
or in the form of mortgage-related securities.
During 2009, approximately 1,100 lenders delivered single-family
mortgage loans to us, either for securitization or for purchase.
We acquire a significant portion of our single-family mortgage
loans from several large mortgage lenders. During 2009, our top
five lender customers, in the aggregate, accounted for
approximately 62% of our single-family business volume, compared
with 66% in 2008. Two lender customers, Bank of America
Corporation and Wells Fargo & Company, including their
respective affiliates, each accounted for more than 20% of our
single-family business volume for 2009.
Due to ongoing consolidation within the mortgage industry, as
well as the number of mortgage lenders that have gone out of
business since late 2006, we, as well as our competitors, seek
business from a decreasing number of large mortgage lenders. To
the extent we become more reliant on a smaller number of lender
customers, our negotiating leverage with these customers
decreases, which could diminish our ability to price our
products and services optimally. In addition, many of our lender
customers are experiencing financial and liquidity problems that
may affect the volume of business they are able to generate. We
discuss these and other risks that this customer concentration
poses to our business in Risk Factors.
COMPETITION
Historically, our competitors have included Freddie Mac, FHA,
Ginnie Mae (which primarily guarantees securities backed by
FHA-insured loans), the FHLBs, financial institutions,
securities dealers, insurance companies, pension funds,
investment funds and other investors. During 2008, almost all of
our competitors, other than Freddie Mac, FHA, Ginnie Mae and the
FHLBs, ceased their activities in the residential mortgage
finance business, and we remained the largest single issuer of
mortgage-related securities in the secondary market in 2009.
We compete to acquire mortgage assets in the secondary market
both for our investment portfolio and for securitization into
Fannie Mae MBS. We also compete for the issuance of
mortgage-related securities to investors. Competition in these
areas is affected by many factors, including the amount of
residential mortgage
43
loans offered for sale in the secondary market by loan
originators and other market participants, the nature of the
residential mortgage loans offered for sale (for example,
whether the loans represent refinancings), the current demand
for mortgage assets from mortgage investors, the interest rate
risk investors are willing to assume and the yields they will
require as a result, and the credit risk and prices associated
with available mortgage investments. Pursuant to its agency MBS
purchase program, the Federal Reserve was an active and
significant purchaser of our MBS during 2009, which was
significant in supporting the liquidity of our MBS.
Competition to acquire mortgage assets is significantly affected
by pricing and eligibility standards. In 2008 and 2009, changes
in our pricing and eligibility standards and in the eligibility
standards of the mortgage insurance companies reduced our
acquisition of loans with higher LTV ratios and other high-risk
features. In addition, FHA has become the lower-cost option, or
in some cases the only option, for loans with higher LTV ratios.
Prior to the severe market downturn, there was a significant
increase in the issuance of mortgage-related securities by
non-agency issuers, which caused a decrease in our share of the
market for new issuances of single-family mortgage-related
securities from 2003 to 2006. Non-agency issuers, also referred
to as private-label issuers, are those issuers of
mortgage-related securities other than agency issuers Fannie
Mae, Freddie Mac and Ginnie Mae. The subsequent mortgage and
credit market disruption led many investors to curtail their
purchases of private-label mortgage-related securities. As a
result, private-label mortgage-related securities issuances were
significantly curtailed. Accordingly, our market share
significantly increased during 2008 and remained high in 2009.
Our estimated market share of new single-family mortgage-related
securities issuances was 46.3% in 2009 and 45.4% in 2008,
compared with 33.9% in 2007. Our estimated market share in 2009
of 46.3% includes $94.6 billion of whole loans held for
investment in our mortgage portfolio that were securitized into
Fannie Mae MBS in the second quarter, but retained in our
mortgage portfolio and consolidated on our consolidated balance
sheets. Excluding these Fannie Mae MBS from the estimate of our
market share, our estimated 2009 market share of new
single-family mortgage-related securities issuances was 43.2%.
During 2009, our primary competitors for the issuance of
mortgage-related securities were Ginnie Mae (which primarily
guarantees mortgage-related securities backed by FHA-insured
loans) and Freddie Mac. Our estimated market share of new
single-family mortgage-related securities issuances was
approximately 38.9% in the fourth quarter of 2009, compared with
approximately 41.7% in the fourth quarter of 2008 and 48.5% in
the fourth quarter of 2007. In comparison, Ginnie Maes
market share of new single-family mortgage-related securities
issuances was approximately 34.5% in the fourth quarter of 2009,
compared with approximately 37.8% in the fourth quarter of 2008
and 9.0% in the fourth quarter of 2007. Our estimates of market
share exclude previously securitized mortgages and are based on
publicly available data.
We also compete for low-cost debt funding with institutions that
hold mortgage portfolios, including Freddie Mac and the FHLBs.
EMPLOYEES
As of December 31, 2009, we employed approximately
6,000 personnel, including full-time and part-time
employees, term employees and employees on leave.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We make available free of charge through our Web site our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all other SEC reports and amendments to those reports as
soon as reasonably practicable after we electronically file the
material with, or furnish it to, the SEC. Our Web site address
is www.fanniemae.com. Materials that we file with the SEC are
also available from the SECs Web site, www.sec.gov. You
may also request copies of any filing from us, at no cost, by
calling the Fannie Mae Fixed-Income Securities Helpline at
(800) 237-8627 or
(202) 752-7115
or by writing to Fannie Mae, Attention: Fixed-Income Securities,
3900 Wisconsin Avenue, NW, Area 2H-3S, Washington, DC 20016.
44
We are providing our Web site addresses and the Web site address
of the SEC solely for your information. Information appearing on
our Web site or on the SECs Web site is not incorporated
into this annual report on
Form 10-K.
FORWARD-LOOKING
STATEMENTS
This report includes statements that constitute forward-looking
statements within the meaning of Section 21E of the
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, may,
prospects, or similar words.
Among the forward-looking statements in this report are
statements relating to:
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Our belief that the weak economy and stressed housing market
will continue and will adversely impact our results of
operations, liquidity and financial condition in 2010;
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Our expectation that adverse credit performance trends may
continue into 2010;
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Our expectation that we will not be able to return to long-term
profitability anytime in the foreseeable future;
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Our expectation that we will not earn profits in excess of our
annual dividend obligation to Treasury for the indefinite future;
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Our expectation that unemployment rates will decline modestly
yet remain elevated throughout 2010;
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Our belief that ongoing adverse conditions in the housing and
mortgage markets, along with the continuing deterioration
throughout our book of business and the costs associated with
our efforts to assist the mortgage market pursuant to our
mission, will increase the amount of funds that Treasury is
required to provide to us;
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Our expectation that the conservatorship and investment by
Treasury will continue to have a material adverse effect on our
common and preferred shareholders;
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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;
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Our expectation that dividends and commitment fees we must pay
or that accrue on Treasurys investments will increase and
will have a significant adverse impact on our future financial
position and net worth;
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Our expectation that permanent Home Affordable Modification
Program modifications will increase as trial periods are
completed and permanent modification offers are extended;
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Our expectation that the actions we take to stabilize the
housing market and minimize our credit losses will continue to
have, at least in the short term, a material adverse effect on
our business, results of operations, financial condition and net
worth;
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Our belief that activities our regulators, other
U.S. government agencies or Congress may request or require
us to take to support the mortgage market and help homeowners
may adversely affect our business;
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Our expectation that we will no longer be able to sell or
otherwise transfer, or use or otherwise realize future tax
benefits from, our LIHTC investments;
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Our expectation that heightened default and severity rates will
continue during 2010 and that home prices, particularly in some
geographic areas, may decline further;
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Our expectation of further increases in the level of
foreclosures and single-family delinquency rates as well as in
the level of multifamily defaults and loss severity in 2010;
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Our expectation that home sales will start a longer term growth
path by the end of 2010;
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Our expectation that home prices will stabilize in 2010 and that
the
peak-to-trough
home price decline on a national basis will range between 17% to
24%;
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Our expectation that U.S. residential single-family
mortgage debt outstanding will decrease by 1.7% in 2010;
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Our expectation that a decline in total originations as well as
a potential shift of the market away from refinance activity
during 2010 will have a significant adverse impact on our
business volumes;
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Our expectation that our credit-related expenses will remain
high in 2010, and that our credit losses will continue to
increase during 2010;
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Our expectation that we will continue to have losses throughout
our guaranty book of business due to high unemployment and
continuing declines in home prices;
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Our expectation of the ongoing uncertainty regarding the future
of our business, including whether we will continue to exist in
our current form after the termination of the conservatorship;
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Our belief that it is likely we will not remediate the material
weakness in our disclosure controls and procedures while we are
under conservatorship;
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Our expectation that we will experience high levels of
period-to-period
volatility in our results of operations and financial condition;
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Our projections with respect to interest rates and any effects
of those interest rate projections on our credit loss
expectations;
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Our expectation that we will experience periodic fluctuations in
the fair value of our net assets due to our business activities
and changes in market conditions;
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Our belief that changes or perceived changes in the
governments support of us or the financial markets could
increase our roll-over risk and materially adversely affect our
ability to refinance our debt as it becomes due;
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Our belief that demand for our debt securities could decline,
perhaps significantly, as the Federal Reserve concludes its
agency debt and MBS purchase programs;
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Our belief that we could use the 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;
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Our expectations regarding the impact of the new consolidation
accounting standards on our accounting, financial statements,
financial results and net worth;
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Our expectation that our acquisitions of Alt-A and subprime
mortgage loans will be minimal in future periods and that the
percentage of the book of business attributable to Alt-A and
subprime will shrink over time;
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Our expectation that the challenging mortgage and credit market
conditions will likely continue to adversely affect the
liquidity and financial condition of us and our institutional
counterparties;
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Our belief that, 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;
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Our belief that one or more of our financial guarantor
counterparties may not be able to fully meet their obligations
to us in the future;
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Our belief that we may experience further losses relating to our
derivative contracts;
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Our belief that our remaining deferred tax assets related to
certain
available-for-sale
securities we hold are recoverable;
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Our belief that the credit losses we experience in future
periods are likely to be larger, and perhaps substantially
larger, than our current combined loss reserves;
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Our expectation that we will experience additional
other-than-temporary
impairment writedowns of our investments in private-label
mortgage-related securities, including those that continue to be
AAA-rated;
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Our belief that the performance of our 2008 and 2009 workouts
will be highly dependent on economic factors, such as
unemployment rates and home prices;
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Our belief that exposure to refinancing risk may be higher for
multifamily loans that are due to mature during the next several
years;
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Our intention to use the funds we receive from Treasury under
the senior preferred stock purchase agreement to repay our debt
obligations and pay dividends on the senior preferred stock;
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Our belief that the amount of financing we could obtain in the
event of a liquidity crisis or significant market disruption by
borrowing against our mortgage-related securities is
substantially lower than the amount of mortgage-related
securities we hold;
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Our intention to either continue to sell or allow to mature
non-mortgage-related securities from time to time as market
conditions permit;
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Our belief that our liquidity contingency plan is unlikely to be
sufficient to provide us with alternative sources of liquidity
for 90 days;
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Our expectation that we will experience further losses and
write-downs relating to our investment securities;
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Our expectation that credit deterioration will continue at a
slower pace, coupled with an increase in the pace of
foreclosures and problem loan workouts, and result in a slower
rate of increase in delinquencies;
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Our expectation that, as interest rates change, we are likely to
take actions to rebalance our portfolio to manage our interest
rate exposure;
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Our belief that the ultimate amount of realized credit losses
and realized values we receive from holding our assets and
liabilities is likely to differ materially from the current
estimated fair values;
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Our intention to repay our short-term and long-term debt
obligations as they become due primarily through proceeds from
the issuance of additional debt securities;
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Our expectation that single-family loans we acquired in 2009
loans may have relatively slow prepayment speeds, and therefore
remain in our book of business for a relatively long time, due
to the historically low interest rates throughout 2009;
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Our expectation that we will significantly increase our
purchases of delinquent loans from single-family MBS trusts;
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Our expectations regarding our new executive compensation
program, including our belief that it will enable us to recruit
and retain well-qualified executives; and
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Descriptions of assumptions underlying or relating to any of the
foregoing matters and any other statements contained in this
report that are or may be forward-looking statements.
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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
47
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: our ability to maintain a positive net worth;
adverse effects from activities we undertake to support the
mortgage market and help borrowers; the conservatorship and its
effect on our business; 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; further disruptions in the housing, credit and stock
markets; the level and volatility of interest rates and credit
spreads; the adequacy of credit reserves; pending government
investigations and litigation; changes in management; the
accuracy of subjective estimates used in critical accounting
policies; and those factors described in this report, including
those factors described in Risk Factors.
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
Risk Factors. 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.
This section identifies specific risks that should be considered
carefully in evaluating our business. The risks described in
Risks Relating to Our Business are specific to us
and our business, while those described in Risks Relating
to Our Industry relate to the industry in which we
operate. Refer to MD&ARisk Management for
a more detailed description of the primary risks to our business
and how we seek to manage those risks.
Any of these factors could materially adversely affect our
business, results of operations, financial condition, liquidity
and net worth, 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. However, these are not the only risks facing us.
Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially
adversely affect our business, results of operations, financial
condition, liquidity and net worth.
48
RISKS
RELATING TO OUR BUSINESS
The future of our company following termination of the
conservatorship and the timing of the conservatorships end
are 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 continue to exist in the same or
a similar form after conservatorship is terminated or whether
the conservatorship will end in receivership or in some other
manner. The Obama Administrations June 2009 white paper on
financial regulatory reform stated that Treasury and HUD, in
consultation with other government agencies, would engage in a
wide-ranging initiative to develop recommendations on the future
of the GSEs. On December 24, 2009, in announcing amendments
to its senior preferred stock purchase agreements with Fannie
Mae and Freddie Mac, Treasury announced that it expected to
provide a preliminary report about longer term reform of the
federal governments role in the housing market around the
time President Obama released his fiscal 2011 budget. Treasury
observed, Recent announcements on the tightening of
underwriting standards by Fannie Mae, Freddie Mac, and FHA,
demonstrate a commitment to prudent housing finance policy that
enables a transition to an environment where the private market
is able to provide a larger source of mortgage finance. In
February 2010, the Administration stated that it continues to
monitor the situation of the GSEs, and indicated that it would
release a statement on the GSEs in the very near
future. Since June 2009, Congressional committees and
subcommittees have held hearings to discuss the present
condition and future status of Fannie Mae and Freddie Mac and at
least one legislative proposal addressing the future status of
the GSEs has been offered. We cannot predict the prospects for
the enactment, timing or content of legislative proposals
regarding the future status of the GSEs. See
BusinessGSE Reform and Pending Legislation for
more information about the white papers mention of options
for reform of the GSEs and Congressional hearings about our
present condition and future status.
Accordingly, there continues to be uncertainty regarding the
future of Fannie Mae, including whether we will continue to
exist in our current form after conservatorship is terminated.
The options for reform of the GSEs include options that would
result in a substantial change to our business structure or in
Fannie Maes liquidation or dissolution.
We expect FHFA to request additional funds from Treasury
on our behalf to ensure we maintain a positive net worth and
avoid mandatory receivership. The dividends and commitment fees
we must pay or that accrue on Treasurys investments are
substantial and are expected to increase, and we likely will not
be able to fund them through net income.
FHFA must place us into receivership if the Director of FHFA
makes a written determination that our assets are less than our
obligations (which we refer to as a net worth deficit) or if we
have not been paying our debts, in either case, for a period of
60 days. We have had a net worth deficit as of the end of
each of the last five fiscal quarters, including as of
December 31, 2009. Treasury provided us with funds under
the senior preferred stock purchase agreement to cure the net
worth deficits in prior periods before the end of the
60-day
period, and we expect Treasury to do the same with respect to
the December 31, 2009 deficit. When Treasury provides the
additional $15.3 billion FHFA has already requested on our
behalf, the aggregate liquidation preference on the senior
preferred stock will be $76.2 billion, and will require an
annualized dividend of $7.6 billion. The prospective
$7.6 billion annual dividend obligation exceeds our
reported annual net income for all but one of the last eight
years. Our ability to maintain a positive net worth 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. Further funds from Treasury under the senior
preferred stock purchase agreement will 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.
In addition, beginning in 2011, the senior preferred stock
purchase agreement requires that we pay a quarterly commitment
fee to Treasury, unless Treasury waives this fee. The quarterly
commitment fee amounts have not yet been determined. The
aggregate liquidation preference and dividend obligations will
also increase by the
49
amount of any required dividend we fail to pay in cash and by
any required quarterly commitment fee that we fail to pay. The
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 strain our financial resources and
have an adverse impact on our results of operations, financial
condition, liquidity and net worth, both in the short and long
term.
Our regulator is authorized or required to place us into
receivership under specified conditions, which would result in
the liquidation of our assets. Amounts recovered from the
liquidation may be insufficient to cover our obligations or
liquidation preferences on our preferred stock, or provide any
proceeds to common shareholders.
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. Because of the weak economy
and conditions in the housing market, we will continue to need
funding from Treasury to avoid a trigger of mandatory
receivership. In addition, we could be put into 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. These conditions include: a substantial
dissipation of assets or earnings due to unsafe or unsound
practices; the existence of an unsafe or unsound condition to
transact business; an inability to meet our obligations in the
ordinary course of business; a weakening of our condition due to
unsafe or unsound practices or conditions; critical
undercapitalization; the likelihood of losses that will deplete
substantially all of our capital; or by consent. A receivership
would terminate the conservatorship. In addition to the powers
FHFA has as conservator, the appointment of FHFA as our receiver
would terminate all rights and claims that our shareholders and
creditors may have against our assets or under our charter
arising as a result of their status as shareholders or
creditors, except for their right to payment, resolution or
other satisfaction of their claims as permitted under the GSE
Act. Unlike a conservatorship, the purpose of which is to
conserve our assets and return us to a sound and solvent
condition, the purpose of a receivership is to liquidate our
assets and resolve claims against us.
In the event of a liquidation of our assets, only after paying
the secured and unsecured claims against the company (including
repaying all outstanding debt obligations), the administrative
expenses of the receiver and the liquidation preference of the
senior preferred stock, would any liquidation proceeds be
available to repay the liquidation preference on any other
series of preferred stock. Finally, only after the liquidation
preference on all series of preferred stock is repaid would any
liquidation proceeds be available for distribution to the
holders of our common stock. It is highly uncertain that there
would be sufficient proceeds to repay the liquidation preference
of any series of our preferred stock or to make any distribution
to the holders of our common stock. To the extent we are placed
into receivership and do not or cannot fulfill our guaranty to
the holders of our Fannie Mae MBS, the MBS holders could become
unsecured creditors of ours with respect to claims made under
our guaranty.
We have experienced substantial deterioration in the
credit performance of mortgage loans that we own or that back
our guaranteed Fannie Mae MBS, which we expect to continue and
result in additional credit-related expenses.
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 remained stressed in 2009 and early
2010, 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 extent and duration of the
decline in home prices and high unemployment. These
deteriorating credit performance trends have been notable in
certain of our higher risk loan categories, states and vintages.
In
50
addition, home price declines, adverse market conditions, and
continuing high levels of unemployment have also increasingly
affected the credit performance of our broader book of business.
Further, as social acceptability of defaulting on a mortgage
increases, more borrowers may default on their mortgages because
they owe more than their houses are worth. We present detailed
information about the risk characteristics of our conventional
single-family guaranty book of business in
MD&ARisk ManagementCredit Risk
ManagementMortgage Credit Risk Management, and we
present detailed information on our 2009 credit-related
expenses, credit losses and results of operations in
MD&AConsolidated Results of Operations.
Adverse credit performance trends may continue, particularly if
we experience further national and regional declines in home
prices, weak economic conditions and high unemployment.
The credit losses we experience in future periods are
likely to be larger, and perhaps substantially larger, than our
current combined loss reserves. As a result, we likely will
experience credit losses for which we have not yet
provisioned.
In accordance with GAAP, our combined loss reserves, as
reflected on our 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 weak
housing and mortgage markets, and possibly also, in the near
term, due to the costs of our activities under various programs
designed to keep borrowers in their homes, high 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 but they likely will exceed, perhaps substantially, our
current combined loss reserves. The credit losses we experience
in future periods will adversely affect our business, results of
operations, financial condition, liquidity and net worth.
We expect to experience further losses and write-downs
relating to our investment securities.
We experienced significant fair value losses and
other-than-temporary
impairment write-downs relating to our investment securities in
2008 and recorded significant
other-than-temporary
impairment write-downs of some of our
available-for-sale
securities in 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, in the case of fair value losses,
our investments in commercial mortgage-backed securities
(CMBS) due to the decline in home prices and the
weak economy. 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 MD&AConsolidated Balance Sheet
AnalysisMortgage-Related SecuritiesInvestments in
Private-Label Mortgage-Related Securities for detailed
information on our investments in private-label mortgage-related
securities backed by Alt-A and subprime mortgage 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 deterioration in the
housing market and economy, including continued high
unemployment, additional ratings downgrades or other events.
To the extent that the market for our securities remains
illiquid, we are required to use a greater amount of management
judgment to value the securities we own in our investment
portfolio. Further, if we were to sell any of these securities,
the price we ultimately would realize could be materially lower
than the estimated fair value at which we carry these securities
on our balance sheet.
Any of the above factors could require us to record additional
write-downs in the value of our investment portfolio, which
could have a material adverse effect on our business, results of
operations, financial condition, liquidity and net worth.
51
Our business activities are significantly restricted by
the conservatorship and the senior preferred stock purchase
agreement.
We are currently under the control of our conservator, FHFA, and
we do not know when or how the conservatorship will be
terminated. Under the GSE 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. 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 in making or
approving a decision unless specifically directed to do so by
the conservator.
The conservator said in February 2010 that while we are in
conservatorship, we will be limited to continuing our existing
core business activities and taking actions necessary to advance
the goals of the conservatorship.
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 (except on the senior
preferred stock); sell, issue, purchase or redeem Fannie Mae
equity securities; sell, transfer, lease or otherwise dispose of
assets 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. In deciding whether or not to consent to any request for
approval it receives from us under the agreement, Treasury has
the right to withhold its consent for any reason and is not
required by the agreement to consider any particular factors,
including whether or not management believes that the
transaction would benefit the company. Pursuant to the senior
preferred stock purchase agreement, the maximum allowable amount
of mortgage assets we may own on December 31, 2010 is
$810 billion. On December 31, 2011, and each December
31 thereafter, our mortgage assets may not exceed 90% of the
maximum allowable amount that we were permitted to own as of
December 31 of the immediately preceding calendar year. The
maximum allowable amount is reduced annually until it reaches
$250 billion. This limit on the amount of mortgage assets
we are permitted to hold could constrain the amount of
delinquent loans we purchase from single-family MBS trusts.
Please see BusinessMortgage
SecuritizationsPurchases of Loans from our MBS
Trusts for more information about these planned purchases.
We discuss the powers of the conservator, the terms of the
senior preferred stock purchase agreement, and their impact on
us and shareholders in BusinessConservatorship and
Treasury Agreements. These factors may adversely affect
our business, results of operations, financial condition,
liquidity and net worth.
The conservatorship and investment by Treasury have had,
and will continue to have, a material adverse effect on our
common and preferred shareholders.
No voting rights during conservatorship. The
rights and powers of our shareholders are suspended during the
conservatorship. The conservatorship has no specified
termination date. During the conservatorship, our common
shareholders do not have the ability to elect directors or to
vote on other matters unless the conservator delegates this
authority to them.
Dividends to common and preferred shareholders, other than to
Treasury, have been eliminated. Under the terms
of the senior preferred stock purchase agreement, dividends may
not be paid to common or preferred shareholders (other than the
senior preferred stock) without the consent of Treasury,
regardless of whether we are in conservatorship.
Liquidation preference of senior preferred stock will
increase, likely substantially. The senior
preferred stock ranks prior to our common stock and all other
series of our preferred stock, as well as any capital stock we
issue in the future, as to both dividends and distributions upon
liquidation. Accordingly, if we are liquidated, the senior
preferred stock is entitled to its then-current liquidation
preference, plus any accrued but unpaid dividends, before any
distribution is made to the holders of our common stock or other
preferred stock. As of December 31, 2009, the liquidation
preference on the senior preferred stock was $60.9 billion;
however, it will increase to $76.2 billion when Treasury
provides the additional $15.3 billion FHFA has already
requested on
52
our behalf. The liquidation preference could increase
substantially as we draw on Treasurys funding commitment,
if we do not pay dividends owed on the senior preferred stock or
if we do not pay the quarterly commitment fee under the senior
preferred stock purchase agreement. If we are liquidated, it is
highly uncertain that there would be sufficient funds remaining
after payment of amounts to our creditors and to Treasury as
holder of the senior preferred stock to make any distribution to
holders of our common stock and other preferred stock.
Exercise of the Treasury warrant would substantially dilute
investment of current shareholders. If Treasury
exercises its warrant to purchase shares of our common stock
equal to 79.9% of the total number of shares of our common stock
outstanding on a fully diluted basis, the ownership interest in
the company of our then existing common shareholders will be
substantially diluted, and we would thereafter have a
controlling shareholder.
No longer managed for the benefit of
shareholders. Because we are in conservatorship,
we are no longer managed with a strategy to maximize shareholder
returns.
We do not know when or how the conservatorship will be
terminated, and if or when the rights and powers of our
shareholders, including the voting powers of our common
shareholders, will be restored. Moreover, even if the
conservatorship is terminated, by their terms, we remain subject
to the senior preferred stock purchase agreement, senior
preferred stock and warrant, which can only be cancelled or
modified by mutual consent of Treasury and the conservator. For
a description of additional restrictions on and risks to our
shareholders, see BusinessConservatorship and
Treasury Agreements.
Efforts we are required or asked to take by FHFA, other
government agencies or Congress in pursuit of providing
liquidity, stability and affordability to the mortgage market
and providing assistance to struggling homeowners, or in pursuit
of other goals, 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. 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 minimizing our credit losses from delinquent
mortgages, and providing assistance to struggling homeowners to
help them remain in their homes. As a result, we may continue to
take a variety of actions designed to address this focus that
could adversely affect our economic returns, possibly
significantly, such as: reducing our guaranty fees and modifying
loans to extend the maturity, lower the interest rate or defer
or forgive principal owed by the borrower. These activities may
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
also may ask us to undertake significant efforts to support the
housing and mortgage markets, as well as struggling homeowners.
For example, under the Administrations Making Home
Affordable Program, we are offering HAMP. We have incurred
substantial costs in connection with the program, as we discuss
in MD&AConsolidated Results of
OperationsFinancial Impact of the Making Home Affordable
Program on Fannie Mae.
During 2009, we were subject to housing goals that required that
a specified portion of our mortgage purchases 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. Market conditions during 2009
resulted in the origination of fewer goals-qualifying mortgages,
which negatively affected our ability to meet our goals. These
conditions include: tighter underwriting and eligibility
standards; the sharply increased standards of private mortgage
insurers; high unemployment; the increased role of FHA in
acquiring goals-qualifying mortgage loans; the collapse of the
private-label mortgage-related securities market; multifamily
market volatility; and the prospect of high levels of
refinancings. These conditions are likely to continue in 2010.
On February 17, 2010, the FHFA announced a proposed rule
implementing the new housing goals structure for 2010 and 2011
as required by the 2008 Reform Act. The new housing goals
structure establishes goals for the purchase of purchase money
mortgages backed by single-family, owner-occupied properties
affordable to low-income families, very low-income families, and
families in low-income areas. The proposed rule also establishes
goals for the purchase of
53
mortgages financing multifamily housing affordable to low-income
families and very low-income families. We cannot predict the
impact that market conditions during 2010 will have on our
ability to meet the new goals.
Based on preliminary calculations, we believe we met all of our
2009 housing goals except for our underserved areas
goal and our increased multifamily special affordable
housing subgoal. We have requested that FHFA find, based
on economic and market conditions and our financial condition,
that the underserved areas goal and the increased
multifamily special affordable housing subgoal were
infeasible for 2009. If FHFA makes this finding, there will be
no enforcement action against us for failing to meet these
goals. If 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
financial condition. The potential penalties for failure to
comply with housing plan requirements are a
cease-and-desist
order and civil money penalties. In addition, to the extent that
we purchase higher risk loans in order to meet our housing
goals, these purchases could contribute to further increases in
our credit losses and credit-related expenses.
Limitations on our ability to access the debt capital
markets could have a material adverse effect on our ability to
fund our operations and generate net interest income.
Our ability to fund our business depends primarily on our
ongoing access to the debt capital markets. Our level of net
interest income depends on how much lower our cost of funds is
compared to what we earn on our mortgage assets. 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 long-term debt. We
believe that our ability in 2009 to issue debt of varying
maturities at attractive pricing resulted from federal
government support of us and the financial markets, including
the prior 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.
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. Although demand for our debt
securities has continued to be strong as of the date of this
filing, demand for our debt securities could decline, perhaps
significantly, as the Federal Reserve concludes its agency debt
and MBS purchase programs by March 31, 2010. On
February 1, 2010, the Obama Administration stated in its
fiscal year 2011 budget proposal that it was continuing to
monitor the situation of the GSEs and would continue to provide
updates on considerations for longer-term reform of Fannie Mae
and Freddie Mac as appropriate. Please see
MD&ALiquidity and Capital
ManagementLiquidity ManagementDebt FundingDebt
Funding Activity for a more complete discussion of actions
taken by the federal government to support us and the financial
markets. There can be no assurance that the government will
continue to support us or that our current level of access to
debt funding will continue.
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 the operation of our business and have a material adverse
effect on our liquidity, results of operations, financial
condition and net worth.
Our liquidity contingency planning may not provide
sufficient liquidity to operate our business and meet our
obligations if we cannot access the unsecured debt
markets.
We plan for alternative sources of liquidity that are designed
to allow us to meet our cash obligations for 90 days
without relying on the issuance of unsecured debt. We believe,
however, that market conditions over the last two years have had
an adverse impact on our ability to effectively plan for a
liquidity crisis. During periods of adverse market conditions,
our ability to repay maturing indebtedness and fund our
operations could be significantly impaired. Our liquidity
contingency planning during 2009 relied significantly on the
Treasury credit facility, as well as our ability to pledge
mortgage assets as collateral for secured borrowings and sell
other assets. The Treasury credit facility expired on
December 31, 2009, leaving secured borrowings and assets
sales as our principal sources of alternative liquidity. Our
ability to pledge or sell mortgage assets may
54
be impaired, or the assets may be reduced in value if other
market participants are seeking to pledge or sell similar assets
at the same time. We may be unable to find sufficient
alternative sources of liquidity in the event our access to the
unsecured debt markets is impaired. See
MD&ALiquidity and Capital
ManagementLiquidity ManagementLiquidity Contingency
Planning for a discussion of our contingency plans if we
become unable to issue unsecured debt.
A decrease in our credit ratings would likely have an
adverse effect on our ability to issue debt on reasonable terms
and trigger additional collateral requirements.
Our borrowing costs and our access to the debt capital markets
depend in large part on the high credit ratings on our senior
unsecured debt. Our ratings are subject to revision or
withdrawal at any time by the rating agencies. Factors such as
the amount of our net losses, deterioration in our financial
condition, actions by governmental entities or others, and
sustained declines in our long-term profitability could
adversely affect our credit ratings. The reduction in our credit
ratings would likely increase our borrowing costs, limit our
access to the capital markets and trigger additional collateral
requirements under our derivatives contracts and other borrowing
arrangements. It may also reduce our earnings and materially
adversely affect our liquidity, our ability to conduct our
normal business operations, our financial condition and results
of operations. Our credit ratings and ratings outlook are
included in MD&ALiquidity and Capital
ManagementLiquidity ManagementCredit Ratings.
Deterioration in the credit quality of, or defaults by,
one or more of our institutional counterparties could result in
financial losses, business disruption and decreased ability to
manage risk.
We face the risk that one or more of our institutional
counterparties may fail to fulfill their contractual obligations
to us. 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. 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.
We may have multiple exposures to one counterparty as many of
our counterparties provide several types of services to us. For
example, our lender customers or their affiliates also act as
derivatives counterparties, mortgage servicers, custodial
depository institutions or document custodians. 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.
An institutional counterparty may default in its obligations to
us for a number of reasons, such as changes in financial
condition that affect its credit rating, a reduction in
liquidity, operational failures or insolvency. A number of our
institutional counterparties are currently experiencing
financial difficulties that 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. Counterparty defaults or limitations on their ability to do
business with us could result in significant financial losses or
hamper our ability to do business, 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 or is liquidated at prices not sufficient to
recover the full amount of the loan or derivative exposure. We
have exposure to these financial institutions in the form of
unsecured debt instruments, derivatives 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.
55
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.
Deterioration in the credit quality of, or defaults by,
one or more of our mortgage insurer counterparties could result
in nonpayment of claims under mortgage insurance policies,
business disruption and increased concentration risk.
We rely heavily on mortgage insurers to provide insurance
against borrower defaults on conventional single-family mortgage
loans with LTV ratios over 80% at the time of acquisition. 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. Since January 1, 2009, 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. One
of our mortgage insurer counterparties ceased issuing
commitments for new mortgage insurance in 2008, and, under an
order received from its regulator, is now 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 publicly disclosed that they
might exceed the state-imposed
risk-to-capital
limits under which they operate and they might not have access
to sufficient capital to continue to write new business in
accordance with state regulatory requirements. Regulators in
some states have been granted statutory relief to temporarily
waive or raise
risk-to-capital
limits. However, we can not be certain that a regulator will
grant such relief for a regulated entity. Some mortgage insurers
have been exploring corporate restructurings, intended to
provide relief from
risk-to-capital
limits in certain states. A restructuring plan that would
involve contributing capital to a subsidiary would result in
less liquidity available to its parent company to pay claims on
its existing book of business, and an increased risk that its
parent company will not pay its claims in full in the future.
In addition, many mortgage insurers have pursued and continue to
explore capital raising options. 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
unless they can secure a waiver from their state regulator. This
would increase the risk that they will fail to pay our claims
under insurance policies, and could also cause the quality and
speed of their claims processing to deteriorate. If our
assessment of one or more of our mortgage insurer
counterpartys ability to fulfill its obligations to us
worsens and our internal credit rating for the insurer is
further downgraded, it could result in a significant increase in
our loss reserves and a significant increase in the fair value
of our guaranty obligations.
Many mortgage insurers have stopped insuring new mortgages with
higher
loan-to-value
ratios or with lower borrower credit scores or on select
property types, which has contributed to the reduction in our
business volumes for high
loan-to-value
ratio loans. As our charter generally requires us to obtain
credit enhancement on conventional single-family mortgage loans
with
loan-to-value
ratios over 80% at the time of purchase, an inability to find
suitable credit enhancement may inhibit our ability to pursue
new business opportunities, meet our housing goals and otherwise
support the housing and mortgage markets. 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. In
addition, access to fewer mortgage insurer counterparties will
increase our concentration risk with the remaining mortgage
insurers in the industry.
The loss of business volume from any one of our key lender
customers could adversely affect our business and result in a
decrease in our revenues.
Our ability to generate revenue from the purchase and
securitization of mortgage loans depends on our ability to
acquire a steady flow of mortgage loans from the originators of
those loans. We acquire most of our mortgage loans through
mortgage purchase volume commitments that are negotiated
annually or semiannually with lender customers and that
establish a minimum level of mortgage volume that these
customers will
56
deliver to us. We acquire a significant portion of our mortgage
loans from several large mortgage lenders. During 2009, two of
our customers each accounted for greater than 20% of our
single-family business volume. Accordingly, maintaining our
current business relationships and business volumes with our top
lender customers is critical to our business.
The mortgage industry has been consolidating and a decreasing
number of large lenders originate most single-family mortgages.
The loss of business from any one of our major lender customers
could adversely affect our revenues and the liquidity of Fannie
Mae MBS, which in turn could have an adverse effect on their
market value. In addition, as we become more reliant on a
smaller number of lender customers, our negotiating leverage
with these customers decreases, which could diminish our ability
to price our products optimally.
In addition, many of our lender customers are experiencing, or
may experience in the future, financial and liquidity problems
that may affect the volume of business they are able to
generate. Many of our lender customers also have tightened their
lending criteria, which has reduced their loan volume. If any of
our key lender customers significantly reduces the volume or
quality of mortgage loans that the lender delivers to us or that
we are willing to buy from them, we could lose significant
business volume that we might be unable to replace, which could
adversely affect our business and result in a decrease in our
revenues. In addition, a significant reduction in the volume of
mortgage loans that we securitize could reduce the liquidity of
Fannie Mae MBS, which in turn could have an adverse effect on
their market value.
Our reliance on third parties to service our mortgage
loans may impede our efforts to keep people in their homes, as
well as the re-performance rate of loans we modify.
Mortgage servicers, or their agents and contractors, typically
are the primary point of contact for borrowers as we delegate
servicing responsibilities to them. 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. 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.
Further, our servicers have advised us that they have not been
able to reach many of the borrowers who 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.
Our adoption of new accounting standards relating to the
elimination of QSPEs could have a material adverse effect on our
ability to issue financial reports in a timely manner.
Effective January 1, 2010, we adopted new accounting
standards for transfers of financial assets and consolidation,
which will result in our recording on our consolidated balance
sheet substantially all of the loans held in our MBS trusts.
Implementation of these standards required us to make major
operational and system changes. These changes, which involved
the efforts of hundreds of our employees and contractors, have
had a substantial impact on our overall internal control
environment. The adoption of these accounting standards requires
that we consolidate onto our balance sheet the assets and
liabilities of the substantial majority of our MBS trusts, which
will significantly increase the amount of our assets and
liabilities. We initially recorded the assets and liabilities of
the substantial majority of our existing outstanding MBS trusts
that we were required to consolidate effective January 1, 2010
based on the unpaid principal balance as of that date. The
unpaid principal balance amounts we consolidated related to MBS
trusts increased both our total assets and total liabilities by
approximately $2.4 trillion effective January 1, 2010. In
addition, the number of loans on our balance sheet increased as
a result of this consolidation to approximately 18 million
as of January 1, 2010, from approximately two million as of
December 31, 2009. Because of the magnitude and complexity
of the operational and system changes that we have made, there
is a risk that unexpected
57
developments could preclude us from implementing all of the
necessary system changes and internal control processes by the
time we file our results for the first quarter of 2010. Failure
to make these changes 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 has diverted resources
from our other business requirements and corporate initiatives,
which could have a material adverse impact on our operations.
Material weaknesses in our internal control over financial
reporting could result in errors in our reported results or
disclosures that are not complete or accurate.
Management has determined that, as of the date of this filing,
we have ineffective disclosure controls and procedures and two
material weaknesses in our internal control over financial
reporting. In addition, our independent registered public
accounting firm, Deloitte & Touche LLP, has expressed
an adverse opinion on our internal control over financial
reporting because of the material weaknesses. Our ineffective
disclosure controls and procedures and material weaknesses could
result in errors in our reported results or disclosures that are
not complete or accurate, which could have a material adverse
effect on our business and operations.
One of the material weaknesses relates specifically to the
impact of the conservatorship on our disclosure controls and
procedures. Because we are under the control of FHFA, 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.
Because FHFA currently functions as both our regulator and our
conservator, there are inherent structural limitations on our
ability to design, implement, test or operate effective
disclosure controls and procedures relating to information
within FHFAs knowledge. As a result, 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 financial statements. Given
the structural nature of this material weakness, it is likely
that we will not remediate this weakness while we are under
conservatorship. See Controls and Procedures for
further discussion of managements conclusions on our
disclosure controls and procedures and internal control over
financial reporting.
Operational control weaknesses could materially adversely
affect our business, cause financial losses and harm our
reputation.
Shortcomings or failures in our internal processes, people or
systems could have a material adverse effect on our risk
management, liquidity, financial statement reliability,
financial condition and results of operations; disrupt our
business; and result in legislative or regulatory intervention,
liability to customers, and financial losses or damage to our
reputation, including as a result of our inadvertent
dissemination of confidential or inaccurate information. For
example, our business is dependent on our ability to manage and
process, on a daily basis, an extremely large number of
transactions across numerous and diverse markets and in an
environment in which we must make frequent changes to our core
processes in response to changing external conditions. These
transactions are subject to various legal and regulatory
standards. We rely upon business processes that are highly
dependent on people, technology and the use of numerous complex
systems and models to manage our business and produce books and
records upon which our financial statements are prepared. We
experienced a number of operational incidents in 2009 related to
inadequately designed or failed execution of internal processes
or systems. For example, in July and August 2009, we publicly
identified errors in certain information reported about our MBS
trusts and published corrected data relating to these errors.
We are implementing our operational risk management framework to
support the identification, assessment, mitigation and control,
and reporting and monitoring of operational risk. 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 changing external
conditions. These changes, in turn, have necessitated
modifications to or development of new business models,
processes, systems, policies, standards and controls. The steps
we have taken and are taking to enhance our technology and
operational controls and organizational
58
structure may not be effective to manage these risks and may
create additional operational risk as we execute these
enhancements.
In addition, we have experienced substantial changes in
management, employees and our business structure and practices
since the conservatorship began. These changes could increase
our operational risk and result in business interruptions and
financial losses. In addition, due to events that are wholly or
partially beyond our control, employees or third parties could
engage in improper or unauthorized actions, or these systems
could fail to operate properly, which could lead to financial
losses, business disruptions, legal and regulatory sanctions,
and reputational damage.
Management turnover may impair our ability to manage our
business effectively.
Since August 2008, we have had a total of three Chief Executive
Officers, three Chief Financial Officers, three Chief Risk
Officers, two General Counsels and an interim General Counsel,
two Executive Vice Presidents leading our Single Family
business, 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 Risk Officer, General Counsel and Chief
Technology Officer were new to Fannie Mae in 2009. Integration
of new management and further turnover in key management
positions could harm our ability to manage our business
effectively and ultimately adversely affect our financial
performance.
Limitations and restrictions on employee compensation have
adversely affected, and may in the future adversely affect, our
ability to recruit and retain well-qualified employees. 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.
In many cases, our accounting policies and methods, which
are fundamental to how we report our financial condition and
results of operations, require management to make judgments and
estimates about matters that are inherently uncertain.
Management also may rely on the use of models in making
estimates about these matters.
Our accounting policies and methods are fundamental to how we
record and report our financial condition and results of
operations. Our management must exercise judgment in applying
many of these accounting policies and methods so that these
policies and methods comply with GAAP and reflect
managements judgment of the most appropriate manner to
report our financial condition and results of operations. In
some cases, management must select the appropriate accounting
policy or method from two or more alternatives, any of which
might be reasonable under the circumstances but might affect the
amounts of assets, liabilities, revenues and expenses that we
report. See Note 1, Summary of Significant Accounting
Policies for a description of our significant accounting
policies.
We have identified three accounting policies as critical to the
presentation of our financial condition and results of
operations. These accounting policies are described in
MD&ACritical Accounting Policies and
Estimates. We believe these policies are critical because
they require management to make particularly subjective or
complex judgments about matters that are inherently uncertain
and because of the likelihood that materially different amounts
would be reported under different conditions or using different
assumptions. Due to the complexity of these critical accounting
policies, our accounting methods relating to these policies
involve substantial use of models. Models are inherently
imperfect predictors of actual results because they are based on
assumptions, including assumptions about future events. Our
models may not include assumptions that reflect very positive or
very negative market conditions and, accordingly, our actual
results could differ significantly from those generated by our
models. As a result of the above factors, the estimates that we
use to prepare our financial statements, as well as our
estimates of our future results of operations, may be
inaccurate, potentially significantly.
Failure of our models to produce reliable results may
adversely affect our ability to manage risk and make effective
business decisions.
59
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 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.
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.
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.
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. The application of management
judgment to interpret or adjust modeled results, particularly in
the current environment in which many events are unprecedented
and therefore there is no relevant historical data, also may
produce unreliable information.
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. Furthermore, any strategies we employ to attempt to
manage the risks associated with our use of models may not be
effective.
Changes in option-adjusted spreads or interest rates, or
our inability to manage interest rate risk successfully, could
adversely affect our net interest income and increase interest
rate risk.
We fund our operations primarily through the issuance of debt
and invest our funds primarily in mortgage-related assets that
permit the mortgage borrowers to prepay the mortgages at any
time. These business activities expose us to market risk, which
is the risk of adverse changes in the fair value of financial
instruments resulting from changes in market conditions. Our
most significant market risks are interest rate risk and
option-adjusted spread risk. We describe these risks in more
detail in MD&ARisk ManagementMarket Risk
Management, Including Interest Rate Risk Management.
Changes in interest rates affect both the value of our mortgage
assets and prepayment rates on our mortgage loans.
Changes in interest rates could have a material adverse effect
on our business, results of operations, financial condition,
liquidity and net worth. Our ability to manage interest rate
risk depends on our ability to issue debt
60
instruments with a range of maturities and other features,
including call features, at attractive rates and to engage in
derivatives transactions. We must exercise judgment in selecting
the amount, type and mix of debt and derivatives instruments
that will most effectively manage our interest rate risk. The
amount, type and mix of financial instruments that are available
to us may not offset possible future changes in the spread
between our borrowing costs and the interest we earn on our
mortgage assets.
Our business is subject to laws and regulations that
restrict our activities and operations, which may prohibit us
from undertaking activities that management believes would
benefit our business and limits our ability to diversify our
business.
As a federally chartered corporation, we are subject to the
limitations imposed by the Charter Act, extensive regulation,
supervision and examination by FHFA, and regulation by other
federal agencies, including Treasury, HUD and the SEC. As a
company under conservatorship, our primary regulator has
management authority over us in its role as our conservator. We
are also subject to many laws and regulations that affect our
business, including those regarding taxation and privacy. In
addition, the policy, approach or regulatory philosophy of these
agencies can materially affect our business. For example, the
GSE Act requires that, with some exceptions, we must obtain
FHFAs approval before initially offering a product. In a
February 2, 2010 letter to Congress, the Acting Director of
FHFA announced that FHFA was instructing Fannie Mae and Freddie
Mac not to submit requests for approval of new products under
FHFAs rule implementing the GSE Act provision, stating
that permitting [Fannie Mae and Freddie Mac] to engage in
new products is inconsistent with the goals of
conservatorship, and concluding that Fannie Mae and
Freddie Mac will be limited to continuing their existing
core business activities and taking actions necessary to advance
the goals of the conservatorship.
The Charter Act defines our permissible business activities. For
example, we may not purchase single-family loans in excess of
the conforming loan limits. In addition, under the Charter Act,
our business is limited to the U.S. housing finance sector.
As a result of these limitations on our ability to diversify our
operations, our financial condition and earnings depend almost
entirely on conditions in a single sector of the
U.S. economy, specifically, the U.S. housing market.
The deteriorating conditions in the U.S. housing market
over the past approximately two years has therefore had a
significant adverse effect on our results of operations,
financial condition and net worth, which is likely to continue.
We could be required to pay substantial judgments,
settlements or other penalties as a result of pending government
investigations and civil litigation.
We are subject to investigations by the Department of Justice
and the SEC, and are a party to a number of lawsuits. We are
unable at this time to estimate our potential liability in these
matters, but may be required to pay substantial judgments,
settlements or other penalties and incur significant expenses in
connection with these investigations and lawsuits, which could
have a material adverse effect on our business, results of
operations, financial condition, liquidity and net worth. In
addition, responding to requests for information in these
investigations and lawsuits may divert significant internal
resources away from managing our business. More information
regarding these investigations and lawsuits is included in
Legal Proceedings and Note 20,
Commitments and Contingencies.
If our common stock trades below one dollar per share, or
our conservator determines that our securities should not
continue to be listed on a national securities exchange, our
common and preferred stock could be delisted from the NYSE,
which likely would result in a significant decline in trading
volume and liquidity, and possibly a decline in price, of our
securities.
The average closing price of our common stock for the 30
consecutive trading days ended February 24, 2010 was $1.03
per share. Under NYSE rules, we would not meet the NYSEs
standards for continued listing of our common stock if the
average closing price of our common stock were less than one
dollar per share during a consecutive 30
trading-day
period. If we receive notice from the NYSE that we have failed
to satisfy this requirement, and the average price of our common
stock does not subsequently rise above one dollar for a period
of 30 consecutive trading days within a specified period, the
NYSE rules provide that the NYSE will initiate suspension and
delisting procedures unless we present a plan to the NYSE to
cure this deficiency.
61
If we were to receive notice from the NYSE that we failed to
satisfy the average minimum closing price requirement for our
common stock, our conservator would be involved in any decision
made on whether or not we submit a plan to the NYSE to cure this
deficiency. Our conservator could decline to permit any such
submission, which would result in the NYSE initiating suspension
and delisting procedures. Our conservator would be involved in
any decision regarding the continued listing of our common and
preferred stock on the NYSE. For example, our conservator could
direct us to voluntarily delist our common and preferred stock
from the NYSE.
If our common and preferred stock were to be delisted from the
NYSE, it likely would result in a significant decline in the
trading volume and liquidity of both our common stock and 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.
Mortgage fraud could result in significant financial
losses and harm to our reputation.
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. As a result, 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
A continuing, or broader, decline in U.S. home prices
or activity in the U.S. housing market would likely cause
higher credit losses and credit-related expenses, and lower
business volumes.
We expect weakness in the real estate financial markets to
continue into 2010. The continued deterioration in the
performance of outstanding mortgages will result in the
foreclosure of some troubled loans, which is likely to add to
excess inventory. We also expect heightened default and severity
rates to continue during this period, and home prices,
particularly in some geographic areas, may decline further. Any
resulting increase in delinquencies or defaults, or in severity,
will result in a higher level of credit losses and
credit-related expenses, which in turn will reduce our earnings
and adversely affect our net worth and financial condition.
Our business volume is affected by the rate of growth in total
U.S. residential mortgage debt outstanding and the size of
the U.S. residential mortgage market. The rate of growth in
total U.S. residential mortgage debt outstanding has
declined substantially in response to the reduced activity in
the housing market and declines in home prices, and we expect
single-family mortgage debt outstanding to decrease by 1.7% in
2010. A decline in the rate of growth in mortgage debt
outstanding reduces the unpaid principal balance of mortgage
loans available for us to purchase or securitize, which in turn
could reduce our net interest income and guaranty fee income.
Even if we are able to increase our share of the secondary
mortgage market, it may not be sufficient to make up for the
decline in the rate of growth in mortgage originations, which
could adversely affect our results of operations and financial
condition.
Structural and regulatory changes in the financial
services industry may negatively impact 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. 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. That announcement was followed by
proposed legislation submitted to Congress by the Department of
the Treasury. The proposed legislation included proposals
relating to the promotion of robust supervision and regulation
of financial firms, stronger consumer protection regulations,
the enhanced regulation of securitization markets, changes to
existing capital and liquidity requirements for financial firms,
additional regulation of the
over-the-counter
62
derivatives market, regulations on compensation practices and
changes in accounting standards. The House Financial Services
Committee and the Agriculture Committee conducted hearings
during 2009, and the House passed the Wall Street Reform and
Consumer Protection Act in December 2009. While not identical to
the Treasury proposal, the House bill was broadly similar to
that proposal. In November 2009, Senator Christopher Dodd
introduced the Restoring American Financial Stability Act of
2009, which covered many of the same areas as the House bill but
contained many significant differences. If one of these bills is
implemented, it may directly and indirectly affect many aspects
of our business. Additionally, implementation of such a bill
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.
On February 1, 2010, the Obama Administration stated in its
fiscal year 2011 budget proposal that it was continuing to
monitor the situation of the GSEs and would continue to provide
updates on considerations for longer-term reform of Fannie Mae
and Freddie Mac as appropriate.
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 (and their
interpretation or implementation) 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.
The occurrence of a major natural or other disaster in the
United States could increase our delinquency rates and credit
losses or disrupt our business operation.
The occurrence of a major natural disaster, terrorist attack or
health epidemic in the United States could increase our
delinquency rates and credit losses in the affected region or
regions, which could have a material adverse effect on our
business, results of operations, financial condition, liquidity
and net worth.
The contingency plans and facilities that we have in place may
be insufficient to prevent an adverse effect on our ability to
conduct business, which could lead to financial losses.
Substantially all of our senior management and investment
personnel work out of our offices in the Washington, DC
metropolitan area. If a disruption occurs and our senior
management or other employees are unable to occupy our offices,
communicate with other personnel or travel to other locations,
our ability to interact with each other and with our customers
may suffer, and we may not be successful in implementing
contingency plans that depend on communication or travel.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We own our principal office, which is located at 3900 Wisconsin
Avenue, NW, Washington, DC, as well as additional Washington, DC
facilities at 3939 Wisconsin Avenue, NW and 4250 Connecticut
Avenue, NW. We also own two office facilities in Herndon,
Virginia, as well as two additional facilities located in
Reston, Virginia, and Urbana, Maryland. These owned facilities
contain a total of approximately 1,459,000 square feet
63
of space. We lease the land underlying the 4250 Connecticut
Avenue building pursuant to a ground lease that automatically
renews on July 1, 2029 for an additional 49 years
unless we elect to terminate the lease by providing notice to
the landlord of our decision to terminate at least one year
prior to the automatic renewal date. In addition, we lease
approximately 429,000 square feet of office space,
including a conference center, at 4000 Wisconsin Avenue, NW,
which is adjacent to our principal office. The present lease
term for the office space at 4000 Wisconsin Avenue expires in
April 2013 and we have one additional
5-year
renewal option remaining under the original lease. The lease
term for the conference center at 4000 Wisconsin Avenue expires
in April 2018. We also lease an additional approximately
229,000 square feet of office space at two locations in
Washington, DC and Virginia. We maintain approximately
612,000 square feet of office space in leased premises in
Pasadena, California; Irvine, California; Atlanta, Georgia;
Chicago, Illinois; Philadelphia, Pennsylvania; and two
facilities in Dallas, Texas.
|
|
Item 3.
|
Legal
Proceedings
|
This item describes our material legal proceedings. We describe
additional material legal proceedings in Note 20,
Commitments and Contingencies in the section titled
Litigation and Regulatory Matters, which is
incorporated herein by reference. 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. Litigation claims
and proceedings of all types are subject to many factors that
generally cannot be predicted accurately.
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. For matters where the likelihood or extent of a
loss is not probable or cannot be reasonably estimated, we have
not recognized in our consolidated financial statements the
potential liability that may result from these matters. We
presently cannot determine the ultimate resolution of the
matters described or incorporated by reference below. We have
recorded a reserve for legal claims related to those matters for
which we were able to determine a loss was both probable and
reasonably estimable. If certain of these matters are determined
against us, it could have a material adverse effect on our
results of operations, liquidity and financial condition,
including our net worth.
Shareholder
Derivative Litigation
Four shareholder derivative cases, filed at various times
between June 2007 and June 2008, naming certain of our current
and former directors and officers as defendants, and Fannie Mae
as a nominal defendant, are currently pending in the
U.S. District Court for the District of Columbia:
Kellmer v. Raines, et al. (filed June 29,
2007); Middleton v. Raines, et al. (filed
July 6, 2007); Arthur v. Mudd, et al. (filed
November 26, 2007); and Agnes v. Raines, et al.
(filed June 25, 2008). Three of the cases (Kellmer,
Middleton, and Agnes) rely on factual allegations
that Fannie Maes accounting statements were inconsistent
with the GAAP requirements relating to hedge accounting and the
amortization of premiums and discounts. Two of the cases
(Arthur and Agnes) rely on factual allegations
that defendants wrongfully failed to disclose our exposure to
the subprime mortgage crisis and that the Board improperly
authorized the company to buy back $100 million in shares
while the stock price was artificially inflated. Plaintiffs
seek, on behalf of Fannie Mae, various forms of monetary and
non-monetary relief, including unspecified money damages
(including restitution, legal fees and expenses, disgorgement
and punitive damages); corporate governance changes; an
accounting; and attaching, impounding or imposing a constructive
trust on the individual defendants assets. Pursuant to a
June 25, 2009 order, FHFA, as our conservator, substituted
itself for shareholder plaintiffs in all of these actions.
Plaintiffs Kellmer and Agnes are in the process of appealing the
substitution order. FHFA has moved for voluntary dismissal
without prejudice (or, alternatively, for a stay of proceedings)
of all four derivative cases. Certain former officer defendants
have also moved to dismiss the Kellmer, Middleton, and
Agnes actions.
64
Inquiry
by the Financial Crisis Inquiry Commission
On January 25, 2010, we received a request for documents
and information from the Financial Crisis Inquiry Commission in
connection with its statutory mandate to examine the causes,
domestic and global, of the current financial crisis in the
United States. We are cooperating with this inquiry.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
65
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is publicly traded on the New York and Chicago
stock exchanges and is identified by the ticker symbol
FNM. The transfer agent and registrar for our common
stock is Computershare, P.O. Box 43078, Providence,
Rhode Island 02940.
Common
Stock Data
The following table shows, for the periods indicated, the high
and low sales prices per share of our common stock in the
consolidated transaction reporting system as reported in the
Bloomberg Financial Markets service, as well as the dividends
per share declared in each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
40.20
|
|
|
$
|
18.25
|
|
|
$
|
0.35
|
|
Second Quarter
|
|
|
32.31
|
|
|
|
19.23
|
|
|
|
0.35
|
|
Third Quarter
|
|
|
19.96
|
|
|
|
0.35
|
|
|
|
0.05
|
|
Fourth Quarter
|
|
|
1.83
|
|
|
|
0.30
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.43
|
|
|
$
|
0.35
|
|
|
$
|
|
|
Second Quarter
|
|
|
1.05
|
|
|
|
0.51
|
|
|
|
|
|
Third Quarter
|
|
|
2.13
|
|
|
|
0.51
|
|
|
|
|
|
Fourth Quarter
|
|
|
1.55
|
|
|
|
0.88
|
|
|
|
|
|
Dividends
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.
Statutory Restrictions. Under the GSE 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 GSE 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.
See MD&ALiquidity and Capital Management
for information on dividends declared and paid to Treasury on
the senior preferred stock.
66
Holders
As of January 31, 2010, we had approximately 19,000
registered holders of record of our common stock, including
holders of our restricted stock. In addition, as of
January 31, 2010, Treasury held a warrant giving it the
right to purchase shares of our common stock equal to 79.9% of
the total number of shares of our common stock outstanding on a
fully diluted basis on the date of exercise.
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 Stock Compensation Plans).
Information about sales and issuances of our unregistered
securities during the first three quarters of 2009, which were
made pursuant to these Stock Compensation Plans, was provided in
our quarterly reports on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009 filed with the SEC on May 8,
2009, August 6, 2009 and November 5, 2009,
respectively.
During the quarter ended December 31, 2009,
3,358,526 shares of common stock were issued upon
conversion of 2,179,730 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 GSE 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 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.
Fannie Maes securities offerings are exempted from SEC
registration requirements, except that, under the GSE 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, we are not required to and do not file registration
statements or prospectuses with the SEC under the Securities Act
with respect to our securities offerings. 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 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.
67
We are providing our Web site address solely for your
information. Information appearing on our Web site is not
incorporated into this annual report on
Form 10-K.
Purchases
of Equity Securities by the Issuer
The following table shows shares of our common stock we
repurchased during the fourth quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
Total
|
|
|
|
|
|
Shares Purchased as
|
|
|
Shares that
|
|
|
|
Number of
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
May Yet be
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
Purchased Under
|
|
|
|
Purchased(1)
|
|
|
per Share
|
|
|
Program(2)
|
|
|
the
Program(3)
|
|
|
|
(Shares in thousands)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1-31
|
|
|
3
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
47,720
|
|
November 1-30
|
|
|
1
|
|
|
|
1.04
|
|
|
|
|
|
|
|
46,457
|
|
December 1-31
|
|
|
3
|
|
|
|
1.02
|
|
|
|
|
|
|
|
46,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of shares of common stock
reacquired from employees to pay an aggregate of approximately
$7,714 in withholding taxes due upon the vesting of previously
issued restricted stock. Does not include 2,179,730 shares
of 8.75% Non-Cumulative Mandatory Convertible
Series 2008-1
Preferred Stock received from holders upon conversion of those
shares into 3,358,526 shares of common stock.
|
|
|
|
(2) |
|
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 fourth
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.
|
|
|
|
(3) |
|
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. Please see Note 13,
Stock-Based Compensation, for information about shares
issued, shares expected to be issued, and 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.
|
68
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial data presented below is
summarized from our results of operations for the five-year
period ended December 31, 2009, as well as selected
consolidated balance sheet data as of the end of each year
within this five-year period. Certain prior period amounts have
been reclassified to conform to the current period presentation.
This data should be reviewed in conjunction with the audited
consolidated financial statements and related notes and with the
MD&A included in this annual report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
|
Statement of operations
data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
14,510
|
|
|
$
|
8,782
|
|
|
$
|
4,581
|
|
|
$
|
6,752
|
|
|
$
|
11,505
|
|
Guaranty fee income
|
|
|
7,211
|
|
|
|
7,621
|
|
|
|
5,071
|
|
|
|
4,250
|
|
|
|
4,006
|
|
Losses on certain guaranty contracts
|
|
|
|
|
|
|
|
|
|
|
(1,424
|
)
|
|
|
(439
|
)
|
|
|
(146
|
)
|
Net
other-than-temporary
impairments
|
|
|
(9,861
|
)
|
|
|
(6,974
|
)
|
|
|
(814
|
)
|
|
|
(853
|
)
|
|
|
(1,246
|
)
|
Investment gains (losses), net
|
|
|
1,458
|
|
|
|
(246
|
)
|
|
|
(53
|
)
|
|
|
162
|
|
|
|
354
|
|
Trust management
income(2)
|
|
|
40
|
|
|
|
261
|
|
|
|
588
|
|
|
|
111
|
|
|
|
|
|
Fair value losses,
net(3)
|
|
|
(2,811
|
)
|
|
|
(20,129
|
)
|
|
|
(4,668
|
)
|
|
|
(1,744
|
)
|
|
|
(4,013
|
)
|
Administrative expenses
|
|
|
(2,207
|
)
|
|
|
(1,979
|
)
|
|
|
(2,669
|
)
|
|
|
(3,076
|
)
|
|
|
(2,115
|
)
|
Credit-related
expenses(4)
|
|
|
(73,536
|
)
|
|
|
(29,809
|
)
|
|
|
(5,012
|
)
|
|
|
(783
|
)
|
|
|
(428
|
)
|
Other income (expenses),
net(5)
|
|
|
(6,327
|
)
|
|
|
(1,004
|
)
|
|
|
(87
|
)
|
|
|
244
|
|
|
|
(98
|
)
|
(Provision) benefit for federal income taxes
|
|
|
985
|
|
|
|
(13,749
|
)
|
|
|
3,091
|
|
|
|
(166
|
)
|
|
|
(1,277
|
)
|
Net (loss) income attributable to Fannie Mae
|
|
|
71,969
|
|
|
|
(58,707
|
)
|
|
|
(2,050
|
)
|
|
|
4,059
|
|
|
|
6,347
|
|
Preferred stock dividends and issuance costs at redemption
|
|
|
(2,474
|
)
|
|
|
(1,069
|
)
|
|
|
(513
|
)
|
|
|
(511
|
)
|
|
|
(486
|
)
|
Net (loss) income attributable to common stockholders
|
|
|
(74,443
|
)
|
|
|
(59,776
|
)
|
|
|
(2,563
|
)
|
|
|
3,548
|
|
|
|
5,861
|
|
Per common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(13.11
|
)
|
|
$
|
(24.04
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
3.65
|
|
|
$
|
6.04
|
|
Diluted
|
|
|
(13.11
|
)
|
|
|
(24.04
|
)
|
|
|
(2.63
|
)
|
|
|
3.65
|
|
|
|
6.01
|
|
Weighted-average common shares
outstanding:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,680
|
|
|
|
2,487
|
|
|
|
973
|
|
|
|
971
|
|
|
|
970
|
|
Diluted
|
|
|
5,680
|
|
|
|
2,487
|
|
|
|
973
|
|
|
|
972
|
|
|
|
998
|
|
Cash dividends declared per share
|
|
$
|
|
|
|
$
|
0.75
|
|
|
$
|
1.90
|
|
|
$
|
1.18
|
|
|
$
|
1.04
|
|
New business acquisition data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS issues acquired by third
parties(7)
|
|
$
|
496,067
|
|
|
$
|
434,711
|
|
|
$
|
563,648
|
|
|
$
|
417,471
|
|
|
$
|
465,632
|
|
Mortgage portfolio
purchases(8)
|
|
|
327,578
|
|
|
|
196,645
|
|
|
|
182,471
|
|
|
|
185,507
|
|
|
|
146,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New business acquisitions
|
|
$
|
823,645
|
|
|
$
|
631,356
|
|
|
$
|
746,119
|
|
|
$
|
602,978
|
|
|
$
|
612,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Balance sheet
data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS
|
|
$
|
229,169
|
|
|
$
|
234,250
|
|
|
$
|
179,401
|
|
|
$
|
196,678
|
|
|
$
|
232,451
|
|
Other agency MBS
|
|
|
43,905
|
|
|
|
35,440
|
|
|
|
32,957
|
|
|
|
31,484
|
|
|
|
30,684
|
|
Mortgage revenue bonds
|
|
|
13,446
|
|
|
|
13,183
|
|
|
|
16,213
|
|
|
|
17,221
|
|
|
|
19,178
|
|
Other mortgage-related securities
|
|
|
54,265
|
|
|
|
56,781
|
|
|
|
90,827
|
|
|
|
97,156
|
|
|
|
86,645
|
|
Non-mortgage-related securities
|
|
|
8,882
|
|
|
|
17,640
|
|
|
|
38,115
|
|
|
|
47,573
|
|
|
|
37,116
|
|
Mortgage
loans:(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
18,462
|
|
|
|
13,270
|
|
|
|
7,008
|
|
|
|
4,868
|
|
|
|
5,064
|
|
Loans held for investment, net of allowance
|
|
|
375,563
|
|
|
|
412,142
|
|
|
|
396,516
|
|
|
|
378,687
|
|
|
|
362,479
|
|
Total assets
|
|
|
869,141
|
|
|
|
912,404
|
|
|
|
879,389
|
|
|
|
841,469
|
|
|
|
831,686
|
|
Short-term debt
|
|
|
200,437
|
|
|
|
330,991
|
|
|
|
234,160
|
|
|
|
165,810
|
|
|
|
173,186
|
|
Long-term debt
|
|
|
574,117
|
|
|
|
539,402
|
|
|
|
562,139
|
|
|
|
601,236
|
|
|
|
590,824
|
|
Total liabilities
|
|
|
884,422
|
|
|
|
927,561
|
|
|
|
835,271
|
|
|
|
799,827
|
|
|
|
792,263
|
|
Senior preferred stock
|
|
|
60,900
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
20,348
|
|
|
|
21,222
|
|
|
|
16,913
|
|
|
|
9,108
|
|
|
|
9,108
|
|
Total Fannie Mae stockholders equity (deficit)
|
|
|
(15,372
|
)
|
|
|
(15,314
|
)
|
|
|
44,011
|
|
|
|
41,506
|
|
|
|
39,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory capital data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net worth surplus
(deficit)(10)
|
|
$
|
(15,281
|
)
|
|
$
|
(15,157
|
)
|
|
$
|
44,118
|
|
|
$
|
41,642
|
|
|
$
|
39,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book of business data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
portfolio(11)
|
|
$
|
769,252
|
|
|
$
|
792,196
|
|
|
$
|
727,903
|
|
|
$
|
728,932
|
|
|
$
|
737,889
|
|
Fannie Mae MBS held by third
parties(12)
|
|
|
2,432,789
|
|
|
|
2,289,459
|
|
|
|
2,118,909
|
|
|
|
1,777,550
|
|
|
|
1,598,918
|
|
Other
guarantees(13)
|
|
|
27,624
|
|
|
|
27,809
|
|
|
|
41,588
|
|
|
|
19,747
|
|
|
|
19,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage credit book of business
|
|
$
|
3,229,665
|
|
|
$
|
3,109,464
|
|
|
$
|
2,888,400
|
|
|
$
|
2,526,229
|
|
|
$
|
2,355,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty book of
business(14)
|
|
$
|
3,097,201
|
|
|
$
|
2,975,710
|
|
|
$
|
2,744,237
|
|
|
$
|
2,379,986
|
|
|
$
|
2,219,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans(15)
|
|
$
|
216,455
|
|
|
$
|
119,232
|
|
|
$
|
27,156
|
|
|
$
|
13,846
|
|
|
$
|
14,194
|
|
Combined loss reserves
|
|
|
64,891
|
|
|
|
24,753
|
|
|
|
3,391
|
|
|
|
859
|
|
|
|
724
|
|
Combined loss reserves as a percentage of total guaranty book of
business
|
|
|
2.10
|
%
|
|
|
0.83
|
%
|
|
|
0.12
|
%
|
|
|
0.04
|
%
|
|
|
0.03
|
%
|
Combined loss reserves as a percentage of total nonperforming
loans
|
|
|
29.98
|
|
|
|
20.76
|
|
|
|
12.49
|
|
|
|
6.20
|
|
|
|
5.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
yield(16)
|
|
|
1.65
|
%
|
|
|
1.03
|
%
|
|
|
0.57
|
%
|
|
|
0.85
|
%
|
|
|
1.31
|
%
|
Average effective guaranty fee rate (in basis
points)(17)
|
|
|
27.6
|
bp
|
|
|
31.0
|
bp
|
|
|
23.7
|
bp
|
|
|
22.2
|
bp
|
|
|
22.3
|
bp
|
Credit loss ratio (in basis
points)(18)
|
|
|
44.6
|
bp
|
|
|
22.7
|
bp
|
|
|
5.3
|
bp
|
|
|
2.2
|
bp
|
|
|
1.1
|
bp
|
Return on
assets(19)*
|
|
|
(8.27
|
)%
|
|
|
(6.77
|
)%
|
|
|
(0.30
|
)%
|
|
|
0.42
|
%
|
|
|
0.63
|
%
|
Return on
equity(20)*
|
|
|
N/A
|
|
|
|
(1,704.3
|
)
|
|
|
(8.3
|
)
|
|
|
11.3
|
|
|
|
19.5
|
|
Equity to
assets(21)*
|
|
|
N/A
|
|
|
|
2.7
|
|
|
|
4.9
|
|
|
|
4.8
|
|
|
|
4.2
|
|
Dividend
payout(22)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
32.4
|
|
|
|
17.2
|
|
Earnings to combined fixed charges and preferred stock dividends
and issuance costs at redemption
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
0.89:1
|
|
|
|
1.12:1
|
|
|
|
1.23:1
|
|
|
|
|
(1) |
|
Certain prior period amounts have
been reclassified to conform to the current period presentation.
|
70
|
|
|
(2) |
|
We began separately reporting the
revenues from trust management income in our consolidated
statements of operations effective November 2006. We previously
included these revenues as a component of interest income. We
have not reclassified prior period amounts to conform to the
current period presentation.
|
|
(3) |
|
Consists of the following:
(a) derivatives fair value gains (losses), net;
(b) trading securities gains (losses), net; (c) hedged
mortgage assets gains (losses), net; (d) debt foreign
exchange gains (losses), net; and (e) debt fair value gains
(losses), net.
|
|
(4) |
|
Consists of provision for credit
losses and foreclosed property expense.
|
|
(5) |
|
Consists of the following:
(a) debt extinguishment gains (losses), net;
(b) losses from partnership investments; and (c) fee
and other income.
|
|
(6) |
|
Includes the weighted-average
shares of common stock that would be issuable upon the full
exercise of the warrant issued to Treasury from the date of
conservatorship through the end of the period for 2008 and for
the full year for 2009. Because the warrants exercise
price of $0.00001 per share is considered non-substantive
(compared to the market price of our common stock), the warrant
was evaluated based on its substance over form. It was
determined to have characteristics of non-voting common stock,
and thus included in the computation of basic earnings (loss)
per share.
|
|
(7) |
|
Reflects unpaid principal balance
of Fannie Mae MBS issued and guaranteed by us during the
reporting period less: (a) securitizations of mortgage
loans held in our mortgage portfolio during the reporting period
and (b) Fannie Mae MBS purchased for our mortgage portfolio
during the reporting period.
|
|
(8) |
|
Reflects unpaid principal balance
of mortgage loans and mortgage-related securities we purchased
for our investment portfolio during the reporting period.
Includes acquisition of mortgage-related securities accounted
for as the extinguishment of debt because the entity underlying
the mortgage-related securities has been consolidated in our
consolidated balance sheet. Includes capitalized interest
beginning in 2006.
|
|
(9) |
|
Mortgage loans consist solely of
domestic residential real-estate mortgages.
|
|
(10) |
|
Total assets less total liabilities.
|
|
(11) |
|
Unpaid principal balance of
mortgage loans and mortgage-related securities (including Fannie
Mae MBS) held in our portfolio.
|
|
(12) |
|
Reflects unpaid principal balance
of Fannie Mae MBS held by third-party investors. The principal
balance of resecuritized Fannie Mae MBS is included only once in
the reported amount.
|
|
(13) |
|
Primarily includes long-term
standby commitments we have issued and single-family and
multifamily credit enhancements we have provided and that are
not otherwise reflected in the table.
|
|
(14) |
|
Reflects mortgage credit book of
business less non-Fannie Mae mortgage-related securities held in
our investment portfolio for which we do not provide a guaranty.
|
|
(15) |
|
Consists of on-balance sheet
nonperforming loans held in our mortgage portfolio and
off-balance sheet nonperforming loans in Fannie Mae MBS held by
third parties. Includes all nonaccrual loans, as well as
troubled debt restructurings (TDRs) and HomeSaver
Advance first-lien loans on accrual status. We generally
classify single family and multifamily loans as nonperforming
when the payment of principal or interest on the loan is equal
to or greater than two and three months past due, respectively.
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 2008, the nonperforming loans
that we reported consisted of on-balance sheet nonperforming
loans held in our mortgage portfolio and did not include
off-balance nonperforming loans in Fannie Mae MBS held by third
parties. We have revised previously reported amounts to conform
to the current period presentation.
|
|
(16) |
|
Calculated based on net interest
income for the reporting period divided by the average balance
of total interest-earning assets during the period, expressed as
a percentage.
|
|
(17) |
|
Calculated based on guaranty fee
income for the reporting period divided by average outstanding
Fannie Mae MBS and other guarantees during the period, expressed
in basis points.
|
|
(18) |
|
Consists of (a) charge-offs,
net of recoveries and (b) foreclosed property expense for
the reporting period divided by the average guaranty book of
business during the period, expressed in basis points.
|
|
(19) |
|
Calculated based on net income
(loss) available to common stockholders for the reporting period
divided by average total assets during the period, expressed as
a percentage.
|
|
(20) |
|
Calculated based on net income
(loss) available to common stockholders for the reporting period
divided by average outstanding common equity during the period,
expressed as a percentage.
|
|
(21) |
|
Calculated based on average
stockholders equity divided by average total assets during
the reporting period, expressed as a percentage.
|
|
(22) |
|
Calculated based on common
dividends declared during the reporting period divided by net
income available to common stockholders for the reporting
period, expressed as a percentage.
|
Note:
|
|
*
|
Average balances for purposes of
ratio calculations are based on balances at the beginning of the
year and at the end of each respective quarter for 2009, 2008
and 2007. Average balances for purposes of ratio calculations
for all other years are based on beginning and end of year
balances.
|
71
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Our Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
should be read in conjunction with our consolidated financial
statements as of December 31, 2009 and related notes, and
with BusinessExecutive Summary. This
discussion contains forward-looking statements that are based
upon managements current expectations and are subject to
significant uncertainties and changes in circumstances. Please
review BusinessForward-Looking Statements for
more information on the forward-looking statements in this
report and Risk Factors for a discussion of factors
that could cause our actual results to differ, perhaps
materially, from our forward-looking statements. Please also see
MD&AGlossary of Terms Used in This
Report.
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 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 Note 1, Summary of Significant Accounting
Policies.
We have identified three 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:
|
|
|
|
|
Fair Value Measurement
|
|
|
|
Other-Than-Temporary
Impairment of Investment Securities
|
|
|
|
Allowance for Loan Losses and Reserve for Guaranty Losses
|
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. 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. We rely on a number of valuation and risk
models as the basis for some of the amounts recorded in our
financial statements. Many of these models involve significant
assumptions and have limitations. See Risk Factors
and Risk ManagementModel Risk Management for a
discussion of the risk associated with the use of models.
Fair
Value Measurement
The use of fair value to measure our assets and liabilities 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.
Fair value is defined 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 Financial Accounting Standards Board
(FASB) issued guidance on how to determine the fair
value when the volume and level of activity for an 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 an asset or
liability: (1) there are few transactions for the product
category; (2) price quotes are not based on current market
information; (3) the price quotes we receive vary
significantly 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
72
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 (in
other words, a primary market) for the product or similar
products; or (8) there is limited availability of public
market information. Our adoption of this guidance did not result
in a change in our valuation techniques for estimating fair
value.
In determining fair value, we use various valuation techniques.
We disclose the carrying value and fair value of our assets and
liabilities and describe the valuation measurement techniques
used to determine the fair value of these financial instruments
in Note 19, Fair Value.
The fair value accounting rules provide 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 fair value hierarchy are described below:
|
|
|
|
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.
|
The majority of the financial instruments that we report at fair
value in our consolidated financial statements 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
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 this valuation technique relies on
significant unobservable inputs, the fair value estimation is
classified as Level 3. The process for determining fair
value using unobservable inputs 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
The assets and liabilities that we have classified as
Level 3 consist primarily of financial instruments for
which there is limited market activity and therefore little or
no price transparency. As a result, the valuation techniques
that we use to estimate fair value involve significant
unobservable inputs. Our Level 3 financial instruments
consist of certain mortgage- and asset-backed securities and
residual interests, certain mortgage loans, our guaranty assets
and buy-ups,
our master servicing assets and certain highly structured,
complex derivative instruments.
Fair value measurements related to financial instruments that
are reported at fair value in our consolidated financial
statements each period, such as our trading and
available-for-sale
securities and derivatives, are referred to as recurring fair
value measurements. The primary assets and liabilities reported
at fair value on a recurring basis are trading and
available-for-sale
securities, derivatives, and guaranty assets and
buy-ups.
73
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 December 31, 2009 and 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.
Table
2: Level 3 Recurring Financial Assets at Fair
Value
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Balance Sheet Category
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Trading securities
|
|
$
|
8,861
|
|
|
$
|
12,765
|
|
Available-for-sale
securities
|
|
|
36,154
|
|
|
|
47,837
|
|
Derivatives assets
|
|
|
150
|
|
|
|
362
|
|
Guaranty assets and
buy-ups
|
|
|
2,577
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
Level 3 recurring assets
|
|
$
|
47,742
|
|
|
$
|
62,047
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
869,141
|
|
|
$
|
912,404
|
|
Total recurring assets measured at fair value
|
|
$
|
353,718
|
|
|
$
|
359,246
|
|
Level 3 recurring assets as a percentage of total assets
|
|
|
5
|
%
|
|
|
7
|
%
|
Level 3 recurring assets as a percentage of total recurring
assets measured at fair value
|
|
|
13
|
%
|
|
|
17
|
%
|
Total recurring assets measured at fair value as a percentage of
total assets
|
|
|
41
|
%
|
|
|
39
|
%
|
The decrease in assets classified as Level 3 during 2009
was principally the result of a net transfer of approximately
$9.0 billion in assets to Level 2 from Level 3.
The transferred assets consisted primarily of Fannie Mae
guaranteed mortgage-related securities, which includes
securities backed by jumbo conforming loans, and private-label
mortgage-related securities backed by non-fixed rate Alt-A
loans. During 2009, price transparency improved as a result of
increased market activity and we noted some convergence in
prices obtained from third-party vendors. As a result, we
determined that our fair value estimates for these securities
did not rely on significant unobservable inputs.
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 the 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 $3.6 billion during the year ended
December 31, 2009 and $1.3 billion during the year
ended December 31, 2008. In addition, certain other 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 consisted of
held-for-investment
loans, acquired property, guaranty assets, master servicing
assets, and partnership investments, totaled $17.6 billion
during the year ended December 31, 2009 and
$22.4 billion during the year ended December 31, 2008.
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 our
model results to independent third-party valuations to validate
the reasonableness of our assumptions and valuation results. We
also compare our 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. For a discussion of
other-than-temporary
impairments
74
recognized on our LIHTC investments, see Off-Balance Sheet
Arrangements and Variable Interest EntitiesPartnership
Investment InterestsLIHTC Partnership Interests.
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 $601 million as of December 31,
2009 and $2.9 billion as of December 31, 2008, and
derivatives liabilities with a fair value of $27 million as
of December 31, 2009 and $52 million as of
December 31, 2008.
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 Office
and our Finance Division, is responsible for reviewing the
valuation 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
responsible for obtaining prices, 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 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 preparing our financial
statements.
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.
The dislocation of historical pricing relationships between
certain financial instruments persisted during 2009 due to the
housing and financial market crisis, which continued in 2009.
These conditions, which have resulted in greater market
volatility, wider credit spreads and a lack of price
transparency, have made the measurement of fair value more
difficult and complex for some financial instruments,
particularly for financial instruments for which there is no
active market, such as our guaranty contracts and loans
purchased with evidence of credit deterioration.
75
Fair
Value of Guaranty Obligations
When we issue Fannie Mae MBS, we record in our consolidated
balance sheets a guaranty asset that represents the present
value of cash flows expected to be received as compensation over
the life of the guaranty. As guarantor of our Fannie Mae MBS
issuances, we also recognize at inception of the guaranty the
fair value of our obligation to stand ready to perform over the
term of the guaranty. As described in Note 1, Summary
of Significant Accounting Policies, we record this amount
in our consolidated balance sheets as a component of
Guaranty obligations. The fair value of our guaranty
obligations consists of the following: (1) compensation to
cover estimated default costs, including estimated unrecoverable
principal and interest that will be incurred over the life of
the underlying mortgage loans backing our Fannie Mae MBS;
(2) estimated foreclosure-related costs; (3) estimated
administrative and other costs related to our guaranty; and
(4) an estimated market risk premium, or profit, that a
market participant would require to assume the obligation.
Effective January 1, 2008, as part of our implementation of
the new accounting standard related to fair value measurements,
we changed our approach to measuring the fair value of our
guaranty obligations. Specifically, we adopted a measurement
approach that is based upon an estimate of the compensation that
we would require to issue the same guaranty in a standalone
arms-length transaction with an unrelated party. For a
guaranty issued in a lender swap transaction after 2007, we
measure the fair value of the guaranty obligation at inception
based on the fair value of the total compensation we expect to
receive, which primarily consists of the guaranty fee, credit
enhancements, buy-downs, risk-based price adjustments and our
right to receive interest income during the float period in
excess of the amount required to compensate us for master
servicing. See Consolidated Results of
OperationsGuaranty Fee Income for a description of
buy-downs and risk-based price adjustments. Because the fair
value of the guaranty obligation at inception for guaranty
contracts issued after 2007 is equal to the fair value of the
total compensation we expect to receive, we no longer recognize
losses or record deferred profit at inception of our lender swap
transactions, which represent the bulk of our guaranty
transactions.
We also changed how we measure the fair value of our existing
guaranty obligations to be consistent with our approach for
measuring guaranty obligations at initial recognition. This
change, which affects the fair value amounts disclosed in
Supplemental Non-GAAP InformationFair Value
Balance Sheets and in Note 19, Fair
Value, does not affect the amounts recorded in our results
of operations or consolidated balance sheets. The fair value of
any guaranty obligation measured after its initial recognition
represents 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 continue to use the models and inputs that
we used prior to our adoption of the new accounting standard
related to fair value measurements to estimate this fair value,
which we calibrated to our current market pricing in 2008.
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, our estimate of the
fair value of our existing guaranty obligations is based solely
upon our model results, without further adjustment. The
estimated fair value of our guaranty obligations as of each
balance sheet date will always be 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, or
profit, that a market participant would require to assume our
existing obligations.
Fair
Value of Loans Purchased with Evidence of Credit
Deterioration
We have the option to purchase delinquent loans underlying our
Fannie Mae MBS under specified conditions, which we describe in
BusinessMortgage SecuritizationsPurchases of
Loans from our MBS Trusts. The acquisition cost for loans
purchased from MBS trusts is the unpaid principal balance of the
loan plus accrued interest. We generally are required to
purchase the loan if it is delinquent as to 24 monthly
payments of principal and interest and is still in the MBS trust
at that time. As long as the loan or REO property remains in the
MBS trust, we continue to pay principal and interest to the MBS
trust under the terms of our guaranty arrangement. As described
in Note 1, Summary of Significant Accounting
Policies, when we acquire loans
76
with impaired credit, we record our net investment in these
delinquent loans at the lower of the acquisition cost of the
loan or the estimated fair value at the date of purchase. To the
extent the acquisition cost exceeds the estimated fair value, we
record an acquired credit-impaired loan fair value loss against
the Reserve for guaranty losses at the time we
acquire the loan.
We reduce the Guaranty obligation (in proportion to
the Guaranty asset) as payments on the loans
underlying our MBS are received, including those resulting from
the purchase of delinquent loans from MBS trusts, and report the
reduction as a component of Guaranty fee income.
These prepayments may cause an impairment of the Guaranty
asset, which results in a proportionate reduction in the
corresponding Guaranty obligation and recognition of
income. We place acquired credit-impaired loans on nonaccrual
status and classify them as nonperforming when we believe
collectability of interest or principal on the loan is not
reasonably assured. If we subsequently determine that the
collectability of principal and interest is reasonably assured,
we return the loan to accrual status. While the loan is on
nonaccrual status, we do not recognize income on the loan. We
apply any cash receipts towards the recovery of the interest
receivable at acquisition and to past due principal payments. We
may, however, subsequently recover a portion or the full amount
of these fair value losses as discussed below.
To the extent that we have previously recognized an acquired
credit-impaired loan fair value loss, our recorded investment in
the loan is less than its acquisition cost. Under the accounting
standard for acquired credit-impaired loans, the excess of the
undiscounted contractual cash flows of the loan over the
estimated cash flows we expect to collect at acquisition
represents a nonaccretable difference that is not recognized in
our earnings. If the estimated cash flows we expect to collect
exceed the initial recorded investment in the loan, we accrete
this excess amount into our earnings as a component of the net
interest income over the life of the loan. If estimated cash
flows we expect to collect decrease subsequent to acquisition,
we record impairment on the loan. If an acquired credit-impaired
loan pays off in full, we recover the acquired credit-impaired
loan fair value loss as a component of net interest income on
the date of the payoff. If the loan is returned to accrual
status, we recover the acquired credit-impaired loan fair value
loss over the contractual life of the loan as a component of net
interest income (via an adjustment of the effective yield of the
loan). If we foreclose upon a loan purchased from an MBS trust,
we record a charge-off at foreclosure based on the excess of our
recorded investment in the loan over the fair value of the
collateral less estimated selling costs. Any charge-off recorded
at foreclosure for an acquired credit-impaired loan, which is
recorded at fair value at acquisition, would be lower than it
would have been if we had recorded the loan at its acquisition
cost. In some cases, the proceeds from the sale of the
collateral may exceed our recorded investment in the loan,
resulting in a gain.
Following is an example of how acquired credit-impaired loan
fair value losses, credit-related expenses and credit losses
related to loans underlying our guaranty contracts are recorded
in our consolidated financial statements. This example shows the
accounting and effect on our financial statements of the
following events: (a) we acquire a credit-impaired loan
from an MBS trust; (b) we foreclose on this mortgage loan;
and (c) we sell the foreclosed property that served as
collateral for the loan. This example is based on the following
assumptions:
|
|
(a) |
We acquire a credit-impaired loan from an MBS trust that has an
unpaid principal balance and accrued interest of $100 at a cost
of $100. The estimated fair value at the date of purchase is $70.
|
|
|
(b) |
We foreclose upon the mortgage loan and record the acquired REO
property at the appraised fair value, net of estimated selling
costs, which is $80.
|
(c) We sell the REO property for $85.
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Impact of Assumptions
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
Acquisition
|
|
|
(b)
|
|
|
Sale of
|
|
|
Cumulative
|
|
|
|
of Loans
|
|
|
Subsequent
|
|
|
Foreclosed
|
|
|
Earnings
|
|
|
|
from Trust
|
|
|
Foreclosure
|
|
|
Property
|
|
|
Impact
|
|
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
70
|
|
|
$
|
(70
|
)
|
|
$
|
|
|
|
|
|
|
Acquired property, net
|
|
|
|
|
|
|
80
|
|
|
|
(80
|
)
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses-beginning balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Plus: Provision for credit losses attributable to acquired
credit-impaired
loans fair value
losses(1)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Charge-offs related to initial purchase discount on
acquired credit-impaired loans
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses-ending balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses attributable to acquired
credit-impaired loans fair value losses
|
|
$
|
(30
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(30
|
)
|
Foreclosed property income (expense)
|
|
|
|
|
|
|
10
|
|
|
|
5
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pre-tax income (loss) effect
|
|
$
|
(30
|
)
|
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The adjustment to the
Provision for credit losses is presented for
illustrative purposes only. We actually determine our
Reserve for guaranty losses by aggregating
homogeneous loans into pools based on similar underlying risk
characteristics in accordance with the FASB standard on
accounting for contingencies. Accordingly, we do not have a
specific reserve or provision attributable to each delinquent
loan purchased from an MBS trust prior to its purchase.
|
As indicated in the example above, we would record the loan at
the estimated fair value of $70 and record a credit-impaired
loans fair value loss of $30 as a charge-off to the reserve for
guaranty losses when we acquire the delinquent loan from the MBS
trust. We record a provision for credit losses each period to
adjust the reserve for guaranty losses to reflect the probable
credit losses incurred on loans remaining in MBS trusts.
Assuming all other things were equal, this reserve for guaranty
losses is reduced at period end because the purchased loan is no
longer included in the population for which the reserve is
determined. Therefore, if the charge-off for the credit-impaired
loans fair value loss is greater than the decrease in the
reserve caused by removing the loan from the population subject
to accounting for contingencies, an incremental loss will be
recognized through the provision for credit losses in the period
the loan is purchased. We would record the REO property acquired
through foreclosure at the appraised fair value, net of
estimated selling costs, of $80. Although we recorded an initial
credit-impaired loan fair value loss of $30, the actual
credit-related expense we experience on this loan would be $15,
which represents the difference between the amount we paid for
the loan and the amount we received from the sale of the
acquired REO property, net of selling costs.
As described above, if a credit-impaired loan cures,
which means it returns to accrual status, pays off or is
resolved through a modification, long-term forbearance or a
repayment plan, the credit-impaired loans fair value loss
would be recovered over the life of the loan as a component of
net interest income through an adjustment of the effective yield
or upon full pay off of the loan. Conversely, if a loan remains
in an MBS trust, we would continue to provide for incurred
losses in our Reserve for guaranty losses.
Our estimate of the fair value of delinquent loans purchased
from MBS trusts is based upon an assessment of what a market
participant would pay for the loan at the date of acquisition.
Prior to July 2007, we estimated the initial fair value of these
loans using internal prepayment, interest rate and credit risk
models that incorporated market-based inputs of certain key
factors, such as default rates, loss severity and prepayment
speeds. Beginning in July 2007, the mortgage markets experienced
a number of significant events, including a
78
dramatic widening of credit spreads for mortgage securities
backed by higher risk loans, a large number of credit downgrades
of higher risk mortgage-related securities, and a severe
reduction in market liquidity for certain mortgage-related
transactions. As a result of this extreme disruption in the
mortgage markets, we concluded that our model-based estimates of
fair value for delinquent loans were no longer aligned with the
market prices for these loans. Therefore, we began obtaining
indicative market prices from large, experienced dealers and
used an average of these market prices to estimate the initial
fair value of delinquent loans purchased from MBS trusts. Refer
to Fair Value Measurement in this section for a
detailed discussion on the valuation process. These prices,
which reflect the significant decline in the value of mortgage
assets due to the deterioration in the housing and credit
markets, have resulted in a substantial increase in the
credit-impaired loans fair value loss we record when we purchase
a delinquent loan from an MBS trust.
See Consolidated Results of OperationsCredit-Related
Expenses for a discussion of our fair value losses on
acquired credit-impaired loans.
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 a new accounting
standard that modified the model for assessing
other-than-temporary
impairment for investments in debt securities. Under this new
standard, a debt security is evaluated for
other-than-temporary
impairment if its fair value is less than its amortized cost
basis. We recognize
other-than-temporary
impairment in earnings if one of the following conditions
exists: (1) our 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) we do
not expect to recover our amortized cost basis. If, by contrast,
we do not intend to sell the security and will not be required
to sell prior to recovery of the amortized cost basis, we
recognize only the credit component of
other-than-temporary
impairment in earnings. We record the noncredit component 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, 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 standard 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 as a result of our reclassifying 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 that is related to some
available-for-sale
securities we hold, which reduced our accumulated deficit,
because we continue to have the intent and ability to hold these
securities to recovery.
As a result of our April 1, 2009 adoption of the new
other-than-temporary
impairment standard, we revised our approach for measuring and
recognizing impairment losses on our investment securities. Our
evaluation continues to require significant management judgment
and consideration of various factors to determine if we will
receive the amortized cost basis of our investment securities.
These factors include: 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.
We provide more detailed information on our accounting for
other-than-temporary
impairment in Note 1, Summary of Significant
Accounting Policies. Also refer to Consolidated
Balance Sheet AnalysisTrading 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. See Risk Factors for a
discussion of the risks associated with possible future
write-downs of our investment securities.
79
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 probable losses incurred in our guaranty book of
business as of the balance sheet date. 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 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. As a
result, the guaranty reserve considers not only the principal
and interest due on the loan at the current balance sheet date,
but also any additional interest payments due to the trust from
the current balance sheet date up until the point of loan
acquisition or foreclosure. We maintain separate loss reserves
for single-family and multifamily loans. Our single-family and
multifamily loss reserves consist of a specific loss reserve for
individually impaired loans and a collective loss reserve for
all other loans.
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. We 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. We
also consider the recoveries that we will receive on mortgage
insurance and other credit enhancements entered into
contemporaneous with and in contemplation of a guaranty or loan
purchase transaction, as such recoveries reduce the severity of
the loss associated with defaulted loans. Because of the stress
in the housing and credit markets, and the speed and extent of
deterioration in these markets, our process for determining our
loss reserves has become significantly more complex and involves
a greater degree of management judgment than prior to this
period of economic stress.
Single-Family
Loss Reserves
We establish a specific single-family loss reserve for
individually impaired loans, which includes loans we restructure
in a troubled debt restructuring, certain nonperforming loans in
MBS trusts and acquired credit-impaired loans that have been
further impaired subsequent to acquisition. The single-family
loss reserve for individually impaired loans is a growing
portion of the total single-family reserve and will continue to
grow in conjunction with our modification efforts. We typically
measure impairment based on the difference between our recorded
investment in the loan and the present value of the estimated
cash flows we expect to receive, which we calculate using the
effective interest rate of the original loan or the effective
interest rate at acquisition for credit-impaired loans. However,
when foreclosure is probable, we measure impairment based on the
difference between our recorded investment in the loan and the
fair value of the underlying property, adjusted for the
estimated discounted costs to sell the property and estimated
insurance or other proceeds we expect to receive.
We establish a collective single-family loss reserve, which
represents the majority of our total single-family loss reserve,
for all other single-family loans in our single-family guaranty
book of business using an econometric model that estimates the
probability of default of loans to derive an overall loss
reserve estimate given multiple factors such as: origination
year,
mark-to-market
LTV ratio, delinquency status and loan product type. This model
was implemented in the fourth quarter of 2009 to replace our
previous model. Our previous model was used during 2008 and the
first nine months of 2009 and was a loss curve-based model that
was driven primarily by original LTV ratio, loan product type,
the age of the mortgage loan and the performance to date of the
vintage to which the loan belonged. The new model resulted in a
decrease in our
80
single-family loss reserves as of December 31, 2009 of
approximately $800 million relative to what the loss
reserve would have been using the previous model.
We believe that the loss severity estimates used in determining
our loss reserves reflect current available information on
actual events and conditions as of each balance sheet date,
including current home price and unemployment trends. Our loss
severity estimates do not incorporate assumptions about future
changes in home prices. We do, however, use a one-quarter look
back period to develop our loss severity estimates for all loan
categories. When using our previous model, we made adjustments
to the period of default history used to estimate defaults for
loans originated in 2006, 2007, and 2008, as well as some
product types originated in 2005. Our new model, because it
directly includes vintage effects in the estimation, does not
require these adjustments.
Because the previous model was heavily dependent on changing
default patterns, it was necessary to make adjustments to the
loss curves to reflect the impacts of foreclosure moratoria and
modification programs we implemented. Our new model directly
uses delinquency status; therefore, it is no longer necessary to
make these adjustments.
For the first three quarters of 2009, consistent with the
approach we used as of December 31, 2008, we made
adjustments to our model-generated results to capture
incremental losses that may not have been fully reflected in our
model related to geographically concentrated areas that are
experiencing severe stress as a result of significant home price
declines. These adjustments are no longer necessary because the
new model captures the impact of
mark-to-market
LTV on default risk and captures the stress in those areas that
have experienced significant home price declines. At the end of
December 31, 2008 and the end of the first and second
quarters of 2009, we also made adjustments to our
model-generated results to capture incremental losses
attributable to the sharp rise in unemployment during those
quarters, which had not been fully captured in our prior model.
We believe our new model incorporates the continuing high rate
of unemployment.
Multifamily
Loss Reserves
We establish a specific multifamily loss reserve for multifamily
loans that we determine are individually impaired. We use an
internal credit-risk rating system and the delinquency status to
evaluate the credit quality of our multifamily loans and to
determine which loans we believe are impaired. Our risk-rating
system assigns an internal rating through an assessment of the
credit risk profile and repayment prospects of each loan, taking
into consideration available operating statements and expected
cash flows from the property, the estimated value of the
property, the historical loan payment experience and current
relevant market conditions that may impact credit quality.
Because our multifamily loans are collateral-dependent, if we
conclude that a multifamily loan is impaired, we measure the
impairment based on the difference between our recorded
investment in the loan and the fair value of the underlying
property less the estimated discounted costs to sell the
property. We generally obtain property appraisals from
independent third-parties to determine the fair value of
multifamily loans that we consider to be individually impaired.
We also obtain property appraisals when we foreclose on a
multifamily property.
The collective multifamily loss reserve for all other
multifamily loans in our multifamily guaranty book of business
is established using an internal model that applies loss factors
to loans with similar risk ratings. Our loss factors are
developed based on our historical data of default and loss
severity experience. Management may also apply judgment to
adjust the loss factors derived from our models, taking into
consideration model imprecision and specifically known events,
such as current credit conditions, that may affect the credit
quality of our multifamily loan portfolio but are not yet
reflected in our model-generated loss factors.
During the first and second quarters of 2009, we made several
enhancements 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, as evidenced by a
significant increase in multifamily loan defaults and loss
severities. These model enhancements involved weighting recent
loan default and severity experience, which has been higher than
in previous periods, to derive the key parameters used in
calculating our expected default rates. During the third and
fourth quarters of 2009, we made
81
additional adjustments to our reserve to capture market trends
in capitalization rates and more current financial information
from borrowers.
Combined
Loss Reserves
Our combined loss reserves increased by $40.1 billion
during 2009 to $64.9 billion as of December 31, 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 2009.
We provide additional information on our combined loss reserves
and the impact of adjustments to our loss reserves on our
consolidated financial statements in Consolidated Results
of OperationsCredit-Related Expenses and
Note 4, Allowance for Loan Losses and Reserve for
Guaranty Losses. See Risk Factors for a
discussion of the risk that future credit losses may be larger
than our combined loss reserves.
CONSOLIDATED
RESULTS OF OPERATIONS
The section below provides a comparative discussion of our
consolidated results of operations for the periods indicated.
You should read this section together with our consolidated
financial statements, including the accompanying notes.
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 interest rate
volatility, as well as activity related to these financial
instruments.
82
Table 3 presents a condensed summary of our consolidated results
of operations.
Table
3: Summary of Consolidated Results of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
|
Net interest income
|
|
$
|
14,510
|
|
|
$
|
8,782
|
|
|
$
|
4,581
|
|
|
$
|
5,728
|
|
|
$
|
4,201
|
|
Guaranty fee income
|
|
|
7,211
|
|
|
|
7,621
|
|
|
|
5,071
|
|
|
|
(410
|
)
|
|
|
2,550
|
|
Trust management income
|
|
|
40
|
|
|
|
261
|
|
|
|
588
|
|
|
|
(221
|
)
|
|
|
(327
|
)
|
Fee and other income
|
|
|
733
|
|
|
|
772
|
|
|
|
965
|
|
|
|
(39
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
22,494
|
|
|
$
|
17,436
|
|
|
$
|
11,205
|
|
|
$
|
5,058
|
|
|
$
|
6,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on certain guaranty contracts
|
|
|
|
|
|
|
|
|
|
|
(1,424
|
)
|
|
|
|
|
|
|
1,424
|
|
Investment gains (losses),
net(1)
|
|
|
1,458
|
|
|
|
(246
|
)
|
|
|
(53
|
)
|
|
|
1,704
|
|
|
|
(193
|
)
|
Net
other-than-temporary
impairments(1)
|
|
|
(9,861
|
)
|
|
|
(6,974
|
)
|
|
|
(814
|
)
|
|
|
(2,887
|
)
|
|
|
(6,160
|
)
|
Fair value losses, net
|
|
|
(2,811
|
)
|
|
|
(20,129
|
)
|
|
|
(4,668
|
)
|
|
|
17,318
|
|
|
|
(15,461
|
)
|
Losses from partnership investments
|
|
|
(6,735
|
)
|
|
|
(1,554
|
)
|
|
|
(1,005
|
)
|
|
|
(5,181
|
)
|
|
|
(549
|
)
|
Administrative expenses
|
|
|
(2,207
|
)
|
|
|
(1,979
|
)
|
|
|
(2,669
|
)
|
|
|
(228
|
)
|
|
|
690
|
|
Credit-related expenses
|
|
|
(73,536
|
)
|
|
|
(29,809
|
)
|
|
|
(5,012
|
)
|
|
|
(43,727
|
)
|
|
|
(24,797
|
)
|
Other non-interest expenses
|
|
|
(1,809
|
)
|
|
|
(1,315
|
)
|
|
|
(707
|
)
|
|
|
(494
|
)
|
|
|
(608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary losses
|
|
|
(73,007
|
)
|
|
|
(44,570
|
)
|
|
|
(5,147
|
)
|
|
|
(28,437
|
)
|
|
|
(39,423
|
)
|
Benefit (provision) for federal income taxes
|
|
|
985
|
|
|
|
(13,749
|
)
|
|
|
3,091
|
|
|
|
14,734
|
|
|
|
(16,840
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(409
|
)
|
|
|
(15
|
)
|
|
|
409
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(72,022
|
)
|
|
|
(58,728
|
)
|
|
|
(2,071
|
)
|
|
|
(13,294
|
)
|
|
|
(56,657
|
)
|
Less: Net loss attributable to the noncontrolling interest
|
|
|
53
|
|
|
|
21
|
|
|
|
21
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
$
|
(71,969
|
)
|
|
$
|
(58,707
|
)
|
|
$
|
(2,050
|
)
|
|
$
|
(13,262
|
)
|
|
$
|
(56,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(13.11
|
)
|
|
$
|
(24.04
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
10.93
|
|
|
$
|
(21.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior to the April 2009 change in
accounting for impairments, net
other-than-temporary
impairments also included the non-credit portion, which in
subsequent periods is recorded in other comprehensive income.
Certain prior period amounts have been reclassified to conform
with the current period presentation.
|
Net
Interest Income
Net interest income represents the difference between interest
income and interest expense and is a primary source of our
revenue. The amount of interest income and interest expense we
recognize in the consolidated statements of operations is
affected by our investment activity, our debt activity, asset
yields and our funding costs.
Table 4 presents an analysis of our net interest income, average
balances, and related yields earned on assets and incurred on
liabilities for the periods indicated. For most components of
the average balances, we used a daily weighted average of
amortized cost. When daily average balance information was not
available, such as for mortgage loans, we used month-end
averages. 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.
83
Table
4: Analysis of Net Interest Income and
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
Average
|
|
|
Income/
|
|
|
Rates
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
Balance
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
Balance
|
|
|
Expense
|
|
|
Earned/Paid
|
|
|
|
(Dollars in millions)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(1)
|
|
$
|
425,779
|
|
|
$
|
21,521
|
|
|
|
5.05
|
%
|
|
$
|
416,616
|
|
|
$
|
22,692
|
|
|
|
5.45
|
%
|
|
$
|
393,827
|
|
|
$
|
22,218
|
|
|
|
5.64
|
%
|
Mortgage securities
|
|
|
347,467
|
|
|
|
17,230
|
|
|
|
4.96
|
|
|
|
332,442
|
|
|
|
17,344
|
|
|
|
5.22
|
|
|
|
328,769
|
|
|
|
18,052
|
|
|
|
5.49
|
|
Non-mortgage
securities(2)
|
|
|
53,724
|
|
|
|
247
|
|
|
|
0.46
|
|
|
|
60,230
|
|
|
|
1,748
|
|
|
|
2.90
|
|
|
|
64,204
|
|
|
|
3,441
|
|
|
|
5.36
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
46,073
|
|
|
|
260
|
|
|
|
0.56
|
|
|
|
41,991
|
|
|
|
1,158
|
|
|
|
2.76
|
|
|
|
15,405
|
|
|
|
828
|
|
|
|
5.37
|
|
Advances to lenders
|
|
|
4,580
|
|
|
|
97
|
|
|
|
2.12
|
|
|
|
3,521
|
|
|
|
181
|
|
|
|
5.14
|
|
|
|
6,633
|
|
|
|
227
|
|
|
|
3.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
877,623
|
|
|
$
|
39,355
|
|
|
|
4.48
|
%
|
|
$
|
854,800
|
|
|
$
|
43,123
|
|
|
|
5.04
|
%
|
|
$
|
808,838
|
|
|
$
|
44,766
|
|
|
|
5.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
280,215
|
|
|
$
|
2,305
|
|
|
|
0.82
|
%
|
|
$
|
277,503
|
|
|
$
|
7,806
|
|
|
|
2.81
|
%
|
|
$
|
176,071
|
|
|
$
|
8,992
|
|
|
|
5.11
|
%
|
Long-term debt
|
|
|
567,940
|
|
|
|
22,539
|
|
|
|
3.97
|
|
|
|
549,833
|
|
|
|
26,526
|
|
|
|
4.82
|
|
|
|
605,498
|
|
|
|
31,186
|
|
|
|
5.15
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
45
|
|
|
|
1
|
|
|
|
1.44
|
|
|
|
428
|
|
|
|
9
|
|
|
|
2.10
|
|
|
|
161
|
|
|
|
7
|
|
|
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
848,200
|
|
|
$
|
24,845
|
|
|
|
2.93
|
%
|
|
$
|
827,764
|
|
|
$
|
34,341
|
|
|
|
4.15
|
%
|
|
$
|
781,730
|
|
|
$
|
40,185
|
|
|
|
5.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of net non-interest bearing funding
|
|
$
|
29,423
|
|
|
|
|
|
|
|
0.10
|
%
|
|
$
|
27,036
|
|
|
|
|
|
|
|
0.14
|
%
|
|
$
|
27,108
|
|
|
|
|
|
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest yield
|
|
|
|
|
|
$
|
14,510
|
|
|
|
1.65
|
%
|
|
|
|
|
|
$
|
8,782
|
|
|
|
1.03
|
%
|
|
|
|
|
|
$
|
4,581
|
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected benchmark interest rates at end of
period:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month LIBOR
|
|
|
|
|
|
|
|
|
|
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
1.43
|
%
|
|
|
|
|
|
|
|
|
|
|
4.70
|
%
|
2-year swap
interest rate
|
|
|
|
|
|
|
|
|
|
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
3.82
|
|
5-year swap
interest rate
|
|
|
|
|
|
|
|
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
4.19
|
|
30-year
Fannie Mae MBS par coupon rate
|
|
|
|
|
|
|
|
|
|
|
4.56
|
|
|
|
|
|
|
|
|
|
|
|
3.89
|
|
|
|
|
|
|
|
|
|
|
|
5.51
|
|
|
|
|
(1) |
|
Interest income includes interest
income on acquired credit-impaired loans, which totaled
$619 million, $634 million, and $496 million for
2009, 2008, and 2007, respectively. These interest income
amounts also include accretion of $405 million,
$158 million, and $80 million for 2009, 2008, and
2007, respectively, relating to a portion of the fair value
losses recorded upon the acquisition of the loans.
|
|
(2) |
|
Includes cash equivalents.
|
|
(3) |
|
Data from British Bankers
Association, Thomson Reuters Indices and Bloomberg.
|
84
Table
5: Rate/Volume Analysis of Changes in Net Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
Total
|
|
|
Variance Due
to:(1)
|
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
Variance
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
(1,171
|
)
|
|
$
|
491
|
|
|
$
|
(1,662
|
)
|
|
$
|
474
|
|
|
$
|
1,258
|
|
|
$
|
(784
|
)
|
Mortgage securities
|
|
|
(114
|
)
|
|
|
765
|
|
|
|
(879
|
)
|
|
|
(708
|
)
|
|
|
200
|
|
|
|
(908
|
)
|
Non-mortgage
securities(2)
|
|
|
(1,501
|
)
|
|
|
(171
|
)
|
|
|
(1,330
|
)
|
|
|
(1,693
|
)
|
|
|
(201
|
)
|
|
|
(1,492
|
)
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
(898
|
)
|
|
|
103
|
|
|
|
(1,001
|
)
|
|
|
330
|
|
|
|
886
|
|
|
|
(556
|
)
|
Advances to lenders
|
|
|
(84
|
)
|
|
|
44
|
|
|
|
(128
|
)
|
|
|
(46
|
)
|
|
|
(132
|
)
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(3,768
|
)
|
|
|
1,232
|
|
|
|
(5,000
|
)
|
|
|
(1,643
|
)
|
|
|
2,011
|
|
|
|
(3,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
(5,501
|
)
|
|
|
76
|
|
|
|
(5,577
|
)
|
|
|
(1,186
|
)
|
|
|
3,873
|
|
|
|
(5,059
|
)
|
Long-term debt
|
|
|
(3,987
|
)
|
|
|
849
|
|
|
|
(4,836
|
)
|
|
|
(4,660
|
)
|
|
|
(2,760
|
)
|
|
|
(1,900
|
)
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
7
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(9,496
|
)
|
|
|
919
|
|
|
|
(10,415
|
)
|
|
|
(5,844
|
)
|
|
|
1,120
|
|
|
|
(6,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
5,728
|
|
|
$
|
313
|
|
|
$
|
5,415
|
|
|
$
|
4,201
|
|
|
$
|
891
|
|
|
$
|
3,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and net interest yield increased during 2009
compared with 2008, driven by lower funding costs and by growth
in the average size of our mortgage portfolio. The significant
reduction in the average cost of our debt was primarily
attributable to a decline in borrowing rates as we replaced
higher cost debt with lower cost debt. In addition, net interest
income and net interest yield benefited from funds we received
from Treasury under the senior preferred stock purchase
agreement as the cost of these funds is included in dividends
rather than interest expense. Additionally, 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 but is included in our
results as a component of Fair Value Gains (Losses)
and is shown in Table 7. If we had included the economic impact
of adding the net contractual interest accruals on our interest
rate swaps in our interest expense, our funding costs would have
increased by 40 basis points in 2009 compared with an
18 basis point increase in 2008.
Although our interest-earning assets were lower as of
December 31, 2009 compared with December 31, 2008, our
average interest-earning assets for 2009 were higher compared
with 2008. During 2008, we increased our portfolio balance as
mortgage-to-debt
spreads reached historic highs, and liquidations were reduced
due to the disruption of the housing and credit markets. As a
result, we began 2009 with a substantially higher balance of
interest-earning assets compared with the beginning of 2008.
Although portfolio actions and high liquidation levels reduced
our balance of interest-earning assets during the course of
2009, the higher beginning balance resulted in a higher average
balance of interest-earning assets for the full year of 2009
compared with 2008.
The increase in our net interest income and expansion of our net
interest yield in 2008 compared with 2007 was largely
attributable to a reduction in our short-term debt costs, a
shift in our funding mix to more short-term debt, and early
redemption of our step-rate debt securities in 2008. In
addition, our regulators reduction in our capital surplus
requirement on March 1, 2008 provided us with flexibility
to take advantage of opportunities to purchase mortgage assets
at attractive prices and spreads. If we had included the
economic impact of adding the net contractual interest accruals
on our interest rate swaps in our interest expense, our funding
costs would have increased by 18 basis points in 2008
compared with a 3 basis point decline in 2007.
85
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 have outstanding.
Although the debt and mortgage portfolio caps did not have a
significant impact on our portfolio activities during 2009,
these limits may have an 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.
For a description of the Treasury agreements and terms, see
BusinessConservatorship and Treasury
AgreementsTreasury Agreements.
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 (as
defined below). The average effective guaranty fee rate reflects
our average contractual guaranty fee rate adjusted for the
impact of amortization of upfront fees and
buy-up
impairment.
Guaranty fee income is primarily affected by the amount of
outstanding Fannie Mae MBS and our other guarantees and the
amount of compensation we receive for providing our guaranty on
Fannie Mae MBS and for other guarantees. The amount of
compensation we receive and the form of payment varies depending
on factors such as the risk profile of the securitized loans,
the level of credit risk we assume and the negotiated payment
arrangement with the lender. We typically negotiate a
contractual guaranty fee with the lender and collect the fee on
a monthly basis based on the contractual fee rate multiplied by
the unpaid principal balance of loans underlying a Fannie Mae
MBS. In lieu of charging a higher contractual fee rate for loans
with greater credit risk, we may require that the lender pay an
upfront fee to compensate us for assuming the additional credit
risk. We refer to this payment as a risk-based pricing
adjustment. We also may 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 by making an upfront payment to the lender
(buy-up)
or receiving an upfront payment from the lender
(buy-down).
As we receive monthly contractual payments for our guaranty, we
recognize guaranty fee income. We recognize upfront risk-based
pricing adjustments and buy-down payments over the expected life
of the underlying assets of the related MBS trusts as a
component of guaranty fee income. We record
buy-up
payments as an asset and reduce the recorded asset as cash flows
are received over the expected life of the underlying assets of
the related MBS trusts. We assess
buy-ups for
other-than-temporary impairment and include any impairment
recognized as a component of guaranty fee income. The extent to
which we amortize upfront payments and other deferred amounts
into income depends on the rate of expected prepayments, which
is affected by interest rates. In general, as interest rates
decrease, expected prepayment rates increase, resulting in
accelerated amortization of deferred amounts into income, which
increases our guaranty fee income. Conversely, as interest rates
increase, expected prepayments rates decrease, resulting in
slower amortization of deferred amounts. Prepayment rates also
affect the estimated fair value of
buy-ups.
Faster than expected prepayment rates shorten the average
expected life of the underlying assets of the related MBS
trusts, which reduces the value of our
buy-up
assets. This reduction in value may result in the recognition of
other-than-temporary
impairment, which reduces our guaranty fee income.
Table 6 shows the components of our guaranty fee income, our
average effective guaranty fee rate and Fannie Mae MBS activity
for the periods indicated.
86
Table
6: Guaranty Fee Income and Average Effective Guaranty
Fee
Rate(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
% Change
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs.
|
|
|
2008 vs.
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions, rate in basis points)
|
|
|
Guaranty fee income/average effective guaranty fee rate
excluding certain fair value adjustments and
buy-up
impairment
|
|
$
|
6,449
|
|
|
|
24
|
.7 bp
|
|
|
$
|
7,913
|
|
|
|
32
|
.2 bp
|
|
|
$
|
5,063
|
|
|
|
23
|
.7 bp
|
|
|
|
(19
|
)%
|
|
|
56
|
%
|
Net change in fair value of
buy-ups and
certain guaranty assets
|
|
|
787
|
|
|
|
3
|
.0
|
|
|
|
(18
|
)
|
|
|
(0
|
.1)
|
|
|
|
24
|
|
|
|
0
|
.1
|
|
|
|
4,472
|
|
|
|
(175
|
)
|
Buy-up
impairment
|
|
|
(25
|
)
|
|
|
(0
|
.1)
|
|
|
|
(274
|
)
|
|
|
(1
|
.1)
|
|
|
|
(16
|
)
|
|
|
(0
|
.1)
|
|
|
|
91
|
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income/average effective guaranty fee rate
|
|
$
|
7,211
|
|
|
|
27
|
.6 bp
|
|
|
$
|
7,621
|
|
|
|
31
|
.0 bp
|
|
|
$
|
5,071
|
|
|
|
23
|
.7 bp
|
|
|
|
(5
|
)%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding Fannie Mae MBS and other guarantees
|
|
$
|
2,617,273
|
|
|
|
|
|
|
|
$
|
2,459,383
|
|
|
|
|
|
|
|
$
|
2,139,481
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
15
|
%
|
Fannie Mae MBS issues
|
|
|
807,853
|
|
|
|
|
|
|
|
|
542,813
|
|
|
|
|
|
|
|
|
629,607
|
|
|
|
|
|
|
|
|
49
|
|
|
|
(14
|
)
|
|
|
|
(1) |
|
Guaranty fee income includes
$537 million, $1.1 billion, and $603 million for
2009, 2008 and 2007, respectively, related to the accretion of
deferred amounts on guarantee contracts where we recognized
losses at the inception of the contract.
|
The decrease in guaranty fee income for 2009 resulted from a
decrease in the average effective guaranty fee rate partially
offset by an increase in average outstanding Fannie Mae MBS and
other guarantees. The decrease in our average effective guaranty
fee rate for 2009 compared with 2008 was primarily attributable
to lower amortization of deferred revenue in 2009 as the sharp
decline in interest rates generated an acceleration of deferred
amounts into income during the fourth quarter of 2008. In
addition, the effective guaranty fee rate declined due to a
lower average charged guaranty fee on new acquisitions due to a
reduction in our acquisition of loans with higher risk, higher
fee categories such as higher LTV and lower FICO credit scores.
This decline was partially offset by higher fair value
adjustments on
buy-ups and
certain guaranty assets recorded during 2009 due to increased
market prices on interest-only strips. We use interest-only
strips pricing as a component in estimating the fair value of
our buy-ups
and certain guaranty assets. The increase in our average
outstanding Fannie Mae MBS and other guarantees for 2009 was
driven by continued high market share of new single-family
mortgage-related securities issuances and because new MBS
issuances outpaced liquidations.
The increase in guaranty fee income in 2008 from 2007 was the
result of an increase in average outstanding Fannie Mae MBS and
other guarantees, and an increase in our average effective
guaranty fee. The increase in average outstanding Fannie Mae MBS
and other guarantees reflected our higher market share of
mortgage-related securities issuances during 2008, as compared
with 2007. The increase in our average effective guaranty fee
rate for 2008 was primarily due to the accelerated recognition
of deferred amounts into income, as interest rates were
generally lower in 2008 than in 2007. Our average effective
guaranty fee rate for 2008 also was affected by guaranty fee
pricing changes we implemented to address increased risk in the
housing market. These pricing changes included an adverse market
delivery charge of 25 basis points for all loans delivered
to us, which became effective in early 2008.
Effective January 1, 2010, the vast majority of our
guaranty fee income will be reflected in interest income on a
consolidated basis due to our adoption of new accounting
standards that require us to consolidate the substantial
majority of our MBS trusts. We discuss the impact of the new
accounting standards in Off-Balance Sheet Arrangements and
Variable Interest EntitiesElimination of QSPEs and Changes
in the Consolidation Model for Variable Interest Entities.
87
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. The decreases in trust management income in
2009 as compared with 2008 and in 2008 as compared with 2007
were attributable to significantly lower short-term interest
rates.
Fee and
Other Income
Fee and other income consist primarily of transaction fees,
technology fees and multifamily fees. These fees are largely
driven by our business volume. The decreases in fee and other
income in 2009 as compared with 2008 and in 2008 as compared
with 2007 were primarily attributable to lower multifamily fees
due to fewer multifamily prepayments.
Losses on
Certain Guaranty Contracts
Beginning in 2008 with our adoption of the accounting standard
relating to fair value measurements, we no longer recognize
losses or record deferred profit in our consolidated financial
statements at inception of our guaranty contracts for new MBS
issuances since the estimated fair value of the guaranty
obligation at inception equals the estimated fair value of the
total compensation received.
The losses in 2007 reflected the increase in the estimated
market risk premium that a market participant would require to
assume our guaranty obligations due to the decline in home
prices and deterioration in credit conditions. We will continue
to accrete these losses into income over time as part of the
accretion of the related guaranty obligation.
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; gains and losses
recognized from the sale of
available-for-sale
securities; and other investment gains and losses. Investment
gains and losses may fluctuate significantly from period to
period depending upon our portfolio investment and
securitization activities. The shift to gains in 2009 compared
with losses in 2008 was primarily attributable to: (1) an
increase in gains on portfolio securitizations as we increased
our MBS issuance volumes and sales related to whole loan conduit
activity; and (2) an increase in realized gains on sales of
available-for-sale
securities as tightening of investment spreads on agency MBS led
to higher sale prices. These gains were partially offset by an
increase in lower of cost or fair value adjustments on loans,
primarily driven by a decline in the credit quality of these
loans and an increase in interest rates. The increase in
investment losses in 2008 compared with 2007 was primarily
attributable to an increase in lower of cost or fair value
adjustments on loans and lower gains from sales of
available-for-sale
securities, partially offset by a shift from losses to gains on
portfolio securitizations.
Net
Other-Than-Temporary
Impairment
Net
other-than-temporary
impairment increased in 2009 compared with 2008 primarily due to
an increase in the expected losses on our private-label
securities. Net
other-than-temporary
impairment recorded in 2009 was impacted by the adoption of a
new accounting standard effective on April 1, 2009. Under
the new standard, we recognize only the credit component of
other-than-temporary
impairment in our consolidated statements of operations.
Approximately 57% of the impairment recorded in 2009 was
recorded in the first quarter prior to the change in accounting
standards. The 2009 impairment reflects current market
conditions and was primarily driven by an increase in loss
projections on our Alt-A and subprime securities due to model
refinements, changes in interest rates and net projected home
prices. Model refinements were made to the collateral default
and severity models for Alt-A and subprime securities to more
closely align with the observed deterioration of the loans
underlying the securities. See Note 5, Investments in
Securities for additional information regarding the
composition and 2009 attribution on the
other-than-temporary
impairment recognized on our
88
investments. See Risk Factors for a discussion of
the risks associated with possible future write-downs of our
investment securities.
The increase in net
other-than-temporary
impairment in 2008 over 2007 was principally related to Alt-A
and subprime private-label securities, reflecting a reduction in
expected cash flows due to an increase in expected defaults and
loss severities on the mortgage loans underlying these
securities.
Fair
Value Gains (Losses), Net
Table 7 presents the components of fair value gains (losses) for
the periods indicated.
Table
7: Fair Value Gains (Losses), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives fair value gains (losses)
attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net contractual interest income (expense) accruals on interest
rate swaps
|
|
$
|
(3,359
|
)
|
|
$
|
(1,576
|
)
|
|
$
|
261
|
|
|
|
|
|
Net change in fair value during the
period(1)
|
|
|
(1,337
|
)
|
|
|
(13,387
|
)
|
|
|
(4,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk management derivatives fair value losses, net
|
|
|
(4,696
|
)
|
|
|
(14,963
|
)
|
|
|
(4,158
|
)
|
|
|
|
|
Mortgage commitment derivatives fair value gains (losses), net
|
|
|
(1,654
|
)
|
|
|
(453
|
)
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives fair value losses, net
|
|
|
(6,350
|
)
|
|
|
(15,416
|
)
|
|
|
(4,113
|
)
|
|
|
|
|
Trading securities gains (losses),
net(2)
|
|
|
3,744
|
|
|
|
(7,040
|
)
|
|
|
(365
|
)
|
|
|
|
|
Hedged mortgage assets gains,
net(3)
|
|
|
|
|
|
|
2,154
|
|
|
|
|
|
|
|
|
|
Debt foreign exchange gains (losses), net
|
|
|
(173
|
)
|
|
|
230
|
|
|
|
(190
|
)
|
|
|
|
|
Debt fair value losses, net
|
|
|
(32
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value losses, net
|
|
$
|
(2,811
|
)
|
|
$
|
(20,129
|
)
|
|
$
|
(4,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
5-year swap
interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31
|
|
|
2.22
|
%
|
|
|
3.31
|
%
|
|
|
4.99
|
%
|
|
|
|
|
As of June 30
|
|
|
2.97
|
|
|
|
4.26
|
|
|
|
5.50
|
|
|
|
|
|
As of September 30
|
|
|
2.65
|
|
|
|
4.11
|
|
|
|
4.87
|
|
|
|
|
|
As of December 31
|
|
|
2.98
|
|
|
|
2.13
|
|
|
|
4.19
|
|
|
|
|
|
|
|
|
(1) |
|
Includes losses of approximately
$104 million in 2008 that resulted from the termination of
our derivative contracts with a subsidiary of Lehman Brothers.
|
|
(2) |
|
Includes trading losses of
$608 million in 2008 that resulted from the write-down to
fair value of our investment in corporate debt securities issued
by Lehman Brothers.
|
|
(3) |
|
Represents adjustments to the
carrying value of mortgage assets designated for hedge
accounting that are attributable to changes in interest rates.
|
Risk
Management Derivatives Fair Value Gains (Losses),
Net
Risk management derivative instruments are an integral part of
our management of interest rate risk. We supplement our issuance
of debt securities with derivative instruments to further reduce
duration and prepayment risks. We generally are an end user of
derivatives. Our principal purpose in using derivatives is to
manage our aggregate interest rate risk profile within
prescribed risk parameters. We generally use only derivatives
that are relatively liquid and straightforward to value. We
consider the cost of derivatives used in our management of
interest rate risk to be an inherent part of the cost of funding
and hedging our mortgage investments and to be economically
similar to the interest expense that we recognize on the debt we
issue to fund our mortgage investments.
89
We present, by derivative instrument type, the fair value gains
and losses on our derivatives for the years ended
December 31, 2009, 2008 and 2007 in Note 10,
Derivative Instruments and Hedging Activities.
The primary factors affecting the fair value of our risk
management derivatives include the following.
|
|
|
|
|
Changes in interest rates: Our derivatives, in
combination with our issuances of debt securities, are intended
to offset changes in the fair value of our mortgage assets,
which tend to increase in value when interest rates decrease
and, conversely, decrease in value when interest rates rise.
Because our derivatives portfolio predominately consists of
pay-fixed swaps, we typically report declines in fair value as
swap interest rates decrease and increases in fair value as swap
interest rates increase.
|
|
|
|
Implied interest rate volatility: Our
derivatives portfolio includes option-based derivatives, which
we use to economically hedge the embedded prepayment option in
our mortgage investments. A key variable in estimating the fair
value of option-based derivatives is implied volatility, which
reflects the markets expectation of the magnitude of
future changes in interest rates. Assuming all other factors are
held equal, including interest rates, a decrease in implied
volatility would reduce the fair value of our derivatives and an
increase in implied volatility would increase the fair value.
|
|
|
|
Changes in our derivative activity: As
interest rates change, we are likely to take actions to
rebalance our portfolio to manage our interest rate exposure. As
interest rates decrease, expected mortgage prepayments are
likely to increase, which reduces the duration of our mortgage
investments. In this scenario, we generally will rebalance our
existing portfolio to manage this risk by terminating pay-fixed
swaps or adding receive-fixed swaps, which shortens the duration
of our liabilities. Conversely, when interest rates increase and
the duration of our mortgage assets increases, we are likely to
rebalance our existing portfolio by adding pay-fixed swaps that
have the effect of extending the duration of our liabilities. We
also add derivatives in various interest rate environments to
hedge the risk of incremental mortgage purchases that we are not
able to accomplish solely through our issuance of debt
securities.
|
|
|
|
Time value of purchased options: Intrinsic
value and time value are the two primary components of an
options price. The intrinsic value is the amount that can
be immediately realized by exercising the optionthe amount
by which the market rate exceeds or is below the exercise, or
strike rate, such that the option is
in-the-money.
The time value of an option is the amount by which the price of
an option exceeds its intrinsic value. Time decay refers to the
diminishing value of an option over time as less time remains to
exercise the option. We have a significant amount of purchased
options where the time value of the upfront premium we pay for
these options decreases due to the passage of time relative to
the expiration date of these options.
|
We recorded risk management derivative fair value losses in 2009
driven by losses on our received fixed swaps and received fixed
option-based derivatives due to an increase in swap rates and by
time decay associated with our purchased options. Our risk
management derivative losses were partially offset by gains on
our net-pay fixed book due to higher swap rates.
We recorded risk management derivative losses in 2008 and 2007
primarily attributable to the decline in swap interest rates,
which resulted in substantial fair value losses on our pay-fixed
swaps that exceeded our fair value gains on our receive-fixed
swaps.
Because risk management derivatives are an important part of our
interest rate risk management strategy, it is important to
evaluate the impact of our derivatives in the context of our
overall interest rate risk profile and in conjunction with the
other offsetting
mark-to-market
gains and losses presented in Table 7. For additional
information on our use of derivatives to manage interest rate
risk, including the economic objective of our use of various
types of derivative instruments, changes in our derivatives
activity and the outstanding notional amounts, see Risk
ManagementMarket Risk Management, Including Interest Rate
Risk Management. See Consolidated Balance Sheet
AnalysisDerivative Instruments for a discussion of
the effect of derivatives on our consolidated balance sheets.
90
Mortgage
Commitment Derivatives Fair Value Gains (Losses),
Net
Commitments to purchase or sell some mortgage-related securities
and to purchase single-family mortgage loans generally are
derivatives. For these mortgage commitment derivatives, we
include changes in their fair value in our consolidated
statements of operations. When derivative purchase commitments
settle, we include their fair value on the settlement date in
the cost basis of the security we purchase. We recorded
increased losses on our mortgage commitments securities in 2009
compared with 2008, driven primarily by increased losses on
commitments to sell, associated in large part with dollar roll
transactions, due to an increase in mortgage-related securities
prices during the commitment period. We recorded increased
losses on our mortgage commitments securities in 2008 compared
with 2007 due primarily to losses in 2008 on our securities
purchase commitments as mortgage-related securities prices
decreased during the commitment period.
Trading
Securities Gains (Losses), Net
Gains on trading securities in 2009 were primarily attributable
to the narrowing of spreads on CMBS, agency MBS and non-mortgage
related securities. These gains were partially offset by an
increase in interest rates. The primary driver of our losses on
trading securities in 2008 was a significant widening of
spreads, particularly on private-label mortgage-related
securities backed by Alt-A and subprime loans and CMBS, as well
as losses on non-mortgage securities in our cash and other
investments portfolio. The losses on trading securities in 2007
were primarily attributable to widening of credit spreads.
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 ManagementMarket Risk
Management, Including Interest Rate Risk
ManagementMeasurement of Interest Rate Risk.
Hedged
Mortgage Assets Gains (Losses), Net
We implemented hedge accounting during the second quarter of
2008 and discontinued hedge accounting in the fourth quarter of
2008. We did not have any derivatives designated as hedges
during 2007 or 2009.
Our hedge accounting relationships during 2008 consisted of
pay-fixed interest rate swaps designated as fair value hedges of
changes in the fair value, attributable to changes in the LIBOR
benchmark interest rate, of specified mortgage assets. For these
relationships, we included changes in the fair value of hedged
mortgage assets attributable to changes in the benchmark
interest rate in our assessment of hedge effectiveness. These
fair value accounting hedges resulted in gains on the hedged
mortgage assets of $2.2 billion for 2008, which were offset
by losses of $2.2 billion on the pay-fixed swaps designated
as hedging instruments. The losses on these pay-fixed swaps are
included as a component of derivatives fair value losses, net.
We also recorded as a component of derivatives fair value losses
$94 million of 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.
Losses
from Partnership Investments
We are a limited liability investor in LIHTC and non-LIHTC
investments formed for the purpose of providing equity funding
for affordable multifamily rental properties. We generally
receive tax benefits (tax credits and tax deductions for net
operating losses) on our LIHTC investments that we have
historically used to reduce our income tax expense. Given our
current tax position, it is unlikely that we will be able to use
the tax benefits that we expect to receive in the future from
these LIHTC investments.
Prior to September 30, 2009, we entered into a nonbinding
letter of intent to transfer equity interests in our LIHTC
investments to third party investors at a price above carrying
value. This transaction was subject to the Treasurys
approval under the terms of our senior preferred stock purchase
agreement. In November of 2009, Treasury notified FHFA and us
that it did not consent to the proposed transaction. Treasury
stated the proposed sale would result in a loss of aggregate tax
revenues that would be greater than the savings to the
91
federal government from a reduction in the capital contribution
obligation of Treasury to Fannie Mae under the senior preferred
stock purchase agreement. Treasury further stated that
withholding approval of the proposed sale afforded more
protection to the taxpayers than approval would have provided.
We have continued to explore options to sell or otherwise
transfer our LIHTC investments for value consistent with our
mission; however, to date, we have not been successful. On
February 18, 2010, FHFA informed us, by letter, of its
conclusion that any sale by us of our LIHTC assets would require
Treasurys consent under the senior preferred stock
purchase agreement, and that FHFA had presented other options
for Treasury to consider, including allowing us to pay senior
preferred stock dividends by waiving the right to claim future
tax benefits of the LIHTC investments. FHFAs letter
further informed us that, after further consultation with the
Treasury, we may not sell or transfer our LIHTC partnership
interests and that FHFA sees no disposition options. Therefore,
we no longer have both the intent and ability to sell or
otherwise transfer our LIHTC investments for value. As a result,
we recognized a loss of $5.0 billion during the fourth
quarter of 2009 to reduce the carrying value of our LIHTC
Partnership investments to zero in our consolidated
financial statements. We will no longer recognize net operating
losses or impairment on our LIHTC investments, which will
significantly reduce Losses from partnership
investments in the future.
As of December 31, 2009, we have an obligation to fund
$541 million in capital contributions on our LIHTC
investments. This obligation has been recorded as a component of
Partnership liabilities in our consolidated balance
sheet.
Losses from partnership investments increased in 2009 compared
with 2008 due to the recognition of higher
other-than-temporary
impairment on our LIHTC investments, as discussed above.
The increase in losses from partnership investments from 2008
compared with 2007 was primarily due to impairment charges on
our LIHTC partnership investments that we recorded in 2008
partially offset by gains from the sale of two portfolios of
investments in LIHTC partnerships.
Administrative
Expenses
Administrative expenses increased in 2009 driven by an increase
in resources and third-party services related to our foreclosure
prevention efforts. The increase in these costs was partially
offset by lower staffing levels throughout the year in other
areas of the company. The decrease in administrative expenses in
2008 from 2007 reflected significant reductions in restatement
and related regulatory expenses and a reduction in our ongoing
operating costs due to efforts we undertook in 2007 to increase
productivity and lower our administrative costs.
Credit-Related
Expenses
Credit-related expenses consist of the provision for credit
losses and foreclosed property expense. We detail the components
of our credit-related expenses in Table 8.
Table
8: Credit-Related Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Provision for credit losses attributable to guaranty book of
business
|
|
$
|
52,071
|
|
|
$
|
25,522
|
|
|
$
|
3,200
|
|
Provision for credit losses attributable to acquired
credit-impaired loans and HomeSaver Advance fair value losses
|
|
|
20,555
|
|
|
|
2,429
|
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for credit losses
|
|
|
72,626
|
|
|
|
27,951
|
|
|
|
4,564
|
|
Foreclosed property expense
|
|
|
910
|
|
|
|
1,858
|
|
|
|
448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-related expenses
|
|
$
|
73,536
|
|
|
$
|
29,809
|
|
|
$
|
5,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
Provision
for Credit Losses Attributable to the 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 establish 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.
We summarize the changes in our loss reserves in Table 9.
93
Table
9: Allowance for Loan Losses and Reserve for Guaranty
Losses (Combined Loss Reserves)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Changes in combined loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,923
|
|
|
$
|
698
|
|
|
$
|
340
|
|
|
$
|
302
|
|
|
$
|
349
|
|
Provision for credit losses
|
|
|
9,569
|
|
|
|
4,022
|
|
|
|
658
|
|
|
|
174
|
|
|
|
124
|
|
Charge-offs(1)
|
|
|
(2,245
|
)
|
|
|
(1,987
|
)
|
|
|
(407
|
)
|
|
|
(206
|
)
|
|
|
(267
|
)
|
Recoveries
|
|
|
214
|
|
|
|
190
|
|
|
|
107
|
|
|
|
70
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(2)
|
|
$
|
10,461
|
|
|
$
|
2,923
|
|
|
$
|
698
|
|
|
$
|
340
|
|
|
$
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
21,830
|
|
|
$
|
2,693
|
|
|
$
|
519
|
|
|
$
|
422
|
|
|
$
|
396
|
|
Provision for credit losses
|
|
|
63,057
|
|
|
|
23,929
|
|
|
|
3,906
|
|
|
|
415
|
|
|
|
317
|
|
Charge-offs
|
|
|
(31,142
|
)
|
|
|
(4,986
|
)
|
|
|
(1,782
|
)
|
|
|
(336
|
)
|
|
|
(302
|
)
|
Recoveries
|
|
|
685
|
|
|
|
194
|
|
|
|
50
|
|
|
|
18
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
54,430
|
|
|
$
|
21,830
|
|
|
$
|
2,693
|
|
|
$
|
519
|
|
|
$
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
24,753
|
|
|
$
|
3,391
|
|
|
$
|
859
|
|
|
$
|
724
|
|
|
$
|
745
|
|
Provision for credit losses
|
|
|
72,626
|
|
|
|
27,951
|
|
|
|
4,564
|
|
|
|
589
|
|
|
|
441
|
|
Charge-offs(1)
|
|
|
(33,387
|
)
|
|
|
(6,973
|
)
|
|
|
(2,189
|
)
|
|
|
(542
|
)
|
|
|
(569
|
)
|
Recoveries
|
|
|
899
|
|
|
|
384
|
|
|
|
157
|
|
|
|
88
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(2)
|
|
$
|
64,891
|
|
|
$
|
24,753
|
|
|
$
|
3,391
|
|
|
$
|
859
|
|
|
$
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attribution of charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs attributable to guaranty book of business
|
|
$
|
(12,832
|
)
|
|
$
|
(4,544
|
)
|
|
$
|
(825
|
)
|
|
$
|
(338
|
)
|
|
$
|
(318
|
)
|
Charge-offs attributable to fair value losses on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-impaired loans acquired from MBS trusts
|
|
|
(20,327
|
)
|
|
|
(2,096
|
)
|
|
|
(1,364
|
)
|
|
|
(204
|
)
|
|
|
(251
|
)
|
HomeSaver Advance loans
|
|
|
(228
|
)
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
$
|
(33,387
|
)
|
|
$
|
(6,973
|
)
|
|
$
|
(2,189
|
)
|
|
$
|
(542
|
)
|
|
$
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of combined loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of each period attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
62,848
|
|
|
$
|
24,649
|
|
|
$
|
3,318
|
|
|
$
|
785
|
|
|
$
|
647
|
|
Multifamily
|
|
|
2,043
|
|
|
|
104
|
|
|
|
73
|
|
|
|
74
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
64,891
|
|
|
$
|
24,753
|
|
|
$
|
3,391
|
|
|
$
|
859
|
|
|
$
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family and multifamily loss reserves as a percentage
of applicable guaranty book of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
2.16
|
%
|
|
|
0.88
|
%
|
|
|
0.13
|
%
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
Multifamily
|
|
|
1.10
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
0.06
|
|
Combined loss reserves as a percentage of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total guaranty book of business
|
|
|
2.10
|
|
|
|
0.83
|
|
|
|
0.12
|
|
|
|
0.04
|
|
|
|
0.03
|
|
Total nonperforming loans
|
|
|
29.98
|
|
|
|
20.76
|
|
|
|
12.49
|
|
|
|
6.20
|
|
|
|
5.10
|
|
|
|
|
(1) |
|
Includes accrued interest of
$1.5 billion, $642 million, $128 million,
$39 million and $24 million for 2009, 2008, 2007, 2006
and 2005, respectively.
|
|
(2) |
|
Includes $726 million,
$150 million, $39 million, $28 million and
$22 million as of December 31, 2009, 2008, 2007, 2006
and 2005, respectively, for acquired credit-impaired loans.
|
94
Our provision for credit losses increased in both 2009 and 2008,
as we increased our combined loss reserves, both in absolute
terms and as a percentage of our total guaranty book of business
and nonperforming loans, as provisions have been well in excess
of our charge-offs.
Key factors affecting the provision for credit losses
attributable to our guaranty book of business for 2009 compared
with 2008 include the following:
|
|
|
|
|
An increase in nonperforming loans, delinquencies, and defaults
due to the general deterioration in our guaranty book of
business during both 2009 and 2008, reflecting the combination
of high unemployment and the prolonged downturn in the housing
market. As shown in Table 43, our conventional single-family
serious delinquency rate and average default rate increased in
2009 compared with 2008. Factors contributing to these
conditions include the following:
|
|
|
|
|
|
Stress on a broader segment of borrowers due to the rise in
unemployment and underemployment and the decline in home prices
has resulted in higher delinquency rates on loans in our
single-family guaranty book of business that do not have
characteristics typically associated with higher risk loans.
|
|
|
|
Certain loan categories continued to contribute
disproportionately to the increase in our nonperforming loans
and credit losses in 2009. These categories include: loans on
properties in certain Midwest states, 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 decline in home prices has also produced negative home
equity for some borrowers, including the impact of existing
second mortgage liens, affecting their ability to refinance or
willingness to make their mortgage payments, causing higher
delinquencies.
|
|
|
|
The number of loans seriously delinquent also increased due to
delays in foreclosures as we require servicers to exhaust
foreclosure prevention alternatives as part of our effort to
keep borrowers in their homes, and new laws enacted in a number
of states that lengthen the time required to complete a
foreclosure.
|
|
|
|
|
|
As shown in Table 43, our average loan loss severity, or average
initial charge-off per default, increased primarily as a result
of the decline in home prices and a higher percentage of loan
charge-offs for loans that are not covered by mortgage insurance.
|
|
|
|
A greater proportion of the loans in our guaranty book of
business are subject to individual impairment rather than the
collective reserve for loan losses.
|
|
|
|
|
|
We consider a loan to be individually impaired when, based on
current information, it is probable that we will not receive all
amounts due, including interest, in accordance with the
contractual terms of the loan agreement. Individually impaired
loans currently include, among others, those restructured in a
troubled debt restructuring. Any impairment recognized on these
loans is part of our provision for credit losses and allowance
for loan losses. The higher levels of workouts initiated as a
result of our foreclosure prevention efforts during 2009,
including HAMP, increased the number individually impaired
loans, especially those considered to be troubled debt
restructurings.
|
Although our combined loss reserves increased significantly in
2009 compared with 2008, we did not add to our combined loss
reserves in the fourth quarter of 2009 and our provision for
credit losses declined. The slight decline in our loss reserves
as of December 31, 2009 compared with September 30,
2009 was due to a moderation in the pace at which loans
transitioned to seriously delinquent status and an improvement
in our loss severities due to stabilizing home prices as well as
an increase in the number of loans acquired from our MBS trusts
in order to complete workouts for the loans. To the extent that
the acquisition cost of these loans exceeds the estimated fair
value, we record a fair value loss against the Reserve for
guaranty losses. Recognizing these fair value losses,
which typically meet or exceed the actual credit losses we
ultimately realize, has the effect of reducing the inherent
losses that remain in our guaranty book of business, and
consequently reduces our combined loss reserves. With the
adoption of new accounting standards on January 1, 2010, we will
no longer recognize the acquisition of loans from the MBS trusts
that we have consolidated
95
as a purchase with an associated fair value loss for the
difference between the fair value of the acquired loan and its
acquisition cost, as these loans will already be reflected on
our consolidated balance sheet.
During 2009, the portion of our loss reserves attributable to
certain states, certain higher risk loan categories and our 2006
and 2007 loan vintages has generally declined since the end of
2008. The Midwest accounted for approximately 13% of our
combined single-family loss reserves as of December 31,
2009, compared with approximately 18% as of December 31,
2008. Our mortgage loans in California, Florida, Arizona and
Nevada together accounted for approximately 53% of our combined
single-family loss reserves as of December 31, 2009,
compared with approximately 67% as of December 31, 2008.
Our Alt-A loans represented approximately 35% of our combined
single-family loss reserves as of December 31, 2009,
compared with approximately 50% as of December 31, 2008,
and our 2006 and 2007 loan vintages together accounted for
approximately 69% of our combined single-family loss reserves as
of December 31, 2009, compared with approximately 90% as of
December 31, 2008.
The increase in the provision for credit losses attributable to
the guaranty book of business from 2007 to 2008 reflects the
impact of the continued and significant national decline in home
prices and the worsening economic downturn, which resulted in
higher delinquencies and defaults and an increase in average
loss severity.
For additional discussions on delinquent loans and
concentrations, see Risk ManagementMortgage Credit
Risk ManagementSingle-Family Mortgage Credit Risk
ManagementProblem Loan Management and Foreclosure
Prevention. For additional discussions on our charge-offs,
see Credit Loss Performance Metrics.
As discussed above, our nonperforming single-family loans
increased substantially during 2009 due to both higher
delinquencies and the increase in troubled debt restructurings
(TDR), which are a form of restructuring of a
mortgage loan in which a concession is granted to a borrower
experiencing financial difficulty. 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. During the fourth quarter
of 2008, we began to place loans on nonaccrual status at an
earlier stage, when two or more payments were past due. We
classify TDRs and HomeSaver Advance first-lien loans as
nonperforming 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. We continue to
accrue interest on nonperforming loans that are federally
insured or guaranteed by the U.S. government, TDRs on
accrual status and HomeSaver Advance first-lien loans on accrual
status.
The composition of our nonperforming loans is shown below in
Table 10. For additional discussions on the impact of
individually impaired loans on our allowance for loan losses,
see Note 3, Mortgage Loans.
96
Table
10: Nonperforming Single-Family and Multifamily
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
On-balance sheet nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
34,079
|
|
|
$
|
17,634
|
|
|
$
|
8,343
|
|
|
$
|
5,961
|
|
|
$
|
8,356
|
|
Troubled debt restructurings on accrual status
|
|
|
6,922
|
|
|
|
1,931
|
|
|
|
1,765
|
|
|
|
1,086
|
|
|
|
661
|
|
HomeSaver Advance first-lien loans on accrual status
|
|
|
866
|
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet nonperforming loans
|
|
|
41,867
|
|
|
|
20,686
|
|
|
|
10,108
|
|
|
|
7,047
|
|
|
|
9,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet nonperforming loans in unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet nonperforming loans, excluding HomeSaver
Advance first-lien
loans(1)
|
|
|
161,406
|
|
|
|
89,617
|
|
|
|
17,048
|
|
|
|
6,799
|
|
|
|
5,177
|
|
HomeSaver Advance first-lien
loans(2)
|
|
|
13,182
|
|
|
|
8,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet nonperforming loans
|
|
|
174,588
|
|
|
|
98,546
|
|
|
|
17,048
|
|
|
|
6,799
|
|
|
|
5,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
216,455
|
|
|
$
|
119,232
|
|
|
$
|
27,156
|
|
|
$
|
13,846
|
|
|
$
|
14,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing on-balance sheet loans past due 90 days or
more(3)
|
|
$
|
612
|
|
|
$
|
317
|
|
|
$
|
204
|
|
|
$
|
147
|
|
|
$
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Interest related to on-balance sheet nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
forgone(4)
|
|
$
|
1,341
|
|
|
$
|
401
|
|
|
$
|
215
|
|
|
$
|
163
|
|
|
$
|
184
|
|
Interest income recognized for the
period(5)
|
|
|
1,206
|
|
|
|
771
|
|
|
|
328
|
|
|
|
295
|
|
|
|
405
|
|
|
|
|
(1) |
|
Represents loans that would meet
our criteria for nonaccrual status if the loans had been
on-balance sheet.
|
|
(2) |
|
Represents all off-balance sheet
first-lien loans associated with unsecured HomeSaver Advance
loans, including first-lien loans that are not seriously
delinquent.
|
|
(3) |
|
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 in the event of a default.
|
|
(4) |
|
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.
|
|
(5) |
|
Represents interest income
recognized during the period for on-balance sheet loans
classified as nonperforming as of the end of each period.
|
Provision
for Credit Losses Attributable to Fair Value Losses on Acquired
Credit-Impaired Loans and HomeSaver Advance Loans
In our capacity as guarantor of our MBS trusts, we have the
option under the trust agreements to purchase mortgage loans
that meet specific criteria 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 effective. The proportion of delinquent loans purchased
from MBS trusts for the purpose of modification varies from
period to period, driven primarily by changes in our loss
mitigation efforts, as well as changes in interest rates and
other market factors. See BusinessMortgage
SecuritizationsPurchases of Loan from our MBS Trusts
for additional information on the provisions in our MBS trust
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.
97
We generally record our net investment in acquired
credit-impaired 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 that the acquisition cost of these
loans exceeds the estimated fair value, we record a fair value
loss charge-off against the Reserve for guaranty
losses at the time we acquire the loan. Recognizing these
fair value losses, which typically meet or exceed the actual
credit losses we ultimately realize, has the effect of reducing
the inherent losses that remain in our guaranty book of
business, and consequently reduces our combined loss reserves.
However, any incremental impairment recognized on these loans
after the date of acquisition would be a component of our
combined loss reserves.
As shown in Table 8: Credit-Related Expenses, our
provision for credit losses attributable to acquired
credit-impaired loans significantly increased during both 2009
and 2008. The decline in home prices, significant reduction in
liquidity in the mortgage markets and increase in mortgage
credit risk, have resulted in downward pressure on the fair
value of these loans during 2009 and 2008. The increase in our
provision for credit losses attributable to acquired
credit-impaired loans in 2009 compared with 2008 is attributable
to the decline in fair value of these loans and an increase in
the amount of credit-impaired loans we acquired from MBS trusts
as a result of increased workouts initiated through our
foreclosure prevention efforts. The increase in provision for
credit losses attributable to acquired credit-impaired loans in
2008 compared with 2007 was primarily driven by the decrease in
the fair value of these loans.
Table 11 provides a quarterly comparison of the number of
credit-impaired loans acquired from MBS trusts, the average fair
value based on indicative market prices, the unpaid principal
balance and accrued interest of these loans.
Table
11: Statistics on Credit-Impaired Loans Acquired from
MBS Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
(Dollars in millions)
|
|
|
Number of credit-impaired loans acquired from MBS trusts
|
|
|
74,739
|
|
|
|
62,546
|
|
|
|
17,580
|
|
|
|
12,223
|
|
|
|
6,124
|
|
|
|
3,678
|
|
|
|
4,618
|
|
|
|
10,586
|
|
Average indicative market
price(1)
|
|
|
44
|
%
|
|
|
44
|
%
|
|
|
43
|
%
|
|
|
45
|
%
|
|
|
50
|
%
|
|
|
53
|
%
|
|
|
53
|
%
|
|
|
60
|
%
|
Unpaid principal balance and accrued interest of loans acquired
|
|
$
|
16,364
|
|
|
$
|
13,757
|
|
|
$
|
3,717
|
|
|
$
|
2,561
|
|
|
$
|
1,286
|
|
|
$
|
744
|
|
|
$
|
807
|
|
|
$
|
1,704
|
|
|
|
|
(1) |
|
Calculated based on the estimated
fair value at the date of acquisition of credit-impaired loans
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 2009, we incorporated the average
fair value of acquired credit-impaired multifamily loans into
the calculation of our average indicative market price. We have
revised the previously reported prior period amounts to reflect
this change.
|
Table 12 presents activity related to credit-impaired loans
acquired from MBS trusts under our guaranty arrangements for the
periods indicated.
98
Table
12: Activity of Credit-Impaired Loans Acquired from
MBS Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
|
|
|
Contractual
|
|
|
Market
|
|
|
for Loan
|
|
|
Net
|
|
|
|
Amount(1)
|
|
|
Discount
|
|
|
Losses
|
|
|
Investment
|
|
|
|
(Dollars in millions)
|
|
|
Balance as of December 31, 2007
|
|
$
|
8,096
|
|
|
$
|
(991
|
)
|
|
$
|
(39
|
)
|
|
$
|
7,066
|
|
Purchases of delinquent loans
|
|
|
4,542
|
|
|
|
(2,096
|
)
|
|
|
|
|
|
|
2,446
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
|
|
(184
|
)
|
Principal repayments
|
|
|
(648
|
)
|
|
|
114
|
|
|
|
5
|
|
|
|
(529
|
)
|
Modifications and troubled debt restructurings
|
|
|
(3,255
|
)
|
|
|
1,247
|
|
|
|
37
|
|
|
|
(1,971
|
)
|
Foreclosures, transferred to REO
|
|
|
(1,710
|
)
|
|
|
460
|
|
|
|
32
|
|
|
|
(1,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
7,025
|
|
|
$
|
(1,266
|
)
|
|
$
|
(149
|
)
|
|
$
|
5,610
|
|
Purchases of delinquent loans
|
|
|
36,530
|
|
|
|
(20,419
|
)
|
|
|
|
|
|
|
16,111
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
(691
|
)
|
|
|
(691
|
)
|
Principal repayments
|
|
|
(68
|
)
|
|
|
47
|
|
|
|
13
|
|
|
|
(8
|
)
|
Modifications and troubled debt restructurings
|
|
|
(18,228
|
)
|
|
|
9,539
|
|
|
|
74
|
|
|
|
(8,615
|
)
|
Foreclosures, transferred to REO
|
|
|
(1,554
|
)
|
|
|
632
|
|
|
|
27
|
|
|
|
(895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
23,705
|
|
|
$
|
(11,467
|
)
|
|
$
|
(726
|
)
|
|
$
|
11,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects contractually required
principal and accrued interest payments that we believe are
probable of collection.
|
With the adoption of new accounting standards on January 1,
2010, we will no longer recognize the acquisition of loans from
the MBS trusts that we have consolidated as a purchase with an
associated fair value loss for the difference between the fair
value of the acquired loan and its acquisition cost, as these
loans will already be reflected on our consolidated balance
sheet. We provide additional information on the impact of the
new accounting guidance in Off-Balance Sheet Arrangements
and Variable Interest EntitiesElimination of QSPEs and
Changes in the Consolidation Model for Variable Interest
Entities.
We provide additional information on our loan workout activities
in Risk ManagementCredit Risk
ManagementMortgage Credit Risk ManagementProblem
Loan Management and Foreclosure Prevention and additional
information on credit-impaired loans acquired from MBS trusts in
Note 3, Mortgage Loans.
Foreclosed
Property Expense
While we experienced an increase in foreclosure activity in 2009
compared with 2008 due to higher foreclosed property
acquisitions, foreclosed property expense decreased in 2009
compared with 2008 primarily driven by $668 million in cash
fees received from the cancellation and restructuring of some of
our mortgage insurance coverage. These fees represented an
acceleration of, and discount on, claims to be paid pursuant to
the coverage in order to reduce our future exposure to our
mortgage insurers. Foreclosed property expense increased in 2008
compared with 2007 due to a rise in foreclosed property
acquisitions reflecting the deterioration in the credit
performance of our book of business.
Credit
Loss Performance Metrics
Our credit-related expenses should be considered in conjunction
with our credit loss performance. 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
99
loans as credit losses, we adjust our credit loss performance
metrics for the impact associated with HomeSaver Advance loans
and the acquisition of credit-impaired loans from MBS trusts as
follows:
|
|
|
|
|
We include the impact of any credit losses that ultimately
result from foreclosure.
|
|
|
|
We exclude the impact of fair value losses recorded upon
acquisition.
|
|
|
|
We add back to our credit losses the amount of charge-offs and
foreclosed property expense that we would have recorded if we
had calculated these amounts based on the acquisition cost.
Because the fair value amount at acquisition was 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.
|
Interest forgone on nonperforming loans in our mortgage
portfolio 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 acquired credit-impaired loans are excluded
from credit losses.
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 fair value losses associated with
the acquisition of credit-impaired loans from MBS trusts and
HomeSaver Advance loans, investors are able to evaluate our
credit performance on a more consistent basis among periods.
Table 13 details the components of our credit loss performance
metrics for the periods indicated.
Table
13: Credit Loss Performance Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
|
(Dollars in millions)
|
|
|
Charge-offs, net of recoveries
|
|
$
|
32,488
|
|
|
|
106.7
|
bp
|
|
$
|
6,589
|
|
|
|
22.9
|
bp
|
|
$
|
2,032
|
|
|
|
8.0
|
bp
|
Foreclosed property expense
|
|
|
910
|
|
|
|
3.0
|
|
|
|
1,858
|
|
|
|
6.5
|
|
|
|
448
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses including the effect of fair value losses on
credit-impaired loans acquired from MBS trusts and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HomeSaver Advance loans
|
|
|
33,398
|
|
|
|
109.7
|
|
|
|
8,447
|
|
|
|
29.4
|
|
|
|
2,480
|
|
|
|
9.8
|
|
Less: Fair value losses resulting from acquired credit-impaired
loans and HomeSaver Advance loans
|
|
|
(20,555
|
)
|
|
|
(67.5
|
)
|
|
|
(2,429
|
)
|
|
|
(8.4
|
)
|
|
|
(1,364
|
)
|
|
|
(5.4
|
)
|
Plus: Impact of acquired credit-impaired loans on charge-offs
and foreclosed property expense
|
|
|
739
|
|
|
|
2.4
|
|
|
|
501
|
|
|
|
1.7
|
|
|
|
223
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses and credit loss ratio
|
|
$
|
13,582
|
|
|
|
44.6
|
bp
|
|
$
|
6,519
|
|
|
|
22.7
|
bp
|
|
$
|
1,339
|
|
|
|
5.3
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
13,362
|
|
|
|
|
|
|
$
|
6,467
|
|
|
|
|
|
|
$
|
1,331
|
|
|
|
|
|
Multifamily
|
|
|
220
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,582
|
|
|
|
|
|
|
$
|
6,519
|
|
|
|
|
|
|
$
|
1,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the amount for each line
item presented divided by the average guaranty book of business
during the period.
|
The substantial increase in our credit losses and credit loss
ratio reflects the impact of the same adverse conditions that
impacted our credit related expenses as described above,
particularly the combination of high unemployment and the
prolonged downturn in the housing market with associated home
price declines that have increased defaults and average loss
severity.
Table 14 provides an analysis of our credit losses in certain
higher risk loan categories, loan vintages and loans within
certain states that continue to account for a disproportionate
share of our credit losses as compared with our other loans.
100
Table
14: Credit Loss Concentration Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
Single-Family Conventional Guaranty Book
|
|
Percentage of Single-Family Credit Losses
|
|
|
of Business
Outstanding(1)
|
|
For the Year Ended
|
|
|
As of December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
Geographical distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona, California, Florida and Nevada
|
|
|
28
|
%
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
57
|
%
|
|
|
49
|
%
|
|
|
15
|
%
|
Illinois, Indiana, Michigan and Ohio
|
|
|
11
|
|
|
|
11
|
|
|
|
12
|
|
|
|
15
|
|
|
|
21
|
|
|
|
47
|
|
All other states
|
|
|
61
|
|
|
|
62
|
|
|
|
61
|
|
|
|
28
|
|
|
|
30
|
|
|
|
38
|
|
Select higher risk product
features(2)
|
|
|
24
|
|
|
|
28
|
|
|
|
29
|
|
|
|
69
|
|
|
|
75
|
|
|
|
58
|
|
Vintages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
11
|
|
|
|
14
|
|
|
|
17
|
|
|
|
31
|
|
|
|
35
|
|
|
|
21
|
|
2007
|
|
|
15
|
|
|
|
20
|
|
|
|
21
|
|
|
|
36
|
|
|
|
28
|
|
|
|
2
|
|
All other vintages
|
|
|
74
|
|
|
|
66
|
|
|
|
62
|
|
|
|
33
|
|
|
|
37
|
|
|
|
77
|
|
|
|
|
(1) |
|
Calculated based on the unpaid
principal balance of loans, where we have detailed loan-level
information, for each category divided by the unpaid principal
balance of our single-family conventional guaranty book of
business.
|
|
(2) |
|
Includes Alt-A loans, subprime
loans, interest-only loans, loans with original
loan-to-value
ratio greater than 90%, and loans with FICO credit scores less
than 620.
|
The suspension of foreclosure sales on occupied single-family
properties during our foreclosure moratoria in late 2008 and
early 2009 and our directive to delay foreclosure sales until
the loan servicer exhausts all other foreclosure prevention
alternatives reduced our foreclosure activity in 2009. Even with
these strategies in place, we nonetheless acquired a record
number of foreclosed properties, though we believe our
charge-offs and credit losses were below what would have
otherwise been recorded in 2009 had the moratoria not been in
place. While the foreclosure moratoria affected the timing of
when we incurred a credit loss, they did 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 discussion of
changes we made in our loss reserve estimation process to
address the impact of the foreclosure moratoria 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 OFHEO, 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
other provisions of the 2005 agreement were suspended on
March 18, 2009 by FHFA until further notice, the disclosure
requirement was not suspended. 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 15 compares the credit loss sensitivities for the periods
indicated 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.
101
Table
15: Single-Family Credit Loss
Sensitivity(1)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Gross single-family credit loss sensitivity
|
|
$
|
18,311
|
|
|
$
|
13,232
|
|
Less: Projected credit risk sharing proceeds
|
|
|
(2,533
|
)
|
|
|
(3,478
|
)
|
|
|
|
|
|
|
|
|
|
Net single-family credit loss sensitivity
|
|
$
|
15,778
|
|
|
$
|
9,754
|
|
|
|
|
|
|
|
|
|
|
Outstanding single-family whole loans and Fannie Mae MBS
|
|
$
|
2,830,004
|
|
|
$
|
2,724,253
|
|
Single-family net credit loss sensitivity as a percentage of
outstanding single-family whole loans and Fannie Mae MBS
|
|
|
0.56
|
%
|
|
|
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
December 31, 2009 and 2008. The mortgage loans and
mortgage-related securities that are included in these estimates
consist of: (a) single-family Fannie Mae MBS (whether held
in our mortgage portfolio or held by third parties), excluding
certain whole loan REMICs and private-label wraps;
(b) single-family mortgage loans, excluding mortgages
secured only by second liens, subprime mortgages, manufactured
housing chattel loans and reverse mortgages; and
(c) 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
2009 reflected the decline in home prices and the ongoing
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.
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 in
2009 compared with 2008 primarily due to an increase in our
master servicing costs, recording reserves for legal claims, and
an increase in net losses recorded on the extinguishment of
debt. The increased expenses were partially offset by a
reduction in interest expense associated with unrecognized tax
benefits related to certain unresolved tax positions. The
increase in expenses for 2008 compared with 2007 was
attributable to interest expense associated with the increase in
our unrecognized tax benefit, an increase in amortization
expense related to our master servicing assets and an increase
in the net losses recorded on the extinguishment of debt.
Federal
Income Taxes
We recorded a tax benefit for federal income taxes of
$985 million for 2009, resulting in an effective income tax
rate for the year of 1%, which 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 on all of
our 2009 pre-tax loss as there has been no change in our 2008
conclusion that it was more likely than not that we would not
generate sufficient taxable income in the foreseeable future to
realize all of our net deferred tax assets. As a result, we
recorded an increase in our valuation allowance of
$25.7 billion in 2009 in our consolidated statement of
operations, which represented the tax effect associated with a
portion of the pre-tax loss. The valuation allowance recorded
against our deferred tax assets totaled $52.7 billion as of
December 31, 2009, resulting in a net deferred tax asset of
$909 million. In comparison, we recorded a provision for
federal income taxes of $13.7 billion in 2008, due
primarily to the valuation allowance recorded against our
deferred tax assets that totaled $30.8 billion as of
December 31, 2008,
102
resulting in a net deferred tax asset of $3.9 billion. We
recorded a tax benefit of $3.1 billion for 2007, which
reflected the combined effect of a pre-tax loss in 2007 and tax
credits generated from our LIHTC partnership investments.
We discuss the factors that led us to record a partial valuation
allowance against our net deferred tax assets in
Note 11, Income Taxes. The amount of deferred
tax assets considered realizable is subject to adjustment in
future periods. We will continue to monitor all available
evidence related to our ability to utilize our remaining
deferred tax assets. If we determine that recovery is not
likely, we will record an additional valuation allowance against
the deferred tax assets that we estimate may not be recoverable.
Our income tax expense in future periods will be reduced or
increased to the extent of offsetting decreases or increases to
our valuation allowance.
Financial
Impact of the Making Home Affordable Program on Fannie
Mae
Home
Affordable Refinance Program
Because we already own or guarantee the original mortgages that
we refinance under HARP, our expenses under that program consist
mostly of limited administrative costs.
Home
Affordable Modification Program
Modifying loans we own or guarantee under HAMP, pursuant to our
mission, directly affects our financial results in the following
ways:
Key
elements affecting our financial results
Loans in trial modification plans are treated as individually
impaired. Under HAMP, a borrower must satisfy the terms of a
trial modification plan, typically for a period of at least
three months, before the modification of the loan can become
effective. A trial modification period begins when the borrower
and Fannie Mae agree to the terms of the trial modification
plan. A loan that enters a trial modification plan may be
recorded on our consolidated balance sheet or may remain in an
MBS trust and not be recorded on our consolidated balance sheet.
If the loan is recorded on our consolidated balance sheet, we
account for the loan as a TDR, because it is a restructuring of
a mortgage loan in which a concession is granted to a borrower
experiencing financial hardship. As a result, for a loan that is
reported on our balance sheet, we consider the loan to be
individually impaired when it enters a trial modification
period, and we calculate our allowance for loan losses for the
restructured loan on an individual basis. If the loan in a trial
modification plan remains in an MBS trust and is not recorded on
our balance sheet, we calculate a reserve for guaranty losses
for the loan in a manner similar to how we calculate the
allowance for loan losses for individually impaired loans that
are recorded on our balance sheet. Once a permanent loan
modification becomes effective, the loan will continue to be
considered individually impaired.
We continually re-measure our loss reserves to determine if the
amount of impairment recorded is appropriate and make
adjustments as required. Consequently, after a loan has entered
into a trial modification under HAMP, we continue to adjust the
amount of impairment.
Prior to the effective date of a permanent modification, a loan
in an MBS trust that is in a trial modification period is
purchased from the MBS trust to maintain compliance with the
terms of the trust. These loans are considered credit-impaired
at acquisition, and therefore we record a fair value loss for
any excess of the loans acquisition cost over its fair
value. At that time, our reserve for guaranty losses is reduced
to the extent of any previously recorded loss reserves
associated with the individually impaired loan.
The following table provides information about the impairments
and fair value losses associated with these activities for
Fannie Mae loans entering trial modifications under HAMP. These
amounts have been included
103
in the calculation of our provision for credit losses in our
consolidated results of operations for the year ended
December 31, 2009.
Table
16: Impairments and Fair Value Losses on Loans in
HAMP(1)
|
|
|
|
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
(Dollars in millions)
|
|
|
Impairments(2)
|
|
$
|
15,777
|
|
Fair value losses on credit-impaired loans acquired from MBS
trusts(3)
|
|
|
10,637
|
|
|
|
|
|
|
Total
|
|
$
|
26,414
|
|
|
|
|
|
|
Loans entered into a trial modification under the program
|
|
|
333,300
|
|
Credit-impaired loans in trial modifications under the program
acquired from MBS trusts
|
|
|
83,700
|
|
|
|
|
(1) |
|
Includes amounts for loans that
entered into a trial modification under the program but that
have not yet received, or that have been determined to be
ineligible for, a permanent modification under the program,
including loans that entered into a trial modification prior to
December 31, 2009, but were reported from servicers to us
subsequent to that date. Some of these ineligible loans have
since been modified outside of the program.
|
|
(2) |
|
Impairments consist of
(a) impairments recognized on loans accounted for as loans
restructured in a troubled debt restructuring and
(b) incurred credit losses on loans in MBS trusts that have
entered into a trial modification and been individually assessed
for incurred credit losses.
|
|
(3) |
|
These fair value losses are
recorded as charge-offs against the Reserve for guaranty
losses and have the effect of increasing the provision for
credit losses in our consolidated statement of operations.
|
When we begin to individually assess a loan for impairment, we
exclude the loan from the population of loans on which we
calculate our collective loss reserves. Amounts in the table
above do not reflect the impact of removing these individually
impaired loans from this population. The collective loss
reserves are reduced by the fact that these loans are no longer
included in the population for which the collective reserves are
calculated.
Effective January 1, 2010, we adopted new accounting
standards for transfers of financial assets and consolidation,
which resulted in our recording on our consolidated balance
sheet substantially all of the loans held in our MBS trusts.
Under the new accounting standards, the acquisition of loans
from our consolidated MBS trusts no longer triggers an
accounting event because the loans underlying our MBS trusts are
already recorded on our consolidated balance sheet.
Consequently, effective January 1, 2010, our consolidated
financial statements will no longer reflect the recognition of
fair value losses on the acquisition of credit-impaired loans
from MBS trusts. However, we will assess these loans for
probable incurred credit losses as part of our determination of
our allowance for loan losses and, to the extent necessary,
recognize these losses in our consolidated statements of
operations in our Provision for credit losses. We
believe that the amount we initially recognize in our provision
for credit losses for probable incurred credit losses on
credit-impaired loans acquired from MBS trusts will be less than
the fair value losses we would have recognized under the
previously applicable accounting standard upon acquiring loans
from our MBS trusts.
Servicer
and Borrower Incentives
We also incurred $21 million in paid and accrued incentive
fees for servicers and borrowers in connection with loans
modified under HAMP during 2009, which we recorded as part of
our Other expenses.
Overall
Impact of the Making Home Affordable Program
Because of the unprecedented nature of the circumstances that
led to the Making Home Affordable Program, we cannot quantify
what the impact would have been on Fannie Mae if the Making Home
Affordable Program had not been introduced. We do not know how
many loans we would have modified under alternative programs,
what the terms or costs of those modifications would have been,
or how many foreclosures would have resulted nationwide, and at
what pace, and the impact on housing prices if the program had
not been put
104
in place. As a result, the amounts we discuss above are not
intended to measure how much the program is costing us in
comparison to what it would cost us if we did not have the
program at all.
BUSINESS
SEGMENT RESULTS
We provide a more complete description of our business segments
in BusinessBusiness Segments. 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 Note 15, Segment Reporting. We
summarize our segment results for the periods indicated in the
tables below and provide a discussion of these results.
Table
17: Business Segment Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Net
revenues:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family
|
|
$
|
8,784
|
|
|
$
|
9,434
|
|
|
$
|
7,062
|
|
Housing and Community Development
|
|
|
582
|
|
|
|
476
|
|
|
|
425
|
|
Capital Markets
|
|
|
13,128
|
|
|
|
7,526
|
|
|
|
3,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,494
|
|
|
$
|
17,436
|
|
|
$
|
11,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family
|
|
$
|
(63,798
|
)
|
|
$
|
(27,101
|
)
|
|
$
|
(858
|
)
|
Housing and Community Development
|
|
|
(9,028
|
)
|
|
|
(2,189
|
)
|
|
|
157
|
|
Capital Markets
|
|
|
857
|
|
|
|
(29,417
|
)
|
|
|
(1,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(71,969
|
)
|
|
$
|
(58,707
|
)
|
|
$
|
(2,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family
|
|
$
|
19,991
|
|
|
$
|
24,115
|
|
|
$
|
23,356
|
|
Housing and Community Development
|
|
|
5,698
|
|
|
|
10,994
|
|
|
|
15,094
|
|
Capital Markets
|
|
|
843,452
|
|
|
|
877,295
|
|
|
|
840,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
869,141
|
|
|
$
|
912,404
|
|
|
$
|
879,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes net interest income,
guaranty fee income, trust management income, and fee and other
income.
|
Single-Family
Business
Table 18 summarizes the financial results for our Single-Family
business for the periods indicated.
105
Table
18: Single-Family Business Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
|
(Dollars in millions)
|
|
|
Statement of operations
data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
|
|
$
|
8,002
|
|
|
$
|
8,390
|
|
|
$
|
5,816
|
|
|
$
|
(388
|
)
|
|
$
|
2,574
|
|
Trust management income
|
|
|
39
|
|
|
|
256
|
|
|
|
553
|
|
|
|
(217
|
)
|
|
|
(297
|
)
|
Other
income(2)
|
|
|
741
|
|
|
|
716
|
|
|
|
629
|
|
|
|
25
|
|
|
|
87
|
|
Losses on certain guaranty contracts
|
|
|
|
|
|
|
|
|
|
|
(1,387
|
)
|
|
|
|
|
|
|
1,387
|
|
Credit-related
expenses(3)
|
|
|
(71,320
|
)
|
|
|
(29,725
|
)
|
|
|
(5,003
|
)
|
|
|
(41,595
|
)
|
|
|
(24,722
|
)
|
Other
expenses(4)
|
|
|
(2,635
|
)
|
|
|
(1,950
|
)
|
|
|
(1,928
|
)
|
|
|
(685
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes
|
|
|
(65,173
|
)
|
|
|
(22,313
|
)
|
|
|
(1,320
|
)
|
|
|
(42,860
|
)
|
|
|
(20,993
|
)
|
Benefit (provision) for federal income taxes
|
|
|
1,375
|
|
|
|
(4,788
|
)
|
|
|
462
|
|
|
|
6,163
|
|
|
|
(5,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
$
|
(63,798
|
)
|
|
$
|
(27,101
|
)
|
|
$
|
(858
|
)
|
|
$
|
(36,697
|
)
|
|
$
|
(26,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other key performance data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average single-family guaranty book of business
|
|
$
|
2,864,759
|
|
|
$
|
2,715,606
|
|
|
$
|
2,406,422
|
|
|
$
|
149,153
|
|
|
$
|
309,184
|
|
|
|
|
(1) |
|
Certain prior period amounts have
been reclassified to conform with the current period
presentation.
|
|
(2) |
|
Consists of net interest income,
investment gains and losses, and fee and other income.
|
|
(3) |
|
Consists of the provision for
credit losses and foreclosed property expense.
|
|
(4) |
|
Consists of administrative expenses
and other expenses.
|
Key factors affecting the results of our Single-Family business
for 2009 compared with 2008 included the following:
|
|
|
|
|
A decrease in guaranty fee income, due to a decrease in our
average effective guaranty fee rate partially offset by growth
in the average single-family guaranty book of business.
|
|
|
|
|
|
The decrease in our average effective guaranty fee rate was
primarily attributable to lower amortization of deferred revenue
in 2009 as the sharp decline in interest rates in 2008 generated
an acceleration of deferred amounts. This decline was partially
offset by a higher fair value adjustment on our
buy-ups and
certain guaranty assets recorded during 2009 due to increased
market prices on interest only-strips.
|
|
|
|
Our average single-family guaranty book of business increased by
5.5% in 2009 over 2008. We experienced an increase in our
average outstanding Fannie Mae MBS and other guarantees as our
market share of new single-family mortgage-related securities
issuances remained high and new MBS issuances outpaced
liquidations. Our estimated market share of new single-family
mortgage-related securities issuances, which is based on
publicly available data and excludes previously securitized
mortgages, increased to 46.3% for 2009 from 45.4% for 2008.
|
|
|
|
The average charged guaranty fee on our new single-family
business for 2009 was 23.8 basis points compared with
28.0 basis points in 2008. 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 reduction in our acquisition of loans with higher risk,
higher fee categories such as higher LTV and lower FICO scores
due to (1) changes in our underwriting and eligibility
standards; (2) changes in the eligibility standards of the
mortgage insurance companies; and (3) the increased
presence of FHA in the higher-LTV market.
|
|
|
|
In October 2008, we canceled a planned 25 basis point
increase in our adverse market delivery charge on new
Single-Family business. If we had not cancelled the planned fee
increase, we would have collected, based on our 2009 volumes,
approximately $1.7 billion in additional adverse market
delivery fees in 2009. These fees would have been deferred and
amortized into income over the expected life of
|
106
|
|
|
|
|
our guaranty. We estimate that approximately $200 million
of the $1.7 billion would have been recognized into our
2009 consolidated statement of operations.
|
|
|
|
|
|
A substantial increase in credit-related expenses, reflecting a
significantly higher incremental provision for credit losses as
well as higher charge-offs.
|
|
|
|
|
|
The increase in credit-related expenses was due to worsening
credit performance trends, including significant increases in
delinquencies, defaults and loss severities, throughout our
guaranty book of business, reflecting the adverse impact of the
decline in home prices, the weak economy and high unemployment.
Certain higher risk loan categories, loan vintages and loans
within certain states that have had the greatest home price
depreciation from their peaks continue to account for a
disproportionate share of our credit losses, but we are also
experiencing deterioration in the credit performance of loans
with fewer risk layers. In addition, the increased level of
troubled debt restructurings, particularly through workouts
initiated as part of our foreclosure prevention efforts,
increased the number of loans that were individually impaired,
contributing to the increase in the provision for credit losses.
|
|
|
|
We also experienced a significant increase in fair value losses
on credit-impaired loans acquired from MBS trusts for the
purpose of modifying them during 2009, reflecting the increase
in the number of delinquent loans acquired from MBS trusts, and
the decrease in the estimated fair value of these loans compared
with 2008.
|
|
|
|
Credit-related expenses in the Single-Family business represent
the substantial majority of the companys total
credit-related expenses. We provide additional information on
total credit-related expenses in Consolidated Results of
OperationsCredit-Related Expenses.
|
|
|
|
|
|
The net tax benefit recognized in 2009 was attributable to our
ability to carry back current year tax losses to previous tax
years. We recorded a valuation allowance for the majority of the
tax benefits associated with the pre-tax losses recognized in
2009 that we were unable to carry back to previous tax years 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. We recorded
a non-cash charge in 2008 to establish a partial deferred tax
asset valuation allowance against our net deferred tax assets.
|
Key factors affecting the results of our Single-Family business
for 2008 compared with 2007 included the following:
|
|
|
|
|
Increased guaranty fee income, primarily attributable to an
increase in the average effective guaranty fee rate, coupled
with growth in the average single-family guaranty book of
business.
|
|
|
|
|
|
The average effective single-family guaranty fee rate increased
to 30.9 basis points in 2008, from 24.2 basis points
in 2007. The growth in our average effective single-family
guaranty fee rate during 2008 was primarily driven by the
accelerated recognition of deferred amounts into income, as
interest rates fell significantly during 2008, resulting in
higher expected prepayment rates. Our average effective guaranty
fee rate for 2008 also reflected the impact of guaranty fee
pricing changes we implemented to address the current risks in
the housing market and a shift in the composition of our new
business to a greater proportion of higher-quality, lower risk
and lower guaranty fee mortgages. The combined effect of these
changes resulted in a reduction in the average charged guaranty
fee on new single-family business to 28.0 basis points in
2008, from 28.6 basis points for 2007.
|
|
|
|
Our average single-family guaranty book of business increased by
13% in 2008 reflecting a significant increase in our market
share. Our estimated market share of new single-family
mortgage-related securities issuances, which is based on
publicly available data and excludes previously securitized
mortgages, increased to 45.4% for 2008, from 33.9% for 2007.
|
|
|
|
|
|
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, particularly in certain higher
risk loan
|
107
|
|
|
|
|
categories and vintages and certain states. We also experienced
an increase in fair value losses on credit-impaired loans in
2008.
|
|
|
|
|
|
A non-cash charge in 2008 to establish a partial deferred tax
asset valuation allowance against our net deferred tax assets.
As a result of the partial deferred tax valuation allowance, we
did not record tax benefits for the majority of the losses we
incurred during 2008. The allocation of this charge to our
Single-Family business resulted in a provision for federal
income taxes of $4.8 billion for 2008, compared with a tax
benefit of $462 million for 2007.
|
HCD
Business
Table 19 summarizes the financial results for our HCD business
for the periods indicated.
Table
19: HCD Business Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
|
(Dollars in millions)
|
|
|
Statement of operations
data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
|
|
$
|
675
|
|
|
$
|
633
|
|
|
$
|
470
|
|
|
$
|
42
|
|
|
$
|
163
|
|
Other
income(2)
|
|
|
100
|
|
|
|
186
|
|
|
|
359
|
|
|
|
(86
|
)
|
|
|
(173
|
)
|
Losses on partnership investments
|
|
|
(6,735
|
)
|
|
|
(1,554
|
)
|
|
|
(1,005
|
)
|
|
|
(5,181
|
)
|
|
|
(549
|
)
|
Credit-related
expenses(3)
|
|
|
(2,216
|
)
|
|
|
(84
|
)
|
|
|
(9
|
)
|
|
|
(2,132
|
)
|
|
|
(75
|
)
|
Other
expenses(4)
|
|
|
(594
|
)
|
|
|
(880
|
)
|
|
|
(1,188
|
)
|
|
|
286
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes
|
|
|
(8,770
|
)
|
|
|
(1,699
|
)
|
|
|
(1,373
|
)
|
|
|
(7,071
|
)
|
|
|
(326
|
)
|
Benefit (provision) for federal income taxes
|
|
|
(311
|
)
|
|
|
(511
|
)
|
|
|
1,509
|
|
|
|
200
|
|
|
|
(2,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(9,081
|
)
|
|
|
(2,210
|
)
|
|
|
136
|
|
|
|
(6,871
|
)
|
|
|
(2,346
|
)
|
Less: Net loss attributable to the noncontrolling interest
|
|
|
53
|
|
|
|
21
|
|
|
|
21
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
(9,028
|
)
|
|
$
|
(2,189
|
)
|
|
$
|
157
|
|
|
$
|
(6,839
|
)
|
|
$
|
(2,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other key performance data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average multifamily guaranty book of business
|
|
$
|
179,315
|
|
|
$
|
161,722
|
|
|
$
|
131,375
|
|
|
$
|
17,593
|
|
|
$
|
30,347
|
|
|
|
|
(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 expense.
|
|
(4) |
|
Consists of net interest expense,
losses on certain guaranty contracts, administrative expenses
and other expenses.
|
Key factors affecting the results of our HCD business for 2009
compared with 2008 included the following:
|
|
|
|
|
An increase in guaranty fee income, which was primarily
attributable to growth in the average multifamily guaranty book
of business. The increase in the average multifamily guaranty
book of business reflected the investment and liquidity we have
been providing to the multifamily mortgage market. Compared with
2008, during 2009 there was also an increase in the average
charged guaranty fee rate, which was offset by lower
guaranty-related amortization income.
|
|
|
|
We recorded $5.0 billion of
other-than-temporary
impairment on our LIHTC investments during the fourth quarter of
2009. We provide further discussion of losses from partnership
investments, including details regarding
other-than-temporary
impairments of these assets, in Consolidated Results of
OperationsLosses from Partnership Investments.
|
|
|
|
An increase in credit-related expenses largely reflecting the
increase in our multifamily combined loss reserves to
$2.0 billion, or 1.10% of our multifamily guaranty book of
business, as of December 31, 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 driven by several factors including higher severity,
deterioration in
|
108
|
|
|
|
|
some large loans, lower property values, and weaker financial
results from borrowers, all of which are a reflection of the
weak economy. Net charge-offs and foreclosed property expenses
totaled $220 million in 2009 compared with $52 million
in 2008.
|
|
|
|
|
|
The net tax provision recognized in 2009 was attributable to the
reversal of the use of certain tax credits, net of our ability
to carryback current tax losses. In addition, we recorded a
valuation allowance for all of the tax benefits associated with
the tax credits generated by our partnership investments in
2009. We recorded a non-cash charge in 2008 to establish a
partial deferred tax asset valuation allowance against our net
deferred tax assets.
|
Key factors affecting the results of our HCD business for 2008
compared with 2007 included the following:
|
|
|
|
|
Increased guaranty fee income, attributable to growth in the
average multifamily guaranty book of business, an increase in
the average effective multifamily guaranty fee rate and the
accelerated amortization of our deferred guaranty obligation due
to the decline in interest rates. The increases in our book of
business and guaranty fee rate reflected the increased
investment and liquidity that we provided to the multifamily
mortgage market in 2008.
|
|
|
|
A decrease in other income, primarily attributable to lower
multifamily fees due to a reduction in multifamily loan
prepayments during 2008.
|
|
|
|
An increase in losses on partnership investments. We discuss
details on losses from partnership investments in
Consolidated Results of OperationsLosses from
Partnership Investments.
|
|
|
|
A non-cash charge in 2008 to establish a partial deferred tax
asset valuation allowance against our net deferred tax assets.
As a result of the partial deferred tax valuation allowance, we
did not record tax benefits for the majority of the losses we
incurred during 2008. The allocation of this charge to our HCD
business largely resulted in a provision for federal income
taxes of $511 million for 2008. In comparison, we recorded
a tax benefit of $1.5 billion for 2007, driven by tax
credits of $1.0 billion.
|
Capital
Markets Group
Table 20 summarizes the financial results for our Capital
Markets group for the periods indicated.
Table
20: Capital Markets Group Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
Variance
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 vs. 2008
|
|
|
2008 vs. 2007
|
|
|
|
(Dollars in millions)
|
|
|
Statement of operations
data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
14,275
|
|
|
$
|
8,664
|
|
|
$
|
4,620
|
|
|
$
|
5,611
|
|
|
$
|
4,044
|
|
Investment gains (losses), net
|
|
|
1,460
|
|
|
|
(174
|
)
|
|
|
11
|
|
|
|
1,634
|
|
|
|
(185
|
)
|
Net
other-than-temporary
impairments
|
|
|
(9,861
|
)
|
|
|
(6,974
|
)
|
|
|
(814
|
)
|
|
|
(2,887
|
)
|
|
|
(6,160
|
)
|
Fair value losses, net
|
|
|
(2,811
|
)
|
|
|
(20,129
|
)
|
|
|
(4,668
|
)
|
|
|
17,318
|
|
|
|
(15,461
|
)
|
Fee and other income, net
|
|
|
319
|
|
|
|
264
|
|
|
|
313
|
|
|
|
55
|
|
|
|
(49
|
)
|
Other
expenses(2)
|
|
|
(2,446
|
)
|
|
|
(2,209
|
)
|
|
|
(1,916
|
)
|
|
|
(237
|
)
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes and extraordinary
losses, net of tax effect
|
|
|
936
|
|
|
|
(20,558
|
)
|
|
|
(2,454
|
)
|
|
|
21,494
|
|
|
|
(18,104
|
)
|
Benefit (provision) for federal income taxes
|
|
|
(79
|
)
|
|
|
(8,450
|
)
|
|
|
1,120
|
|
|
|
8,371
|
|
|
|
(9,570
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(409
|
)
|
|
|
(15
|
)
|
|
|
409
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
857
|
|
|
$
|
(29,417
|
)
|
|
$
|
(1,349
|
)
|
|
$
|
30,274
|
|
|
$
|
(28,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
109
Key factors affecting the results of our Capital Markets group
for 2009 compared with 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.
|
|
|
|
|
|
The significant reduction in the average cost of our debt during
2009 compared with 2008 was primarily attributable to a decline
in borrowing rates as we replaced higher cost debt with lower
cost debt.
|
|
|
|
Our net interest income does not include the effect of the
periodic net contractual interest accruals on our interest rate
swaps totaling $3.4 billion in 2009, compared with
$1.6 billion in 2008. These amounts are included in
derivatives gains (losses) and reflected in our consolidated
statements of operations as a component of Fair value
gains (losses), net.
|
|
|
|
|
|
A substantial decrease in fair value losses. We discuss our fair
value losses in Consolidated Results of
OperationsFair Value Gains (Losses), Net.
|
|
|
|
The shift to investment gains in 2009 compared with investment
losses in 2008 was primarily attributable to: (1) an
increase in gains on portfolio securitizations as we increased
our MBS issuance volumes and sales related to whole loan conduit
activity; and (2) an increase in realized gains on sales of
available-for-sale
securities as tightening of investment spreads on agency MBS led
to higher sale prices. These gains were partially offset by an
increase in lower of cost or fair value adjustments on loans,
primarily driven by a decline in the credit quality of these
loans and an increase in interest rates.
|
|
|
|
An increase in net
other-than-temporary
impairment during 2009. We discuss net-other-than-temporary
impairment in Consolidated Results of OperationsNet
Other-Than-Temporary
Impairment.
|
|
|
|
We recorded a non-cash charge in 2008 to establish a partial
deferred tax asset valuation allowance against our net deferred
tax assets.
|
Key factors affecting the results of our Capital Markets group
for 2008 compared with 2007 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. The decrease in
the average cost of our debt was due to the decline in
short-term interest rates during 2008 and a shift in our funding
mix to more short-term debt. The reversal of accrued interest
expense on step-rate debt that we paid off during 2008 also
reduced the average cost of our debt. The increase in our net
interest income does not reflect the impact of a significant
increase in the net contractual interest expense on our interest
rate swaps.
|
|
|
|
A substantial increase in fair value losses. We discuss details
on our fair value losses in Consolidated Results of
Operations-Fair Value Gains (Losses), Net.
|
|
|
|
An increase in net
other-than-temporary
impairment during 2008. We discuss details on
net-other-than-temporary impairment in Consolidated
Results of
Operations-Net
Other-Than-Temporary
Impairment.
|
|
|
|
A non-cash charge in 2008 to establish a partial deferred tax
asset valuation allowance against our net deferred tax assets.
As a result of the partial deferred tax valuation allowance, we
did not record tax benefits for the majority of the losses we
incurred during 2008. The allocation of this charge to our
Capital Markets group resulted in a provision for federal income
taxes of $8.5 billion for 2008, compared with a tax benefit
of $1.1 billion for 2007.
|
CONSOLIDATED
BALANCE SHEET ANALYSIS
We seek to structure the composition of our balance sheet and
manage its size to comply with our regulatory requirements, to
provide adequate liquidity to meet our needs, and to mitigate
our interest rate risk and credit
110
risk exposure. The major asset components of our consolidated
balance sheet include our mortgage investments and our cash and
other investments portfolio. We fund and manage the interest
rate risk on these investments through the issuance of debt
securities and the use of derivatives. Our debt securities and
derivatives represent the major liability components of our
consolidated balance sheet.
Effective January 1, 2010, we adopted new accounting
standards that significantly increased the loans and debt we
will report on our consolidated balance sheet in 2010. We
discuss the impact of the new accounting standards in
Off-Balance Sheet Arrangements and Variable Interest
EntitiesElimination of QSPEs and Changes in the
Consolidation Model for Variable Interest Entities.
Following is a discussion of the major components of our assets
and liabilities. See Supplemental
Non-GAAP InformationFair Value Balance Sheets
for the details of the change in our equity.
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
$69.4 billion as of December 31, 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.
Mortgage
Investments
Table 21 summarizes our mortgage portfolio activity and Table 22
shows the composition of our mortgage portfolio by product type
and the carrying value for the periods indicated.
Table
21: Mortgage Portfolio
Activity(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases(2)
|
|
|
Sales
|
|
|
Liquidations(3)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
$
|
129,472
|
|
|
$
|
72,956
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
41,182
|
|
|
$
|
22,913
|
|
Intermediate-term(4)
|
|
|
27,444
|
|
|
|
30,004
|
|
|
|
|
|
|
|
|
|
|
|
13,804
|
|
|
|
10,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate loans
|
|
|
156,916
|
|
|
|
102,960
|
|
|
|
|
|
|
|
|
|
|
|
54,986
|
|
|
|
33,710
|
|
Adjustable-rate loans
|
|
|
6,825
|
|
|
|
14,313
|
|
|
|
|
|
|
|
|
|
|
|
9,787
|
|
|
|
9,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
163,741
|
|
|
|
117,273
|
|
|
|
|
|
|
|
|
|
|
|
64,773
|
|
|
|
43,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
154,735
|
|
|
|
50,509
|
|
|
|
195,757
|
|
|
|
33,595
|
|
|
|
40,299
|
|
|
|
21,137
|
|
Intermediate-term(5)
|
|
|
5,595
|
|
|
|
11,970
|
|
|
|
22,167
|
|
|
|
6,734
|
|
|
|
7,000
|
|
|
|
4,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate securities
|
|
|
160,330
|
|
|
|
62,479
|
|
|
|
217,924
|
|
|
|
40,329
|
|
|
|
47,299
|
|
|
|
25,853
|
|
Adjustable-rate securities
|
|
|
1,232
|
|
|
|
14,794
|
|
|
|
825
|
|
|
|
2,711
|
|
|
|
13,794
|
|
|
|
17,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage securities
|
|
|
161,562
|
|
|
|
77,273
|
|
|
|
218,749
|
|
|
|
43,040
|
|
|
|
61,093
|
|
|
|
42,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
$
|
325,303
|
|
|
$
|
194,546
|
|
|
$
|
218,749
|
|
|
$
|
43,040
|
|
|
$
|
125,866
|
|
|
$
|
86,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual liquidation rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.3
|
%
|
|
|
11.5
|
%
|
|
|
|
(1) |
|
Amounts represent unpaid principal
balance and exclude unamortized premiums, discounts and other
cost basis adjustments.
|
|
(2) |
|
Excludes advances to lenders and
mortgage-related securities acquired through the extinguishment
of debt.
|
|
(3) |
|
Includes scheduled repayments,
prepayments, foreclosures and lender repurchases.
|
|
(4) |
|
Consists of mortgage loans with
contractual maturities at purchase equal to or less than
15 years.
|
|
(5) |
|
Consists of mortgage securities
with maturities at issue date equal to or less than
15 years.
|
111
Table
22: Mortgage Portfolio
Composition(1)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
loans:(2)
|
|
|
|
|
|
|
|
|
Single-family:
|
|
|
|
|
|
|
|
|
Government insured or
guaranteed(3)(4)
|
|
$
|
52,399
|
|
|
$
|
43,799
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term, fixed-rate
|
|
|
179,654
|
|
|
|
186,550
|
|
Intermediate-term,
fixed-rate(5)
|
|
|
29,474
|
|
|
|
37,546
|
|
Adjustable-rate(6)
|
|
|
34,602
|
|
|
|
44,157
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family
|
|
|
243,730
|
|
|
|
268,253
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
296,129
|
|
|
|
312,052
|
|
|
|
|
|
|
|
|
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
Government insured or
guaranteed(3)
|
|
|
585
|
|
|
|
699
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term, fixed-rate
|
|
|
5,727
|
|
|
|
5,636
|
|
Intermediate-term,
fixed-rate(5)
|
|
|
91,760
|
|
|
|
90,837
|
|
Adjustable-rate
|
|
|
22,342
|
|
|
|
20,269
|
|
|
|
|
|
|
|
|
|
|
Total conventional multifamily
|
|
|
119,829
|
|
|
|
116,742
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
120,414
|
|
|
|
117,441
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
416,543
|
|
|
|
429,493
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums and other cost basis adjustments, net
|
|
|
(11,168
|
)
|
|
|
(894
|
)
|
Lower of cost or market adjustments on loans held for sale
|
|
|
(889
|
)
|
|
|
(264
|
)
|
Allowance for loan losses for loans held for investment
|
|
|
(10,461
|
)
|
|
|
(2,923
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans, net
|
|
|
394,025
|
|
|
|
425,412
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
|
220,245
|
|
|
|
228,949
|
|
Freddie Mac
|
|
|
41,390
|
|
|
|
33,383
|
|
Ginnie Mae
|
|
|
1,277
|
|
|
|
1,518
|
|
Alt-A
|
|
|
24,505
|
|
|
|
27,858
|
|
Subprime
|
|
|
20,527
|
|
|
|
24,551
|
|
CMBS
|
|
|
25,703
|
|
|
|
25,825
|
|
Mortgage revenue bonds
|
|
|
14,453
|
|
|
|
15,447
|
|
Other mortgage-related securities
|
|
|
4,609
|
|
|
|
5,172
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities
|
|
|
352,709
|
|
|
|
362,703
|
|
|
|
|
|
|
|
|
|
|
Market value
adjustments(7)
|
|
|
(5,275
|
)
|
|
|
(15,996
|
)
|
Other-than-temporary
impairments, net of accretion
|
|
|
(7,835
|
)
|
|
|
(7,349
|
)
|
Unamortized discounts and other cost basis adjustments,
net(8)
|
|
|
1,186
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-related securities, net
|
|
|
340,785
|
|
|
|
339,654
|
|
|
|
|
|
|
|
|
|
|
Mortgage portfolio,
net(9)
|
|
$
|
734,810
|
|
|
$
|
765,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mortgage loans and mortgage-related
securities are reported at unpaid principal balance. Certain
prior period amounts have been reclassified to conform with the
current period presentation.
|
|
(2) |
|
Mortgage loans include unpaid
principal balances totaling $147.0 billion and
$65.8 billion as of December 31, 2009 and 2008,
respectively, related to mortgage-related securities that were
held in consolidated variable interest entities
|
112
|
|
|
|
|
and mortgage-related securities
created from securitization transactions that did not meet the
sales accounting criteria 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 VA, FHA or the Rural Development Housing and
Community Facilities Program of the Department of Agriculture.
|
|
(4) |
|
Includes reverse mortgages with an
outstanding unpaid principal balance of $49.9 billion and
$41.2 billion as of December 31, 2009 and 2008,
respectively.
|
|
(5) |
|
Intermediate-term, fixed-rate
consists of mortgage loans with contractual maturities at
purchase equal to or less than 15 years.
|
|
(6) |
|
Includes reverse mortgages with an
outstanding unpaid principal balance of $327 million and
$353 million as of December 31, 2009 and 2008,
respectively.
|
|
(7) |
|
Includes unrealized gains and
losses on mortgage-related securities and securities commitments
classified as trading and available for sale.
|
|
(8) |
|
Includes the impact of
other-than-temporary
impairments of cost basis adjustments.
|
|
(9) |
|
Includes consolidated
mortgage-related assets acquired through the assumption of debt.
Also includes $3.0 billion and $720 million as of
December 31, 2009 and 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.
|
Our mortgage portfolio as of December 31, 2009 declined
compared with December 31, 2008, primarily because of
higher sales and liquidations partially offset by higher
purchases. Mortgage portfolio purchases and sales were
significantly higher in 2009 compared with 2008, primarily due
to: increased mortgage originations; increased volume of loan
deliveries to us; increased securitizations from our portfolio;
and increased dollar roll activity. The increase in mortgage
liquidations during 2009 reflects an increase in the volume of
refinancings, as mortgage interest rates were at historically
low levels throughout most of 2009.
Our recent mortgage portfolio activities have been focused on
providing liquidity to the market through dollar roll
transactions and whole loan conduit activities. Our portfolio
purchase and sales activity includes the settlement of dollar
roll transactions that are accounted for as purchases and sales
but does not include activity related to dollar roll
transactions that are accounted for as secured financings. These
transactions often settle in different periods, which may cause
period-to-period
fluctuations in our mortgage portfolio balance. 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.
On February 10, 2010, we announced that we intend to
significantly increase our purchases of delinquent loans from
single-family MBS trusts. Under our single-family MBS trust
documents, we have the option to purchase from our MBS trusts
loans that are delinquent as to four or more consecutive monthly
payments. We will begin purchasing these loans in March 2010. We
expect to purchase a significant portion of the current
delinquent population within a few months period subject to
market, servicer capacity, and other constraints including the
limit on the mortgage assets that we may own pursuant to the
senior preferred stock purchase agreement. As of
December 31, 2009, the total unpaid principal balance of
all loans in single-family MBS trusts that were delinquent four
or more months was approximately $127 billion.
We are restricted in the amount of mortgage assets that we may
own. The maximum allowable amount was $900 billion on
December 31, 2009. Beginning on December 31, 2010 and
each year thereafter, we are required to reduce our mortgage
assets to 90% of the maximum allowable amount that we were
permitted to own as of December 31 of the immediately preceding
calendar year, until the amount of our mortgage assets reaches
$250 billion. Accordingly, the maximum allowable amount of
mortgage assets we may own on December 31, 2010 is
$810 billion. The definition of mortgage asset is based on
the unpaid principal balance of such assets and does not reflect
market valuation adjustments, allowance for loan losses,
impairments, unamortized premiums and discounts, and the impact
of consolidation of variable interest entities, which are
reflected in the amounts reported for Mortgage portfolio,
net in Table 22. Under this definition, our mortgage
assets on December 31, 2009 were $773 billion. We
disclose the amount of our mortgage assets on a monthly basis
under the caption Gross Mortgage Portfolio in our
Monthly Summaries, which are available on our Web site and
announced in a press release. 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. Under this definition,
our indebtedness as of December 31, 2009 was
$786 billion. We disclose the amount of our indebtedness on
a
113
monthly basis under the caption Total Debt
Outstanding in our Monthly Summaries, which are available
on our Web site and announced in a press release. Under the
terms of the senior preferred stock purchase agreement,
mortgage assets and indebtedness are
calculated without giving effect to changes made after May 2009
to the accounting rules governing the transfer and servicing of
financial assets and the extinguishment of liabilities or
similar accounting standards. Accordingly, our adoption of new
accounting policies regarding consolidation and transfers of
financial assets will not affect these calculations.
Mortgage-Related
Securities
Our mortgage investment securities are classified in our
consolidated balance sheets as either trading or available for
sale and reported at fair value. Gains and losses on trading
securities are recognized in earnings, while unrealized gains
and losses on
available-for-sale
securities are recorded in stockholders equity as a
component of AOCI. Table 23 details the amortized cost, fair
value, maturity and average yield of our investment securities
classified as
available-for-sale
as of December 31, 2009.
Table
23: Amortized Cost, Fair Value, Maturity and Average
Yield of Investments in
Available-for-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
|
|
$
|
148,074
|
|
|
$
|
154,419
|
|
|
$
|
20
|
|
|
$
|
21
|
|
|
$
|
681
|
|
|
$
|
718
|
|
|
$
|
21,743
|
|
|
$
|
22,719
|
|
|
$
|
125,630
|
|
|
$
|
130,961
|
|
Freddie Mac
|
|
|
26,281
|
|
|
|
27,469
|
|
|
|
25
|
|
|
|
25
|
|
|
|
62
|
|
|
|
64
|
|
|
|
1,738
|
|
|
|
1,822
|
|
|
|
24,456
|
|
|
|
25,558
|
|
Ginnie Mae
|
|
|
1,253
|
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
1,248
|
|
|
|
1,348
|
|
Alt-A
|
|
|
17,836
|
|
|
|
14,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351
|
|
|
|
332
|
|
|
|
17,485
|
|
|
|
13,818
|
|
Subprime
|
|
|
13,232
|
|
|
|
10,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,232
|
|
|
|
10,746
|
|
CMBS
|
|
|
15,797
|
|
|
|
13,193
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
|
366
|
|
|
|
15,057
|
|
|
|
12,584
|
|
|
|
365
|
|
|
|
243
|
|
Mortgage revenue bonds
|
|
|
13,679
|
|
|
|
12,846
|
|
|
|
29
|
|
|
|
29
|
|
|
|
377
|
|
|
|
388
|
|
|
|
822
|
|
|
|
823
|
|
|
|
12,451
|
|
|
|
11,606
|
|
Other mortgage-related securities
|
|
|
4,225
|
|
|
|
3,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
4,225
|
|
|
|
3,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
240,377
|
|
|
$
|
237,728
|
|
|
$
|
74
|
|
|
$
|
75
|
|
|
$
|
1,495
|
|
|
$
|
1,536
|
|
|
$
|
39,716
|
|
|
$
|
38,306
|
|
|
$
|
199,092
|
|
|
$
|
197,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield(1)
|
|
|
5.67
|
%
|
|
|
|
|
|
|
12.13
|
%
|
|
|
|
|
|
|
5.29
|
%
|
|
|
|
|
|
|
5.37
|
%
|
|
|
|
|
|
|
5.73
|
%
|
|
|
|
|
|
|
|
(1) |
|
Yields are determined by dividing
interest income (including the amortization and accretion of
premiums, discounts and other cost basis adjustments) by
amortized cost balances of year-end.
|
Investments
in Private-Label Mortgage-Related Securities
We classify private-label securities as Alt-A, subprime,
multifamily or manufactured housing if the securities were
labeled as such when issued. We have also invested in
private-label subprime mortgage securities that we have
resecuritized to include our guaranty (wraps). 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 believe that one or more of our financial
guarantor counterparties may not be able to 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.
Table 24 summarizes, by the underlying loan type, the unpaid
principal balance and the average credit enhancement on our
private-label mortgage-related securities (excluding wraps),
CMBS, and mortgage revenue
114
bonds as of December 31, 2009. 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 24 also provides
information on the credit ratings of our private-label
securities as of February 24, 2010. 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
24:
|
Investments
in Private-Label Mortgage-Related Securities (Excluding Wraps),
CMBS, and Mortgage Revenue Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of February 24, 2010
|
|
|
|
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
|
|
$
|
6,099
|
|
|
|
49
|
%
|
|
|
|
%
|
|
|
20
|
%
|
|
|
80
|
%
|
|
|
40
|
%
|
Other Alt-A mortgage loans
|
|
|
18,406
|
|
|
|
12
|
|
|
|
17
|
|
|
|
25
|
|
|
|
58
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A mortgage loans
|
|
|
24,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime mortgage
loans(4)
|
|
|
20,527
|
|
|
|
31
|
|
|
|
11
|
|
|
|
7
|
|
|
|
82
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A and subprime mortgage loans
|
|
|
45,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured housing mortgage loans
|
|
|
2,485
|
|
|
|
35
|
|
|
|
2
|
|
|
|
19
|
|
|
|
79
|
|
|
|
|
|
Other mortgage loans
|
|
|
2,124
|
|
|
|
6
|
|
|
|
54
|
|
|
|
25
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private-label mortgage-related securities
|
|
|
49,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
|
25,703
|
|
|
|
30
|
|
|
|
34
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bonds
|
|
|
14,453
|
|
|
|
37
|
|
|
|
33
|
|
|
|
57
|
|
|
|
10
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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.
Bonds that are guaranteed by third parties are deemed to be 100%.
|
|
(2) |
|
Represents the lowest rating of the
four credit rating agencies as of February 24, 2010,
calculated based on unpaid principal balance as of
December 31, 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
December 31, 2009, that are under review for further
downgrade by the four rating agencies.
|
|
(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 $5.9 billion as of December 31, 2009.
|
We are working to enforce investor rights on private-label
securities holdings, and are engaged in efforts to potentially
mitigate losses on our own private-label securities holdings.
FHFA has directed us to work with Freddie Mac to enforce
investor rights in private-label securities holdings in which we
both have interests. Enforcement of investor rights in
private-label securities faces many obstacles, including the
fact that we frequently do not have any direct right of
enforcement and must act through the independent trustees.
115
Moreover, we and the other entities involved often have
competing financial interests. As a result, the effectiveness of
our efforts is difficult to determine and also may not be known
for some time.
Investments
in Alt-A and Subprime Private-Label Mortgage-Related
Securities
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 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 fair value losses on these securities.
Table 25 presents the fair value of our investments in Alt-A and
subprime private-label securities, excluding wraps, and an
analysis of the cumulative losses on these investments as of
December 31, 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 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 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. 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 AOCI. Table 25 displays the
estimated noncredit and credit-related components of the fair
value losses on our trading securities and our
available-for-sale
securities.
|
|
Table
25:
|
Analysis
of Losses on Alt-A and Subprime Private-Label Mortgage-Related
Securities (Excluding
Wraps)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
|
|
$
|
3,303
|
|
|
$
|
1,355
|
|
|
$
|
(1,938
|
)
|
|
$
|
(791
|
)
|
|
$
|
(1,147
|
)
|
Subprime private-label securities
|
|
|
3,007
|
|
|
|
1,780
|
|
|
|
(1,227
|
)
|
|
|
(371
|
)
|
|
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A and subprime private-label securities classified as
trading
|
|
$
|
6,310
|
|
|
$
|
3,135
|
|
|
$
|
(3,165
|
)
|
|
$
|
(1,162
|
)
|
|
$
|
(2,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A private-label securities
|
|
|
21,202
|
|
|
|
14,150
|
|
|
|
(7,143
|
)
|
|
|
(3,686
|
)
|
|
|
(3,457
|
)
|
Subprime private-label securities
|
|
|
17,520
|
|
|
|
10,746
|
|
|
|
(6,989
|
)
|
|
|
(2,486
|
)
|
|
|
(4,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A and subprime private-label securities classified as
available for sale
|
|
$
|
38,722
|
|
|
$
|
24,896
|
|
|
$
|
(14,132
|
)
|
|
$
|
(6,172
|
)
|
|
$
|
(7,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $5.9 billion as of December 31, 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.
|
116
|
|
|
(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 current economic environment, including lower home prices
and high unemployment, has 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 26
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, Inc.
LoanPerformance (First American CoreLogic). We also
present the average credit enhancement and monoline financial
guaranteed amount for these securities as of December 31,
2009.
|
|
Table 26:
|
Credit
Statistics of Loans Underlying Alt-A and Subprime Private-Label
Mortgage-Related Securities (Including Wraps)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Unpaid Principal Balance
|
|
|
|
|
|
|
|
|
|
|
|
Monoline
|
|
|
|
|
|
|
Available
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Financial
|
|
|
|
|
|
|
for
|
|
|
|
|
|
³
60 Days
|
|
|
Loss
|
|
|
Credit
|
|
|
Guaranteed
|
|
|
|
Trading
|
|
|
Sale
|
|
|
Wraps(1)
|
|
|
Delinquent(2)(3)
|
|
|
Severity(3)(4)
|
|
|
Enhancement(5)
|
|
|
Amount(6)
|
|
|
|
(Dollars in Millions)
|
|
|
|
|
|
Private-label mortgage-related securities backed
by:(7)
|
Alt-A mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option ARM Alt-A mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and prior
|
|
$
|
|
|
|
$
|
582
|
|
|
$
|
|
|
|
|
38.5
|
%
|
|
|
41.2
|
%
|
|
|
21.7
|
%
|
|
$
|
|
|
2005
|
|
|
|
|
|
|
1,527
|
|
|
|
|
|
|
|
41.3
|
|
|
|
52.9
|
|
|
|
45.6
|
|
|
|
297
|
|
2006
|
|
|
|
|
|
|
1,632
|
|
|
|
|
|
|
|
47.1
|
|
|
|
60.6
|
|
|
|
43.7
|
|
|
|
271
|
|
2007
|
|
|
2,358
|
|
|
|
|
|
|
|
|
|
|
|
44.1
|
|
|
|
62.0
|
|
|
|
62.1
|
|
|
|
858
|
|
Other Alt-A mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and prior
|
|
|
|
|
|
|
7,671
|
|
|
|
|
|
|
|
8.7
|
|
|
|
49.8
|
|
|
|
12.2
|
|
|
|
18
|
|
2005
|
|
|
|
|
|
|
4,659
|
|
|
|
165
|
|
|
|
22.6
|
|
|
|
49.4
|
|
|
|
10.3
|
|
|
|
|
|
2006
|
|
|
74
|
|
|
|
4,986
|
|
|
|
|
|
|
|
31.7
|
|
|
|
54.9
|
|
|
|
6.9
|
|
|
|
|
|
2007
|
|
|
871
|
|
|
|
|
|
|
|
241
|
|
|
|
47.7
|
|
|
|
61.9
|
|
|
|
34.7
|
|
|
|
360
|
|
2008(8)
|
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A mortgage loans:
|
|
|
3,303
|
|
|
|
21,202
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and
prior(9)
|
|
|
|
|
|
|
2,595
|
|
|
|
640
|
|
|
|
24.2
|
|
|
|
66.6
|
|
|
|
57.5
|
|
|
|
623
|
|
2005(8)
|
|
|
|
|
|
|
269
|
|
|
|
1,842
|
|
|
|
46.0
|
|
|
|
73.1
|
|
|
|
58.4
|
|
|
|
235
|
|
2006
|
|
|
|
|
|
|
13,939
|
|
|
|
|
|
|
|
54.0
|
|
|
|
70.9
|
|
|
|
23.8
|
|
|
|
52
|
|
2007
|
|
|
3,007
|
|
|
|
717
|
|
|
|
6,422
|
|
|
|
51.8
|
|
|
|
69.7
|
|
|
|
26.4
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subprime mortgage loans:
|
|
|
3,007
|
|
|
|
17,520
|
|
|
|
8,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A and subprime mortgage loans:
|
|
$
|
6,310
|
|
|
$
|
38,722
|
|
|
$
|
9,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
|
(1) |
|
Represents our exposure to
private-label Alt-A and subprime mortgage-related securities
that have been resecuritized (or wrapped) to include our
guaranty. 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.
|
|
(2) |
|
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 December 2009
remittances for November 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.
|
|
(3) |
|
The average delinquency and
severity metrics are calculated at loan level for each loan pool
associated with securities where Fannie Mae has exposure and are
weighted based on the unpaid principal balance of those
securities.
|
|
(4) |
|
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 December 2009 remittances for November
2009 payments. For consistency purposes, we have adjusted the
severity data, where appropriate.
|
|
(5) |
|
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.
|
|
(6) |
|
Reflects amount of unpaid principal
balance supported by financial guarantees from monoline
financial guarantors.
|
|
(7) |
|
Vintages are based on series date
and not loan origination date.
|
|
(8) |
|
The unpaid principal balance
includes private-label REMIC securities that have been
resecuritized totaling $145 million for the 2008 vintage of
other Alt-A loans and $43 million for the 2005 vintage of
subprime loans. These securities are excluded from the
delinquency, severity and credit enhancement statistics reported
in this table.
|
|
(9) |
|
Includes a wrap transaction that
was consolidated on our balance sheet 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.
|
Debt
Instruments
We issue debt instruments as the primary means to fund our
mortgage investments and manage 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
$774.6 billion as of December 31, 2009, from
$870.5 billion as of December 31, 2008. We provide a
summary of our debt activity for 2009, 2008 and 2007 and a
comparison of the mix between our outstanding short-term and
long-term debt as of December 31, 2009 and 2008 in
Liquidity and Capital ManagementLiquidity
ManagementDebt FundingDebt Funding Activity.
Also see Note 9, 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 December 31,
2009 and 2008 in Note 10, 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. Table 27
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 2009.
118
|
|
Table
27:
|
Changes
in Risk Management Derivative Assets (Liabilities) at Fair
Value,
Net(1)
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Net derivative liability as of December 31,
2008(2)
|
|
$
|
(1,761
|
)
|
|
|
|
|
Effect of cash payments:
|
|
|
|
|
|
|
|
|
Fair value at inception of contracts entered into during the
period(3)
|
|
|
1,955
|
|
|
|
|
|
Fair value at date of termination of contracts settled during
the
period(4)
|
|
|
7,407
|
|
|
|
|
|
Net collateral posted
|
|
|
(6,886
|
)
|
|
|
|
|
Periodic net cash contractual interest
payments(5)
|
|
|
3,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash payments
|
|
|
6,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations impact of recognized amounts:
|
|
|
|
|
|
|
|
|
Net contractual interest expense accruals on interest rate swaps
|
|
|
(3,359
|
)
|
|
|
|
|
Net change in fair value during the period
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives fair value losses,
net(6)
|
|
|
(4,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative liability as of December 31,
2009(2)
|
|
$
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes mortgage commitments.
|
|
(2) |
|
Reflects the net amount of
Derivative liabilities at fair value recorded in our
consolidated balance sheets, excluding mortgage commitments.
|
|
(3) |
|
Cash payments made to purchase
derivative option contracts (purchased options premiums)
increase the derivative asset recorded in the consolidated
balance sheets. Primarily includes upfront premiums paid on
option contracts. Also includes upfront cash paid on other
derivative contracts.
|
|
(4) |
|
Cash payments made to terminate
and/or sell derivative contracts reduce the derivative liability
recorded in the consolidated balance sheets. Primarily
represents cash paid (received) upon termination of derivative
contracts.
|
|
(5) |
|
Interest is accrued on interest
rate swap contracts based on the contractual terms. Accrued
interest income increases our derivative asset and accrued
interest expense increases our derivative liability. The
offsetting interest income and expense are included as
components of derivatives fair value gains (losses), net in the
consolidated statements of operations. Net periodic interest
receipts reduce the derivative asset and net periodic interest
payments reduce the derivative liability.
|
|
(6) |
|
Reflects net derivatives fair value
losses, excluding mortgage commitments, recognized in the
consolidated statements of operations.
|
For additional information on our derivative instruments, see
Consolidated Results of OperationsFair Value Gains
(Losses), Net, Risk ManagementMarket Risk
Management, Including Interest Rate Risk Management and
Note 10, Derivative Instruments and Hedging
Activities.
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 29, Supplemental
Non-GAAP Consolidated Fair Value Balance Sheets,
which we provide at the end of this section, presents our
non-GAAP fair value balance sheets as of December 31, 2009
and 2008, and the non-GAAP estimated fair value of our net
assets.
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 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 estimated fair value of our net assets,
which is derived from our non-GAAP fair value balance sheets, is
calculated based on the
119
difference between the fair value of our assets and the fair
value of our liabilities adjusted for non-controlling interests.
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 28 below summarizes changes in our stockholders
deficit reported in our GAAP consolidated balance sheets and in
the fair value of our net assets on our non-GAAP fair value
balance sheets as of December 31, 2009.
|
|
Table
28:
|
Comparative
MeasuresGAAP Change in Stockholders Deficit and
Non-GAAP Change in Fair Value of Net Assets (Net of Tax
Effect)
|
|
|
|
|
|
|
|
2009
|
|
|
|
(Dollars in millions)
|
|
|
GAAP consolidated balance sheets:
|
|
|
|
|
Fannie Mae stockholders deficit as of January
1(1)
|
|
$
|
(15,314
|
)
|
Cumulative effect from the adoption of the FASB guidance on
other-than-temporary
impairments, net of tax
|
|
|
2,964
|
|
Net loss attributable to Fannie Mae
|
|
|
(71,969
|
)
|
Changes in net unrealized losses on
available-for-sale
securities, net of tax
|
|
|
4,936
|
|
Reclassification adjustment for
other-than-temporary
impairments recognized in net loss, net of tax
|
|
|
6,420
|
|
Capital
transactions:(2)
|
|
|
|
|
Funds received from Treasury under the senior preferred stock
purchase agreement
|
|
|
59,900
|
|
Senior preferred stock dividends
|
|
|
(2,470
|
)
|
Other capital transactions
|
|
|
20
|
|
|
|
|
|
|
Capital transactions, net
|
|
|
57,450
|
|
Other
|
|
|
141
|
|
|
|
|
|
|
Fannie Mae stockholders deficit as of December
31(1)
|
|
$
|
(15,372
|
)
|
|
|
|
|
|
Non-GAAP fair value balance sheets:
|
|
|
|
|
Estimated fair value of net assets as of January
1(3)
|
|
$
|
(105,150
|
)
|
Capital transactions, net
|
|
|
57,450
|
|
Change in estimated fair value of net assets, excluding effect
of capital transactions
|
|
|
(51,092
|
)
|
|
|
|
|
|
Increase in estimated fair value of net assets, net
|
|
|
6,358
|
|
|
|
|
|
|
Estimated fair value of net assets as of December
31(3)
|
|
$
|
(98,792
|
)
|
|
|
|
|
|
|
|
|
(1) |
|
Our net worth, as defined under the
Treasury senior preferred stock purchase agreement, is
equivalent to the Total deficit amount reported in
our consolidated balance sheets. Our net worth, or total
deficit, is comprised of Fannie Maes
stockholders equity (deficit) and
Noncontrolling interests reported in our
consolidated balance sheets.
|
|
(2) |
|
Represents capital transactions,
which are reflected in the consolidated statements of changes in
equity.
|
|
(3) |
|
Represents estimated fair value of
net assets (net of tax effect) presented in Table 29:
Supplemental Non-GAAP Consolidated Fair Value Balance
Sheets.
|
The fair value of our net assets, including capital
transactions, increased by $6.4 billion during 2009, which
resulted in a fair value net asset deficit of $98.8 billion
as of December 31, 2009. Included in this increase was
$59.9 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
$51.1 billion during 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 weak economy, 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 spread
between mortgage assets and associated debt and derivatives.
120
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, excluding capital transactions,
during 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 Measurement, 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 fair value and disclose
the carrying value and fair value of our financial assets and
liabilities in Note 19, Fair Value.
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
(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. To the extent we intend to hold 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 December 31, 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:
|
|
|
|
|
Credit Losses under GAAP: In our GAAP
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 consolidated financial statements
if and when the anticipated loss triggering event occurs. For
additional information, see Critical Accounting Policies
and EstimatesAllowance for Loan Losses and Reserve for
Guaranty Losses, Note 1, Summary of Significant
Accounting Policies and Consolidated Results of
OperationsCredit-Related Expenses.
|
|
|
|
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 Critical
Accounting Policies and EstimatesFair Value
MeasurementFair Value of Guaranty Obligations.
|
These differences in measurement methods result in significant
differences between our GAAP balance sheets and our non-GAAP
fair value balance sheets.
121
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 fair value changes 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 2009. The following
attribution of the primary factors driving the decrease of
$51.1 billion in the fair value of our net assets,
excluding capital transactions, during 2009 reflects our current
estimate of the items presented (on a pre-tax basis).
|
|
|
|
|
A pre-tax decrease of approximately $60 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.
|
|
|
|
In connection with our MBS guarantees, we acquired loans from
MBS trusts at par plus accrued interest, which substantially
exceeded fair value. These purchases reduced the fair value of
our net assets by approximately $20 billion. As these loans
are acquired and reflected at fair value on the Fair Value
Balance Sheet, any guaranty obligations previously associated
with these loans are reversed. Hence, as loans are acquired from
Trust, the fair value of our guaranty obligations declines.
|
|
|
|
A pre-tax increase of approximately $18 billion in the fair
value of the net portfolio attributable to the positive impact
of changes in the spread between mortgage assets and associated
debt and derivatives. We provide additional information on the
composition and estimated fair value of our mortgage investments
in Consolidated Balance Sheet AnalysisMortgage
Investments.
|
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.
122
Supplemental
Non-GAAP Fair Value Balance Sheet Report
We present our non-GAAP fair value balance sheet report in Table
29 below.
Table
29: Supplemental Non-GAAP Consolidated Fair
Value Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
|
|
$
|
9,882
|
|
|
$
|
|
|
|
$
|
9,882
|
(2)
|
|
$
|
18,462
|
|
|
$
|
|
|
|
$
|
18,462
|
(2)
|
Federal funds sold and securities purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under agreements to resell
|
|
|
53,684
|
|
|
|
(28
|
)
|
|
|
53,656
|
(2)
|
|
|
57,418
|
|
|
|
2
|
|
|
|
57,420
|
(2)
|
Trading securities
|
|
|
111,939
|
|
|
|
|
|
|
|
111,939
|
(2)
|
|
|
90,806
|
|
|
|
|
|
|
|
90,806
|
(2)
|
Available-for-sale
securities
|
|
|
237,728
|
|
|
|
|
|
|
|
237,728
|
(2)
|
|
|
266,488
|
|
|
|
|
|
|
|
266,488
|
(2)
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
18,462
|
|
|
|
655
|
|
|
|
19,117
|
(3)
|
|
|
13,270
|
|
|
|
351
|
|
|
|
13,621
|
(3)
|
Mortgage loans held for investment, net of allowance for loan
losses
|
|
|
375,563
|
|
|
|
20,166
|
|
|
|
395,729
|
(3)
|
|
|
412,142
|
|
|
|
3,069
|
|
|
|
415,211
|
(3)
|
Guaranty assets of mortgage loans held in portfolio
|
|
|
|
|
|
|
2,936
|
|
|
|
2,936
|
(3)(4)
|
|
|
|
|
|
|
2,255
|
|
|
|
2,255
|
(3)(4)
|
Guaranty obligations of mortgage loans held in portfolio
|
|
|
|
|
|
|
(28,322
|
)
|
|
|
(28,322
|
)(3)(4)
|
|
|
|
|
|
|
(11,396
|
)
|
|
|
(11,396
|
)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
394,025
|
|
|
|
(4,565
|
)
|
|
|
389,460
|
(2)(3)
|
|
|
425,412
|
|
|
|
(5,721
|
)
|
|
|
419,691
|
(2)(3)
|
Advances to lenders
|
|
|
5,449
|
|
|
|
(305
|
)
|
|
|
5,144
|
(2)
|
|
|
5,766
|
|
|
|
(354
|
)
|
|
|
5,412
|
(2)
|
Derivative assets at fair value
|
|
|
1,474
|
|
|
|
|
|
|
|
1,474
|
(2)
|
|
|
869
|
|
|
|
|
|
|
|
869
|
(2)
|
Guaranty assets and
buy-ups, net
|
|
|
9,520
|
|
|
|
5,104
|
|
|
|
14,624
|
(2)(4)
|
|
|
7,688
|
|
|
|
1,336
|
|
|
|
9,024
|
(2)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
|
823,701
|
|
|
|
206
|
|
|
|
823,907
|
(2)
|
|
|
872,909
|
|
|
|
(4,737
|
)
|
|
|
868,172
|
(2)
|
Master servicing assets and credit enhancements
|
|
|
651
|
|
|
|
5,917
|
|
|
|
6,568
|
(4)(5)
|
|
|
1,232
|
|
|
|
7,035
|
|
|
|
8,267
|
(4)(5)
|
Other assets
|
|
|
44,789
|
|
|
|
(163
|
)
|
|
|
44,626
|
(5)(6)
|
|
|
38,263
|
|
|
|
(2
|
)
|
|
|
38,261
|
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
869,141
|
|
|
$
|
5,960
|
|
|
$
|
875,101
|
|
|
$
|
912,404
|
|
|
$
|
2,296
|
|
|
$
|
914,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
(2)
|
|
$
|
77
|
|
|
$
|
|
|
|
$
|
77
|
(2)
|
Short-term debt
|
|
|
200,437
|
(7)
|
|
|
56
|
|
|
|
200,493
|
(2)
|
|
|
330,991
|
(7)
|
|
|
1,299
|
|
|
|
332,290
|
(2)
|
Long-term debt
|
|
|
574,117
|
(7)
|
|
|
19,616
|
|
|
|
593,733
|
(2)
|
|
|
539,402
|
(7)
|
|
|
34,879
|
|
|
|
574,281
|
(2)
|
Derivative liabilities at fair value
|
|
|
1,029
|
|
|
|
|
|
|
|
1,029
|
(2)
|
|
|
2,715
|
|
|
|
|
|
|
|
2,715
|
(2)
|
Guaranty obligations
|
|
|
13,996
|
|
|
|
124,586
|
|
|
|
138,582
|
(2)
|
|
|
12,147
|
|
|
|
78,728
|
|
|
|
90,875
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
|
789,579
|
|
|
|
144,258
|
|
|
|
933,837
|
(2)
|
|
|
885,332
|
|
|
|
114,906
|
|
|
|
1,000,238
|
(2)
|
Other liabilities
|
|
|
94,843
|
|
|
|
(54,878
|
)
|
|
|
39,965
|
(8)
|
|
|
42,229
|
|
|
|
(22,774
|
)
|
|
|
19,455
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
884,422
|
|
|
|
89,380
|
|
|
|
973,802
|
|
|
|
927,561
|
|
|
|
92,132
|
|
|
|
1,019,693
|
|
Equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
preferred(9)
|
|
|
60,900
|
|
|
|
|
|
|
|
60,900
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
Preferred
|
|
|
20,348
|
|
|
|
(19,629
|
)
|
|
|
719
|
|
|
|
21,222
|
|
|
|
(20,674
|
)
|
|
|
548
|
|
Common
|
|
|
(96,620
|
)
|
|
|
(63,791
|
)
|
|
|
(160,411
|
)
|
|
|
(37,536
|
)
|
|
|
(69,162
|
)
|
|
|
(106,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fannie Mae stockholders deficit/non-GAAP fair
value of net assets
|
|
$
|
(15,372
|
)
|
|
$
|
(83,420
|
)
|
|
$
|
(98,792
|
)
|
|
$
|
(15,314
|
)
|
|
$
|
(89,836
|
)
|
|
$
|
(105,150
|
)
|
Noncontrolling interests
|
|
|
91
|
|
|
|
|
|
|
|
91
|
|
|
|
157
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deficit
|
|
|
(15,281
|
)
|
|
|
(83,420
|
)
|
|
|
(98,701
|
)
|
|
|
(15,157
|
)
|
|
|
(89,836
|
)
|
|
|
(104,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
869,141
|
|
|
$
|
5,960
|
|
|
$
|
875,101
|
|
|
$
|
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.
|
123
|
|
|
(2) |
|
We determined the estimated fair
value of these financial instruments in accordance with the FASB
fair value guidance as described in Note 19, Fair
Value.
|
|
(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 the
total mortgage loans reported in our GAAP 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
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 Note 19, Fair Value of the
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 19.
|
|
(4) |
|
In our GAAP 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 $8.4 billion and
$7.0 billion as of December 31, 2009 and 2008,
respectively. The associated
buy-ups
totaled $1.2 billion and $645 million as of
December 31, 2009 and 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 obligation-related components totaled $4.2 billion
and the guaranty asset-related components totaled
$8.2 billion as of December 31, 2009 and 2008,
respectively. These components represent the sum of the
following line items in this table: (a) Guaranty assets of
mortgage loans held in portfolio; (b) Guaranty obligations
of mortgage loans held in portfolio, (c) Guaranty assets
and buy-ups;
and (d) Master servicing assets and credit enhancements.
See Critical Accounting Policies and EstimatesFair
Value MeasurementFair Value of Guaranty Obligations.
|
|
(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 consolidated balance
sheets: (a) Accrued interest receivable; (b) Acquired
property, net; (c) Deferred tax assets, net;
(d) Partnership investments; (e) Servicer and MBS
trust receivable and (f) Other assets. The carrying value
of these items in our GAAP consolidated balance sheets together
totaled $46.6 billion and $40.1 billion as of
December 31, 2009 and 2008, respectively. We deduct the
carrying value of the
buy-ups
associated with our guaranty obligation, which totaled
$1.2 billion and $645 million as of December 31,
2009 and 2008, respectively, from Other assets
reported in our GAAP consolidated balance sheets because
buy-ups are
a financial instrument that we combine with guaranty assets in
our disclosure in Note 19, Fair Value. We have
estimated the fair value of master servicing assets and credit
enhancements based on our fair value methodologies described in
Note 19.
|
|
(6) |
|
The GAAP carrying values of other
assets generally approximates fair value, except for our LIHTC
partnership investments as of December 31, 2008. Our LIHTC
partnership investments, including restricted cash from
consolidations, had a carrying value of $6.3 billion and an
estimated fair value of $6.5 billion as of
December 31, 2008. As discussed in Consolidated
Results of OperationsLosses from Partnership
Investments, we recognized
other-than-temporary
impairment losses to reduce the carrying value of our LIHTC
partnership investments to zero. Our LIHTC partnership
investments carrying value of zero is included in the estimated
fair value in the Fair Value Balance Sheet as of
December 31, 2009.
|
|
(7) |
|
Includes debt instruments that we
elected to report at fair value in our GAAP consolidated balance
sheets. We did not elect to report any short-term debt
instruments at fair value as of December 31, 2009. Includes
long-term debt with a reported fair value of $3.3 billion
as of December 31, 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 consolidated balance
sheets: (a) Accrued interest payable; (b) Reserve for
guaranty losses; (c) Partnership liabilities;
|
124
|
|
|
|
|
(d) Servicer and MBS trust
payable; and (e) Other liabilities. The carrying value of
these items in our GAAP consolidated balance sheets together
totaled $94.8 billion and $42.2 billion as of
December 31, 2009 and 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 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 amount included in
estimated fair value of the senior preferred stock
is the liquidation preference, which is the same as the GAAP
carrying value, and does not reflect fair value.
|
LIQUIDITY
AND CAPITAL MANAGEMENT
Our business activities require that we maintain adequate
liquidity to fund our operations. We have implemented a
liquidity policy which is designed to mitigate our liquidity
risk. During 2009, we experienced strong demand for our debt
securities, and we believe our ready access to long-term debt
funding has been primarily due to actions taken by the federal
government to support us and the financial markets.
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 markets. Our senior
unsecured debt obligations are rated AAA, or its equivalent, 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;
|
|
|
|
funds 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;
|
|
|
|
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.
|
Our primary funding needs include:
|
|
|
|
|
the repayment of matured, redeemed and repurchased debt;
|
|
|
|
the purchase of mortgage loans (including delinquent loans from
MBS trusts), mortgage-related securities and other investments;
|
|
|
|
interest payments on outstanding debt;
|
125
|
|
|
|
|
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 increased proportion of our cash funding during 2009,
compared with 2008, came from (1) principal repayments on
liquidations and sales of mortgage assets due to an increase in
refinancing activity and (2) payments we received from
Treasury under the senior preferred stock purchase agreement. In
addition, in 2008 we began paying cash dividends to Treasury
under the senior preferred stock purchase agreement, and have
paid a total of $2.5 billion in dividends as of
December 31, 2009. As we draw more funds pursuant to the
senior preferred stock purchase agreement, we expect our cash
dividend payments to Treasury will continue to increase in
future periods if we continue to pay the dividend on a quarterly
basis, rather than allowing the dividend to accrue at an
increased rate of 12% and be added to the liquidation preference
of the senior preferred stock.
On February 10, 2010, we announced that we intend to
significantly increase our purchases of delinquent loans from
single-family MBS trusts. Under our single-family MBS trust
documents, we have the option to purchase from our MBS trusts
loans that are delinquent as to four or more consecutive monthly
payments. We will begin purchasing these loans in March 2010. As
a result, we expect our funding needs to increase in 2010
because we expect to purchase a significant portion of the
current delinquent population within a few months period subject
to market, servicer capacity, and other constraints including
the limit on the mortgage assets that we may own pursuant to the
senior preferred stock purchase agreement. As of
December 31, 2009, the total unpaid principal balance of
all loans in single-family MBS trusts that were delinquent four
or more months was approximately $127 billion.
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. Because debt issuance is our
primary funding source, 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.
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. Since 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.
126
Debt
Funding Activity
Table 30 below summarizes our debt activity for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Issued during the
period:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
1,381,640
|
|
|
$
|
1,624,868
|
|
|
$
|
1,543,387
|
|
Weighted-average interest rate
|
|
|
0.30
|
%
|
|
|
2.11
|
%
|
|
|
4.87
|
%
|
Long-term:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
295,147
|
|
|
$
|
248,168
|
|
|
$
|
193,910
|
|
Weighted-average interest rate
|
|
|
2.52
|
%
|
|
|
3.76
|
%
|
|
|
5.45
|
%
|
Total issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
1,676,787
|
|
|
$
|
1,873,036
|
|
|
$
|
1,737,297
|
|
Weighted-average interest rate
|
|
|
0.70
|
%
|
|
|
2.33
|
%
|
|
|
4.93
|
%
|
Paid off during the
period:(1)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
1,513,683
|
|
|
$
|
1,529,368
|
|
|
$
|
1,473,283
|
|
Weighted-average interest rate
|
|
|
0.53
|
%
|
|
|
2.54
|
%
|
|
|
4.96
|
%
|
Long-term:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
260,578
|
|
|
$
|
266,764
|
|
|
$
|
233,393
|
|
Weighted-average interest rate
|
|
|
4.09
|
%
|
|
|
4.89
|
%
|
|
|
4.79
|
%
|
Total paid off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(3)
|
|
$
|
1,774,261
|
|
|
$
|
1,796,132
|
|
|
$
|
1,706,676
|
|
Weighted-average interest rate
|
|
|
1.05
|
%
|
|
|
2.89
|
%
|
|
|
4.94
|
%
|
|
|
|
(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. Includes debt issued and repaid to
Fannie Mae MBS trusts of $766.8 billion,
$482.5 billion and $420.5 billion for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
|
(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 of the result of calls and payments for
any other repurchases.
|
The strong demand for our debt securities in 2009 allowed us to
issue a variety of non-callable and callable debt in a wide
range of maturities, which helped to improve our liquidity
profile. Our issuances of debt securities in 2009 saw demand
from a broad 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 significantly
lower during 2009 than it had been during 2007 and the first
half of 2008.
Our ability to issue long-term debt improved significantly in
2009, compared with the period from July through November 2008,
when our access to the debt markets was severely limited. We
believe that this improvement is primarily due to actions taken
by the federal government to support us and the financial
markets, including:
|
|
|
|
|
Treasurys funding commitment to us under the senior
preferred stock purchase agreement;
|
|
|
|
making the Treasury credit facility available to us through
December 31, 2009;
|
127
|
|
|
|
|
the Federal Reserves active program to purchase
approximately $175 billion of debt securities of Fannie
Mae, Freddie Mac and the Federal Home Loan Banks, as well as
$1.25 trillion in Fannie Mae, Freddie Mac and Ginnie Mae
mortgage-backed securities;
|
|
|
|
Treasurys agency MBS purchase program which ended
December 31, 2009; and
|
|
|
|
the Federal Reserve and Treasurys programs to support the
liquidity of the financial markets overall, including several
asset purchase programs and several asset financing programs.
|
The Treasury credit facility that we entered into in September
2008 terminated on December 31, 2009 in accordance with its
terms. Fannie Mae did not request any funds or borrow any
amounts under the Treasury credit facility. In September 2009,
the Federal Reserve announced that it will gradually decrease
its purchases under the agency debt and MBS purchase program
(which was originally scheduled to expire on December 31,
2009), in order to promote a smooth transition in the markets
and anticipates that these purchases will be completed by the
end of the first quarter of 2010. In November 2009, the Federal
Reserve announced that, under its agency debt purchase program,
it would purchase approximately $175 billion in agency debt
securities, somewhat less than the originally announced maximum
of up to $200 billion. Treasury announced that its agency
MBS purchase program would end on December 31, 2009.
Despite the expiration of the Treasury credit facility and MBS
purchase program and the scheduled expiration of the Federal
Reserve purchase programs, as of the date of this filing, demand
for our long-term debt securities continues to be strong.
The Obama Administration previously stated that it would provide
recommendations or ideas on the future of Fannie Mae, Freddie
Mac and the Federal Home Loan Bank system in early 2010. On
February 10, 2010, the Obama Administration stated in its
fiscal year 2011 budget that it was continuing to monitor the
situation of the GSEs and would continue to provide updates on
considerations for longer-term reform of Fannie Mae and Freddie
Mac as appropriate. These updates may have a material impact on
our ability to issue debt or refinance existing debt as it
becomes due.
We believe that continued federal government support of our
business and the financial markets, as well as our status as a
GSE, are essential to maintaining our access to debt funding.
Changes or perceived changes in the governments support
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 liquidity and roll-over
risk and have a material adverse impact on our liquidity,
financial condition and results of operations. See Risk
Factors 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 31 provides information, as of December 31, 2009 and
2008, on our outstanding short-term and long-term debt, based on
its original contractual terms. Our total outstanding debt,
which consists of federal funds purchased and securities sold
under agreements to repurchase and short-term and long-term
debt, decreased to $774.6 billion as of December 31,
2009, from $870.5 billion as of December 31, 2008.
As of December 31, 2009, our outstanding short-term debt,
based on its original contractual maturity, decreased as a
percentage of our total outstanding debt to 26% from 38% as of
December 31, 2008. For information on our outstanding debt
maturing within one year, including the current portion of our
long-term debt, as a percentage of our total debt, see
Maturity Profile of Outstanding Debt. In addition,
the weighted-average interest rate on our long-term debt
(excluding debt from consolidations), based on its original
contractual maturity, decreased to 3.71% as of December 31,
2009 from 4.66% as of December 31, 2008.
Pursuant to the terms of the senior preferred stock purchase
agreement, we are prohibited from issuing debt if it 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 under the senior preferred
stock purchase
128
agreement is $1,080 billion. Beginning on 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 December 31, 2009, our aggregate indebtedness totaled
$785.8 billion, which was $294.2 billion below our
debt limit. Our calculation of our indebtedness for purposes of
complying with our debt cap reflects par value. 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
31:
|
Outstanding
Short-Term Borrowings and Long-Term
Debt(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
$
|
77
|
|
|
|
0.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
|
|
|
|
$
|
199,987
|
|
|
|
0.27
|
%
|
|
|
|
|
|
$
|
322,932
|
|
|
|
1.75
|
%
|
Foreign exchange discount notes
|
|
|
|
|
|
|
300
|
|
|
|
1.50
|
|
|
|
|
|
|
|
141
|
|
|
|
2.50
|
|
Other short-term debt
|
|
|
|
|
|
|
100
|
|
|
|
0.53
|
|
|
|
|
|
|
|
333
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate short-term debt
|
|
|
|
|
|
|
200,387
|
|
|
|
0.27
|
|
|
|
|
|
|
|
323,406
|
|
|
|
1.75
|
|
Floating-rate short-term
debt(3)
|
|
|
|
|
|
|
50
|
|
|
|
0.02
|
|
|
|
|
|
|
|
7,585
|
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
|
|
|
$
|
200,437
|
|
|
|
0.27
|
%
|
|
|
|
|
|
$
|
330,991
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior fixed-rate long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark notes and bonds
|
|
|
2010 - 2030
|
|
|
$
|
279,945
|
|
|
|
4.10
|
%
|
|
|
2009-2030
|
|
|
$
|
251,063
|
|
|
|
4.92
|
%
|
Medium-term notes
|
|
|
2010 - 2019
|
|
|
|
171,207
|
|
|
|
2.97
|
|
|
|
2009-2018
|
|
|
|
151,277
|
|
|
|
4.20
|
|
Foreign exchange notes and bonds
|
|
|
2010 - 2028
|
|
|
|
1,239
|
|
|
|
5.64
|
|
|
|
2009-2028
|
|
|
|
1,513
|
|
|
|
4.70
|
|
Other long-term
debt(3)
|
|
|
2010 - 2039
|
|
|
|
62,783
|
|
|
|
5.80
|
|
|
|
2009-2038
|
|
|
|
73,061
|
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior fixed-rate debt
|
|
|
|
|
|
|
515,174
|
|
|
|
3.94
|
|
|
|
|
|
|
|
476,914
|
|
|
|
4.85
|
|
Senior floating-rate long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2010 - 2014
|
|
|
|
41,911
|
|
|
|
0.26
|
|
|
|
2009-2017
|
|
|
|
45,737
|
|
|
|
2.21
|
|
Other long-term
debt(3)
|
|
|
2020 - 2037
|
|
|
|
1,041
|
|
|
|
4.12
|
|
|
|
2020-2037
|
|
|
|
874
|
|
|
|
7.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior floating-rate debt
|
|
|
|
|
|
|
42,952
|
|
|
|
0.34
|
|
|
|
|
|
|
|
46,611
|
|
|
|
2.30
|
|
Subordinated fixed-rate long-term
debt:(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying
subordinated(6)
|
|
|
2011 - 2014
|
|
|
|
7,391
|
|
|
|
5.47
|
|
|
|
2011-2014
|
|
|
|
7,391
|
|
|
|
5.47
|
|
Subordinated debentures
|
|
|
2019
|
|
|
|
2,433
|
|
|
|
9.89
|
|
|
|
2019
|
|
|
|
2,225
|
|
|
|
9.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subordinated fixed-rate long-term debt
|
|
|
|
|
|
|
9,824
|
|
|
|
6.57
|
|
|
|
|
|
|
|
9,616
|
|
|
|
6.50
|
|
Debt from consolidations
|
|
|
2010 - 2039
|
|
|
|
6,167
|
|
|
|
5.63
|
|
|
|
2009-2039
|
|
|
|
6,261
|
|
|
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
$
|
574,117
|
|
|
|
3.73
|
%
|
|
|
|
|
|
$
|
539,402
|
|
|
|
4.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding callable
debt(7)
|
|
|
|
|
|
$
|
210,181
|
|
|
|
3.48
|
%
|
|
|
|
|
|
$
|
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 December 31, 2009
and 2008 include fair value gains and losses associated with
debt that we elected to carry at fair value. The unpaid
principal balance of outstanding debt, which excludes
unamortized discounts, premiums and other cost basis adjustments
and amounts related to debt from consolidations, totaled
$784.0 billion and $881.2 billion as December 31,
2009 and 2008, respectively.
|
129
|
|
|
(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. Reported amounts include a net discount and
other cost basis adjustments of $129 million and
$1.6 billion as of December 31, 2009, and 2008,
respectively.
|
|
(3) |
|
Includes a portion of structured
debt instruments that is reported at fair value.
|
|
(4) |
|
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 $107.3 billion and
$86.5 billion as of December 31, 2009 and 2008,
respectively. Reported amounts include a net discount and other
cost basis adjustments of $15.6 billion and
$15.5 billion as of December 31, 2009 and 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
consolidations, totaled $583.4 billion and
$548.6 billion as December 31, 2009 and 2008,
respectively.
|
|
(5) |
|
The presentation of subordinated
debt changed as of September 30, 2009. Prior period was
revised to conform to the current period presentation.
|
|
(6) |
|
Consists of subordinated debt with
an interest deferral feature.
|
|
(7) |
|
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.
|
Table 32 below presents additional information for each category
of our short-term borrowings.
|
|
Table
32:
|
Outstanding
Short-Term
Borrowings(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
As of December 31
|
|
|
Average During the Year
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
Maximum
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding(2)
|
|
|
Rate
|
|
|
Outstanding(3)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
|
|
|
|
|
%
|
|
$
|
42
|
|
|
|
1.55
|
%
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
$
|
199,987
|
|
|
|
0.27
|
%
|
|
$
|
253,884
|
|
|
|
0.92
|
%
|
|
$
|
325,239
|
|
Foreign exchange discount notes
|
|
|
300
|
|
|
|
1.50
|
|
|
|
222
|
|
|
|
1.41
|
|
|
|
300
|
|
Other fixed-rate short-term debt
|
|
|
100
|
|
|
|
0.53
|
|
|
|
199
|
|
|
|
1.30
|
|
|
|
334
|
|
Floating-rate short-term debt
|
|
|
50
|
|
|
|
0.02
|
|
|
|
2,744
|
|
|
|
1.20
|
|
|
|
3,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
200,437
|
|
|
|
0.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
As of December 31
|
|
|
Average During the Year
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
Maximum
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding(2)
|
|
|
Rate
|
|
|
Outstanding(3)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
77
|
|
|
|
0.01
|
%
|
|
$
|
294
|
|
|
|
1.93
|
%
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
$
|
322,932
|
|
|
|
1.75
|
%
|
|
$
|
257,845
|
|
|
|
2.51
|
%
|
|
$
|
326,374
|
|
Foreign exchange discount notes
|
|
|
141
|
|
|
|
2.50
|
|
|
|
276
|
|
|
|
3.73
|
|
|
|
363
|
|
Other fixed-rate short-term debt
|
|
|
333
|
|
|
|
2.80
|
|
|
|
714
|
|
|
|
2.83
|
|
|
|
1,886
|
|
Floating-rate short-term
debt(4)
|
|
|
7,585
|
|
|
|
1.66
|
|
|
|
4,858
|
|
|
|
2.26
|
|
|
|
7,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
330,991
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
As of December 31
|
|
|
Average During the Year
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
Maximum
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding(2)
|
|
|
Rate
|
|
|
Outstanding(3)
|
|
|
|
(Dollars in millions)
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
869
|
|
|
|
3.48
|
%
|
|
$
|
932
|
|
|
|
5.09
|
%
|
|
$
|
3,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
$
|
233,258
|
|
|
|
4.45
|
%
|
|
$
|
162,952
|
|
|
|
5.01
|
%
|
|
$
|
233,258
|
|
Foreign exchange discount notes
|
|
|
301
|
|
|
|
4.28
|
|
|
|
341
|
|
|
|
2.88
|
|
|
|
654
|
|
Other fixed-rate short-term debt
|
|
|
601
|
|
|
|
4.37
|
|
|
|
2,690
|
|
|
|
5.17
|
|
|
|
4,959
|
|
Debt from
consolidations(4)
|
|
|
|
|
|
|
|
|
|
|
826
|
|
|
|
5.34
|
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
234,160
|
|
|
|
4.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes unamortized discounts,
premiums and other cost basis adjustments.
|
|
(2) |
|
Average amount outstanding during
the year has been calculated using month-end balances.
|
|
(3) |
|
Maximum outstanding represents the
highest month-end outstanding balance during the year.
|
|
(4) |
|
Includes a portion of structured
debt instruments that is reported at fair value.
|
Maturity
Profile of Outstanding Debt
Table 33 presents the maturity profile, as of December 31,
2009, of our outstanding debt maturing within one year, by
month, including amounts that we have announced we are calling
for redemption. Our outstanding debt maturing within one year,
including the current portion of our long-term debt, decreased
as a percentage of our total outstanding debt, excluding debt
from consolidations, to 41% as of December 31, 2009,
compared with 49% as of December 31, 2008. The
weighted-average maturity of our outstanding debt that is
maturing within one year was 103 days as of
December 31, 2009, compared with 81 days as of
December 31, 2008.
|
|
Table
33:
|
Maturity
Profile of Outstanding Debt Maturing Within One
Year(1)
|
|
|
|
(1) |
|
Includes unamortized discounts,
premiums and other cost basis adjustments of $181 million
as of December 31, 2009. Excludes debt from consolidations
of $771 million as of December 31, 2009.
|
Table 34 presents the maturity profile, as of December 31,
2009, of the portion of our long-term debt that matures in more
than one year, on a quarterly basis for one year and on an
annual basis thereafter, excluding amounts we have announced
that we are calling for redemption within one year. The
weighted-average maturity of our outstanding debt maturing in
more than one year was approximately 72 months as of
December 31, 2009, compared with approximately
79 months as of December 31, 2008.
131
|
|
Table
34:
|
Maturity
Profile of Outstanding Debt Maturing in More Than One
Year(1)
|
|
|
|
(1) |
|
Includes unamortized discounts,
premiums and other cost basis adjustments of $15.5 billion
as of December 31, 2009. Excludes debt from consolidations
of $5.4 billion as of December 31, 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 pay our debt obligations and to pay dividends on
the senior preferred stock.
Contractual
Obligations
Table 35 summarizes, by remaining maturity, our future cash
obligations related to our long-term debt, announced calls,
operating leases, purchase obligations and other material
noncancelable contractual obligations as of December 31,
2009.
|
|
Table
35:
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period as of December 31, 2009
|
|
|
|
|
|
|
Less than
|
|
|
1 to < 3
|
|
|
3 to 5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(Dollars in millions)
|
|
|
Long-term debt
obligations(1)
|
|
$
|
567,950
|
|
|
$
|
115,094
|
|
|
$
|
196,174
|
|
|
$
|
116,273
|
|
|
$
|
140,409
|
|
Contractual interest on long-term debt
obligations(2)
|
|
|
127,292
|
|
|
|
18,816
|
|
|
|
28,615
|
|
|
|
20,307
|
|
|
|
59,554
|
|
Operating lease
obligations(3)
|
|
|
188
|
|
|
|
41
|
|
|
|
73
|
|
|
|
36
|
|
|
|
38
|
|
Purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
commitments(4)
|
|
|
31,902
|
|
|
|
31,870
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
Other purchase
obligations(5)
|
|
|
849
|
|
|
|
306
|
|
|
|
490
|
|
|
|
52
|
|
|
|
1
|
|
Other long-term liabilities reflected in the consolidated
balance
sheet(6)
|
|
|
1,970
|
|
|
|
1,617
|
|
|
|
314
|
|
|
|
23
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
730,151
|
|
|
$
|
167,744
|
|
|
$
|
225,698
|
|
|
$
|
136,691
|
|
|
$
|
200,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the carrying amount of
our long-term debt assuming payments are made in full at
maturity. Amounts exclude $6.2 billion in long-term debt
from consolidations. Amounts include an unamortized net discount
and other cost basis adjustments of $15.6 billion.
|
|
(2) |
|
Excludes contractual interest on
long-term debt from consolidations.
|
|
(3) |
|
Includes certain premises and
equipment leases.
|
|
(4) |
|
Includes on- and off-balance sheet
commitments to purchase mortgage loans and mortgage-related
securities.
|
132
|
|
|
(5) |
|
Includes only unconditional
purchase obligations that are subject to a cancellation penalty
for certain telecom services, software and computer services,
and other agreements. Excludes arrangements that may be
cancelled without penalty. Amounts also include off-balance
sheet commitments for the unutilized portion of lending
agreements entered into with multifamily borrowers.
|
|
(6) |
|
Excludes risk management derivative
transactions that may require cash settlement in future periods
and our obligations to stand ready to perform under our
guarantees relating to Fannie Mae MBS and other financial
guarantees, because the amount and timing of payments under
these arrangements are generally contingent upon the occurrence
of future events. For a description of the amount of our on- and
off-balance sheet Fannie Mae MBS and other financial guarantees
as of December 31, 2009, see Off-Balance Sheet
Arrangements and Variable Interest Entities. Includes
future cash payments due under our contractual obligations to
fund LIHTC and other partnerships that are unconditional
and legally binding and cash received as collateral from
derivative counterparties, which are included in our
consolidated balance sheets under Partnership
liabilities and Other liabilities,
respectively. Amounts also include our obligation to fund
partnerships that have been consolidated and tax liabilities for
unrecognized tax benefits.
|
Equity
Funding
As a result of the covenants under the senior preferred stock
purchase agreement and Treasurys ownership of the warrant
to purchase up to 79.9% of the total shares of our common stock
outstanding, 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
BusinessConservatorship and Treasury
AgreementsTreasury AgreementsCovenants Under
Treasury Agreements.
We have received a total of $59.9 billion from Treasury
pursuant to the senior preferred stock purchase agreement as of
December 31, 2009. These funds allowed us to eliminate our
net worth deficits as of the end of each of the four prior
quarters. In February 2010, the Acting Director of FHFA
submitted a request for $15.3 billion from Treasury under
the senior preferred stock purchase agreement to eliminate our
net worth deficit as of December 31, 2009, and requested
receipt of those funds on or prior to March 31, 2010. 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 $76.2 billion. Due to current trends in the housing
and financial markets, we continue to 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. Treasurys maximum
funding commitment to us prior to the December 2009 amendment of
the senior preferred stock purchase agreement was
$200 billion. The amendment to the agreement stipulates
that the cap on Treasurys funding commitment to us under
the senior preferred stock purchase agreement will increase as
necessary to accommodate any net worth deficits for calendar
quarters in 2010 through 2012. For any net worth deficits after
December 31, 2012, Treasurys remaining funding
commitment will be $124.8 billion ($200 billion less
$59.9 billion drawn to date and $15.3 billion
requested based on our net worth deficit as of December 31,
2009) less any positive net worth as of December 31,
2012.
Liquidity
Governance and Monitoring
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 Risk Factors 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 to
management and FHFA;
|
|
|
|
daily forecasting and statistical analysis of our daily cash
needs over a 28-business-day period;
|
133
|
|
|
|
|
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;
|
|
|
|
routine operational testing of our ability to rely upon
identified sources of liquidity, such as mortgage repurchase
agreements; and
|
|
|
|
periodic review and testing of our liquidity management controls
by our internal audit department.
|
On a daily basis, we measure the number of business days for
which we are able to meet all obligations (assuming no
incremental debt issuances and no asset sales). In addition, we
run daily
90-day
liquidity simulations in which we consider all sources of cash
inflows and all sources of cash outflows during the following
90 days to determine whether there are sufficient cash
flows to cover our obligations. Beginning in 2010, at the
request of FHFA, we will conduct twelve-month projections of our
cash needs to assess our ability to meet our cash obligations
over a one-year period. FHFA regularly reviews our compliance
with our liquidity policy.
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.
Liquidity
Contingency Planning
We conduct liquidity contingency planning to prepare for an
event in which 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 two years,
however, have had an adverse impact on our ability to
effectively plan for a liquidity crisis and that we may be
unable to find sufficient alternative sources of liquidity for a
90-day
period.
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:
|
|
|
|
|
our cash and other investments portfolio; and
|
|
|
|
our unencumbered mortgage portfolio.
|
While our liquidity contingency planning attempts to address
current market conditions, our status under conservatorship and
Treasury arrangements, and the more fundamental changes in the
longer-term credit market environment, we believe that effective
liquidity contingency plans may be difficult or impossible to
execute under current market conditions for a company of our
size in our circumstances.
Cash
and Other Investments Portfolio
A potential 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 36
below provides information on the composition of our cash and
other investments portfolio for the periods indicated.
134
|
|
Table
36:
|
Cash and
Other Investments Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Cash and cash equivalents
|
|
$
|
6,812
|
|
|
$
|
17,933
|
|
|
$
|
3,941
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
53,684
|
|
|
|
57,418
|
|
|
|
49,041
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
8,515
|
|
|
|
10,598
|
|
|
|
15,511
|
|
Corporate debt securities
|
|
|
364
|
|
|
|
6,037
|
|
|
|
13,515
|
|
Other
|
|
|
3
|
|
|
|
1,005
|
|
|
|
9,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,378
|
|
|
$
|
92,991
|
|
|
$
|
91,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have maintained a significant amount of liquidity during
2009, as required by FHFA. Our cash and other investments
portfolio decreased from 2008 levels due to the reduction in our
short-term debt balances, which reduced the amount of cash we
needed on hand as of December 31, 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, we
issued a significant amount of long-term debt and reduced the
proportion of our short-term debt as a percentage of our total
debt in 2009; and that trend has continued through the date of
this filing.
We no longer purchase corporate debt securities or asset-backed
securities with a maturity of greater than one year for
liquidity purposes, because we determined that we could not rely
on our ability to sell these securities when we needed
liquidity. We make sales from our remaining inventory of 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 2009, the amount of these
securities we held was reduced by $7.8 billion due to the
sale or maturity of the securities. Approximately
$8.9 billion of our cash and other investments portfolio as
of December 31, 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
$60.5 billion of our cash and other investments portfolio
as of December 31, 2009 consisted of cash and cash
equivalents and short-term (less than three months to maturity),
liquid investments such as federal funds, repurchase agreements,
short-term bank deposits and bank certificates of deposit. In
the fourth quarter of 2009, in an effort to enhance our
liquidity position, FHFA directed us to diversify our cash and
other investment portfolio to include U.S. Treasury Bills,
which we began purchasing in January 2010.
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 2009, we made enhancements to our systems to facilitate
the securitization of a significant portion of the single-family
whole loans in our mortgage portfolio into Fannie Mae MBS. In
2009, we securitized approximately $94.6 billion of whole
loans held for investment in our mortgage portfolio into Fannie
Mae MBS. These mortgage-related securities could be used as
collateral in repurchase agreements or other lending
arrangements. 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.
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-related securities we hold. Due to
the large size of our portfolio of mortgage-related securities
and current
135
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 could 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. As a result, 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),
qualifying subordinated debt and preferred stock are rated and
continuously monitored by Standard & Poors,
Moodys and Fitch. There have been no changes in our credit
ratings from December 31, 2008 to February 20, 2010.
Table 37 below presents the credit ratings issued by each of
these rating agencies as of February 20, 2010.
|
|
Table
37:
|
Fannie
Mae Credit Ratings
|
|
|
|
|
|
|
|
|
|
As of February 20, 2010
|
|
|
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
|
|
Stable
|
|
Stable
|
|
|
(for Long Term Senior Debt
and Subordinated Debt)
|
|
(for all ratings)
|
|
(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 Note 10, 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.
Cash
Flows
Year Ended December 31, 2009. Cash
and cash equivalents of $6.8 billion as of
December 31, 2009 decreased by $11.1 billion from
December 31, 2008. Net cash generated from investing
activities totaled $117.7 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
$85.9 billion, largely attributable to our purchases of
loans held for sale due to a significant increase in whole loan
conduit activity,
136
and net cash outflows used in financing activities of
$42.9 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.
Year Ended December 31, 2008. Cash
and cash equivalents of $17.9 billion as of
December 31, 2008 increased by $14.0 billion from
December 31, 2007. This increase was due in large part to
our efforts during the second half of 2008 to increase our cash
and cash equivalent balances in light of market conditions. Net
cash generated from operating activities totaled
$15.9 billion, resulting primarily from the proceeds from
maturities or sales of our short-term, liquid investments, which
are classified as trading securities. We also generated net cash
from financing activities of $70.6 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 $72.5 billion,
attributable to our purchases of
available-for-sale
securities, loans held for investment and advances to lenders.
Capital
Management
Regulatory
Capital
FHFA has 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 also reports them on its website. FHFA is not reporting
on our critical capital, risk-based capital or subordinated debt
levels during the conservatorship.
Pursuant to its authority under the GSE Act, FHFA has announced
that it will be revising our minimum capital and risk-based
capital requirements.
Table 38 displays our core capital and our statutory minimum
capital requirement as of December 31, 2009 and
December 31, 2008. The amounts for December 31, 2009
are our estimates as submitted to FHFA.
|
|
Table
38:
|
Regulatory
Capital Measures
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
|
(Dollars in millions)
|
|
|
Core
capital(2)
|
|
$
|
(74,540
|
)
|
|
$
|
(8,641
|
)
|
Statutory minimum capital
requirement(3)
|
|
|
33,057
|
|
|
|
33,552
|
|
|
|
|
|
|
|
|
|
|
Deficit of core capital over statutory minimum capital
requirement
|
|
$
|
(107,597
|
)
|
|
$
|
(42,193
|
)
|
|
|
|
|
|
|
|
|
|
Deficit of core capital percentage over statutory minimum
capital requirement
|
|
|
(325.5
|
)%
|
|
|
(125.8
|
)%
|
|
|
|
(1) |
|
Amounts as of December 31,
2009 and 2008 represent estimates that have been submitted to
FHFA. 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 excludes (a) accumulated other
comprehensive income (loss) and (b) senior preferred stock.
|
|
(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 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 in 2009. The senior
137
preferred stock is not included in core capital due to its
cumulative dividend provision. For additional information
regarding our regulatory capital requirements see
Note 17Regulatory Capital Requirements.
On January 12, 2010, FHFA (1) directed us, for loans
backing Fannie Mae MBS held by third parties, to continue
reporting our minimum capital requirements based on 0.45% of the
unpaid principal balance and critical capital based on 0.25% of
the unpaid principal balance, notwithstanding our adoption
effective January 1, 2010 of new accounting standards that
resulted in our recording on our consolidated balance sheet
substantially all of the loans backing these Fannie Mae MBS, and
(2) issued a regulatory interpretation stating that our
minimum capital requirements are not automatically affected by
the new accounting standards.
Capital
Activity
Following our entry into conservatorship, FHFA advised us to
manage to a positive net worth, which is represented as the
total deficit line item in 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 increased by $124 million during 2009, to a
total deficit of $15.3 billion as of December 31,
2009. See Table 28 for a summary of the changes in equity and
see Consolidated Results of Operations for a
discussion of the factors that affected our results of
operations during 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 one million shares of senior preferred stock with an
initial aggregate liquidation preference of $1 billion and
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, exercisable until September 7,
2028. As we discuss in more detail above under Equity
Funding, we have received a total of $59.9 billion
under the senior preferred stock purchase agreement that has
allowed us to eliminate our net worth deficit and thereby avoid
triggering mandatory receivership under the GSE Act.
The senior preferred stock purchase agreement contains covenants
that significantly restrict our business activities and prohibit
us from obtaining equity or subordinated debt funding without
the prior consent of Treasury, as we describe in more detail in
Risk Factors. We describe the terms of the agreement
and the covenants it contains in more detail in
BusinessConservatorship and Treasury
AgreementsTreasury Agreements.
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 on the senior preferred stock 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
138
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. For 2009, dividends declared by the
conservator and paid by us totaled $2.5 billion.
When Treasury provides the additional funds that FHFA requested
on our behalf, the aggregate liquidation preference of our
senior preferred stock will total $76.2 billion and the
annualized dividend on the senior preferred stock will be
$7.6 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 December 31, 2009. The terms of these securities
state that, if our core capital is below 125% of our critical
capital requirement (which it was as of December 31, 2009),
we will defer interest payments on these securities. FHFA has
directed us, however, to continue paying principal and interest
on our outstanding qualifying 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 specific issuance, maintenance, reporting and
disclosure requirements relating to our qualifying subordinated
debt. In November 2008, FHFA advised us that, during the
conservatorship and thereafter until we are directed otherwise,
it was suspending these requirements.
Under the senior preferred stock purchase agreement, we are
prohibited from issuing additional subordinated debt without the
written consent of Treasury.
OFF-BALANCE
SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES
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 our
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
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 our 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. In 2009 and prior, most MBS
trusts created as part of our guaranteed securitizations were
not consolidated by the company for financial reporting purposes
because the trusts were considered QSPEs under the accounting
rules governing the transfer and servicing of financial assets
and the extinguishment of liabilities. As of January 1,
2010, we adopted two new accounting standards that impact the
consolidation of our MBS trusts. See Elimination of QSPEs
and Changes in the Consolidation Model for Variable Interest
Entities.
While our credit guarantees relating to our MBS trusts represent
the substantial majority of our guaranty activity, our HCD
business provides credit enhancements primarily for taxable and
tax-exempt bonds issued by state and local governmental entities
to finance multifamily housing for low- and moderate-income
families. Under these credit enhancement arrangements, we
guarantee to the trust that we will supplement proceeds as
required to permit timely payment on the related bonds, which
improves the bond ratings and thereby results in lower-cost
financing for multifamily housing. We also provide liquidity
support for variable-rate demand housing bonds as part of these
credit enhancement arrangements. These transactions contribute
to our housing goals and help us meet other mission-related
objectives. Outstanding liquidity commitments to advance funds
for securities backed by multifamily housing revenue bonds
totaled $15.5 billion and $14.7 billion at
139
December 31, 2009 and December 31, 2008, respectively.
These commitments require us to advance funds to third parties
that enable them to repurchase tendered bonds or securities that
are unable to be remarketed. Any repurchased securities are
pledged to us to secure funding until the securities are
remarketed. We hold cash and cash equivalents in our cash and
other investments portfolio in excess of these commitments to
advance funds. Of the outstanding December 31, 2009,
commitments, $870 million are associated with the temporary
credit and liquidity facilities program that Fannie Mae is
participating in with the Treasury and Freddie Mac. See
Certain Relationships and Related Transactions, and
Director IndependenceTransactions with 5%
Shareholders for a description of the program. At
December 31, 2009 there were no liquidity guarantee
advances outstanding; whereas at December 31, 2008 there
were $8 million in liquidity advances outstanding.
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 39 presents the amounts of both our on- and off-balance
sheet Fannie Mae MBS and other guaranty obligations as of
December 31, 2009 and 2008.
|
|
Table
39:
|
On- and
Off-Balance Sheet MBS and Other Guaranty Arrangements
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae MBS and other guarantees
outstanding(2)
|
|
$
|
2,828,513
|
|
|
$
|
2,611,523
|
|
Less: Consolidated Fannie Mae MBS
|
|
|
(147,855
|
)
|
|
|
(65,306
|
)
|
Less: Fannie Mae MBS held in
portfolio(3)
|
|
|
(220,245
|
)
|
|
|
(228,949
|
)
|
|
|
|
|
|
|
|
|
|
Fannie Mae MBS held by third parties and other guarantees
|
|
$
|
2,460,413
|
|
|
$
|
2,317,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain prior period amounts have
been reclassified to conform to the current period presentation.
|
|
(2) |
|
Includes unpaid principal balance
of other guarantees of $27.6 billion as of
December 31, 2009 and $27.8 billion as of
December 31, 2008.
|
|
(3) |
|
Amounts represent unpaid principal
balance and are recorded in Investments in
Securities in our consolidated balance sheets.
|
Our maximum potential exposure to credit losses relating to our
outstanding and unconsolidated Fannie Mae MBS held by third
parties and other financial guarantees is primarily represented
by the unpaid principal balance of the mortgage loans underlying
outstanding and unconsolidated Fannie Mae MBS held by third
parties and other financial guarantees of $2.5 trillion as of
December 31, 2009 and $2.3 trillion as of December 31,
2008. Our maximum potential exposure to credit losses is
significantly higher than the guaranty obligations of
$14.0 billion as of December 31, 2009 and
$12.1 billion as of December 31, 2008, and reserve for
guaranty losses of $54.4 billion as of December 31,
2009 and $21.8 billion as of December 31, 2008
reflected in our consolidated balance sheets.
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
ManagementSingle Family Mortgage Credit Risk
Management. For additional information on our
securitization transactions, see Note 2,
Consolidations, Note 6, Portfolio
Securitizations and Note 7, Financial
Guarantees and Master Servicing.
Elimination
of QSPEs and Changes in the Consolidation Model for Variable
Interest Entities
Effective January 1, 2010, we prospectively adopted two new
accounting standards that eliminated the concept of QSPEs and
amended the accounting for transfers of financial assets and the
consolidation model for variable interest entities
(VIEs). Under these new accounting standards, the
consolidation exemption for QSPEs was removed. All formerly
designated QSPEs must be evaluated for consolidation in
accordance with
140
the new consolidation model, which changes the method of
analyzing which party to a VIE should consolidate the VIE.
The adoption of these new accounting standards will have a
significant impact on the presentation of our consolidated
financial statements beginning in 2010. Because the concept of a
QSPE is eliminated, our existing QSPEs, primarily our MBS
trusts, are subject to the new consolidation standards. Based on
our analysis, we are required to consolidate the substantial
majority of our MBS trusts and record the underlying assets
(typically mortgage loans) and debt (typically bonds issued by
the trusts in the form of Fannie Mae MBS certificates) of these
trusts as assets and liabilities in our consolidated balance
sheet. As indicated in Table 39 above, the substantial majority
of the underlying assets and debt of these trusts are not
recorded in our consolidated balance sheet as of
December 31, 2009. Consequently, the consolidation of these
MBS trusts onto our balance sheet will significantly increase
the amount of our assets and liabilities. We initially recorded
the assets and liabilities of the substantial majority of our
existing outstanding MBS trusts that we were required to
consolidate effective January 1, 2010 based on the unpaid
principal balance as of that date. The unpaid principal balance
amounts we consolidated related to MBS trusts increased both our
total assets and total liabilities by approximately $2.4
trillion effective January 1, 2010.
In addition, consolidation of these MBS trusts will result in
other changes to our consolidated financial statements. The most
significant changes are:
|
|
|
|
|
|
Financial Statement
|
|
Accounting and Presentation Changes
|
|
|
Balance Sheet
|
|
|
|
Significant increase in loans and debt and significant decrease
in trading and available-for-sale securities
|
|
|
|
|
Separate presentation of the elements of the consolidated MBS
trusts (such as mortgage loans, debt, accrued interest
receivable and payable) on the face of the balance sheet
|
|
|
|
|
Reclassification of substantially all of the previously recorded
reserve for guaranty losses to allowance for loan losses
|
|
|
|
|
Elimination of substantially all previously recorded guaranty
assets and guaranty obligations
|
|
|
Statement of Operations
|
|
|
|
Significant increase in interest income and interest expense
attributable to the consolidated assets and liabilities of the
consolidated MBS trusts
|
|
|
|
|
Decrease to provision for credit losses and a corresponding
decrease in net interest income due to recording interest
expense on consolidated MBS trusts when we are not accruing
interest on underlying nonperforming consolidated loans
|
|
|
|
|
Separate presentation of the elements of the MBS trusts
(interest income and interest expense) on the face of the
statement of operations
|
|
|
|
|
Reclassification of the substantial majority of guaranty fee
income and trust management income to interest income
|
|
|
|
|
Elimination of fair value losses on credit-impaired loans
acquired from the MBS trusts we have consolidated, as the
underlying loans in our MBS trusts will be recorded in our
consolidated balance sheet
|
|
|
Statement of Cash Flows
|
|
|
|
Significant change in the amounts of cash flows from investing
and financing activities
|
|
|
Although these new accounting standards do not change the
economic risk to our business, specifically our exposure to
liquidity, credit, and interest rate risks, the transition
adjustment recorded to accumulated deficit as of January 1,
2010 to reflect the cumulative effect of adopting these new
standards will affect our net worth.
141
We estimate the decrease to our total deficit to be between
$2 billion and $4 billion as a result of adoption
effective January 1, 2010. The primary components of the
cumulative transition adjustment recorded effective
January 1, 2010 include the following: (1) for all of
our outstanding MBS trusts that we consolidate, the reversal of
the related guaranty assets and guaranty obligations;
(2) for all of our outstanding MBS trusts that we
consolidate, the reversal of amounts previously recorded in the
reserve for guaranty losses for future interest payments on
seriously delinquent loans; (3) for all of our investments
in single-class Fannie Mae MBS classified as
available-for-sale,
the reversal of the related unrealized gains and losses recorded
in AOCI; and (4) for all of our investments in
single-class Fannie Mae MBS classified as trading, the
reversal of the related fair value gains and losses previously
recorded in earnings. The adoption of these new accounting
standards will not significantly impact our required level of
capital under existing minimum and critical capital
requirements, which have been suspended by our conservator. FHFA
directed us to continue reporting our minimum capital
requirements based on 0.45%, and critical capital requirements
based on 0.25%, of the unpaid principal balance of loans backing
MBS held by third parties, notwithstanding the new accounting
standards.
Because these new standards will have such a significant impact
on our accounting and financial statements, we made major
operational and system changes to implement the 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 Note 1, Summary of Significant
Accounting Policies.
Partnership
Investment Interests
The carrying value of our partnership investments, which
primarily include investments in affordable rental and for-sale
housing partnerships, totaled $2.4 billion as of
December 31, 2009, compared with $9.3 billion as of
December 31, 2008. For additional information regarding our
holdings in off-balance sheet limited partnerships, refer to
Note 2, Consolidations.
LIHTC
Partnership Interests
In most instances, we are not the primary beneficiary of our
LIHTC partnership investments, and therefore our consolidated
balance sheets reflect only our investment in the LIHTC
partnership, rather than the full amount of the LIHTC
partnerships assets and liabilities. For partnership
investments where we have determined that we are the primary
beneficiary, we have consolidated these investments and recorded
all of the LIHTC partnership assets and liabilities in our
consolidated balance sheets. The portion of these investments
owned by third parties is recorded in the consolidated balance
sheets as an offsetting minority interest.
In cases where we are not the primary beneficiary of these
investments, we account for our investments in LIHTC
partnerships by using the equity method of accounting or the
effective yield method of accounting, as appropriate. In each
case, we record in the consolidated financial statements our
share of the income and losses of the LIHTC partnerships, as
well as our share of the tax credits and tax benefits of the
partnerships. Our share of the operating losses generated by our
LIHTC partnerships is recorded in the consolidated statements of
operations under Losses from partnership
investments. Any tax credits or benefits associated with
the operating losses from our LIHTC partnerships are recognized
in Provision (benefit) for federal income taxes in
our consolidated statements of operations. LIHTC partnership
investments, excluding restricted cash from consolidations,
totaled $44 million, which represents the consolidated
assets attributable to non-controlling interest, as of
December 31, 2009, compared with $6.3 billion as of
December 31, 2008. As a result of our current tax position,
we currently are not making any new LIHTC investments, other
than pursuant to commitments existing prior to 2008, and are not
recognizing any tax benefits in our consolidated statements of
operations associated with the tax credits and net operating
losses.
Prior to September 30, 2009, we entered into a nonbinding
letter of intent to transfer equity interests in our LIHTC
investments to third party investors at a price above carrying
value. This transaction was subject to the Treasurys
approval under the terms of our senior preferred stock purchase
agreement. In November of 2009, Treasury notified FHFA and us
that it did not consent to the proposed transaction. Treasury
stated the proposed sale would result in a loss of aggregate tax
revenues that would be greater than the savings to the
142
federal government from a reduction in the capital contribution
obligation of Treasury to Fannie Mae under the senior preferred
stock purchase agreement. Treasury further stated that
withholding approval of the proposed sale afforded more
protection to the taxpayers than approval would have provided.
We have continued to explore options to sell or otherwise
transfer our LIHTC investments for value consistent with our
mission; however, to date, we have not been successful. On
February 18, 2010, FHFA informed us, by letter, of its
conclusion that any sale by us of our LIHTC assets would require
Treasurys consent under the senior preferred stock
purchase agreement, and that FHFA had presented other options
for Treasury to consider, including allowing us to pay senior
preferred stock dividends by waiving the right to claim future
tax benefits of the LIHTC investments. FHFAs letter
further informed us that, after further consultation with the
Treasury, we may not sell or transfer our LIHTC partnership
interests and that FHFA sees no disposition options. Therefore,
we no longer have both the intent and ability to sell or
otherwise transfer our LIHTC investments for value. As a result,
we recognized a loss of $5.0 billion during the fourth
quarter of 2009 to reduce the carrying value of our LIHTC
Partnership investments to zero in the consolidated
financial statements. We will no longer recognize net operating
losses or impairment on our LIHTC investments, which will
significantly reduce Losses from partnership
investments in the future.
Table 40 below provides information regarding our LIHTC
partnership investments as of and for the years ended
December 31, 2009 and 2008.
Table
40: LIHTC Partnership Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Consolidated
|
|
Unconsolidated
|
|
Consolidated
|
|
Unconsolidated
|
|
|
(Dollars in millions)
|
|
As of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation to fund LIHTC partnerships
|
|
$
|
282
|
|
|
$
|
259
|
|
|
$
|
612
|
|
|
$
|
545
|
|
For the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax credits from investments in LIHTC partnerships
|
|
$
|
435
|
|
|
$
|
506
|
|
|
$
|
423
|
|
|
$
|
546
|
|
Losses from investments in LIHTC partnerships
|
|
|
2,997
|
|
|
|
3,073
|
|
|
|
554
|
|
|
|
597
|
|
Tax benefits on credits and losses from investments in LIHTC
partnerships
|
|
|
1,484
|
|
|
|
1,581
|
|
|
|
616
|
|
|
|
755
|
|
Contributions to LIHTC partnerships
|
|
|
341
|
|
|
|
293
|
|
|
|
656
|
|
|
|
602
|
|
Distributions from LIHTC partnerships
|
|
|
10
|
|
|
|
3
|
|
|
|
13
|
|
|
|
15
|
|
For more information on our off-balance sheet transactions, see
Note 18, Concentrations of Credit Risk.
Treasury
Housing Finance Agency Initiative
During the fourth quarter of 2009, we entered into agreements
with Treasury, FHFA and Freddie Mac under which we provided
assistance to state and local HFAs through two primary programs,
which together comprise what we refer to as the HFA initiative.
See Certain Relationships and Related Transactions, and
Director IndependenceTransactions with Related
PersonsTransactions with TreasuryTreasury Housing
Finance Agency Initiative for a discussion of the HFA
initiative.
RISK
MANAGEMENT
Our business activities expose us to the following four major
categories of risk: credit risk, market risk (including interest
rate and liquidity risk), operational risk and model risk, which
often overlap. We seek to manage these risks and mitigate our
losses by using an established risk management framework. Our
risk management framework is intended to provide the basis for
the principles that govern our risk management activities.
|
|
|
|
|
Credit Risk. Credit risk is the risk of
financial loss resulting from the failure of a borrower or
institutional counterparty to honor its financial or contractual
obligations to us and exists primarily in our mortgage credit
book of business and derivatives portfolio.
|
143
|
|
|
|
|
Market Risk. Market risk is the
exposure generated by adverse changes in the value of financial
instruments caused by a change in market prices or interest
rates. Two significant market risks we face and actively manage
are interest rate risk and liquidity risk. Interest rate risk is
the risk of changes in our long-term earnings or in the value of
our net assets due to fluctuations in interest rates. Liquidity
risk is the potential inability of the Company to meet its
funding obligations in a timely manner.
|
|
|
|
Operational Risk. Operational risk is
the loss resulting from inadequate or failed internal processes,
people, systems, or from external events.
|
|
|
|
Model Risk. Model risk is the potential
for model errors to adversely impact the company. We use models
to help manage our business. For example, we use models to
measure and monitor our exposures to credit and market risk
(including interest rate risk), make key business decisions
relating to credit guaranty fee pricing, credit loss mitigation,
asset acquisition, and debt issuances. We also use the results
of models to report our financial performance and determine
asset and liability fair values. As such, modeling errors can
occur when predicting prepayments, projecting defaults and
losses, or valuing options either through human error or
inaccurate assumptions.
|
We are also subject to a number of other risks that could
adversely impact our business, financial condition, earnings and
cash flows, including legal and reputational risks that may
arise due to a failure to comply with laws, regulations or
ethical standards and codes of conduct applicable to our
business activities and functions. See Risk Factors.
Our risk management framework and governance structure are
intended to provide comprehensive controls and ongoing
management of the major risks inherent in our business
activities. Our ability to identify, assess, mitigate and
control, and report and monitor risk is crucial to our safety
and soundness.
|
|
|
|
|
Risk Identification: We are exposed to
risk through our daily business dealings. Risks are identified
through our risk management framework. Employees who manage risk
are responsible for identifying and determining potential losses
that could arise from specific or unusual events.
|
|
|
|
Risk Assessment: We assess risk using a
variety of methodologies, such as calculation of potential
losses from loans, stress tests relating to interest rate
sensitivity, and rebalancing of financial instruments to
maintain a close match between the duration of our assets and
liabilities. Information obtained from these assessments is
reviewed on a regular basis to ensure that our risk assumptions
are reasonable and reflect our current positions.
|
|
|
|
Risk Mitigation & Control: We
manage risk through four control elements that are designed to
work in conjunction with each other: (1) risk policies
provide guidance for the management of risk; (2) limits
establish boundaries for level of risk taking, subject to our
risk tolerances. Limits can be established at the Board,
management or operating level by the Board of Directors,
executive management, or senior management, respectively;
(3) delegations of authority exist to provide oversight and
accountability in decision making; and (4) our risk
committee structure provides a forum for discussing emerging
risks, risk mitigation strategies and communicating across
functional lines to enhance risk management. Business units are
required to proactively develop appropriate controls and
procedures to help ensure exposures do not exceed established
tolerances.
|
|
|
|
Risk Reporting &
Monitoring: Our business units actively
monitor emerging and identified risks that are taken when
executing our strategies. Risks and concerns are reported to the
appropriate level of management to ensure that the necessary
action is taken to mitigate the risk.
|
Enterprise
Risk Governance
Our enterprise risk management structure is designed to balance
a strong corporate risk management philosophy, appetite and
culture with a well-defined independent risk management
function. Our objective is to ensure that people and processes
are organized in a way to promote a cross-functional approach to
risk management and that controls are in place to better manage
our risks and comply with legal and regulatory requirements.
144
Our enterprise risk governance structure consists of the Board
of Directors, executive leadership, including the Chief Risk
Officer, the Enterprise Risk Management division, divisional
chief risk officers, and risk management committees. This
structure encourages a culture of accountability within the
divisions and promotes effective risk management throughout the
company.
Our organizational structure and risk management framework work
in conjunction with each other to identify risk-related trends
with respect to customers, products or portfolios and to develop
appropriate strategies to mitigate emerging and identified risks.
Board
of Directors
The Board of Directors is responsible for the oversight of risk
management primarily through the Boards Risk Policy and
Capital Committee. This board committee oversees risk-related
policies, including: review of the corporate level risk policies
and limits; performance against these policies and limits; and
the sufficiency of risk management capabilities. In addition,
the Audit Committee reviews the system of internal controls over
financial reporting that we rely upon to provide reasonable
assurance of compliance with our enterprise risk management
processes.
Enterprise
Risk Management Division
Our Enterprise Risk Management division is headed by the Chief
Risk Officer. The Chief Risk Officer reports directly to the
Chief Executive Officer and independently to the Board of
Directors, primarily through the Boards Risk
Policy & Capital Committee. Enterprise Risk Management
is responsible for providing our risk management directives and
functions as well as for establishing effective controls,
including policy development, risk management methodologies and
risk reporting.
Our Enterprise Risk Management division has designated
divisional chief risk officers for each of our three business
segments: Single-Family Credit Guaranty, HCD and Capital
Markets. The divisional chief risk officers are responsible for
oversight and approval of key risks within their respective
business unit, including credit, market, model and operational
risk. The divisional chief risk officers also are responsible
for developing the appropriate risk policies and reporting
requirements for their business unit.
Risk
Committees
We use our risk committees as a forum for discussing emerging
risks, risk mitigation strategies, and communication across
business lines. Risk committees enhance the risk management
framework by reinforcing our risk management culture and
providing accountability for the resolution of key risk issues
and decisions. Each business risk committee is co-chaired by the
divisional chief risk officer and the business head and includes
key business and risk leaders.
Our current committee structure includes four Business Risk
Committees (Capital Markets Risk, Credit Portfolio Management
Product Committee, HCD Risk and Single Family Risk) and five
Enterprise Risk Committees (Asset & Liability, Credit
Risk, Credit Expense Forecast and Allowance, Model Risk
Oversight and Operational Risk).
Internal
Audit
Our Internal Audit group, under the direction of the Chief Audit
Executive, provides an objective assessment of the design and
execution of our internal control system, including our
management systems, risk governance, and policies and
procedures. The Chief Audit Executive reports directly and
independently to the Audit Committee of the Board of Directors,
and audit personnel are compensated on objectives set for the
group by the Audit Committee rather than corporate financial
results or goals. The Chief Audit Executive reports only
administratively to management and may be removed only upon
Board approval. Internal Audit activities are designed to
provide reasonable assurance that resources are safeguarded;
that significant financial, managerial and operating information
is complete, accurate and reliable; and that employee actions
comply with our policies and applicable laws and regulations.
145
Compliance &
Ethics
The Compliance & Ethics division, under the direction
of the Chief Compliance Officer, is dedicated to developing
policies and procedures to help ensure that Fannie Mae and its
employees comply with the law, our Code of Conduct, and all
regulatory obligations. The Chief Compliance Officer reports
directly to our Chief Executive Officer and independently to the
Audit Committee of the Board of Directors, and
Compliance & Ethics personnel are compensated on
objectives set for the group by the Audit Committee of the Board
of Directors rather than corporate financial results or goals.
The Chief Compliance Officer may be removed only upon Board
approval. The Chief Compliance Officer is responsible for
overseeing our compliance activities; developing and promoting a
code of ethical conduct; evaluating and investigating any
allegations of misconduct; and overseeing and coordinating
regulatory reporting and examinations.
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 continuing
adverse market conditions 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
mortgage assets, have issued a guaranty in connection with the
creation of Fannie Mae MBS backed by mortgage assets or provided
other credit enhancements on mortgage assets. While our mortgage
credit book of business includes all of our mortgage-related
assets, both on- and off-balance sheet, our guaranty book of
business excludes non-Fannie Mae mortgage-related securities
held in our portfolio for which we do not provide a guaranty.
Mortgage
Credit Book of Business
Table 41 displays the composition of our entire mortgage credit
book of business as of the periods indicated. Our single-family
mortgage credit book of business accounted for approximately 93%
of our total mortgage credit book of business as of
December 31, 2009 and 2008.
146
Table
41: Composition of Mortgage Credit Book of
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Single-Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(4)
|
|
$
|
243,730
|
|
|
$
|
52,399
|
|
|
$
|
119,829
|
|
|
$
|
585
|
|
|
$
|
363,559
|
|
|
$
|
52,984
|
|
Fannie Mae
MBS(5)
|
|
|
218,033
|
|
|
|
1,816
|
|
|
|
314
|
|
|
|
82
|
|
|
|
218,347
|
|
|
|
1,898
|
|
Agency mortgage-related
securities(5)(6)
|
|
|
41,337
|
|
|
|
1,309
|
|
|
|
|
|
|
|
21
|
|
|
|
41,337
|
|
|
|
1,330
|
|
Mortgage revenue
bonds(5)
|
|
|
2,709
|
|
|
|
2,056
|
|
|
|
7,734
|
|
|
|
1,954
|
|
|
|
10,443
|
|
|
|
4,010
|
|
Other mortgage-related
securities(5)(7)
|
|
|
47,825
|
|
|
|
1,796
|
|
|
|
25,703
|
|
|
|
20
|
|
|
|
73,528
|
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage portfolio
|
|
|
553,634
|
|
|
|
59,376
|
|
|
|
153,580
|
|
|
|
2,662
|
|
|
|
707,214
|
|
|
|
62,038
|
|
Fannie Mae MBS held by third
parties(8)
|
|
|
2,370,037
|
|
|
|
15,197
|
|
|
|
46,628
|
|
|
|
927
|
|
|
|
2,416,665
|
|
|
|
16,124
|
|
Other credit
guarantees(9)
|
|
|
9,873
|
|
|
|
802
|
|
|
|
16,909
|
|
|
|
40
|
|
|
|
26,782
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage credit book of business
|
|
$
|
2,933,544
|
|
|
$
|
75,375
|
|
|
$
|
217,117
|
|
|
$
|
3,629
|
|
|
$
|
3,150,661
|
|
|
$
|
79,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty book of business
|
|
$
|
2,841,673
|
|
|
$
|
70,214
|
|
|
$
|
183,680
|
|
|
$
|
1,634
|
|
|
$
|
3,025,353
|
|
|
$
|
71,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Single-Family
|
|
|
Multifamily
|
|
|
Total
|
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
Conventional(1)
|
|
|
Government(2)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage
portfolio:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans(4)
|
|
$
|
268,253
|
|
|
$
|
43,799
|
|
|
$
|
116,742
|
|
|
$
|
699
|
|
|
$
|
384,995
|
|
|
$
|
44,498
|
|
Fannie Mae
MBS(5)
|
|
|
226,654
|
|
|
|
1,850
|
|
|
|
376
|
|
|
|
69
|
|
|
|
227,030
|
|
|
|
1,919
|
|
Agency mortgage-related
securities(5)(6)
|
|
|
33,320
|
|
|
|
1,559
|
|
|
|
|
|
|
|
22
|
|
|
|
33,320
|
|
|
|
1,581
|
|
Mortgage revenue
bonds(5)
|
|
|
2,951
|
|
|
|
2,480
|
|
|
|
7,938
|
|
|
|
2,078
|
|
|
|
10,889
|
|
|
|
4,558
|
|
Other mortgage-related
securities(5)(7)
|
|
|
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(8)
|
|
|
2,238,257
|
|
|
|
13,117
|
|
|
|
37,298
|
|
|
|
787
|
|
|
|
2,275,555
|
|
|
|
13,904
|
|
Other credit
guarantees(9)
|
|
|
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) |
|
Refers to mortgage loans and
mortgage-related securities that are not guaranteed or insured
by the U.S. government or any of its agencies.
|
|
(2) |
|
Refers to mortgage loans and
mortgage-related securities guaranteed or insured, in whole or
in part, by the U.S. government or one of its agencies.
|
|
(3) |
|
Mortgage portfolio data is reported
based on unpaid principal balance.
|
|
(4) |
|
Includes unpaid principal balance
totaling $147.0 billion as of December 31, 2009 and
$65.8 billion as of December 31, 2008, related to
mortgage-related securities that we held in consolidated VIEs
and mortgage-related
|
147
|
|
|
|
|
securities created from
securitization transactions that did not meet sale accounting
criteria which effectively resulted in these mortgage-related
securities being accounted for as loans.
|
|
(5) |
|
Includes unpaid principal balance
totaling $15.6 billion as of December 31, 2009 and
$13.3 billion as of December 31, 2008, related to
mortgage-related securities that we were required to consolidate
and mortgage-related securities created from securitization
transactions that did not meet sale accounting criteria, which
effectively resulted in these mortgage-related securities being
accounted for as securities.
|
|
(6) |
|
Consists of mortgage-related
securities issued by Freddie Mac and Ginnie Mae.
|
|
(7) |
|
Includes mortgage-related
securities issued by entities other than Fannie Mae, Freddie Mac
or Ginnie Mae.
|
|
(8) |
|
The principal balance of
resecuritized Fannie Mae MBS is included only once in the
reported amount.
|
|
(9) |
|
Includes single-family and
multifamily credit enhancements that we have provided and that
are not otherwise reflected in the table.
|
Single-Family
Mortgage Credit Risk Management
Our strategy in managing single-family 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 below, 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 single-family 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
single-family mortgage credit book of business. We regularly
review and provide updates to our underwriting standards and
eligibility guidelines that take into consideration changing
market conditions. The credit risk profile of our single-family
mortgage credit book of business is influenced by, among other
things, the credit profile of the borrower, features of the
loan, loan product type, the type of property securing the loan
and the housing market and general economy. We focus our efforts
more on loans that we believe pose a higher risk of default,
which typically have been loans associated with higher
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. These and other factors affect both the amount
of expected credit loss on a given loan and the sensitivity of
that loss to changes in the economic environment.
The credit statistics reported below, unless otherwise noted,
pertain generally to the portion of our single-family guaranty
book of business for which we have access to detailed loan-level
information, which constituted over 98% of our conventional
single-family guaranty book of business as of December 31,
2009 and 99% as of December 31, 2008. We typically obtain
this data from the sellers or servicers of the mortgage loans in
our guaranty book of business 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. See Risk Factors for discussion of the
risk that one or more parties in a mortgage transaction engages
in fraud by misrepresenting facts about a mortgage loan.
Because we believe we have limited credit exposure on our
government loans, the single-family credit statistics reported
in the sections below generally relate to our conventional
single-family guaranty book of business and represent the
substantial majority of our total single-family guaranty book of
business.
We provide information on the performance of non-Fannie Mae
mortgage-related securities held in our portfolio, including the
impairment that we have recognized on these securities, in
Consolidated Balance Sheet AnalysisTrading and
Available-for-Sale
Investment SecuritiesInvestments in Private-Label
Mortgage-Related Securities.
Single-Family
Acquisition Policy and Underwriting Standards
Our Single-Family business, in conjunction with our Enterprise
Risk Management division, is responsible for pricing and
managing credit risk relating to the portion of our
single-family mortgage credit book of business
148
consisting of single-family mortgage loans and Fannie Mae MBS
backed by single-family mortgage loans (whether held in our
portfolio or held by third parties). Desktop
Underwritertm,
our proprietary automated underwriting system which measures
default risk by assessing the primary risk factors of a
mortgage, is used to evaluate the majority of the loans we
purchase or securitize. As part of our regular evaluation of
Desktop Underwriter, we conduct periodic examinations of the
underlying risk assessment models to improve Desktop
Underwriters ability to effectively analyze risk by
recalibrating the models based on actual loan performance and
market assumptions. Subject to our prior approval, we also may
purchase and securitize mortgage loans that have been
underwritten using other automated underwriting systems, as well
as mortgage loans underwritten to
agreed-upon
standards that differ from our standard underwriting and
eligibility criteria. Additionally, as the number of our
delinquent and defaulted loans has increased, so has the
corresponding number of these loans reviewed for compliance with
our requirements. We use the information obtained from these
loan quality reviews to provide more timely feedback to lenders
on possible areas for correction in their origination practices.
We initiated underwriting and eligibility changes that were
announced or became effective in 2009 such as establishing a
minimum FICO credit score and a maximum
debt-to-income
cap, updating Desktop Underwriters credit risk assessment
model by implementing Desktop Underwriter 8.0, and we provided
updates to our property-related policies. All of the changes
focused on strengthening the underwriting and eligibility
standards to promote and provide prudent and sustainable
homeownership options to borrowers. The result of many of these
changes is reflected in the substantially improved risk profile
of the single-family acquisitions in 2009. For loans associated
with our Refi Plus Initiatives, which are loans that are
refinanced back to us from our portfolio, some of these changes
do not apply unless expressly stated otherwise.
Our charter requires that conventional single-family mortgage
loans with LTV ratios above 80% at acquisition that we purchase
or that back Fannie Mae MBS generally be covered by one or more
of the following: (1) insurance or a guaranty by a
qualified insurer; (2) a sellers agreement to
repurchase or replace any mortgage loan in default (for such
period and under such circumstances as we may require); or
(3) retention by the seller of at least a 10% participation
interest in the mortgage loans. Under HARP, however, we allow
borrowers who have mortgage loans with current LTV ratios up to
125% to refinance their mortgages without obtaining new mortgage
insurance in excess of what was already in place. We have worked
with FHFA to provide us with the flexibility to implement this
element of HARP.
Borrower-paid primary mortgage insurance is the most common type
of credit enhancement in our single-family mortgage credit book
of business. Primary mortgage insurance transfers varying
portions of the credit risk associated with a mortgage loan to a
third-party insurer. In order for us to receive a payment in
settlement of a claim under a primary mortgage insurance policy,
the insured loan must be in default and the borrowers
interest in the property that secured the loan must have been
extinguished, generally in a foreclosure action. Once title to
the property has been transferred, we or a servicer on our
behalf files a claim with the mortgage insurer. The mortgage
insurer then has a prescribed period of time within which to
make a determination as to whether the claim is payable or
whether the coverage should be rescinded. The claims process for
primary mortgage insurance typically takes three to six months
after title to the property has been transferred.
Mortgage insurers may also provide pool mortgage insurance,
which is insurance that applies to a defined group of loans.
Pool mortgage insurance benefits typically are based on actual
loss incurred and are subject to an aggregate loss limit. The
triggers for payment under a pool mortgage insurance policy are
generally the same as for primary mortgage insurance, except
that we generally must have received a claim payment from the
primary mortgage insurer and the foreclosed property must have
been sold to a third party so that we can quantify the net loss
with respect to the insured loan and determine the claim payable
under the pool policy. In addition, under some of our pool
mortgage insurance policies, we are required to meet specified
loss deductibles before we can recover under the policy. We
typically collect claims under pool mortgage insurance three to
six months after disposition of the property that secured the
loan.
For additional discussion of our aggregate mortgage insurance
coverage as of December 31, 2009 and 2008 and the increase
in mortgage insurance rescissions, see Risk
ManagementInstitutional Counterparty Credit
RiskMortgage Insurers.
149
Single-Family
Portfolio Diversification and Monitoring
Our single-family mortgage credit book of business is
diversified based on several factors that influence credit
quality. We monitor various loan attributes, in conjunction with
housing market and economic conditions, to ensure that our
pricing and our eligibility and underwriting criteria accurately
reflect the risk associated with loans we acquire or guarantee.
In some cases we may decide to significantly reduce our
participation in riskier loan product categories. We also review
the payment performance of loans in order to help identify
potential problem loans early in the delinquency cycle to guide
the development of our loss mitigation strategies.
The profile of our guaranty book of business is comprised of the
following key loan attributes:
|
|
|
|
|
LTV ratio. LTV ratio is a strong predictor of
credit performance. The likelihood of default and the gross
severity of a loss in the event of default are typically lower
as the LTV ratio decreases. This also applies to the estimated
mark-to-market
LTV ratios, particularly those over 100%.
|
|
|
|
Product type. Certain loan product types have
features that may result in increased risk. Intermediate-term,
fixed-rate mortgages generally exhibit the lowest default rates,
followed by long-term, fixed-rate mortgages. ARMs and
balloon/reset mortgages typically exhibit higher default rates
than fixed-rate mortgages, partly because the borrowers
future payments may rise, within limits, as interest rates
change.
Negative-amortizing
and interest-only loans also default more often than traditional
fixed-rate mortgage loans.
|
|
|
|
Number of units. Mortgages on
one-unit
properties tend to have lower credit risk than mortgages on
two-, three- or
four-unit
properties.
|
|
|
|
Property type. Certain property types have a higher risk
of default. For example, condominiums generally are considered
to have higher credit risk than single-family detached
properties.
|
|
|
|
Occupancy type. Mortgages on properties
occupied by the borrower as a primary or secondary residence
tend to have lower credit risk than mortgages on investment
properties.
|
|
|
|
Credit score. Credit score is a measure often
used by the financial services industry, including our company,
to assess borrower credit quality and the likelihood that a
borrower will repay future obligations as expected. A higher
credit score typically indicates lower credit risk.
|
|
|
|
Loan purpose. Loan purpose indicates how the
borrower intends to use the funds from a mortgage loan. Cash-out
refinancings have a higher risk of default than either mortgage
loans used for the purchase of a property or other refinancings
that restrict the amount of cash returned to the borrower.
|
|
|
|
Geographic concentration. Local economic
conditions affect borrowers ability to repay loans and the
value of collateral underlying loans. Geographic diversification
reduces mortgage credit risk.
|
|
|
|
Loan age. We monitor year of origination and
loan age, which is defined as the number of years since
origination. Statistically, the peak ages for default are
currently from two to six years after origination. However, we
have seen higher early default rates for loans originated in
2006 and 2007, due to a higher number of loans originated during
these years with risk layering. Risk layering means permitting a
loan to have several features that compound risk, such as loans
with reduced documentation and higher risk loan product types.
|
Table 42 presents our conventional single-family business
volumes and our conventional single-family guaranty book of
business for the periods indicated, based on certain key risk
characteristics that we use to evaluate the risk profile and
credit quality of our single-family loans.
150
|
|
Table
42:
|
Risk
Characteristics of Conventional Single-Family Business Volume
and Guaranty Book of
Business(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Conventional
|
|
|
|
Percent of Conventional
|
|
|
Single-Family Guaranty
|
|
|
|
Single-Family Business
Volume(2)
|
|
|
Book of
Business(3)
|
|
|
|
For The Year Ended December 31,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Original LTV
ratio:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 60%
|
|
|
33
|
%
|
|
|
23
|
%
|
|
|
17
|
%
|
|
|
24
|
%
|
|
|
22
|
%
|
|
|
23
|
%
|
60.01% to 70%
|
|
|
17
|
|
|
|
16
|
|
|
|
13
|
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
70.01% to 80%
|
|
|
40
|
|
|
|
39
|
|
|
|
45
|
|
|
|
42
|
|
|
|
43
|
|
|
|
43
|
|
80.01% to
90%(5)
|
|
|
7
|
|
|
|
12
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
8
|
|
90.01% to
100%(5)
|
|
|
3
|
|
|
|
10
|
|
|
|
16
|
|
|
|
9
|
|
|
|
10
|
|
|
|
10
|
|
Greater than
100%(5)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
67
|
%
|
|
|
72
|
%
|
|
|
75
|
%
|
|
|
71
|
%
|
|
|
72
|
%
|
|
|
72
|
%
|
Average loan amount
|
|
$
|
219,118
|
|
|
$
|
208,652
|
|
|
$
|
195,427
|
|
|
$
|
153,302
|
|
|
$
|
148,824
|
|
|
$
|
142,747
|
|
Estimated
mark-to-market
LTV
ratio:(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<= 60%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
%
|
|
|
36
|
%
|
|
|
46
|
%
|
60.01% to 70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
13
|
|
|
|
15
|
|
70.01% to 80%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
17
|
|
|
|
19
|
|
80.01% to 90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
|
12
|
|
90.01% to 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
8
|
|
|
|
6
|
|
Greater than 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
12
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
%
|
|
|
70
|
%
|
|
|
61
|
%
|
Product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
82
|
%
|
|
|
78
|
%
|
|
|
76
|
%
|
|
|
75
|
%
|
|
|
74
|
%
|
|
|
71
|
%
|
Intermediate-term
|
|
|
15
|
|
|
|
12
|
|
|
|
5
|
|
|
|
13
|
|
|
|
13
|
|
|
|
15
|
|
Interest-only
|
|
|
*
|
|
|
|
2
|
|
|
|
9
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate
|
|
|
97
|
|
|
|
92
|
|
|
|
90
|
|
|
|
91
|
|
|
|
90
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
|
|
|
1
|
|
|
|
4
|
|
|
|
7
|
|
|
|
4
|
|
|
|
5
|
|
|
|
5
|
|
Negative-amortizing
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Other ARMs
|
|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable-rate
|
|
|
3
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of property units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 unit
|
|
|
98
|
%
|
|
|
97
|
%
|
|
|
96
|
%
|
|
|
96
|
%
|
|
|
96
|
%
|
|
|
96
|
%
|
2-4 units
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family homes
|
|
|
92
|
%
|
|
|
89
|
%
|
|
|
89
|
%
|
|
|
91
|
%
|
|
|
91
|
%
|
|
|
91
|
%
|
Condo/Co-op
|
|
|
8
|
|
|
|
11
|
|
|
|
11
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
93
|
%
|
|
|
89
|
%
|
|
|
89
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
Second/vacation home
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Investor
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FICO credit score:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
|
*
|
%
|
|
|
3
|
%
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
620 to < 660
|
|
|
2
|
|
|
|
6
|
|
|
|
12
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Conventional
|
|
|
|
Percent of Conventional
|
|
|
Single-Family Guaranty
|
|
|
|
Single-Family Business
Volume(2)
|
|
|
Book of
Business(3)
|
|
|
|
For The Year Ended December 31,
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
660 to < 700
|
|
|
7
|
|
|
|
14
|
|
|
|
19
|
|
|
|
16
|
|
|
|
17
|
|
|
|
18
|
|
700 to < 740
|
|
|
17
|
|
|
|
22
|
|
|
|
23
|
|
|
|
22
|
|
|
|
23
|
|
|
|
23
|
|
>= 740
|
|
|
74
|
|
|
|
55
|
|
|
|
40
|
|
|
|
50
|
|
|
|
45
|
|
|
|
43
|
|
Not available
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
761
|
|
|
|
738
|
|
|
|
716
|
|
|
|
730
|
|
|
|
724
|
|
|
|
721
|
|
Loan purpose:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
20
|
%
|
|
|
41
|
%
|
|
|
50
|
%
|
|
|
36
|
%
|
|
|
41
|
%
|
|
|
41
|
%
|
Cash-out refinance
|
|
|
27
|
|
|
|
31
|
|
|
|
32
|
|
|
|
31
|
|
|
|
32
|
|
|
|
32
|
|
Other refinance
|
|
|
53
|
|
|
|
28
|
|
|
|
18
|
|
|
|
33
|
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
concentration:(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
|
|
17
|
%
|
Northeast
|
|
|
19
|
|
|
|
18
|
|
|
|
18
|
|
|
|
19
|
|
|
|
19
|
|
|
|
19
|
|
Southeast
|
|
|
20
|
|
|
|
23
|
|
|
|
26
|
|
|
|
24
|
|
|
|
25
|
|
|
|
25
|
|
Southwest
|
|
|
15
|
|
|
|
16
|
|
|
|
18
|
|
|
|
15
|
|
|
|
16
|
|
|
|
16
|
|
West
|
|
|
30
|
|
|
|
28
|
|
|
|
23
|
|
|
|
26
|
|
|
|
24
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<=1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
5
|
|
|
|
7
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
18
|
|
|
|
22
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
10
|
|
|
|
12
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
13
|
|
|
|
16
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
14
|
|
|
|
17
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
20
|
|
|
|
21
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
16
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Represents less than 0.5% of
conventional single-family business volume or book of business.
|
|
(1) |
|
We reflect second lien loans in the
original LTV ratio calculation only when we own both the first
and second mortgage liens or we own only the second mortgage
lien. Second lien mortgage loans represented less than 0.5% of
our conventional single-family business volume for each of the
years ended December 31, 2009, 2008 and 2007, and less than
0.5% of our conventional single-family guaranty book of business
as of December 31, 2009, 2008 and 2007. 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 LTV ratio generally is
based on the original unpaid principal balance of the loan
divided by the appraised property value reported to us at the
time of acquisition of the loan. Excludes loans for which this
information is not readily available.
|
|
(5) |
|
We purchase loans with original LTV
ratios above 80% to fulfill our mission to serve the primary
mortgage market and provide liquidity to the housing system.
Except as permitted under HARP, our charter generally requires
primary mortgage insurance or other credit enhancement for loans
that we acquire that have a LTV ratio over 80%.
|
|
(6) |
|
The aggregate estimated
mark-to-market
LTV ratio is based on the unpaid principal balance of the loan
as of the end of each reported period divided by the estimated
current value of the property, which we calculate using an
internal valuation model that estimates periodic changes in home
value. Excludes loans for which this information is not readily
available.
|
152
|
|
|
(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
Profile Summary
During 2008 and early 2009 we made changes in our pricing and
eligibility standards that helped to improve the risk profile of
our new single-family business in 2009 and support sustainable
homeownership. Compared to our 2008 acquisitions, the
composition of our 2009 acquisitions experienced a decline in
the average original LTV ratio, an increase in the average FICO
credit score, and a shift in product mix to more fully
amortizing fixed-rate mortgage loans. The early performance of
the single-family loans we acquired in 2009 appears stronger
than that of loans acquired in any other year in the past
decade. While this early performance is strong, we cannot yet
predict how these loans will ultimately perform. Moreover, we
expect the ultimate performance of these loans will be affected
by macroeconomic trends, including unemployment, the economy,
and house prices. We expect that these loans may have relatively
slow prepayment speeds, and therefore remain in our book of
business for a relatively long time, due to the historically low
interest rates throughout 2009, which resulted in our 2009
acquisitions overall having an average interest rate of 4.9%. In
addition to changes in our pricing and eligibility standards,
our 2009 acquisitions reflect changes in the eligibility
standards of mortgage insurers, which further reduced our
acquisition of loans with higher LTV ratios. Also, the Federal
Housing Administration (FHA) has become the
lower-cost option, or in some cases the only option, for loans
with higher LTV ratios, which further reduced our acquisition of
these loans.
The credit profile of our 2009 acquisitions was further enhanced
by a significant increase in our acquisition of refinanced
loans, which generally have a stronger credit profile as the act
of refinancing indicates the borrowers ability and desire
to maintain homeownership. Refinancings represented 80% of our
2009 business volume compared with 59% in 2008. The drop in
interest rates and our Refi Plus initiatives provided an
opportunity for many borrowers to refinance to obtain a lower
payment. Historically, refinanced loans have tended to perform
better than loans used for initial home purchase. However, the
loans acquired through our Refi Plus initiatives, including
loans acquired under HARP that permit LTV ratios up to 125%,
tend to have higher original LTV ratios and lower FICO credit
scores and may not ultimately perform as strongly as traditional
refinanced loans have historically performed.
Whether our 2010 acquisitions exhibit the same credit profile as
our 2009 acquisitions will depend on many factors, including our
future pricing and eligibility standards, our future objectives,
mortgage insurers eligibility standards, and future
activity by our competitors, including FHA.
The prolonged and severe decline in home prices has contributed
to an increase in the overall estimated weighted average
mark-to-market
LTV ratio of our conventional single-family guaranty book of
business to 75% as of December 31, 2009, from 70% as of
December 31, 2008. The portion of our conventional
single-family guaranty book of business with an estimated
mark-to-market
LTV ratio greater than 100% increased to 14% as of
December 31, 2009, from 12% as of December 31, 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 calculate our
mark-to-market
LTV ratios based on the unpaid principal balance of the loan as
of the date of each reported period divided by the estimated
current value of the property underlying the loan, which we
determine using an internal valuation model that estimates
periodic changes in home value.
Our exposure, as discussed below, to Alt-A and subprime loans
included in our single-family guaranty book of business does not
include (1) our investments in private-label
mortgage-related securities backed by Alt-A and subprime loans
or (2) resecuritizations, or wraps, of private-label
mortgage-related securities backed by Alt-A mortgage loans that
we have guaranteed. We classified newly originated mortgage
loans as Alt-A if the lender that delivered the mortgage loan to
us 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. As
a result of our decision to discontinue the
153
purchase of newly originated Alt-A loans effective
January 1, 2009, we expect our acquisitions of Alt-A
mortgage loans to continue to be minimal in future periods and
the percentage of the book of business attributable to Alt-A to
decrease over time. We currently are not acquiring mortgages
that are classified as subprime. 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. The unpaid principal balance of Alt-A
and subprime loans included in our single-family guaranty book
of business of $255.7 billion as of December 31, 2009,
represented approximately 9% of our conventional single-family
guaranty book of business and 82% of our total exposure to Alt-A
and subprime loans and mortgage-related securities of
$312.4 billion as of December 31, 2009. See
Note 18, Concentrations of Credit Risk for
additional information on our total exposure to Alt-A and
subprime loans and mortgage-related securities.
We also provide information on our jumbo-conforming,
high-balance loans and reverse mortgages. The outstanding unpaid
principal balance of our jumbo-conforming and high-balance loans
was $66.6 billion, or 2.4% of our conventional
single-family guaranty book of business, as of December 31,
2009 and $19.7 billion, or 0.7% of our conventional
single-family guaranty book of business, as of December 31,
2008. Jumbo-conforming and high-balance loans refer to
high-balance loans we acquired pursuant to the Economic Stimulus
Act of 2008, the 2008 Reform Act and the American Recovery and
Reinvestment Act of 2009, which 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
BusinessOur Charter and Regulation of Our
ActivitiesCharter ActLoan Standards for
additional information on our loan limits.
The outstanding unpaid principal balance of reverse mortgages
included in our mortgage portfolio was $50.2 billion as of
December 31, 2009 and $41.6 billion as of
December 31, 2008. The majority of these loans are Home
Equity Conversion Mortgages, 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 of new reverse mortgage acquisitions
was approximately 90% in 2008 and 50% in 2009. The decrease in
our market share was a result of the changes in our pricing
strategy and market conditions and also resulted in our market
share of acquisitions in the fourth quarter to fall below 10%.
Because Home Equity Conversion Mortgages are insured by the
federal government through the FHA, we believe that we have
limited exposure to losses on these loans, although home price
declines and a weak housing market have also affected the
performance of this book.
Problem
Loan Management and Foreclosure Prevention
Our problem loan management strategies are focused on keeping
borrowers in their homes to minimize foreclosures, which
advances our public mission and may also help in reducing our
long-term credit losses. 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 regarding the performance of our loan workout
activities.
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 are loans that are three or more monthly payments
past due or in the foreclosure process. Unless otherwise noted,
single-family delinquency data is calculated based on number of
loans. We include conventional single-family loans that we own
and that back Fannie Mae MBS in the calculation of the
single-family delinquency rate. Percentage of book calculations
are based on the unpaid principal balance of loans for each
category divided by the unpaid principal balance of our total
single-family guaranty book of business for which we have
detailed loan level information.
154
Problem
Loan Statistics
The following table displays the delinquency status of loans in
our conventional single-family guaranty book of business (based
on number of loans), average default rate and average loss
severity as of the periods indicated.
Table
43: Delinquency Status, Default Rate and Loss
Severity of Conventional Single-Family Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
As of period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency status:
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 59 days delinquent
|
|
|
2.46
|
%
|
|
|
2.52
|
%
|
|
|
2.11
|
%
|
60 to 89 days delinquent
|
|
|
1.07
|
|
|
|
1.00
|
|
|
|
0.58
|
|
Seriously delinquent
|
|
|
5.38
|
|
|
|
2.42
|
|
|
|
0.98
|
|
Percentage of seriously delinquent loans more than 180 days
past due
|
|
|
57.22
|
|
|
|
40.00
|
|
|
|
32.06
|
|
For the period ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average default rate
|
|
|
1.07
|
%
|
|
|
0.59
|
%
|
|
|
0.32
|
%
|
Average loss
severity(1)
|
|
|
37
|
|
|
|
26
|
|
|
|
11
|
|
|
|
|
(1) |
|
Excludes fair value losses to
credit-impaired loans acquired from MBS trusts and HomeSaver
Advance loans.
|
Early Stage Delinquency
The prolonged and severe decline in home prices, coupled with
continued high unemployment, caused an increase in the number of
early stage delinquenciesloans that are less than three
monthly payments past dueduring 2008 compared with 2007.
During 2009, early stage delinquencies decreased slightly but
remain high. As a result, the potential number of loans at
imminent risk of payment default will remain high.
Serious Delinquency
The number of loans that transitioned to seriously delinquent in
2009 increased substantially from 2008. In addition, the aging
of our seriously delinquent loans has significantly increased.
The following factors have contributed to the increase in the
number of delinquent conventional single-family loans
transitioning to seriously delinquent and to the extension in
the period of time that loans are remaining seriously delinquent:
|
|
|
|
|
Declines in home prices lengthen the period of time that loans
are seriously delinquent because a delinquent borrower may not
have sufficient equity in the home to refinance or sell the
property and recover enough proceeds to pay off the loan and
avoid foreclosure.
|
|
|
|
High levels of unemployment are hampering the ability of many
delinquent borrowers to cure delinquencies and return their
loans to current status.
|
|
|
|
Loans in a trial-payment period under HAMP typically remain
delinquent until the trial period is successfully completed and
a final loan modification has been executed. When the final loan
modification is executed, the loan status becomes current, but
the loan will likely continue to be classified as a
nonperforming loan as most of our recent modifications are TDRs.
|
|
|
|
Loan servicers are operating under our directive to delay
foreclosure sales until they verify that borrowers are not
eligible for HAMP modifications and other home retention and
foreclosure-prevention alternatives have been exhausted.
|
|
|
|
A number of states have enacted laws to lengthen or impose other
requirements that result in slowdowns in the legal processes for
completing foreclosures.
|
In addition to the increase in the number of seriously
delinquent conventional single-family loans, we observed a shift
in the number of payments being made before a loan becomes
seriously delinquent. As we have tightened our underwriting and
eligibility standards, the percentage of loans transitioning to
seriously delinquent within the first 12 months has
significantly decreased. However, as weak economic and housing
155
conditions persisted and unemployment remained high throughout
2009, there was an increase in the percentage of borrowers who
had been making their payments for longer periods of time now
becoming seriously delinquent. This factor has also contributed
to the increase in the portion of our losses attributed to loans
without higher risk characteristics, as discussed in
Consolidated Results of OperationsCredit-Related
ExpensesSummary of Provision for Credit Losses and
Combined Loss Reserve.
Table 44 provides a comparison, by geographic region and by
loans with and without credit enhancement, of the serious
delinquency rates as of the periods indicated for conventional
single-family loans in our single-family guaranty book of
business.
Table
44: Serious Delinquency Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Conventional single-family delinquency rates by geographic
region:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
16
|
%
|
|
|
4.97
|
%
|
|
|
16
|
%
|
|
|
2.44
|
%
|
|
|
17
|
%
|
|
|
1.35
|
%
|
Northeast
|
|
|
19
|
|
|
|
4.53
|
|
|
|
19
|
|
|
|
1.97
|
|
|
|
19
|
|
|
|
0.94
|
|
Southeast
|
|
|
24
|
|
|
|
7.06
|
|
|
|
25
|
|
|
|
3.27
|
|
|
|
25
|
|
|
|
1.18
|
|
Southwest
|
|
|
15
|
|
|
|
4.19
|
|
|
|
16
|
|
|
|
1.98
|
|
|
|
16
|
|
|
|
0.86
|
|
West
|
|
|
26
|
|
|
|
5.45
|
|
|
|
24
|
|
|
|
2.10
|
|
|
|
23
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single- family loans
|
|
|
100
|
%
|
|
|
5.38
|
%
|
|
|
100
|
%
|
|
|
2.42
|
%
|
|
|
100
|
%
|
|
|
0.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional single-family loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
18
|
%
|
|
|
13.51
|
%
|
|
|
21
|
%
|
|
|
6.42
|
%
|
|
|
21
|
%
|
|
|
2.75
|
%
|
Non-credit enhanced
|
|
|
82
|
|
|
|
3.67
|
|
|
|
79
|
|
|
|
1.40
|
|
|
|
79
|
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional single- family loans
|
|
|
100
|
%
|
|
|
5.38
|
%
|
|
|
100
|
%
|
|
|
2.42
|
%
|
|
|
100
|
%
|
|
|
0.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See footnote 8 to Table 42 for
states included in each geographic region.
|
The current economic environment, including the continued
weakness in the housing market and high unemployment, has
adversely affected the serious delinquency rates across our
conventional single-family guaranty book of business. However,
certain states, certain higher risk loan categories, such as
Alt-A loans, subprime loans, loans with higher
mark-to-market
LTVs, and our 2006 and 2007 loan vintages continue to exhibit
higher than average delinquency rates and account for a
disproportionate share of our credit losses. States in the
Midwest have experienced prolonged economic weakness and
California, Florida, Arizona and Nevada have experienced the
most significant declines in home prices coupled with rising
unemployment rates.
Table 45 below presents the conventional serious delinquency
rates and other financial information as of the periods
indicated for our single-family loans with some of these risk
characteristics. The reported categories are not mutually
exclusive. 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.
156
|
|
Table
45:
|
Conventional
Single-Family Serious Delinquency Rate Concentration
Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-
|
|
|
|
Unpaid
|
|
|
Percentage
|
|
|
Serious
|
|
|
Market
|
|
|
Unpaid
|
|
|
Percentage
|
|
|
Serious
|
|
|
Market
|
|
|
Unpaid
|
|
|
Percentage
|
|
|
Serious
|
|
|
Market
|
|
|
|
Principal
|
|
|
of Book
|
|
|
Delinquency
|
|
|
LTV
|
|
|
Principal
|
|
|
of Book
|
|
|
Delinquency
|
|
|
LTV
|
|
|
Principal
|
|
|
of Book
|
|
|
Delinquency
|
|
|
LTV
|
|
|
|
Balance
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Ratio(1)
|
|
|
Balance
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Ratio(1)
|
|
|
Balance
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Ratio(1)
|
|
|
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
|
|
$
|
76,073
|
|
|
|
3
|
%
|
|
|
8.80
|
%
|
|
|
100
|
%
|
|
$
|
77,728
|
|
|
|
3
|
%
|
|
|
3.41
|
%
|
|
|
86
|
%
|
|
$
|
73,261
|
|
|
|
3
|
%
|
|
|
0.75
|
%
|
|
|
64
|
%
|
California
|
|
|
484,923
|
|
|
|
17
|
|
|
|
5.73
|
|
|
|
77
|
|
|
|
436,117
|
|
|
|
16
|
|
|
|
2.30
|
|
|
|
71
|
|
|
|
383,708
|
|
|
|
15
|
|
|
|
0.50
|
|
|
|
53
|
|
Florida
|
|
|
195,309
|
|
|
|
7
|
|
|
|
12.82
|
|
|
|
100
|
|
|
|
199,871
|
|
|
|
7
|
|
|
|
6.14
|
|
|
|
87
|
|
|
|
189,028
|
|
|
|
8
|
|
|
|
1.59
|
|
|
|
65
|
|
Nevada
|
|
|
34,657
|
|
|
|
1
|
|
|
|
13.00
|
|
|
|
123
|
|
|
|
35,787
|
|
|
|
1
|
|
|
|
4.74
|
|
|
|
98
|
|
|
|
33,995
|
|
|
|
1
|
|
|
|
1.20
|
|
|
|
70
|
|
Select Midwest
states(2)
|
|
|
304,147
|
|
|
|
11
|
|
|
|
5.62
|
|
|
|
77
|
|
|
|
308,463
|
|
|
|
11
|
|
|
|
2.70
|
|
|
|
72
|
|
|
|
297,160
|
|
|
|
12
|
|
|
|
1.49
|
|
|
|
67
|
|
All other states
|
|
|
1,701,379
|
|
|
|
61
|
|
|
|
4.11
|
|
|
|
69
|
|
|
|
1,653,426
|
|
|
|
62
|
|
|
|
1.86
|
|
|
|
66
|
|
|
|
1,533,035
|
|
|
|
61
|
|
|
|
0.90
|
|
|
|
61
|
|
Product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
248,311
|
|
|
|
9
|
|
|
|
15.63
|
|
|
|
92
|
|
|
|
290,778
|
|
|
|
11
|
|
|
|
7.03
|
|
|
|
81
|
|
|
|
311,404
|
|
|
|
12
|
|
|
|
2.15
|
|
|
|
69
|
|
Subprime
|
|
|
7,364
|
|
|
|
*
|
|
|
|
30.68
|
|
|
|
97
|
|
|
|
8,417
|
|
|
|
*
|
|
|
|
14.29
|
|
|
|
87
|
|
|
|
8,327
|
|
|
|
*
|
|
|
|
5.76
|
|
|
|
76
|
|
Vintages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
292,184
|
|
|
|
11
|
|
|
|
12.87
|
|
|
|
97
|
|
|
|
372,254
|
|
|
|
14
|
|
|
|
5.11
|
|
|
|
85
|
|
|
|
430,845
|
|
|
|
17
|
|
|
|
1.74
|
|
|
|
74
|
|
2007
|
|
|
422,956
|
|
|
|
15
|
|
|
|
14.06
|
|
|
|
96
|
|
|
|
536,459
|
|
|
|
20
|
|
|
|
4.70
|
|
|
|
87
|
|
|
|
527,852
|
|
|
|
21
|
|
|
|
0.68
|
|
|
|
77
|
|
All other vintages
|
|
|
2,081,348
|
|
|
|
74
|
|
|
|
3.08
|
|
|
|
67
|
|
|
|
1,802,679
|
|
|
|
66
|
|
|
|
1.51
|
|
|
|
62
|
|
|
|
1,551,490
|
|
|
|
62
|
|
|
|
0.91
|
|
|
|
52
|
|
Estimated
mark-to-market
LTV ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
100%(1)
|
|
|
403,443
|
|
|
|
14
|
|
|
|
22.09
|
|
|
|
128
|
|
|
|
314,674
|
|
|
|
12
|
|
|
|
10.98
|
|
|
|
119
|
|
|
|
59,403
|
|
|
|
2
|
|
|
|
4.71
|
|
|
|
105
|
|
Select combined risk characteristics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original LTV ratio > 90% and FICO score < 620
|
|
|
23,966
|
|
|
|
1
|
|
|
|
27.96
|
|
|
|
104
|
|
|
|
27,159
|
|
|
|
1
|
|
|
|
15.97
|
|
|
|
98
|
|
|
|
29,347
|
|
|
|
1
|
|
|
|
8.64
|
|
|
|
90
|
|
|
|
|
*
|
|
Percentage is less than 0.5%.
|
|
(1) |
|
Second lien loans held by third
parties are not included in the calculation of the estimated
mark-to-market
LTV ratios.
|
|
(2) |
|
Consists of Illinois, Indiana,
Michigan and Ohio.
|
We expect our conventional single-family serious delinquency
rate to continue to be high in 2010 due to high unemployment and
the prolonged downturn in the housing market; however, we expect
the growth of our serious delinquency rate will moderate in
2010. We anticipate that the pace of loans transitioning out of
serious delinquency status will increase as the number of
foreclosures and problem loan workouts that we complete
increases.
Management
of Problem Loans
Early intervention for a potential or existing problem loan is
critical to helping borrowers avoid foreclosure and stay in
their homes. If a borrower does not make the required payments,
we work 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.
The efforts of our mortgage servicers are critical in keeping
people in their homes, preventing foreclosures and providing
homeowner assistance. We require our single-family servicers to
pursue various resolutions of problem loans as an alternative to
foreclosure, and we continue to work with our servicers to
implement our
157
foreclosure prevention initiatives effectively and to find ways
to enhance our workout protocols and their workflow processes.
We have substantially increased the number of personnel
designated to work with our servicers. In addition, we have
employees working
on-site with
our largest servicers.
Three key areas where our servicers play a critical role in
implementing our foreclosure prevention initiatives are:
(1) establishing contact with the borrower;
(2) considering the borrowers financial profile in
identifying potential home retention strategies to reduce the
likelihood that the borrower will re-default; and (3) in
the event that there is not a suitable home retention strategy
available, offering a viable foreclosure alternative to the
borrower.
Loan
Workout Metrics
During 2009 we announced clarifications and changes to our
servicing policies that give servicers additional flexibility in
the foreclosure prevention process. These changes include
allowing servicers, if appropriate, to extend the forbearance
period, increase the length of repayment plan terms, and begin
earlier intervention of foreclosure prevention efforts. We also
made changes in 2008 to the documents that govern our
single-family trusts. These changes, which are intended to
facilitate the workout process on loans included in trusts
governed by these trust documents, became effective
January 1, 2009.
We refer to actions taken by servicers with borrowers to resolve
the problem of existing or potential delinquent loan payments as
workouts. Our 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. The existence of a second lien may limit our
ability to provide borrowers with loan workout options,
including foreclosure avoidance alternatives.
During 2009, we experienced a significant shift in our approach
to workouts to address the increasing number of borrowers facing
long-term, rather than short-term, financial hardships. While it
has always been our objective to help borrowers retain their
homes, prior to 2009, our workout solutions focused on borrowers
after the hardship that caused them to be delinquent on their
mortgage obligation had been resolved. These solutions included
(1) loan modifications that capitalized the delinquent
principal and interest payments
and/or
extended the term of the loan, or (2) a personal loan,
called a HomeSaver Advance and described in greater detail
below, used to cover the delinquent principal and interest. When
a home retention solution was not available, the borrower would
sell the property as a means of paying off the entire mortgage
obligation as the value of the property was generally in excess
of their mortgage obligation.
During 2009, the prolonged economic stress and high levels of
unemployment hindered the efforts of many delinquent borrowers
to bring their loans current. Borrowers have become increasingly
in need of workout solutions prior to the resolution of the
hardships that are causing their mortgage delinquency.
Furthermore, as a result of the severe decline in home prices,
many borrowers do not have the ability to sell their property
and pay off their mortgage obligation to resolve their
delinquency because their mortgage obligation is more than the
current value of their property. In response to this need, we
have continued to look for ways to help borrowers keep their
homes. For instance, our loan modifications during 2009 have
concentrated on lowering or deferring borrowers monthly
mortgage payments for a predetermined period of time to allow
borrowers to work through the hardships. In addition, as a means
of reducing the cost and stigma associated with foreclosure,
there has been greater focus on alternatives to foreclosure for
borrowers who are unable to retain their homes.
In March 2009, we implemented HAMP, a modification initiative
under the Making Home Affordable Program. Intended to be uniform
across servicers, HAMP is aimed at helping borrowers whose loan
is either currently delinquent or is at imminent risk of
default. HAMP modifications can include reduced interest rates,
term extensions,
and/or
principal forbearance to bring the monthly payment down to 31%
of the borrowers gross (pre-tax) income. We require that
servicers first evaluate borrowers for eligibility under HAMP
before considering other workout options or foreclosure. By
design, not all borrowers facing foreclosure will be eligible
for a HAMP modification. As a result, we are working with
servicers to ensure that borrowers who do
158
not qualify for HAMP or who fail to successfully complete the
HAMP required trial period are provided with alternative home
retention options or a foreclosure avoidance alternative.
Table 46 provides statistics on our single-family loan workouts,
by type, for periods indicated. These statistics do not include
trial modifications under HAMP or repayment and forbearance
plans that have been initiated but not completed.
Table
46: Statistics on Single-Family Loan
Workouts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
|
(Dollars in millions)
|
|
|
Home retention strategies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications
|
|
$
|
18,702
|
|
|
|
98,575
|
|
|
$
|
5,119
|
|
|
|
33,388
|
|
|
$
|
3,342
|
|
|
|
26,466
|
|
Repayment plans and forbearances
completed(1)
|
|
|
2,930
|
|
|
|
22,948
|
|
|
|
936
|
|
|
|
7,892
|
|
|
|
904
|
|
|
|
7,955
|
|
HomeSaver Advance first-lien loans
|
|
|
6,057
|
|
|
|
39,199
|
|
|
|
11,196
|
|
|
|
70,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,689
|
|
|
|
160,722
|
|
|
$
|
17,251
|
|
|
|
112,247
|
|
|
$
|
4,246
|
|
|
|
34,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure alternatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preforeclosure sales
|
|
$
|
8,457
|
|
|
|
36,968
|
|
|
$
|
2,212
|
|
|
|
10,355
|
|
|
$
|
415
|
|
|
|
2,720
|
|
Deeds-in-lieu
of foreclosure
|
|
|
491
|
|
|
|
2,649
|
|
|
|
252
|
|
|
|
1,341
|
|
|
|
97
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,948
|
|
|
|
39,617
|
|
|
$
|
2,464
|
|
|
|
11,696
|
|
|
$
|
512
|
|
|
|
3,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan workouts
|
|
$
|
36,637
|
|
|
|
200,339
|
|
|
$
|
19,715
|
|
|
|
123,943
|
|
|
$
|
4,758
|
|
|
|
37,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan workouts as a percentage of single-family guaranty book of
business(2)
|
|
|
1.26
|
%
|
|
|
1.10
|
%
|
|
|
0.70
|
%
|
|
|
0.68
|
%
|
|
|
0.18
|
%
|
|
|
0.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year ended
December 31, 2009, repayment plans reflected those plans
associated with loans that were 60 days or more delinquent.
For the years ended December 31, 2008 and 2007, repayment
plans reflected those plans associated with loans that were
90 days or more delinquent. If we had included repayment
plans associated with loans that were 60 days or more
delinquent for the years ended December 31, 2008 and 2007,
the unpaid principal balance that had repayment plans and
forbearances completed would have been $2.8 billion and
$2.1 billion, respectively, and the number of loans that
had repayment plans and forbearances completed would have been
22,337 and 17,926, respectively.
|
|
(2) |
|
Represents total loan workouts
during the period as a percentage of our single-family guaranty
book of business as of the end of each year.
|
We increased the level of workout volume in 2009, through
workouts initiated through our foreclosure prevention efforts.
Loan modifications more than doubled from the volumes in 2008 as
the number of borrowers who were experiencing significant
adverse changes in their financial condition increased.
Consequently we reduced the number of HomeSaver Advance loans we
purchased because we require that all potential loan workouts
first be evaluated under HAMP before being considered for other
alternatives. We also agreed to an increasing number of
preforeclosure sales and accepted a higher number of
deeds-in-lieu
of foreclosure during 2009 as a growing number of borrowers were
adversely affected by the weak economy.
Loan modifications involve changes to the original mortgage
terms such as product type, interest rate, amortization term,
maturity date
and/or
unpaid principal balance. Modifications include TDRs, which are
restructurings of mortgage loans 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. As discussed above and in
greater detail below, the profile of the modifications completed
during 2009 has shifted from those completed prior to 2009.
159
Because we did not begin implementing HAMP until March 2009 and
servicers required time to execute the program, the majority of
workouts and loan modifications performed during 2009 were not
made under HAMP and the number of trial modifications initiated
under this program was relatively small until the third and
fourth quarters of 2009. As shown in Table 16: Impairments
and Fair Value Losses in HAMP, during 2009, we initiated
approximately 333,000 trial modifications under HAMP, as well as
other loan modifications, repayment and forbearance plans.
However, it is difficult to predict how many of these trial
modifications and initiated plans will be completed. There have
been only a limited number of permanent HAMP modifications
because the program entails at least a three month trial period.
During this trial period, the loan servicer evaluates the
borrowers ability to make the required modified loan
payment and collects all required documentation before making
the modification effective. The inability to obtain proper
documentation from borrowers who had entered into a trial
modification was a significant factor in the low number of
modifications that have become permanent under HAMP.
Accordingly, the majority of workouts and loan modifications
performed during 2009 were not made under HAMP. In a February
2010 announcement, as directed by Treasury, servicers are
required to conduct a full verification of a borrowers
eligibility prior to offering a HAMP trial period plan. This is
effective for all HAMP trial period plans with effective dates
on or after June 1, 2010.
Introduced in 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 loans. 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; to the extent the acquisition cost exceeds the
estimated fair value, we record either an impairment or a fair
value loss charge-off against the Reserve for guaranty
losses at the time we acquire the loans. The aggregate
unpaid principal balance and carrying value of our HomeSaver
Advances were $324 million and $1 million as of
December 31, 2009, compared with $461 million and
$8 million as of December 31, 2008. Approximately 22%
of the first lien mortgage loans associated with HomeSaver
Advance purchased during 2008 were current or had paid off as of
nine months following the funding date of the unsecured
HomeSaver Advance loan.
Foreclosure alternatives may be more appropriate if the borrower
has experienced a significant adverse change in financial
condition due to events such as unemployment or reduced income,
divorce, or unexpected issues like medical bills and is
therefore no longer able to make the required mortgage payments.
Since the cost of foreclosure can be significant to both the
borrower and Fannie Mae, to avoid foreclosure and satisfy the
first lien mortgage obligation, our servicers work with a
borrower to sell their home prior to foreclosure in a
preforeclosure sale or accept the
deed-in-lieu
of foreclosure whereby the borrower voluntarily signs over the
title to their property to the servicer. These alternatives are
designed to reduce our credit losses while helping borrowers
avoid the pressure and stigma associated with a foreclosure.
Given the continued increase in the number of loans at risk of
foreclosure, we remain focused on our goals to minimize our
credit losses and help borrowers stay in their homes. As such,
we expect to increase the number of loan workouts in 2010
including modifications both under HAMP and outside the program.
We also expect to increase foreclosure alternatives in those
instances that borrowers are unable to remain in their homes. We
expect to continue to look for additional solutions to help
borrowers stay in their homes and avoid foreclosure.
In an effort to keep people in their homes, we experienced a
shift in loan modification type during 2009 and 2008. Table 47
below displays the types of loan modifications provided to
borrowers for 2009, 2008 and 2007.
160
Table
47: Loan Modification Profile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Term extension, interest rate reduction, or combination of
both(1)
|
|
|
93
|
%
|
|
|
57
|
%
|
|
|
52
|
%
|
Initial reduction in the monthly
payment(2)
|
|
|
87
|
|
|
|
38
|
|
|
|
9
|
|
Estimated mark-to-market LTV ratio > 100%
|
|
|
47
|
|
|
|
22
|
|
|
|
8
|
|
Troubled debt restructurings
|
|
|
92
|
|
|
|
60
|
|
|
|
43
|
|
|
|
|
(1) |
|
Reported statistics for term
extension, interest rate reduction or the combination of both
for 2009 and 2008 include subprime adjustable-rate mortgage
loans that have been modified to a fixed-rate loan.
|
|
(2) |
|
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.
|
The vast majority of our 2009 and 2008 loan modifications were
designed to help distressed borrowers by reducing the
borrowers monthly principal and interest payment through
an extension of the loan term, a reduction in the interest rate,
or a combination of both. Prior to 2008, the majority of our
loan modifications did not result in economic concessions to the
borrower.
A significant portion of our modifications pertain to loans with
a mark-to-market LTV ratio greater than 100%, because the
average serious delinquency rate for these loans has been
substantially higher than our overall average single-family
serious delinquency rate and because these borrowers are unable
to sell their homes as their mortgage obligation is greater than
the value of their homes. As of December 31, 2009, the
serious delinquency rate for loans with a mark-to-market LTV
ratio greater than 100% was 22%, compared with our overall
average single-family serious delinquency rate of 5.38%. These
loans represented approximately 47% of the modifications that we
made during 2009, compared with 22% for 2008 and 8% for 2007.
Approximately 48% of loans modified during the first and second
quarters of 2009 were current or had paid off as of six months
following the loan modification date. Approximately 37% of loans
modified during 2008 were current or had paid off as of six
months following the loan modification date. As we have focused
our efforts on distressed borrowers, who are experiencing
current economic hardship, the short term performance of our
workouts may not be indicative of long term performance. We
believe the performance of our 2008 and 2009 workouts will be
highly dependent on economic factors, such as unemployment rates
and home prices.
There is significant uncertainty 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 and the stock market and high
unemployment. Modifications may also not be sufficient to help
borrowers with second liens and significant non-mortgage debt
obligations. However, as we complete an increasing number of
loan modifications, we are able to reduce the current stress on
our servicers by reducing the number of seriously delinquent
loans they are required to manage. If a borrower defaults on a
loan modification, we require our servicer to work with the
borrower to cure the modified loan, or if that is not feasible,
evaluate the borrower for any other available foreclosure
prevention alternatives prior to commencing foreclosure
proceedings. If a borrower defaults on a loan modification
executed under HAMP, they are not eligible for another HAMP
modification. FHFA, other agencies of the U.S. government
or Congress may ask us to undertake new initiatives to support
the housing and mortgage markets should our current modification
efforts ultimately not perform in a manner that results in the
stabilization of these markets.
REO
Management
Foreclosure and REO activity affect the level of credit losses.
Table 48 compares our foreclosure activity, by region, for the
periods indicated. Regional REO acquisition and charge-off
trends generally follow a pattern that is similar to, but lags,
that of regional delinquency trends.
161
Table
48: Single-Family Foreclosed Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Single-family foreclosed properties (number of properties):
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period inventory of single-family foreclosed
properties
(REO)(1)
|
|
|
63,538
|
|
|
|
33,729
|
|
|
|
25,125
|
|
Acquisitions by geographic
area:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
36,072
|
|
|
|
30,026
|
|
|
|
20,303
|
|
Northeast
|
|
|
7,934
|
|
|
|
5,984
|
|
|
|
3,811
|
|
Southeast
|
|
|
39,302
|
|
|
|
24,925
|
|
|
|
12,352
|
|
Southwest
|
|
|
31,197
|
|
|
|
18,340
|
|
|
|
9,942
|
|
West
|
|
|
31,112
|
|
|
|
15,377
|
|
|
|
2,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties acquired through foreclosure
|
|
|
145,617
|
|
|
|
94,652
|
|
|
|
49,121
|
|
Dispositions of REO
|
|
|
(123,000
|
)
|
|
|
(64,843
|
)
|
|
|
(40,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period inventory of single-family foreclosed properties
(REO)(1)
|
|
|
86,155
|
|
|
|
63,538
|
|
|
|
33,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of single-family foreclosed properties (dollars
in
millions)(3)
|
|
$
|
8,466
|
|
|
$
|
6,531
|
|
|
$
|
3,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family foreclosure
rate(4)
|
|
|
0.80
|
%
|
|
|
0.52
|
%
|
|
|
0.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes acquisitions through
deeds-in-lieu
of foreclosure.
|
|
(2) |
|
See footnote 8 to Table 42 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 the total number
of properties acquired through foreclosure as a percentage of
the total number of loans in our conventional single-family
guaranty book of business as of the end of each respective
period.
|
Despite the increase in our foreclosure rate during 2009,
foreclosure levels were lower than what they otherwise would
have been because of our foreclosure moratoria and directive to
delay foreclosure sales until the loan servicer verifies that
the borrower is ineligible for HAMP modifications and all other
foreclosure prevention alternatives have been exhausted. During
2008 and 2009, we significantly increased our REO sales staff as
part of our efforts to sell our inventory of foreclosed
properties and reduce the costs associated with these
properties. However, the weak economy 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 significantly reduced the values of our foreclosed
single-family properties. As shown in Table 49 we have
experienced a disproportionate share of defaults, particularly
within certain states that have had significant home price
depreciation and Alt-A loans.
Table
49: Single Family Acquired Property Concentration
Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
For The Year Ended
|
|
|
As of
|
|
|
For The Year Ended
|
|
|
As of
|
|
|
For The Year Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
|
Properties
|
|
|
Percentage of
|
|
|
Properties
|
|
|
Percentage of
|
|
|
Properties
|
|
|
|
Book
|
|
|
Acquired
|
|
|
Book
|
|
|
Acquired
|
|
|
Book
|
|
|
Acquired
|
|
|
|
Outstanding(1)
|
|
|
by
Foreclosure(2)
|
|
|
Outstanding(1)
|
|
|
by
Foreclosure(2)
|
|
|
Outstanding(1)
|
|
|
by
Foreclosure(2)
|
|
|
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona, California, Florida and Nevada
|
|
|
28
|
%
|
|
|
36
|
%
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
10
|
%
|
Illinois, Indiana, Michigan and Ohio
|
|
|
11
|
|
|
|
20
|
|
|
|
11
|
|
|
|
25
|
|
|
|
12
|
|
|
|
34
|
|
Product Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
9
|
|
|
|
31
|
|
|
|
11
|
|
|
|
31
|
|
|
|
12
|
|
|
|
22
|
|
|
|
|
(1) |
|
Percentage calculated based on
unpaid principal balance as of the end of each period.
|
162
|
|
|
(2) |
|
Calculated based on number of
properties acquired through foreclosure during the year divided
by total number of properties acquired through foreclosure.
|
Although we have expanded our loan workout initiatives to keep
borrowers in their homes, we expect our foreclosures to increase
in 2010 as a result of the adverse impact that the weak economy
and high unemployment have had and are expected to have on the
financial condition of borrowers.
Multifamily
Mortgage Credit Risk Management
The credit risk profile of our multifamily mortgage credit book
of business is influenced by, among other things, the structure
of the financing; the type and location of the property; the
condition and value of the property; the financial strength of
the borrower and lender; market and sub-market trends and
growth; and the current and anticipated cash flows from the
property. These and other factors affect both the amount of
expected credit loss on a given loan and the sensitivity of that
loss to changes in the economic environment. We provide
information on our credit-related expenses and credit losses in
Consolidated Results of OperationsCredit-Related
Expenses.
While our multifamily mortgage credit book of business includes
all of our multifamily mortgage-related assets, both on-and
off-balance sheet, our guaranty book of business excludes
non-Fannie Mae multifamily mortgage-related securities held in
our portfolio for which we do not provide a guaranty. Our
multifamily guaranty book of business consists of multifamily
mortgage loans held in our mortgage portfolio; Fannie Mae MBS
held in our portfolio or by third parties; and other credit
enhancements that we provide on mortgage assets. The following
credit risk management discussion pertains to our multifamily
guaranty book of business.
The credit statistics reported below, unless otherwise noted,
pertain only to a specific portion of our multifamily guaranty
book of businessgenerally the portion for which we have
access to detailed loan-level information. We typically obtain
this data from the sellers or servicers of the mortgage loans in
our guaranty book of business 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. The portion of our multifamily guaranty book of
business for which we have detailed loan level-information
constituted over 98% and 99% of our total multifamily guaranty
book as of December 31, 2009 and 2008, respectively. See
Risk Factors where we discuss the additional risks
to us if one or more parties in a mortgage transaction engages
in fraud by misrepresenting facts about a mortgage loan.
Multifamily
Acquisition Policy and Underwriting Standards
Our HCD business, in conjunction with our Enterprise Risk
Management division, is responsible for pricing and managing the
credit risk on multifamily mortgage loans we purchase and on
Fannie Mae MBS backed by multifamily loans (whether held in our
portfolio or held by third parties). Multifamily loans that we
purchase or that back Fannie Mae MBS are either underwritten by
a Fannie Mae-approved lender or subject to our underwriting
review prior to closing. Many of our agreements delegate the
underwriting decisions to the lender, principally through our
Delegated Underwriting and Servicing, or
DUS®,
program. Loans delivered to us by DUS lenders and their
affiliates represented approximately 81% of our multifamily
guaranty book of business as of December 31, 2009 compared
with 87% as of December 31, 2008.
We use various types of credit enhancement arrangements for our
multifamily loans, including lender risk sharing, lender
repurchase agreements, pool insurance, subordinated
participations in mortgage loans or structured pools, cash and
letter of credit collateral agreements, and
cross-collateralization/cross-default provisions. The most
prevalent form of credit enhancement on multifamily loans is
lender risk sharing. Lenders in the DUS program typically share
in loan-level credit losses in one of two ways: either
(1) they bear losses up to the first 5% of unpaid principal
balance of the loan and share in remaining losses up to a
prescribed limit or (2) they agree to share with us up to
one-third of the credit losses on an equal basis. Other lenders
typically share or absorb credit losses up to a negotiated
percentage of the loan or the pool balance.
163
As a result, our credit-enhanced loans typically account for a
smaller proportion of our multifamily credit losses compared
with their share of our seriously delinquent loans.
Multifamily
Portfolio Diversification and Monitoring
Diversification within our multifamily mortgage credit book of
business and equity investments business by geographic
concentration, term-to-maturity, interest rate structure,
borrower concentration and credit enhancement arrangements is an
important factor that influences credit quality and performance
and helps reduce our credit risk.
The weighted average original LTV ratio for our multifamily
mortgage credit book of business was 67% for each year ended
2009, 2008 and 2007. The percentage of our multifamily mortgage
credit book of business with an original LTV ratio greater than
80% was 5% for each year ended 2009 and 2008 and 6% for year
ended 2007. We present the current risk profile of our
multifamily guaranty book of business in Note 7,
Financial Guarantees and Master Servicing.
We monitor the performance and risk concentrations of our
multifamily loan and equity investments and the underlying
properties on an ongoing basis throughout the life of the
investment at the loan, equity investment, fund, property and
portfolio level. We closely track the physical condition of the
property, the historical performance of the investment, loan or
property, the relevant local market and economic conditions that
may signal changing risk or return profiles and other risk
factors. For example, we closely monitor the rental payment
trends and vacancy levels in local markets to identify loans or
investments that merit closer attention or loss mitigation
actions. We also monitor our LIHTC investments for program
compliance.
For our investments in multifamily loans, the primary asset
management responsibilities are performed by our DUS and other
multifamily lenders. Similarly, for many of our equity
investments, the primary asset management is performed by our
syndicators, our fund advisors, our joint venture partners or
other third parties. We periodically evaluate the performance of
our third-party service providers for compliance with our asset
management criteria.
Problem
Loan Management and Foreclosure Prevention
Increased vacancy rates and declining rental income and net
operating income, due to weak economic conditions and reduced
liquidity in the financial markets, has caused increases in our
multifamily serious delinquency rate and the level of
foreclosures. In response to the increase in the number of
multifamily problem loans, we have further tightened our
underwriting standards and implemented more proactive portfolio
management and monitoring. 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
Table 50 provides a comparison of our multifamily serious
delinquency rates for loans with and without credit enhancement.
We classify multifamily loans as seriously delinquent when
payment is 60 days or more past due. We calculate
multifamily serious delinquency rates based on the unpaid
principal balance of loans, where we have detailed loan-level
information, for each category divided by the unpaid principal
balance of our total multifamily guaranty book of business. 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.
164
Table
50: Multifamily Serious Delinquency Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
Percentage of
|
|
|
Serious
|
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
Book
|
|
|
Delinquency
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Multifamily loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit enhanced
|
|
|
89
|
%
|
|
|
0.54
|
%
|
|
|
86
|
%
|
|
|
0.26
|
%
|
|
|
88
|
%
|
|
|
0.06
|
%
|
Non-credit enhanced
|
|
|
11
|
|
|
|
1.33
|
|
|
|
14
|
|
|
|
0.54
|
|
|
|
12
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily loans
|
|
|
100
|
%
|
|
|
0.63
|
%
|
|
|
100
|
%
|
|
|
0.30
|
%
|
|
|
100
|
%
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our multifamily serious delinquency rate is
attributable to the weakness in the economy, which initially had
a negative impact on smaller borrowers, but more recently has
also begun to impact large balance loans, or loans with an
originating loan size of over $25 million. As the continued
weak economic conditions begin to impact our larger borrowers,
our risk of loss increases.
Our 2007 loan acquisitions, which represented approximately 24%
of our multifamily guaranty book of business as of
December 31, 2009, but accounted for approximately 48% of
our multifamily serious delinquency rate, have been a
significant driver of the increase in our multifamily serious
delinquency rate. Although our 2007 loan acquisitions were
underwritten to our then-current credit standards and required
borrower cash equity, they were acquired near the peak of the
multifamily housing values. This vintage continues to show
stress as a result of weak economic conditions, lack of
liquidity in the market and significant decline in property
values.
REO
Management
Foreclosure and REO activity affects the level of credit losses.
Table 51 compares our multifamily REO balances for the periods
indicated.
|
|
Table
51:
|
Multifamily
Foreclosed Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Number of multifamily foreclosed properties (REO)
|
|
|
73
|
|
|
|
29
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of multifamily foreclosed properties (dollars in
millions)
|
|
$
|
265
|
|
|
$
|
105
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed above, our multifamily foreclosed property
inventory increase reflects the continuing stress on our
multifamily guaranty book of business due to weak economic
conditions and lack of liquidity in the market.
Institutional
Counterparty Credit Risk Management
We rely on our institutional counterparties to provide services
and credit enhancements, including primary and pool mortgage
insurance coverage, risk sharing agreements with lenders and
financial guaranty contracts, 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;
|
|
|
|
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;
|
165
|
|
|
|
|
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;
|
|
|
|
issuers of securities held in our cash and other investments
portfolio;
|
|
|
|
derivatives counterparties;
|
|
|
|
mortgage originators and investors;
|
|
|
|
debt security and mortgage dealers; and
|
|
|
|
document custodians.
|
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 during 2008 and 2009
have adversely affected 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 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 Risk 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
counterparties, 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 their value. 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.
On September 22, 2009, we filed a proof of claim as a
creditor in the bankruptcy case of Lehman Brothers Holdings,
Inc., which filed for bankruptcy in September 2008. The claim of
$8.9 billion included losses we incurred in connection with
the termination of our outstanding derivatives contracts with a
subsidiary of Lehman Brothers, federal securities law claims
related to Lehman Brothers private label securities and notes
held in our cash and other investments portfolio, losses arising
under certain REMIC and grantor trust transactions, and mortgage
loan repurchase obligations. A contingent claim of
$6.9 billion was also included, primarily relating to a
large multifamily transaction. However, based on Lehman
Brothers financial condition, we believe we will receive
only a portion of these claims.
On December 11, 2009, the House of Representatives passed
legislation that would significantly alter the current
regulatory framework applicable to the financial services
industry, with enhanced and more comprehensive regulation of
financial firms and markets. If that bill or similar legislation
is implemented, it will result in increased supervision and more
comprehensive regulation of our counterparties, which may have a
significant impact on our counterparty risk. See Risk
FactorsStructural and regulatory changes in the financial
services industry may negatively impact our business.
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. We
166
have minimum standards and financial requirements for mortgage
servicers. For example, we require servicers to collect and
retain a sufficient level of servicing fees to reasonably
compensate a replacement servicer in the event of a servicing
contract breach. In addition, we perform periodic
on-site and
financial reviews of our servicers and monitor their financial
and portfolio performance as compared to peers and internal
benchmarks. We work with our largest servicers to establish
performance goals and report performance against the goals, and
our servicing consultants work with servicers to improve
servicing results and compliance with our servicing guide.
Our business with our mortgage servicers is concentrated. Our
ten largest single-family mortgage servicers, including their
affiliates, serviced 80% of our single-family mortgage credit
book of business as of December 31, 2009 compared with 81%
as of 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 December 31,
2009 and 2008. In addition, we had two other mortgage servicers,
Wells Fargo and JP Morgan Chase & Co., that, with
their affiliates, each serviced over 10% of our single-family
mortgage credit book of business as of December 31, 2009.
Wells Fargo and PNC, with their affiliates, each serviced over
10% of our multifamily mortgage credit book of business as of
December 31, 2009. 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.
Due to the economic recession that began in December 2007 and
the continuing weak economy, the financial condition and
performance of many of our mortgage servicers has deteriorated,
with several experiencing ratings downgrades and liquidity
constraints, however, during 2009, our primary mortgage servicer
counterparties have generally continued to meet their
obligations to us. The 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
in the future. We are also relying on our mortgage servicers to
play a significant role in our homeownership assistance
programs; the broad scope of some of these programs, as well as
the recent economic challenges in the market, may limit their
capacity to support these programs.
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 underwriting and eligibility
requirements or if mortgage insurers rescind coverage. Beginning
in 2008, there was a substantial increase in the amount of
repurchase and reimbursement requests that we made to our
mortgage servicers, of which a small amount remain outstanding.
For 2009, we continued to see an increase in the amount of
repurchase and reimbursement requests. The amount of our
outstanding repurchase and reimbursement requests from 2009 is
increasing primarily due to (1) 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, and
(2) significant increases in the number of mortgage loans
for which mortgage insurance coverage has been rescinded. We
expect the amount of our outstanding repurchase and
reimbursement requests to remain high throughout 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
and we may be unable to recover on all outstanding loan
repurchase and reimbursement obligations resulting from breaches
of seller representations and warranties. If a significant
servicer counterparty, or a number of servicer counterparties,
fails to fulfill its 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 likely would incur costs and potential increases in servicing
fees and could also face operational risks if we decide to
replace a mortgage servicer due to its default, our assessment
of its financial condition or for other reasons. If a
significant mortgage servicer counterparty fails, 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 penalties for late payment of taxes and insurance
on the properties that secure the mortgage loans serviced by
167
that mortgage servicer. 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.
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. See Risk
Factors for additional discussion on risks of mortgage
fraud we are exposed to.
Risk management steps we have taken to mitigate our risk to
servicers with whom we have material counterparty exposure
include guaranty of obligations by a higher-rated entity,
reduction or elimination of exposures, reduction or elimination
of certain business activities, transfer of exposures to third
parties, receipt of additional collateral and suspension or
termination of the servicing relationship.
Mortgage
Insurers
We use several types of credit enhancement to manage our
single-family mortgage credit risk, including primary and pool
mortgage insurance coverage. 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 $106.5 billion
on the single-family mortgage loans in our guaranty book of
business as of December 31, 2009, which represented
approximately 4% of our single-family guaranty book of business
as of December 31, 2009. Primary mortgage insurance
represented $99.6 billion of this total, and pool mortgage
insurance was $6.9 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.
Increases in mortgage insurance claims due to higher defaults
and credit losses in recent periods have adversely affected the
financial results and condition of 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 seven
mortgage insurer counterparties that continue to be rated. As a
result of the downgrades, these 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.
Due to these downgrades, we have begun to primarily rely on our
internal credit ratings when assessing our exposure to a
counterparty.
Our rating structure is based on a scale of 1 to 8. A rating of
1 represents a counterparty that we view as having excellent
credit quality. We consider the credit quality of an 8 to be
poor. These internal ratings, which reflect our views of a
mortgage insurers claims paying ability, are based
primarily on an assessment of the mortgage insurers
capital adequacy and liquidity. These assessments conducted in
making our credit quality determinations involve in-depth credit
reviews of each mortgage insurer, a comprehensive analysis of
the mortgage insurance sector, stress analyses of the
insurers portfolio, discussions with the insurers
management, the insurers plans to maintain capital within
the insuring entity and our views on macroeconomic variables
which impact a mortgage insurers estimated future paid
losses, such as changes in home prices and changes in interest
rates. From time to time, we may also discuss its situation with
the rating agencies.
168
Table 52 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
December 31, 2009. These mortgage insurers provided over
99% of our total mortgage insurance coverage on single-family
loans in our guaranty book of business as of December 31,
2009.
Table
52: Mortgage Insurance Coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Maximum
Coverage(2)
|
|
Counterparty:(1)
|
|
Primary
|
|
|
Pool
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage Guaranty Insurance Corporation
|
|
$
|
23,580
|
|
|
$
|
2,230
|
|
|
$
|
25,810
|
|
Radian Guaranty, Inc.
|
|
|
15,802
|
|
|
|
514
|
|
|
|
16,316
|
|
Genworth Mortgage Insurance Corporation
|
|
|
15,574
|
|
|
|
377
|
|
|
|
15,951
|
|
United Guaranty Residential Insurance Company
|
|
|
14,733
|
|
|
|
260
|
|
|
|
14,993
|
|
PMI Mortgage Insurance Co.
|
|
|
13,375
|
|
|
|
872
|
|
|
|
14,247
|
|
Republic Mortgage Insurance Company
|
|
|
10,856
|
|
|
|
1,501
|
|
|
|
12,357
|
|
Triad Guaranty Insurance Corporation
|
|
|
3,520
|
|
|
|
1,108
|
|
|
|
4,628
|
|
CMG Mortgage Insurance
Company(3)
|
|
|
1,967
|
|
|
|
|
|
|
|
1,967
|
|
|
|
|
(1) |
|
Insurance coverage amounts provided
for each counterparty may include coverage provided by
consolidated affiliates and subsidiaries of the counterparty.
|
|
(2) |
|
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.
|
|
(3) |
|
CMG Mortgage Insurance Company is a
joint venture owned by PMI Mortgage Insurance Co. and CUNA
Mutual Insurance Society.
|
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 2010 and they may not have access to
sufficient capital to continue to write new business in
accordance with state regulatory requirements. Several mortgage
insurers have approached us with various proposed corporate
restructurings that would require our approval of affiliated
mortgage insurance writing entities. The restructurings are
intended to provide relief from risk-to-capital limits in
certain states. We have engaged in discussions with these
mortgage insurers to determine if, and how, any restructuring
may provide the intended relief and permit a mortgage insurer to
continue to serve the market by writing mortgage insurance and
fulfill existing obligations to us with respect to risk in
force. In those cases where a restructuring provides the
intended relief and we have received assurances from the
mortgage insurer
and/or the
relevant state regulatory authority that the restructuring will
not materially affect existing claims paying abilities, we may
conditionally approve these affiliated mortgage writing
entities, as we did with Mortgage Guaranty Insurance
Corporations affiliated mortgage insurance writing entity,
MGIC Indemnity Corporation.
In addition, many mortgage insurers have been exploring and
continue to explore capital raising options, most 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 unless they can secure a waiver
from their state regulator. 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 pay our 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, and we are unable to replace them with another
mortgage insurer, it is likely we would further increase our
concentration risk with the remaining mortgage insurers in the
industry.
169
Triad Guaranty Insurance Corporation ceased issuing commitments
for new mortgage insurance and began to run-off its existing
business in July 2008. In April 2009, Triad received an order
from its regulator that changes the way it will pay all
policyholder claims. Under the order, 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.
When we estimate the credit losses that are inherent in our
mortgage loan portfolio and under the terms of our guaranty
obligations we also consider the recoveries that we will receive
on primary mortgage insurance, as mortgage insurance recoveries
would reduce the severity of the loss associated with defaulted
loans. We adjust the contractually due recovery amount to ensure
that only amounts which are probable of collection as of the
balance sheet date are included in our loss reserve estimate. As
a result, if our assessment of one or more of our mortgage
insurer counterpartys ability to fulfill their respective
obligations to us worsens, it could result in an increase in our
loss reserves.
As of December 31, 2009, our Allowance for loan losses of
$10.5 billion and Reserve for guaranty losses of
$54.4 billion incorporated an estimated recovery amount of
approximately $16.3 billion from mortgage insurance related
both to loans that are individually measured for impairment and
those that are measured collectively for impairment. This amount
is comprised of the contractual recovery of approximately
$18.5 billion as of December 31, 2009 and an
adjustment of approximately $2.2 billion which reduces the
contractual recovery for our assessment of our mortgage insurer
counterparties inability to fully pay those claims.
For loans that are collectively evaluated for impairment, we
estimate the portion of our incurred loss that we expect to
recover from each of our mortgage insurance counterparties based
on the losses that have been incurred, the contractual mortgage
insurance coverage, and an estimate of each counterpartys
resources available to pay claims to Fannie Mae. An analysis by
our Counterparty Risk division determines whether, based on all
the information available to the company, any counterparty is
considered probable to fail to meet their obligations in the
next 30 months. This period is consistent with the amount
of time over which claims related to losses incurred today are
expected to be paid. If that separate analysis finds a
counterparty is probable to fail, we then reserve for the
shortfall between incurred claims and estimated resources
available to pay claims to Fannie Mae.
For loans that have been determined to be individually impaired,
we calculate a net present value of the expected cash flows for
each loan to determine the level of impairment. These expected
cash flow projections include proceeds from mortgage insurance,
that are based, in part, on the internal credit ratings for each
of our mortgage insurance counterparties. Specifically, for
loans insured by a mortgage insurer with a poorer credit rating,
our cash flow projections include fewer proceeds from the
insurer.
As described above, our methodologies for individually and
collectively impaired loans differ as required by GAAP, but both
consider the ability of our counterparties to pay their
obligations in a manner that is consistent with each
methodology. As the loans individually assessed for impairment
consider the life of the loan, we use the noted risk ratings to
adjust the loss severity in our best estimates of future cash
flows. As the loans collectively assessed for impairment only
look to the probable payments we would receive associated with
our loss emergence period, we use the noted shortfall to adjust
the loss severity.
When an insured loan held in Fannie Maes mortgage
portfolio subsequently goes into foreclosure, Fannie Mae charges
off the loan, eliminating any previously-recorded loss reserves,
and records real-estate owned and a mortgage insurance
receivable for the claim proceeds deemed probable of recovery,
as appropriate. We had outstanding receivables from mortgage
insurers of $2.5 billion as of December 31, 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 assessed the receivables for collectibility, and
they are recorded net of a valuation allowance of
$51 million as of December 31, 2009 and
$8 million as of December 31, 2008 in Other
assets. These mortgage insurance receivables are
short-term in nature, having a duration of approximately three
to six months, and the valuation allowance reduces our claim
receivable to the amount which is considered probable of
collection as of
170
December 31, 2009 and 2008. We received proceeds under our
primary and pool mortgage insurance policies for single-family
loans of $3.6 billion for the year ended December 31,
2009 and $1.8 billion for the year ended December 31,
2008. The proceeds received in 2009 include lump-sum payments of
$668 million received from the cancellation and
restructurings of some of our mortgage insurance coverage.
For individually impaired loans, our internal credit ratings for
mortgage insurer counterparties impact our expected cash flow
projections for those loans. Specifically, for loans insured by
a mortgage insurer with a poorer credit rating, our cash flow
projections include fewer proceeds from the insurer. We
calculate a net present value of the expected cash flow
projections of each loan to determine the level of impairment,
which is included in our allowance for loan losses or reserve
for guaranty losses. Also, as our internal credit ratings of our
mortgage insurer counterparties decrease, 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.
Except for Triads claims included in their deferred
payment obligations discussed above, our mortgage insurer
counterparties have continued to pay claims owed to us. Our
mortgage insurer counterparties have significantly increased the
number of mortgage loans for which they have rescinded coverage.
In those cases where the mortgage insurance was obtained to meet
our Charter requirements or where we independently agree with
the materiality of the finding that was the basis for the
rescission, we generally require the servicer to repurchase the
loan or indemnify us against loss.
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. Except for Triad, as of
February 26, 2010, 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 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. During 2009, we received an application from,
Essent Guaranty, Inc., a new mortgage insurer, requesting
eligibility to do business with us. We announced the approval of
that application on February 18, 2010. By increasing the
number of counterparties with which we do business, we would
reduce the concentration of our counterparty exposure.
From time to time, we may enter into negotiated transactions
with mortgage insurer counterparties pursuant to which we agree
to cancel or restructure insurance coverage, in excess of
Charter requirements, in exchange for a fee. For example, in the
third and fourth quarters of 2009, we agreed to cancel and
restructure mortgage insurance coverage provided by a mortgage
insurer counterparty on a number of mortgage pools in exchange
for a fee that represented an acceleration of, and discount on,
claims to be paid pursuant to the coverage. As these insurance
cancellations and restructurings provide our counterparties with
capital relief and provide us with cash in lieu of future claims
that the counterparty may not be able to pay, thereby reducing
our future credit exposure, we anticipate negotiating additional
insurance coverage restructurings in 2010.
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 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 2009, these loans
accounted for 10% our single-family business volume.
171
In connection with HARP, 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 refinanced
loans with updated 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. Unless our
regulator grants our request for an extension of this
flexibility for loans originated through June 2011, under the
terms of HARP, we will no longer have the flexibility to accept
loans, originated after June 10, 2010, that do not meet our
charter required credit enhancements.
Financial
Guarantors
We were the beneficiary of financial guarantees totaling
$9.6 billion as of December 31, 2009 and
$10.2 billion as of December 31, 2008, 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 $51.3 billion as of
December 31, 2009 and $43.5 billion as of
December 31, 2008.
Nine financial guarantors provided bond insurance coverage to us
as of December 31, 2009. Only one of the financial
guarantors had an investment grade rating while the others were
rated below investment grade. Most of these financial guarantors
experienced material adverse changes to their financial
condition during 2009 because of significantly higher claim
losses which have impaired their claims paying ability. 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 believe that one or more of our financial
guarantor counterparties may not be able to fully meet their
obligations to us in the future. For the year ended
December 31, 2009, we recognized other-than-temporary
impairments of $293 million related to securities for which
we had obtained financial guarantees. See Consolidated
Balance Sheet AnalysisTrading and Available-for-Sale
Investment SecuritiesInvestments in Private-Label
Mortgage-Related Securities for more information on our
investments in private-label mortgage-related securities and
municipal bonds.
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.
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 $18.3 billion as of
December 31, 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 $28.7 billion as of December 31, 2009 and
$27.2 billion as of December 31, 2008.
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 December 31, 2009 from 50% as of December 31, 2008.
The percentage of these recourse obligations to lender
counterparties rated below investment grade increased to 22% as
of December 31, 2009, from 13% as of December 31,
2008. The remaining percentage of these recourse obligations
were to lender counterparties that were not rated by rating
agencies, which decreased to 33% as of December 31, 2009
from 36% as of December 31, 2008. 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
172
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.
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. 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.
Several of our DUS lenders and their parent companies have come
under stress due to overall market conditions, including Capmark
Finance Inc. (Capmark). Capmark along with its
parent and various other affiliates, filed for Chapter 11
bankruptcy protection on October 25, 2009. On
December 11, 2009, via the bankruptcy Section 363
auction process, Capmarks mortgage origination and
servicing assets, including its Fannie Mae portfolio, were
acquired by Berkadia Commercial Mortgage LLC. While the Capmark
debt portfolio will continue with an active DUS lender, we
continue to have exposure to at least one other bankrupt Capmark
affiliated entity which manages our investment in several LIHTC
funds. At this time, it is too early to determine what, if any,
impact the bankruptcy may have on us but any action taken,
including a sale, that affects our investment requires our
consent.
Custodial
Depository Institutions
A total of $51.0 billion in deposits for single-family
payments were received and held by 284 institutions in the month
of December 2009 and a total of $28.8 billion in deposits
for single-family payments were received and held by 298
institutions in the month of December 2008. Of these total
deposits, 95% as of December 31, 2009 and 96% as of
December 31, 2008 were held by institutions rated as
investment grade by Standard & Poors,
Moodys and Fitch. Our ten largest custodial depository
institutions held 93% of these deposits as of both
December 31, 2009 and 2008.
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.
Due to the challenging market conditions, several of our
custodial depository counterparties experienced ratings
downgrades and liquidity constraints. In response, during 2008
we began reducing the aggregate amount of our funds permitted to
be held with these counterparties, requiring more frequent
remittances of funds, and moving funds held with our largest
counterparties from custodial accounts to trust accounts that
would provide more protection to us in the event of the
insolvency of a depository or servicer. In late 2008 and 2009,
changes in FDIC rules substantially lowered our counterparty
exposure relating to principal and interest payments held on our
behalf in custodial depository accounts. These rules are
effective through December 2013.
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.
173
Our cash and other investments portfolio which totaled
$69.4 billion as of December 31, 2009, included
$45.8 billion of unsecured positions with issuers of
corporate debt securities or short-term deposits with financial
institutions, of which approximately 92% were with issuers which
had a credit rating of AA (or its equivalent) or higher, based
on the lowest of Standard & Poors, Moodys
and Fitch ratings. As of December 31, 2008, our cash and
other investments portfolio totaled $93.0 billion and
included $56.7 billion of unsecured positions with issuers
of corporate debt securities or short-term deposits with
financial institutions, of which approximately 93% were with
issuers which had a credit rating of AA (or its equivalent) or
higher, based on the lowest of Standard & Poors,
Moodys and Fitch ratings.
Due to the economic recession that began in December 2007 and
the continuing weak economy, 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 the
market value and liquidity of these investments, and we could
experience further losses relating to these securities. We no
longer purchase these non-mortgage-related securities and intend
to either continue to sell them 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.
During 2009, 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 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 December 31, 2009 and 2008 in Note 10,
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, 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 2009 and non-cash collateral posted to us at any time is
held and monitored daily by a third-party custodian. Since July
2009, cash collateral posted to us is held and monitored by us
and transacted through a third party. 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 may retain collateral
previously posted by that counterparty to the extent that we are
in a net gain position on the termination date.
174
Our net credit exposure on derivatives contracts increased to
$238 million as of December 31, 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. As of
December 31, 2009, we had exposure to only six
interest-rate and foreign currency derivatives counterparties in
a net gain position. Approximately $78 million, or 33%, of
our net derivatives exposure as of December 31, 2009 was
with three interest-rate and foreign currency derivative
counterparties rated AA- or better by Standard &
Poors and Aa3 or better by Moodys. The three
remaining interest-rate and foreign currency derivative
counterparties accounted for $76 million, or 32%, of our
net derivatives exposure as of December 31, 2009, and were
rated A or better by Standard & Poors and A1 or
better by Moodys. Of the $84 million of net exposure
in other derivatives as of December 31, 2009, approximately
97% 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 16 counterparties as of
December 31, 2009 and 19 counterparties as of
December 31, 2008. Derivatives transactions with nine of
our counterparties accounted for approximately 93% of our total
outstanding notional amount as of December 31, 2009, with
each of these counterparties accounting for between
approximately 5% and 19% of the total outstanding notional
amount. In addition to the 16 counterparties with whom we had
outstanding notional amounts as of December 31, 2009, we
had master netting agreements with three counterparties with
whom we may enter into interest rate derivative or foreign
currency derivative transactions in the future. See Risk
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 Market Risk
Management, Including Interest Rate Risk Management for
information on the outstanding notional amount of our risk
management derivative contracts as of December 31, 2009 and
2008 and for a discussion of how we use derivatives to manage
our interest rate risk. See Risk Factors for a
discussion of the risks to our business posed by interest rate
risk.
Mortgage
Originators and Investors
We are routinely exposed to pre-settlement risk through the
purchase or sale of closed mortgage loans and mortgage-related
securities with mortgage originators and mortgage investors. The
risk is the possibility that the counterparty will be unable or
unwilling to either deliver closed mortgage assets or compensate
us for the cost to cancel or replace the transaction. We manage
this risk by determining position limits with these
counterparties, based upon our assessment of their
creditworthiness, and monitoring and managing these exposures.
Debt
Security and Mortgage Dealers
The credit risk associated with dealers that commit to place our
debt securities is that they will fail to honor their contracts
to take delivery of the debt, which could result in delayed
issuance of the debt through another dealer. The primary credit
risk associated with dealers who make forward commitments to
deliver mortgage pools to us is that they may fail to deliver
the
agreed-upon
loans to us on the
agreed-upon
date, which could result in our having to replace the mortgage
pools at higher cost to meet a forward commitment to sell the
175
MBS. We manage these risks by establishing approval standards
and limits on exposure and monitoring both our exposure
positions and changes in the credit quality of dealers.
Document
Custodians
We use third-party document custodians to provide loan document
certification and custody services for some of the loans that we
purchase and securitize. In many cases, our lender customers or
their affiliates also serve as document custodians for us. Our
ownership rights to the mortgage loans that we own or that back
our Fannie Mae MBS could be challenged if a lender intentionally
or negligently pledges or sells the loans that we purchased or
fails to obtain a release of prior liens on the loans that we
purchased, which could result in financial losses to us. When a
lender or one of its affiliates acts as a document custodian for
us, the risk that our ownership interest in the loans may be
adversely affected is increased, particularly in the event the
lender were to become insolvent. We mitigate these risks through
legal and contractual arrangements with these custodians that
identify our ownership interest, as well as by establishing
qualifying standards for document custodians and requiring
removal of the documents to our possession or to an independent
third-party document custodian if we have concerns about the
solvency or competency of the document custodian.
Market
Risk Management, Including Interest Rate Risk
Management
We are subject to market risk, which includes interest rate
risk, spread risk and liquidity risk. These risks arise from our
mortgage asset investments. Interest rate risk is the risk of
loss in value or expected future earnings that may result from
changes to interest rates. Spread risk is the resulting impact
of changes in the spread between our mortgage assets and our
debt and derivatives we use to hedge our position. Liquidity
risk is the risk that we will not be able to meet our funding
obligations in a timely manner.
Interest
Rate Risk Management
Our goal is to manage market risk to be neutral to the movements
in interest rates and volatility, subject to model constraints
and prevailing market conditions. We employ an integrated
interest rate risk management strategy that allows for informed
risk taking within pre-defined corporate risk limits. Decisions
regarding our strategy in managing interest rate risk are based
upon our corporate market risk policy and limits that are
established by our Chief Market Risk Officer and our Chief Risk
Officer and are subject to review and approval by our Board of
Directors. Our Capital Markets Group has primary responsibility
for executing our interest rate risk management strategy.
We have actively managed the interest rate risk of our net
portfolio, which is defined below, through the following
techniques: (1) asset selection and structuring (that is,
by identifying or structuring mortgage assets with attractive
prepayment and other risk characteristics); (2) issuing a
broad range of both callable and non-callable debt instruments;
and (3) using LIBOR-based interest-rate derivatives. We
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. For mortgage assets in our portfolio that we intend
to hold 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. For more information on
the impact that changes in spreads have on the value of the fair
value of our net assets, see Supplemental
Non-GAAP InformationFair Value Balance
SheetsPrimary Factors Driving Changes in
Non-GAAP Fair Value of Net Assets.
We monitor current market conditions, including the interest
rate environment, to assess the impact of these conditions on
individual positions and our overall interest rate risk profile.
In addition to qualitative factors, we use various quantitative
risk metrics in determining the appropriate composition of our
consolidated balance sheet and relative mix of debt and
derivatives positions in order to remain within pre-defined risk
tolerance levels that we consider acceptable. We regularly
disclose two interest rate risk metrics that estimate our
overall interest rate exposure: (1) fair value sensitivity
to changes in interest rate levels and the slope of the yield
curve and (2) duration gap.
176
The metrics used to measure our interest rate exposure are
generated using internal models. Our internal models, consistent
with standard practice for models used in our industry, require
numerous assumptions. There are inherent limitations in any
methodology used to estimate the exposure to changes in market
interest rates. 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. When market conditions change rapidly and
dramatically, as they did during the financial market crisis of
late 2008, the assumptions of our models may no longer
accurately capture or reflect the changing conditions. On a
continuous basis, management makes judgments about the
appropriateness of the risk assessments indicated by the models.
Sources
of Interest Rate Risk Exposure
The primary source of our interest rate risk is the composition
of 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 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.
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.
Changes in interest rates, as well as other factors, influence
mortgage prepayment rates and duration and also affect the value
of our mortgage assets. When interest rates decrease, prepayment
rates on fixed-rate mortgages generally accelerate because
borrowers usually can pay off their existing mortgages and
refinance at lower rates. Accelerated prepayment rates have the
effect of shortening the duration and average life of the
fixed-rate mortgage assets we hold in our portfolio. In a
declining interest rate environment, existing mortgage assets
held in our portfolio tend to increase in value or price because
these mortgages are likely to have higher interest rates than
new mortgages, which are being originated at the then-current
lower interest rates. Conversely, when interest rates increase,
prepayment rates generally slow, which extends the duration and
average life of our mortgage assets and results in a decrease in
value.
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.
Interest
Rate Risk Management Strategy
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.
|
177
Debt
Instruments
Historically, the primary tool we have used to fund the purchase
of mortgage assets and manage the interest rate risk implicit in
our mortgage assets is the variety of debt instruments we issue.
The debt we issue is a mix that typically consists of short- and
long-term, non-callable debt and callable debt. The varied
maturities and flexibility of these debt combinations help us in
reducing the mismatch of cash flows between assets and
liabilities in order to manage the duration risk associated with
an investment in long-term fixed-rate assets. Callable debt
helps us manage the prepayment risk associated with fixed-rate
mortgage assets because the duration of callable debt changes
when interest rates change in a manner similar to changes in the
duration of mortgage assets. See Liquidity and Capital
ManagementLiquidity ManagementDebt Funding for
additional information on our debt activity.
Derivative
Instruments
Derivative instruments also are an integral part of our strategy
in managing interest rate risk. Derivative instruments may be
privately negotiated contracts, which are often referred to as
over-the-counter derivatives, or they may be listed and traded
on an exchange. When deciding whether to use derivatives, we
consider a number of factors, such as cost, efficiency, the
effect on our liquidity, results of operations, and our overall
interest rate risk management strategy.
The derivatives we use for interest rate risk management
purposes consist primarily of over-the-counter contracts that
fall into three broad categories:
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|
|
Interest rate swap contracts. An interest rate
swap is a transaction between two parties in which each agrees
to exchange, or swap, interest payments. The interest payment
amounts are tied to different interest rates or indices for a
specified period of time and are 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. A swaption
is an option contract that allows us to enter into a pay-fixed
or receive-fixed swap at some point in the future.
|
|
|
|
Foreign currency swaps. These swaps have the
effect of converting 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.
|
We use interest rate swaps and interest rate options, in
combination with our issuance of debt securities, to better
match the prepayment risk and duration of our assets with the
duration of our liabilities. We are generally an end user of
derivatives; our principal purpose in using derivatives is to
manage our aggregate interest rate risk profile within
prescribed risk parameters. We generally only use derivatives
that are relatively liquid and straightforward to value. We use
derivatives for four primary purposes:
(1) As a substitute for notes and bonds that we issue
in the debt markets;
(2) To achieve risk management objectives not
obtainable with debt market securities;
(3) To quickly and efficiently rebalance our
portfolio;
(4) To hedge foreign currency exposure;
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.
Table 53 presents, by derivative instrument type, our risk
management derivative activity for the years ended
December 31, 2009 and 2008, along with the stated
maturities of derivatives outstanding as of December 31,
2009.
178
Table
53: Activity and Maturity Data for Risk Management
Derivatives(1)
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-
|
|
|
Receive-
|
|
|
|
|
|
Foreign
|
|
|
Pay-
|
|
|
Receive-
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Fixed(2)
|
|
|
Fixed(3)
|
|
|
Basis(4)
|
|
|
Currency(5)
|
|
|
Fixed
|
|
|
Fixed
|
|
|
Rate Caps
|
|
|
Other(6)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of December 31, 2007
|
|
$
|
377,738
|
|
|
$
|
285,885
|
|
|
$
|
7,001
|
|
|
$
|
2,559
|
|
|
$
|
85,730
|
|
|
$
|
124,651
|
|
|
$
|
2,250
|
|
|
$
|
650
|
|
|
$
|
886,464
|
|
Additions
|
|
|
277,735
|
|
|
|
318,698
|
|
|
|
24,335
|
|
|
|
1,141
|
|
|
|
21,272
|
|
|
|
98,061
|
|
|
|
200
|
|
|
|
269
|
|
|
|
741,711
|
|
Terminations(7)
|
|
|
(108,557
|
)
|
|
|
(153,502
|
)
|
|
|
(6,776
|
)
|
|
|
(2,048
|
)
|
|
|
(27,502
|
)
|
|
|
(129,152
|
)
|
|
|
(1,950
|
)
|
|
|
(92
|
)
|
|
|
(429,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
297,379
|
|
|
|
279,854
|
|
|
|
2,765
|
|
|
|
577
|
|
|
|
32,825
|
|
|
|
19,175
|
|
|
|
6,500
|
|
|
|
13
|
|
|
|
639,088
|
|
Terminations(7)
|
|
|
(461,695
|
)
|
|
|
(455,518
|
)
|
|
|
(24,100
|
)
|
|
|
(692
|
)
|
|
|
(13,025
|
)
|
|
|
(37,355
|
)
|
|
|
|
|
|
|
(92
|
)
|
|
|
(992,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of December 31, 2009
|
|
$
|
382,600
|
|
|
$
|
275,417
|
|
|
$
|
3,225
|
|
|
$
|
1,537
|
|
|
$
|
99,300
|
|
|
$
|
75,380
|
|
|
$
|
7,000
|
|
|
$
|
748
|
|
|
$
|
845,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future maturities of notional
amounts:(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1 year
|
|
$
|
56,625
|
|
|
$
|
33,655
|
|
|
$
|
2,180
|
|
|
$
|
402
|
|
|
$
|
2,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
58
|
|
|
$
|
94,920
|
|
1 year to 5 years
|
|
|
204,121
|
|
|
|
154,344
|
|
|
|
85
|
|
|
|
|
|
|
|
52,950
|
|
|
|
|
|
|
|
7,000
|
|
|
|
593
|
|
|
|
419,093
|
|
5 years to 10 years
|
|
|
95,343
|
|
|
|
73,736
|
|
|
|
|
|
|
|
449
|
|
|
|
14,000
|
|
|
|
28,945
|
|
|
|
|
|
|
|
97
|
|
|
|
212,570
|
|
Over 10 years
|
|
|
26,511
|
|
|
|
13,682
|
|
|
|
960
|
|
|
|
686
|
|
|
|
30,350
|
|
|
|
46,435
|
|
|
|
|
|
|
|
|
|
|
|
118,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
382,600
|
|
|
$
|
275,417
|
|
|
$
|
3,225
|
|
|
$
|
1,537
|
|
|
$
|
99,300
|
|
|
$
|
75,380
|
|
|
$
|
7,000
|
|
|
$
|
748
|
|
|
$
|
845,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay rate
|
|
|
3.46
|
%
|
|
|
0.26
|
%
|
|
|
0.05
|
%
|
|
|
|
|
|
|
5.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive rate
|
|
|
0.26
|
%
|
|
|
3.47
|
%
|
|
|
1.59
|
%
|
|
|
|
|
|
|
|
|
|
|
4.45
|
%
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
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) |
|
There were no swaps callable by
Fannie Mae as of December 31, 2009. Notional amounts
include swaps callable by Fannie Mae of $1.7 billion and
$8.2 billion as of December 31, 2008 and 2007,
respectively.
|
|
(3) |
|
Notional amounts include swaps
callable by Fannie Mae of $406 million, $418 million
and $432 million as of December 31, 2009, 2008 and
2007, respectively. There were no swaps callable by derivatives
counterparties as of December 31, 2009. The notional
amounts of swaps callable by derivatives counterparties were
$10.4 billion and $7.8 billion as of December 31,
2008 and 2007, respectively.
|
|
(4) |
|
Notional amounts include swaps
callable by derivatives counterparties of $610 million,
$925 million and $6.6 billion as of December 31,
2009, 2008 and 2007, respectively.
|
|
(5) |
|
Terminations include exchange rate
adjustments to foreign currency swaps existing at both the
beginning and the end of the period. In 2009, exchange rate
adjustments for foreign currency swaps that were added or
terminated during the period are reflected in the respective
categories. In 2008, exchange rate adjustments related to
additions and terminations were included in the terminations
category.
|
|
(6) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts.
|
|
(7) |
|
Includes matured, called,
exercised, assigned and terminated amounts.
|
|
(8) |
|
Amounts reported in the table are
based on contractual maturities. Some of these amounts represent
swaps that are callable by Fannie Mae or by a derivative
counterparty, in which case the notional amount would cease to
be outstanding prior to maturity if the call option were
exercised. See notes (2), (3) and (4) for information
on notional amounts that are callable.
|
179
The decline of our outstanding notional balance of our risk
management derivatives during 2009 resulted from our normal
portfolio rebalancing activities, which included the termination
of a significant portion of offsetting pay-fixed and
receive-fixed swap positions that we determined are no longer
providing an economic hedging benefit. The increase of our
outstanding notional balance of our risk management derivatives
during 2008 reflected both rebalancing activities we undertook,
which included increasing our pay-fixed and receive-fixed
interest rate swaps in response to the interest rate volatility
during the period, and the increased reliance during the second
half of 2008 on short-term debt and derivatives to hedge
incremental fixed-rate mortgage asset purchases.
Monitoring
and Active Portfolio Rebalancing
By investing in mortgage assets, we assume prepayment risk. As
described above, we attempt to offset this prepayment risk
either by issuing callable debt that we can redeem at our option
or by purchasing option-based derivatives that we can exercise
at our option. We also manage the prepayment risk of our assets
relative to our funding through active portfolio rebalancing. We
implement rebalancing strategies based on a number of factors,
including an assessment of current market conditions and various
measurements of interest rate risk. In 2009, we formed a
cross-functional risk committee that meets on a weekly basis to
assess our current market risk and provide appropriate portfolio
rebalancing guidance.
Measurement
of Interest Rate Risk
Our interest rate risk measurement framework is based on the
fair value of our assets, liabilities and derivative instruments
and the sensitivity of these values to changes in market
factors. Estimating the impact of prepayment risk is critical in
managing interest rate risk. We use prepayment models to
determine the estimated duration and convexity of our mortgage
assets and various quantitative methods for measuring our
interest rate exposure. Because no single method can reflect all
aspects of the interest rate risk inherent in our mortgage
portfolio, we utilize various risk measurements that together
provide a more complete assessment of our aggregate interest
rate risk profile.
We measure and monitor the fair value sensitivity to both small
and large changes in the level of interest rates, changes in the
shape of the yield curve, and changes in interest rate
volatility. In addition, we perform a range of stress test
analyses that measure the sensitivity of the portfolio to severe
hypothetical changes in market conditions.
Below we present two quantitative metrics that provide useful
estimates of our interest rate exposure: (1) fair value
sensitivity of net portfolio to changes in interest rate levels
and slope of yield curve and (2) duration gap. We also
provide additional information that may be useful in evaluating
our interest rate exposure. Our overall interest rate exposure,
as reflected in the fair value sensitivity to changes in
interest rate levels and the slope of the yield curve and
duration gap, was within acceptable, pre-defined corporate
limits as of December 31, 2009.
Our fair value sensitivity and duration gap metric, which are
based on our net portfolio defined above, are calculated using
internal models that require standard assumptions regarding
interest rates and future prepayments of principal over the
remaining life of our securities. 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. The reliability
of our interest rate risk analysis depends on the availability
and quality of historical data for each of the types of
securities in our net portfolio.
Fair
Value Sensitivity to Changes in Interest Rate 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 the following
hypothetical situations:
|
|
|
|
|
A 50 basis point shift in interest rates.
|
|
|
|
A 25 basis point change in the slope of the yield curve.
|
180
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 aforementioned 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 was $(0.6) billion and
$(0.1) billion, respectively, for the month of December
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 sensitivity measures presented in Table 54 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
54: Fair Value Sensitivity of Net Portfolio to
Changes in Interest Rate Level and Slope of Yield
Curve(1)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
(2)(3)
|
|
|
|
(Dollars in billions)
|
|
|
Rate level shock:
|
|
|
|
|
|
|
|
|
-100 basis points
|
|
$
|
(0.1
|
)
|
|
$
|
(2.8
|
)
|
-50 basis points
|
|
|
0.1
|
|
|
|
(1.0
|
)
|
+50 basis points
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)
|
+100 basis points
|
|
|
(0.9
|
)
|
|
|
(1.6
|
)
|
Rate slope shock:
|
|
|
|
|
|
|
|
|
-25 basis points (flattening)
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
+25 basis points (steepening)
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
|
(1) |
|
Computed based on changes in LIBOR
swap rates.
|
|
(2) |
|
Amounts include the sensitivities
of our preferred stock.
|
|
(3) |
|
Reflects metrics as of
December 31, 2008 adjusted to exclude the sensitivity of
changes in interest rates of our Alt-A and subprime
private-label mortgage-related investment securities.
|
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 analysis 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 55 below presents our monthly effective duration gap from
December 2008 to January 2010. We also 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 55 below, the duration of the
181
mortgage index as calculated by Barclays Capital is both higher
and more volatile than our duration gap. This difference 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.
|
|
(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
55: Duration Gap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-Year Fannie Mae
|
|
|
|
Fannie Mae
|
|
|
Mortgage Index
|
|
|
|
Effective
|
|
|
Option Adjusted
|
|
Month
|
|
Duration Gap
|
|
|
Duration(1)
|
|
|
|
(In months)
|
|
|
December 2008
|
|
|
(1
|
)
|
|
|
21
|
|
January 2009
|
|
|
|
|
|
|
13
|
|
February 2009
|
|
|
1
|
|
|
|
30
|
|
March 2009
|
|
|
(2
|
)
|
|
|
26
|
|
April 2009
|
|
|
(1
|
)
|
|
|
23
|
|
May 2009
|
|
|
1
|
|
|
|
30
|
|
June 2009
|
|
|
1
|
|
|
|
41
|
|
July 2009
|
|
|
(1
|
)
|
|
|
40
|
|
August 2009
|
|
|
|
|
|
|
41
|
|
September 2009
|
|
|
(2
|
)
|
|
|
39
|
|
October 2009
|
|
|
(1
|
)
|
|
|
40
|
|
November 2009
|
|
|
|
|
|
|
38
|
|
December 2009
|
|
|
1
|
|
|
|
40
|
|
January 2010
|
|
|
1
|
|
|
|
43
|
|
|
|
|
(1) |
|
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.
|
Other
Interest Rate Risk Information
The interest rate risk measures discussed above 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
56, 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 for the periods
indicated, from the same hypothetical changes in the level of
interest rates as presented above in Table 54. 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.
182
Table
56: Interest Rate Sensitivity of Financial
Instruments(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Pre-tax Effect on Estimated Fair Value
|
|
|
|
|
|
|
Change in Interest Rates
|
|
|
|
Estimated
|
|
|
(in basis points)
|
|
|
|
Fair Value
|
|
|
-100
|
|
|
-50
|
|
|
+50
|
|
|
+100
|
|
|
|
|
|
|
(Dollars in billions)
|
|
|
|
|
|
Trading financial instruments
|
|
$
|
111.9
|
|
|
$
|
2.7
|
|
|
$
|
1.6
|
|
|
$
|
(1.9
|
)
|
|
$
|
(4.0
|
)
|
Guaranty assets and guaranty obligations,
net(2)
|
|
|
(149.3
|
)
|
|
|
11.3
|
|
|
|
5.7
|
|
|
|
(6.0
|
)
|
|
|
(4.3
|
)
|
Other financial instruments,
net(3)
|
|
|
(72.5
|
)
|
|
|
(2.2
|
)
|
|
|
(1.1
|
)
|
|
|
1.2
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
Pre-tax Effect on Estimated Fair Value
|
|
|
|
|
|
|
Change in Interest Rates
|
|
|
|
Estimated
|
|
|
(in basis points)
|
|
|
|
Fair Value
|
|
|
-100
|
|
|
-50
|
|
|
+50
|
|
|
+100
|
|
|
|
|
|
|
(Dollars in billions)
|
|
|
|
|
|
Trading financial instruments
|
|
$
|
90.8
|
|
|
$
|
1.4
|
|
|
$
|
0.8
|
|
|
$
|
(1.0
|
)
|
|
$
|
(2.0
|
)
|
Guaranty assets and guaranty obligations,
net(2)
|
|
|
(91.0
|
)
|
|
|
11.9
|
|
|
|
5.6
|
|
|
|
(6.7
|
)
|
|
|
(7.6
|
)
|
Other financial instruments,
net(3)
|
|
|
(131.9
|
)
|
|
|
(1.6
|
)
|
|
|
(0.4
|
)
|
|
|
(0.9
|
)
|
|
|
(1.8
|
)
|
|
|
|
(1) |
|
Excludes preferred stock.
|
|
(2) |
|
Consists of the net of
Guaranty assets and Guaranty obligations
reported in our consolidated balance sheets. In addition,
includes certain amounts that have been reclassified from
Mortgage loans reported in our consolidated balance
sheets to reflect how the risk of the interest rate and credit
risk components of these loans are managed by our business
segments.
|
|
(3) |
|
Consists of the net of all other
financial instruments reported in Note 19, Fair
Value.
|
Liquidity
Risk Management
We are exposed to liquidity risk when the markets in which we
operate become subject to less purchasing activity by market
participants. Our liquidity could be negatively impacted by a
variety of circumstances including: downgrades of the credit
rating on our senior unsecured debt; sudden unexpected cash
outflows; or other events that cause counterparties to avoid
trading with or lending to us. For a description of how we
manage and monitor liquidity risk, refer to Liquidity and
Capital Management.
Operational
Risk Management
We have made a number of changes in our Operational Risk
Management efforts in 2009 including our leadership,
organizational structure, business focus and policies. Our goal
is to keep our operational risk at appropriate levels relative
to the nature of our business activities and the markets in
which we operate, our capital and liquidity requirements, the
economic environment and the regulatory environment.
Our Corporate Operational Risk Framework is based on the Basel
Committee guidance of sound practices for the management of
operational risk broadly adopted by U.S. Commercial banks
comparable in size to Fannie Mae. Our framework is intended to
provide a methodology to identify, assess, mitigate, control and
monitor operational risks across the company. Included in this
framework is a requirement and plan for the development of a new
system for tracking and reporting of operational risk incidents.
The framework also includes a methodology for business owners to
conduct risk control self assessments to self identify potential
operational risks and points of execution failure, the
effectiveness of associated controls, and document corrective
action plans to close identified deficiencies. This methodology
is in its early stage of execution and the success of our
operational risk effort will depend on our ability to complete
these reviews and to address the gaps identified in this work.
183
Management
of Business Resiliency
Our business resiliency program is designed to provide
reasonable assurance for continuity of critical business
operations in the event of disruptions caused by the loss of
facilities, technology or personnel. Despite proactive planning,
testing and continuous preparation of back up venues, these
measures may not prevent a significant business disruption from
an improbable but highly catastrophic event.
Non-Mortgage
Related Fraud Risk
Our anti-fraud program provides a framework for managing
non-mortgage related fraud risk. The program is designed to
provide reasonable assurance for the prevention and detection of
non-mortgage related fraudulent activity. However, because
fraudulent activity requires the intentional circumvention of
the internal control structure, the efforts of the program may
not always prevent, or immediately detect, instances of such
activity.
See Risk Factors for a discussion of operational
risk at Fannie Mae.
Model
Risk Management
We make significant use of models to manage our business. We use
models to measure and monitor our exposures to credit and market
risk (including interest rate risk). We use the information
provided by models to make key business decisions related to
such areas as credit guaranty fee pricing, credit loss
mitigation, asset acquisition, and debt issuances. We also use
the results of models to report our financial performance and
determine asset and liability fair values.
Model risk is the potential for model errors to adversely impact
the company. We manage model risk within an established
framework that provides for identifying, assessing, mitigating
and controlling, and reporting and monitoring model risk. This
framework includes, among other controls, a process for
validating and approving models for production use and for
periodic performance assessments of the models once they have
been implemented into production. Model validation and
assessment reviews are conducted by a team within the Enterprise
Risk Division team who are independent of the model developers.
A key goal of this process is to ensure that model assumptions
and limitations are fully understood, as models are inherently
risky given the impossibility of predicting the future with
certainty.
Our model risk policy applies to all models used for financial
reporting, risk management, and business decision making. The
model risk policy applies both to models developed internally
and to models licensed from third-party vendors. This policy
includes an independent function within our Enterprise Risk
Management division which has oversight responsibility for
models and is independent of both model developers and business
users.
During the normal course of business, we utilize a significant
number of models with varying degrees of complexity. Most of
these are specialized models used to predict prepayments,
project defaults and losses, or value options. We maintain an
inventory of all models and assign a risk priority rating to the
model, based on the potential impact of the information
generated from the model. Based on the rating assigned to a new
model, it is reviewed by our independent oversight function
before it is placed into production. We have a variety of
process controls in place to oversee and manage changes made to
our models. We continue to focus on enhancing these controls and
improving communication related to model changes to address
downstream impacts.
Model
Limitations
Our models have evolved over time in response to changes in the
composition of our portfolio, improvements in modeling
techniques, systems capabilities and changes in market
conditions. In addition, our models may require additional
assumptions for products that do not have extensive historical
price data, or for illiquid positions for which accurate daily
prices are not consistently available. For example, historical
data that form the basis of our prepayment assumptions may fail
to accurately predict future prepayments, and our interest rate
risk metrics may not fully capture the effects of market
illiquidity.
184
We historically have complemented our quantitative measures with
qualitative information that reflects information more current
than that available in our models or that cannot be fully
captured in our models to assess whether, and to what extent, we
may need to adjust our models or risk limits. Management
regularly compares our internal model results to other metrics
to validate the reasonableness of the results. Based on
management experience and judgment, we may periodically make
adjustments to the methodologies used to address the limitations
inherent in our models and reflect enhancements in the
underlying estimation processes.
Although we continue to work to improve our process for model
validation and review, we recognize that models are inherently
imperfect predictors of actual results because they are based on
data available to us and our assumptions about factors such as
future loan demand, prepayment speeds, default rates, severity
rates and other factors that may overstate or understate future
experience. Further, the turmoil in the housing and credit
markets created additional risk regarding the reliability of our
models because models are less dependable when the economic
environment is outside of historical experience, as has been the
case in the last two years. See Risk Factors for a
discussion of risks associated with our reliance on models.
IMPACT OF
FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
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 Note 1, 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 accounting standards
we adopted effective January 1, 2010 that eliminate the
concept of QSPEs and change the consolidation model for variable
interest entities.
185
GLOSSARY
OF TERMS USED IN THIS REPORT
Terms used in this report have the following meanings, unless
the context indicates otherwise.
An Acquired credit-impaired loan refers to a
loan we have acquired for which there is evidence of credit
deterioration since origination and for which it is probable we
will not be able to collect all of the contractually due cash
flows. We record our net investment in such loans at the lower
of the acquisition cost of the loan or the estimated fair value
of the loan at the date of acquisition. Typically, loans we
acquire from our MBS trusts pursuant to our option to purchase
upon default meet these criteria. Because we acquire these loans
from our MBS trusts at par value plus accrued interest, to the
extent the par value of a loan exceeds the estimated fair value
at the time we acquire the loan, we record the related fair
value loss as a charge against the Reserve for guaranty
losses.
Alt-A mortgage loan or Alt-A loan
generally refers to a mortgage loan originated under a
lenders program offering 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 have a higher risk of default than
non-Alt-A mortgage loans. In reporting our Alt-A exposure, we
have classified newly originated 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.
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.
Business volume or new business
acquisitions refers to the sum in any given period of
the unpaid principal balance of: (1) the mortgage loans and
mortgage-related securities we purchase for our investment
portfolio; (2) the mortgage loans we securitize into Fannie
Mae MBS that are acquired by third parties; and (3) credit
enhancements that we provide on our mortgage assets. It excludes
mortgage loans we securitize from our portfolio and the purchase
of Fannie Mae MBS for our investment portfolio.
Buy-ups
refer to upfront payments we make to lenders to adjust the
monthly contractual guaranty fee rate on a Fannie Mae MBS so
that the pass-through coupon rate on the MBS is in a more easily
tradable increment of a whole or half percent.
Buy-downs refer to upfront payments we
receive from lenders to adjust the monthly contractual guaranty
fee rate on a Fannie Mae MBS so that the pass-through coupon
rate on the MBS is in a more easily tradable increment of a
whole or half percent.
Charge-off refers to loan amounts written off
as uncollectible bad debts. When repayment is considered
unlikely, these loan amounts are removed from our consolidated
balance sheet and charged against our loss reserves.
Conventional mortgage refers to a mortgage
loan that is not guaranteed or insured by the
U.S. government or its agencies, such as the VA, the FHA or
the Rural Development Housing and Community Facilities Program
of the Department of Agriculture.
Credit enhancement refers to an agreement
used to reduce credit risk by requiring collateral, letters of
credit, mortgage insurance, corporate guaranties, or other
agreements to provide an entity with some assurance that it will
be compensated to some degree in the event of a financial loss.
Duration refers to the sensitivity of the
value of a security to changes in interest rates. The duration
of a financial instrument is the expected percentage change in
its value in the event of a change in interest rates of
100 basis points.
Guaranty book of business refers to the sum
of the unpaid principal balance of: (1) mortgage loans held
in our mortgage portfolio; (2) Fannie Mae MBS held in our
mortgage portfolio; (3) Fannie Mae MBS held by third
parties; and (4) other credit enhancements that we provide
on mortgage assets. It excludes non-Fannie Mae mortgage-related
securities held in our investment portfolio for which we do not
provide a guaranty.
Implied volatility refers to the
markets expectation of the magnitude of future changes in
interest rates.
186
Interest rate swap refers to 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 principal amount.
An interest rate swap is a type of derivative.
LIHTC partnerships refer to low-income
housing tax credit limited partnerships or limited liability
companies.
Loans, mortgage loans and
mortgages refer to both whole loans and loan
participations, secured by residential real estate, cooperative
shares or by manufactured housing units.
Mortgage assets, when referring to our
assets, refers to both mortgage loans and mortgage-related
securities we hold in our investment portfolio.
Mortgage credit book of business refers to
the sum of the unpaid principal balance of: (1) mortgage
loans held in our mortgage portfolio; (2) Fannie Mae MBS
held in our mortgage portfolio; (3) non-Fannie Mae
mortgage-related securities held in our investment portfolio;
(4) Fannie Mae MBS held by third parties; and
(5) other credit enhancements that we provide on mortgage
assets.
Multifamily mortgage loan refers to a
mortgage loan secured by a property containing five or more
residential dwelling units.
Notional amount refers to the hypothetical
dollar amount in an interest rate swap transaction on which
exchanged payments are based. The notional amount in an interest
rate swap transaction generally is not paid or received by
either party to the transaction and is typically significantly
greater than the potential market or credit loss that could
result from such transaction.
Option-adjusted spread or OAS
refers to the incremental expected return between a
security, loan or derivative contract and a benchmark yield
curve (typically, U.S. Treasury securities, LIBOR and
swaps, or agency debt securities). The OAS provides explicit
consideration of the variability in the securitys cash
flows across multiple interest rate scenarios resulting from any
options embedded in the security, such as prepayment options.
For example, the OAS of a mortgage that can be prepaid by the
homeowner without penalty is typically lower than a nominal
yield spread to the same benchmark because the OAS reflects the
exercise of the prepayment option by the homeowner, which lowers
the expected return of the mortgage investor. In other words,
OAS for mortgage loans is a risk-adjusted spread after
consideration of the prepayment risk in mortgage loans. The
market convention for mortgages is typically to quote their OAS
to swaps. The OAS of our debt and derivative instruments are
also frequently quoted to swaps. The OAS of our net mortgage
assets is therefore the combination of these two spreads to
swaps and is the option-adjusted spread between our assets and
our funding and hedging instruments.
Outstanding Fannie Mae MBS refers to the
total unpaid principal balance of Fannie Mae MBS that is held by
third-party investors and held in our mortgage portfolio.
Pay-fixed swap refers to an agreement under
which we pay a predetermined fixed rate of interest based upon a
set notional principal amount and receive a variable interest
payment based upon a stated index, with the index resetting at
regular intervals over a specified period of time. These
contracts generally increase in value as interest rates rise and
decrease in value as interest rates fall.
Private-label securities refers to
mortgage-related securities issued by entities other than agency
issuers Fannie Mae, Freddie Mac or Ginnie Mae.
Receive-fixed swap refers to an agreement
under which we make a variable interest payment based upon a
stated index, with the index resetting at regular intervals, and
receive a predetermined fixed rate of interest based upon a set
notional amount and over a specified period of time. These
contracts generally increase in value as interest rates fall and
decrease in value as interest rates rise.
REMIC or Real Estate Mortgage
Investment Conduit refers to a type of
mortgage-related security in which interest and principal
payments from mortgages or mortgage-related securities are
structured into separately traded securities.
187
REO refers to real-estate owned by Fannie Mae
because we have foreclosed on the property or obtained the
property through a
deed-in-lieu
of foreclosure.
Severity rate or loss severity
rate refers to the percentage of our total loss, which
includes the unpaid principal balance of a loan, purchased
interest, and selling costs if applicable, that we believe will
not be recovered in the event of default.
Single-class Fannie Mae MBS refers to
Fannie Mae MBS where the investors receive principal and
interest payments in proportion to their percentage ownership of
the MBS issue.
Single-family mortgage loan refers to a
mortgage loan secured by a property containing four or fewer
residential dwelling units.
Structured Fannie Mae MBS refers to Fannie
Mae MBS that are resecuritizations of other Fannie Mae MBS.
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.
Swaptions refers to options on interest rate
swaps in the form of contracts granting an option to one party
and creating a corresponding commitment from the counterparty to
enter into specified interest rate swaps in the future.
Swaptions are traded in the
over-the-counter
market and not through an exchange.
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Item 7A.
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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 MD&ARisk ManagementMarket Risk
Management, including Interest Rate Risk Management.
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Item 8.
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Financial
Statements and Supplementary Data
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Our consolidated financial statements and notes thereto are
included elsewhere in this annual report on
Form 10-K
as described below in Exhibits and Financial Statement
Schedules.
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A.
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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
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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 December 31, 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 December 31, 2009 or as of the date of filing
this report.
Our disclosure controls and procedures were not effective as of
December 31, 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 with respect to our controls over the change
management process we apply to applications and models we use in
accounting for (1) our provision for credit losses and
(2) other-than-temporary impairment on our 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
December 31, 2009 or as of the date of this filing, and we
continue to have two material weaknesses in our internal control
over financial reporting. These material weaknesses are
described in more detail below under Description of
Material Weaknesses.
We intend to design, implement and test new controls to
remediate the material weakness in the design of our controls
over the change management process we apply to applications and
models we use in accounting for (1) our provision for
credit losses and (2) other-than-temporary impairment on
our private-label mortgage-related securities by
December 31, 2010. However, based on discussions with FHFA
and the structural nature of the weakness in our disclosure
controls and procedures, it is likely that we will not remediate
the weakness in our disclosure controls and procedures relating
to information known to FHFA while we are under conservatorship.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Overview
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting, as defined in rules
promulgated under the Exchange Act, is a process designed by, or
under the supervision of, our Chief Executive Officer and Chief
Financial Officer and effected by our Board of Directors,
management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with GAAP. Internal control over financial reporting
includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our
management and our Board of Directors; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial
statements.
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Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on
a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the
financial reporting process, and it is possible to design into
the process safeguards to reduce, though not eliminate, this
risk.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2009.
In making its assessment, management used the criteria
established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Managements
assessment of our internal control over financial reporting as
of December 31, 2009 identified two material weaknesses,
which are described below. Because of these material weaknesses,
management has concluded that our internal control over
financial reporting was not effective as of December 31,
2009. Management also has concluded that our internal control
over financial reporting also was not effective as of the date
of filing this report.
Our independent registered public accounting firm,
Deloitte & Touche LLP, has issued an audit report on
our internal control over financial reporting, expressing an
adverse opinion on the effectiveness of our internal control
over financial reporting as of December 31, 2009. This
report is included below.
Description
of Material Weaknesses
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 had the following material
weaknesses as of December 31, 2009:
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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
190
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 December 31, 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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Change Management for Applications and Models used in
Accounting for Our Provision for Credit Losses and for
Other-than-temporary Impairment on Our Private-label
Mortgage-related Securities. We did not maintain
effective internal control over financial reporting with respect
to our controls over the change management process we apply to
applications and models we use in accounting for (1) our
provision for credit losses and (2) other-than-temporary
impairment on our private-label mortgage-related securities.
Specifically, requirements definition, and systems and
user-acceptance testing were not adequate to prevent or identify
errors that affected (a) the identification of loan
populations and (b) the estimation of cash flows. As a
result, incorrect data and assumptions were used in our
accounting for our provision for credit losses and for
other-than-temporary impairment on our private-label
mortgage-related securities.
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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. Below we describe
changes in our internal control over financial reporting since
September 30, 2009 that management believes have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Implementation
of New Accounting Standards
As described in MD&AOff-Balance Sheet
Arrangements and Variable Interest EntitiesElimination of
QSPEs and Changes in the Consolidation Model for Variable
Interest Entities, effective January 1, 2010, we
adopted two new accounting standards that amend the accounting
for transfers of financial assets and the consolidation model
for variable interest entities VIEs. These accounting standards
will have a major impact on the presentation of our consolidated
financial statements. They require that we consolidate the
substantial majority of our MBS trusts and record the underlying
assets (typically mortgage loans) and debt (typically bonds
issued by the trusts in the form of Fannie Mae MBS certificates)
of these trusts as assets and liabilities on our consolidated
balance sheet. As a result, we expect to reflect approximately
18 million loans on our consolidated balance sheet,
compared with approximately two million loans as of
December 31, 2009.
Our implementation of these new accounting standards required us
to make major operational and system changes to enable the
reporting of these previously non-consolidated assets and
liabilities on our consolidated balance sheet. As a result, we
have made material changes in our internal control over
financial reporting.
A large-scale initiative was undertaken to manage the business
process and system changes necessary to comply with the new
requirements. The operational and system changes that were
implemented provide support for (1) the process by which we
determine whether to consolidate loans and (2) our
compliance with the associated accounting requirements for loans
and securities. In developing system functionality across
multiple areas to support the new requirements, we have created
new controls, amended existing controls and, in some cases,
removed controls that are no longer applicable under the new
accounting guidance.
The effort to design and implement the operational and system
changes, and the associated control activities resident in the
impacted business processes have been substantially completed as
of the date of this filing and integrated into managements
ongoing program to evaluate and monitor internal control over
financial reporting.
191
Identification
of Material Weakness
During the first quarter of 2010, management identified an
additional material weakness in our internal control over
financial reporting as of December 31, 2009 with respect to
our controls over the change management process we apply to
applications and models we use in accounting for (1) our
provision for credit losses and (2) other-than-temporary
impairment on our private-label mortgage-related securities.
This material weakness is described above under
Description of Material Weaknesses. We are currently
taking steps to remediate this material weakness and we intend
to complete remediation by December 31, 2010.
MITIGATING
ACTIONS RELATING TO MATERIAL WEAKNESSES
Disclosure
Controls and Procedures
As described above under Description of Material
Weaknesses, 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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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 annual report on
Form 10-K
for the year ended December 31, 2009 (2009 Form
10-K),
and engaged in discussions regarding issues associated with the
information contained in those filings. Prior to filing our 2009
Form 10-K,
FHFA provided Fannie Mae management with a written
acknowledgement that it had reviewed the 2009
Form 10-K,
and it was not aware of any material misstatements or omissions
in the 2009
Form 10-K
and had no objection to our filing the
Form 10-K.
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The Director of FHFA or, after August 2009, the Acting 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 attend meetings frequently with various
groups within the company to enhance the flow of information and
to provide oversight on a variety of matters, including
accounting, credit and market risk management, liquidity,
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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Change
Management for Applications and Models used in Accounting for
Our Provision for Credit Losses and for Other-than-temporary
Impairment on Our Private-label Mortgage-related
Securities
As described above under Description of Material
Weaknesses, we have a material weakness in our internal
control over financial reporting with respect to our controls
over the change management process we apply to applications and
models we use in accounting for (1) our provision for
credit losses and (2) other-than-temporary impairment on
our private-label mortgage-related securities. As a result,
incorrect data and assumptions were used in our accounting for
our provision for credit losses and for other-than-temporary
impairment on our private-label mortgage-related securities.
Management identified these weaknesses in the course of
preparing our financial statements for the year ended
December 31, 2009. As soon as the weaknesses were
identified, management reviewed and corrected the applications,
the models and our accounting for the affected areas. Because of
the additional procedures management conducted during the first
quarter of 2010, even though we have not yet remediated the
design of the controls over change management that constitute
this material weakness, we have recorded the appropriate
provision for credit losses and the appropriate amount of
other-than-temporary impairment on our private-label
mortgage-related securities in our financial statements for the
year ended December 31, 2009 that are included in this
report. We are currently taking steps to remediate this material
weakness and we intend to complete remediation by
December 31, 2010.
192
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Fannie Mae:
We have audited Fannie Mae and consolidated entities (In
conservatorship) (the Company) internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
that risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is 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.
The following material weaknesses have been identified and
included in managements assessment:
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Disclosure Controls and ProceduresThe
Companys disclosure controls and procedures did not
adequately ensure the accumulation and communication to
management of information known to the Federal Housing Finance
Agency that is needed to meet its disclosure obligations under
the federal securities laws as they relate to financial
reporting.
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Change Management for Applications and Models used in
Accounting for Provision for Credit Losses and for
Other-than-temporary Impairment on Private-label
Mortgage-related SecuritiesThe Company did not
maintain effective internal control over financial reporting
with respect to its controls over the change management process
for applications and models used in accounting for (1) the
provision for credit losses and (2) other-than-temporary
impairment on private-label mortgage-related securities.
Specifically,
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193
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requirements definition, and systems and user-acceptance testing
were not adequate to prevent or identify errors that affected
(a) the identification of loan populations and (b) the
estimation of cash flows. As a result, incorrect data and
assumptions were initially used in accounting for the provision
for credit losses and for other-than-temporary impairment on
private-label mortgage-related securities.
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These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the consolidated financial statements as of and for the year
ended December 31, 2009, of the Company and this report
does not affect our report on such financial statements.
In our opinion, because of the effect of the material weaknesses
identified above on the achievement of the objectives of the
control criteria, the Company has not maintained effective
internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2009, of the Company and our report dated
February 26, 2010 expressed an unqualified opinion on those
financial statements and included explanatory paragraphs
regarding the Companys adoption of new accounting
standards and the Companys dependence upon the continued
support of the United States Government, various United States
Government agencies and the Companys conservator and
regulator, the Federal Housing Finance Agency.
/s/ Deloitte &
Touche LLP
Washington, DC
February 26, 2010
194
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Item 9B.
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Other
Information
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None.
PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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Our current directors are listed below. They have provided the
following information about their principal occupation, business
experience and other matters. Upon FHFAs appointment as
our conservator on September 6, 2008, FHFA succeeded to all
rights, titles, powers and privileges of any director of Fannie
Mae with respect to Fannie Mae and its assets. More information
about FHFAs September 6, 2008 appointment as our
conservator and its subsequent reconstitution of our Board and
direction regarding the Boards function and authorities
can be found below in Corporate
GovernanceConservatorship and Delegation of Authority to
Board of Directors.
As discussed in more detail below under Corporate
GovernanceComposition of Board of Directors, FHFA,
as conservator, appointed an initial group of directors to our
Board following our entry into conservatorship, delegated to the
Board the authority to appoint directors to subsequent vacancies
subject to conservator review, and defined the term of service
of directors during conservatorship. In its continued assessment
of current directors and evaluation of potential candidates for
director, the Nominating and Corporate Governance Committee
considers, among other things, whether the Board as a whole
possesses meaningful experience, qualifications and skills in
the following subject areas:
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business;
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finance;
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capital markets;
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accounting;
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risk management;
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public policy;
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mortgage lending, real estate, low-income housing
and/or
homebuilding; and
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the regulation of financial institutions.
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See Corporate GovernanceComposition of Board of
Directors below for further information on the factors the
Nominating and Corporate Governance Committee considers in
evaluating and selecting board members.
Dennis R. Beresford, 71, has served as Ernst &
Young Executive Professor of Accounting at the J.M. Tull School
of Accounting, Terry College of Business, University of Georgia
since 1997. From 1987 to 1997, Mr. Beresford served as
Chairman of the Financial Accounting Standards Board, or FASB,
the designated organization in the private sector for
establishing standards of financial accounting and reporting in
the U.S. From 1961 to 1986, Mr. Beresford was with
Ernst & Young LLP, including ten years as a Senior
Partner and National Director of Accounting. In addition,
Mr. Beresford served on the SEC Advisory Committee on
Improvements to Financial Reporting. Mr. Beresford is
currently a member of the Board of Directors and Chairman of the
Audit Committee of Kimberly-Clark Corporation and of Legg Mason,
Inc. He previously was a member of the Board of Directors of
MCI, Inc. from July 2002 to January 2006, where he served as
Chairman of the Audit Committee. Mr. Beresford is a
certified public accountant. Mr. Beresford initially became
a Fannie Mae director in May 2006, before we were put into
conservatorship, and FHFA appointed Mr. Beresford to Fannie
Maes Board in December 2008. Mr. Beresford serves as
Chair of the Audit Committee and is also a member of the
Compensation Committee and Executive Committee.
195
The Nominating and Corporate Governance Committee concluded that
Mr. Beresford should continue to serve as a director due to
his extensive experience in accounting, finance and risk
management, which he gained in the positions described above.
William Thomas Forrester, 61, served as Chief Financial
Officer of The Progressive Corporation from 1999 until his
retirement in March 2007, and served in a variety of senior
financial and operating positions with Progressive prior to that
time. Prior to joining The Progressive Corporation in 1984,
Mr. Forrester was with Price Waterhouse LLP, a major public
accounting firm, from 1976 to 1984. Mr. Forrester is
currently a member of the Board of Directors and Chairman of the
Audit Committee of The Navigators Group, Inc. He also serves on
the Finance Committee and Compensation Committee of The
Navigators Group, Inc. He previously was a member of the Board
of Directors of Axis Capital Holdings Limited from December 2003
to May 2006, where he served as Chairman of the Audit Committee.
Mr. Forrester has been a Fannie Mae director since December
2008. Mr. Forrester serves as a member of the Audit
Committee and Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee concluded that
Mr. Forrester should continue to serve as a director due to
his extensive experience in business, finance, accounting and
risk management, which he gained in the positions described
above.
Brenda J. Gaines, 60, served as President and Chief
Executive Officer of Diners Club North America, a subsidiary of
Citigroup, from October 2002 until her retirement in April 2004.
She served as President, Diners Club North America, from
February 1999 to September 2002. From 1988 until her appointment
as President, she held various positions within Diners Club
North America, Citigroup and Citigroups predecessor
corporations. She also served as Deputy Chief of Staff for the
Mayor of the City of Chicago from 1985 to 1987 and as Chicago
Commissioner of Housing from 1983 to 1985. Ms. Gaines also
has over 12 years of experience with the Department of
Housing and Urban Development, including serving as Deputy
Regional Administrator from 1980 to 1981. Ms. Gaines is
currently a member of the Board of Directors of Office Depot,
Inc., where she serves as Chair of the Audit Committee and a
member of the Corporate Governance and Nominating Committee.
Ms. Gaines is also a member of the Board of Directors of
NICOR, Inc., where she serves as a member of the Corporate
Governance Committee, and Tenet Healthcare Corporation, where
she serves as a member of both the Audit Committee and
Compensation Committee. She previously was a member of the Board
of Directors of CNA Financial Corporation from October 2004 to
May 2007, where she served as Chair of the Audit Committee.
Ms. Gaines initially became a Fannie Mae director in
September 2006, before we were put into conservatorship, and
FHFA appointed Ms. Gaines to Fannie Maes Board in
December 2008. Ms. Gaines serves as Chair of the
Compensation Committee and is also a member of the Audit
Committee and Executive Committee.
The Nominating and Corporate Governance Committee concluded that
Ms. Gaines should continue to serve as a director due to
her extensive experience in business, finance, accounting, risk
management, public policy matters, mortgage lending, low-income
housing, and the regulation of financial institutions, which she
gained in the positions described above.
Charlynn Goins, 67, served as Chairman of the Board of
Directors of New York City Health and Hospitals Corporation from
June 2004 to October 2008. She also served on the Board of
Trustees of The Mainstay Funds, New York Life Insurance
Companys retail family of funds, from June 2001 through
July 2006 and on the Board of Directors of The Communitys
Bank from February 2001 through June 2004. Ms. Goins also
was a Senior Vice President of Prudential Financial, Inc.
(formerly, Prudential Securities, Inc.) from 1990 to 1997.
Ms. Goins serves as the Chairman of the New York Community
Trust and as a trustee of the Brooklyn Museum of Art. She also
serves as a director and a member of the Organization and
Compensation Committee of AXA Financial Inc. She is also a
director of AXA Equitable, MONY Life and MONY Life of America,
which are subsidiaries of AXA Financial Inc. Ms. Goins is
an attorney. Ms. Goins has been a Fannie Mae director since
December 2008. Ms. Goins serves as Chair of the Nominating
and Corporate Governance Committee and is also a member of the
Strategic Planning Committee and Executive Committee.
196
The Nominating and Corporate Governance Committee concluded that
Ms. Goins should continue to serve as a director due to her
extensive experience in business, finance and public policy
matters, which she gained in the positions described above.
Frederick B. Bart Harvey III, 60, retired in
March 2008 from his role as chairman of the Board of Trustees of
Enterprise Community Partners and Enterprise Community
Investment, providers of development capital and technical
expertise to create affordable housing and rebuild communities.
Enterprise is a national non-profit that raises funds from the
private sector to finance homes primarily for low and very low
income people. Enterprise has also pioneered green
affordable housing with its EnterpriseGreen Communities
initiative. Mr. Harvey was Enterprises chief
executive officer from 1993 to 2007. He joined Enterprise in
1984, and a year later became vice chairman. Before joining
Enterprise, Mr. Harvey served for 10 years in various
domestic and international positions with Dean Witter Reynolds
(now Morgan Stanley), leaving as Managing Director of Corporate
Finance. Mr. Harvey was a member of the Board of Directors
of the Federal Home Loan Bank of Atlanta from 1996 to 1999, a
director of the National Housing Trust from 1990 to 2008, and
also served as an executive committee member of the National
Housing Conference from 1999 to 2008. Mr. Harvey initially
became a Fannie Mae director in August 2008, before we were put
into conservatorship, and FHFA appointed Mr. Harvey to
Fannie Maes Board in December 2008. Mr. Harvey is
Chair of the Strategic Planning Committee and also serves as a
member of the Nominating and Corporate Governance Committee,
Risk Policy and Capital Committee, and Executive Committee.
The Nominating and Corporate Governance Committee concluded that
Mr. Harvey should continue to serve as a director due to
his extensive experience in business, finance, capital markets,
risk management, public policy matters, mortgage lending,
low-income housing and homebuilding, which he gained in the
positions described above.
Philip A. Laskawy, 68, retired from Ernst &
Young in September 2001, after having held several positions
during his employment there from 1961 to 2001, including serving
as Chairman and Chief Executive Officer from 1994 until his
retirement in September 2001. Mr. Laskawy currently serves
on the Boards of Directors of General Motors Corporation, Henry
Schein, Inc., Lazard Ltd. and Loews Corporation. He is a member
of the Audit Committee of each of these companies, including
Chairman of the Audit Committee of General Motors Corporation.
He is also Chair of the Nominating and Governance Committee and
a member of the Strategic Advisory Committee at Henry Schein,
Inc. Mr. Laskawy previously was a member of the Board of
Directors of The Progressive Corporation (from 2001 through
December 2007) and Discover Financial Services (from June
2007 through September 2008). He served as Chairman of the Audit
Committee at each of these companies. Mr. Laskawy initially
became a director and Chairman of Fannie Maes Board in
September 2008. Mr. Laskawy is Chair of the Risk Policy and
Capital Committee and the Executive Committee.
The Nominating and Corporate Governance Committee concluded that
Mr. Laskawy should continue to serve as a director due to
his extensive experience in business, finance, accounting and
risk management, which he gained in the positions described
above.
Egbert L. J. Perry, 54, is the Chairman and Chief
Executive Officer of The Integral Group LLC. Founded in 1993 by
Mr. Perry, Integral is a real estate advisory, investment
management and development company based in Atlanta.
Mr. Perry has over 29 years experience as a real
estate professional, including work in urban development,
developing and investing in mixed-income, mixed-use communities,
affordable/work force housing and commercial real estate
projects in markets across the country. Mr. Perry currently
serves as Chair of the Board of Directors of Atlanta Life
Financial Group, where he serves as a member of the Audit
Committee, as Chair of the Advisory Board of the Penn Institute
for Urban Research and as a trustee of the University of
Pennsylvania and Childrens Healthcare of Atlanta.
Mr. Perry served from 2002 through 2008 as a director of
the Federal Reserve Bank of Atlanta. Mr. Perry has been a
Fannie Mae director since December 2008. Mr. Perry is a
member of the Nominating and Corporate Governance Committee,
Risk Policy and Capital Committee, and Strategic Planning
Committee.
The Nominating and Corporate Governance Committee concluded that
Mr. Perry should continue to serve as a director due to his
extensive experience in business, finance, accounting, mortgage
lending, real estate, low-income housing and homebuilding, which
he gained in the positions described above.
197
Jonathan Plutzik, 55, has served as Chairman of Betsy
Ross Investors, LLC since August 2005. He also has served as
President of the Jonathan Plutzik and Lesley Goldwasser Family
Foundation Inc. and as Chairman of the Coro New York Leadership
Center since January 2003. Mr. Plutzik served as
Non-Executive Chairman of the Board of Directors at Firaxis
Games from June 2002 to December 2005. Before that, he served
from 1978 to June 2002 in various positions with Credit Suisse
First Boston, retiring in June 2002 from his role as Vice
Chairman. Mr. Plutzik has been a Fannie Mae director since
November 2009. Mr. Plutzik is a member of the Compensation
Committee and Risk Policy and Capital Committee.
The Nominating and Corporate Governance Committee concluded that
Mr. Plutzik should continue to serve as a director due to
his extensive experience in business, finance, capital markets,
risk management and the regulation of financial institutions,
which he gained in the positions described above.
David H. Sidwell, 56, served as Executive Vice President
and Chief Financial Officer of Morgan Stanley from March 2004 to
October 2007, when he retired. From 1984 to March 2004,
Mr. Sidwell worked for JPMorgan Chase & Co. in a
variety of financial and operating positions, most recently as
Chief Financial Officer of JPMorgan Chases investment bank
from January 2000 to March 2004. Prior to joining JP Morgan in
1984, Mr. Sidwell was with Price Waterhouse LLP, a major
public accounting firm, from 1975 to 1984. Mr. Sidwell
serves as a Trustee of the International Accounting Standards
Committee Foundation. Mr. Sidwell is currently a member of
the Board of Directors and Chair of the Risk Committee of UBS
AG. He previously was a member of the Board of Directors of MSCI
Inc. from November 2007 through September 2008, where he served
as Chair of the Audit Committee and a member of the Nominating
and Corporate Governance Committee. Mr. Sidwell has been a
Fannie Mae director since December 2008. Mr. Sidwell is a
member of the Compensation Committee, Risk Policy and Capital
Committee, and Strategic Planning Committee.
The Nominating and Corporate Governance Committee concluded that
Mr. Sidwell should continue to serve as a director due to
his extensive experience in business, finance, capital markets,
accounting, risk management and the regulation of financial
institutions, which he gained in the positions described above.
Michael J. Williams, 52, has been President and Chief
Executive Officer of Fannie Mae since April 2009. He previously
served as Fannie Maes Executive Vice President and Chief
Operating Officer from November 2005 to April 2009.
Mr. Williams also served as Fannie Maes Executive
Vice President for Regulatory Agreements and Restatement from
February 2005 to November 2005, as PresidentFannie Mae
eBusiness from July 2000 to February 2005 and as Senior Vice
Presidente-commerce
from July 1999 to July 2000. Prior to this, Mr. Williams
served in various roles in the Single-Family and Corporate
Information Systems divisions of Fannie Mae. Mr. Williams
joined Fannie Mae in 1991. Mr. Williams has been a Fannie
Mae director since April 2009. He is a member of the Executive
Committee.
Mr. Williams serves as a member of our Board of Directors
pursuant to a FHFA order that specifies that our Chief Executive
Officer will serve as a member of the Board. In addition, the
Nominating and Corporate Governance Committee concluded that
Mr. Williams should continue to serve as a director due to
his extensive experience in business, finance, accounting,
mortgage lending, real estate and low-income housing, which he
gained in the positions described above.
Conservatorship
and Delegation of Authority to Board of Directors
On September 6, 2008, the Director of FHFA appointed FHFA
as our conservator in accordance with the GSE Act. Upon its
appointment, the conservator immediately succeeded to all
rights, titles, powers and privileges of Fannie Mae, and of any
shareholder, 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. As a result, our Board of Directors no longer had the power
or duty to manage, direct or oversee our business and affairs.
On November 24, 2008, FHFA, as conservator, reconstituted
our Board of Directors and directed us regarding the function
and authorities of the Board of Directors. FHFA has delegated to
our Board of Directors and
198
management the authority to conduct our
day-to-day
operations, subject to the direction of the conservator.
FHFAs delegation of authority to the Board became
effective on December 19, 2008 when FHFA appointed nine
Board members to serve in addition to the Board Chairman, who
was appointed by FHFA on September 16, 2008. Pursuant to
FHFAs delegation of authority to the Board, the Board is
responsible for carrying out normal Board functions, but is
required to obtain the review and approval of FHFA as
conservator before taking action in the specified areas
described below. The delegation of authority will remain in
effect until modified or rescinded by the conservator. The
conservatorship has no specified termination date. The directors
serve on behalf of the conservator and exercise their authority
as directed by and with the approval, where required, of the
conservator. Our directors have no 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.
The conservator instructed that in taking actions the Board
should ensure that appropriate regulatory approvals have been
received. In addition, the conservator directed the Board to
consult with and obtain the approval of the conservator before
taking action in the following areas:
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(1)
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actions involving capital stock, dividends, the senior preferred
stock purchase agreement, increases in risk limits, material
changes in accounting policy and reasonably foreseeable material
increases in operational risk;
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(2)
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the creation of any subsidiary or affiliate or any substantial
non-ordinary course transactions with any subsidiary or
affiliate;
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(3)
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matters that relate to conservatorship;
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(4)
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actions involving hiring, compensation and termination benefits
of directors and officers at the executive vice president level
and above and other specified executives;
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(5)
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actions involving retention and termination of external auditors
and law firms serving as consultants to the Board;
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(6)
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settlements of litigation, claims, regulatory proceedings or
tax-related matters in excess of a specified threshold;
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(7)
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any merger with or acquisition of a business for consideration
in excess of $50 million; and
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(8)
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any action that in the reasonable business judgment of the Board
at the time that the action is taken is likely to cause
significant reputational risk.
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For more information on the conservatorship, refer to
BusinessConservatorship and Treasury
AgreementsConservatorship.
Composition
of Board of Directors
In November 2008, FHFA directed that our Board will have a
minimum of nine and not more than thirteen directors. There will
be a non-executive Chairman of the Board, and our Chief
Executive Officer will be the only corporate officer serving as
a director. Our initial directors were appointed by the
conservator and subsequent vacancies have been and may continue
to be filled by the Board, subject to review by the conservator.
Each director will serve on the Board until the earlier of
(1) resignation or removal by the conservator or
(2) the election of a successor director at an annual
meeting of shareholders.
Fannie Maes bylaws provide that each director holds office
for the term to which he or she was elected or appointed and
until his or her successor is chosen and qualified or until he
or she dies, resigns, retires or is removed from office in
accordance with the law, whichever occurs first. Under the
Charter Act, each director is elected or appointed for a term
ending on the date of our next shareholders meeting. As
noted above, however, the conservator appointed the initial
directors to our Board, delegated to the Board the authority to
appoint directors to subsequent vacancies subject to conservator
review, and defined the term of service of directors during
conservatorship.
199
Under the Charter Act, our Board shall at all times have as
members at least one person from the homebuilding, mortgage
lending and real estate industries, and at least one person from
an organization representing consumer or community interests or
one person who has demonstrated a career commitment to the
provision of housing for low-income households. It is the policy
of the Board that a substantial majority of Fannie Maes
directors will be independent, in accordance with the standards
adopted by the Board. In addition, the Board, as a group, must
be knowledgeable in business, finance, capital markets,
accounting, risk management, public policy, mortgage lending,
real estate, low-income housing, homebuilding, regulation of
financial institutions and any other areas that may be relevant
to the safe and sound operation of Fannie Mae.
In addition to knowledge in the areas noted above, the
Nominating and Corporate Governance Committee considers the
personal attributes and diversity of backgrounds offered by
candidates, but does not have a formal policy on the
consideration of diversity in identifying Board members. The
Nominating and Corporate Governance Committee seeks out Board
members who possess the highest personal values, judgment and
integrity, diverse ideas and perspectives, and an understanding
of the regulatory environment in which Fannie Mae does business.
The Committee also considers whether a prospective candidate for
the Board has the ability to attend meetings and fully
participate in the activities of the Board. Information
regarding the particular experience, qualifications, attributes
or skills of each of our current directors is provided above
under Directors.
Board
Leadership Structure
We have had a non-executive Chairman of the Board since 2004.
FHFA examination guidance requires separate Chairman of the
Board and Chief Executive Officer positions and requires that
the Chairman of the Board be an independent director. Our Board
is also structured so that all but one of our directors, our
Chief Executive Officer, are independent. A non-executive
Chairman structure is consistent with the Boards emphasis
on independent oversight, as well as our conservators
directives.
Our Board has five standing committees: the Audit Committee, the
Compensation Committee, the Nominating and Corporate Governance
Committee, the Risk Policy and Capital Committee, and the
Strategic Planning Committee. The Board and the standing Board
committees function in accordance with their designated duties
and with the authorities as set forth in federal statutes,
regulations and FHFA examination and policy guidance, Delaware
law (for corporate governance purposes) and in Fannie Maes
bylaws and applicable charters of Fannie Maes Board
committees. Such duties or authorities may be modified by the
conservator at any time. The Board also has an Executive
Committee, as provided in Fannie Maes bylaws.
The Board oversees risk management primarily through the Risk
Policy and Capital Committee. This Committee oversees
managements risk-related policies, including reviewing
corporate level risk policies and limits, performance against
these policies and limits, and the sufficiency of risk
management capabilities. For more information on the
Boards role in risk oversight, see
MD&ARisk ManagementEnterprise Risk
GovernanceBoard of Directors.
Corporate
Governance Information, Committee Charters and Codes of
Conduct
Our Corporate Governance Guidelines, as well as the charters for
standing Board committees, including our Boards Audit
Committee, Compensation Committee and Nominating and Corporate
Governance Committee, are posted on our Web site,
www.fanniemae.com, under Corporate Governance in the
About Us section of our Web site.
We have a Code of Conduct that is applicable to all officers and
employees and a Code of Conduct and Conflicts of Interest Policy
for Members of the Board of Directors. Our Code of Conduct also
serves as the code of ethics for our Chief Executive Officer and
senior financial officers required by the Sarbanes-Oxley Act of
2002 and implementing regulations of the SEC. We have posted
these codes on our Web site, www.fanniemae.com, under
Corporate Governance in the About Us
section of our Web site. We intend to disclose any changes to or
waivers from these codes that apply to any of our executive
officers or directors by posting this information on our Web
site.
200
Audit
Committee Membership
Our Board has a standing Audit Committee consisting of
Mr. Beresford, who is the Chair, Mr. Forrester and
Ms. Gaines, all of whom are independent under the New York
Stock Exchange, or NYSE, listing standards, Fannie Maes
Corporate Governance Guidelines and other SEC rules and
regulations applicable to audit committees. The Board has
determined that Mr. Beresford, Mr. Forrester and
Ms. Gaines each have the requisite experience to qualify as
an audit committee financial expert under the rules
and regulations of the SEC and has designated each of them as
such.
Executive
Sessions
Our non-management directors meet regularly in executive
sessions without management present. Our Board of Directors
reserves time for executive sessions at every regularly
scheduled Board meeting. The non-executive Chairman of the
Board, Mr. Laskawy, presides over these sessions.
Communications
with Directors
Interested parties wishing to communicate any concerns or
questions about Fannie Mae to the non-executive Chairman of the
Board or to our non-management directors individually or as a
group may do so by electronic mail addressed to
board@fanniemae.com, or by U.S. mail addressed
to Fannie Mae Board of Directors,
c/o Office
of the Corporate Secretary, Fannie Mae, Mail Stop 1H-2S/05, 3900
Wisconsin Avenue NW, Washington, DC
20016-2892.
Communications may be addressed to a specific director or
directors, including Mr. Laskawy, the Chairman of the
Board, or to groups of directors, such as the independent or
non-management directors.
The Office of the Corporate Secretary is responsible for
processing all communications to a director or directors.
Communications that are deemed by the Office of the Corporate
Secretary to be commercial solicitations, ordinary course
customer inquiries, incoherent or obscene are not forwarded to
directors.
Director
Nominations; Shareholder Proposals
During the conservatorship, FHFA, as conservator, has all powers
of the shareholders and Board of Directors of Fannie Mae. As a
result, under the GSE Act, Fannie Maes common shareholders
no longer have the ability to recommend director nominees or
elect the directors of Fannie Mae or bring business before any
meeting of shareholders pursuant to the procedures in our
bylaws. In consultation with the conservator, we currently do
not plan to hold an annual meeting of shareholders in 2010. For
more information on the conservatorship, refer to
BusinessConservatorship and Treasury
AgreementsConservatorship.
201
Our current executive officers who are not also members of the
Board of Directors are listed below. They have provided the
following information about their principal occupation, business
experience and other matters.
Kenneth J. Bacon, 55, has been Executive Vice
PresidentHousing and Community Development since July
2005. He was interim head of Housing and Community Development
from January 2005 to July 2005. He was Senior Vice
PresidentMultifamily Lending and Investment from May 2000
to January 2005, and Senior Vice PresidentAmerican
Communities Fund from October 1999 to May 2000. From August 1998
to October 1999 he was Senior Vice President of the Community
Development Capital Corporation. He was Senior Vice President of
Fannie Maes Northeastern Regional Office in Philadelphia
from May 1993 to August 1998. Mr. Bacon was a director of
the Fannie Mae Foundation from January 1995 until it was
dissolved in June 2009. He was Vice Chairman of the Fannie Mae
Foundation from January 2005 to September 2008 and was Chairman
from September 2008 to June 2009. Mr. Bacon is a director
of Comcast Corporation and the Corporation for Supportive
Housing. He is a member of the Executive Leadership Council.
David C. Benson, 50, has been Executive Vice
PresidentCapital Markets since April 2009. Prior to that
time, Mr. Benson served as Fannie Maes Executive Vice
PresidentCapital Markets and Treasury from August 2008 to
April 2009, as Fannie Maes Senior Vice President and
Treasurer from March 2006 to August 2008, and as Fannie
Maes Vice President and Assistant Treasurer from June 2002
to February 2006. Prior to joining Fannie Mae, Mr. Benson
was Managing Director in the fixed income division of Merrill
Lynch & Co. From 1988 through 2002, he served in
several capacities at Merrill Lynch in the areas of risk
management, trading, debt syndication and
e-commerce
based in New York and London.
Terence W. Edwards, 54, has been Executive Vice
PresidentCredit Portfolio Management since September 2009,
when he joined Fannie Mae. Prior to joining Fannie Mae,
Mr. Edwards served as the President and Chief Executive
Officer of PHH Corporation, a leading outsource provider of
mortgage and fleet management services, from January 2005 to
June 2009. Mr. Edwards was also a member of the Board of
Directors of PHH Corporation from January 2005 through June
2009. Prior to PHH Corporations spin-off from Cendant
Corporation (now known as Avis Budget Group, Inc.) in January
2005, Mr. Edwards served as President and Chief Executive
Officer of Cendant Mortgage Corporation (now known as PHH
Mortgage Corporation), a subsidiary of Cendant Corporation,
beginning in February 1996. Mr. Edwards had previously
served in other executive roles at PHH Corporation, which he
joined in 1980.
David C. Hisey, 49, has been Executive Vice President and
Deputy Chief Financial Officer since November 2008.
Mr. Hisey previously served as Executive Vice President and
Chief Financial Officer from August to November 2008, as Senior
Vice President and Controller from February 2005 to August 2008
and as Senior Vice President, Financial Controls and Operations
from January to February 2005. Prior to joining Fannie Mae,
Mr. Hisey was Corporate Vice President of Financial
Services Consulting, Managing Director and practice leader of
the Lending and Leasing Group of BearingPoint, Inc., a
management consulting and systems integration company. Prior to
joining BearingPoint in 2000, Mr. Hisey was an audit
partner with KPMG, LLP. Mr. Hisey serves as our principal
accounting officer and is a certified public accountant.
David M. Johnson, 49, has been Executive Vice President
and Chief Financial Officer since November 2008. Prior to
joining Fannie Mae, Mr. Johnson held the position of
Executive Vice President and Chief Financial Officer of The
Hartford Financial Services Group, Inc., a diversified
insurance/financial services company, from 2001 until April
2008. Mr. Johnson had previously served as Senior Executive
Vice President and Chief Financial Officer of Cendant
Corporation from November 1998 through January 2001. Prior to
joining Cendant Corporation, Mr. Johnson served as a
Managing Director in the Investment Banking Division at Merrill
Lynch, Pierce, Fenner and Smith, Inc., where he started in 1986.
Linda K. Knight, 60, has served as Executive Vice
President and Treasurer since April 2009. Ms. Knight
previously served as Executive Vice PresidentEnterprise
Operations & Securities from November 2008 to April
2009. Ms. Knight has been responsible for securities
operations since August 2008. She was responsible for enterprise
operations from April 2007 to April 2009, except for a period
from August 2008 to September
202
2008. Ms. Knight served under the title Executive Vice
PresidentSecurities from August to November 2008 and as
Executive Vice PresidentEnterprise Operations from April
2007 until August 2008. Previously, Ms. Knight served as
Executive Vice PresidentCapital Markets from March 2006 to
April 2007. Before that, she served as Senior Vice President and
Treasurer from February 1993 to March 2006, and Vice President
and Assistant Treasurer from November 1986 to February 1993.
Ms. Knight held the position of Director, Treasurers
Office from November 1984 to November 1986. Ms. Knight
joined Fannie Mae in August 1982 as a senior market analyst.
Timothy J. Mayopoulos, 50, has been Executive Vice
President, General Counsel and Corporate Secretary since April
2009, when he joined Fannie Mae. Prior to joining Fannie Mae,
Mr. Mayopoulos was Executive Vice President and General
Counsel of Bank of America Corporation from January 2004 to
December 2008. Before joining Bank of America, he was Managing
Director and General Counsel, Americas of Deutsche Bank
AGs Corporate and Investment Bank from January 2002 to
January 2004. Prior to that, he was Managing Director and Senior
Deputy General Counsel, Americas of Credit Suisse First Boston
from November 2000 to May 2001. He previously served as Managing
Director and Associate General Counsel at Donaldson,
Lufkin & Jenrette, Inc., where he worked from May 1996
to November 2000. From October 1986 to September 1994,
Mr. Mayopoulos was in private practice at Davis
Polk & Wardwell. He also served as Associate
Independent Counsel in the Office of the Independent Counsel
from October 1994 to May 1996 during the Whitewater
investigation.
Karen R. Pallotta, 46, has been Executive Vice
PresidentSingle-Family Mortgage Business since June 2009.
Ms. Pallotta served as Senior Vice PresidentProduct
Acquisition Strategy and Support from September 2005 to May
2009. She previously served as Vice PresidentMarketing and
Lender Strategies from November 2001 to September 2005.
Ms. Pallotta held the positions of DirectorMarketing
from December 1999 to November 2001 and
DirectorTransactions and Account Management from July 1997
to December 1999. From July 1990, when she joined Fannie Mae, to
July 1997, Ms. Pallotta held various analyst, manager and
specialist positions with Fannie Mae.
Kenneth J. Phelan, 50, has been Executive Vice
PresidentChief Risk Officer, since April 2009, when he
joined Fannie Mae. Prior to joining Fannie Mae, Mr. Phelan
served as Chief Risk Officer of Wachovia Corporation, a
financial holding company and bank holding company, from October
2008 to January 2009. Prior to Wachovia, Mr. Phelan served
as Head of Risk Management Services at JPMorgan
Chase & Co., a financial holding company, from August
2004 to September 2008. He also served as Head of Risk Strategy
Development for Bank One Corporation, which was acquired by
JPMorgan Chase & Co. in 2004, from February 2001 to
August 2004.
William B. Senhauser, 47, has been Senior Vice President
and Chief Compliance Officer since December 2005 and interim
head of Communications and Marketing Services and the Office of
Community and Charitable Giving since December 2009.
Mr. Senhauser previously served as Vice President for
Regulatory Agreements and Restatement from October 2004 to
December 2005 and Vice President for Operating Initiatives from
January 2003 to September 2004. Mr. Senhauser joined Fannie
Mae in 2000 as Vice President for Fair Lending.
Michael A. Shaw, 62, has been Executive Vice President
and Chief Credit Officer since April 2009. Mr. Shaw
previously served as Executive Vice President and Enterprise
Risk Officer from November 2008 to April 2009, and as Executive
Vice President and Chief Risk Officer from August 2008 to
November 2008. Prior to that time, Mr. Shaw served as
Senior Vice PresidentCredit Risk Oversight beginning in
April 2006, when he joined Fannie Mae. Prior to that time,
Mr. Shaw was employed at JPMorgan Chase & Co.,
where he served as Senior Credit Executive from 2004 to 2006, as
Senior Risk Executive, Policy, Reporting, Analytics and Finance
during 2004 and as Senior Credit ExecutiveConsumer, Chase
Financial Services from 2003 to 2004. Prior to joining JP
Morgan, Mr. Shaw held senior risk positions at GE Capital
and a subsidiary from 1997 to 2003. Mr. Shaw previously
served in several senior risk positions at Citigroup Inc., which
he joined in 1972.
Edward G. Watson, 48, has been Executive Vice
PresidentOperations and Technology, since April 2009, when
he joined Fannie Mae. Prior to joining Fannie Mae,
Mr. Watson held a variety of positions with Citigroup Inc.,
a global diversified financial services holding company. From
April 2004 to April 2008, he was
203
Global Head, Capital Markets Operations and Institutional
Clients Group Business Services. Before that, he served in a
series of senior finance positions, including as Chief Financial
Officer of Citigroup International, the European Investment
Bank, and of Global Investment Management. Upon joining
Citigroup in 1994, Mr. Watson led the effort to build the
infrastructure for a
start-up
interest rate and equity
over-the-counter
derivatives business, which he ran until 1998.
Under our bylaws, each executive officer holds office until his
or her successor is chosen and qualified or until he or she
resigns, retires or is removed from office.
Section 16(a)
Beneficial Ownership Reporting Compliance
Our directors and officers file with the SEC reports on their
ownership of our stock and on changes in their stock ownership.
Based on a review of forms filed during 2009 or with respect to
2009 and on written representations from our directors and
officers, we believe that all of our directors and officers
timely filed all required reports and reported all transactions
reportable during 2009. However, William Senhauser reported one
2008 transaction late.
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Item 11.
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Executive
Compensation
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COMPENSATION
DISCUSSION AND ANALYSIS
Executive
Summary
Our Board of Directors approved a new executive compensation
program in December 2009, which we have used for 2009
compensation actions. The new program and our 2009 compensation
actions were approved by FHFA in consultation with the
Department of the Treasury. The new program represents a change
from our previous executive compensation structure and also
takes into account the extraordinary market environment and
conditions the company is facing and taking actions to address.
The Board of Directors and FHFA believe that our new executive
compensation program reflects evolving standards regarding
executive compensation and will also enable us to recruit and
retain well-qualified executives. Although we did not receive
funds pursuant to the Troubled Asset Relief Program
(TARP), the new executive compensation program
follows the same general structure of compensation arrangements
approved by Treasurys Special Master for TARP Executive
Compensation for top executives at financial institutions that
have received exceptional TARP assistance, except that our
program reflects our different circumstances. As described in
more detail below, our new executive compensation structure
consists of three primary elements: base salary, deferred pay
and a performance-based long-term incentive award. Elements of
our new compensation structure also adopt or expand on
compensation reforms advanced by Treasurys Special Master
for TARP Executive Compensation. For example, we have
implemented forfeiture and repayment provisions, or
clawbacks. These clawbacks, which are more extensive
in scope than the clawbacks required for senior executives at
TARP-assisted firms, provide for an executive officer to repay
some or all of his or her deferred pay and long-term incentive
awards in the event his or her gross misconduct or gross
negligence materially harms the company, he or she is convicted
of a felony, or he or she has been granted deferred pay or
long-term incentive awards based on materially inaccurate
performance metrics.
Given Fannie Maes essential role in supporting the housing
and mortgage markets during this critical time, attracting and
retaining high-quality executives remains a top priority of both
the Board of Directors and FHFA. FHFAs Acting Director has
stated that he believes it is critical to protect the taxpayer
interests in Fannie Mae and Freddie Mac by ensuring that each
company has experienced, qualified people managing
day-to-day
business operations in the midst of the current uncertainty over
the future of both companies, and that any other approach puts
at risk the management of more than $5 trillion in mortgage
holdings and guarantees that are supported by taxpayers through
the senior preferred stock purchase agreements with Treasury.
In making specific compensation determinations for 2009, the
Board of Directors and FHFA also sought to recognize that the
company and its management worked diligently in an
extraordinarily challenging market
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environment to meet the corporate performance goals established
for 2009. Our achievements in 2009 included providing over
$800 billion in liquidity to the mortgage market, playing a
central role in launching the Obama Administrations Home
Affordable Modification Program and helping homeowners by
completing more than 600,000 workouts. More information
regarding our 2009 corporate goals and performance against these
goals is provided below under 2009 Compensation Process
and DecisionsWhat elements of corporate performance and
other factors did the Compensation Committee and the Board
consider in making compensation decisions relating to the 2009
long-term incentive awards and 2008 Retention Program
awards?
Our Named
Executives for 2009
This section discusses compensation decisions relating to our
current and former Chief Executive Officer, our Chief Financial
Officer, and our next three most highly compensated executive
officers during 2009. We refer to these individuals as our named
executives. For 2009, our named executives were:
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Michael J. Williams, President and Chief Executive Officer
(since April 2009) and Executive Vice President and Chief
Operating Officer (until April 2009);
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Herbert M. Allison, Jr., President and Chief Executive
Officer (until April 2009);
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David M. Johnson, Executive Vice President and Chief Financial
Officer;
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Kenneth J. Bacon, Executive Vice PresidentHousing and
Community Development;
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David C. Benson, Executive Vice PresidentCapital
Markets; and
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Timothy J. Mayopoulos, Executive Vice President, General Counsel
and Corporate Secretary.
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Executive
Compensation Objectives
What
are the goals and objectives for our executive compensation
program?
Given Fannie Maes essential role in providing liquidity to
the mortgage market and supporting the housing market, as well
as the need to prudently manage our $3.2 trillion book of
business, a primary goal of our Board of Directors and FHFA in
developing our executive compensation program is to attract and
retain the executive talent needed to continue to fulfill these
roles and responsibilities. Our 2009 executive compensation
program is also intended to drive a pay for performance
environment by rewarding executive officers for company and
individual performance through the use of performance-based
long-term incentive awards. In addition, the Board of Directors
and FHFA sought to develop an executive compensation program
that reflects evolving standards regarding executive
compensation and, to the extent appropriate, is generally
consistent with the structural standards created for
TARP-assisted firms.
Elements
of 2009 Compensation
What
are the elements of our 2009 executive compensation
arrangements?
Compensation for our named executives for 2009, other than for
Mr. Allison, consisted of three primary elements: base
salary, deferred pay and a long-term incentive award. The named
executives also received retirement benefits, other benefits
generally available to our employees and certain perquisites.
Our compensation arrangements for Mr. Allison are discussed
under Individual Compensation Decisions for
2009What compensation arrangements did we have with
Mr. Allison, our previous Chief Executive Officer?
below.
Base
Salary, Deferred Pay and Long-Term Incentive Awards
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Base Salary. Base salary is paid in cash
throughout the year on a bi-weekly basis and provides a minimum,
fixed level of cash compensation for the named executives. Base
salary reflects the named executives level of
responsibility and experience, as well as his performance over
time. Beginning in
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2010, base salary will be capped at $500,000 for all of our
executive officers, including the named executives, other than
our Chief Executive Officer and Chief Financial Officer.
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Deferred Pay. Deferred pay is paid to the
named executives in cash in quarterly installments in the year
following the performance year. Generally, 2009 deferred pay
will be paid in four equal quarterly installments in March,
June, September and December of 2010. Deferred pay is designed
to replicate the stock salary element of the
compensation program applicable to financial institutions that
received TARP assistance and is also intended to serve as a
retention incentive for the named executives; however, deferred
pay will be paid in cash, not stock. Given the low market value
of our common stock since our entry into conservatorship, we and
FHFA believe that stock-based compensation would not provide
appropriate retention incentives for our named executives.
Further, large grants of low-priced stock could provide
substantial incentives for the named executives to seek and take
large risks. In addition, we are prohibited from paying new
stock-based compensation under the senior preferred stock
purchase agreement without Treasurys consent.
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The amount of deferred pay is the remaining portion of a named
executives total direct compensation that is not base
salary or a long-term incentive award at the target level.
Deferred pay for 2009 contains no performance-based component;
however, as described below under Components of 2010
Compensation and Changes from 2009 Compensation
Arrangements, 50% of deferred pay for 2010 will be based
on the companys performance against corporate goals
established for 2010 and 50% of deferred pay for 2010 will be
service-based. Except in the limited circumstances described
under Compensation TablesPotential Payments Upon
Termination or
Change-in-Control
below, we will pay installments of deferred pay only if the
named executive is employed by Fannie Mae on the scheduled
payment dates.
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Long-term Incentive Award. A long-term
incentive award is a performance-based cash award that is paid
in the two calendar years following the performance year. Half
of the 2009 long-term incentive award was paid in February 2010
and the remaining half of the award will be paid in the first
quarter of 2011. Long-term incentive awards are designed to
provide incentives to the named executives to achieve corporate
and individual performance goals. In addition, because the final
half of the award is not payable until the first quarter of the
second year following the performance year, it also serves as a
retention incentive for the named executives. Except in the
limited circumstances described under Compensation
TablesPotential Payments Upon Termination or
Change-in-Control
below, we will pay installments of a long-term incentive award
only if the named executive is employed by Fannie Mae on the
scheduled payment dates.
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We target long-term incentive awards at one-third of total
compensation. The actual amount paid to a named executive is
based on the companys and the named executives
performance against corporate and individual performance goals.
For a description of our 2009 corporate performance goals, see
2009 Compensation Process and DecisionsWhat
elements of corporate performance and other factors did the
Compensation Committee and the Board consider in making
compensation decisions relating to the 2009 long-term incentive
awards and 2008 Retention Program awards? below. Our
Board of Directors retains the discretion to pay individual
long-term incentive awards that are lower or higher than the
target amounts and this discretion is not restricted to a
specific range above or below these targets; however, the sum of
the individual long-term incentive awards to all executive
officers cannot exceed the overall size of the long-term
incentive pool for our executive officers, and FHFA has directed
that this pool cannot exceed 120% of target. In addition, each
long-term incentive award paid to an executive officer must be
approved by FHFA.
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Employee
Benefits
Our employee benefits are a fundamental part of our executive
compensation program, and serve as an important tool in
attracting and retaining senior executives. We describe these
employee benefits below.
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Retirement Plans. We redesigned our retirement
benefits program in late 2007 and further limited certain
retirement benefits in 2009. As a result of these changes, the
retirement plans in which each of our named executives was
eligible to participate in 2009 depended on their date of hire
or promotion, as applicable.
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Messrs. Williams and
Bacon. Messrs. Williams and Bacon
participate in our Executive Pension Plan, tax-qualified defined
benefit pension plan and supplemental defined benefit pension
plans. As discussed below under Components of 2010
Compensation and Changes from 2009 Compensation
Arrangements, we have frozen benefit accruals under the
Executive Pension Plan.
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Mr. Benson. Mr. Benson participates
in our tax-qualified defined benefit pension plan and
supplemental defined benefit pension plans. He is not eligible
to participate in our Executive Pension Plan because he was
promoted to executive vice president after we froze
participation in the Executive Pension Plan in November 2007.
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Messrs. Johnson and Mayopoulos. We hired
Messrs. Johnson and Mayopoulos after we froze participation
in our Executive Pension Plan, tax-qualified defined benefit
pension plan and supplemental defined benefit pension plans.
Accordingly, they do not participate in any of our defined
benefit pension plans. They participate instead in our
Supplemental Retirement Savings Plan, which is an unfunded,
non-tax-qualified defined contribution plan.
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All of the named executives are also eligible to participate in
our Retirement Savings Plan, which is a 401(k) plan that is
available to our employee population as a whole. Participants in
our Retirement Savings Plan who are not eligible for our
tax-qualified defined benefit pension plan receive an enhanced
matching contribution under the Retirement Savings Plan. We
provide more detail on our retirement plans under
Compensation TablesPension Benefits and
Compensation TablesNonqualified Deferred
Compensation.
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Other Employee Benefits and Plans. In general,
the named executives are eligible for employee benefits
available to our employee population as a whole, including our
medical insurance plans and matching charitable gifts program.
The named executives are also eligible to participate in our
supplemental long-term disability plan, which is available only
to employees above a specified level. Until December 2009, the
named executives were also eligible to participate in our
executive life insurance program; however, that benefit has been
terminated. Beginning in 2010, the named executives are eligible
for the life insurance program generally available to our
employee population as a whole.
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Perquisites. In 2009, we provided certain
named executives with limited perquisites not generally
available to our employee population as a whole, consisting
primarily of reimbursement of relocation and temporary living
expenses. In addition, all named executives were eligible to
receive an annual physical at the companys expense. More
information on perquisites provided to our named executives is
provided below under Compensation TablesComponents
of All Other Compensation for 2009. As noted
below under Components of 2010 Compensation and Changes
from 2009 Compensation Arrangements, effective
January 1, 2010, we have limited perquisites for our named
executives to no more than $25,000 per year. Any exceptions to
this limit will require the approval of FHFA in consultation
with Treasury.
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Severance Benefits. We have not entered into
employment agreements with any of our named executives that
would entitle the executive to severance benefits. Information
on compensation that we may pay to a named executive in certain
circumstances in the event the executives employment is
terminated is provided below in Compensation
TablesPotential Payments Upon Termination or
Change-in-Control.
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2008
Retention Program
Following our entry into conservatorship in September 2008, FHFA
determined that no executive officer would receive a cash bonus
or long-term incentive award for 2008 performance. FHFA then
established a broad-based employee retention program, referred
to as the 2008 Retention Program, under which our named
executives who were employed by Fannie Mae prior to
conservatorship (Messrs. Williams, Bacon and Benson)
received cash retention awards. The final portion of these
retention awards was based on 2009 corporate performance, as
determined by the Compensation Committee and Board of Directors
and as approved by FHFA in February 2010, and was paid in
February 2010. The corporate goals against which performance was
measured were the same as those applicable to the 2009 long-term
incentive award. See 2009 Compensation Process and
DecisionsWhat elements of corporate performance and
other factors did the Compensation
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Committee and the Board consider in making compensation
decisions relating to the 2009 long-term incentive awards and
2008 Retention Program awards? below for a discussion
of the corporate goals against which performance was measured
and the Compensation Committees and Boards
assessment of performance against these goals.
Although we consider all payments under the 2008 Retention
Program to be part of our 2008 compensation program, we have
incorporated the amount of this final retention payment into the
applicable named executives 2009 compensation set forth
below in the Summary Compensation Table for 2009, 2008 and
2007 because this final payment under the 2008 Retention
Program was based on 2009 corporate performance. For a
description of the 2008 Retention Program, please refer to
Executive CompensationCompensation Discussion and
Analysis in our 2008
Form 10-K.
Why
was this mix of base salary, deferred pay and long-term
incentive awards selected?
FHFA worked with our management and Board of Directors, and
sought the guidance of Treasurys Special Master for TARP
Executive Compensation, to develop an executive compensation
program that benefits from the structural standards created for
TARP-assisted firms. As a result of these efforts, we adopted a
compensation program based on FHFAs guidance consisting of
base salary, deferred pay and a long-term incentive award. With
regard to the relative distribution of total compensation among
these elements, based on guidance from FHFA, we targeted the
long-term incentive award component at one-third of total
compensation and limited annual base salary rates to no more
than $500,000 beginning in 2010, except in the case of our Chief
Executive Officer and Chief Financial Officer, which is similar
to the pay structure created for TARP-assisted firms. FHFA
provided guidance that the remaining portion of total
compensation be paid over time in cash in the form of deferred
pay.
2009
Compensation Process and Decisions
What
was the effect of the conservatorship on our process for setting
executive compensation in 2009?
As discussed above under BusinessConservatorship and
Treasury AgreementsConservatorship, we have been
under the conservatorship of FHFA since September 2008. The
conservatorship has had a significant impact on the compensation
received by our named executives in 2009, as well as the process
by which executive compensation for 2009 was determined.
Regulatory requirements affecting our compensation process
include:
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Our directors serve on behalf of FHFA and exercise their
authority subject to the direction of FHFA. More information
about the role of our directors is described above in
Directors, Executive Officers and Corporate
GovernanceCorporate GovernanceConservatorship and
Delegation of Authority to Board of Directors.
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FHFA, as our conservator, has directed that our Board consult
with and obtain FHFAs consent before taking any actions
involving hiring, compensation or termination benefits of any
officer at the executive vice president level and above and
including, regardless of title, executives who hold positions
with the functions of the chief operating officer, chief
financial officer, general counsel, chief business officer,
chief investment officer, treasurer, chief compliance officer,
chief risk officer and chief/general/internal auditor.
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Under the terms of the senior preferred stock purchase agreement
with Treasury, we may not enter into any new compensation
arrangements with, or increase amounts or benefits payable under
existing compensation arrangements of, any named executives or
executive officers without the consent of the Director of FHFA,
in consultation with the Secretary of the Treasury.
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Under the terms of the senior preferred stock purchase
agreement, we may not sell or issue any equity securities
without the prior written consent of Treasury, other than as
required by the terms of any binding agreement in effect on the
date of the senior preferred stock purchase agreement. This
restricts our ability to offer stock-based compensation.
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While we are in conservatorship, FHFA, as our conservator,
retains the authority to approve and to modify both the terms
and amount of any compensation to any of our executive officers.
In addition, until December 31, 2009, the Housing and
Economic Recovery Act of 2008 separately provided FHFA, as our
regulator, with the power to approve, disapprove and modify
executive compensation.
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FHFA, as our regulator, must approve any termination benefits we
offer to our named executives and certain other officers
identified by FHFA.
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Under the Housing and Economic Recovery Act of 2008 and related
regulations issued by FHFA, the Director of FHFA has the
authority to prohibit or limit us from making any golden
parachute payment to specified categories of persons,
including our named executives.
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As a result of these requirements, the 2009 compensation
determinations for our named executives discussed in this
Compensation Discussion and Analysis were approved by the Acting
Director of FHFA in consultation with Treasury.
What
was the role of the Compensation Committee, the Board of
Directors, Fannie Mae senior management, FHFA and Treasury in
determining 2009 compensation?
Our senior management, Compensation Committee and Board of
Directors worked closely with FHFA in developing our 2009
executive compensation structure and total compensation target
amounts for the named executives. Senior management, working
with its compensation consultant and using benchmark data from
the comparator group identified below, developed compensation
alternatives for the named executives for the Compensation
Committees consideration. See What comparator
group did we use for benchmarking and how did we select this
group? below for a description of our comparator group
and managements and the Compensation Committees role
in determining the comparator group. The Compensation Committee,
working with its own independent compensation consultant,
reviewed the compensation alternatives proposed by management
and developed compensation recommendations for the named
executives that were provided to FHFA for their consideration.
FHFA reviewed these recommendations and, in consultation with
management, the Board of Directors and Treasury over the course
of several months, developed and refined the overall structure
of our 2009 executive compensation program and the total
compensation target amounts for the named executives. The
Compensation Committee then reviewed the proposed 2009 executive
compensation structure and total compensation target amounts,
and recommended the structure and targets to the Board. The
Board approved the structure and targets, subject to FHFAs
approval. FHFA, in consultation with Treasury, then approved our
new executive compensation structure and our new total
compensation target amounts for the named executives in December
2009.
In determining the funding level and amount of 2009 long-term
incentive awards and the amount of the final payment of the 2008
Retention Program awards, the Compensation Committee and the
Board of Directors reviewed and discussed information provided
by senior management on our ongoing performance relative to our
corporate performance goals on a periodic basis during 2009. In
January 2010, the Compensation Committee and the Board evaluated
corporate performance relative to our 2009 goals. Based on this
review, the Compensation Committee, with input from the Board,
made an initial determination that the pool for 2009 long-term
incentive awards for executive officers and for the final
payment of the 2008 Retention Program awards would be funded at
95% of target, subject to FHFA approval. In addition, in January
2010, the Board evaluated each named executives individual
performance and made an initial determination of his individual
2009 long-term incentive award amount, subject to FHFA approval.
The Board evaluated the Chief Executive Officers
individual performance with input from the Compensation
Committee and evaluated each other named executives
individual performance with input from both the Compensation
Committee and the Chief Executive Officer. The Compensation
Committees and Boards initial compensation
determinations relating to the 2009 long-term incentive awards
and 2008 Retention Program award payments were provided to FHFA
for their review and approval in January 2010.
In February 2010, following its review of these initial
determinations and information about the factors the
Compensation Committee and the Board considered in making these
determinations, FHFA provided guidance to the Compensation
Committee and the Board on its view that the Committee should
reduce the level of
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funding for the pool for 2009 long-term incentive awards for
executive officers and for the final payment of the 2008
Retention Program awards from the level it had initially
determined. Based on this guidance, the Compensation Committee,
with input from the Board, reassessed its initial funding
determination and made a determination to decrease the funding
level of the pool for 2009 long-term incentive awards for
executive officers and for the final payment of the 2008
Retention Program awards from 95% to 90% of target, subject to
FHFA approval. FHFA then approved the revised funding level of
90% for the pool for 2009 long-term incentive awards for
executive officers and the adjusted amount of each named
executives individual 2009 long-term incentive award, as
well as the revised amounts of the final payment of the 2008
Retention Program awards.
For a description of the factors the Compensation Committee and
the Board considered in making compensation decisions relating
to the 2009 long-term incentive awards and 2008 Retention
Program awards, including guidance from FHFA that led to the
decrease in funding level described above, see What
elements of corporate performance and other factors did the
Compensation Committee and the Board consider in making
compensation decisions relating to the 2009 long-term incentive
awards and 2008 Retention Program awards? and
Individual Compensation Decisions for 2009 below.
How
did we use compensation consultants in making 2009 compensation
decisions for our named executives?
McLagan, the outside compensation consultant retained by Fannie
Maes management, assisted management in proposing total
compensation levels for each of the named executives. McLagan
benchmarked compensation for the named executives
positions against the comparator group identified below using
publically available proxy data. In addition, McLagan provided
feedback to management and the Compensation Committee on
financial services industry market practices. We paid
approximately $458,000 to McLagan for their services in 2009 in
providing advice and recommendations relating to our 2009
compensation program for executives and other employees.
Frederic W. Cook & Co., Inc. (FW Cook),
the independent compensation consultant retained by the
Compensation Committee, reviewed benchmark data for the Chief
Executive Officer prepared by McLagan and recommended a target
compensation level for the Chief Executive Officer position for
the Compensation Committees, the Boards and
FHFAs consideration. FW Cook also reviewed the recommended
compensation levels for the other named executives and provided
feedback from its review to the Compensation Committee. FW Cook
also advised the Compensation Committee on other matters
relating to executive compensation, including the structure of
our executive compensation program, alignment of our executive
compensation program with TARP standards, market trends in
executive compensation and the selection of the new comparator
group identified below. We paid approximately $154,000 to FW
Cook for their services in 2009 in providing advice and
recommendations to the Compensation Committee and the Board
relating to our executive compensation. FW Cook did not provide
any additional services to the company in 2009.
Prior to FW Cooks engagement as the independent
compensation consultant to the Compensation Committee in 2009,
Semler Brossy Consulting Group, LLC (Semler Brossy)
provided consulting services to the Compensation Committee as an
independent compensation consultant. In early 2009, the
Compensation Committee consulted with Semler Brossy on various
matters relating to executive compensation, including
performance metrics for long-term incentives and draft incentive
structures. We paid approximately $43,000 to Semler Brossy for
their services in 2009 in providing advice and recommendations
to the Compensation Committee relating to our executive
compensation. Semler Brossy did not provide any additional
services to the company in 2009.
What
was the role of benchmark data in determining 2009 compensation
for our named executives?
Benchmark data from the comparator group identified below was
used by management, the Compensation Committee and FHFA to help
determine overall compensation levels for the named executives.
Management worked with McLagan to benchmark changes in incentive
compensation levels from 2007 to 2008 for the named
executives positions, as well as overall 2008 compensation
levels for these positions. The benchmark
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data used consisted of publically available proxy data relating
to the comparator group identified below. Management and the
Compensation Committee considered these benchmark data, the
criticality of positions within the company and the key skills
required for each role to make recommendations on the
compensation levels for each named executive to FHFA. FHFA, in
consultation with Treasury, reviewed the recommended
compensation levels and gave direction to management and the
Compensation Committee on the final target total compensation
levels for each named executive.
Benchmark data from the comparator group identified below was
not used in developing the overall structure of our 2009
executive compensation program, in terms of the elements of
compensation and the relative distribution of compensation among
the various elements. As discussed above, the structure of our
compensation program was developed based on elements of the
compensation structure approved by Treasurys Special
Master for TARP Executive Compensation for companies receiving
exceptional TARP assistance.
What
comparator group did we use for benchmarking and how did we
select this group?
In 2009, the Compensation Committee selected a new comparator
group of 18 companies for benchmarking named executive
compensation. The companies in the comparator group are:
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Allstate Corporation
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Fifth Third Bancorp
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Principal Financial Group
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American International Group
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Genworth Financial, Inc.
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Prudential Financial, Inc.
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Bank of New York Mellon Corporation
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GMAC LLC
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Regions Financial Corporation
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BB&T Corporation
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Hartford Financial Services Group
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State Street Corporation
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Capital One Financial Corporation
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Lincoln National Corporation
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SunTrust Banks Inc.
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Freddie Mac
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Metlife, Inc.
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US Bancorp.
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Management requested that McLagan review our existing comparator
group and recommend appropriate changes. Based on its review and
with input from management, McLagan recommended the new
comparator group identified above. The Compensation Committee,
with input from FW Cook, then reviewed and approved the
composition of the new comparator group. Factors relevant to the
selection of this comparator group included their status as
U.S. public companies, the industry in which they operate
(each is a commercial bank, public insurance company or
government-sponsored enterprise) and their size (in terms of
total assets, revenues and headcount) relative to the size of
Fannie Mae. Because we are a government-sponsored enterprise
with a unique business, structure and mission, the only directly
comparable firm to us is Freddie Mac. Our total assets are
substantially larger than the median of the comparator group and
our net revenues are also larger than the median of the
comparator group; however, our headcount is substantially
smaller than the median of the comparator group and in many
cases our operations are less diverse.
What
elements of corporate performance and other factors did the
Compensation Committee and the Board consider in making
compensation decisions relating to the 2009 long-term incentive
awards and 2008 Retention Program awards?
The Compensation Committee and the Board of Directors evaluated
the companys performance against its 2009 corporate
performance goals and related objectives to determine the
funding of the pool for 2009 long-term incentive awards for the
named executives and the amounts of the final performance-based
portion of the 2008 Retention Program awards for the applicable
named executives.
Fannie Mae had three overall corporate performance goals for
2009, with related objectives designed to achieve each of these
overall goals. Management and the Board of Directors, in
consultation with FHFA, selected these corporate performance
goals and objectives to carry out the companys mission and
current business objectives. See BusinessExecutive
Summary for a description of our mission and current
business objectives. The Compensation Committee did not give
more weight to one goal than any other goal.
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Our 2009 corporate performance goals and related objectives, and
our performance against these goals and objectives, are
described below:
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Goal 1: Our first 2009
performance goal was to be a recognized leader in the housing
recovery by providing liquidity to the mortgage market and
helping to prevent foreclosures. Our performance against this
goal was to be measured by our achievement of the following four
objectives:
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Help homeowners. The first objective was to
help homeowners avoid foreclosure by completing 387,500 to
460,000 workouts, including modifications, forbearances,
foreclosure alternatives and other home retention activities. We
exceeded this objective by completing more than 600,000 workouts
in 2009.
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Administration of the Home Affordable Modification
Program. The second objective was to carry out
our role as program administrator of Treasurys Home
Affordable Modification Program, or HAMP. We successfully
completed all 2009 milestones associated with this
objective, which were:
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New Reporting System. We implemented a new
reporting system for tracking trial modifications and permanent
loans and incentive payments made under HAMP in June.
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Payments to Servicers. We made our first
incentive payments to servicers under HAMP in July.
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Second Lien Program and Other Program
Initiatives. Working with Treasury, we announced
the Second Lien Program in August. In addition, on behalf of
Treasury, we released the Home Price Decline Protection Program
in July and the Home Affordable Foreclosure Alternatives Program
in November.
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Guidance to Servicers. We provided clear
guidance to servicers about HAMP. For example, we maintained the
HAMP servicer website on Treasurys behalf, which houses
all program-related servicer communications, directives,
training modules and frequently asked questions; we held weekly
calls with servicers; and we issued multiple communications to
servicers to announce program-related enhancements and new
directives.
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Servicer and Borrower Outreach. We engaged in
many different servicer and borrower outreach activities in
2009, including working with servicers to solicit information
from more than three million borrowers to determine HAMP
eligibility, working with partners to launch 20 outreach events
in cities throughout the country, launching call centers for
borrowers and servicers, working with partners to launch a
public service announcement campaign for HAMP and deploying
Fannie Mae representatives to the major servicers to monitor
performance and improve conversions to permanent modifications.
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Single-Family Market Served. The third
objective was to provide liquidity to the single-family mortgage
market. The amount of liquidity we provided to the single-family
mortgage market was to be measured by our achievement of a
market share of new single-family mortgage-related securities
issuances of 37.5%, while balancing the credit risk and expected
profitability of this new business. We exceeded this objective
for 2009, achieving a market share for new single-family
mortgage-related securities issuances of 46.3% for 2009 and
actively balancing this market position with prudent lending and
pricing.
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Multifamily Market Served. The fourth
objective was to provide liquidity to the multifamily mortgage
market. The amount of liquidity we provided to the multifamily
mortgage market was to be measured by our achievement of a
multifamily GSE market share of 50%, while balancing the credit
risk and expected profitability of these new acquisitions.
Multifamily GSE market share refers to the percentage of
multifamily credit guaranty acquisitions by Fannie Mae versus
Freddie Mac. We exceeded this objective for 2009, achieving a
multifamily GSE market share of 54% for 2009 and actively
balancing this market position with prudent lending and pricing.
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The Compensation Committee determined that the targets for all
related objectives to this performance goal were either met or
exceeded. In connection with this assessment, the Committee
recognized the
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continued weakness in the housing and financial markets and
noted that, without the companys involvement, the housing
market would have been significantly worse. The Committee noted
that management exceeded the target for the number of homeowners
helped and exceeded the targets for single-family and
multifamily market share. The Committee determined that the
company successfully executed its role as administrator of HAMP,
implementing and administering the program in a very difficult
operating environment. The Committee also recognized that the
company took a variety of steps to help its borrowers who were
not eligible under HAMP. The Committee noted that,
notwithstanding managements performance, significant
opportunities remain for converting HAMP trial modifications
into permanent modifications; however, the Committee concluded
that, based on the factors described above, it was not
appropriate to reduce the named executives long-term
incentive awards or 2008 Retention Program awards based on the
performance of HAMP in 2009.
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Goal 2: Our second 2009
performance goal was to protect taxpayers, achieve our mission
and build a more streamlined, high-performing company. Our
performance against this goal was to be measured by our
achievement of the following seven objectives:
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Administrative expenses. The first objective
was to (a) limit administrative expenses to
$1.8 billion, excluding extraordinary items such as the
implementation of new accounting rules on consolidation, certain
costs relating to HAMP and other extraordinary expenses, and
(b) limit the number of our employees to 5,800. This
objective was to be balanced against our other corporate goals
and objectives when evaluating our performance against it. We
met the first target of this objective by keeping our
administrative expenses, excluding extraordinary items, to
$1.7 billion. We did not, however, meet the second target
of this objective, as our employee headcount of approximately
6,000 employees at year end exceeded our target by
approximately 4%. These additional employees were hired to
support our credit-related initiatives, including our work as
HAMP program administrator, and to replace existing contractors.
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Cumulative Treasury Infusion. The second
objective was to protect taxpayers by limiting the amount of the
investment Treasury must make under the senior preferred stock
purchase agreement. Because this objective might be in conflict
with Goal 1, it was to be balanced against Goal 1 when
evaluating our performance against it. We met this objective by
actively managing our business throughout the year with the goal
that our new business activities would be profitable. These
efforts mitigated the size of our draws under the senior
preferred stock purchase agreement in 2009, which were primarily
caused by credit losses relating to business originated prior to
2009. We also focused on a variety of initiatives to help reduce
our credit losses from what they otherwise would have been.
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Housing Goals. The third objective was to
finalize a framework for our new housing goals with FHFA and
meet these housing goals to the extent feasible. FHFA announced
our final 2009 housing goals in August. Based on our preliminary
determination, which has not yet been validated by FHFA, we
believe we met all of the 2009 housing goals and related
subgoals, except for the underserved areas goal and
the increased multifamily special affordable housing
subgoal. We did not meet this goal and subgoal based on our
assessment that they were infeasible given the current market
and economic conditions. See BusinessOur Charter and
Regulation of Our ActivitiesRegulation and Oversight of
Our ActivitiesHousing Goals and Subgoals and Duty to Serve
Underserved Markets for more information on our 2009
housing goals and our performance against these goals.
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Return on Capital Framework. The fourth
objective was to work to establish a return on capital
methodology to ensure that we earn the appropriate return on new
business, with a particular focus on economic capital. We met
this objective by developing a framework for economic capital
and return on capital for the company.
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Information Technology/Operations
Redesign. The fifth objective was to begin a two-
to three-year plan to reengineer
end-to-end
business processes, including information technology
architecture and operations processes. We successfully completed
all 2009 milestones associated with this objective, which
consisted of developing a target state architecture and
governance framework, making this
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governance framework operational, developing a plan to lower our
operational costs and achieving over $10 million in 2010
run rate savings from transformation work in 2009.
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Housing and Economic Recovery Act-Compliant
Sourcing. The sixth objective was to design an
approach to sourcing that is compliant with the Housing and
Economic Recovery Acts requirement that we implement
standards and procedures to ensure the inclusion and utilization
of minorities and women, and minority- and women-owned
businesses, in all of our business and activities. We met this
objective by developing a sourcing framework that is designed to
be compliant with the Housing and Economic Recovery Acts
requirement and by finalizing a policy on compliance with the
Act.
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Performance-Based Culture. The seventh
objective was to move toward a performance-based culture in
order to accomplish our goals and position the company for
long-term success. We successfully completed all
2009 milestones associated with this objective, which
included collecting employee input, selecting areas of focus,
implementing action plans and measuring our performance against
those plans. We also attained our goals of retaining
high-performing employees at a higher rate than lower-performing
employees and maintaining a diverse workforce at all levels.
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The Compensation Committee determined that we achieved this
performance goal and five of the seven related objectives. The
Committee determined that our failure to meet two of the related
objectives was based on sound business rationale. As noted
above, we did not meet our headcount target and did not meet all
of our 2009 housing goals and subgoals. The Committee determined
that exceeding the headcount target was necessary to support our
responsibilities under HAMP and other government housing
initiatives and to support our credit-related initiatives. The
Committee also agreed with managements determination that
the missed housing goal and subgoal were infeasible given the
current market and economic conditions.
In evaluating our performance with respect to this goal, the
Committee also considered our financial performance and the
amount of our draws under the senior preferred stock purchase
agreement. The Committee noted that significant losses in 2009
had been anticipated at the time the corporate goals were
established. These anticipated losses stemmed primarily from
business originated prior to 2009 and were the principal reason
for our draws under the senior preferred stock purchase
agreement. Moreover, the Committee noted that the housing and
financial markets in 2009 proved weaker than had been
anticipated when the goals were initially established, which
exacerbated our losses and the amount of our draws under the
senior preferred stock purchase agreement. The Committee
recognized the numerous activities and programs we undertook in
2009 to stabilize the housing market and provide market
liquidity. The Committee also recognized our efforts to enter
into profitable business transactions in 2009 and the variety of
initiatives we undertook with the goal of reducing our future
credit losses below what they otherwise would have been.
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Goal 3: Our third 2009
performance goal was to measure, manage and reduce enterprise
risk more effectively. Our performance against this goal was to
be measured by our achievement of the following two objectives:
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Risk and Controls. The first objective was to
achieve and maintain a strong control and risk environment. We
met all 2009 milestones associated with this objective,
which consisted of implementing an updated enterprise risk
framework, remediating the material weakness in our internal
control over financial reporting relating to model inputs for
assessment of
other-than-temporary
impairment for private-label mortgage-related securities,
resolving certain significant deficiencies, designing operating
metrics, and creating and implementing a new operational risk
framework. Although we met all 2009 milestones relating to
our risk and controls objective, we experienced a number of
operational incidents in 2009 related to inadequately designed
or failed execution of internal processes or systems. For
example, in July and August 2009, we publicly identified errors
in certain information reported about our MBS trusts and
published corrected data relating to these errors.
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Credit. The second objective was to develop
and implement a new Board reporting framework to measure the
performance of our acquisitions for the second half of 2008 and
2009 with regard to actual
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credit losses as compared with our modeled credit losses. We met
this objective by developing this new reporting framework and
reporting to the Board under the framework beginning in November
2009.
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The Compensation Committee determined that we substantially
achieved this performance goal. In making its determination, the
Committee balanced the operational incidents that occurred in
2009 related to our internal processes and systems noted above
against our achievements in the risk and controls and credit
areas.
In addition to the performance evaluation described above, in
making its 2009 compensation decisions regarding the 2009
long-term incentive awards and the final payment of the 2008
Retention Program awards, the Compensation Committee considered
the difficulty of achieving the multiple goals and objectives
described above and the difficult market environment in which
the company operated in 2009. The Committee also considered the
importance of attracting and retaining qualified senior
executives so that we can continue to carry out our mission and
current business objectives. The Committee noted that
compensation target amounts were based in part on comparator
group data for 2008 compensation and expected trends in
compensation at the time the goals were established, and that
the current trend in the financial services industry is toward
higher compensation. The Committee also considered
managements recommendation. Finally, the Committee
considered guidance received from FHFA on its view that,
notwithstanding the companys achievement or substantial
achievement of each of its 2009 performance goals, the level of
funding for the pool for 2009 long-term incentive awards for
executive officers and for the final payment of the 2008
Retention Program awards should also take into account the level
of the companys draws under the senior preferred stock
purchase agreement with Treasury.
Based on its performance evaluation and the additional factors
noted above, the Compensation Committee determined, with input
from the full Board of Directors and subject to FHFA approval,
that the final performance-based portion of the 2008 Retention
Program awards would be paid at 90% of target and the pool for
2009 long-term incentive awards for the companys executive
officers would be funded at 90% of target.
In determining the amounts of the long-term incentive awards for
the named executives, the Board of Directors also evaluated each
named executives individual performance. Individual
performance was not a factor in determining the amounts of the
final performance-based portion of the 2008 Retention Program
awards. The Boards individual compensation decisions are
described below under Individual Compensation Decisions
for 2009.
Individual
Compensation Decisions for 2009
The amounts of the 2009 long-term incentive awards awarded to
the named executives (other than Mr. Allison) took into
account not only the companys performance against the 2009
corporate goals and objectives described above, but also an
assessment by the Board of Directors of each named
executives performance during the year. The Board assessed
the Chief Executive Officers performance with input from
the Compensation Committee and assessed each other named
executives performance with input from both the
Compensation Committee and the Chief Executive Officer. Based on
these assessments, the Board used its judgment and discretion to
determine the amount of compensation it deemed appropriate for
each named executive. The Board did not evaluate the performance
of Mr. Allison, who left the company in April 2009 and, at
his request, did not receive a 2009 long-term incentive award.
The Board of Directors determined that each named executive
achieved his individual performance goals for 2009. As the pool
for 2009 long-term incentive awards for the companys
executive officers was funded at 90% of target as described
above, the Board determined that, subject to FHFA approval, each
named executive would therefore receive a 2009 long-term
incentive award equal to 90% of his individual target for this
award, except for Mr. Mayopoulos as described under
What elements of our other named executives
performance did the Board of Directors consider in determining
their 2009 long-term incentive awards? below. Each
named executives 2009 long-term incentive award was also
approved by FHFA.
215
The compensation arrangements for each of our named executives
are set forth below in the Summary Compensation Table for
2009, 2008 and 2007. We describe the elements of each
named executives performance that the Board of Directors
considered in determining his 2009 long-term incentive award
below.
What
elements of Mr. Williams, our current Chief Executive
Officers, performance did the Board of Directors consider
in determining his 2009 long-term incentive award?
Mr. Williams individual 2009 performance was
evaluated based on the companys performance against the
corporate performance goals for 2009, reflecting the fact that
he is accountable for the success of the entire organization. In
addition, other achievements not reflected in the corporate
performance goals were considered.
Under Mr. Williams leadership in 2009, the company
met or exceeded the four objectives supporting the corporate
goal of being a recognized leader in the housing recovery by
providing liquidity to the mortgage market and helping to
prevent foreclosures, which included completing more than
600,000 workouts in 2009, successfully completing all
2009 milestones relating to our role as HAMP program
administrator and achieving the companys single-family and
multifamily market share objectives. The company also achieved
or substantially achieved its other corporate performance goals.
During his tenure as Chief Executive Officer, Mr. Williams
has provided strong and steady leadership in an extraordinarily
challenging period for the company and a difficult market
environment. He has built and maintained good relationships with
FHFA and Treasury. He also has built an effective senior
management team, including successfully integrating several
members of the senior management team who were new to the
company in 2009. Mr. Williams leadership also has
been instrumental in motivating key employees and attracting and
retaining the personnel necessary to continue to carry out the
companys mission and current business objectives.
What
elements of our other named executives performance did the
Board of Directors consider in determining their 2009 long-term
incentive awards?
David Johnson, Executive Vice President and Chief
Financial Officer. In determining the amount
of Mr. Johnsons long-term incentive award, the Board
considered the critical role he played in achieving the
corporate objectives of building a return on capital framework
and rebuilding the companys credit risk models, which were
significant factors in the companys ability to achieve its
2009 corporate goals. The Board also considered
Mr. Johnsons instrumental role in supporting
Treasurys initiatives, including HAMP and the Housing
Finance Agency initiative. In addition, the Board considered
Mr. Johnsons extensive work in advising the Strategic
Planning Committee and supporting the companys strategic
initiatives.
Kenneth Bacon, Executive Vice PresidentHousing and
Community Development. In determining the
amount of Mr. Bacons long-term incentive award, the
Board considered the leadership role he played in developing and
maintaining strong customer relationships, aggressively
addressing multifamily credit risk, and otherwise providing
liquidity in the multifamily market. The Board also considered
Mr. Bacons pivotal role in successfully implementing,
within a compressed timeframe, Treasurys Housing Finance
Agency initiative, a program which provided critical support to
state and local housing finance agencies.
David Benson, Executive Vice PresidentCapital
Markets. In determining the amount of
Mr. Bensons long-term incentive award, the Board
considered his crucial role in helping the company achieve its
goals of providing liquidity to the market, improving its
operational discipline and promoting a performance-based
culture. The Board considered Mr. Bensons extensive
work in advising the Strategic Planning Committee and supporting
the companys strategic initiatives. In addition, the Board
considered the benefit to the company of Mr. Bensons
substantial experience and knowledge regarding the capital
markets.
Timothy Mayopoulos, Executive Vice President, General
Counsel and Corporate Secretary. In
determining the amount of Mr. Mayopoulos long-term
incentive award, the Board considered the significant role he
played in addressing the legal issues and additional
responsibilities arising from our conservatorship, his work on
FHFA regulatory matters and his success in continuing to
strengthen the companys relationship with FHFA.
216
The Board also considered Mr. Mayopoulos outstanding
performance in handling the companys litigation matters
and as Secretary of the Board. In addition, the Board considered
his role in successfully working with FHFA to finalize a new
executive compensation program. In addition to considering his
performance, the Board determined that Mr. Mayopoulos
should receive an additional amount in recognition of the
termination of his temporary living benefit in December 2009.
Accordingly, the Board determined that Mr. Mayopoulos
long-term incentive award would equal 90% of his target
long-term incentive award plus an additional $75,000. See
footnote 1 to the Components of All Other
Compensation for 2009 table below for a description
of Mr. Mayopoulos temporary living benefit that was
terminated in December 2009.
What
compensation arrangements did we have with Mr. Allison, our
previous Chief Executive Officer?
At his request, Mr. Allison, who was our Chief Executive
Officer from September 2008 to April 2009, did not receive any
salary, deferred pay or long-term incentive award for his
service to the company.
As set forth in the Components of All Other
Compensation for 2009 table below, Mr. Allison
participated in our executive life insurance program in 2009 and
therefore we paid the premium for his life insurance coverage.
We also paid an amount to cover the withholding tax that
resulted from our payment of this premium. In 2009,
Mr. Allison reimbursed us our incremental cost for his use
of a company car and driver for commuting and certain other
personal travel and for meals from our corporate dining service.
We paid an amount to cover the withholding tax relating to his
use of a company car and driver for commuting and certain other
personal travel.
Other
Considerations
Do our
compensation policies and practices create risks that are
reasonably likely to have a material adverse effect on the
company?
We conducted a risk assessment of our employee compensation
policies and practices, including those relating to our named
executives. In conducting this risk assessment, we reviewed,
among other things, our compensation plans, pay profiles,
performance goals, payout curves and performance appraisal
management process. Based on the results of our risk assessment,
we concluded that our employee compensation policies and
practices, including those relating to our named executives, do
not create risks that are reasonably likely to have a material
adverse effect on the company.
We recognize that the objective of helping homeowners avoid
foreclosure, which was one of the 2009 corporate performance
objectives on which long-term incentive awards were based, is
likely to have a detrimental effect, at least in the short term,
on our results of operations, financial condition and net worth.
However, we believe that any potential material risk created by
this objective has been mitigated by our other 2009 corporate
performance objectives, including those relating to protecting
taxpayers, achieving our mission, building a more streamlined,
high-performing company and measuring, managing and reducing
enterprise risk more effectively.
What
is our compensation recoupment policy with respect to executive
officer compensation?
Beginning with compensation for the 2009 performance year, our
executive officers compensation is subject to the
following forfeiture and repayment provisions, also known as
clawback provisions:
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Materially Inaccurate Information. If an
executive officer has been granted deferred pay or incentive
payments (including long-term incentive awards) based on
materially inaccurate financial statements or any other
materially inaccurate performance metric criteria, he or she
will forfeit or must repay amounts granted in excess of the
amounts the Board of Directors determines would likely have been
granted using accurate metrics.
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Termination for Cause. If we terminate an
executive officers employment for cause, he or she will
immediately forfeit all deferred pay, long-term incentive awards
and any other incentive payments that have not yet been paid. We
may terminate an executive officers employment for cause
if we determine that the officer has: (a) materially harmed
the company by, in connection with the officers
performance
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of his or her duties for the company, engaging in gross
misconduct or performing his or her duties in a grossly
negligent manner, or (b) been convicted of, or pleaded
nolo contendere with respect to, a felony.
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Subsequent Determination of Cause. If an
executive officers employment was not terminated for
cause, but the Board of Directors later determines, within a
specified period of time, that he or she could have been
terminated for cause and that the officers actions
materially harmed the business or reputation of the company,
the officer will forfeit or must repay, as the case may be,
deferred pay, long-term incentive awards and any other incentive
payments received by the officer to the extent the Board of
Directors deems appropriate under the circumstances. The Board
of Directors may require the forfeiture or repayment of all
deferred pay, long-term incentive awards and any other incentive
payments so that the officer is in the same economic position as
if he or she had been terminated for cause as of the date of
termination of his or her employment.
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Effect of Willful Misconduct. If an executive
officers employment: (a) is terminated for cause (or
the Board of Directors later determines that cause for
termination existed) due to either (i) willful misconduct
by the officer in connection with his or her performance of his
or her duties for the company or (ii) the officer has been
convicted of, or pleaded nolo contendere with respect to,
a felony consisting of an act of willful misconduct in the
performance of his or her duties for the company and (b) in
the determination of the Board of Directors, this has materially
harmed the business or reputation of the company, then, to the
extent the Board of Directors deems it appropriate under the
circumstances, in addition to the forfeiture or repayment of
deferred pay, long-term incentive awards and any other incentive
payments described above, the executive officer will also
forfeit or must repay, as the case may be, deferred pay and
annual incentives or long-term awards paid to him or her in the
two-year period prior to the date of termination of his or her
employment or payable to him or her in the future. Misconduct is
not considered willful unless it is done or omitted to be done
by the officer in bad faith or without reasonable belief that
his or her action or omission was in the best interest of the
company.
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The forfeiture and repayment provisions described above do not
apply to payments to executive officers under the 2008 Retention
Program.
Certain of the bonus or other incentive-based or equity-based
compensation for our Chief Executive Officer and Chief Financial
Officer also may be subject to a requirement that they be
reimbursed to the company in the event that Section 304 of
the Sarbanes-Oxley Act of 2002 applies to that compensation.
What
are our stock ownership and hedging policies?
In January 2009, our Board eliminated our stock ownership
requirements because of the difficulty of meeting the
requirements at current market prices and because we had ceased
paying our executives stock-based compensation. All employees,
including our named executives, are prohibited from purchasing
and selling derivative securities related to our equity
securities, including warrants, puts and calls, or from dealing
in any derivative securities other than pursuant to our
stock-based benefit plans.
How
does section 162(m) limit the tax deductibility of our
compensation expenses?
Subject to certain exceptions, section 162(m) of the
Internal Revenue Code imposes a $1 million limit on the
amount that a company may annually deduct for compensation to
its CEO and certain other named executives, unless, among other
things, the compensation is performance-based, as
defined in section 162(m), and provided under a plan that
has been approved by the shareholders. Given the
conservatorship, the desire to maintain flexibility to promote
our corporate goals and our projected tax losses, we have not
adopted a policy requiring all compensation to be deductible
under section 162(m). In particular, awards under the 2008
Retention Program received by the named executives in 2009 do
not qualify as performance-based compensation under
section 162(m). In addition, deferred pay and long-term
incentive awards for 2009 performance are not structured to
qualify as performance-based compensation under
section 162(m).
218
Components
of 2010 Compensation and Changes from 2009 Compensation
Arrangements
What
are the elements of our 2010 executive compensation
arrangements?
Compensation arrangements for 2010 for our named executives who
continue to remain employed with us will continue to consist of
the same basic elements as our 2009 executive compensation
program, with the following changes:
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Deferred Pay. Deferred pay for 2010 will be
50% service-based and 50% performance-based, rather than 100%
service-based as in 2009. The performance-based portion of
deferred pay for the named executives will be based on the
companys performance against corporate goals established
for 2010, as determined by the Board of Directors and as
approved by the Director of FHFA. As of February 26, 2010,
we have not yet established our 2010 corporate goals.
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Long-term Incentive Award. The first
installment payment of the 2010 long-term incentive award will
continue to be based on performance against corporate and
individual goals established for 2010; however, the second
installment payment of the award will be based on performance
against corporate goals established for both 2010 and 2011.
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Termination of Executive Life Insurance
Program. Effective December 2009, the executive
life insurance benefit has been terminated.
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Cap on Perquisites. Effective January 1,
2010, perquisites for named executives will be limited to
$25,000 per year, and any exceptions to this limit will require
the approval of FHFA in consultation with Treasury.
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Freeze on Executive Pension Plan Accruals. We
have frozen benefit accruals in the Executive Pension Plan for
all participants, including Messrs. Williams and Bacon.
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COMPENSATION
COMMITTEE REPORT
The Compensation Committee of the Board of Directors of Fannie
Mae has reviewed and discussed the Compensation Discussion and
Analysis included in this
Form 10-K
with management. Based on such review and discussions, the
Compensation Committee has recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in
this
Form 10-K.
Compensation Committee:
Brenda J. Gaines, Chair
Dennis R. Beresford
Jonathan Plutzik (committee member since November 2009)
David H. Sidwell
219
COMPENSATION
TABLES
Summary
Compensation Table for 2009, 2008 and 2007
The following table shows summary compensation information for
2009, 2008 and 2007 for the named executives.
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Change in
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Pension
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Value and
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Non-Equity
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Nonqualified
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Incentive
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Deferred
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Stock
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Plan
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Compensation
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All Other
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Name and
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Salary
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Bonus
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Principal Position
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Year
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($)(1)
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($)(2)
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($)(3)
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($)(4)
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($)(5)
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($)(6)
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($)(7)
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Michael
Williams(8)
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2009
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860,523
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2,867,200
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2,051,100
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790,803
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111,180
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6,680,806
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President and Chief Executive Officer
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2008
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676,000
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871,000
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4,783,993
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724,874
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43,034
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7,098,901
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2007
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697,164
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5,247,443
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1,189,760
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359,279
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|
|
|
55,418
|
|
|
|
7,549,064
|
|
Herbert
Allison(9)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330,858
|
|
|
|
330,858
|
|
President and Chief Executive Officer
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,260
|
|
|
|
58,260
|
|
David
Johnson(10)
|
|
|
2009
|
|
|
|
675,000
|
|
|
|
1,700,000
|
|
|
|
|
|
|
|
1,035,000
|
|
|
|
|
|
|
|
192,365
|
|
|
|
3,602,365
|
|
Executive Vice President and Chief Financial Officer
|
|
|
2008
|
|
|
|
48,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
962
|
|
|
|
49,039
|
|
Kenneth
Bacon(11)
|
|
|
2009
|
|
|
|
550,800
|
|
|
|
1,069,600
|
|
|
|
|
|
|
|
1,017,000
|
|
|
|
288,324
|
|
|
|
56,996
|
|
|
|
2,982,720
|
|
Executive Vice PresidentHousing and Community Development
|
|
|
2008
|
|
|
|
527,262
|
|
|
|
670,000
|
|
|
|
1,999,998
|
|
|
|
|
|
|
|
271,981
|
|
|
|
58,800
|
|
|
|
3,528,041
|
|
David Benson
|
|
|
2009
|
|
|
|
519,231
|
|
|
|
1,369,667
|
|
|
|
|
|
|
|
1,282,800
|
|
|
|
125,157
|
|
|
|
47,815
|
|
|
|
3,344,670
|
|
Executive Vice PresidentCapital Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
Mayopoulos(12)
|
|
|
2009
|
|
|
|
439,346
|
|
|
|
1,278,610
|
|
|
|
|
|
|
|
842,601
|
|
|
|
|
|
|
|
87,138
|
|
|
|
2,647,695
|
|
Executive Vice President, General Counsel and Corporate
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Calendar year 2009 contained 27
biweekly pay periods, rather than the usual 26 biweekly pay
periods. As a result, salary amounts for 2009 are slightly
higher to reflect the additional biweekly pay period.
|
|
(2) |
|
Amounts shown for 2009 in the
Bonus column consist of the entire amount of 2009
deferred pay. Except for Messrs. Williams and Mayopoulos,
this deferred pay will be paid in four equal installments in
March, June, September and December 2010. These amounts
generally will be paid only if the named executive remains
employed by us on the payment date. More information about
deferred pay is presented in Compensation Discussion and
AnalysisElements of 2009 CompensationWhat are the
elements of our 2009 executive compensation
arrangements? More information on
Mr. Williams 2009 compensation is provided in
footnote 8 below and more information on
Mr. Mayopoulos 2009 compensation is provided in
footnote 12 below.
|
|
(3) |
|
Amounts shown in the Stock
Awards column represent the aggregate grant date fair
value of restricted stock granted during the applicable year
computed in accordance with the accounting standards for stock
compensation. The amounts shown exclude the impact of estimated
forfeitures related to service-based vesting conditions. Amounts
for 2008 and 2007 in the Stock Awards and
Total columns have been recomputed to reflect the
aggregate grant date fair value of the restricted stock granted
during each year in accordance with the accounting standards for
stock compensation, rather than the amount recognized for
financial statement purposes with respect to the restricted
stock during each year. The grant date fair value of restricted
stock for each year is the average of the high and low trading
price of our common stock on the date of grant.
|
|
(4) |
|
Amounts shown for 2009 in the
Non-Equity Incentive Plan Compensation column
include long-term incentive awards awarded based on 2009
corporate and individual performance. The amount of this award
was $1,665,000 for Mr. Williams, $1,035,000 for
Mr. Johnson, $720,000 for Mr. Bacon, $837,300 for
Mr. Benson and $842,601 for Mr. Mayopoulos. These
long-term incentive awards are payable in two equal
installments. The first installment was paid in February 2010
and the second installment will be paid in the first quarter of
2011. These amounts generally will be paid only if the named
executive remains employed by us on the payment date. More
information about these long-term incentive awards is presented
in Compensation Discussion and
Analysis Elements of 2009 CompensationWhat
are the elements of our 2009 executive compensation
arrangements?
|
|
|
|
Amounts shown for 2009 in the
Non-Equity Incentive Plan Compensation column for
Messrs. Williams, Bacon and Benson also include the
performance-based portion of their 2008 Retention Program award,
which was based on 2009 corporate performance. The amount of
this award was $386,100 for Mr. Williams, $297,000 for
Mr. Bacon and $445,500 for Mr. Benson. This portion of
the 2008 Retention Program award was paid in February 2010.
Messrs. Allison, Johnson and Mayopoulos did not receive
2008 Retention Program awards.
|
220
|
|
|
|
|
The amount shown for
Mr. Williams for 2007 in the Non-Equity Incentive
Plan Compensation column represents the amount he earned
under our Annual Incentive Plan in 2007. This amount was paid to
Mr. Williams in 2008.
|
|
(5) |
|
The reported amounts represent
change in pension value. We calculated these amounts using the
same assumptions we use for financial reporting under GAAP,
using a discount rate of 6.10% at December 31, 2009. None
of our named executives received above-market or preferential
earnings on nonqualified deferred compensation.
|
|
(6) |
|
See the table entitled
Components of All Other Compensation for
2009 below for more information about the amounts reported
for 2009 in the All Other Compensation column, which
include (1) perquisites and other personal benefits,
including relocation and temporary living expenses, if the total
amount of the perquisites provided to the named executive was
$10,000 or more; (2) company contributions under our
Retirement Savings Plan (401(k) Plan); (3) company credits
to our Supplemental Retirement Savings Plan; (4) payments
of universal life insurance coverage premiums; (5) tax
gross-ups;
and (6) matching charitable contributions under our
matching charitable gifts program.
|
|
(7) |
|
Amounts for 2008 and 2007 in the
Stock Awards and Total columns have been
recomputed to reflect the aggregate grant date fair value of the
restricted stock granted during each year in accordance with the
accounting standards for stock compensation, rather than the
amount recognized for financial statement purposes with respect
to the restricted stock during each year.
|
|
(8) |
|
Mr. Williams became our
President and Chief Executive Officer on April 21, 2009. He
previously served as Fannie Maes Executive Vice President
and Chief Operating Officer from November 2005 through
April 20, 2009. Rather than receiving his 2009 deferred pay
in four equal installments, Mr. Williams 2009
deferred pay will be paid in the following four installments:
$581,000 in March 2010, $736,200 in June 2010, $775,000 in
September 2010 and $775,000 in December 2010.
|
|
(9) |
|
Mr. Allison was our President
and Chief Executive Officer from September 2008 through April
2009. At his request, he did not receive any salary, deferred
pay or long-term incentive awards for his 2008 or 2009 service
to Fannie Mae.
|
|
(10) |
|
Mr. Johnson joined Fannie Mae
in November 2008.
|
|
(11) |
|
Mr. Bacons 2009 base
salary rate was reduced from his 2008 base salary rate, but this
change was not implemented until January 1, 2010. Because
he was paid at his higher 2008 base salary rate during 2009, the
$55,400 difference between his 2008 base salary rate and his
2009 base salary rate will be deducted from his deferred pay
received in 2010. Amounts shown for Mr. Bacon in the
Salary column reflect the amounts paid to him during
2009 at his 2008 base salary rate. Similarly, amounts shown for
Mr. Bacon in the Bonus column reflect his 2009
deferred pay as reduced by the $55,400 that will be deducted
from this pay in 2010.
|
|
(12) |
|
Mr. Mayopoulos has been an
employee of Fannie Mae since April 21, 2009 and was engaged
as a consultant for Fannie Mae from February 17, 2009
through April 20, 2009. Amounts shown in the
Salary column for Mr. Mayopoulos consist of
(a) $353,846 in base salary paid to him from April 21,
2009 (the date he became an employee of Fannie Mae) through
December 31, 2009; and (b) $85,500 in fees paid to him
from February 17, 2009 through April 20, 2009 for his
services as a consultant. Rather than receiving his 2009
deferred pay in four equal installments,
Mr. Mayopoulos 2009 deferred pay included in the
Bonus column will be paid in the following four
installments: $176,360 in March 2010, $367,416 in June 2010,
$367,417 in September 2010 and $367,417 in December 2010.
|
Components
of All Other Compensation for 2009
The table below shows more information about the amounts
reported for 2009 in the All Other Compensation
column of the Summary Compensation Table for 2009, 2008
and 2007 above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
Perquisites
|
|
Company
|
|
Credits to
|
|
Universal Life
|
|
|
|
|
|
|
and Other
|
|
Contributions to
|
|
Supplemental
|
|
Insurance
|
|
|
|
Charitable
|
|
|
Personal
|
|
Retirement Savings
|
|
Retirement Savings
|
|
Coverage
|
|
Tax
|
|
Award
|
Name
|
|
Benefits(1)
|
|
(401(k)) Plan
|
|
Plan
|
|
Premiums(2)
|
|
Gross-Ups(3)
|
|
Programs(4)
|
|
Michael Williams
|
|
|
|
|
|
|
$7,350
|
|
|
|
|
|
|
|
$99,880
|
|
|
|
|
|
|
|
$3,950
|
|
Herbert Allison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,381
|
|
|
|
$114,477
|
|
|
|
|
|
David Johnson
|
|
|
$128,841
|
|
|
|
19,600
|
|
|
|
$34,400
|
|
|
|
|
|
|
|
9,524
|
|
|
|
|
|
Kenneth Bacon
|
|
|
|
|
|
|
7,350
|
|
|
|
|
|
|
|
49,646
|
|
|
|
|
|
|
|
|
|
David Benson
|
|
|
|
|
|
|
12,250
|
|
|
|
|
|
|
|
35,515
|
|
|
|
|
|
|
|
50
|
|
Timothy Mayopoulos
|
|
|
58,831
|
|
|
|
19,600
|
|
|
|
8,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with SEC rules,
amounts shown under All Other Compensation do not
include perquisites or personal benefits for a named executive
that, in the aggregate, amount to less than $10,000. In addition
to the perquisites discussed below, our executives may have used
company drivers and vehicles and our corporate dining service
for personal purposes, in which case they reimbursed us our
incremental cost.
|
221
|
|
|
|
|
In 2009, Mr. Allison used a
company car and driver for commuting and certain other personal
travel, and used our corporate dining services, for both of
which he reimbursed us our incremental cost. Because he
reimbursed our incremental costs, no amounts are shown in the
Perquisites and Other Personal Benefits column for
these items.
|
|
|
|
The amount shown in the
Perquisites and Other Personal Benefits column for
Mr. Johnson consists of (a) relocation expenses, which
includes moving costs, storage costs and costs associated with
the sale of his home, and (b) 90 days of temporary
living expenses, which includes housing expenses and a
$1,000 monthly allowance to cover other living expenses
such as meals. These relocation and temporary living expenses
were paid to Mr. Johnson as part of the relocation benefit
we agreed to provide to him in connection with his hire in
November 2008. This benefit expired in 2009 in accordance with
its terms.
|
|
|
|
The amount shown in the
Perquisites and Other Personal Benefits column for
Mr. Mayopoulos consists of temporary living expenses, which
includes housing expenses, travel and commuting expenses, and a
$1,000 monthly allowance to cover other living expenses
such as meals. In connection with his hire in April 2009, we
agreed to pay Mr. Mayopoulos up to $8,000 per month in
temporary living expenses for a period of up to 24 months
or until FHFA directed that the payments be discontinued. We
discontinued payment of Mr. Mayopoulos temporary
living expenses in December 2009.
|
|
|
|
We calculated the incremental cost
to us of providing Mr. Johnsons relocation expenses
and temporary living expenses based on actual cost (that is, the
total amount of expenses incurred by us in providing the
benefit). The incremental cost of Mr. Mayopoulos
temporary living expenses was also calculated based on actual
cost, except for the portion of his commuting expenses relating
to the use of a company car and driver. We calculated the
incremental cost of Mr. Mayopoulos use of a company
car and driver based on a mileage cost that incorporates
depreciation, fuel, maintenance and repair costs, as well as any
overtime hours worked by the driver.
|
|
(2) |
|
Amounts shown in the
Universal Life Insurance Coverage Premiums column
consist of the cost of our payment of universal life insurance
premiums pursuant to our executive life insurance program for
participating named executives in 2009. As noted under
Components of 2010 Compensation and Changes from 2009
Compensation Arrangements, effective December 2009, we
terminated the executive life insurance benefit and therefore we
no longer pay for universal life insurance coverage for our
current or retired executive officers.
|
|
(3) |
|
Amounts shown in the Tax
Gross-Ups
column for Mr. Allison reflect amounts we paid to cover the
withholding tax that resulted from our payment of
Mr. Allisons universal life insurance premium and
Mr. Allisons use of a company car and driver for
commuting and certain other personal travel. Amounts shown in
the Tax
Gross-Ups
column for Mr. Johnson reflect amounts we paid to cover the
withholding tax that resulted from our payment of his temporary
living expenses and our payment of storage costs relating to his
relocation benefit.
|
|
(4) |
|
Amounts shown in the
Charitable Award Programs column reflect gifts we
made under our matching charitable gifts program, under which
gifts made by our employees and directors to
Section 501(c)(3) charities are matched, up to an aggregate
total of $10,000 in any calendar year.
|
Grants of
Plan-Based Awards in 2009
The following table shows grants of awards made to the named
executives during 2009 under our long-term incentive plan. The
terms of these long-term incentive awards are described above in
Compensation Discussion and AnalysisElements of 2009
CompensationWhat are the elements of our 2009 executive
compensation arrangements?
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible Payouts Under
|
|
|
|
Non-Equity Incentive Plan
Awards(1)
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Michael Williams
|
|
|
|
|
|
|
1,850,000
|
|
|
|
|
|
Herbert Allison
|
|
|
|
|
|
|
|
|
|
|
|
|
David Johnson
|
|
|
|
|
|
|
1,150,000
|
|
|
|
|
|
Kenneth Bacon
|
|
|
|
|
|
|
800,000
|
|
|
|
|
|
David Benson
|
|
|
|
|
|
|
930,333
|
|
|
|
|
|
Timothy
Mayopoulos(2)
|
|
|
|
|
|
|
852,890
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts shown in this column
are the target amounts established by our Board and approved by
FHFA in 2009 for 2009 performance. The amount shown for
Mr. Williams has been adjusted to reflect the portion of
the year he served as our Chief Executive Officer and the
portion of the year he served as our Chief Operating Officer.
The amount shown for Mr. Mayopoulos has been prorated to
reflect the portion of the year he provided services to Fannie
Mae. The actual amount of each named executives award was
determined in 2010 based on 2009 performance against corporate
and individual performance goals. Our Board had discretion to
pay awards in amounts below or above these target amounts,
subject to the approval of FHFA. See Compensation
Discussion and AnalysisElements of 2009
|
222
|
|
|
|
|
CompensationWhat are the
elements of our 2009 executive compensation
arrangements? for more information about the
Boards discretion to award amounts above or below these
target amounts. As discussed above in Compensation
Discussion and AnalysisIndividual Compensation Decisions
for 2009, based on corporate and individual performance
for 2009, in 2010, the Board awarded and FHFA approved long-term
incentive awards that were 90% of these target amounts for each
named executive other than Mr. Mayopoulos, as described in
footnote 2 below. The actual amounts awarded by the Board and
approved by FHFA for 2009 performance are included in the
Non-Equity Incentive Plan Compensation column of the
Summary Compensation Table for 2009, 2008 and 2007
and explained in footnote 4 to that table. The first installment
of this award was paid in February 2010 and the second
installment of this award will be paid in the first quarter of
2011.
|
|
(2) |
|
In 2010, the Board awarded
Mr. Mayopoulos a long-term incentive award equal to 90% of
his target long-term incentive award plus an additional $75,000,
as described in Compensation Discussion and
AnalysisIndividual Compensation Decisions for
2009What elements of our other named executives
performance did the Board of Directors consider in determining
their 2009 long-term incentive awards?
|
Outstanding
Equity Awards at 2009 Fiscal Year-End
The following table shows outstanding stock option awards and
unvested restricted stock held by the named executives as of
December 31, 2009. The market value of stock awards shown
in the table below is based on a per share price of $1.18, which
was the closing market price of our common stock on
December 31, 2009. As of December 31, 2009, the
exercise prices of all of the outstanding options referenced in
the table below were substantially higher than the market price
of our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Awards(2)
|
|
Stock
Awards(2)
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
Market Value of
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
Shares or
|
|
Shares or
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
Units of
|
|
Units of
|
|
|
|
|
|
|
Unexercised
|
|
Option
|
|
Option
|
|
Stock That
|
|
Stock That
|
|
|
Award
|
|
Grant
|
|
Options (#)
|
|
Exercise
|
|
Expiration
|
|
Have Not
|
|
Have Not
|
Name
|
|
Type(1)
|
|
Date
|
|
Exercisable
|
|
Price ($)
|
|
Date
|
|
Vested (#)
|
|
Vested ($)
|
|
Michael Williams
|
|
O
|
|
|
1/18/2000
|
|
|
|
20,027
|
(3)
|
|
|
62.50
|
|
|
|
1/18/2010
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
11/21/2000
|
|
|
|
35,610
|
|
|
|
77.10
|
|
|
|
11/21/2010
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/16/2001
|
|
|
|
13,087
|
(3)
|
|
|
78.56
|
|
|
|
1/18/2010
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
11/20/2001
|
|
|
|
44,735
|
|
|
|
80.95
|
|
|
|
11/20/2011
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/21/2003
|
|
|
|
63,836
|
|
|
|
69.43
|
|
|
|
1/21/2013
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/23/2004
|
|
|
|
73,880
|
|
|
|
78.32
|
|
|
|
1/23/2014
|
|
|
|
|
|
|
|
|
|
|
|
RS
|
|
|
3/22/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,403
|
(4)
|
|
|
18,176
|
|
|
|
RS
|
|
|
1/25/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,311
|
|
|
|
54,647
|
|
|
|
RS
|
|
|
1/28/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,567
|
|
|
|
131,649
|
|
Herbert Allison
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Johnson
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Bacon
|
|
O
|
|
|
1/18/2000
|
|
|
|
16,536
|
(3)
|
|
|
62.50
|
|
|
|
1/18/2010
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
11/21/2000
|
|
|
|
11,410
|
|
|
|
77.10
|
|
|
|
11/21/2010
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
11/20/2001
|
|
|
|
13,080
|
|
|
|
80.95
|
|
|
|
11/20/2011
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/21/2003
|
|
|
|
25,478
|
|
|
|
69.43
|
|
|
|
1/21/2013
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/23/2004
|
|
|
|
27,622
|
|
|
|
78.32
|
|
|
|
1/23/2014
|
|
|
|
|
|
|
|
|
|
|
|
RS
|
|
|
3/22/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,190
|
(4)
|
|
|
7,304
|
|
|
|
RS
|
|
|
1/25/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,975
|
|
|
|
22,391
|
|
|
|
RS
|
|
|
1/28/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,642
|
|
|
|
55,038
|
|
David Benson
|
|
O
|
|
|
6/3/2002
|
|
|
|
12,000
|
|
|
|
79.33
|
|
|
|
6/3/2012
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
6/3/2002
|
|
|
|
20,080
|
(5)
|
|
|
79.33
|
|
|
|
6/3/2012
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/21/2003
|
|
|
|
9,624
|
|
|
|
69.43
|
|
|
|
1/21/2013
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/21/2003
|
|
|
|
2,408
|
(3)
|
|
|
69.43
|
|
|
|
1/18/2010
|
|
|
|
|
|
|
|
|
|
|
|
O
|
|
|
1/23/2004
|
|
|
|
12,223
|
|
|
|
78.32
|
|
|
|
1/23/2014
|
|
|
|
|
|
|
|
|
|
|
|
RS
|
|
|
3/22/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,091
|
(4)
|
|
|
1,287
|
|
|
|
RS
|
|
|
3/22/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323
|
(4)
|
|
|
381
|
|
|
|
RS
|
|
|
1/25/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,966
|
|
|
|
7,040
|
|
|
|
RS
|
|
|
1/28/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,957
|
|
|
|
21,189
|
|
Timothy Mayopoulos
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
(1) |
|
O indicates stock options and RS
indicates restricted stock.
|
|
|
|
(2) |
|
Except as otherwise indicated, all
awards of options and restricted stock listed in this table vest
in four equal annual installments beginning on the first
anniversary of the date of grant. Amounts reported in this table
for restricted stock represent only the unvested portion of
awards. Amounts reported in this table for options represent
only the unexercised portions of awards.
|
|
(3) |
|
The stock options vested 100% on
January 23, 2004.
|
|
(4) |
|
The initial award amount vests in
four equal annual installments beginning on January 24,
2007. In connection with the stock awards with a grant date of
March 22, 2006, some of our named executives also received
a cash award payable in four equal annual installments beginning
on January 24, 2007. As of December 31, 2009, the
unpaid portions of these cash awards were as follows:
Mr. Williams, $414,068; Mr. Bacon, $166,403; and
Mr. Benson, $77,384.
|
|
(5) |
|
This option award had special
vesting provisions: 3,860 options vested immediately upon grant,
9,080 vested on August 31, 2002, 4,370 vested on
January 31, 2003, 1,610 vested on January 31, 2004 and
1,160 vested on January 31, 2005.
|
Option
Exercises and Stock Vested in 2009
The following table shows information regarding vesting of
restricted stock held by the named executives during 2009. We
have calculated the value realized on vesting by multiplying the
number of shares of stock by the fair market value of our common
stock on the vesting date. We have provided no information
regarding stock option exercises because no named executives
exercised stock options during 2009.
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
Number of Shares
|
|
Value Realized on
|
Name
|
|
Acquired on Vesting (#)
|
|
Vesting ($)
|
|
Michael Williams
|
|
|
75,747
|
|
|
|
48,864
|
|
Herbert Allison
|
|
|
|
|
|
|
|
|
David Johnson
|
|
|
|
|
|
|
|
|
Kenneth Bacon
|
|
|
31,224
|
|
|
|
20,140
|
|
David Benson
|
|
|
12,294
|
|
|
|
7,998
|
|
Timothy Mayopoulos
|
|
|
|
|
|
|
|
|
Pension
Benefits
Changes
to our Retirement Program
We made revisions to our retirement program in both 2007 and
2009. The primary changes in 2007 were to limit ongoing
participation in our defined benefit pension plans, including
our Retirement Plan, Executive Pension Plan, Supplemental
Pension Plan and 2003 Supplemental Pension Plan, which are
described below, to employees who were hired prior to
January 1, 2008 and who also satisfied a Rule of 45 as of
July 1, 2008 (that is, the sum of their age and years of
service was 45 or greater). Benefits in these plans for
employees who did not meet the Rule of 45 were frozen as of
June 30, 2008 and no officers were allowed to become
participants in the Executive Pension Plan after
November 20, 2007. In 2009, we further amended the
Executive Pension Plan so that 2009 is the last year for which
participants will receive additional accruals under the plan.
Employees hired after December 31, 2007 and employees hired
before January 1, 2008 who did not satisfy the Rule of 45
participate in an enhanced version of our Retirement Savings
Plan (our 401(k) plan) and may be eligible to participate in our
Supplemental Retirement Savings Plan, rather than our defined
benefit pension plans.
During 2009, Messrs. Williams, Bacon and Benson
participated in our defined benefit pension plans and our
Retirement Savings Plan. Messrs. Allison, Johnson and
Mayopoulos did not participate in our defined benefit pension
plans. Messrs. Johnson and Mayopoulos participated in our
enhanced Retirement Savings Plan and our Supplemental Retirement
Savings Plan.
224
Defined
Benefit Pension Plans
Retirement Plan. The Federal National Mortgage
Association Retirement Plan for Employees Not Covered Under
Civil Service Retirement Law, which we refer to as the
Retirement Plan, provides benefits for eligible employees,
including Messrs. Williams, Bacon and Benson. Normal
retirement benefits are computed on a single life basis using a
formula based on final average annual earnings and years of
credited service. Participants are fully vested when they
complete five years of credited service. Since 1989, provisions
of the Internal Revenue Code of 1986, as amended, have limited
the amount of annual compensation that may be used for
calculating pension benefits and the annual benefit that may be
paid. For 2009, the statutory compensation and benefit caps were
$245,000 and $195,000, respectively. Before 1989, some employees
accrued benefits based on higher income levels. Early retirement
is generally available at age 55. For employees who retire
before age 65, benefits are reduced by stated percentages
for each year that they are younger than 65.
Executive Pension Plan. The Executive Pension
Plan supplements the benefits payable to key officers under the
Retirement Plan. Participation in the Executive Pension Plan was
closed to new participants in November 2007, and 2009 is the
last year for which participants will receive additional
accruals under this plan. Messrs. Williams and Bacon were
the only named executives who participated in the Executive
Pension Plan in 2009.
The maximum annual pension benefit (when combined with the
Retirement Plan benefit) that would be payable is 40% of the
named executives highest average covered compensation
earned during any 36 consecutive months within the last
120 months of employment. Covered compensation generally is
a participants average annual base salary, including
deferred compensation, plus the participants other taxable
compensation (excluding income or gain in connection with the
exercise of stock options) earned for the relevant year, in an
amount up to 150% of base salary. Effective for benefits earned
on and after March 1, 2007, the only taxable compensation
other than base salary considered for the purpose of calculating
covered compensation is a participants Annual Incentive
Plan cash bonus, and for 2008 and 2009, the 2008 Retention
Program awards.
Early retirement is generally available at age 55 and
participants who retire before age 60 receive a reduced
benefit. The benefit is reduced by 2% for each year between the
year in which benefit payments begin and the year in which the
participant turns 60. A participant is not entitled to receive a
pension benefit under the Executive Pension Plan until the
participant has completed five years of service as a plan
participant, at which point the pension benefit becomes 50%
vested and continues vesting at the rate of 10% per year during
the next five years. The benefit payment typically is a monthly
amount equal to 1/12th of the participants annual
retirement benefit payable during the lives of the participant
and the participants surviving spouse. The benefit payment
to the surviving spouse is subject to an actuarial adjustment
for participants who joined the Executive Pension Plan on or
after March 1, 2007. If a participant dies before receiving
benefits under the Executive Pension Plan, generally his or her
surviving spouse will be entitled to a death benefit that begins
when the participant would have reached age 55, based on
the participants pension benefit at the date of death.
The Compensation Committee approved participation in the
Executive Pension Plan. The Board of Directors approved each
participants pension goal, which is part of the formula
that determines pension benefits. Payments under the Executive
Pension Plan are reduced by any amounts payable under the
Retirement Plan.
Supplemental Defined Benefit Pension Plans. We
adopted the Supplemental Pension Plan to provide supplemental
retirement benefits to employees whose salary exceeds the
statutory compensation cap applicable to the Retirement Plan or
whose benefit under the Retirement Plan is limited by the
statutory benefit cap applicable to the Retirement Plan.
Separately, we adopted the 2003 Supplemental Pension Plan to
provide additional benefits to our officers based on their
annual cash bonuses, which are not taken into account under the
Retirement Plan or the Supplemental Pension Plan. Officers hired
after December 31, 2007 are not eligible to participate in
these plans. Benefits under the supplemental defined benefit
pension plans vest at the same time as benefits under the
Retirement Plan. For 2008 and 2009, the pension benefit under
the 2003 Supplemental Pension Plan also includes awards paid
under the 2008 Retention Program. For purposes of
225
determining benefits under the 2003 Supplemental Pension Plan,
the amount of an officers annual cash bonus and retention
award taken into account is limited in the aggregate to 50% of
the officers base salary. Benefits under the supplemental
defined benefit pension plans typically commence at the later of
age 55, separation from service or the date elected in
advance by the participant. Officers who are eligible to
participate in the Executive Pension Plan will receive the
greater of their Executive Pension Plan benefits or combined
Supplemental Pension Plan and 2003 Supplemental Pension Plan
benefits.
The table below shows the years of credited service and the
present value of accumulated benefits for each named executive
as of December 31, 2009. For Messrs. Williams and
Bacon, the table shows benefits under the Executive Pension
Plan, but not our supplemental defined benefit pension plans,
because we have assumed that as of December 31, 2009, upon
his retirement, the benefits each of Messrs. Williams and
Bacon would receive under the Executive Pension Plan will be
greater than the combined benefits he would receive under our
supplemental defined benefit pension plans, and that therefore
he will receive no benefits under our supplemental defined
benefit pension plans. For Mr. Benson, the table shows
benefits under the Supplemental Pension Plan and the 2003
Supplemental Pension Plan, as he does not participate in the
Executive Pension Plan.
Pension
Benefits for 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Years
|
|
Present Value of
|
|
|
|
|
Credited
|
|
Accumulated
|
Name
|
|
Plan Name
|
|
Service
(#)(1)
|
|
Benefit
($)(2)
|
|
Michael Williams
|
|
Retirement Plan
|
|
|
19
|
|
|
|
374,882
|
|
|
|
Supplemental Pension Plan
|
|
|
|
|
|
|
|
|
|
|
2003 Supplemental Pension Plan
|
|
|
|
|
|
|
|
|
|
|
Executive Pension Plan
|
|
|
9
|
|
|
|
2,896,593
|
|
Herbert Allison
|
|
Not applicable
|
|
|
|
|
|
|
|
|
David Johnson
|
|
Not applicable
|
|
|
|
|
|
|
|
|
Kenneth
Bacon(3)
|
|
Retirement Plan
|
|
|
17
|
|
|
|
405,404
|
|
|
|
Supplemental Pension Plan
|
|
|
|
|
|
|
|
|
|
|
2003 Supplemental Pension Plan
|
|
|
|
|
|
|
|
|
|
|
Executive Pension Plan
|
|
|
5
|
|
|
|
1,127,267
|
|
David Benson
|
|
Retirement Plan
|
|
|
8
|
|
|
|
135,137
|
|
|
|
Supplemental Pension Plan
|
|
|
8
|
|
|
|
106,574
|
|
|
|
2003 Supplemental Pension Plan
|
|
|
8
|
|
|
|
128,260
|
|
Timothy Mayopoulos
|
|
Not applicable
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Messrs. Williams and Bacon
have fewer years of credited service under the Executive Pension
Plan than under the Retirement Plan because they each worked at
Fannie Mae prior to becoming a participant in the Executive
Pension Plan.
|
|
|
|
(2) |
|
The present value for the Executive
Pension Plan assumes that the named executives will remain in
service until age 60, the normal retirement age under the
Executive Pension Plan, and for the Retirement Plan,
Supplemental Pension Plan and 2003 Supplemental Pension Plan
assumes that the named executives will remain in service until
age 65, the normal retirement age under those plans. The
values also assume that benefits under the Executive Pension
Plan will be paid in the form of a monthly annuity for the life
of the named executive and the named executives surviving
spouse and benefits under the Retirement Plan will be paid in
the form of a single life monthly annuity for the life of the
named executive. The postretirement mortality assumption is
based on the RP 2000 white collar mortality table projected to
2010. The final payments of the 2008 Retention Program award,
paid in February 2010, have been taken into account for the
purpose of determining present value as of December 31,
2009. For additional information regarding the calculation of
present value and the assumptions underlying these amounts, see
Note 14, Employee Retirement Benefits in this report.
|
|
(3) |
|
Mr. Bacon is eligible for
early retirement under the Retirement Plan and Executive Pension
Plan. The terms of early retirement under these plans are
described above under Defined Benefit Pension Plans.
|
Retirement
Savings Plan
The Retirement Savings Plan is a defined contribution plan that
includes a 401(k) before-tax feature, a regular after-tax
feature and a Roth after-tax feature. Under the plan, eligible
employees may allocate investment
226
balances to a variety of investment options. Prior to
January 1, 2008, we matched employee contributions up to 3%
of base salary in cash. Effective January 1, 2008 for new
hires and rehires after that date and effective June 22,
2008 for non-grandfathered employees, we increased our matching
contributions from 3% of base salary to 6% of base salary,
eligible bonuses and overtime. All non-grandfathered employees
and post-2007 new hires and rehires are 100% vested in our
matching contributions. Grandfathered employees continue to
receive benefits under the 3% of base salary matching program
and are fully vested in our matching contributions after five
years of service. Messrs. Williams, Bacon and Benson are
grandfathered employees and therefore receive benefits under the
3% matching program, while Messrs. Johnson and Mayopoulos
are non-grandfathered employees and therefore receive benefits
under the 6% matching program.
All employees, with the exception of those participating in the
Executive Pension Plan (which includes Messrs. Williams and
Bacon), receive an additional 2% contribution (based on salary
for grandfathered employees and on salary, eligible bonuses and
overtime for non-grandfathered employees, new hires and rehires)
from the company regardless of employee contributions to this
plan. Participants are fully vested in this 2% contribution
after three years of service.
Nonqualified
Deferred Compensation
Supplemental Retirement Savings Plan. Our
Supplemental Retirement Savings Plan is an unfunded,
non-tax-qualified defined contribution plan that became
effective in 2008 as part of the redesign of our retirement
benefits program. The Supplemental Retirement Savings Plan is
intended to supplement our Retirement Savings Plan, or 401(k)
plan, to provide benefits to participants who are not
grandfathered under our defined-benefit Retirement
Plan and whose annual eligible earnings exceed the IRS annual
limit on eligible compensation for 401(k) plans (for 2009, the
limit was $245,000). Messrs. Johnson and Mayopoulos are the
named executives who participated in the Supplemental Retirement
Savings Plan in 2009.
For 2009, we credited 8% of a participating employees
eligible compensation that exceeds the IRS annual limit for
2009. Eligible compensation for a year consisted of base salary
plus any annual bonus earned for that year, plus any awards
earned for that year under the 2008 Retention Program, up to a
combined maximum of two times base salary. The 8% credit
consists of two parts: (1) a 2% credit that will vest after
the participant has completed three years of service with us;
and (2) a 6% credit that is immediately vested.
While the Supplemental Retirement Savings Plan is not funded,
amounts credited on behalf of a participant under the
Supplemental Retirement Savings Plan are deemed to be invested
in mutual fund investments similar to the investments offered
under our 401(k) plan. Participants may change their investment
elections on a daily basis.
Amounts deferred under the Supplemental Retirement Savings Plan
are payable to participants in the January or July following
separation from service with us, subject to a six month delay in
payment for the 50 most highly-compensated officers.
Participants may not withdraw amounts from the Supplemental
Retirement Savings Plan while they are employed by us.
Elective Deferred Compensation Plan I. Our
Elective Deferred Compensation Plan I allowed eligible employees
to defer up to 50% of their salary and up to 100% of their bonus
to future years. Deferred amounts are deemed to be invested in
mutual funds or in an investment option with earnings
benchmarked to our long-term borrowing rate, as designated by
the participants. This deferred compensation plan is an unfunded
plan. Mr. Bacon was our only named executive that
participated in our Elective Deferred Compensation Plan I in
2009, which was frozen as to future deferrals in 2004.
227
The table below provides information on the nonqualified
deferred compensation of the named executives for 2009.
Nonqualified
Deferred Compensation for 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
|
|
Aggregate
|
|
|
Contributions
|
|
Contributions in
|
|
Earnings in
|
|
Aggregate
|
|
Balance at
|
|
|
in Last
|
|
Last Fiscal
|
|
Last Fiscal
|
|
Withdrawals/
|
|
Last Fiscal
|
Name
|
|
Fiscal Year ($)
|
|
Year
($)(1)
|
|
Year
($)(2)
|
|
Distributions
($)(3)
|
|
Year-End ($)
|
|
Michael Williams
2001 Special Stock
Award(4)
|
|
|
|
|
|
|
|
|
|
|
577
|
|
|
|
|
|
|
|
1,620
|
|
Herbert Allison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Johnson
Supplemental Retirement Savings Plan
|
|
|
|
|
|
|
34,400
|
|
|
|
3,442
|
|
|
|
|
|
|
|
37,842
|
|
Kenneth Bacon
Elective Deferred Compensation Plan I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(256,489
|
)
|
|
|
|
|
David Benson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy Mayopoulos
Supplemental Retirement Savings Plan
|
|
|
|
|
|
|
8,708
|
|
|
|
175
|
|
|
|
|
|
|
|
8,883
|
|
|
|
|
(1) |
|
Amounts reported in this column for
Messrs. Johnson and Mayopoulos as registrant contributions
in the last fiscal year pursuant to the Supplemental Retirement
Savings Plan are also reported as 2009 compensation in the
All Other Compensation column of the Summary
Compensation Table for 2009, 2008 and 2007 and the
Company Credits to Supplemental Retirement Savings
Plan column of the related Components of All
Other Compensation for 2009 table.
|
|
|
|
(2) |
|
None of the earnings reported in
this column are reported as 2009 compensation in the
Summary Compensation Table for 2009, 2008 and 2007
because the earnings are neither above-market nor preferential.
|
|
(3) |
|
As permitted under a transition
period for changes in the tax laws relating to deferred
compensation, our conservator approved a change to our Elective
Deferred Compensation Plan I to permit participants to make an
election to receive payment in early 2009 of amounts they
deferred under those plans that otherwise may have been paid
later. As a result, Mr. Bacon elected to receive early
payment of his balance under this plan. Mr. Bacon received
the distribution in January 2009.
|
|
(4) |
|
The Board previously approved a
special stock award to officers for 2001 performance. On
January 15, 2002, Mr. Williams deferred until
retirement 1,142 shares he received in connection with this
award. Aggregate earnings on these shares reflect changes in
stock price. Mr. Williams number of shares has grown
through the reinvestment of dividends to 1,373 shares as of
December 31, 2009.
|
Potential
Payments upon Termination or
Change-in-Control
The information below describes and quantifies certain
compensation and benefits that may have become payable to each
of our named executives under our existing plans and
arrangements if our named executives employment had
terminated on December 31, 2009, taking into account the
named executives compensation and service levels as of
that date and based on a per share price of $1.18, which was the
closing price of our common stock on December 31, 2009. The
discussion below does not reflect retirement or deferred
compensation benefits to which our named executives may be
entitled, as these benefits are described above under
Pension Benefits and Nonqualified Deferred
Compensation. The information below also does not
generally reflect compensation and benefits available to all
salaried employees upon termination of employment with us under
similar circumstances. We are not obligated to provide any
additional compensation to our named executives in connection
with a
change-in-control.
FHFA
must approve any termination benefits we provide named
executives.
FHFA, as our regulator, must approve any termination benefits we
offer our named executives. Moreover, as our conservator, FHFA
has directed that our Board consult with and obtain FHFAs
consent before taking any action involving termination benefits
for any officer at the executive vice president level and above
and including, regardless of title, executives who hold
positions with the functions of the chief operating officer,
chief financial officer, general counsel, chief business
officer, chief investment officer, treasurer, chief compliance
officer, chief risk officer and chief/general/internal auditor.
In addition, as described below under
228
Potential Payments to Named Executives, in the event
Fannie Mae terminates a named executives employment other
than for cause, any determination by the Board to pay unpaid
deferred pay or long-term incentive awards to the named
executive is subject to the approval of FHFA in consultation
with Treasury.
Potential
Payments to Named Executives
We have not entered into employment agreements with any of our
named executives that would entitle our executives to severance
benefits. Below we discuss various elements of compensation that
may become payable in the event a named executive dies or
retires, or in the event his employment is terminated by Fannie
Mae. We then quantify the amounts that may have become payable
to our named executives in these circumstances, in each case as
of December 31, 2009.
|
|
|
|
|
Deferred Pay and Long-Term Incentive
Awards. In general, an executive officer,
including our named executives, must continue to be employed to
receive payments of deferred pay or the long-term incentive
award, and will forfeit any unpaid amounts upon termination of
his or her employment. Exceptions to this general rule apply in
the case of an executive officers death or retirement, and
may apply in the event an executive officers employment is
terminated by Fannie Mae other than for cause, as follows:
|
|
|
|
|
|
Death. In the event an executive
officers employment is terminated due to his or her death,
his or her estate will receive the remaining installment
payments of deferred pay for the prior year, as well as a pro
rata portion of deferred pay for the current year, based on time
worked during the year. In addition, his or her estate will
receive any remaining installment payment of a long-term
incentive award for a completed performance year and a pro rata
portion of a long-term incentive award for the current
performance year, based on time worked during the year; provided
that the executive officer was employed at least one complete
calendar quarter during the current performance year.
|
|
|
|
Retirement. If an executive officer retires
from Fannie Mae at or after age 65 with at least
5 years of service, he or she will receive the remaining
installment payments of deferred pay for the prior year. In
addition, he or she will receive any remaining installment
payment of a long-term incentive award for a completed
performance year.
|
|
|
|
Termination by Fannie Mae. If Fannie Mae
terminates an executive officers employment other than for
cause, the Board of Directors may determine, subject to the
approval of FHFA in consultation with Treasury, that he or she
may receive certain unpaid deferred pay or long-term incentive
awards.
|
In each case, for any long-term incentive award (or, beginning
in 2010, any performance-based portion of a deferred pay award)
that has not been finally determined, the award will be adjusted
based on performance relative to the applicable performance
goals and, in the case of a termination by Fannie Mae, cannot
exceed 100% of the target award. In addition, installment
payments of the awards will be made on the original payment
schedule, rather than being provided in a lump sum. In the case
of a termination by Fannie Mae, an executive officer must agree
to the terms of a standard termination agreement with the
company in order to receive these post-termination of employment
payments. More information about deferred pay and the long-term
incentive awards is provided above in Compensation
Discussion and AnalysisElements of 2009
CompensationWhat are the elements of our 2009 executive
compensation arrangements?
|
|
|
Stock Compensation Plans and 2005 Performance Year Cash
Awards. Under the Fannie Mae Stock Compensation
Plan of 1993 and the Fannie Mae Stock Compensation Plan of 2003,
stock options, restricted stock and restricted stock units held
by our employees, including our named executives, fully vest
upon the employees death, total disability or retirement.
In addition, upon the occurrence of these events, or if an
option holder leaves our employment after age 55 with at
least 5 years of service, the option holder, or the
holders estate in the case of death, can exercise any
stock options until the initial expiration date of the stock
option, which is generally 10 years after the date of
grant. For these purposes, retirement generally
means that the executive retires at or after age 60 with
5 years of service or age 65 (with no service
requirement). In early 2006, Messrs. Williams, Bacon and
Benson received a portion of their long-term incentive stock
awards for the 2005 performance year in the form of cash awards
payable in four equal annual installments beginning in 2007.
Under their terms, these cash awards are subject to accelerated
|
229
|
|
|
payment at the same rate as restricted stock or restricted stock
units and, accordingly, these named executives would receive
accelerated payment of the unpaid portions of this cash in the
event of termination of employment by reason of death, total
disability or retirement.
|
|
|
|
Retention Awards under 2008 Retention
Program. In 2008, the conservator established our
2008 Retention Program, a broad-based employee retention
program, under which Messrs. Williams, Bacon and Benson
received cash retention awards. The final portion of these
awards was paid in February 2010. Generally, retention award
payments were payable only if the named executive remained
employed by us on the payment date or was involuntarily
terminated for reasons other than for cause or unsatisfactory
performance.
|
|
|
Retiree Medical Benefits. We currently make
certain retiree medical benefits available to our full-time
salaried employees who retire and meet certain age and service
requirements.
|
The table below shows the amounts that would have become payable
if a named executives employment had terminated on
December 31, 2009 as a result of his death. The table below
does not show any amounts that would have become payable if a
named executive had retired on December 31, 2009 since as
of that date none of the named executives had reached the
minimum age required to receive any of these amounts upon his
retirement (with the exception of Mr. Allison, who was not
entitled to any amounts upon his retirement).
Potential Payments Upon Death as of December 31,
2009(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
Restricted
|
|
2005 Performance
|
|
|
|
Incentive
|
|
|
Name
|
|
Stock(2)
|
|
Year Cash
Award(3)
|
|
Deferred Pay
|
|
Award(4)
|
|
Total
|
|
Michael Williams
|
|
$
|
204,472
|
|
|
$
|
414,068
|
|
|
$
|
2,867,200
|
|
|
$
|
1,665,000
|
|
|
$
|
5,150,740
|
|
Herbert Allison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Johnson
|
|
|
|
|
|
|
|
|
|
|
1,700,000
|
|
|
|
1,035,000
|
|
|
|
2,735,000
|
|
Kenneth Bacon
|
|
|
84,732
|
|
|
|
166,403
|
|
|
|
1,069,600
|
|
|
|
720,000
|
|
|
|
2,040,735
|
|
David Benson
|
|
|
29,898
|
|
|
|
77,384
|
|
|
|
1,369,667
|
|
|
|
837,300
|
|
|
|
2,314,249
|
|
Timothy Mayopoulos
|
|
|
|
|
|
|
|
|
|
|
1,278,610
|
|
|
|
767,601
|
|
|
|
2,046,211
|
|
|
|
|
(1) |
|
The named executives would also
have received the applicable amounts shown in the
Restricted Stock and 2005 Performance Year
Cash Award columns of this table in the event of their
total disability, but not the amounts shown under any other
column.
|
|
|
|
(2) |
|
These values are based on a per
share price of $1.18, which was the closing price of our common
stock on December 31, 2009.
|
|
(3) |
|
The reported amounts represent
accelerated payment of cash awards made in early 2006 in
connection with long-term incentive stock awards for the 2005
performance year.
|
|
(4) |
|
Assumes that each named executive
would receive 90% of his target long-term incentive award, which
were the amounts of these awards approved by the Board based on
corporate and individual performance for 2009 for each named
executive except Mr. Mayopoulos. Mr. Mayopoulos
2009 long-term incentive award equals 90% of his target
long-term incentive award plus an additional amount in
recognition of the termination of his temporary living benefit
in December 2009; however, Mr. Mayopoulos would not have
received the additional amount in the event his employment had
terminated on December 31, 2009 as a result of his death.
See Compensation Discussion and AnalysisIndividual
Compensation Decisions for 2009 for more information
regarding the Boards determination with respect to
Mr. Mayopoulos 2009 long-term incentive award.
|
230
The table below shows the amount of the 2008 Retention Award
that would have become payable to a named executive if his
employment was terminated on December 31, 2009 other than
for cause or unsatisfactory performance. The table also shows
the maximum amount of deferred pay and long-term incentive award
that could have become payable to the named executive if his
employment was terminated other than for cause on
December 31, 2009. Any amounts of unpaid deferred pay or
long-term incentive awards paid to executive officers if they
are terminated other than for cause will be determined on a
case-by-case
basis in the discretion of our Board of Directors and also
subject to the approval of FHFA in consultation with Treasury.
We therefore cannot make a reasonable estimate of the amounts
that would become payable in such cases; if his employment had
been terminated other than for cause as of December 31,
2009, each named executive could have received anywhere from
none to 100% of his 2009 deferred pay and from none to 90% of
his target 2009 long-term incentive award.
Maximum
Potential Payments Upon Termination Other Than For Cause as of
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based
|
|
|
|
|
|
|
|
|
Portion of 2008
|
|
|
|
Long-Term
|
|
|
|
|
Retention
|
|
|
|
Incentive
|
|
|
Name
|
|
Award(1)
|
|
Deferred
Pay(2)
|
|
Award(3)
|
|
Total
|
|
Michael Williams
|
|
$
|
386,100
|
|
|
$
|
2,867,200
|
|
|
$
|
1,665,000
|
|
|
$
|
4,918,300
|
|
Herbert Allison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Johnson
|
|
|
|
|
|
|
1,700,000
|
|
|
|
1,035,000
|
|
|
|
2,735,000
|
|
Kenneth Bacon
|
|
|
297,000
|
|
|
|
1,069,600
|
|
|
|
720,000
|
|
|
|
2,086,600
|
|
David Benson
|
|
|
445,500
|
|
|
|
1,369,667
|
|
|
|
837,300
|
|
|
|
2,652,467
|
|
Timothy Mayopoulos
|
|
|
|
|
|
|
1,278,610
|
|
|
|
767,601
|
|
|
|
2,046,211
|
|
|
|
|
(1) |
|
Assumes that each named executive
would have received 90% of the target performance-based portion
of his 2008 Retention Program award, which were the amounts of
these awards ultimately paid out in February 2010 based on 2009
corporate performance, as described in footnote 4 to the
Summary Compensation Table for 2009, 2008 and 2007.
Messrs. Allison, Johnson and Mayopoulos did not receive
awards under the 2008 Retention Program.
|
|
|
|
(2) |
|
Assumes that each named executive
would have received 100% of his 2009 deferred pay. The actual
amount of unpaid deferred pay a named executive would receive in
the event his employment is terminated would be in the
discretion of our Board of Directors and also subject to the
approval of FHFA in consultation with Treasury, and could range
from 0% to 100% of the amount shown in this column.
|
|
(3) |
|
Assumes that each named executive
would receive 90% of his target long-term incentive award. The
amounts of these awards approved by the Board based on corporate
and individual performance for 2009 for each named executive
except Mr. Mayopoulos were 90% of the target amounts, which
therefore represents the maximum amount each named executive
could have received in the event his employment was terminated
as of December 31, 2009. Mr. Mayopoulos 2009
long-term incentive award equals 90% of his target long-term
incentive award plus an additional amount in recognition of the
termination of his temporary living benefit in December 2009.
Mr. Mayopoulos would not have received the additional
amount in the event his employment had been terminated on
December 31, 2009. See Compensation Discussion and
AnalysisIndividual Compensation Decisions for 2009
for more information regarding the Boards determinations
with respect to each named executives 2009 long-term
incentive award. The actual amount of unpaid long-term incentive
award a named executive would receive in the event his
employment is terminated would be in the discretion of our Board
of Directors and also subject to the approval of FHFA in
consultation with Treasury, and could range from 0% to 100% of
the amount shown in this column.
|
Payments
to Former Chief Executive Officer
Mr. Allison, who served as our Chief Executive Officer from
September 2008 to April 2009, received no payments from us as a
result of his resignation from Fannie Mae. We paid the premium
for universal life insurance coverage for Mr. Allison under
our executive life insurance program before he left the company.
Following his resignation, we paid amounts to cover the
withholding tax that resulted from our payment of this life
insurance premium, as well as withholding taxes relating to his
use of a company car and driver.
231
Director
Compensation
In November 2008, FHFA approved a new program under which our
non-management directors receive all compensation in cash, as
described below. This compensation for the directors was
designed to be reasonable, appropriate and commensurate with the
duties and responsibilities of their Board service.
The total 2009 compensation for our non-management directors is
shown in the table below. Mr. Williams and
Mr. Allison, our only directors who also served as
employees of Fannie Mae during 2009, were not entitled to
receive any of the benefits provided to our non-management
directors other than those provided under the matching
charitable gifts program, which is available to all of our
employees.
2009
Non-Employee Director Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
or Paid
|
|
All Other
|
|
|
|
|
in Cash
|
|
Compensation
|
|
Total
|
Name
|
|
($)
|
|
($)(1)
|
|
($)
|
|
Current Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis R. Beresford
|
|
|
185,000
|
|
|
|
|
|
|
|
185,000
|
|
William Thomas Forrester
|
|
|
170,000
|
|
|
|
|
|
|
|
170,000
|
|
Brenda J. Gaines
|
|
|
180,000
|
|
|
|
|
|
|
|
180,000
|
|
Charlynn Goins
|
|
|
178,889
|
|
|
|
|
|
|
|
178,889
|
|
Frederick B. Bart Harvey III
|
|
|
164,167
|
|
|
|
|
|
|
|
164,167
|
|
Philip A. Laskawy
|
|
|
290,000
|
|
|
|
|
|
|
|
290,000
|
|
Egbert L. J. Perry
|
|
|
160,000
|
|
|
|
|
|
|
|
160,000
|
|
Jonathan Plutzik
|
|
|
19,556
|
|
|
|
|
|
|
|
19,556
|
|
David H. Sidwell
|
|
|
160,000
|
|
|
|
10,000
|
|
|
|
170,000
|
|
Former
Director(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diana L. Taylor
|
|
|
93,333
|
|
|
|
|
|
|
|
93,333
|
|
|
|
|
(1) |
|
All Other Compensation
consists of gifts we made or will make under our matching
charitable gifts program. Our matching charitable gifts program
is discussed in greater detail following this table.
|
|
|
|
(2) |
|
Diana Taylor resigned from our
Board in July 2009.
|
Compensation
Arrangements for our Non-Management Directors
Our non-management directors receive a retainer at an annual
rate of $160,000, with no meeting fees. Committee chairs and
Audit Committee members receive an additional retainer at an
annual rate of $25,000 for the Audit Committee chair, $15,000
for the Risk Policy and Capital Committee chair and $10,000 for
all other committee chairs and each member of the Audit
Committee. In recognition of the substantial amount of time and
effort necessary to fulfill the duties of non-executive Chairman
of the Board, the annual retainer for our non-executive
Chairman, Mr. Laskawy, is $290,000. Our directors receive
no equity compensation.
Additional
Arrangements with our Non-Management Directors
Matching Charitable Gifts Program. To further
our support for charitable giving, non-employee directors are
able to participate in our corporate matching gifts program on
the same terms as our employees. Under this program, gifts made
by employees and directors to Section 501(c)(3) charities
are matched, up to an aggregate total of $10,000 in any calendar
year, including up to $500 that may be matched on a
2-for-1
basis.
Stock Ownership Guidelines for Directors. In
January 2009, our Board eliminated our stock ownership
requirements for directors and for senior officers in light of
the difficulty of meeting the requirements at current market
prices and because we have ceased paying stock-based
compensation.
Other Expenses. We also pay for or reimburse
directors for
out-of-pocket
expenses incurred in connection with their service on the Board,
including travel to and from our meetings, accommodations, meals
and training.
232
Fannie Mae Directors Charitable Award
Program. In 1992, we established our
Directors Charitable Award Program. Under the program, we
agreed to make donations upon the death of a director to
charitable organizations or educational institutions of the
directors choice. We agreed to donate $100,000 for every
year of service by a director up to a maximum of $1,000,000. The
program has generally been funded by life insurance contracts on
the lives of participating current and former directors. We
terminated the program with respect to living directors in
September 2009. However, we intend to pay future promised
payments on behalf of two former directors who were deceased
prior to September 2009, and on behalf of whom payments to
charities had already begun.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The following table provides information as of December 31,
2009 with respect to shares of common stock that may be issued
under our existing equity compensation plans. At this time, we
are prohibited from issuing new stock without the prior written
consent of Treasury under the terms of the senior preferred
stock purchase agreement, other than as required by the terms of
any binding agreement in effect on the date of the senior
preferred stock purchase agreement, including as required by the
terms of outstanding stock options and restricted stock units.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Remaining Available
|
|
|
Number of
|
|
|
|
for Future Issuance
|
|
|
Securities to be
|
|
|
|
under Equity
|
|
|
Issued upon
|
|
Weighted-Average
|
|
Compensation Plans
|
|
|
Exercise of
|
|
Exercise Price of
|
|
(Excluding
|
|
|
Outstanding
|
|
Outstanding
|
|
Securities
|
|
|
Options, Warrants
|
|
Options, Warrants
|
|
Reflected in First
|
Plan Category
|
|
and Rights (#)
|
|
and Rights
|
|
Column) (#)
|
|
Equity compensation plans approved by stockholders
|
|
|
8,989,492
|
(1)
|
|
$
|
72.39
|
(2)
|
|
|
40,707,853
|
(3)
|
Equity compensation plans not approved by stockholders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,989,492
|
|
|
$
|
72.39
|
|
|
|
40,707,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount includes outstanding
stock options; restricted stock units; deferred stock units; and
shares issuable upon the payout of deferred stock balances.
Outstanding awards, options and rights include grants under the
Fannie Mae Stock Compensation Plan of 1993, the Stock
Compensation Plan of 2003 and the payout of shares deferred upon
the settlement of awards made under the 1993 plan and a prior
plan.
|
|
|
|
(2) |
|
The weighted average exercise price
is calculated for the outstanding options and does not take into
account restricted stock units or deferred shares.
|
|
(3) |
|
This number of shares consists of
11,960,258 shares available under the 1985 Employee Stock
Purchase Plan and 28,747,595 shares available under the
Stock Compensation Plan of 2003 that may be issued as restricted
stock, stock bonuses, stock options or in settlement of
restricted stock units, performance share program awards, stock
appreciation rights or other stock-based awards. No more than
1,433,784 of the shares issuable under the Stock Compensation
Plan of 2003 may be issued as restricted stock or
restricted stock units vesting in full in fewer than three
years, performance shares with a performance period of less than
one year or bonus shares subject to similar vesting provisions
or performance periods.
|
233
Beneficial
Ownership
The following table shows the beneficial ownership of our common
stock by each of our current directors and the named executives,
and all current directors and executive officers as a group, as
of February 15, 2010, unless otherwise indicated. As of
that date, no director or named executive, nor all directors and
current executive officers as a group, owned as much as 1% of
our outstanding common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of Beneficial
Ownership(1)
|
|
|
|
|
Stock Options
|
|
|
|
|
|
|
Exercisable or
|
|
|
|
|
|
|
Other Shares
|
|
|
|
|
Common Stock
|
|
Obtainable
|
|
Total
|
|
|
Beneficially
|
|
Within 60 Days of
|
|
Common Stock
|
|
|
Owned Excluding
|
|
February 15,
|
|
Beneficially
|
Name and Position
|
|
Stock Options
|
|
2010(2)
|
|
Owned
|
|
Herbert M. Allison
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Former President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth J.
Bacon(3)
|
|
|
63,587
|
|
|
|
77,590
|
|
|
|
141,177
|
|
Executive Vice President, Housing and Community Development
|
|
|
|
|
|
|
|
|
|
|
|
|
David C.
Benson(4)
|
|
|
21,445
|
|
|
|
53,927
|
|
|
|
75,372
|
|
Executive Vice President, Capital Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis R. Beresford
|
|
|
4,719
|
|
|
|
0
|
|
|
|
4,719
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
W. Thomas Forrester
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Brenda J. Gaines
|
|
|
487
|
|
|
|
0
|
|
|
|
487
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Charlynn Goins
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Frederick Barton Harvey, III
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Johnson
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip A. Laskawy
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy J. Mayopoulos
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Executive Vice President, General Counsel and Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
Egbert L. J. Perry
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan Plutzik
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
David H. Sidwell
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J.
Williams(5)
|
|
|
279,777
|
|
|
|
219,434
|
|
|
|
499,211
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and current executive officers as a group
(22 persons)(6)
|
|
|
518,006
|
|
|
|
485,540
|
|
|
|
1,003,546
|
|
|
|
|
(1) |
|
Beneficial ownership is determined
in accordance with the rules of the SEC for computing the number
of shares of common stock beneficially owned by each person and
the percentage owned. Holders of restricted stock have no
investment power but have sole voting power over the shares and,
accordingly, these shares are included in this table. Holders of
shares through our Employee Stock Ownership Plan, or ESOP, have
sole voting power over the shares so these shares are also
included in this table. Holders of shares through our ESOP
generally have no investment power unless they are at least
55 years of age and have at least 10 years of
participation in the ESOP. Additionally, although holders of
shares through our ESOP have sole voting power through the power
to direct the trustee of the plan to vote their shares, to the
extent some holders do not provide any direction as to how to
vote their shares, the plan trustee may vote those shares in the
same proportion as the trustee votes the shares for which the
trustee has received direction. Holders of stock options have no
investment or voting power over the shares issuable upon the
exercise of
|
234
|
|
|
|
|
the options until the options are
exercised. Shares issuable upon the vesting of restricted stock
units are not considered to be beneficially owned under
applicable SEC rules and, accordingly, restricted stock units
are not included in the amounts shown.
|
|
|
|
(2) |
|
These shares are issuable upon the
exercise of outstanding stock options, except for
1,373 shares of deferred stock held by Mr. Williams,
which he could obtain within 60 days in certain
circumstances.
|
|
(3) |
|
Mr. Bacons shares
include 48 shares held as custodian for family members,
1,101 shares held through our ESOP and 40,583 shares
of restricted stock.
|
|
(4) |
|
Mr. Bensons shares
include 481 shares held through our ESOP and
14,954 shares of restricted stock.
|
|
(5) |
|
Mr. Williams shares
include 180,465 shares held jointly with his spouse,
700 shares held by his daughter, 921 shares held
through our ESOP and 97,534 shares of restricted stock.
|
|
(6) |
|
The amount of shares held by all
directors and current executive officers as a group includes
201,117 shares of restricted stock held by our directors
and current executive officers, 6,054 shares held by them
through our ESOP and 748 shares of stock held by their
family members. The beneficially owned total includes
1,373 shares of deferred stock. The shares in this table do
not include 52,856 shares of restricted stock units over
which the holders will not obtain voting rights or investment
power until the restrictions lapse.
|
The following table shows the beneficial ownership of our common
stock by each holder of more than 5% of our common stock as of
February 15, 2010.
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
5% Holders
|
|
Beneficially Owned
|
|
Percent of Class
|
|
Department of the Treasury
|
|
|
Variable(1
|
)
|
|
|
79.9
|
%
|
1500 Pennsylvania Avenue, NW., Room 3000 Washington, DC
20220
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In September 2008, we issued to
Treasury a warrant to purchase, for one one-thousandth of a cent
($0.00001) per share, shares of our 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. The
warrant may be exercised in whole or in part at any time until
September 7, 2028. As of February 26, 2010, Treasury
has not exercised the warrant. The information above assumes
Treasury beneficially owns no other shares of our common stock.
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
POLICIES
AND PROCEDURES RELATING TO TRANSACTIONS WITH RELATED
PERSONS
We review relationships and transactions in which Fannie Mae is
a participant and in which any of our directors and executive
officers or their immediate family members has an interest to
determine whether any of those persons has a material interest
in the relationship or transaction. Our current written policies
and procedures for review, approval or ratification of
relationships or transactions with related persons are set forth
in our:
|
|
|
|
|
Code of Conduct and Conflicts of Interest Policy for Members of
the Board of Directors;
|
|
|
|
Nominating and Corporate Governance Committee Charter;
|
|
|
|
Board of Directors delegation of authorities and
reservation of powers;
|
|
|
|
Code of Conduct for employees;
|
|
|
|
Conflict of Interest Policy and Conflict of Interest Procedure
for employees; and
|
|
|
|
Employment of Relatives Practice.
|
In addition, depending on the circumstances, relationships and
transactions with related persons may require approval of the
conservator pursuant to the delegation of authority issued to us
by the conservator on November 24, 2008 or may require the
approval of Treasury pursuant to the senior preferred stock
purchase agreement.
Our Code of Conduct and Conflicts of Interest Policy for Members
of the Board of Directors prohibits our directors from engaging
in any conduct or activity that is inconsistent with our best
interests, as defined by the conservators express
directions. The Code of Conduct and Conflicts of Interest Policy
for Members of the
235
Board of Directors requires each of our directors to excuse
himself or herself from voting on any issue before the Board
that could result in a conflict, self-dealing or other
circumstance where the directors position as a director
would be detrimental to us or result in a noncompetitive,
favored or unfair advantage to either the director or the
directors associates. In addition, our directors must
disclose to the Chair of the Nominating and Corporate Governance
Committee, or another member of the committee, any situation
that involves or appears to involve a conflict of interest. This
includes, for example, any financial interest of a director, an
immediate family member of a director or a business associate of
a director in any transaction being considered by the Board, as
well as any financial interest a director may have in an
organization doing business with us. Each of our directors also
must annually certify compliance with the Code of Conduct and
Conflicts of Interest Policy for Members of the Board of
Directors.
The Nominating and Corporate Governance Committee Charter and
our Boards delegation of authorities and reservation of
powers require the Nominating and Corporate Governance Committee
to review and approve any transaction that Fannie Mae engages in
with any director, nominee for director or executive officer, or
any immediate family member of a director, nominee for director
or executive officer, that is required to be disclosed pursuant
to Item 404 of
Regulation S-K.
In addition, the Boards delegation of authorities and
reservation of powers requires the Board and the conservator to
approve any action, including a related party transaction, that
in the reasonable business judgment of the Board at the time the
action is taken is likely to cause significant reputational risk.
Our Code of Conduct for employees requires that we and our
employees seek to avoid any actual or apparent conflict between
our business interests and the personal interests of our
employees or their relatives or associates. An employee who
knows or suspects a violation of our Code of Conduct must raise
the issue with the employees manager, another appropriate
member of management, a member of our Human Resources division
or our Compliance and Ethics division.
Under our Conflict of Interest Policy and Conflict of Interest
Procedure for employees, an employee who has a potential or
actual conflict of interest must request review and approval of
the conflict. Conflicts requiring review and approval include
situations where the employee or a close relative of the
employee has (1) a financial interest worth more than
$100,000 in an entity that does business with or seeks to do
business with or competes with Fannie Mae or (2) a
financial interest worth more than $10,000 in such an entity
combined with the ability to control or influence Fannie
Maes relationship with the entity. In accordance with its
charter, our Nominating and Corporate Governance Committee must
review activities engaged in by our Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Enterprise
Risk Officer, General Counsel, Chief Audit Executive or Chief
Compliance Officer that may result in an actual or potential
conflict of interest under the Employee Code of Conduct or
Conflict of Interest Policy and Conflict of Interest Procedure.
Our Chief Executive Officer is responsible for reviewing and
approving conflicts involving other executive officers. If any
conflicts are determined to involve significant reputational
risk, they must be raised to the conservator.
Our Employment of Relatives Practice prohibits, among other
things, situations where an employee would exercise influence,
control or authority over the employees relatives
areas of responsibility or terms of employment, including but
not limited to job responsibilities, performance ratings or
compensation. Employees have an obligation to disclose the
existence of any relation to another current employee prior to
applying for any position or engaging in any other work
situation that may give rise to prohibited influence, control or
authority.
We are required by the conservator to obtain its approval for
various matters, some of which may involve relationships or
transactions with related persons. These matters include actions
involving the senior preferred stock purchase agreement, the
creation of any subsidiary or affiliate or any substantial
non-ordinary course transactions with any subsidiary or
affiliate, actions involving hiring, compensation and
termination benefits of directors and officers at the executive
vice president level and above and other specified executives,
and any action that in the reasonable business judgment of the
Board at the time that the action is taken is likely to cause
significant reputational risk. The senior preferred stock
purchase agreement requires us to obtain Treasury approval of
transactions with affiliates unless, among other things, the
transaction is upon terms no less favorable to us than would be
obtained in a comparable arms-length transaction with a
non-affiliate or
236
the transaction is undertaken in the ordinary course or pursuant
to a contractual obligation or customary employment arrangement
in existence at the time the senior preferred stock purchase
agreement was entered into.
We require our directors and executive officers, not less than
annually, to describe to us any situation involving a
transaction with us in which a director or executive officer
could potentially have a personal interest that would require
disclosure under Item 404 of
Regulation S-K.
TRANSACTIONS
WITH RELATED PERSONS
Transactions
with Treasury
Treasury beneficially owns more than 5% of the outstanding
shares of our common stock by virtue of the warrant we issued to
Treasury on September 7, 2008. The warrant entitles
Treasury to purchase shares of our common stock equal to 79.9%
of our outstanding common stock on a fully diluted basis on the
date of exercise, for an exercise price of $0.00001 per share,
and is exercisable in whole or in part at any time on or before
September 7, 2028. We describe below transactions we
entered into with Treasury in 2009.
Treasury
Senior Preferred Stock Purchase Agreement
We issued the warrant to Treasury pursuant to the terms of the
senior preferred stock purchase agreement we entered into with
Treasury on September 7, 2008. Under the senior preferred
stock purchase agreement, we also issued to Treasury one million
shares of senior preferred stock. We issued the warrant and the
senior preferred stock as an initial commitment fee in
consideration of Treasurys commitment to provide up to
$100 billion in funds to us under the terms and conditions
set forth in the senior preferred stock purchase agreement. On
May 6, 2009, Treasury amended the senior preferred stock
purchase agreement to increase its funding commitment to
$200 billion and to revise some of the covenants in the
agreement. Treasury further amended the senior preferred stock
purchase agreement on December 24, 2009 in order to further
increase its funding commitment to the greater of
(a) $200 billion or (b) $200 billion plus
the cumulative amount of our net worth deficit as of the end of
any and each calendar quarter in 2010, 2011 and 2012, less any
positive net worth as of December 31, 2012, as well as to
make some other revisions to the agreement. See our current
report on
Form 8-K
filed with the SEC on December 30, 2009 for a more detailed
description of Treasurys December 2009 amendment to the
senior preferred stock purchase agreement. We have received an
aggregate of $59.9 billion from Treasury under the senior
preferred stock purchase agreement, and in February 2010, the
Acting Director of FHFA submitted a request on behalf of Fannie
Mae to Treasury for an additional $15.3 billion from
Treasury under the senior preferred purchase stock agreement.
See BusinessConservatorship and Treasury
AgreementsTreasury Agreements for more information
about the senior preferred stock purchase agreement.
Treasury
Credit Facility
On September 19, 2008, we entered into the Treasury credit
facility under which we were allowed to request loans from
Treasury until December 31, 2009. The Treasury credit
facility terminated on December 31, 2009 in accordance with
its terms. We did not request any loans or borrow any amounts
under the Treasury credit facility prior to its termination on
December 31, 2009.
Treasury
GSE MBS Purchase Program
On September 7, 2008, Treasury announced the GSE
mortgage-backed securities purchase program under which Treasury
conducted open market purchases of mortgage-backed securities
issued by us and Freddie Mac during 2008 and 2009. This program
ended on December 31, 2009, which was the expiration date
of Treasurys authority to purchase these mortgage-backed
securities under the Housing and Economic Recovery Act of 2008.
Through December 31, 2009, Treasury purchased approximately
$226 billion in Fannie Mae and Freddie Mac mortgage-backed
securities pursuant to this program.
237
Treasury
Home Affordable Modification Program
On February 18, 2009, the Obama Administration announced
its Homeowner Affordability and Stability Plan, a plan to
provide stability and affordability to the U.S. housing
market. Pursuant to this plan, in March 2009, the Administration
announced the details of its Making Home Affordable Program, a
program intended to provide assistance to homeowners and prevent
foreclosures. One of the primary initiatives under the Making
Home Affordable Program is the Home Affordable Modification
Program, or HAMP, which is aimed at helping borrowers whose loan
is either currently delinquent or at imminent risk of default by
modifying their mortgage loan to make their monthly payments
more affordable. In addition to our participation in the
Administrations initiatives under the Making Home
Affordable Program, Treasury engaged us to serve as program
administrator for loans modified under HAMP pursuant to the
financial agency agreement between Treasury and us, dated
February 18, 2009. See BusinessMaking Home
Affordable ProgramOur Role as Program Administrator of
HAMP for a description of our principal activities as HAMP
program administrator.
Under our arrangement with Treasury, Treasury has agreed to
compensate us for a significant portion of the work we have
performed in our role as HAMP program administrator. In December
2009, Treasury established a budget for services provided by us
in connection with HAMP that contemplates that, in
U.S. government fiscal years 2009, 2010 and 2011, we will
receive an aggregate of approximately $81.3 million from
Treasury for our work as HAMP program administrator, as well as
receive from Treasury an additional amount of approximately
$70.2 million to be passed through to third-party vendors
engaged by us for HAMP. These amounts are based on current
workload estimates and program scope relating to HAMP and will
be updated to reflect any changes in policy, workload and
program scope. As of February 26, 2010, we have not billed
Treasury and have not received compensation for the work we have
performed in our role as HAMP program administrator.
Treasury
Housing Finance Agency Initiative
On October 19, 2009, we entered into a memorandum of
understanding with Treasury, FHFA and Freddie Mac that
established terms under which we, Freddie Mac and Treasury would
provide assistance to state and local housing finance agencies
(HFAs) so that the HFAs could continue to meet their
mission of providing affordable financing for both single-family
and multifamily housing. Pursuant to this HFA initiative, we,
Freddie Mac and Treasury are providing assistance to the HFAs
through two primary programs: a temporary credit and liquidity
facilities (TCLF) program, which is intended to
improve the HFAs access to liquidity for outstanding HFA
bonds, and a new issue bond (NIB) program, which is
intended to support new lending by the HFAs. We entered into
various agreements in November and December 2009 to implement
these HFA assistance programs, including several to which
Treasury is a party. Pursuant to the TCLF program, Treasury has
purchased participation interests in temporary credit and
liquidity facilities provided by us and Freddie Mac to the HFAs,
which facilities create a credit and liquidity backstop for the
HFAs. Pursuant to the NIB program, Treasury has purchased new
securities issued by us and Freddie Mac backed by new housing
bonds issued by the HFAs.
The total amount established by Treasury for the TCLF program
and the NIB program was $23.4 billion: an aggregate of
$8.2 billion for the TCLF program (of which
$7.7 billion consists of principal and approximately
$500 million consists of accrued interest) and an aggregate
of $15.2 billion for the NIB program (of which
$12.4 billion related to single-family bonds and
$2.8 billion related to multifamily bonds). We and Freddie
Mac administer these programs on a coordinated basis. We provide
temporary credit and liquidity facility support and issue
securities backed by HFA bonds on a
50-50 pro
rata basis with Freddie Mac under these programs. Accordingly,
our portion of the programs totals $11.7 billion:
$4.1 billion in support provided under the TCLF program and
$7.6 billion in securities issued under the NIB program. Freddie
Mac is also providing $54.1 million in assistance to the
HFAs through a multifamily credit enhancement program. We did
not participate in this program.
Treasury will bear the initial losses of principal under the
TCLF program and the NIB program up to 35% of total principal on
a combined program-wide basis, and thereafter we and Freddie Mac
each will bear the
238
losses of principal that are attributable to our own portion of
the temporary credit and liquidity facilities and the securities
that we have issued. Treasury will bear all losses of unpaid
interest under the two programs. Accordingly, Fannie Maes
maximum potential risk of loss under these programs, assuming a
100% loss of principal, is approximately $7.4 billion.
FHFA, as conservator, approved the senior preferred stock
purchase agreement and the amendments to the agreement, the
Treasury credit facility, our role as HAMP program administrator
and the HFA transactions described above. The Treasury GSE MBS
purchase program did not require review and approval under any
of our policies and procedures relating to transactions with
related persons.
Transactions
with PHH Corporation
Terence W. Edwards has been Executive Vice PresidentCredit
Portfolio Management of Fannie Mae since September 14,
2009, when he joined Fannie Mae. Prior to joining Fannie Mae,
Mr. Edwards served as the President and Chief Executive
Officer, as well as a member of the Board of Directors, of PHH
Corporation, until June 17, 2009. Mr. Edwards
continued to be employed by PHH Corporation until
September 11, 2009.
PHH Mortgage Corporation (PHH), a subsidiary of PHH
Corporation, is a single-family seller-servicer customer of
Fannie Mae. We regularly enter into transactions with PHH in the
ordinary course of this business relationship. In 2009, PHH
delivered approximately $16 billion in mortgage loans to
us, which included the delivery of loans for direct payment and
the delivery of pools of mortgage loans in exchange for Fannie
Mae MBS. We acquired most of these mortgage loans pursuant to
our early funding programs. This represented approximately 2% of
our single-family business volume in 2009 and made PHH our
seventh-largest single-family customer. In addition, as of
December 31, 2009, PHH serviced approximately
$64 billion of single-family mortgage loans either owned
directly by Fannie Mae or backing Fannie Mae MBS, which
represented approximately 2% of our single-family servicing
book, making PHH our seventh-largest servicer. PHH also entered
into transactions with us to purchase or sell approximately
$13 billion in Fannie Mae, Freddie Mac and Ginnie Mae
mortgage-related securities in 2009. As a single-family
seller-servicer customer, PHH also pays us fees for its use of
Fannie Mae technology, enters into risk-sharing arrangements
with us, and provides us with collateral to secure some of its
obligations. Our servicers are typically required to advance
funds to pay Fannie Mae MBS investors or to pay taxes and
insurance on a property if a payment is not received from a
borrower or the borrower does not pay taxes or insurance, and we
subsequently reimburse servicers for these advances. We have
provided PHH with an early reimbursement facility to
fund PHHs servicing advances relating to taxes,
insurance and certain other advances to preserve the value of
the property, and the maximum amount outstanding under this
facility during 2009 was $50 million. PHH is also a
participating lender in our
HomePath®
Mortgage financing initiative relating to our REO properties.
We believe that Fannie Mae is one of PHHs largest business
partners and that transactions with Fannie Mae are material to
PHHs business. According to PHH Corporations 2008
Form 10-K,
87% of its mortgage loan sales in 2008 were to Fannie Mae,
Freddie Mac or Ginnie Mae, and its business is highly dependent
on programs administered by the GSEs.
Pursuant to a separation agreement with PHH Corporation,
Mr. Edwards is entitled to receive additional compensation
from PHH Corporation for his prior services to the company. Some
of this additional compensation is dependent on the performance
of PHH Corporation. According to
Forms 8-K
filed by PHH Corporation on August 5, 2009 and
September 16, 2009, Mr. Edwards separation
agreement with PHH Corporation provides that he will receive the
following additional compensation from PHH Corporation:
(a) an amount equal to his base salary for a
24-month
period beginning on PHH Corporations first regular pay
date after March 11, 2010; (b) annual cash bonuses for
calendar years 2009, 2010 and 2011 in an amount equal to the
bonus he would have received based on actual performance of the
company (except that the 2011 bonus will be prorated to reflect
the actual number of months covered by the severance period in
2011), which bonuses will be paid to Mr. Edwards at the
same time bonuses are payable to corporate employees, but no
later than March 15 after the end of the applicable performance
year; and (c) a cash transition payment of $50,000 on PHH
Corporations first regular pay date after March 11,
2010. In addition, the outstanding options and restricted stock
units that have been previously awarded to him will continue to
vest and, on the
239
last day of the severance period, all remaining unvested options
and restricted stock units will become fully vested, except for
the 2009 performance-based restricted stock units which will
become vested only to the extent that performance goals have
been satisfied. In addition, at the time of his hire,
Mr. Edwards held a significant amount of PHH Corporation
common stock, options for the purchase of common stock and
restricted stock. He has since sold most of his common stock
holdings in PHH Corporation, but continues to hold options and
performance-based restricted stock.
Our policies and procedures for the review and approval of
related party transactions described above under Policies
and Procedures Relating to Transactions with Related
Persons did not require the review, approval or
ratification of the above-described transactions with PHH. Our
Nominating and Corporate Governance Committee Charter and our
Boards delegation of authorities did not require the
Nominating and Corporate Governance Committee to review and
approve these transactions because Fannie Mae did not engage in
any such transactions directly with Mr. Edwards. As
required under our Conflict of Interest Policy and Conflict of
Interest Procedure for employees, Mr. Edwards reported his
ongoing financial interest in PHH Corporation at the time of his
employment and requested review and approval of the conflict.
Our Chief Executive Officer reviewed and approved of the
conflict, and to address the conflict has required that
Mr. Edwards be recused from all matters relating to PHH.
Transactions
involving The Integral Group LLC
Mr. Perry, who joined our Board in December 2008, is the
Chairman and Chief Executive Officer of The Integral Group LLC,
referred to as Integral. Over the past eight years, our Housing
and Community Development business has invested indirectly in
certain limited partnerships or limited liability companies that
are controlled and managed by entities affiliated with Integral,
in the capacity of general partner or managing member, as the
case may be. These limited partnerships or limited liability
companies are referred to as the Integral Property Partnerships.
The Integral Property Partnerships own and manage LIHTC
properties. We also hold multifamily mortgage loans made to
borrowing entities sponsored by Integral. We believe that
Mr. Perry has no material direct or indirect interest in
these transactions. Mr. Perry has informed us that Integral
accepted no further equity investments from us relating to
Integral Property Partnerships beginning in December 2008, when
he joined our Board. Mr. Perry has also informed us that
Integral does not intend to seek debt financing intended
specifically to be purchased by us, although, as a secondary
market participant, in the ordinary course of our business we
may purchase multifamily mortgage loans made to borrowing
entities sponsored by Integral. See Director
IndependenceOur Board of Directors below for further
information.
DIRECTOR
INDEPENDENCE
Our Board of Directors, with the assistance of the Nominating
and Corporate Governance Committee, has reviewed the
independence of all current Board members under the listing
standards of the NYSE and the standards of independence adopted
by the Board, as set forth in our Corporate Governance
Guidelines and outlined below. It is the policy of our Board of
Directors that a substantial majority of our seated directors
will be independent in accordance with these standards. Our
Board is currently structured so that all but one of our
directors, our Chief Executive Officer, is independent. Based on
its review, the Board has determined that all of our
non-employee directors meet the director independence standards
of our Corporate Governance Guidelines and the NYSE.
Independence
Standards
Under the standards of independence adopted by our Board, which
meet and in some respects exceed the definition of independence
adopted by the NYSE, an independent director must be
determined to have no material relationship with us, either
directly or through an organization that has a material
relationship with us. A relationship is material if,
in the judgment of the Board, it would interfere with the
directors independent judgment. The Board did not consider
the Boards duties to the conservator, together with the
federal governments controlling beneficial ownership of
Fannie Mae, in determining independence of the
240
Board members. Under the NYSEs listing requirements for
audit committees, members of a companys audit committee
must meet additional, heightened independence criteria, although
our own independence standards require all independent directors
to meet these criteria.
To assist it in determining whether a director is independent,
our Board has adopted the standards set forth below, which are
posted on our Web site, www.fanniemae.com, under Corporate
Governance in the About Us section of our Web
site:
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A director will not be considered independent if, within the
preceding five years:
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the director was our employee; or
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an immediate family member of the director was employed by us as
an executive officer.
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A director will not be considered independent if:
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the director is a current partner or employee of our external
auditor, or within the preceding five years, was (but is no
longer) a partner or employee of our external auditor and
personally worked on our audit within that time; or
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an immediate family member of the director is a current partner
of our external auditor, or is a current employee of our
external auditor and personally works on Fannie Maes
audit, or, within the preceding five years, was (but is no
longer) a partner or employee of our external auditor and
personally worked on our audit within that time.
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A director will not be considered independent if, within the
preceding five years:
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the director was employed by a company at a time when one of our
current executive officers sat on that companys
compensation committee; or
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an immediate family member of the director was employed as an
officer by a company at a time when one of our current executive
officers sat on that companys compensation committee.
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A director will not be considered independent if, within the
preceding five years:
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the director received any compensation from us, directly or
indirectly, other than fees for service as a director; or
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an immediate family member of the director received any
compensation from us, directly or indirectly, other than
compensation received for service as our employee (other than an
executive officer).
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A director will not be considered independent if:
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the director is a current executive officer, employee,
controlling stockholder or partner of a company or other entity
that does or did business with us and to which we made, or from
which we received, payments within the preceding five years
that, in any single fiscal year, were in excess of
$1 million or 2% of the entitys consolidated gross
annual revenues, whichever is greater; or
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an immediate family member of the director is a current
executive officer of a company or other entity that does or did
business with us and to which we made, or from which we
received, payments within the preceding five years that, in any
single fiscal year, were in excess of $1 million or 2% of
the entitys consolidated gross annual revenues, whichever
is greater.
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A director will not be considered independent if the director or
the directors spouse is an executive officer, employee,
director or trustee of a nonprofit organization to which we make
or have made contributions within the preceding three years
(including contributions made by the Fannie Mae Foundation prior
to December 31, 2008) that in any year were in excess
of 5% of the organizations consolidated gross annual
revenues, or $120,000, whichever is less (amounts contributed
under our Matching Gifts Program are not included in the
contributions calculated for purposes of this standard). The
Nominating and Corporate Governance Committee also will receive
periodic reports regarding charitable contributions to
organizations otherwise associated with a director or any spouse
of a director.
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241
After considering all the facts and circumstances, our Board may
determine in its judgment that a director is independent (in
other words, the director has no relationship with us that would
interfere with the directors independent judgment), even
though the director does not meet the standards listed above, so
long as the determination of independence is consistent with the
NYSE definition of independence. Where the
guidelines above and the NYSE independence requirements do not
address a particular relationship, the determination of whether
the relationship is material, and whether a director is
independent, will be made by our Board, based upon the
recommendation of the Nominating and Corporate Governance
Committee.
Our Board
of Directors
Our Board of Directors, with the assistance of the Nominating
and Corporate Governance Committee, has reviewed the
independence of all current Board members under the listing
standards of the NYSE and the standards of independence adopted
by the Board contained in our Guidelines, as outlined above.
Based on its review, the Board has affirmatively determined that
all of our non-employee directors meet the director independence
standards of our Guidelines and the NYSE, and that each of the
following nine directors is independent: Philip A. Laskawy,
Dennis R. Beresford, William Thomas Forrester, Brenda J. Gaines,
Charlynn Goins, Frederick B. Harvey III, Egbert L. J. Perry,
Jonathan Plutzik and David H. Sidwell.
In determining the independence of each of these Board members,
the Board of Directors considered the following relationships in
addition to those addressed by the standards contained in our
Guidelines as set forth above:
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Certain of these Board members also serve as directors or
advisory Board members of other companies that engage in
business with Fannie Mae. The payments made by or to Fannie Mae
pursuant to these relationships during the past five years fell
below our Guidelines thresholds of materiality for a Board
member that is a current executive officer, employee,
controlling shareholder or partner of a company engaged in
business with Fannie Mae. In light of this fact, and the fact
that these Board members are only directors or advisory Board
members of these other companies, the Board of Directors has
concluded that these business relationships are not material to
the independence of these Board members.
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Certain of these Board members also serve as trustees or board
members for charitable organizations that have received
donations from Fannie Mae. The amounts of these charitable
donations were determined to fall below our Guidelines
thresholds of materiality for a Board member who is a current
trustee or board member of a charitable organization that
receives donations from Fannie Mae. In light of this fact, the
Board of Directors has concluded that these relationships with
charitable organizations are not material to the independence of
these Board members.
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Certain of these Board members serve as directors of other
companies that hold Fannie Mae fixed income securities or
control entities that direct investments in such securities. It
is not possible for Fannie Mae to determine the extent of the
holdings of these companies in Fannie Mae fixed income
securities as all payments to holders are made through the
Federal Reserve, and most of these securities are held in turn
by financial intermediaries. The Board of Directors noted that
transactions by these other companies in Fannie Mae fixed income
securities are entered into in the ordinary course of business
of these companies, are not entered into at the direction or
with specific approval by the directors of these companies and
are not material to these other companies. In light of these
facts, including that these Board members are directors at these
other companies rather than current executive officers,
employees, controlling shareholders or partners, the Board of
Directors has concluded that these business relationships are
not material to the independence of these Board members.
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Mr. Perry is an executive officer and majority shareholder
of The Integral Group LLC, which indirectly does business with
Fannie Mae. This business includes the following:
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Fannie Mae purchased a 50% participation in a mortgage loan made
in 2001 to a limited partnership borrower sponsored by Integral.
This mortgage loan was paid off in 2006.
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Since 2006, Fannie Mae has held six multifamily mortgage loans
made to six borrowing entities sponsored by Integral. In each
case, Integral participates in the borrowing entity as a general
partner of
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242
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the limited partnership, or as a managing member of the limited
liability company, as the case may be, and holds a 0.01%
economic interest in such entity. The total amount of
Integrals pro rata share of the interest payments made to
Fannie Mae on the loans since 2006 is less than $1 million.
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Fannie Mae has invested as a limited partner or member in
certain LIHTC funds that in turn have invested directly or
indirectly as a limited partner or member in various Integral
Property Partnerships, which are lower-tier project partnerships
or limited liability companies that own LIHTC properties.
Integral participates indirectly as a member or the general
partner of the Integral Property Partnerships (each a
Project General Partner). The Integral Property
Partnerships construct, develop and manage affordable housing
projects. Each Project General Partner and its affiliates earn
certain fees each year in connection with those project
activities, and such fees are paid from income generated by the
project (other than certain developer fees paid from development
sources). Fannie Maes indirect investments in the Integral
Property Partnerships, through the LIHTC funds, have not
resulted in any direct payments by Fannie Mae to any Project
General Partner or its affiliates, including Integral. Fannie
Maes indirect equity investment in the Integral Property
Partnerships is approximately $32 million, which represents
less than 4% of the total capitalization and less than 11% of
the total equity in all of the Integral Property Partnerships.
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The aggregate debt service and other required payments made,
directly and indirectly, to or on behalf of Fannie Mae pursuant
to these relationships with Integral fall below our
Guidelines thresholds of materiality for a Board member
who is a current executive officer, employee, controlling
shareholder or partner of a company that engages in business
with Fannie Mae. In addition, as a limited partner or member in
the LIHTC funds, which in turn are limited partners in the
Integral Property Partnerships, Fannie Mae has no direct
dealings with Integral or Mr. Perry and is not involved in
the management of the Integral Property Partnerships.
Mr. Perry also generally is not aware of the identity of
the limited partners or members of the LIHTC funds, as Integral
sells the partnership or LLC interests to syndicators who, in
turn, syndicate these interests to limited partners or members
of their choosing. Based on the foregoing, the Board of
Directors has concluded that these business relationships are
not material to Mr. Perrys independence.
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Mr. Plutziks wife, Lesley Goldwasser, currently
serves as a director of Flagstar Bancorp, Inc. Fannie Mae has
conducted business with Flagstar Bancorp, Inc. and its
subsidiaries (referred to collectively as Flagstar)
during the past five years. Transactions between Fannie Mae and
Flagstar include guaranty transactions and Flagstars
servicing of Fannie Mae mortgage loans. We estimate that the
servicing fees we paid to Flagstar represented almost 10% of its
consolidated gross revenues in 2008, and that the guaranty
income and technology fees we received from Flagstar in 2008
represented less than one-half of 1% of Fannie Maes
consolidated gross revenues in 2008. In determining whether
Mr. Plutzik has a material relationship with Fannie Mae
based on Ms. Goldwassers service as a director of
Flagstar Bancorp, Inc., the Board considered the following:
Mr. Plutziks wife, and not Mr. Plutzik himself,
serves as a director of Flagstar Bancorp, Inc.;
Ms. Goldwasser is only a director, and not an executive
officer, of Flagstar Bancorp, Inc.; while the business
relationship between Fannie Mae and Flagstar may be material to
Flagstar, it is not material to Fannie Mae; and the relationship
between Fannie Mae and Flagstar is neither of the type or
magnitude that would typically rise to the level of
consideration by the Board. The Board also considered
Flagstars current performance as a counterparty of Fannie
Mae. Based on the foregoing, the Board of Directors has
concluded that this business relationship is not material to
Mr. Plutziks independence. Further, Mr. Plutzik
has agreed to recuse himself from discussion and voting on any
matters relating to Flagstar to be considered by the Board.
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The Board determined that none of these relationships would
interfere with the directors independent judgment.
Mr. Williams is not considered an independent director
under the Guidelines because of his position as Chief Executive
Officer.
243
Directors
Who Left the Board in 2009
The following persons served on our Board of Directors during
2009 but were not directors as of December 31, 2009:
Herbert Allison and Diana L. Taylor. The Board had affirmatively
determined that Ms. Taylor met the director independence
standards of our Guidelines and the NYSE, and was independent.
In determining the independence of Ms. Taylor, the Board of
Directors at that time considered the following relationship in
addition to those addressed by the standards contained in the
Guidelines. Ms. Taylor served as a director of another
company that held Fannie Mae fixed income securities. It is not
possible for Fannie Mae to determine the extent of the holdings
of this company in Fannie Mae fixed income securities as all
payments to holders are made through the Federal Reserve, and
most of these securities are held in turn by financial
intermediaries. The Board of Directors noted that transactions
by this company in Fannie Mae fixed income securities are
entered into in the ordinary course of business of this company
and are not subject to specific approval by the directors of the
company. In light of these facts, including that Ms. Taylor
is a director at this other company rather than a current
executive officer, employee, controlling shareholder or partner,
the Board of Directors concluded that this business relationship
was not material to her independence.
Mr. Allison was not considered an independent director
under the Guidelines because of his position as Chief Executive
Officer.
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Item 14.
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Principal
Accountant Fees and Services
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The Audit Committee of our Board of Directors is directly
responsible for the appointment, oversight and evaluation of our
independent registered public accounting firm, subject to
conservator approval of matters relating to retention and
termination. In accordance with the Audit Committees
charter, it must approve, in advance of the service, all audit
and permissible non-audit services to be provided by our
independent registered public accounting firm and establish
policies and procedures for the engagement of the external
auditor to provide audit and permissible non-audit services. Our
independent registered public accounting firm may not be
retained to perform non-audit services specified in
Section 10A(g) of the Exchange Act.
Deloitte & Touche LLP was our independent registered
public accounting firm for the years ended December 31,
2009 and 2008. Deloitte & Touche LLP has advised the
Audit Committee that they are independent accountants with
respect to the company, within the meaning of standards
established by the PCAOB and federal securities laws
administered by the SEC.
The following table sets forth the aggregate estimated or actual
fees for professional services provided by Deloitte &
Touche LLP in 2009 and 2008, including fees for the 2009 and
2008 audits.
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For The Year Ended
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December 31,
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Description of Fees
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2009
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2008
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Audit
fees(1)
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$
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42,600,000
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$
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39,000,000
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Audit-related
fees(2)
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2,800,000
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2,800,000
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Total fees
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$
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45,400,000
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$
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41,800,000
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(1) |
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For 2009, includes costs associated
with the audit of our adoption of new consolidation standards.
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(2) |
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For 2009 and 2008, consists of:
(1) fees billed for attest-related services on
securitization transactions and (2) reimbursement of costs
associated with responding to subpoenas relating to Fannie
Maes securities litigation.
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244
Pre-Approval
Policy
The Audit Committees policy is to pre-approve all audit
and permissible non-audit services to be provided by the
independent registered public accounting firm. The independent
registered public accounting firm and management are required to
present reports on the nature of the services provided by the
independent registered public accounting firm for the past year
and the fees for such services, categorized into audit services,
audit-related services, tax services and other services.
In connection with its approval of Deloitte & Touche
as Fannie Maes independent registered public accounting
firm for Fannie Maes 2009 integrated audit, the Audit
Committee delegated the authority to pre-approve any additional
audit and audit-related services to its Chairman,
Mr. Beresford, who was required to report any such
pre-approvals at the next scheduled meeting of the Audit
Committee. Additionally, any services provided by
Deloitte & Touche outside of the scope of this
engagement must be approved by the Conservator.
In 2009, we paid no fees to the independent registered public
accounting firm pursuant to the de minimis exception established
by the SEC, and all services were pre-approved.
245
PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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(a)
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Documents
filed as part of this report
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1.
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Consolidated
Financial Statements
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Report of Independent Registered Public Accounting Firm
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F-2
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Financial Statements
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F-3
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Consolidated Balance Sheets as of December 31, 2009 and 2008
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F-3
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Consolidated Statements of Operations for the years ended
December 31, 2009, 2008 and 2007
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F-4
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Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007
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F-5
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Consolidated Statements of Changes in Equity (Deficit) for the
years ended December 31, 2009, 2008 and 2007
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F-6
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Notes to Consolidated Financial Statements
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F-8
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Note 1 Summary of Significant Accounting
Policies
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F-8
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Note 2 Consolidations
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F-40
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Note 3 Mortgage Loans
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F-44
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Note 4 Allowance for Loan Losses and
Reserve for Guaranty Losses
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F-49
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Note 5 Investments in Securities
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F-51
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Note 6 Portfolio Securitizations
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F-57
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Note 7 Financial Guarantees and Master
Servicing
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F-62
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Note 8 Acquired Property, Net
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F-67
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Note 9 Short-term Borrowings and Long-term
Debt
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F-68
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Note 10 Derivative Instruments and Hedging
Activities
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F-72
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Note 11 Income Taxes
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F-79
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Note 12 Loss Per Share
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F-82
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Note 13 Stock-Based Compensation
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F-83
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Note 14 Employee Retirement Benefits
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F-85
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Note 15 Segment Reporting
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F-94
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Note 16 Equity (Deficit)
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F-99
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Note 17 Regulatory Capital Requirements
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F-106
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Note 18 Concentrations of Credit Risk
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F-108
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Note 19 Fair Value
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F-113
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Note 20 Commitments and Contingencies
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F-125
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Note 21 Selected Quarterly Financial Information
(Unaudited)
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F-129
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Note 22 Subsequent Event
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F-132
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2.
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Financial
Statement Schedules
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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.
246
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Michael J.
Williams and David M. Johnson, and each of them severally, his
or her true and lawful attorney-in-fact with power of
substitution and resubstitution to sign in his or her name,
place and stead, in any and all capacities, to do any and all
things and execute any and all instruments that such attorney
may deem necessary or advisable under the Securities Exchange
Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with
the Annual Report on
Form 10-K
and any and all amendments hereto, as fully for all intents and
purposes as he or she might or could do in person, and hereby
ratifies and confirms all said attorneys-in-fact and agents,
each acting alone, and his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Federal National Mortgage Association
Michael J. Williams
President and Chief Executive Officer
Date: February 26, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/ Philip
A. Laskawy
Philip
A. Laskawy
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Chairman of the Board of Directors
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February 26, 2010
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/s/ Michael
J. Williams
Michael
J. Williams
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President and Chief Executive Officer and Director
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February 26, 2010
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/s/ David
M. Johnson
David
M. Johnson
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Executive Vice President and Chief Financial Officer
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February 26, 2010
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/s/ David
C. Hisey
David
C. Hisey
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Executive Vice President and Deputy Chief Financial Officer
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February 26, 2010
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/s/ Dennis
R. Beresford
Dennis
R. Beresford
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Director
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February 26, 2010
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/s/ William
Thomas Forrester
William
Thomas Forrester
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Director
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February 26, 2010
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/s/ Brenda
J. Gaines
Brenda
J. Gaines
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Director
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February 26, 2010
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/s/ Charlynn
Goins
Charlynn
Goins
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Director
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February 26, 2010
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247
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Signature
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Title
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Date
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/s/ Frederick
B. Harvey III
Frederick
B. Harvey III
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Director
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February 26, 2010
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/s/ Egbert
L. J. Perry
Egbert
L. J. Perry
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Director
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February 26, 2010
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/s/ Jonathan
Plutzik
Jonathan
Plutzik
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Director
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February 26, 2010
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/s/ David
H. Sidwell
David
H. Sidwell
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Director
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February 26, 2010
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248
INDEX TO
EXHIBITS
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Item
|
|
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
|
.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
|
.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
|
.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
|
.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
|
.4
|
|
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
|
.5
|
|
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
|
.6
|
|
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
|
.7
|
|
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.)
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|
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
|
|
4
|
.11
|
|
Certificate of Designation of Terms of Fannie Mae Preferred
Stock, Series O
|
|
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.)
|
|
4
|
.22
|
|
Second Amendment to Amended and Restated Senior Preferred Stock
Purchase Agreement, dated as of December 24, 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 4.1 to Fannie Maes Current Report on
Form 8-K, filed December 30, 2009.)
|
|
10
|
.1
|
|
Fannie Maes Elective Deferred Compensation Plan, as
amended effective November 15, 2004 (Incorporated by
reference to Exhibit 10.21 to Fannie Maes Annual Report on
Form 10-K for the year ended December 31, 2007, filed February
27, 2008.)
|
|
10
|
.2
|
|
Amendment to Fannie Mae Elective Deferred Compensation
Plan I, effective October 27, 2008 (Incorporated by
reference to Exhibit 10.7 to Fannie Maes Annual Report on
Form 10-K for the year ended December 31, 2008, filed February
26, 2009.)
|
|
10
|
.3
|
|
Fannie Mae Elective Deferred Compensation Plan II
(Incorporated by reference to Exhibit 10.7 to Fannie Maes
Annual Report on Form 10-K for the year ended December 31, 2007,
filed February 27, 2008.)
|
|
10
|
.4
|
|
Amendment to Fannie Mae Elective Deferred Compensation Plan II,
effective April 29, 2008 (Incorporated by reference to
Exhibit 10.1 to Fannie Maes Quarterly Report on Form 10-Q,
filed August 8, 2008.)
|
|
10
|
.5
|
|
Amendment to Fannie Mae Elective Deferred Compensation Plan II,
effective October 27, 2008 (Incorporated by reference to
Exhibit 10.10 to Fannie Maes Annual Report on Form 10-K
for the year ended December 31, 2008, filed February 26, 2009.)
|
|
10
|
.6
|
|
Fannie Mae Executive Life Insurance Program, as amended April 9,
2008 (Incorporated by reference Exhibit 10.3 to Fannie
Maes Quarterly Report on Form 10-Q, filed August 8, 2008.)
|
|
10
|
.7
|
|
Description of 2009 compensation and components of 2010
compensation (Incorporated by reference to
Compensation Discussion and AnalysisElements of 2009
Compensation and Components of 2010
Compensation and Changes from 2009 Compensation
Arrangements in Item 11 of Fannie Maes Annual Report
on Form 10-K for the year ended December 31, 2009.)
|
|
10
|
.8
|
|
Compensation Repayment Provisions (Incorporated by
reference to Exhibit 99.1 to Fannie Maes Current Report on
Form 8-K, filed December 24, 2009.)
|
|
10
|
.9
|
|
Long-Term Incentive Plan, effective December 16, 2009
|
|
10
|
.10
|
|
Deferred Pay Plan, effective December 16, 2009
|
|
10
|
.11
|
|
Description of Fannie Maes compensatory arrangements with
its non-employee directors for the year ended December 31,
2009 (Incorporated by reference to information under the
heading Director Compensation in Item 11 of Fannie
Maes Annual Report on Form 10-K, for the year ended
December 31, 2009.)
|
|
10
|
.12
|
|
Fannie Mae Form of Indemnification Agreement for directors and
officers of Fannie Mae (Incorporated by reference to Exhibit
10.15 to Fannie Maes Annual Report on Form 10-K for the
year ended December 31, 2008, filed February 26, 2009.)
|
|
10
|
.13
|
|
Federal National Mortgage Association Supplemental Pension Plan,
as amended November 20, 2007 (Incorporated by reference to
Exhibit 10.10 to Fannie Maes Annual Report on Form 10-K
for the year ended December 31, 2007, filed February 27, 2008.)
|
E-2
|
|
|
|
|
Item
|
|
Description
|
|
|
10
|
.14
|
|
Amendment to Fannie Mae Supplemental Pension Plan for Internal
Revenue Code Section 409A, effective January 1, 2009
(Incorporated by reference to Exhibit 10.11 to Fannie Maes
Annual Report on Form 10-K for the year ended December 31, 2007,
filed February 27, 2008.)
|
|
10
|
.15
|
|
Amendment to Fannie Mae Supplemental Pension Plan, executed
December 22, 2008 (Incorporated by reference to Exhibit
10.18 to Fannie Maes Annual Report on Form 10-K for the
year ended December 31, 2008, filed February 26, 2009.)
|
|
10
|
.16
|
|
Fannie Mae Supplemental Pension Plan of 2003, as amended
November 20, 2007 (Incorporated by reference to Exhibit
10.12 to Fannie Maes Annual Report on Form 10-K for the
year ended December 31, 2007, filed February 27, 2008.)
|
|
10
|
.17
|
|
Amendment to Fannie Mae Supplemental Pension Plan of 2003 for
Internal Revenue Code Section 409A, effective January 1,
2009 (Incorporated by reference to Exhibit 10.13 to Fannie
Maes Annual Report on Form 10-K for the year ended
December 31, 2007, filed February 27, 2008.)
|
|
10
|
.18
|
|
Amendment to Fannie Mae Supplemental Pension Plan of 2003 for
Internal Revenue Code Section 409A, adopted December 22,
2008 (Incorporated by reference to Exhibit 10.21 to Fannie
Maes Annual Report on Form 10-K for the year ended
December 31, 2008, filed February 26, 2009.)
|
|
10
|
.19
|
|
Executive Pension Plan of the Federal National Mortgage
Association as amended and restated (Incorporated by
reference to Exhibit 10.10 to Fannie Maes registration
statement on form 10, filed March 31, 2003)
|
|
10
|
.20
|
|
Amendment to the Executive Pension Plan of the Federal National
Mortgage Association, as amended and restated, effective March
1, 2007 (Incorporated by reference to Exhibit 10.20 to
Fannie Maes Annual Report on Form 10-K for the year ended
December 31, 2005, filed May 2, 2007.)
|
|
10
|
.21
|
|
Amendment to Fannie Mae Executive Pension Plan, effective
November 20, 2007 (Incorporated by reference to Exhibit
10.16 to Fannie Maes Annual Report on Form 10-K for the
year ended December 31, 2007, filed February 27, 2008.)
|
|
10
|
.22
|
|
Amendment to the Executive Pension Plan of the Federal National
Mortgage Association, effective January 1, 2008
(Incorporated by reference to Exhibit 10.25 to Fannie Maes
Annual Report on Form 10-K for the year ended December 31, 2008,
filed February 26, 2009.)
|
|
10
|
.23
|
|
Amendment to the Executive Pension Plan of the Federal National
Mortgage Association, effective December 16, 2009
|
|
10
|
.24
|
|
Fannie Mae Annual Incentive Plan, as amended December 10,
2007 (Incorporated by reference to Exhibit 10.17 to Fannie
Maes Annual Report on Form 10-K for the year ended
December 31, 2007, filed February 27, 2008.)
|
|
10
|
.25
|
|
Fannie Mae Stock Compensation Plan of 2003, as amended through
December 14, 2007 (Incorporated by reference to Exhibit
10.18 to Fannie Maes Annual Report on Form 10-K for the
year ended December 31, 2007, filed February 27, 2008.)
|
|
10
|
.26
|
|
Amendment to Fannie Mae Stock Compensation Plan of 2003, as
amended, for Internal Revenue Code Section 409A, adopted
December 22, 2008 (Incorporated by reference to Exhibit
10.28 to Fannie Maes Annual Report on Form 10-K for the
year ended December 31, 2008, filed February 26, 2009.)
|
|
10
|
.27
|
|
Fannie Mae Stock Compensation Plan of 1993 (Incorporated
by reference to Exhibit 10.18 to Fannie Maes Annual Report
on Form 10-K for the year ended December 31, 2004, filed
December 6, 2006.)
|
|
10
|
.28
|
|
2009 Amendment to Fannie Mae Stock Compensation Plans of 1993
and 2003 (Incorporated by reference to Exhibit 10.1 to
Fannie Maes Quarterly Report on Form 10-Q, filed November
5, 2009.)
|
|
10
|
.29
|
|
Fannie Mae Procedures for Deferral and Diversification of
Awards, as amended effective December 10, 2007
(Incorporated by reference to Exhibit 10.30 to Fannie Maes
Annual Report on Form 10-K for the year ended December 31, 2008,
filed February 26, 2009.)
|
|
10
|
.30
|
|
Fannie Mae Supplemental Retirement Savings Plan, as amended
through April 29, 2008 (Incorporated by reference to
Exhibit 10.2 to Fannie Maes Quarterly Report on Form 10-Q,
filed August 8, 2008.)
|
E-3
|
|
|
|
|
Item
|
|
Description
|
|
|
10
|
.31
|
|
Amendment to Fannie Mae Supplemental Retirement Savings Plan,
effective October 8, 2008 (Incorporated by reference to
Exhibit 10.32 to Fannie Maes Annual Report on Form 10-K
for the year ended December 31, 2008, filed February 26, 2009.)
|
|
10
|
.32
|
|
Directors Charitable Award Program (Incorporated by
reference to Exhibit 10.17 to Fannie Maes registration
statement on Form 10, filed March 31, 2003.)
|
|
10
|
.33
|
|
Form of Nonqualified Stock Option Grant Award Document
|
|
10
|
.34
|
|
Form of Restricted Stock Award Document (Incorporated by
reference to Exhibit 99.1 to Fannie Maes Current Report on
Form 8-K, filed January 26, 2007.)
|
|
10
|
.35
|
|
Form of Restricted Stock Units Award Document adopted January
23, 2008 (Incorporated by reference to Exhibit 10.27 to
Fannie Maes Annual Report on Form 10-K for the year ended
December 31, 2007, filed February 27, 2008.)
|
|
10
|
.36
|
|
Form of Restricted Stock Units Award Document
(Incorporated by reference to Exhibit 99.2 to Fannie Maes
Current Report on Form 8-K, filed January 26, 2007.)
|
|
10
|
.37
|
|
Form of Nonqualified Stock Option Grant Award Document for
Non-Management Directors
|
|
10
|
.38
|
|
Lending Agreement, dated September 19, 2008, between the U.S.
Treasury and Fannie Mae (Incorporated by reference to
Exhibit 10.4 to Fannie Maes Quarterly Report on Form 10-Q,
filed November 10, 2008.)
|
|
10
|
.39
|
|
Senior Preferred Stock Purchase Agreement dated as of September
7, 2008, as amended and restated on September 26, 2008, between
the United States Department of the Treasury and Federal
National Mortgage Association (Incorporated by reference Exhibit
4.20 to Fannie Maes Quarterly Report on Form 10-Q for the
quarter ended September 30, 3008.)
|
|
10
|
.40
|
|
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.)
|
|
10
|
.41
|
|
Second Amendment to Amended and Restated Senior Preferred Stock
Purchase Agreement, dated as of December 24, 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 4.1 to Fannie Maes Current Report on
Form 8-K, filed December 30, 2009.)
|
|
10
|
.42
|
|
Letters, dated September 1, 2005, setting forth an agreement
between Fannie Mae and OFHEO (Incorporated by reference to
Exhibit 10.1 to Fannie Maes Current Report on Form 8-K,
filed September 8, 2005.)
|
|
10
|
.43
|
|
Consent of Defendant Fannie Mae with Securities and Exchange
Commission, dated May 23, 2006 (Incorporated by reference to
Exhibit 10.2 to Fannie Maes Current Report on Form 8-K,
filed May 30, 2006.)
|
|
10
|
.44
|
|
Letter Agreement between Fannie Mae and Timothy J. Mayopoulos,
dated March 9, 2009
|
|
10
|
.45
|
|
Memorandum of Understanding among the Department of the
Treasury, the Federal Housing Finance Agency, the Federal
National Mortgage Association, and the Federal Home Loan
Mortgage Corporation, dated October 19, 2009 (Incorporated by
reference to Exhibit 99.1 to Fannie Maes Current Report on
Form 8-K, filed October 23, 2009.)
|
|
12
|
.1
|
|
Statement re: computation of ratios to earnings to fixed charges
|
|
12
|
.2
|
|
Statement re: computation of ratios of earnings to combined
fixed charges and preferred stock dividends
|
|
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
|
E-4
|
|
|
|
|
Item
|
|
Description
|
|
|
99
|
.1
|
|
New Issue Bond Program Agreement by and among United States
Department of the Treasury, Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation, dated as
of December 9, 2009
|
|
99
|
.2
|
|
New Issue Bond Program Agreement by and among United States
Department of the Treasury, Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation, dated as
of December 18, 2009±
|
|
99
|
.3
|
|
Form of Settlement Agreement among Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, United
States Department of the Treasury, the participating Housing
Finance Agency and U.S. Bank National Association, dated as of
December 9, 2009
|
|
99
|
.4
|
|
Form of Settlement Agreement among Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, United
States Department of the Treasury, the participating Housing
Finance Agency and U.S. Bank National Association, dated as of
December 18, 2009±
|
|
99
|
.5
|
|
Form of Agreement to Purchase Participation by and among U.S.
Department of the Treasury, Fannie Mae and Federal Home Loan
Mortgage Corporation, dated as of December 4, 2009
|
|
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. |
|
|
|
|
|
This exhibit is a management contract or compensatory plan or
arrangement. |
|
± |
|
Exhibit 99.2 and Exhibit 99.4 are not filed because
they are substantially identical in all material respects to
Exhibit 99.1 and Exhibit 99.3, respectively, except as
to the date of execution, the settlement date and deemed closing
date. |
Documents filed as Exhibits 99 in this exhibit list relate
to the implementation of the Memorandum of Understanding filed
as Exhibit 10.46.
E-5
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
Financial Statements
|
|
|
F-3
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-8
|
|
|
|
|
F-8
|
|
|
|
|
F-40
|
|
|
|
|
F-44
|
|
|
|
|
F-49
|
|
|
|
|
F-51
|
|
|
|
|
F-57
|
|
|
|
|
F-62
|
|
|
|
|
F-67
|
|
|
|
|
F-68
|
|
|
|
|
F-72
|
|
|
|
|
F-79
|
|
|
|
|
F-82
|
|
|
|
|
F-83
|
|
|
|
|
F-85
|
|
|
|
|
F-94
|
|
|
|
|
F-99
|
|
|
|
|
F-106
|
|
|
|
|
F-108
|
|
|
|
|
F-113
|
|
|
|
|
F-125
|
|
|
|
|
F-129
|
|
|
|
|
F-132
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Fannie Mae:
We have audited the accompanying consolidated balance sheets of
Fannie Mae and consolidated entities (In conservatorship) (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations, cash flows,
and changes in stockholders equity (deficit) for each of
the three years in the period ended December 31, 2009.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Fannie Mae and consolidated entities (In conservatorship) as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, on April 1, 2009, the Company adopted the
Financial Accounting Standards Board (FASB) modified standard on
the model for assessing
other-than-temporary
impairments, applicable to existing and new debt securities.
As discussed in Note 19 to the consolidated financial
statements, the Company adopted the fair value measurement
guidance on January 1, 2008 that defines fair value,
establishes a framework for measuring fair value, expands
disclosures around fair value measurements and allows companies
the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and
liabilities.
As also discussed in Note 1 to the consolidated financial
statements, the Company is currently under the control of its
conservator and regulator, the Federal Housing Finance Agency
(FHFA). Further, the Company directly and indirectly
receives substantial support from various agencies of the United
States Government, including the Federal Reserve, the United
States Department of Treasury, and FHFA. The Company is
dependent upon the continued support of the United States
Government, various United States Government agencies and the
Companys conservator and regulator, FHFA.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 26, 2010 expressed an adverse
opinion on the Companys internal control over financial
reporting because of material weaknesses.
/s/ Deloitte &
Touche LLP
Washington, DC
February 26, 2010
F-2
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
6,812
|
|
|
$
|
17,933
|
|
Restricted cash
|
|
|
3,070
|
|
|
|
529
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
53,684
|
|
|
|
57,418
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
Trading, at fair value (includes Fannie Mae MBS of $74,750 and
$58,006, respectively)
|
|
|
111,939
|
|
|
|
90,806
|
|
Available-for-sale,
at fair value (includes Fannie Mae MBS of $154,419 and $176,244,
respectively, and securities pledged as collateral that may be
sold or repledged of $1,148 and $720, respectively)
|
|
|
237,728
|
|
|
|
266,488
|
|
|
|
|
|
|
|
|
|
|
Total investments in securities
|
|
|
349,667
|
|
|
|
357,294
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or fair value
|
|
|
18,462
|
|
|
|
13,270
|
|
Loans held for investment, at amortized cost (includes loans
pledged as collateral that may be sold or repledged of $1,947 as
of December 31, 2009)
|
|
|
386,024
|
|
|
|
415,065
|
|
Allowance for loan losses
|
|
|
(10,461
|
)
|
|
|
(2,923
|
)
|
|
|
|
|
|
|
|
|
|
Total loans held for investment, net of allowance
|
|
|
375,563
|
|
|
|
412,142
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
394,025
|
|
|
|
425,412
|
|
Advances to lenders
|
|
|
5,449
|
|
|
|
5,766
|
|
Accrued interest receivable
|
|
|
4,293
|
|
|
|
3,816
|
|
Acquired property, net
|
|
|
9,142
|
|
|
|
6,918
|
|
Derivative assets, at fair value
|
|
|
1,474
|
|
|
|
869
|
|
Guaranty assets
|
|
|
8,356
|
|
|
|
7,043
|
|
Deferred tax assets, net
|
|
|
909
|
|
|
|
3,926
|
|
Partnership investments
|
|
|
2,372
|
|
|
|
9,314
|
|
Servicer and MBS trust receivable
|
|
|
18,329
|
|
|
|
6,482
|
|
Other assets
|
|
|
11,559
|
|
|
|
9,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
869,141
|
|
|
$
|
912,404
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY (DEFICIT)
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
4,980
|
|
|
|
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)
|
|
|
200,437
|
|
|
|
330,991
|
|
Long-term debt (includes debt at fair value of $3,274 and
$21,565, respectively)
|
|
|
574,117
|
|
|
|
539,402
|
|
Derivative liabilities, at fair value
|
|
|
1,029
|
|
|
|
2,715
|
|
Reserve for guaranty losses (includes $4,772 and $1,946,
respectively, related to Fannie Mae MBS included in Investments
in securities)
|
|
|
54,430
|
|
|
|
21,830
|
|
Guaranty obligations (includes $595 and $755, respectively,
related to Fannie Mae MBS included in Investments in securities)
|
|
|
13,996
|
|
|
|
12,147
|
|
Partnership liabilities
|
|
|
2,541
|
|
|
|
3,243
|
|
Servicer and MBS trust payable
|
|
|
25,872
|
|
|
|
6,350
|
|
Other liabilities
|
|
|
7,020
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
884,422
|
|
|
|
927,561
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 20)
|
|
|
|
|
|
|
|
|
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Fannie Mae stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Senior preferred stock, 1,000,000 shares issued and
outstanding
|
|
|
60,900
|
|
|
|
1,000
|
|
Preferred stock, 700,000,000 shares are
authorized579,735,457 and 597,071,401 shares issued
|
|
|
|
|
|
|
|
|
and outstanding, respectively
|
|
|
20,348
|
|
|
|
21,222
|
|
Common stock, no par value, no maximum
authorization1,265,674,761 and 1,238,880,988 shares
|
|
|
|
|
|
|
|
|
issued, respectively; 1,113,358,051 and
1,085,424,213 shares outstanding, respectively
|
|
|
664
|
|
|
|
650
|
|
Additional paid-in capital
|
|
|
2,083
|
|
|
|
3,621
|
|
Accumulated deficit
|
|
|
(90,237
|
)
|
|
|
(26,790
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,732
|
)
|
|
|
(7,673
|
)
|
Treasury stock, at cost, 152,316,710 and
153,456,775 shares, respectively
|
|
|
(7,398
|
)
|
|
|
(7,344
|
)
|
|
|
|
|
|
|
|
|
|
Total Fannie Mae stockholders deficit
|
|
|
(15,372
|
)
|
|
|
(15,314
|
)
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
91
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
Total deficit
|
|
|
(15,281
|
)
|
|
|
(15,157
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit)
|
|
|
869,141
|
|
|
$
|
912,404
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
3,859
|
|
|
$
|
5,878
|
|
|
$
|
2,051
|
|
Available-for-sale
securities
|
|
|
13,618
|
|
|
|
13,214
|
|
|
|
19,442
|
|
Mortgage loans
|
|
|
21,521
|
|
|
|
22,692
|
|
|
|
22,218
|
|
Other
|
|
|
357
|
|
|
|
1,339
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
39,355
|
|
|
|
43,123
|
|
|
|
44,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
2,306
|
|
|
|
7,815
|
|
|
|
8,999
|
|
Long-term debt
|
|
|
22,539
|
|
|
|
26,526
|
|
|
|
31,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
24,845
|
|
|
|
34,341
|
|
|
|
40,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
14,510
|
|
|
|
8,782
|
|
|
|
4,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income (includes imputed interest of $1,333, $1,423
and $1,278, respectively)
|
|
|
7,211
|
|
|
|
7,621
|
|
|
|
5,071
|
|
Losses on certain guaranty contracts
|
|
|
|
|
|
|
|
|
|
|
(1,424
|
)
|
Trust management income
|
|
|
40
|
|
|
|
261
|
|
|
|
588
|
|
Investment gains (losses), net
|
|
|
1,458
|
|
|
|
(246
|
)
|
|
|
(53
|
)
|
Other-than-temporary
impairments
|
|
|
(9,057
|
)
|
|
|
(6,974
|
)
|
|
|
(814
|
)
|
Less: Noncredit portion of
other-than-temporary
impairments recognized in
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive loss
|
|
|
(804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
other-than-temporary
impairments
|
|
|
(9,861
|
)
|
|
|
(6,974
|
)
|
|
|
(814
|
)
|
Fair value losses, net
|
|
|
(2,811
|
)
|
|
|
(20,129
|
)
|
|
|
(4,668
|
)
|
Debt extinguishment losses, net
|
|
|
(325
|
)
|
|
|
(222
|
)
|
|
|
(47
|
)
|
Losses from partnership investments
|
|
|
(6,735
|
)
|
|
|
(1,554
|
)
|
|
|
(1,005
|
)
|
Fee and other income
|
|
|
733
|
|
|
|
772
|
|
|
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest loss
|
|
|
(10,290
|
)
|
|
|
(20,471
|
)
|
|
|
(1,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,133
|
|
|
|
1,032
|
|
|
|
1,370
|
|
Professional services
|
|
|
684
|
|
|
|
529
|
|
|
|
851
|
|
Occupancy expenses
|
|
|
205
|
|
|
|
227
|
|
|
|
263
|
|
Other administrative expenses
|
|
|
185
|
|
|
|
191
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
2,207
|
|
|
|
1,979
|
|
|
|
2,669
|
|
Provision for credit losses
|
|
|
72,626
|
|
|
|
27,951
|
|
|
|
4,564
|
|
Foreclosed property expense
|
|
|
910
|
|
|
|
1,858
|
|
|
|
448
|
|
Other expenses
|
|
|
1,484
|
|
|
|
1,093
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
77,227
|
|
|
|
32,881
|
|
|
|
8,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary losses
|
|
|
(73,007
|
)
|
|
|
(44,570
|
)
|
|
|
(5,147
|
)
|
Provision (benefit) for federal income taxes
|
|
|
(985
|
)
|
|
|
13,749
|
|
|
|
(3,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary losses
|
|
|
(72,022
|
)
|
|
|
(58,319
|
)
|
|
|
(2,056
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(409
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(72,022
|
)
|
|
|
(58,728
|
)
|
|
|
(2,071
|
)
|
Less: Net loss attributable to the noncontrolling interest
|
|
|
53
|
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
|
(71,969
|
)
|
|
|
(58,707
|
)
|
|
|
(2,050
|
)
|
Preferred stock dividends and issuance costs at redemption
|
|
|
(2,474
|
)
|
|
|
(1,069
|
)
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(74,443
|
)
|
|
$
|
(59,776
|
)
|
|
$
|
(2,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per shareBasic and Diluted
|
|
$
|
(13.11
|
)
|
|
$
|
(24.04
|
)
|
|
$
|
(2.63
|
)
|
Cash dividends per common share
|
|
$
|
|
|
|
$
|
0.75
|
|
|
$
|
1.90
|
|
Weighted-average common shares outstandingBasic and Diluted
|
|
|
5,680
|
|
|
|
2,487
|
|
|
|
973
|
|
See Notes to Consolidated Financial Statements
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(72,022
|
)
|
|
$
|
(58,728
|
)
|
|
$
|
(2,071
|
)
|
Reconciliation of net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of investment cost basis adjustments
|
|
|
(687
|
)
|
|
|
(400
|
)
|
|
|
(391
|
)
|
Amortization of debt cost basis adjustments
|
|
|
3,255
|
|
|
|
8,589
|
|
|
|
9,775
|
|
Provision for credit losses
|
|
|
72,626
|
|
|
|
27,951
|
|
|
|
4,564
|
|
Valuation losses
|
|
|
4,530
|
|
|
|
13,964
|
|
|
|
612
|
|
Debt extinguishment losses, net
|
|
|
325
|
|
|
|
222
|
|
|
|
47
|
|
Debt foreign currency transaction (gains) losses, net
|
|
|
173
|
|
|
|
(230
|
)
|
|
|
190
|
|
Losses on certain guaranty contracts
|
|
|
|
|
|
|
|
|
|
|
1,424
|
|
Losses from partnership investments
|
|
|
6,735
|
|
|
|
1,554
|
|
|
|
1,005
|
|
Current and deferred federal income taxes
|
|
|
(1,919
|
)
|
|
|
12,904
|
|
|
|
(3,465
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
409
|
|
|
|
15
|
|
Derivatives fair value adjustments
|
|
|
(1,105
|
)
|
|
|
(1,239
|
)
|
|
|
4,289
|
|
Purchases of loans held for sale
|
|
|
(109,684
|
)
|
|
|
(56,768
|
)
|
|
|
(34,047
|
)
|
Proceeds from repayments of loans held for sale
|
|
|
2,413
|
|
|
|
617
|
|
|
|
594
|
|
Net decrease in trading securities, excluding non-cash transfers
|
|
|
11,976
|
|
|
|
72,689
|
|
|
|
62,699
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty assets
|
|
|
(1,072
|
)
|
|
|
2,089
|
|
|
|
(5
|
)
|
Guaranty obligations
|
|
|
(903
|
)
|
|
|
(5,312
|
)
|
|
|
(630
|
)
|
Other, net
|
|
|
(550
|
)
|
|
|
(2,458
|
)
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(85,909
|
)
|
|
|
15,853
|
|
|
|
42,949
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of trading securities held for investment
|
|
|
(48,659
|
)
|
|
|
(7,635
|
)
|
|
|
|
|
Proceeds from maturities of trading securities held for
investment
|
|
|
12,918
|
|
|
|
9,530
|
|
|
|
|
|
Proceeds from sales of trading securities held for investment
|
|
|
39,261
|
|
|
|
2,823
|
|
|
|
|
|
Purchases of
available-for-sale
securities
|
|
|
(165,103
|
)
|
|
|
(147,337
|
)
|
|
|
(126,200
|
)
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
48,096
|
|
|
|
33,369
|
|
|
|
123,462
|
|
Proceeds from sales of
available-for-sale
securities
|
|
|
306,598
|
|
|
|
146,630
|
|
|
|
76,055
|
|
Purchases of loans held for investment
|
|
|
(52,148
|
)
|
|
|
(63,097
|
)
|
|
|
(76,549
|
)
|
Proceeds from repayments of loans held for investment
|
|
|
57,142
|
|
|
|
49,328
|
|
|
|
56,617
|
|
Advances to lenders
|
|
|
(79,163
|
)
|
|
|
(81,483
|
)
|
|
|
(79,186
|
)
|
Proceeds from disposition of acquired property
|
|
|
22,667
|
|
|
|
10,905
|
|
|
|
5,714
|
|
Reimbursements to servicers for loan advances
|
|
|
(27,503
|
)
|
|
|
(15,282
|
)
|
|
|
(4,585
|
)
|
Contributions to partnership investments
|
|
|
(688
|
)
|
|
|
(1,507
|
)
|
|
|
(3,059
|
)
|
Proceeds from partnership investments
|
|
|
87
|
|
|
|
1,042
|
|
|
|
1,043
|
|
Net change in federal funds sold and securities purchased under
agreements to resell
|
|
|
4,230
|
|
|
|
(9,793
|
)
|
|
|
(38,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
117,735
|
|
|
|
(72,507
|
)
|
|
|
(65,614
|
)
|
Cash flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
1,641,119
|
|
|
|
1,913,685
|
|
|
|
1,743,852
|
|
Payments to redeem short-term debt
|
|
|
(1,773,977
|
)
|
|
|
(1,824,511
|
)
|
|
|
(1,687,570
|
)
|
Proceeds from issuance of long-term debt
|
|
|
289,864
|
|
|
|
243,557
|
|
|
|
193,238
|
|
Payments to redeem long-term debt
|
|
|
(257,329
|
)
|
|
|
(267,225
|
)
|
|
|
(232,978
|
)
|
Repurchase of common and preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,105
|
)
|
Proceeds from issuance of common and preferred stock
|
|
|
|
|
|
|
7,211
|
|
|
|
8,846
|
|
Payments of cash dividends on senior preferred stock to Treasury
|
|
|
(2,470
|
)
|
|
|
(31
|
)
|
|
|
|
|
Payments of cash dividends on common and preferred stock
|
|
|
|
|
|
|
(1,774
|
)
|
|
|
(2,483
|
)
|
Proceeds from senior preferred stock purchase agreement with
Treasury
|
|
|
59,900
|
|
|
|
|
|
|
|
|
|
Net change in federal funds purchased and securities sold under
agreements to repurchase
|
|
|
(54
|
)
|
|
|
(266
|
)
|
|
|
1,561
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(42,947
|
)
|
|
|
70,646
|
|
|
|
23,367
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(11,121
|
)
|
|
|
13,992
|
|
|
|
702
|
|
Cash and cash equivalents at beginning of period
|
|
|
17,933
|
|
|
|
3,941
|
|
|
|
3,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,812
|
|
|
$
|
17,933
|
|
|
$
|
3,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
26,344
|
|
|
$
|
35,959
|
|
|
$
|
40,645
|
|
Income taxes
|
|
|
876
|
|
|
|
845
|
|
|
|
1,888
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization-related transfers from mortgage loans held for
sale to investments in securities
|
|
$
|
119,151
|
|
|
$
|
40,079
|
|
|
$
|
27,707
|
|
Net transfers of loans held for investment to loans held for sale
|
|
|
7,334
|
|
|
|
(13,523
|
)
|
|
|
(4,271
|
)
|
Net consolidation transfers from investments in securities to
mortgage loans held for sale
|
|
|
9,335
|
|
|
|
(1,429
|
)
|
|
|
(260
|
)
|
Net transfers from
available-for-sale
securities to mortgage loans held for sale
|
|
|
1,918
|
|
|
|
2,904
|
|
|
|
514
|
|
Transfers from advances to lenders to investments in securities
(including transfers to trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
of $10,012, $40,660 and $70,156 for 2009, 2008, and 2007,
respectively)
|
|
|
77,191
|
|
|
|
83,534
|
|
|
|
71,801
|
|
Net consolidation-related transfers from investments in
securities to mortgage loans held for investment
|
|
|
3,929
|
|
|
|
(7,983
|
)
|
|
|
(7,365
|
)
|
Net mortgage loans acquired by assuming debt
|
|
|
|
|
|
|
167
|
|
|
|
2,756
|
|
Net transfers from mortgage loans to acquired property
|
|
|
5,707
|
|
|
|
4,272
|
|
|
|
3,025
|
|
Transfers to trading securities from the effect of adopting the
FASB guidance on the fair value option for
|
|
|
|
|
|
|
|
|
|
|
|
|
financial instruments
|
|
|
|
|
|
|
56,217
|
|
|
|
|
|
Issuance of senior preferred stock and warrant to purchase
common stock to Treasury
|
|
|
|
|
|
|
4,518
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
(Dollars and shares in
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Stock
|
|
|
Interest
|
|
|
(Deficit)
|
|
|
Balance as of December 31, 2006
|
|
|
|
|
|
|
132
|
|
|
|
972
|
|
|
$
|
|
|
|
$
|
9,108
|
|
|
$
|
593
|
|
|
$
|
1,942
|
|
|
$
|
37,955
|
|
|
$
|
(445
|
)
|
|
$
|
(7,647
|
)
|
|
$
|
136
|
|
|
$
|
41,642
|
|
Cumulative effect from the adoption of FASB guidance on the
uncertainty in income taxes, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2007, adjusted
|
|
|
|
|
|
|
132
|
|
|
|
972
|
|
|
|
|
|
|
|
9,108
|
|
|
|
593
|
|
|
|
1,942
|
|
|
|
37,959
|
|
|
|
(445
|
)
|
|
|
(7,647
|
)
|
|
|
136
|
|
|
|
41,646
|
|
Change in investment in noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,050
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(2,071
|
)
|
Other comprehensive income, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in net unrealized losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for sale securities (net of tax of $578)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,073
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,073
|
)
|
Reclassification adjustment for other-than- temporary
impairments recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in net loss (net of tax of $285)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
Reclassification adjustment for gains included in net loss (net
of tax of $282)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(523
|
)
|
|
|
|
|
|
|
|
|
|
|
(523
|
)
|
Unrealized gains on guaranty assets and guaranty fee
buy-ups (net
of tax of $13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Amortization of net cash flow hedging losses (net of tax of $2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Prior service cost and actuarial gains, net of amortization for
defined benefit plans (net of tax of $73)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,988
|
)
|
Common stock dividends ($1.90 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,858
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(503
|
)
|
Preferred stock issued
|
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
8,905
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,811
|
|
Preferred stock redeemed
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,100
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the FASB guidance on the
fair value option for financial instruments and the FASB
guidance on fair value measurement, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
71
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,707
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(58,728
|
)
|
Other comprehensive loss, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in net unrealized losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for sale securities (net of tax of $5,395)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,020
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,020
|
)
|
Reclassification adjustment for other-than temporary impairments
recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in net loss (net of tax of $2,441)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,533
|
|
|
|
|
|
|
|
|
|
|
|
4,533
|
|
Reclassification adjustment for gains included in net loss (net
of tax of $36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
Unrealized losses on guaranty assets and guaranty fee
buy-ups
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
(342
|
)
|
Amortization of net cash flow hedging gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Prior service cost and actuarial loss, net of amortization for
defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,946
|
)
|
Common stock dividends ($0.75 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
Senior preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
Common stock issued
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,526
|
|
Common stock warrant issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,518
|
|
Preferred stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,038
|
)
|
Senior preferred stock issued
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Preferred stock issued
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
4,812
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,685
|
|
Conversion of convertible preferred stock into common stock
|
|
|
|
|
|
|
(10
|
)
|
|
|
16
|
|
|
|
|
|
|
|
(503
|
)
|
|
|
8
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury commitment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,518
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Stock
|
|
|
Interest
|
|
|
(Deficit)
|
|
|
Balance as of December 31, 2008
|
|
|
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 the FASB guidance on
other-than-temporary impairments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,520
|
|
|
|
(5,556
|
)
|
|
|
|
|
|
|
|
|
|
|
2,964
|
|
Change in investment in noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,969
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
(72,022
|
)
|
Other comprehensive loss, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in net unrealized losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for sale securities, (net of tax of $2,658)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,936
|
|
|
|
|
|
|
|
|
|
|
|
4,936
|
|
Reclassification adjustment for other-than- temporary
impairments recognized in net loss (net of tax of $3,441)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,420
|
|
|
|
|
|
|
|
|
|
|
|
6,420
|
|
Reclassification adjustment for gains included in net loss (net
of tax of $119)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
Unrealized gains on guaranty assets and guaranty fee
buy-ups
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
Amortization of net cash flow hedging gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Prior service cost and actuarial gains, net of amortization for
defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,525
|
)
|
Senior preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,470
|
)
|
Increase to senior preferred liquidation preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,900
|
|
Conversion of convertible preferred stock into common stock
|
|
|
|
|
|
|
(17
|
)
|
|
|
27
|
|
|
|
|
|
|
|
(874
|
)
|
|
|
14
|
|
|
|
860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
2
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
1
|
|
|
|
580
|
|
|
|
1,113
|
|
|
$
|
60,900
|
|
|
$
|
20,348
|
|
|
$
|
664
|
|
|
$
|
2,083
|
|
|
$
|
(90,237
|
)
|
|
$
|
(1,732
|
)
|
|
$
|
(7,398
|
)
|
|
$
|
91
|
|
|
$
|
(15,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
1.
|
Summary
of Significant Accounting Policies
|
Organization
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
the 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). 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. 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.
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 was available to us and the
other GSEs regulated by FHFA under identical terms until
December 31, 2009. We entered into a lending agreement with
Treasury pursuant to which Treasury established this secured
lending credit facility on September 19, 2008. The secured
lending facility terminated on December 31, 2009 in
accordance with its terms.
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 consenting to the companys placement
into conservatorship. After obtaining this consent, the Director
of FHFA appointed FHFA as our conservator in accordance with the
Federal Housing Enterprises Financial Safety and Soundness Act
of 1992, as amended by the 2008 Reform Act, (together, the
GSE Act). Under the GSE Act, 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.
F-8
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 February 26, 2010, the conservator has advised us
that it has not disaffirmed or repudiated any contracts we
entered into prior to its appointment as conservator. The GSE
Act requires FHFA to exercise its right to disaffirm or
repudiate most contracts within a reasonable period of time
after its appointment as conservator.
The conservator 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 GSE 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 February 26, 2010, 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 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
our business as we did before the conservatorship, or whether
the conservatorship will end in receivership. Under the GSE Act,
FHFA must place us into receivership if the Director of FHFA
makes a written determination that our assets are less than our
obligations (i.e., we have a net worth deficit) or if we
have not been paying our debts, in either case, for a period of
60 days. In addition, the Director of FHFA may place us in
receivership at his discretion 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 into receivership,
different assumptions would be required to determine the
carrying value of our assets, which could lead to substantially
different financial results.
Senior
Preferred Stock and Warrant Issued to Treasury
On September 7, 2008, we, through FHFA in its capacity as
conservator, entered into a senior preferred stock purchase
agreement with Treasury. The agreement was amended on
September 26, 2008, May 6, 2009 and December 24,
2009. Pursuant to the amended senior preferred stock purchase
agreement, Treasury has committed to provide us with funding as
needed to help us maintain a positive net worth thereby avoiding
the mandatory receivership trigger described above.
Treasurys maximum funding commitment to us under the
agreement is the greater of (a) $200 billion or
(b) $200 billion plus the cumulative amount of our net
worth deficit (the amount by which our total liabilities exceed
our total assets) as of the end of any and each calendar quarter
in 2010, 2011 and 2012, less any positive net worth as of
December 31, 2012. As consideration for Treasurys
funding commitment, we issued one million shares of senior
preferred stock and a warrant to purchase shares of our common
stock to Treasury. We also have agreed to pay Treasury a
quarterly commitment fee beginning on March 31, 2011.
Treasury, as holder of the senior preferred stock, is 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, which was
initially $1.0 billion but is subject to adjustment for
amounts Treasury pays to us pursuant to its funding commitment,
as well as any dividends that are not paid in cash for any
dividend period and any commitment fees that are not paid in
cash to Treasury or waived by Treasury. If at any time
F-9
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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, the dividend
rate will be 12% per year. We have received a total of
$59.9 billion to date under Treasurys funding
commitment and the Acting Director of FHFA has submitted a
request for an additional $15.3 billion from Treasury to
eliminate our net worth deficit as of December 31, 2009.
The aggregate liquidation preference of the senior preferred
stock was $60.9 billion as of December 31, 2009 and
will increase to $76.2 billion as a result of FHFAs
request on our behalf for funds to eliminate our net worth
deficit as of December 31, 2009.
On September 7, 2008, we issued a warrant to Treasury
giving it the right to purchase, at a nominal price, shares of
our common stock equal to 79.9% of the total common stock
outstanding on a fully diluted basis on the date Treasury
exercises the warrant. Treasury has the right to exercise the
warrant, in whole or in part, at any time on or before
September 7, 2028. We recorded the warrant at fair value in
our stockholders equity as a component of additional
paid-in-capital.
The fair value of the warrant was calculated using the
Black-Scholes Option Pricing Model. Since the warrant has an
exercise price of $0.00001 per share, the model is insensitive
to the risk-free rate and volatility assumptions used in the
calculation and the share value of the warrant is equal to the
price of the underlying common stock. We estimated that the fair
value of the warrant at issuance was $3.5 billion based on
the price of our common stock on September 8, 2008, which
was after the dilutive effect of the warrant had been reflected
in the market price. Subsequent changes in the fair value of the
warrant are not recognized in the financial statements. If the
warrant is exercised, the stated value of the common stock
issued will be reclassified as Common stock in our
consolidated balance sheets. Because the warrants exercise
price per share is considered non-substantive (compared to the
market price of our common stock), the warrant was determined to
have characteristics of non-voting common stock, and thus is
included in the computation of basic and diluted loss per share.
The weighted-average shares of common stock outstanding for the
year ended December 31, 2009 included shares of common
stock that would be issuable upon full exercise of the warrant
issued to Treasury for the year ended December 31, 2009.
Impact
of U.S. Government Support
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, FHFA and Treasury to eliminate our net
worth deficit, which avoids our being placed into receivership.
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.
We fund our business primarily through the issuance of
short-term and long-term debt securities in the domestic and
international capital markets. Because debt issuance is our
primary funding source, 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.
Our access to long-term debt funding through the unsecured debt
markets improved significantly in 2009. We believe that this
improvement was primarily due to actions taken by the federal
government to support us and the financial markets, including:
|
|
|
|
|
Treasurys funding commitment to us under the senior
preferred stock purchase agreement;
|
|
|
|
Treasurys credit facility that was available to us;
|
|
|
|
Federal Reserves active program to purchase debt
securities of Fannie Mae, the Federal Home Loan Mortgage
Corporation (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;
|
F-10
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
Treasurys agency MBS purchase program; and
|
|
|
|
Federal Reserve and Treasurys programs to support the
liquidity of the financial markets overall, including several
asset purchase programs and several asset financing programs.
|
Accordingly, we believe that continued federal government
support of our business and the financial markets, as well as
our status as a GSE, are essential to maintaining our access to
debt funding. 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
and continue as a going concern.
In September of 2009, the Federal Reserve announced that it will
gradually slow the pace of its purchase of debt securities and
mortgage-backed securities under these programs, originally
scheduled to expire on December 31, 2009, in order to
promote a smooth transition into the markets, and anticipates
that these purchases will be completed by the end of the first
quarter of 2010. In November of 2009, the Federal Reserve
announced that, under its agency debt purchase program, it would
purchase approximately $175 billion in agency debt
securities, somewhat less than the originally announced maximum
of up to $200 billion. On February 10, 2010, the Obama
Administration stated in its fiscal year 2011 budget proposal
that it was continuing to monitor the situation of Fannie Mae,
Freddie Mac and the Federal Home Loan Bank System and would
continue to provide updates on considerations for longer term
reform of Fannie Mae and Freddie Mac as appropriate. These
considerations may have a material impact on our ability to
issue debt or refinance existing debt as it becomes due and
hinder our ability to continue as a going concern.
The U.S. Government continues 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, Treasury generally has committed to provide us, on a
quarterly basis, amounts, if any, by which our total liabilities
exceed our total assets, as reflected on our consolidated
balance sheets, prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP). 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.
On December 24, 2009, Treasury announced an update on
initiatives established under the Housing and Economic Recovery
Act (HERA) of 2008, which supports housing market
stabilization and provides relief to struggling homeowners. The
Treasury announcement includes the following:
|
|
|
|
|
Ending the Treasury purchase program of MBS guaranteed by the
GSEs on December 31, 2009.
|
|
|
|
Terminating the Treasury credit facility established for Fannie
Mae, Freddie Mac and the Federal Home Loan Banks on
December 31, 2009.
|
|
|
|
Amending the senior preferred stock purchase agreement to allow
the cap on Treasurys purchase commitment to increase as
necessary to accommodate any cumulative reduction in our net
worth in calendar years 2010, 2011 and 2012.
|
|
|
|
Modifying the senior preferred stock purchase agreement to
provide us with additional flexibility to meet the requirement
to reduce our investment portfolio. The portfolio reduction
requirement for 2010 and after will be applied to the maximum
allowable size of the portfoliosor
$900 billionrather than the actual size of the
portfolios at the end of 2009. We are also required to limit the
amount of indebtedness that we can incur to 120% of the amount
of mortgage assets we are allowed to own.
|
|
|
|
Amending the senior preferred stock purchase agreement to delay
the date on which we are required to begin paying the Periodic
Commitment Fee by one year from March 31, 2010 to
March 31, 2011 and
|
F-11
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
make technical changes to the definitions of mortgage assets and
indebtedness to make compliance with the covenants of the senior
preferred stock purchase agreement less burdensome and more
transparent in light of impending accounting changes.
|
Basis
of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with GAAP. The accompanying 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.
Related
Parties
As a result of our issuance to Treasury of the warrant to
purchase shares of Fannie Mae common stock equal to 79.9% of the
total number of shares of Fannie Mae common stock, we and the
Treasury are deemed related parties. During 2009, Treasury
engaged us to serve as program administrator for the Home
Affordable Modification Program (HAMP). In addition,
Treasury held a $59.9 billion investment in our senior
preferred stock as of December 31, 2009.
In addition to the transactions described above, on
October 19, 2009, we entered into a memorandum of
understanding with Treasury, FHFA and Freddie Mac. The
memorandum of understanding set forth the terms under which we,
Freddie Mac and Treasury would provide assistance to state and
local housing finance agencies (HFAs) so that the
HFAs could continue to meet their mission of providing
affordable financing for both single-family and multifamily
housing. The memorandum of understanding contemplated providing
assistance to the HFAs through three separate assistance
programs: a temporary credit and liquidity facilities program, a
new issue bond program and a multifamily credit enhancement
program.
In December 2009, under the temporary credit and liquidity
facilities program, we provided $870 million of three-year
standby credit and liquidity support for outstanding variable
rate demand obligations issued by HFAs. Treasury has purchased
participation interests in the temporary credit and liquidity
facilities.
In December 2009, under the new issue bond program, we issued to
Treasury $3.5 billion of partially guaranteed pass-through
securities backed by new single-family and certain new
multifamily housing bonds issued by HFAs.
We are not participating in the multifamily credit enhancement
program.
FHFAs control of both us and Freddie Mac has caused us and
Freddie Mac to be related parties. No transactions outside of
normal business activities have occurred between us and Freddie
Mac. As of December 31, 2009 and 2008, we held Freddie Mac
mortgage-related securities with a fair value of
$42.6 billion and $33.9 billion, respectively, and
accrued interest receivable of $230 million and
$198 million, respectively. We recognized interest income
on Freddie Mac mortgage-related securities held by us of
$2.0 billion and $1.6 billion for the years ended
December 31, 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
Preparing consolidated financial statements in accordance with
GAAP requires management to make estimates and assumptions that
affect our reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities as of the date
of our consolidated financial statements, as well as our
reported amounts of revenues and expenses during the reporting
period. Management has made significant estimates in a variety
of
F-12
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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, and
other-than-temporary
impairment of investment securities and LIHTC partnerships.
Actual results could be different from these estimates. In the
fourth quarter of 2009 we updated our single-family loss
allowance model which resulted in a change in estimate to
decrease our loss reserve by approximately $800 million.
Principles
of Consolidation
If we determine that we have a controlling financial interest in
an entity, then we must consolidate the assets, liabilities and
noncontrolling interests of the entity in our consolidated
financial statements. A controlling financial interest typically
arises as a result of ownership of a majority of the voting
interests of an entity. We may also have a controlling financial
interest in an entity through an arrangement that does not
involve voting interests, such as a variable interest entity
(VIE). We evaluate entities deemed to be VIEs using
a risk and rewards model to determine whether we must
consolidate them. A VIE is an entity (1) that has total
equity at risk that is not sufficient to finance its activities
without additional subordinated financial support from other
entities, (2) where the group of equity holders does not
have the power to direct the activities of the entity that most
significantly impact the entitys economic performance, or
the obligation to absorb the entitys expected losses or
the right to receive the entitys expected residual
returns, or both, or (3) where the voting rights of some
investors are not proportional to their obligations to absorb
the expected losses of the entity, their rights to receive the
expected residual returns of the entity, or both, and
substantially all of the entitys activities either involve
or are conducted on behalf of an investor that has
disproportionately few voting rights.
In order to determine if an entity should be considered a VIE,
we first perform a qualitative analysis, which requires us to
make subjective decisions to complete our assessments. Among
other factors, we analyze the design of the entity, the
variability that the entity was designed to create and pass
along to its interest holders, the rights of the parties and the
purpose of the arrangement. If we cannot conclude after a
qualitative analysis whether an entity is a VIE, we perform a
quantitative analysis. Quantifying the variability of a
VIEs assets is complex and subjective, requiring analysis
of a significant number of possible future economic outcomes as
well as the probability of each outcome occurring.
If an entity is a VIE, we determine whether our variable
interest causes us to be considered the primary beneficiary of
the entitys expected losses or residual returns. We are
the primary beneficiary and are required to consolidate the
entity if we absorb the majority of expected losses or expected
residual returns, or both. In determining whether we are the
primary beneficiary, we evaluate the design of the entity,
including the risks that cause variability, the purpose for
which the entity was created, and the variability that the
entity was designed to pass along to its interest holders.
If we cannot conclude after qualitative analysis whether we are
the primary beneficiary, we perform a quantitative analysis,
using internal cash flow models, which may include Monte Carlo
simulations, to compute and allocate expected losses or residual
returns to each variable interest holder. We base the allocation
of expected cash flows upon the relative contractual rights and
preferences of each interest holder in the VIEs capital
structure. The result of each possible outcome is allocated to
the parties holding interests in the VIE and, based on the
allocation, a calculation is performed to determine which, if
any, is the primary beneficiary.
Specifically, quantitative or qualitative analyses were
performed on certain mortgage and asset-backed investment
trusts. These analyses considered whether the nature of our
variable interests exposed us to credit or prepayment risk, the
two primary drivers of expected losses for these VIEs. For those
mortgage-backed investment trusts that we evaluated using
quantitative analyses, we used internal models to generate Monte
Carlo simulations of cash flows associated with the different
credit, interest rate and housing price environments. Material
assumptions included our projections of interest rate and
housing prices, as well as our
F-13
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
expectations of prepayment, default and severity rates. The
projection of future cash flows is a subjective process
involving significant management judgment. This is primarily due
to the inherent uncertainties related to the interest rate and
housing price environment, as well as the actual credit
performance of the mortgage loans and securities that were held
by each investment trust. If we determined an investment trust
to be a VIE, we consolidated the investment trust when the
modeling resulted in our absorption of more than 50% of the
variability in the expected losses or expected residual returns.
We also quantitatively and qualitatively examined our LIHTC
partnerships and other limited partnerships that were considered
VIEs. Qualitative analyses considered the extent to which the
nature of our variable interest exposed us to losses. For
quantitative analyses, we also used internal cash flow models to
determine if these partnerships were VIEs and, if so, whether we
were the primary beneficiary. LIHTC partnerships are created by
third parties to finance construction of property, giving rise
to tax credits for these partnerships. Material assumptions
include the degree of development cost overruns related to the
construction of the building, the probability of the lender
foreclosing on the building, as well as an investors
ability to use the tax credits to offset taxable income. The
projection of these cash flows and probabilities thereof
requires significant management judgment because of the inherent
limitations that relate to the use of historical data for the
projection of future events. Additionally, we reviewed similar
assumptions and applied cash flow models to determine both VIE
status and primary beneficiary status for our other limited
partnership investments.
We are exempt from evaluating certain securitization trusts for
consolidation if the trusts meet the criteria of a qualified
special purpose entity (QSPE), and if we do not have
the unilateral ability to cause the trust to liquidate or change
the trusts QSPE status. The QSPE requirements
significantly limit the activities in which a QSPE may engage
and the types of assets and liabilities it may hold. Management
judgment is required to determine whether a trusts
activities meet the QSPE requirements. To the extent any trust
fails to meet these criteria, we would be required to
consolidate its assets and liabilities if we determine that we
are the primary beneficiary of the entity.
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
consolidated financial statements at fair value.
With our adoption of the most recent accounting standard on
business combinations effective 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 gains (losses), net
in our consolidated statements of operations. Prior to 2009, we
classified such differences as Extraordinary losses, net
of tax effect in our 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 a scope exception (for example, the entity is a QSPE
that we no longer have the unilateral ability to liquidate), we
deconsolidate the VIE.
Effective January 1, 2009 with our adoption of the
accounting standard on the treatment of noncontrolling interests
in consolidated financial statements, we began recording any
retained interests in a deconsolidated entity at its respective
fair values. Any difference between the fair values and the
previous carrying amounts of our investment in the entity is
recorded as Investment gains (losses), net in our
consolidated statements of operations. Prior to 2009, we
deconsolidated the entity by carrying over our net basis in the
consolidated assets and liabilities to our investment in the
entity.
F-14
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Portfolio
Securitizations
Portfolio securitizations involve the transfer of mortgage loans
or mortgage-related securities from our consolidated balance
sheets to a trust to create Fannie Mae MBS, real estate mortgage
investment conduits (REMICs) or other types of
beneficial interests. We evaluate a transfer of financial assets
via portfolio securitizations to determine whether the transfer
qualifies as a sale. Transfers of financial assets for which we
surrender control and receive compensation other than beneficial
interests in the transferred assets are recorded as sales.
When a transfer that qualifies as a sale is completed, we
derecognize all transferred assets. We allocate the previous
carrying amount of the transferred assets between the assets
sold and the retained interests, if any, in proportion to their
relative fair values at the date of transfer. We record a gain
or loss as a component of Investment gains (losses),
net in our consolidated statements of operations, which
represents the difference between the allocated carrying amount
of the assets sold and the proceeds from the sale, net of any
transaction costs and liabilities incurred, which may include a
recourse obligation for our financial guaranty. Retained
interests are primarily in the form of Fannie Mae MBS, REMIC
certificates, guaranty assets and master servicing assets
(MSAs). We separately describe the subsequent
accounting, as well as how we determine fair value, for our
retained interests in the Investments in Securities,
Guaranty Accounting, and Master
Servicing sections of this note. If a portfolio
securitization does not meet the criteria for sale treatment,
the transferred assets remain on our consolidated balance sheets
and we record a liability to the extent of any proceeds we
received in connection with such transfer.
We also enter into repurchase agreements, including dollar roll
repurchase agreements, which we account for as secured
borrowings. Refer to the Securities Purchased under
Agreements to Resell and Securities Sold under Agreements to
Repurchase section of this note for discussion of our
accounting policies related to these transfers.
Cash
and Cash Equivalents and Statements of Cash Flows
Short-term investments that have a maturity at the date of
acquisition of three months or less and are readily convertible
to known amounts of cash are generally considered cash
equivalents. We may pledge as collateral certain short-term
investments classified as cash equivalents.
We classify cash flows from trading securities based on their
nature and purpose. Prior to 2008, we classified cash flows of
all trading securities as operating activities. Following the
adoption of the updated accounting standard on the fair value
option for financial assets and financial liabilities in 2008,
we began to classify cash flows from trading securities that we
intend to hold for investment (the majority of our
mortgage-related trading securities) as investing activities and
cash flows from trading securities that we do not intend to hold
for investment (primarily our non-mortgage related securities)
as operating activities. We reflect the creation of Fannie Mae
MBS through either securitization of loans held for sale or
advances to lenders as a non-cash activity in our consolidated
statements of cash flows in the line items
Securitization-related transfers from mortgage loans held
for sale to investments in securities or Transfers
from advances to lenders to investments in securities,
respectively. Cash inflows from the sale of a Fannie Mae MBS
created through the securitization of loans held for sale are
reflected in the statement of cash flows based on the balance
sheet classification of the associated Fannie Mae MBS as either
Net decrease in trading securities, excluding non-cash
transfers, or Proceeds from sales of
available-for-sale
securities.
In the presentation of our consolidated statements of cash
flows, we present cash flows from derivatives that do not
contain financing elements, mortgage loans held for sale, and
guaranty fees, including
buy-up and
buy-down payments, as operating activities. We present cash
flows from federal funds sold and securities purchased under
agreements to resell as investing activities and cash flows from
federal funds purchased and
F-15
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
securities sold under agreements to repurchase as financing
activities. We classify cash flows related to dollar roll
transactions that do not meet the requirements to be accounted
for as secured borrowings as purchases and sales of securities
in investing activities.
Restricted
Cash
When we collect and hold cash that is due to certain Fannie Mae
MBS trusts in advance of our requirement to remit these amounts
to the trust, we record the collected cash amount as
Restricted cash in our consolidated balance sheets.
Additionally, we record Restricted cash as a result
of partnership restrictions related to certain consolidated
partnership funds. We also have restricted cash related to
certain collateral arrangements.
Securities
Purchased under Agreements to Resell and Securities Sold under
Agreements to Repurchase
When securities purchased under agreements to resell or
securities sold under agreements to repurchase resulting from
dollar roll transactions do not meet all of the conditions of a
secured financing, we account for the transactions as purchases
or sales, respectively. We treat securities purchased under
agreements to resell and securities sold under agreements to
repurchase as secured financing transactions when all of the
conditions have been met. We record these transactions at the
amounts at which the securities will be subsequently reacquired
or resold, including accrued interest.
Investments
in Securities
Securities
Classified as
Available-for-Sale
or Trading
We classify and account for our securities as either
available-for-sale
(AFS) or trading. We measure AFS securities at fair
value in our consolidated balance sheets, with unrealized gains
and losses included in Accumulated other comprehensive
loss (AOCI), net of applicable income taxes.
We recognize realized gains and losses on AFS securities when
securities are sold. We calculate the gains and losses using the
specific identification method and record them in
Investment gains (losses), net in our consolidated
statements of operations. We measure trading securities at fair
value in our consolidated balance sheets with unrealized and
realized gains and losses included as a component of Fair
value losses, net in our consolidated statements of
operations. We include interest and dividends on securities,
including amortization of the premium and discount at
acquisition, in our consolidated statements of operations. We
describe our amortization policy in the Amortization of
Cost Basis and Guaranty Price Adjustments section of this
note. When we receive multiple deliveries of securities on the
same day that are backed by the same pools of loans, we
calculate the specific cost of each security as the average
price of the trades that delivered those securities. Currently,
we do not have any securities classified as
held-to-maturity,
although we may elect to do so in the future.
We determine fair value using quoted market prices in active
markets for identical assets when available. If quoted market
prices in active markets for identical assets are not available,
we use quoted market prices for similar securities that we
adjust for observable or corroborated (i.e., information
purchased from third-party service providers) market
information. In the absence of observable or corroborated market
data, we use internally developed estimates, incorporating
market-based assumptions when such information is available.
Other-Than-Temporary
Impairment of Debt Securities
Prior to April 1, 2009, we considered a debt security to be
other-than-temporarily
impaired if its estimated fair value was less than its amortized
cost basis and we determined that it was probable that we would
be unable to collect all of the contractual principal and
interest payments or we did not intend to hold the security
until it recovered to its previous carrying amount. In making an
other-than-temporary
impairment assessment, we
F-16
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
considered many factors, including the severity and duration of
the impairment, recent events specific to the issuer
and/or the
industry to which the issuer belongs, external credit ratings
and recent downgrades, as well as our ability and intent to hold
such securities until recovery.
We considered guarantees, insurance contracts or other credit
enhancements (such as collateral) in determining whether it was
probable that we would be unable to collect all amounts due
according to the contractual terms of a debt security only if
(1) such guarantees, insurance contracts or other credit
enhancements provided for payments to be made solely to
reimburse us for failure of the issuer to satisfy its required
payment obligations, (2) such guarantees, insurance
contracts or other credit enhancements were contractually
attached to that security and (3) collection of the amounts
receivable under these agreements was deemed probable.
Guarantees, insurance contracts or other credit enhancements are
considered contractually attached if they are part of and trade
with the security upon transfer of the security to a third party.
When we determined that it was probable that we would not
collect all of the contractual principal and interest amounts
due or we determined that we did not have the ability or intent
to hold the security until recovery of an unrealized loss, we
identified the security as
other-than-temporarily
impaired. For all other securities in an unrealized loss
position, we had the positive intent and ability to hold such
securities until the earlier of full recovery or maturity.
When we determined an investment was
other-than-temporarily
impaired, we wrote down the cost basis of the investment to its
fair value and included the loss in
Other-than-temporary-impairments
in our consolidated statements of operations. The fair value of
the investment then became its new cost basis. We did not
increase the investments cost basis for subsequent
recoveries in fair value, which were recorded in AOCI.
In periods after we recognized an
other-than-temporary
impairment of debt securities, we used the prospective interest
method to recognize interest income. Under the prospective
interest method, we used the new cost basis and the expected
cash flows from the security to calculate the effective yield.
On April 1, 2009, we adopted the FASB modified standard on
the model for assessing
other-than-temporary
impairments, applicable to existing and new debt securities held
by us as of April 1, 2009. Under this new standard, 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, we recognize
in the consolidated statements of operations the entire
difference between the amortized cost basis of the security and
its fair value. 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 or it is not more likely than
not we will be required to sell the security before recovery. In
this case, we separate the difference between the amortized cost
basis of the security and its fair value into the amount
representing the credit loss, which we recognize in our
consolidated statements of operations, and the amount related to
all other factors, which we recognize in Other
comprehensive loss, net of applicable taxes. In
determining whether a credit loss exists, we use the best
estimate of cash flows expected to be collected from the debt
security.
We consider guarantees, insurance contracts or other credit
enhancements (such as collateral) in determining our best
estimate of cash flows expected to be collected only if
(1) such guarantees, insurance contracts or other credit
enhancements provide for payments to be made solely to reimburse
us for failure of the issuer to satisfy its required payment
obligations, (2) such guarantees, insurance contracts or
other credit enhancements are contractually attached to the
security and (3) collection of the amounts receivable under
these agreements is deemed probable. Guarantees, insurance
contracts or other credit enhancements are considered
contractually attached if they are part of and trade with the
security upon transfer of the security to a third party.
F-17
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
In periods after we recognize an
other-than-temporary
impairment of debt securities, we use the prospective interest
method to recognize interest income. Under the prospective
interest method, we use the new cost basis and the cash flows
expected to be collected from the security to calculate the
effective yield.
As a result of adopting the FASB modified standard on the model
for assessing
other-than-temporary
impairments, 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 AOCI. 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 consolidated statements of operations based
upon the assertion of our intent and ability to hold certain of
these securities until recovery. Refer to Note 5,
Investments in Securities for disclosures related to our
investments in securities and
other-than-temporary
impairments and Note 11, Income Taxes for
disclosures related to our deferred tax assets and related
valuation allowance.
Mortgage
Loans
When we acquire mortgage loans that we intend to sell or
securitize, we classify the loans as held for sale
(HFS). When we acquire mortgage loans that we have
the ability and the intent to hold for the foreseeable future or
until maturity, we classify the loans as held for investment
(HFI). We initially classify loans as HFS if they
are product types that we actively securitize from our
portfolio, such as
30-year
fixed rate mortgages, because we have the intent, at
acquisition, to securitize the loans (either during the month in
which the acquisition occurs or during the following month) and
sell all or a portion of the resulting securities. At month-end,
we reclassify loans acquired during the calendar month, from HFS
to HFI, if we have not securitized or are not in the process of
securitizing them because we have the intent to hold those loans
for the foreseeable future or until maturity.
We initially classify loans as HFI if they are product types
that we do not currently securitize from our portfolio, such as
reverse mortgages. We reclassify loans from HFI to HFS if our
investment intent changes. Reclassification of loans from HFI to
HFS is infrequent.
If the underlying assets of a consolidated VIE are mortgage
loans and we were initially the transferor of such loans, we
classify the consolidated loans consistent with our intent and
ability to hold the securities of the consolidated entity;
otherwise, mortgage loans in consolidated VIEs are classified as
HFI.
Loans
Held for Sale
We report HFS loans at the lower of cost or fair value
(LOCOM). Loans held for sale are typically
single-family loans, because we generally do not sell or
securitize multifamily loans from our portfolio. Any excess of
an HFS loans cost over its fair value is recognized as a
valuation allowance, with changes in the valuation allowance
recognized as Investment gains (losses), net in our
consolidated statements of operations. We recognize interest
income on HFS loans on an accrual basis, unless we determine the
ultimate collection of principal or interest payments is not
reasonably assured. When the collection of principal or interest
payments is not reasonably assured, we discontinue the accrual
of interest income. Purchase premiums, discounts and other cost
basis adjustments on HFS loans are deferred upon loan
acquisition, included in the cost basis of the loan, and not
amortized. We determine any LOCOM adjustment on HFS loans on a
pool basis by aggregating those loans based on similar risks and
characteristics, such as product types and interest rates.
In the event that we reclassify HFS loans to HFI, we record the
loans at LOCOM on the date of reclassification. We recognize any
LOCOM adjustment recognized upon reclassification as a basis
adjustment to the HFI loan.
F-18
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Loans
Held for Investment
We report HFI loans at their outstanding unpaid principal
balance adjusted for any deferred and unamortized cost basis
adjustments, including purchase premiums, discounts
and/or other
cost basis adjustments. We recognize interest income on HFI
loans on an accrual basis using the interest method, unless we
determine the ultimate collection of contractual principal or
interest payments in full is not reasonably assured. When the
collection of principal or interest payments in full is not
reasonably assured, the loan is placed on nonaccrual status.
Nonaccrual
Loans
We discontinue accruing interest on single-family and
multifamily loans when we believe collectability of principal or
interest is not reasonably assured, unless the loan is well
secured and in the process of collection based upon an
individual loan assessment. When a loan is placed on nonaccrual
status interest previously accrued but not collected becomes
part of our recorded investment in the loan and is collectively
reviewed for impairment. If cash is received while a loan is on
nonaccrual status, it is applied first towards the recovery of
accrued interest and related scheduled principal repayments.
Once these amounts are recovered, we recognize interest income
on a cash basis. If we have doubt regarding the ultimate
collectability of the remaining recorded investment in a
nonaccrual loan, we apply any payment received to reduce
principal to the extent necessary to eliminate such doubt. We
return a loan to accrual status when we determine that the
collectability of principal and interest is reasonably assured.
Restructured
Loans
A modification to the contractual terms of a loan that results
in granting a concession to a borrower experiencing financial
difficulties is considered a troubled debt restructuring
(TDR). A concession has been granted to a borrower
when we determine that the effective yield based on the
restructured loan term is less than the effective yield prior to
the modification. We measure impairment of a loan restructured
in a TDR individually based on the excess of the recorded
investment in the loan over the present value of the expected
future cash inflows discounted at the loans original
effective interest rate. Cost incurred that affect a TDR are
expensed as incurred.
A loan modification for reasons other than a borrower
experiencing financial difficulties or that results in terms at
least as favorable to us as the terms for comparable loans to
other customers with similar credit risks who are not
refinancing or restructuring a loan is not considered a TDR. We
further evaluate such a loan modification to determine whether
the modification is considered more than minor. If
the modification is considered more than minor and the modified
loan is not subject to the accounting requirements for acquired
credit-impaired loans, we treat the modification as an
extinguishment of the previously recorded loan and recognition
of a new loan. We recognize any unamortized basis adjustments on
the previously recorded loan immediately in Interest
income in our consolidated statements of operations. We
account for minor modifications and modifications to acquired
credit-impaired loans as a continuation of the previously
recorded loan unless the modification is considered a TDR.
Loans
Purchased or Eligible to be Purchased from Trusts
For MBS trusts that include a Fannie Mae guaranty, we have the
option to purchase loans from the trust 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
F-19
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
permissible while the loan is held in an MBS trust. Fannie Mae,
as guarantor or as issuer, may also purchase mortgage loans when
other pre-defined contingencies have been met, such as when
there is a material breach of a representation and warranty.
Under long-term standby commitments, we purchase loans from
lenders when the loans subject to these commitments meet certain
delinquency criteria. Our acquisition cost for these loans is
the unpaid principal balance of the loans plus accrued interest.
For a loan that will be classified as HFI, when there is
evidence of credit deterioration subsequent to the loans
origination and it is probable, at acquisition, that we will be
unable to collect all contractually required payments receivable
(ignoring insignificant delays in contractual payments), we
account for the loan as an acquired credit-impaired loan. We
record such loans at the lower of the acquisition cost or fair
value. We record each acquired loan that does not meet these
criteria at its acquisition cost.
For MBS trusts where we are considered the transferor, we
recognize the loan on our consolidated balance sheets at fair
value and record a corresponding liability to the MBS trust when
the contingency on our options to purchase loans from the trust
has been met and we regain effective control over the
transferred loan.
We base our estimate of the fair value of delinquent loans
purchased from MBS trusts upon an assessment of what a market
participant would pay for the loan at the date of acquisition.
Prior to July 2007, we estimated the initial fair value of these
loans using internal prepayment, interest rate and credit risk
models that incorporated managements best estimate of
certain key assumptions, such as default rates, loss severity
and prepayment speeds. Beginning in July 2007, the mortgage
markets experienced a number of significant events, including a
dramatic widening of credit spreads for mortgage securities
backed by higher risk loans, a large number of credit downgrades
of higher risk mortgage-related securities, and a severe
reduction in market liquidity for certain mortgage-related
transactions. As a result of this extreme disruption in the
mortgage markets, we concluded that our model-based estimates of
fair value for delinquent loans were no longer aligned with the
indicative market prices for these loans. Therefore, we began
utilizing indicative market prices from large, experienced
dealers and used an average of these market prices to estimate
the initial fair value of delinquent loans purchased from MBS
trusts. We consider acquired credit-impaired loans to be
individually impaired at acquisition. However, no valuation
allowance is established or carried over at acquisition. We
record the excess of the loans acquisition cost over its
fair value as a charge-off against our Reserve for
guaranty losses at acquisition. We recognize any
subsequent decreases in estimated future cash flows to be
collected subsequent to acquisition as impairment losses through
the allowance for loan losses.
We place credit-impaired loans that we acquire from MBS trusts
on nonaccrual status at acquisition in accordance with our
nonaccrual policy. If we subsequently determine that the
collectability of principal and interest is reasonably assured
we return the loan to accrual status. We determine the initial
accrual status of acquired loans that are not credit-impaired in
accordance with our nonaccrual policy. Accordingly, we place
loans purchased from trusts under other contingent call options
on accrual status at acquisition if they are current or if there
has been only an insignificant delay in payment and there are no
other facts and circumstances that would lead us to conclude
that the collection of principal and interest is not reasonably
assured.
When the acquired loan is returned to accrual status, the
portion of the expected cash flows, excluding prepayment
estimates, that exceeds the recorded investment in the loan is
accreted into interest income over the contractual life of the
loan. We prospectively recognize increases in future cash flows
expected to be collected as interest income over the remaining
contractual life of the loan through a yield adjustment.
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
F-20
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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. As a
result, the guaranty reserve considers not only the principal
and interest due on the loan at the current balance sheet date,
but also any additional interest payments due to the trust from
the current balance sheet date up until the point of loan
acquisition or foreclosure. We recognize incurred losses by
recording a charge to the Provision for credit
losses in our 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 (1) available information as of each balance sheet
date indicates that it is probable a loss has occurred and
(2) the amount of the loss can be reasonably estimated in
accordance with the FASB standard on accounting for
contingencies. Single-family and multifamily loans that we
evaluate for individual impairment are measured in accordance
with the FASB standard on measuring individual impairment of a
loan. When making an assessment as to whether a loan is
individually impaired, we also consider whether a delay in
payment is insignificant. 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.
Single-family
Loans
We aggregate single-family loans (except for those that are
deemed to be individually impaired), based on similar risk
characteristics for purposes of estimating incurred credit
losses and establish a collective single-family loss reserve
using an econometric model that derives an overall loss reserve
estimate given multiple factors which include but are not
limited to: origination year; loan product type;
mark-to-market
loan-to-value
(LTV) ratio, and delinquency status. Once loans are
aggregated, there typically is not a single, distinct event that
would result in an individual loan or pool of loans being
impaired. Accordingly, to determine an estimate of incurred
credit losses, we base our allowance and reserve methodology on
historical events and trends, such as loss severity, default
rates, and recoveries from mortgage insurance contracts that are
contractually attached to a loan or other credit enhancements
that were entered into contemporaneous with and in contemplation
of a guaranty or loan purchase transaction. Our allowance
calculation also incorporates a loss confirmation period (the
anticipated time lag between a credit loss event and the
confirmation of the credit loss resulting from that event) to
ensure our allowance estimate captures credit losses that have
been incurred as of the balance sheet date but have not been
confirmed. In addition, management performs a review of the
observable data used in its estimate to ensure it is
representative of prevailing economic conditions and other
events existing as of the balance sheet date. We implemented the
econometric model in the fourth quarter of 2009. The previous
model, used during 2007, 2008 and the first nine months of 2009,
was a loss curve-based model that was driven primarily by
original LTV ratio, loan product type, the age of the mortgage
loan and the performance to date of the vintage to which the
loan belonged. Our previous model required that we consider
certain factors when determining whether adjustments to the
observable data used in our allowance methodology are necessary,
such as levels of and trends in delinquencies; levels of and
trends in charge-offs and recoveries; and terms of loans. Our
new model directly incorporates delinquency status and vintage
effects in the estimation, and thus certain of these adjustments
are no longer required.
The excess of our recorded investment in a loan, including
recorded accrued interest, over the fair value of the assets
received in full satisfaction of the loan is treated as a
charge-off loss that is deducted from the allowance for loan
losses or reserve for guaranty losses. Any excess of the fair
value of the assets received in full satisfaction over our
recorded investment in a loan at charge-off is applied first to
recover any forgone, yet contractually past due interest, and
then to Foreclosed property expense in our
consolidated statements of
F-21
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
operations. We also apply estimated proceeds from primary
mortgage insurance that is contractually attached to a loan and
other credit enhancements entered into contemporaneous with and
in contemplation of a guaranty or loan purchase transaction as a
recovery of our recorded investment in a charged-off loan, up to
the amount of loss recognized as a charge-off. We record
proceeds from credit enhancements in excess of our recorded
investment in charged-off loans in Foreclosed property
expense in our consolidated statements of operations when
received.
Individually
Impaired Loans
We consider a loan to be impaired when, based on current
information, it is probable that we will not receive all amounts
due, including interest, in accordance with the contractual
terms of the loan agreement. When making our assessment as to
whether a loan is impaired, we also take into account more than
insignificant delays in payment. 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.
Individually impaired loans currently include those restructured
in a TDR, acquired credit-impaired loans and certain multifamily
loans. Our measurement of impairment on an individually impaired
loan follows the method that is most consistent with our
expectations of recovery of our recorded investment in the loan.
When a loan has been restructured, we measure impairment using a
cash flow analysis discounted at the loans original
effective interest rate, as our expectation is that the loan
will continue to perform under the restructured terms. If we
determine that the only source to recover our recorded
investment in an individually impaired loan is through probable
foreclosure of the underlying collateral, we measure impairment
based on the fair value of the collateral, reduced by estimated
disposal cost on a discounted basis and adjusted for estimated
proceeds from mortgage, flood, or hazard insurance or similar
sources. Impairment recognized on individually impaired loans is
part of our allowance for loan losses.
We use internal models to project cash flows used to assess
impairment of individually impaired loans, including acquired
credit-impaired loans. We generally update the market and loan
characteristic inputs we use in these models monthly, using
month-end data. Market inputs include information such as
interest rates, volatility and spreads, while loan
characteristic inputs include information such as
mark-to-market
loan-to-value
ratios and delinquency status. The loan characteristic inputs
are key factors that affect the predicted rate of default for
loans evaluated for impairment through our internal cash flow
models. We evaluate the reasonableness of our models by
comparing the results with actual performance and our assessment
of current market conditions. In addition, we review our models
at least annually for reasonableness and predictive ability in
accordance with our corporate model review policy. Accordingly,
we believe the projected cash flows generated by our models that
we use to assess impairment appropriately reflect the expected
future performance of the loans.
Multifamily
Loans
We identify multifamily loans for evaluation for impairment
through a credit risk classification process and individually
assign them a risk rating. Based on this evaluation, we
determine whether or not a loan is individually impaired. If we
deem a multifamily loan to be individually impaired, we measure
impairment on that loan based on the fair value of the
underlying collateral less estimated costs to sell the property
on a discounted basis, as we consider such loans to be
collateral-dependent. If we determine that an individual loan
that was specifically evaluated for impairment is not
individually impaired, we include the loan as part of a pool of
loans with similar characteristics that are evaluated
collectively for incurred losses.
We stratify multifamily loans into different risk rating
categories based on the credit risk inherent in each individual
loan. We categorize credit risk based on relevant observable
data about a borrowers ability to pay, including reviews
of current borrower financial information, operating statements
on the underlying collateral,
F-22
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
historical payment experience, collateral values when
appropriate, and other related credit documentation. Multifamily
loans that are categorized into pools based on their relative
credit risk ratings are assigned certain default and severity
factors representative of the credit risk inherent in each risk
category. We apply these factors against our recorded investment
in the loans, including recorded accrued interest associated
with such loans, to determine an appropriate allowance. As part
of our allowance process for multifamily loans, we also consider
other factors based on observable data such as historical
charge-off experience, loan size and trends in delinquency. In
addition, we consider any loss sharing arrangements with our
lenders.
Advances
to Lenders
Advances to lenders represent payments of cash in exchange for
the receipt of mortgage loans from lenders in a transfer that is
accounted for as a secured lending arrangement. These transfers
primarily occur when we provide early funding to lenders for
loans that they will subsequently either sell to us or
securitize into a Fannie Mae MBS that they will deliver to us.
We individually negotiate early lender funding advances with our
lender customers. Early lender funding advances have terms up to
60 days and earn a short-term market rate of interest. In
other cases, the transfers are of loans that the lender has the
unilateral ability to repurchase from us.
We report cash outflows from advances to lenders as an investing
activity in our consolidated statements of cash flows.
Settlements of the advances to lenders, other than through
lender repurchases of loans, are not collected in cash, but
rather in the receipt of either loans or Fannie Mae MBS.
Accordingly, this activity is reflected as a non-cash transfer
in our consolidated statements of cash flows. Currently, we
include advances settled through receipt of securities in the
line item of our consolidated statements of cash flows entitled
Transfers from advances to lenders to investments in
securities. Advances settled through receipt of loans are
not material, and therefore are not separately disclosed in our
consolidated statements of cash flows.
Acquired
Property, Net
Acquired property, net includes foreclosed property
received in full satisfaction of a loan. We recognize foreclosed
property upon the earlier of the loan foreclosure event or when
we take physical possession of the property (i.e.,
through a
deed-in-lieu
of foreclosure transaction). We initially measure foreclosed
property at its fair value less its estimated costs to sell. We
treat any excess of our recorded investment in the loan over the
fair value less estimated costs to sell the property as a
charge-off to the Allowance for loan losses. Any
excess of the fair value less estimated costs to sell the
property over our recorded investment in the loan is recognized
first to recover any forgone, contractually due interest, then
to Foreclosed property expense in our consolidated
statements of operations.
We report foreclosed properties that we intend to sell, are
actively marketing and that are available for immediate sale in
their current condition such that the sale is reasonably
expected to take place within one year as held for sale. We
report these properties at the lower of their carrying amount or
fair value less estimated selling costs, on a discounted basis
if the sale is expected to occur beyond one year from the date
of foreclosure. We do not depreciate these properties.
We determine the fair value of our foreclosed properties using
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. We recognize
a loss for any subsequent write-down of the property to its fair
value less its estimated costs to sell through a valuation
allowance with an offsetting charge to Foreclosed property
expense in our consolidated statements of operations. We
recognize a recovery for any subsequent increase in fair value
less estimated costs to sell up to the cumulative loss
previously recognized through the valuation allowance. We
recognize
F-23
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
gains or losses on sales of foreclosed property through
Foreclosed property expense in our consolidated
statements of operations.
Properties that we do not intend to sell or that are not ready
for immediate sale in their current condition are classified
separately as held for use, are depreciated and are impaired
when circumstances indicate that the carrying amount of the
property is no longer recoverable. Properties classified as held
for use are recorded in Other assets in our
consolidated balance sheets.
Guaranty
Accounting
Our primary guaranty transactions result from mortgage loan
securitizations in which we issue Fannie Mae MBS. The majority
of our Fannie Mae MBS issuances fall within two broad
categories: (1) lender swap transactions, where a lender
delivers mortgage loans to us to deposit into a trust in
exchange for our guaranteed Fannie Mae MBS backed by those
mortgage loans and (2) portfolio securitizations, where we
securitize loans that were previously included in our
consolidated balance sheets, and create guaranteed Fannie Mae
MBS backed by those loans. As guarantor, we guarantee to each
MBS trust that we will supplement amounts received by the MBS
trust as required to permit timely payments of principal and
interest on the related Fannie Mae MBS. This obligation
represents an obligation to stand ready to perform over the term
of the guaranty. Therefore, our guaranty exposes us to credit
losses on the loans underlying Fannie Mae MBS.
As guarantor of our Fannie Mae MBS issuances, we recognize at
inception a non-contingent liability for the fair value of our
obligation to stand ready to perform over the term of the
guaranty as a component of Guaranty obligations in
our consolidated balance sheets. Prior to 2008, we measured the
fair value of the guaranty obligations that we recorded when we
issued Fannie Mae MBS based on managements estimate of the
amount that we would be required to pay a third party of similar
credit standing to assume our obligation. We based this amount
on market information obtained from spot transaction prices,
when available. In the absence of spot transaction prices, which
was the case for the substantial majority of our guarantees, we
used internal models to estimate the fair value of our guaranty
obligations. We reviewed the reasonableness of the results of
our models by comparing those results with available market
information. Key inputs and assumptions used in our models
included the amount of compensation required to cover estimated
default costs, including estimated unrecoverable principal and
interest that we expected to incur over the life of the
underlying mortgage loans backing our Fannie Mae MBS, estimated
foreclosure-related costs, estimated administrative and other
costs related to our guaranty, and an estimated market risk
premium, or profit, that a market participant of similar credit
standing would require to assume the obligation. If our modeled
estimate of the fair value of the guaranty obligation was more
or less than the fair value of the total compensation received,
we recognized a loss or recorded deferred profit, respectively,
at inception of the guaranty contract.
Beginning in 2008, as part of the implementation of revised fair
value measurement standard, we changed our approach to measuring
the fair value of our guaranty obligation to use the transaction
price, as a practical expedient, to measure the fair value of a
guaranty obligation upon initial recognition. Specifically, we
adopted a measurement approach based upon an estimate of the
compensation that we would require to issue the same guaranty in
a standalone arms-length transaction with an unrelated
party. When we initially recognize a guaranty issued in a lender
swap transaction, we measure the fair value of the guaranty
obligation based on the fair value of the total compensation we
receive, which primarily consists of the guaranty fee, credit
enhancements, buy-downs, risk-based price adjustments and our
right to receive interest income during the float period in
excess of the amount required to compensate us for master
servicing. Because the fair value of those guaranty obligations
equals the fair value of the total compensation we receive, we
do not recognize losses or record deferred profit in our
consolidated financial statements at inception of those guaranty
contracts.
F-24
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
In 2008, we also changed the way we measure the fair value of
our existing guaranty obligations subsequent to inception to be
consistent with our new approach for measuring guaranty
obligations at initial recognition. 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 standalone arms-length transaction at
the measurement date. To measure this fair value, we continue to
use our models and inputs that were used prior to our adoption
of the revised fair value measurement standards and, in 2008,
calibrated those models to our current market pricing. 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, our estimate of the
fair value of our existing guaranty obligations is based solely
upon our model results, without further adjustment.
Other than the measurement of fair value of our guaranty
obligations as described above, the accounting for our
guarantees in our consolidated financial statements is
unchanged. Accordingly, the guaranty obligation amounts recorded
in our consolidated balance sheets attributable to guarantees
issued prior to 2008 as well as those issued on or after 2008
are amortized in accordance with our established accounting
policy.
Guaranties
Issued in Connection with Lender Swap Transactions
The majority of our guaranty obligations arise from lender swap
transactions. In a lender swap transaction, we receive a
guaranty fee for our unconditional guaranty to the Fannie Mae
MBS trust. We negotiate a contractual guaranty fee with the
lender and collect the fee on a monthly basis based on the
contractual rate multiplied by the unpaid principal balance of
loans underlying a Fannie Mae MBS issuance. The guaranty fee we
receive varies depending on factors such as the risk profile of
the securitized loans and the level of credit risk we assume. In
lieu of charging a higher guaranty fee for loans with greater
credit risk, we may require that the lender pay an upfront fee
to compensate us for assuming additional credit risk. We refer
to this payment as a risk-based pricing adjustment. Risk-based
pricing adjustments do not affect the pass-through coupon
remitted to Fannie Mae MBS certificateholders. In addition, we
may charge a lower guaranty fee if the lender assumes a portion
of the credit risk through recourse or other risk-sharing
arrangements. We refer to these arrangements as credit
enhancements. We also adjust the monthly guaranty fee so that
the pass-through coupon rates on Fannie Mae MBS are in more
easily tradable increments of a whole or half percent by making
an upfront payment to the lender
(buy-up)
or receiving an upfront payment from the lender
(buy-down).
At inception of a guaranty to an unconsolidated entity, we
recognize on our consolidated balance sheets a non-contingent
liability for the fair value of our obligation to stand ready to
perform over the term of the guaranty in the event that
specified triggering events or conditions occur as a component
of Guaranty obligations. We also record a guaranty
asset that represents the present value of cash flows expected
to be received as compensation over the life of the guaranty. As
described above, for lender swap transactions entered into from
2003 to 2007, if the fair value of the guaranty obligation was
less than the present value of the consideration we expected to
receive, including the fair value of the guaranty asset and any
upfront assets exchanged, we deferred the excess as deferred
profit, which was recorded as an additional component of
Guaranty obligations. If the fair value of the
guaranty obligation exceeded the compensation received, we
recognized a loss in Losses on certain guaranty
contracts in our consolidated statements of operations at
inception of the guaranty fee contract. Beginning in 2008, we
consider the fair value of the guaranty obligations to be equal
to the fair value of the total compensation received for
providing the guaranty. Therefore, we do not recognize losses or
record deferred profit in our consolidated financial statements
at inception of those guaranty contracts issued after 2007.
F-25
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
In addition, we recognize a liability for estimable and probable
losses for the credit risk we assume on loans underlying Fannie
Mae MBS based on managements estimate of probable losses
incurred on those loans as of each balance sheet date. We record
this contingent liability in our consolidated balance sheets as
Reserve for guaranty losses.
Subsequent to initial recognition, we account for the guaranty
asset at amortized cost. As we collect monthly guaranty fees, we
reduce guaranty assets to reflect cash payments received and
recognize imputed interest income on guaranty assets as a
component of Guaranty fee income under the
prospective interest method. We reduce the corresponding
guaranty obligation, including any deferred profit, in
proportion to the reduction in guaranty assets and recognize
this reduction in our consolidated statements of operations as
an additional component of Guaranty fee income. We
assess guaranty assets for
other-than-temporary
impairment based on changes in our estimate of the cash flows to
be received. When we determine a guaranty asset is
other-than-temporarily
impaired, we write down the cost basis of the guaranty asset to
its fair value and include the amount written-down in
Guaranty fee income in our consolidated statements
of operations. Any
other-than-temporary
impairment recorded on guaranty assets results in a
proportionate reduction in the corresponding guaranty
obligations, including any deferred profit recorded prior to
2008.
We record
buy-ups in
our consolidated balance sheets at fair value in Other
assets. We account for
buy-ups
issued prior to 2007 in the same manner as AFS securities with
changes in fair value recorded in AOCI, net of tax. We assess
these
buy-ups for
other-than-temporary
impairment.
Buy-ups
issued beginning in 2007 are accounted for in the same manner as
trading securities, with unrealized gains and losses included in
Guaranty fee income in our consolidated statements
of operations. When we determine a
buy-up is
other-than-temporarily
impaired, we write down the cost basis of the
buy-up to
its fair value and include the amount of the write-down in
Guaranty fee income in our consolidated statements
of operations.
Upfront cash receipts for buy-downs and risk-based price
adjustments on and after 2003 and prior to 2008 are a component
of the compensation received for issuing the guaranty and are
recorded upon issuing a guaranty as an additional component of
Guaranty obligations, for contracts with deferred
profit, or a reduction of the loss recorded as a component of
Losses on certain guaranty contracts, for contracts
where the compensation received is less than the guaranty
obligation. Beginning in 2008, we consider the initial fair
value of the guaranty obligation to be equal to the fair value
of the total compensation received for providing the guaranty.
Therefore, we do not recognize losses or record deferred profit
at the inception of a lender swap transaction and account for
all upfront cash receipts for buy-downs and risk-based price
adjustments for as a component of Guaranty
obligations.
We base the fair value of the guaranty asset at inception on the
present value of expected cash flows using managements
best estimates of certain key assumptions, which include
prepayment speeds, forward yield curves and discount rates
commensurate with the risks involved. We project these cash
flows using proprietary prepayment, interest rate and credit
risk models. Because guaranty assets are like an interest-only
income stream, we discount the projected cash flows from our
guaranty assets using interest spreads from a representative
sample of interest-only trust securities. We adjust these
discounted cash flows for the less liquid nature of the guaranty
asset as compared to the interest-only trust securities.
These initial recognition and measurement provisions apply to
our guaranties issued or modified beginning in 2003. For lender
swap transactions entered into prior to 2003, we recognized
guaranty fees in our consolidated statements of operations as
Guaranty fee income on an accrual basis over the
term of the unconsolidated Fannie Mae MBS. We recognized a
contingent liability based on managements estimate of
probable losses incurred on those loans as of each balance sheet
date, and we deferred upfront cash payments received in the form
of risk-based pricing adjustments or buy-downs as a component of
Other liabilities in our consolidated balance sheets
and amortized them into Guaranty fee income in our
consolidated statements of operations over the life of the
guaranty using the interest method.
F-26
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Guaranties
Issued in Connection with Portfolio Securitizations
In addition to retained interests in the form of Fannie Mae MBS,
REMICs, and MSAs, we retain an interest in securitized loans in
a portfolio securitization, which represents our right to future
cash flows associated primarily with providing our guaranty. We
record the retained guaranty interest in a portfolio
securitization in our consolidated balance sheets as a component
of Guaranty assets. For a portfolio securitization
entered into prior to 2007, we account for the retained guaranty
interests in the same manner as AFS securities. For a portfolio
securitization entered into on or after January 1, 2007, we
account for the retained guaranty interests in the same manner
as trading securities. We determine the fair value of the
guaranty asset in the same manner as we do in a lender swap
transaction. We assume a recourse obligation in connection with
our guaranty of the timely payment of principal and interest to
the MBS trust that we measure and record in our consolidated
balance sheets under Guaranty obligations based on
the fair value of the recourse obligation at inception in a
similar manner as our lender swap transactions. We recognize any
difference between the guaranty asset and the guaranty
obligation in a portfolio securitization as a component of the
gain or loss on the sale of mortgage-related assets and record
the difference as Investment gains (losses), net in
our consolidated statements of operations.
We evaluate the component of the Guaranty assets
that represents the retained interest in securitized loans for
other-than-temporary
impairment. We amortize and account for the guaranty obligations
subsequent to the initial recognition in the same manner that we
account for the guaranty obligations that arise under lender
swap transactions and record a Reserve for guaranty
losses for estimable and probable losses incurred on the
underlying loans as of each balance sheet date. When we
recognize a guaranty obligation and do not receive an associated
guaranty fee, we amortize the guaranty obligation using a
systematic and rational method, dependent on the risk profile of
our guaranty.
Fannie
Mae MBS included in Investments in
securities
When we own unconsolidated Fannie Mae MBS, we do not derecognize
any components of the guaranty assets, guaranty obligations,
reserve for guaranty losses, or any other outstanding recorded
amounts associated with the guaranty transaction because our
contractual obligation to the MBS trust remains in force until
the trust is liquidated. We value Fannie Mae MBS based on their
legal terms, which includes the Fannie Mae guaranty to the MBS
trust, and continue to reflect the unamortized obligation to
stand ready to perform over the term of our guaranty and any
incurred credit losses in our Guaranty obligations
and Reserve for guaranty losses, respectively. We
disclose the aggregate amount of Fannie Mae MBS held as
Investments in securities in our consolidated
balance sheets as well as the amount of our Reserve for
guaranty losses and Guaranty obligations that
relates to Fannie Mae MBS held as Investments in
securities. Upon subsequent sale of a Fannie Mae MBS, we
continue to account for any outstanding recorded amounts
associated with the guaranty transaction on the same basis of
accounting as prior to the sale of Fannie Mae MBS, as no new
assets were retained and no new liabilities have been assumed
upon the subsequent sale.
Credit
Enhancements
Credit enhancements that we recognize separately as Other
assets in our consolidated balance sheets are amortized in
our consolidated statements of operations as Other
expenses. We amortize these assets over the related
contract terms at the greater of amounts calculated by
amortizing recognized credit enhancements (1) commensurate
with the observed decline in the unpaid principal balance of
covered mortgage loans or (2) on a straight-line basis over
a credit enhancements contract term. We record recurring
insurance premiums at the amount paid and amortize them over
their contractual life, and, if provided quarterly, the
amortization period is three months.
F-27
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Amortization
of Cost Basis and Guaranty Price Adjustments
Cost
Basis Adjustments
We amortize cost basis adjustments, including premiums and
discounts on mortgage loans and securities, as a yield
adjustment using the interest method over the contractual or
estimated life of the loan or security. We amortize these cost
basis adjustments into interest income for mortgage securities
and loans we classify as HFI. We do not amortize cost basis
adjustments for loans that we classify as HFS but include them
in the calculation of the gain or loss on the sale of those
loans.
The following table displays unamortized premiums, discounts,
and other cost basis adjustments included in our consolidated
balances sheets as of December 31, 2009 and 2008, that may
result in interest income in our consolidated statements of
operations in future periods.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Investments in securities:
|
|
|
|
|
|
|
|
|
Unamortized premiums (discounts) and other cost basis
adjustments,
net(1)
|
|
$
|
1,185
|
|
|
$
|
290
|
|
Other-than-temporary
impairments(2)
|
|
|
(821
|
)
|
|
|
(6,457
|
)
|
Mortgage loans held-for-investment:
|
|
|
|
|
|
|
|
|
Unamortized premiums (discounts) and other cost basis
adjustments of loans in portfolio, excluding acquired
credit-impaired loans and hedged mortgage
assets(3)
|
|
|
(10,332
|
)
|
|
|
(1,341
|
)
|
Unamortized discount on acquired credit-impaired
loans(4)
|
|
|
(11,467
|
)
|
|
|
(1,320
|
)
|
Unamortized premium on hedged mortgage
assets(5)
|
|
|
806
|
|
|
|
921
|
|
Other
assets(6)
|
|
|
(254
|
)
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(20,883
|
)
|
|
$
|
(8,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the impact of
other-than-temporary impairment of cost basis adjustments.
|
|
(2) |
|
Accretable portion of impairments
recorded as a result of previous other-than-temporary
impairments.
|
|
(3) |
|
Includes the unamortized balance of
the fair value discounts that were recorded upon acquisition of
credit-impaired loans that have been subsequently modified as
TDRs, which accretes into interest income for TDRs that are
placed on accrual status.
|
|
(4) |
|
Represents the unamortized balance
of the fair value discounts that were recorded upon acquisition
and consolidation that may accrete into interest income for
acquired credit-impaired loans that are placed on accrual status.
|
|
(5) |
|
Represents the net premium on
mortgage assets designated for hedge accounting that are
attributable to changes in interest rates and will be amortized
through interest income over the life of the hedged assets.
|
|
(6) |
|
Represents the fair value discount
related to unsecured HomeSaver Advance loans that will accrete
into interest income based on the contractual terms of the loans
for loans on accrual status.
|
We hold a large number of similar mortgage loans and mortgage
securities backed by a large number of similar mortgage loans
for which prepayments are probable and we can reasonably
estimate the timing of such prepayments. We use prepayment
estimates in determining periodic amortization of cost basis
adjustments on substantially all mortgage loans and mortgage
securities in our portfolio under the interest method using a
constant effective yield. We include this amortization in
Interest income. For the purpose of amortizing cost
basis adjustments, we aggregate similar mortgage loans with
similar prepayment characteristics. We consider Fannie Mae MBS
to be aggregations of similar loans for the purpose of
estimating prepayments. We aggregate individual mortgage loans
based upon coupon rate, product type and origination year for
the purpose of estimating prepayments. For each reporting
period, we recalculate the constant effective yield to reflect
the actual payments and prepayments we have received to date and
our new estimate of future prepayments. We then adjust our net
investment in the mortgage loans and mortgage securities to the
amount it would have
F-28
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
been had we applied the recalculated constant effective yield
since their acquisition, with a corresponding charge or credit
to interest income.
We use the contractual terms to determine amortization if
prepayments are not probable, we cannot reasonably estimate
prepayments, or we do not hold a sufficiently large number of
similar loans or a sufficiently large number of similar loans do
not underlie a security. For these loans, we cease amortization
of cost basis adjustments during periods in which we are not
recognizing interest income on the loan because the collection
of the principal and interest payments is not reasonably assured
(that is, when a loan is placed on nonaccrual status).
Deferred
Guaranty Price Adjustments
We apply the interest method using a constant effective yield to
amortize all risk-based price adjustments and buy-downs in
connection with our Fannie Mae MBS issued prior to 2003. We
calculate the constant effective yield for these deferred
guaranty price adjustments based upon our estimate of the cash
flows of the mortgage loans underlying the related Fannie Mae
MBS, which includes an estimate of prepayments. For each
reporting period, we recalculate the constant effective yield to
reflect the actual payments and our new estimate of future
prepayments. We adjust the carrying amount of deferred guaranty
price adjustments to the amount it would have been had we
applied the recalculated constant effective yield since their
inception.
For risk-based pricing adjustments and buy-downs that arose on
Fannie Mae MBS issued beginning in 2003, we record the cash
received and increase Guaranty obligations by a
similar amount. We amortize these amounts as part of the
Guaranty obligations in proportion to the reduction
in the guaranty asset.
Master
Servicing
Upon a transfer of loans to us, either in connection with a
portfolio purchase or a lender swap transaction, we enter into
an agreement with the lender, or its designee, to have that
entity continue to perform the day-to-day servicing of the
mortgage loans. We refer to these activities as primary
servicing. We assume an obligation to perform certain
limited master servicing activities when these loans are
securitized. These activities include assuming the ultimate
obligation for the day-to-day servicing in the event of default
by the primary servicer until a new primary servicer can be put
in place and certain ongoing administrative functions associated
with the securitization. As compensation for performing these
master servicing activities, we receive the right to the
interest earned on MBS trust cash flows from the date of
remittance by the servicer to us until the date of distribution
of such cash flows to MBS certificateholders, which we record in
our consolidated statements of operations as Trust
management income.
We record an MSA as a component of Other assets in
our consolidated balance sheets when the present value of the
estimated compensation for master servicing activities exceeds
adequate compensation for such servicing activities. Conversely,
we record a master servicing liability (MSL) as a
component of Other liabilities in our consolidated
balance sheets when the present value of the estimated
compensation for master servicing activities is less than
adequate compensation. We consider adequate compensation to be
the amount of compensation that would be required by a
substitute master servicer should one be required. We use market
information to determine adequate compensation for these
services.
We initially recognize an MSA at fair value. We subsequently
carry the MSA at LOCOM and amortize it in proportion to net
servicing income for each period. We record impairment of the
MSA through a valuation allowance. When we determine an MSA is
other-than-temporarily impaired, we write down the cost basis of
the MSA to its fair value. We individually assess our MSA for
impairment by reviewing changes in historical interest rates and
the impact of those changes on the historical fair values of the
MSA. We then determine our expectation of the likelihood of a
range of interest rate changes over an appropriate recovery
period using
F-29
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
historical interest rate movements. We record an
other-than-temporary impairment when we do not expect to recover
the valuation allowance based on our expectation of the interest
rate changes and their impact on the fair value of the MSA
during the recovery period. We record amortization and
impairment of the MSA as components of Other
expenses in our consolidated statements of operations.
We initially recognize an MSL at fair value and subsequently
amortize it in proportion to net servicing loss for each period.
We increase the carrying amount of the MSL to fair value when
the fair value exceeds the carrying amount. We record
amortization and valuation adjustments to the MSL as components
of Other expenses in our consolidated statements of
operations. When we receive an MSA or incur an MSL in connection
with a lender swap transaction, we consider that servicing asset
or liability to be a component of the compensation we receive in
exchange for entering into the guaranty arrangement.
We consider MSAs and MSLs recorded in connection with portfolio
securitizations as proceeds received and liabilities incurred in
a securitization, respectively. Accordingly, these amounts are a
component of the calculation of gain or loss on the sale of
assets.
The fair values of the MSA and MSL are based on the present
value of expected cash flows 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. The risks
inherent in MSAs and MSLs are interest rate and prepayment
risks. Changes in anticipated prepayment speeds, in particular,
result in fluctuations in the estimated fair values of the MSA
and MSL.
Effective in 2007, we adopted the revised standard requiring
mortgage servicing rights (MSAs and MSLs) to be initially
recognized at fair value. The standard provides two measurement
options for each class of MSAs and MSLs subsequent to initial
recognition: (1) carry them at fair value with changes in
fair value recognized in earnings or (2) continue to
recognize periodic amortization expense and assess MSAs and MSLs
for impairment or increased obligation consistent with prior
standards. We identify classes of MSAs and MSLs based on the
availability of market inputs used in determining their fair
value. The availability of such market inputs is consistent
across our MSAs and MSLs; therefore, we account for them as one
class. In addition, the standard requires us to consider the
fair value of servicing rights as part of the proceeds received
in exchange for the sale of the assets for purposes of
calculating the gain or loss from the sale. The adoption of the
revised standard did not materially impact our consolidated
financial statements because we elected not to measure MSAs and
MSLs at fair value subsequent to their initial recognition.
Other
Investments
We primarily account for unconsolidated investments in limited
partnerships under the equity method of accounting. These
investments include our LIHTC and other partnership investments.
Under the equity method, we increase or decrease our investment
for our share of the limited partnerships net income or
loss reflected in Losses from partnership
investments in our consolidated statements of operations.
Under certain circumstances we will increase our investment for
additional contributions made to the partnerships and reduce our
investment by distributions received from the partnerships.
For unconsolidated common and preferred stock investments that
are not within the scope of the accounting standards for certain
investments in debt and equity securities, we apply either the
equity or the cost method of accounting. We use the equity
method for accounting for investments in these entities where
our ownership is between 20% and 50%, or where our investments
provide us the ability to exercise significant influence over
the entitys operations and management functions. We use
the cost method for investments in entities where our ownership
is less than 20% and we have no ability to exercise significant
influence over the entitys operations. These investments
are included as Other assets in our consolidated
balance sheets.
F-30
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
We periodically review our investments to determine if an
other-than-temporary loss in value has occurred. In these
reviews, we consider all relevant information, including the
recoverability of our investment, the earnings and near-term
prospects of the entity, factors related to the industry,
financial and operating conditions of the entity and our
ability, if any, to influence the management of the entity.
Commitments
to Purchase and Sell Mortgage Loans and Securities
We enter into commitments to purchase and sell mortgage-backed
securities and to purchase single-family and multifamily
mortgage loans. Commitments to purchase or sell some
mortgage-backed securities and to purchase single-family
mortgage loans generally are derivatives. Our commitments to
purchase multifamily loans are not derivatives because they do
not meet the criteria for net settlement.
For those commitments that we account for as derivatives, we
report them in our consolidated balance sheets at fair value in
Derivative assets, at fair value or Derivative
liabilities, at fair value and include changes in their
fair value in Fair value losses, net in our
consolidated statements of operations. When derivative purchase
commitments settle, we include their fair value on the
settlement date in the cost basis of the security or loan that
we purchase.
Regular-way securities trades provide for delivery of securities
within the time generally established by regulations or
conventions in the market in which the trade occurs and are
exempt from application of the derivative accounting literature.
Commitments to purchase or sell securities that we account for
on a trade-date basis are also exempt from the derivative
accounting requirements. We record the purchase and sale of an
existing security on its trade date when the commitment to
purchase or sell the existing security settles within the period
of time that is customary in the market in which those trades
take place.
Additionally, contracts for the forward purchase or sale of
when-issued and to-be-announced (TBA) securities are
exempt from the derivative accounting requirements if there is
no other way to purchase or sell that security, delivery of that
security and settlement will occur within the shortest period
possible for that type of security, and it is probable at
inception and throughout the term of the individual contract
that physical delivery of the security will occur. Since our
commitments for the purchase of when-issued and TBA securities
can be net settled and we do not document that physical
settlement is probable, we account for all such commitments as
derivatives.
Commitments to purchase securities that we do not account for as
derivatives and do not require trade-date accounting are
accounted for as forward contracts to purchase securities. We
designate these commitments as AFS or trading at inception and
account for them in a manner consistent with that category of
securities.
Derivative
Instruments
We recognize all derivatives as either assets or liabilities in
our consolidated balance sheets at their fair value on a trade
date basis. We report derivatives in a gain position after
offsetting by counterparty in Derivative assets, at fair
value and derivatives in a loss position after offsetting
by counterparty in Derivative liabilities, at fair
value in our consolidated balance sheets.
We offset the carrying amounts of derivatives (other than
commitments) that are in gain positions and loss positions with
the same counterparty, as well as cash collateral receivables
and payables associated with derivative positions in master
netting arrangements. We offset these amounts because the
derivative contracts have determinable amounts, we have the
legal right to offset amounts with each counterparty, that right
is enforceable by law, and we intend to offset the amounts to
settle the contracts.
We determine fair value using quoted market prices in active
markets when available. If quoted market prices are not
available for particular derivatives, we use quoted market
prices for similar derivatives that we adjust
F-31
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
for directly observable or corroborated (i.e., information
purchased from third-party service providers) market
information. In the absence of observable or corroborated market
data, we use internally-developed estimates, incorporating
market-based assumptions wherever such information is available.
For derivatives (other than commitments), we use a mid-market
price when there is a spread between a bid and ask price.
We evaluate financial instruments that we purchase or issue and
other financial and non-financial contracts for embedded
derivatives. To identify embedded derivatives that we must
account for separately, we determine if: (1) the economic
characteristics of the embedded derivative are not clearly and
closely related to the economic characteristics of the financial
instrument or other contract; (2) the financial instrument
or other contract (i.e., the hybrid contract) itself is
not already measured at fair value with changes in fair value
included in earnings; and (3) a separate instrument with
the same terms as the embedded derivative would meet the
definition of a derivative. If the embedded derivative meets all
three of these conditions we elect to carry the hybrid financial
instrument in its entirety at fair value with changes in fair
value recorded in earnings.
Effective in 2007, we adopted a new accounting standard and we
elected fair value measurement for certain hybrid financial
instruments containing embedded derivatives that otherwise
require bifurcation. We also elected to classify some investment
securities that contain embedded derivatives as trading
securities, which includes
buy-ups and
guaranty assets arising from portfolio securitization
transactions. As we adopted this standard prospectively, it had
no impact on our consolidated financial statements on the date
of adoption.
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. We monitor the fair value of the
collateral received from our counterparties, and we may require
additional collateral from those counterparties, as we deem
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.
Cash
Collateral
We pledged $5.4 billion and $15.0 billion in cash
collateral as of December 31, 2009 and 2008, respectively,
related to our derivative activities. For derivative positions
with the same counterparty under master netting arrangements to
the extent that we pledge cash collateral, we remove it from
Cash and cash equivalents and net the right to
receive it against Derivative liabilities at fair
value in our consolidated balance sheets as a part of our
counterparty netting calculation. Additionally, we pledged
$5.4 billion and $5.3 billion in cash collateral as of
December 31, 2009 and 2008, respectively, related to
operating activities and recorded this amount as Other
assets or Federal funds sold and securities
purchased under agreements to resell in our consolidated
balance sheets.
We record cash collateral accepted from a counterparty that we
have the right to use as Cash and cash equivalents
in our 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 consolidated
balance sheets. We primarily net our obligation to return cash
collateral pledged to us against Derivative assets at fair
value in our consolidated balance sheets as part of our
counterparty netting calculation. We accepted cash collateral of
$4.1 billion and $4.0 billion as of December 31,
2009 and 2008, respectively, of which $3.0 billion and
$330 million, respectively, was restricted.
F-32
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Non-Cash
Collateral
We classify securities pledged to counterparties as either
Investments in securities or Cash and cash
equivalents in our consolidated balance sheets. Securities
pledged to counterparties that have been consolidated as loans
are included as Mortgage loans in our consolidated
balance sheets. As of December 31, 2009, we had pledged
$1.1 billion in available-for-sale (AFS)
securities and $1.9 billion in HFI loans which the
counterparty had the right to sell or repledge. As of
December 31, 2008, we had pledged $720 million of AFS
securities, which the counterparty had the right to sell or
repledge. We did not pledge any HFI loans to counterparties as
of December 31, 2008.
The fair value of non-cash collateral accepted that we were
permitted to sell or repledge was $67 million and
$141 million as of December 31, 2009 and 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 $4.2 billion and $13.3 billion
as of December 31, 2009 and 2008, respectively.
Additionally, we had accepted non-cash collateral related to our
HCD business of $2.1 billion and $10.6 billion as of
and December 31, 2009 and 2008, respectively, 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 the underlying loans
and/or
mortgage-related securities.
When securities sold under agreements to repurchase meet all of
the conditions of a secured financing, we report the collateral
of the transferred securities at fair value, excluding accrued
interest. The fair value of these securities is classified in
Investments in securities in our consolidated
balance sheets. We had no repurchase agreements of this type
outstanding as of December 31, 2009 and 2008.
Hedge
Accounting
In 2008, we implemented fair value hedge accounting with respect
to a portion of our derivatives to hedge, for accounting
purposes, changes in the fair value of some of our mortgage
assets attributable to changes in interest rates. Specifically,
we designated certain of our interest rate swaps as hedges of
the change in fair value attributable to the change in the
London Interbank Offered Rate (LIBOR) for certain
multifamily loans classified as HFI and commercial
mortgage-backed securities (CMBS) classified as AFS.
We formally document at the inception of each hedging
relationship the hedging instrument, the hedged item, the risk
management objective and strategy for undertaking each hedging
relationship, and the method used to assess hedge effectiveness.
We use regression analysis to assess whether the derivative
instrument has been and is expected to be highly effective in
offsetting changes in fair value of the hedged item attributable
to the change in the LIBOR.
When hedging relationships are highly effective, we record
changes in the fair value of the hedged item attributable to
changes in the benchmark interest rate as an adjustment to the
carrying amount of the hedged item and include a corresponding
amount in fair value losses, net in our consolidated
statements of operations. For commercial mortgage-backed
securities classified as AFS, we record all other changes in
fair value as part of AOCI and not in earnings. For multi-family
loans, all other changes in fair value are not recorded. If a
hedging relationship is not highly effective, we do not record
an adjustment to earnings. We amortize adjustments to the
carrying amount of hedged items that result from hedge
accounting through interest income in the same manner as other
components of the carrying amount of that asset.
We discontinue hedge accounting prospectively when (1) the
hedging derivative is no longer effective in offsetting changes
in fair value of the hedged item attributable to the hedged
risk, (2) we terminate or sell the derivative or the hedged
item, or (3) we voluntarily elect to remove the hedge
accounting designation. When we discontinue hedge accounting, we
continue to carry the derivative instrument on our consolidated
balance
F-33
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
sheets at its fair value with changes in fair value recognized
in current period earnings. However, we no longer adjust the
carrying value of the hedged item through earnings for changes
in fair value attributable to the hedged risk. We voluntarily
elected to cease all hedge accounting during 2008.
Debt
We classify our outstanding debt as either short-term or
long-term based on the initial contractual maturity. We report
deferred items, including premiums, discounts and other cost
basis adjustments, as basis adjustments to Short-term
debt or Long-term debt in our consolidated
balance sheets. We re-measure the carrying amount, accrued
interest and basis adjustments of debt denominated in a foreign
currency into U.S. dollars using foreign exchange spot
rates as of the balance sheet date and report any associated
gains or losses as a component of Fair value losses,
net in our consolidated statements of operations.
We classify interest expense as either short-term or long-term
based on the contractual maturity of the related debt. We
amortize and report premiums, discounts and other cost basis
adjustments through interest expense using the effective
interest method usually over the contractual term of the debt.
Amortization of premiums, discounts and other cost basis
adjustments begins at the time of debt issuance. We re-measure
interest expense for debt denominated in a foreign currency into
U.S. dollars using the monthly weighted-average spot rate
since the interest expense is incurred over the reporting
period. The difference in rates arising from the month-end spot
exchange rate used to calculate the interest accruals and the
weighted-average exchange rate used to record the interest
expense is a foreign currency transaction gain or loss for the
period and is included as either Short-term debt interest
expense or Long-term debt interest expense in
our consolidated statements of operations.
Trust Management
Income
As master servicer, issuer and trustee for Fannie Mae MBS, we
earn a fee that reflects interest earned on MBS trust cash flows
from the date of remittance of mortgage and other payments to us
by servicers until the date of distribution of these payments to
MBS certificateholders. We included such compensation as
Trust management income in our consolidated
statements of operations.
Fees
Received on the Structuring of Transactions
We offer certain re-securitization services to customers in
exchange for fees. Such services include, but are not limited
to, the issuance, guarantee and administration of Fannie Mae
REMIC, stripped mortgage-backed securities (SMBS),
grantor trust, and Fannie Mae
Mega®
securities (collectively, the Structured
Securities). We receive a one-time conversion fee upon
issuance of a Structured Security that varies based on the value
of securities issued and the transaction structure. The
conversion fee compensates us for all services we provide in
connection with the Structured Security, including services
provided at and prior to security issuance and over the life of
the Structured Securities. Except for Structured Securities
where the underlying collateral is whole loans or private-label
securities, we generally do not receive a guaranty fee as
compensation in connection with the issuance of a Structured
Security, because the transferred mortgage-related securities
have previously been guaranteed by us or another party.
We defer a portion of the fee received upon issuance of a
Structured Security based on our estimate of the fair value of
our future administration services. We amortize this portion of
the fee on a straight-line basis over the expected life of the
Structured Security. We recognize the excess of the total fee
over the fair value of the future services in our consolidated
statements of operations upon issuance of a Structured Security.
However, when we acquire a portion of a Structured Security
contemporaneous with our structuring of the transaction, we
defer and amortize a portion of this upfront fee as an
adjustment to the yield of the purchased security. We
F-34
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
present fees received and costs incurred related to our
structuring of securities in Fee and other income in
our consolidated statements of operations.
Income
Taxes
We recognize deferred tax assets and liabilities for the
difference in the basis of assets and liabilities for financial
accounting and tax purposes. We measure deferred tax assets and
liabilities using enacted tax rates that are expected to be
applicable to the taxable income or deductions in the period(s)
the assets are realized or the liabilities are settled. We
adjust deferred tax assets and liabilities for the effects of
changes in tax laws and rates on the date of enactment. We
recognize investment and other tax credits through our effective
tax rate calculation assuming that we will be able to realize
the full benefit of the credits. We reduce our deferred tax
asset by an allowance if, based on the weight of available
positive and negative evidence, it is more likely than not that
we will not realize some portion, or all, of the deferred tax
asset.
We account for income tax uncertainty using a two-step approach
whereby we recognize an income tax benefit if, based on the
technical merits of a tax position, it is more likely than not
(a probability of greater than 50%) that the tax position would
be sustained upon examination by the taxing authority, which
includes all related appeals and litigation. We then recognize a
tax benefit equal to the largest amount of tax benefit that is
greater than 50% likely to be realized upon settlement with the
taxing authority, considering all information available at the
reporting date. We recognize interest expense on unrecognized
tax benefits as Other expenses in our consolidated
statements of operations.
Stock-Based
Compensation
We measure the cost of employee services received in exchange
for stock-based awards using the fair value of those awards on
the grant date. We recognize compensation cost over the period
during which an employee is required to provide service in
exchange for a stock-based award, which is generally the vesting
period. We recognize compensation cost for retirement-eligible
employees immediately, and for those employees who are nearing
retirement, over the shorter of the vesting period or the period
from the grant date to the date of retirement eligibility.
Pension
and Other Postretirement Benefits
We provide pension and postretirement benefits and account for
these benefit costs on an accrual basis. We determine pension
and postretirement benefit amounts recognized in our
consolidated financial statements on an actuarial basis using
several different assumptions. The two most significant
assumptions used in the valuation are the discount rate and the
long-term rate of return on assets. In determining our net
periodic benefit cost, we apply a discount rate in the actuarial
valuation of our pension and postretirement benefit obligations.
In determining the discount rate as of each balance sheet date,
we consider the current yields on high-quality, corporate
fixed-income debt instruments with maturities corresponding to
the expected duration of our benefit obligations. Additionally,
the net periodic benefit cost recognized in our consolidated
financial statements for our qualified pension plan is impacted
by the long-term rate of return on plan assets. We base our
assumption of the long-term rate of return on the current
investment portfolio mix, actual long-term historical return
information and the estimated future long-term investment
returns for each class of assets. We measure plan assets and
obligations as of the date of our consolidated financial
statements. We recognize the over-funded or under-funded status
of our benefit plans as a prepaid benefit cost (an asset) in
Other assets or an accrued benefit cost (a
liability) in Other liabilities, respectively, in
our consolidated balance sheets. We recognize actuarial gains
and losses and prior service costs and credits when incurred as
adjustments to the prepaid benefit cost or accrued benefit cost
with a corresponding offset in other comprehensive income (loss).
F-35
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Earnings
(Loss) per Share
Earnings (loss) per share (EPS) is presented for
both basic EPS and diluted EPS. We compute basic EPS by dividing
net income (loss) available to common stockholders by the
weighted-average number of shares of common stock outstanding
during the year. In addition to common shares outstanding, the
computation of basic EPS includes instruments for which the
holder has (or is deemed to have) the present rights as of the
end of the reporting period to share in current period earnings
(loss) with common stockholders (i.e., participating
securities and common shares that are currently issuable for
little or no cost to the holder). We include in the denominator
of our EPS computation the weighted-average shares of common
stock that would be issued upon the full exercise of the warrant
issued to Treasury. Diluted EPS is computed by dividing net
income (loss) available to common stockholders by the
weighted-average number of shares of common stock outstanding
during the year, plus the dilutive effect of common stock
equivalents such as convertible securities, stock options and
other performance awards. We exclude these common stock
equivalents from the calculation of diluted EPS when the effect
of inclusion, assessed individually, would be anti-dilutive.
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) is the change in equity, net
of tax, resulting from transactions that we record directly to
stockholders equity. These transactions include:
unrealized gains and losses on AFS securities and certain
commitments whose underlying securities are classified as AFS;
deferred hedging gains and losses from cash flow hedges;
unrealized gains and losses on guaranty assets resulting from
portfolio securitization transactions;
buy-ups
resulting from lender swap transactions; and change in prior
service costs and credits and actuarial gains and losses
associated with pension and postretirement benefits in other
comprehensive income (loss).
As of December 31, 2009 and 2008, we recorded a valuation
allowance for our deferred tax asset for the portion of the
future tax benefit that we more likely than not will not utilize
in the future. We established no valuation allowance for the
deferred tax asset amount related to unrealized losses recorded
through AOCI on our AFS 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.
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 consolidated balance sheets at fair value and
record a corresponding liability to the MBS trust.
Fair
Value Measurements
We estimate 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). When available, the fair
value of our financial instruments is based on quoted market
prices, valuation
F-36
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
techniques that use observable market-based inputs or
unobservable inputs that are corroborated by market data.
Pricing information we obtain from third parties is internally
validated for reasonableness prior to use in the consolidated
financial statements.
On April 1, 2009, we adopted the FASB standard on how to
determine fair value when the volume and level of activity for
the asset or liability have significantly decreased. The
standard 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 this
standard had no impact on our consolidated financial statements.
When observable market prices are not readily available, we
generally estimate the fair value using techniques that rely on
alternate market data or internally developed models. These
models use significant inputs that are generally less readily
observable than objective sources. Market data includes prices
of financial instruments with similar maturities and
characteristics, duration, interest rate yield curves, measures
of volatility and prepayment rates. If market data we need to
estimate fair value is not available, we estimate fair value
using internally-developed models that employ a discounted cash
flow approach.
We base these estimates on pertinent information available to us
at the time of the applicable reporting periods. In certain
cases, fair values are not subject to precise quantification or
verification and may fluctuate as economic and market factors
vary and our evaluation of those factors changes. Although we
use our best judgment in estimating the fair value of these
financial instruments, there are inherent limitations in any
estimation technique. In these cases, a minor change in an
assumption could result in a significant change in our estimate
of fair value, thereby increasing or decreasing the amounts of
our consolidated assets, liabilities, stockholders equity
(deficit) and net income or loss.
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 years
ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Derivatives fair value losses,
net(1)
|
|
$
|
(6,350
|
)
|
|
$
|
(15,416
|
)
|
|
$
|
(4,113
|
)
|
Trading securities gains (losses),
net(2)
|
|
|
3,744
|
|
|
|
(7,040
|
)
|
|
|
(365
|
)
|
Hedged mortgage asset gains,
net(3)
|
|
|
|
|
|
|
2,154
|
|
|
|
|
|
Debt foreign exchange gains (losses), net
|
|
|
(173
|
)
|
|
|
230
|
|
|
|
(190
|
)
|
Debt fair value losses, net
|
|
|
(32
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value losses, net
|
|
$
|
(2,811
|
)
|
|
$
|
(20,129
|
)
|
|
$
|
(4,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes losses of approximately
$104 million in 2008 that resulted from the termination of
our derivative contracts with a subsidiary of Lehman Brothers.
|
|
(2) |
|
Includes trading losses of
$608 million in 2008 that resulted from the write-down to
fair value of our investment in corporate debt securities issued
by Lehman Brothers.
|
|
(3) |
|
Represents adjustments to the
carrying value of mortgage assets designated for hedge
accounting that are attributable to changes in interest rates.
|
F-37
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Reclassification
and Adoption of New Accounting Pronouncements
Pursuant to our January 1, 2009 adoption of the FASB
standard requiring noncontrolling interests to be classified as
a separate component of equity, we reclassified amounts related
to noncontrolling interests in our consolidated balance sheet as
of December 31, 2008. Amounts previously reported as
Minority interests in consolidated subsidiaries are
now reported as Noncontrolling interest.
Additionally, amounts reported in our consolidated statement of
operations for the year ended December 31, 2008 as
Minority interest in losses of consolidated
subsidiaries are now reported as Net loss
attributable to the noncontrolling interest.
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 consolidated balance sheet to
conform to the current period presentation. Also, we
reclassified $7.0 billion and $814 million for the
years ended December 31, 2008 and 2007, respectively, from
Investment gains (losses), net to Net
other-than-temporary impairments in our consolidated
statements of operations to conform to the current period
presentation.
We reclassified $4.5 billion and $529 million, net of
tax, for the years ended December 31, 2008 and 2007,
respectively, from Changes in net unrealized loss on
available-for-sale securities to Reclassification
adjustment for other-than-temporary impairments recognized in
net loss in our Consolidated Statements of Changes in
Stockholders Equity (Deficit) to conform to the current
period presentation.
New
Accounting Pronouncements
Transfers
of Financial Assets and Consolidation Standards
Effective January 1, 2010, we prospectively adopted two new
accounting standards that eliminated the concept of QSPEs and
amended the accounting for transfers of financial assets and the
consolidation model for VIEs. Under these new accounting
standards, the consolidation exemption for QSPEs was removed.
All formerly designated QSPEs must be evaluated for
consolidation in accordance with the new consolidation model,
which changes the method of analyzing which party to a VIE
should consolidate the VIE. The current consolidation model is
replaced with a qualitative evaluation that requires
consolidation of an entity when the reporting enterprise both
(1) has the power to direct matters which significantly
impact the activities and success of the entity, and
(2) has exposure to benefits
and/or
losses that could potentially be significant to the entity.
The new accounting standards require the incremental assets and
liabilities consolidated upon adoption to initially be reported
at their carrying values. If determining the carrying amounts is
not practicable, the assets and liabilities of the VIE shall be
measured at fair value at the date the new standards first
apply. 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 the new
standards first apply. For the outstanding MBS trusts we
consolidated effective January 1, 2010, we initially
recorded the assets and liabilities on our consolidated balance
sheet at their unpaid principal balances, where applicable, as
it is not practicable to determine their carrying values.
Accrued interest, allowance for loan losses or
other-than-temporary impairments have also been recognized as
appropriate. In addition, other assets and liabilities which did
not have an unpaid principal balance or were required to be
carried at fair value have been be measured at fair value at
adoption.
The adoption of these new accounting standards will have a
significant impact on the presentation of our consolidated
financial statements beginning in 2010. Because the concept of a
QSPE is eliminated, our existing QSPEs, primarily our MBS
trusts, are subject to the new consolidation standards. Based on
our analysis, we are required to consolidate the substantial
majority of our MBS trusts and record the underlying
F-38
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
assets (typically mortgage loans) and debt (typically bonds
issued by the trusts in the form of Fannie Mae MBS certificates)
of these trusts as assets and liabilities in our consolidated
balance sheet. The consolidation of these MBS trusts onto our
balance sheet will significantly increase the amount of our
assets and liabilities. The unpaid principal balance amounts we
consolidated related to MBS trusts increased both our total
assets and total liabilities by approximately $2.4 trillion
effective January 1, 2010.
In addition, consolidation of these MBS trusts will result in
other changes to our consolidated financial statements. The most
significant changes are:
|
|
|
|
|
Financial Statement
|
|
Accounting and Presentation Changes
|
|
Balance Sheet
|
|
|
|
Significant increase in loans and debt and significant decrease
in trading and available-for-sale securities
|
|
|
|
|
Separate presentation of the elements of the consolidated MBS
trusts (such as mortgage loans, debt, accrued interest
receivable and payable) on the face of the balance sheet
|
|
|
|
|
Reclassification of substantially all of the previously recorded
reserve for guaranty losses to allowance for loan losses
|
|
|
|
|
Elimination of substantially all previously recorded guaranty
assets and guaranty obligations
|
Statement of Operations
|
|
|
|
Significant increase in interest income and interest expense
attributable to the consolidated assets and liabilities of the
consolidated MBS trusts
|
|
|
|
|
Decrease to provision for credit losses and corresponding
decrease in net interest income due to recording interest
expense on consolidated MBS trusts when we are not accruing
interest on underlying nonperforming consolidated loans
|
|
|
|
|
Separate presentation of the elements of the consolidated MBS
trusts (interest income and interest expense) on the face of the
statement of operations
|
|
|
|
|
Reclassification of the substantial majority of guaranty fee
income and trust management income to interest income
|
|
|
|
|
Elimination of fair value losses on credit-impaired loans
acquired from the MBS trusts we have consolidated, as the
underlying loans in our MBS trusts will be recorded in our
consolidated balance sheet
|
Statement of Cash Flows
|
|
|
|
Significant change in the amounts of cash flows from investing
and financing activities
|
Although these new accounting standards do not change the
economic risk to our business, specifically our exposure to
liquidity, credit, and interest rate risks, the transition
adjustment recorded to accumulated deficit as of January 1,
2010 to reflect the cumulative effect of adopting these new
standards will affect our net worth. We estimate the decrease to
our total deficit to be between $2 billion and
$4 billion as a result of adoption effective
January 1, 2010. The primary components of the cumulative
transition adjustment recorded effective January 1, 2010
include the following: (1) for all of our outstanding MBS
trusts that we consolidate, the reversal of the related guaranty
assets and guaranty obligations; (2) for all of our
outstanding MBS trusts that we consolidate, the reversal of
amounts previously recorded in the reserve for guaranty losses
for future interest payments on seriously delinquent loans;
(3) for all of our investments in single-class Fannie
Mae MBS classified as available-for-sale, the reversal of the
related unrealized gains and losses recorded in AOCI; and
(4) for all of our investments in single-class Fannie
Mae MBS classified as trading, the reversal of the related fair
value gains and losses previously recorded in earnings. The
adoption of these new accounting standards will not
significantly impact our required level of capital under
existing minimum and critical capital requirements, which have
been suspended by our conservator. FHFA directed us to continue
reporting our minimum capital requirements based on 0.45%, and
critical capital requirements based on 0.25%, of the
F-39
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
unpaid principal balance of loans backing MBS held by third
parties, notwithstanding the new accounting standards.
We have interests in various entities that are considered to be
VIEs. 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 we did not create and 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.
Types
of VIEs
Securitization
Trusts
Under our lender swap and portfolio securitization transactions,
mortgage loans are transferred to a trust specifically for the
purpose of issuing a single class of guaranteed securities that
are collateralized by the underlying mortgage loans. The
trusts permitted activities include receiving the
transferred assets, issuing beneficial interests, establishing
the guaranty and servicing the underlying mortgage loans. In our
capacity as issuer, master servicer, trustee and guarantor, we
earn fees for our obligations to each trust. Additionally, we
may retain or purchase a portion of the securities issued by
each trust. However, third parties hold the substantial majority
of outstanding Fannie Mae MBS and therefore, we generally do not
reflect those securities in our consolidated balance sheets. We
have securitized mortgage loans since 1981.
In our structured securitization transactions, we earn fees for
assisting lenders and dealers with the design and issuance of
structured mortgage-related securities. The trusts created in
these transactions have permitted activities that are similar to
those for our lender swap and portfolio securitization
transactions. The assets of these trusts may include
mortgage-related securities
and/or
mortgage loans. The trusts created for Fannie Mae Mega
securities issue single-class securities while the trusts
created for REMIC, grantor trust and SMBS securities issue
single-class and multi-class securities, the latter of which
separate the cash flows from underlying assets into separately
tradable interests. Our obligations and continued involvement in
these trusts are similar to those described for lender swap and
portfolio securitization transactions. We have securitized
mortgage assets in structured transactions since 1986.
We also invest in mortgage-backed and asset-backed securities
that have been issued via private-label trusts. These trusts are
structured to provide investors with a beneficial interest in a
pool of receivables or other financial assets, typically
mortgage loans, credit card receivables, auto loans or student
loans. The trusts act as vehicles to allow loan originators to
securitize assets. Securities are structured from the underlying
pool of assets to provide for varying degrees of risk. The
originators of the financial assets or the underwriters of the
transaction create the trusts and typically own the residual
interest in the trusts assets. Our involvement in these
entities is typically limited to our recorded investment in the
beneficial interests that we have purchased. We have invested in
these vehicles since 1987.
Limited
Partnerships
We have historically made equity investments in various limited
partnerships that sponsor affordable housing projects utilizing
the low-income housing tax credit pursuant to Section 42 of
the Internal Revenue Code. The purpose of these investments is
to increase the supply of affordable housing in the United
States and to serve communities in need. In addition, our
investments in LIHTC partnerships generate both tax credits and
net operating losses that may reduce our federal income tax
liability. Our LIHTC investments primarily represent limited
partnership interests in entities that have been organized by a
fund manager who acts as the general
F-40
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
partner. These fund investments seek out equity investments in
LIHTC operating partnerships that have been established to
identify, develop and operate multifamily housing that is leased
to qualifying residential tenants.
As of December 31, 2009 and 2008, we had LIHTC partnership
investments, excluding restricted cash from consolidation, of
$44 million, which represents the consolidated assets
attributable to non-controlling interest, and $6.3 billion,
respectively. As a result of our current tax position, we did
not make any LIHTC investments in 2009 other than pursuant to
existing prior commitments and we are not currently recognizing
the tax benefits associated with the tax credits and net
operating losses in our consolidated financial statements.
In 2009, 2008 and 2007 we recognized $5.9 billion,
$795 million and $174 million, respectively, of
other-than-temporary impairment losses related to our limited
partnerships in Losses from partnership investments
in our consolidated statements of operations.
Prior to September 30, 2009, we entered into a nonbinding
letter of intent to transfer equity interests in our LIHTC
investments to third party investors at a price above carrying
value. This transaction was subject to Treasurys approval
under the terms of our senior preferred stock purchase
agreement. In November of 2009, Treasury notified FHFA and us
that it did not consent to the proposed transaction. Treasury
stated the proposed sale would result in a loss of aggregate tax
revenues that would be greater than the savings to the federal
government from a reduction in the capital contribution
obligation of Treasury to Fannie Mae under the senior preferred
stock purchase agreement. Treasury further stated that
withholding approval of the proposed sale afforded more
protection to the taxpayers than approval would have provided.
We have continued to explore options to sell or otherwise
transfer our LIHTC investments for value consistent with our
mission; however, to date, we have not been successful. On
February 18, 2010, FHFA informed us, by letter, of its
conclusion that any sale by us of our LIHTC assets would require
Treasurys consent under the senior preferred stock
purchase agreement, and that FHFA had presented other options
for Treasury to consider, including allowing us to pay senior
preferred stock dividends by waiving the right to claim future
tax benefits of the LIHTC investments. FHFAs letter
further informed us that, after further consultation with
Treasury, we may not sell or transfer our LIHTC partnership
interests and that FHFA sees no disposition options. Therefore,
we no longer have both the intent and ability to sell or
otherwise transfer our LIHTC investments for value. The carrying
value of our LIHTC Partnership investments was
reduced to zero in the consolidated financial statements. We
will no longer recognize net operating losses or impairment on
our LIHTC investments, which will significantly reduce
Losses from partnership investments in the future.
As of December 31, 2009, we have an obligation to fund
$541 million in capital contributions. This obligation has
been recorded as a component of Partnership
liabilities on our consolidated balance sheet.
Consolidated
VIEs
We consolidate Fannie Mae MBS trusts in our financial statements
when we own 100% of the trust, which gives us the unilateral
ability to liquidate the trust. We also consolidate MBS trusts
that are within the scope of the applicable consolidation
accounting standard when we are deemed to be the primary
beneficiary. This includes certain private-label, mortgage
revenue bond, and Fannie Mae securitization trusts that meet the
VIE criteria. As an active participant in the secondary mortgage
market, our ownership percentage in any given mortgage-related
security will vary over time. We record third-party ownership in
these consolidated MBS trusts as a component of Long-term
debt in our consolidated balance sheets. We also
consolidate in our financial statements the assets and
liabilities of limited partnerships that are VIEs if we are
deemed to be the primary beneficiary. We record third-party
ownership in these consolidated limited partnerships in
Noncontrolling interest in our consolidated balance
sheets. In general, the investors in the obligations of
consolidated VIEs have recourse only to the assets of those VIEs
and do not have recourse to us, except where we provide a
guaranty to the VIE.
F-41
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the carrying amount and
classification of assets and liabilities of consolidated VIEs as
of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
MBS trusts:
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
49,939
|
|
|
$
|
59,126
|
|
Available-for-sale securities
|
|
|
2,337
|
|
|
|
2,208
|
|
Loans held for sale
|
|
|
3,173
|
|
|
|
1,429
|
|
Trading securities
|
|
|
5,100
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
Total MBS
trusts(1)
|
|
|
60,549
|
|
|
|
63,756
|
|
Limited partnerships:
|
|
|
|
|
|
|
|
|
Partnership investments
|
|
|
430
|
|
|
|
5,697
|
|
Cash, cash equivalents and restricted cash
|
|
|
21
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
Total limited partnership investments
|
|
|
451
|
|
|
|
5,843
|
|
|
|
|
|
|
|
|
|
|
Total assets of consolidated VIEs
|
|
$
|
61,000
|
|
|
$
|
69,599
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
5,218
|
|
|
$
|
5,094
|
|
Partnership liabilities
|
|
|
385
|
|
|
|
2,585
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of consolidated VIEs
|
|
$
|
5,603
|
|
|
$
|
7,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The assets of consolidated MBS
trusts are restricted solely for the purpose of servicing the
related MBS.
|
As of December 31, 2009, we consolidated $5.8 billion
in assets related to MBS trusts that were not consolidated as of
December 31, 2008. We did not consolidated these assets as
of December 31, 2008 because we did not have the unilateral
ability to liquidate the trusts. We consolidated these assets as
of December 31, 2009 because we purchased additional MBS
during the period such that we owned 100% of the trusts as of
that date.
As of December 31, 2008, we consolidated $5.9 billion
in assets related to MBS trusts that were no longer consolidated
as of December 31, 2009 because we sold all or a portion of
our ownership interests in the related MBS trusts such that we
no longer had the unilateral ability to liquidate these trusts.
For the year ended December 31, 2009, we recognized a gain
of $171 million upon deconsolidation of VIEs. The portion
of this gain related to the remeasurement of retained investment
in the trust to its fair value was $37 million for the year
ended December 31, 2009.
Non-consolidated
VIEs
We also have investments in VIEs that we do not consolidate
because we are not deemed to be the primary beneficiary. These
non-consolidated VIEs include securitization trusts and certain
LIHTC partnerships, as well as other equity investments. We also
are the sponsor of various securitization trusts where we may or
may not have a significant variable interest in the entity,
including trusts that meet the definition of a QSPE.
F-42
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the total assets as of
December 31, 2009 and 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 December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage-backed
trusts(1)
|
|
$
|
3,044,516
|
|
|
$
|
3,017,030
|
|
Asset-backed trusts
|
|
|
484,703
|
|
|
|
563,633
|
|
Limited partnership investments
|
|
|
13,085
|
|
|
|
12,884
|
|
Mortgage revenue bonds and other credit enhanced bonds
|
|
|
8,061
|
|
|
|
5,701
|
|
|
|
|
|
|
|
|
|
|
Total assets of non-consolidated VIEs and QSPEs
|
|
$
|
3,550,365
|
|
|
$
|
3,599,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $555.4 billion and
$604.4 billion of assets of non-QSPE securitization trusts
as of December 31, 2009 and 2008, respectively.
|
The following table displays the carrying amount and
classification of the assets and liabilities as of
December 31, 2009 and 2008 related to our variable
interests in non-consolidated VIEs and QSPEs where we have
variable interests in the entities or where we were either the
sponsor or master servicer of the entities, but were not the
transferor.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
161,495
|
|
|
$
|
180,694
|
|
Trading securities
|
|
|
64,183
|
|
|
|
63,265
|
|
Guaranty assets
|
|
|
6,783
|
|
|
|
6,431
|
|
Partnership investments
|
|
|
144
|
|
|
|
3,405
|
|
Servicer and MBS trust receivable
|
|
|
15,903
|
|
|
|
6,111
|
|
Other assets
|
|
|
1,305
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
Total carrying amount of assets related to our interests in
non-consolidated VIEs and QSPEs
|
|
$
|
249,813
|
|
|
$
|
261,232
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses
|
|
$
|
52,703
|
|
|
$
|
21,614
|
|
Guaranty obligations
|
|
|
12,282
|
|
|
|
10,823
|
|
Partnership liabilities
|
|
|
325
|
|
|
|
617
|
|
Servicer and MBS trust payable
|
|
|
20,371
|
|
|
|
4,259
|
|
Other liabilities
|
|
|
781
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
Total carrying amount of liabilities related to our interests in
non-consolidated VIEs and QSPEs
|
|
$
|
86,462
|
|
|
$
|
38,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior period amounts include
additional categories to conform to the current period
presentation.
|
F-43
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 sponsor or master servicer of the entities, but were not the
transferor, as well as the liabilities recognized in our
consolidated balance sheets related to our variable interests in
those entities as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
Exposure
|
|
Recognized
|
|
|
to
Loss(1)
|
|
Liabilities(2)
|
|
|
(Dollars in millions)
|
|
As of December 31, 2009
|
|
$
|
2,611,823
|
|
|
$
|
86,137
|
|
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 covered by our guaranty. Includes
$89.8 billion and $95.9 billion related to non-QSPE
securitization trusts as of December 31, 2009 and 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. Excludes deferred contributions to limited partnership
entities in which we have recognized an equity method investment.
|
|
(3) |
|
Prior period amounts include
additional categories to conform to the current period
presentation.
|
We own both single-family mortgage loans, which are secured by
four or fewer residential dwelling units, and multifamily
mortgage loans, which are secured by five or more residential
dwelling units. We classify these loans as either HFI or HFS. We
report HFI loans at the unpaid principal amount outstanding, net
of unamortized premiums and discounts, other cost basis
adjustments, and an allowance for loan losses. We report HFS
loans at the lower of cost or fair value determined on a pooled
basis, and record valuation changes in our consolidated
statements of operations.
F-44
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays loans in our mortgage portfolio as
of December 31, 2009 and 2008. The table excludes loans
underlying securities that are not consolidated, as those
mortgage loans are not included in our consolidated balance
sheets.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Single-family:(1)
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
$
|
52,399
|
|
|
$
|
43,799
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term fixed rate
|
|
|
179,654
|
|
|
|
186,550
|
|
Intermediate-term
fixed-rate(2)
|
|
|
29,474
|
|
|
|
37,546
|
|
Adjustable-rate
|
|
|
34,602
|
|
|
|
44,157
|
|
|
|
|
|
|
|
|
|
|
Total conventional single-family
|
|
|
243,730
|
|
|
|
268,253
|
|
|
|
|
|
|
|
|
|
|
Total single-family
|
|
|
296,129
|
|
|
|
312,052
|
|
|
|
|
|
|
|
|
|
|
Multifamily:(1)
|
|
|
|
|
|
|
|
|
Government insured or guaranteed
|
|
|
585
|
|
|
|
699
|
|
Conventional:
|
|
|
|
|
|
|
|
|
Long-term fixed-rate
|
|
|
5,727
|
|
|
|
5,636
|
|
Intermediate-term
fixed-rate(2)
|
|
|
91,760
|
|
|
|
90,837
|
|
Adjustable-rate
|
|
|
22,342
|
|
|
|
20,269
|
|
|
|
|
|
|
|
|
|
|
Total conventional multifamily
|
|
|
119,829
|
|
|
|
116,742
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
|
120,414
|
|
|
|
117,441
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums (discounts) and other cost basis
adjustments,
net(3)
|
|
|
(11,168
|
)
|
|
|
(894
|
)
|
Lower of cost or market adjustments on loans held for sale
|
|
|
(889
|
)
|
|
|
(264
|
)
|
Allowance for loan losses for loans held for investment
|
|
|
(10,461
|
)
|
|
|
(2,923
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
$
|
394,025
|
|
|
$
|
425,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes unpaid principal balance
totaling $147.0 billion and $65.8 billion as of
December 31, 2009 and 2008, respectively, of
mortgage-related securities that were held in consolidated
variable interest entities and mortgage-related securities
created from securitization transactions that did not meet the
sales accounting criteria, which effectively resulted in those
mortgage-related securities being accounted for as loans.
|
|
(2) |
|
Intermediate-term fixed-rate
consists of mortgage loans with contractual maturities at
purchase equal to or less than 15 years.
|
|
(3) |
|
Includes a net premium of
$806 million and $921 million as of December 31,
2009 and 2008, respectively, for hedged mortgage loans that will
be amortized through interest income over the life of the loans.
|
For the years ended December 31, 2009 and 2008, we
redesignated loans with a carrying value of $1.2 billion
and $13.5 billion, respectively, from HFS to HFI. We
redesignated $8.5 billion and $1.3 billion,
respectively, of HFI loans to HFS for the years ended
December 31, 2009 and 2008.
Loans
Acquired in a Transfer
Loans can be acquired either through purchase or upon
consolidating MBS trusts that hold loans as underlying
collateral. When a loan underlying a Fannie Mae MBS trust is
delinquent, in whole or in part, for four or more consecutive
monthly payment dates, we have the option to purchase the loan
from the trust. Our acquisition cost for these loans is the
unpaid principal balance of that mortgage loan plus accrued
interest.
F-45
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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. Under long-term standby commitments, we purchase
loans from lenders when the loans subject to these commitments
meet certain delinquency criteria.
We acquired delinquent loans with an unpaid principal balance
plus accrued interest of $36.4 billion, $4.5 billion
and $6.6 billion for the years ended December 31,
2009, 2008 and 2007, respectively. We account for such acquired
loans at the lower of acquisition cost or fair value 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
contractually due cash flows from the borrower, ignoring
insignificant delays or shortfalls in amount. We base our
determination of whether a delay in payment or shortfall in
amount is considered more than insignificant on the facts and
circumstances surrounding the loan.
The following table displays the outstanding balance and
carrying amount of acquired credit-impaired loans as of
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Outstanding contractual balance
|
|
$
|
24,106
|
|
|
$
|
7,206
|
|
Carrying amount:
|
|
|
|
|
|
|
|
|
Loans on accrual status
|
|
|
2,560
|
|
|
|
2,902
|
|
Loans on nonaccrual status
|
|
|
8,952
|
|
|
|
2,708
|
|
|
|
|
|
|
|
|
|
|
Total carrying amount of loans
|
|
$
|
11,512
|
|
|
$
|
5,610
|
|
|
|
|
|
|
|
|
|
|
The following table displays details on acquired credit-impaired
loans at their acquisition dates for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Contractually required principal and interest payments at
acquisition(1)
|
|
$
|
39,197
|
|
|
$
|
5,034
|
|
|
$
|
7,098
|
|
Nonaccretable difference
|
|
|
9,234
|
|
|
|
783
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected at
acquisition(1)
|
|
|
29,963
|
|
|
|
4,251
|
|
|
|
6,527
|
|
Accretable yield
|
|
|
13,852
|
|
|
|
1,805
|
|
|
|
1,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial investment in acquired loans at acquisition
|
|
$
|
16,111
|
|
|
$
|
2,446
|
|
|
$
|
4,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
F-46
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 acquired credit-impaired
loans for the years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Beginning balance, January 1
|
|
$
|
1,559
|
|
|
$
|
2,252
|
|
|
$
|
1,511
|
|
Additions
|
|
|
13,852
|
|
|
|
1,805
|
|
|
|
1,772
|
|
Accretion
|
|
|
(215
|
)
|
|
|
(279
|
)
|
|
|
(273
|
)
|
Reductions(1)
|
|
|
(13,693
|
)
|
|
|
(2,294
|
)
|
|
|
(1,206
|
)
|
Change in estimated cash
flows(2)
|
|
|
8,729
|
|
|
|
420
|
|
|
|
797
|
|
Reclassifications to nonaccretable
difference(3)
|
|
|
(115
|
)
|
|
|
(345
|
)
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
10,117
|
|
|
$
|
1,559
|
|
|
$
|
2,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reductions result from liquidations
and loan modifications due to troubled debt restructurings
(TDRs).
|
|
(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 we were still accounting for as acquired
credit-impaired loans for the respective periods. The table
excludes loans that were modified as TDRs 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 we were still accounting for as acquired
credit-impaired loans, as well as loans that we have
subsequently modified as a TDR, for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Accretion of fair value
discount(1)
|
|
$
|
405
|
|
|
$
|
158
|
|
|
$
|
80
|
|
Interest income on loans returned to accrual status or
subsequently modified as TDRs
|
|
|
214
|
|
|
|
476
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income recognized on acquired credit-impaired
loans
|
|
$
|
619
|
|
|
$
|
634
|
|
|
$
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Provision for credit losses subsequent
to the acquisition of credit-impaired loans
|
|
$
|
691
|
|
|
$
|
185
|
|
|
$
|
76
|
|
|
|
|
(1) |
|
Represents accretion of the fair
value discount that was recorded on acquired credit-impaired
loans.
|
F-47
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Nonaccrual
Loans
We have single-family and multifamily loans in our mortgage
portfolio, including acquired credit-impaired loans, that are
subject to our nonaccrual policy. The following table displays
information about nonaccrual loans in our portfolio as of
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Nonaccrual
loans(1)
|
|
$
|
34,079
|
|
|
$
|
17,634
|
|
Accrued interest recorded on nonaccrual
loans(2)
|
|
|
1,366
|
|
|
|
436
|
|
Accruing loans past due 90 days or more
|
|
|
612
|
|
|
|
317
|
|
Nonaccrual loans in portfolio (number of loans)
|
|
|
292,468
|
|
|
|
141,329
|
|
|
|
|
(1) |
|
Includes the carrying value of all
nonaccrual loans, including TDRs and on-balance sheet HomeSaver
Advance first-lien loans on nonaccrual status. Forgone interest
on nonaccrual loans, which represents the amount of income
contractually due that we would have reported had the loans
performed according to their contractual terms, was
$1.1 billion, $359 million and $200 million for
the years ended December 31, 2009, 2008 and 2007,
respectively.
|
|
(2) |
|
Reflects accrued interest on
nonaccrual loans that was recorded prior to their placement on
nonaccrual status.
|
Impaired
Loans
Impaired loans include single-family and multifamily TDRs,
acquired credit-impaired loans, and other multifamily loans.
Acquired
Credit-impaired Loans without a Loss Allowance
The following table displays the recorded investment of acquired
credit-impaired loans for which we did not recognize a loss
allowance subsequent to acquisition as of December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollars in millions)
|
|
Impaired nonaccrual loans without an allowance
|
|
$
|
3,970
|
|
|
$
|
1,074
|
|
Average recorded investment in nonaccrual loans
|
|
|
2,088
|
|
|
|
1,378
|
|
The amount of interest income recognized on these impaired loans
during the year was $21 million, $5 million and
$8 million for the years ended December 31, 2009, 2008
and 2007, respectively. We do not recognize interest income when
these loans are placed on nonaccrual status.
Other
Impaired Loans
The following table displays the total recorded investment and
the corresponding specific loss allowances as of
December 31, 2009 and 2008 of all other impaired loans,
including acquired credit-impaired loans for which we recognized
a loss allowance subsequent to acquisition.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Impaired loans with an
allowance(1)
|
|
$
|
21,055
|
|
|
$
|
5,044
|
|
Impaired loans without an
allowance(2)
|
|
|
4,450
|
|
|
|
1,649
|
|
|
|
|
|
|
|
|
|
|
Total other impaired
loans(3)
|
|
$
|
25,505
|
|
|
$
|
6,693
|
|
|
|
|
|
|
|
|
|
|
Allowance for other impaired loans
|
|
$
|
5,995
|
|
|
$
|
878
|
|
F-48
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
(1) |
|
Includes $5.0 billion and
$1.1 billion of acquired credit-impaired mortgage loans for
which we recorded a loss allowance subsequent to acquisition as
of December 31, 2009 and 2008, respectively.
|
|
(2) |
|
The discounted cash flows,
collateral value or fair value equals or exceeds the carrying
value of the loan, and as such, no allowance is required.
|
|
(3) |
|
Includes single-family loans
individually impaired and restructured in a TDR of
$19.0 billion and $5.2 billion as of December 31,
2009 and 2008, respectively. Includes multifamily loans that
were both individually impaired and restructured in a TDR of $51
million as of December 31, 2009. We had no multifamily
loans individually impaired and restructured in a TDR as of
December 31, 2008. Includes a carrying value of
$156 million and $164 million for delinquent loans
held in MBS trusts consolidated in our balance sheet related to
our HomeSaver Advance initiative as of December 31, 2009
and 2008, respectively.
|
The following table displays the interest income recognized and
average recorded investment in the other impaired loans for the
years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in millions)
|
|
Interest income recognized
|
|
$
|
532
|
|
|
$
|
251
|
|
|
$
|
92
|
|
Average recorded investment
|
|
|
13,339
|
|
|
|
4,782
|
|
|
|
2,635
|
|
Other
Loans
In 2008, we implemented 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. We limit each loan 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
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollars in millions)
|
|
Unpaid principal balance
|
|
$
|
324
|
|
|
$
|
461
|
|
Carrying value
|
|
|
1
|
|
|
|
8
|
|
The difference between the unpaid principal balance and fair
value at acquisition is recorded as either a charge-off to the
Reserve for guaranty losses or a provision to the
Allowance for loan losses, based on the status of
first mortgage loan. We include these loans in our consolidated
balance sheet as a component of Other assets. We
recorded a fair value loss and impairment at acquisition of
$286 million and $453 million for the years ended
December 31, 2009 and 2008, respectively, for these loans.
While the loan is performing, the fair value discount on these
loans will accrete into income based on the contractual term of
the loan.
|
|
4.
|
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. We
calculate the allowance and reserve 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
F-49
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
subject to risks and uncertainties particularly in the current
uncertain credit environment. We have experienced higher default
and loan loss severity rates during 2009 as compared to 2008,
which has increased our estimates of incurred losses. This has
resulted in a significant increase to our allowance for loan
losses and reserve for guaranty losses as of December 31,
2009.
The following table displays changes in the allowance for loan
losses and reserve for guaranty losses for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1
|
|
$
|
2,923
|
|
|
$
|
698
|
|
|
$
|
340
|
|
Provision
|
|
|
9,569
|
|
|
|
4,022
|
|
|
|
658
|
|
Charge-offs(1)
|
|
|
(2,245
|
)
|
|
|
(1,987
|
)
|
|
|
(407
|
)
|
Recoveries
|
|
|
214
|
|
|
|
190
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December
31(2)
|
|
$
|
10,461
|
|
|
$
|
2,923
|
|
|
$
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for guaranty losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1
|
|
$
|
21,830
|
|
|
$
|
2,693
|
|
|
$
|
519
|
|
Provision
|
|
|
63,057
|
|
|
|
23,929
|
|
|
|
3,906
|
|
Charge-offs(3)(4)
|
|
|
(31,142
|
)
|
|
|
(4,986
|
)
|
|
|
(1,782
|
)
|
Recoveries
|
|
|
685
|
|
|
|
194
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
54,430
|
|
|
$
|
21,830
|
|
|
$
|
2,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes accrued interest of
$1.5 billion, $642 million and $128 million for
the years ended December 31, 2009, 2008 and 2007,
respectively.
|
|
(2) |
|
Includes $726 million,
$150 million and $39 million as of December 31,
2009, 2008 and 2007, respectively, associated with acquired
credit-impaired loans.
|
|
(3) |
|
Includes charges of
$228 million and $333 million for the years ended
December 31, 2009 and 2008, respectively, related to
unsecured HomeSaver Advance loans.
|
|
(4) |
|
Includes charges recorded at the
date of acquisition of $20.3 billion, $2.1 billion and
$1.4 billion for the years ended December 31, 2009,
2008 and 2007, respectively, for acquired credit-impaired loans
where the acquisition cost exceeded the fair value of the
acquired loan.
|
F-50
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
5.
|
Investments
in Securities
|
Trading
Securities
Trading securities are recorded at fair value with subsequent
changes in fair value recorded as Fair value losses,
net in our 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 December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
74,750
|
|
|
$
|
58,006
|
|
Freddie Mac
|
|
|
15,082
|
|
|
|
2,299
|
|
Ginnie Mae
|
|
|
1
|
|
|
|
1
|
|
Alt-A
|
|
|
1,355
|
|
|
|
1,476
|
|
Subprime
|
|
|
1,780
|
|
|
|
2,318
|
|
CMBS
|
|
|
9,335
|
|
|
|
8,205
|
|
Mortgage revenue bonds
|
|
|
600
|
|
|
|
695
|
|
Other mortgage-related securities
|
|
|
154
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
103,057
|
|
|
|
73,166
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
8,515
|
|
|
|
10,598
|
|
Corporate debt securities
|
|
|
364
|
|
|
|
6,037
|
|
Other
|
|
|
3
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,882
|
|
|
|
17,640
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
111,939
|
|
|
$
|
90,806
|
|
|
|
|
|
|
|
|
|
|
Losses in trading securities held in our portfolio, net
|
|
$
|
2,685
|
|
|
$
|
7,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain prior year 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 years ended December 31, 2009,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Net trading gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
$
|
2,457
|
|
|
$
|
(4,297
|
)
|
|
$
|
(365
|
)
|
Non-mortgage-related securities
|
|
|
1,287
|
|
|
|
(2,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,744
|
|
|
$
|
(7,040
|
)
|
|
$
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net trading gains (losses) recorded in the year related to
securities still held at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
$
|
1,974
|
|
|
$
|
(4,464
|
)
|
|
$
|
(536
|
)
|
Non-mortgage-related securities
|
|
|
1,146
|
|
|
|
(2,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,120
|
|
|
$
|
(6,882
|
)
|
|
$
|
(536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Available-for-Sale
Securities
We measure AFS securities at fair value with unrealized gains
and losses recorded as a component of AOCI, net of tax, in our
consolidated balance sheets. We record realized gains and losses
from the sale of AFS securities in Investment gains
(losses), net in our consolidated statements of operations.
The following table displays the gross realized gains, losses
and proceeds on sales of AFS securities for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Gross realized gains
|
|
$
|
4,521
|
|
|
$
|
4,022
|
|
|
$
|
1,929
|
|
Gross realized losses
|
|
|
3,080
|
|
|
|
3,635
|
|
|
|
1,226
|
|
Total
proceeds(1)
|
|
|
226,664
|
|
|
|
130,991
|
|
|
|
71,960
|
|
|
|
|
(1) |
|
Excluding proceeds from the initial
sale of securities from new portfolio securitizations as defined
in Note 6, Portfolio Securitizations.
|
The following tables display the amortized cost, gross
unrealized gains and losses and fair value by major security
type for AFS securities we held as of December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Total
|
|
|
Gross
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Losses -
|
|
|
Losses -
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
OTTI(2)
|
|
|
Other(3)
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
|
|
$
|
148,074
|
|
|
$
|
6,413
|
|
|
$
|
(23
|
)
|
|
$
|
(45
|
)
|
|
$
|
154,419
|
|
Freddie Mac
|
|
|
26,281
|
|
|
|
1,192
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
27,469
|
|
Ginnie Mae
|
|
|
1,253
|
|
|
|
102
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
1,353
|
|
Alt-A
|
|
|
17,836
|
|
|
|
41
|
|
|
|
(2,738
|
)
|
|
|
(989
|
)
|
|
|
14,150
|
|
Subprime
|
|
|
13,232
|
|
|
|
33
|
|
|
|
(1,774
|
)
|
|
|
(745
|
)
|
|
|
10,746
|
|
CMBS
|
|
|
15,797
|
|
|
|
|
|
|
|
|
|
|
|
(2,604
|
)
|
|
|
13,193
|
|
Mortgage revenue bonds
|
|
|
13,679
|
|
|
|
71
|
|
|
|
(44
|
)
|
|
|
(860
|
)
|
|
|
12,846
|
|
Other mortgage-related securities
|
|
|
4,225
|
|
|
|
29
|
|
|
|
(235
|
)
|
|
|
(467
|
)
|
|
|
3,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
240,377
|
|
|
$
|
7,881
|
|
|
$
|
(4,814
|
)
|
|
$
|
(5,716
|
)
|
|
$
|
237,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2008(4)
|
|
|
|
Total
|
|
|
Gross
|
|
|
Gross
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost(1)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
|
|
$
|
171,945
|
|
|
$
|
4,564
|
|
|
$
|
(265
|
)
|
|
$
|
176,244
|
|
Freddie Mac
|
|
|
30,855
|
|
|
|
758
|
|
|
|
(43
|
)
|
|
|
31,570
|
|
Ginnie Mae
|
|
|
1,493
|
|
|
|
78
|
|
|
|
(1
|
)
|
|
|
1,570
|
|
Alt-A
|
|
|
19,576
|
|
|
|
7
|
|
|
|
(4,307
|
)
|
|
|
15,276
|
|
Subprime
|
|
|
18,740
|
|
|
|
11
|
|
|
|
(4,433
|
)
|
|
|
14,318
|
|
CMBS
|
|
|
16,036
|
|
|
|
|
|
|
|
(4,550
|
)
|
|
|
11,486
|
|
Mortgage revenue bonds
|
|
|
14,636
|
|
|
|
29
|
|
|
|
(2,177
|
)
|
|
|
12,488
|
|
Other mortgage-related securities
|
|
|
4,425
|
|
|
|
35
|
|
|
|
(924
|
)
|
|
|
3,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
277,706
|
|
|
$
|
5,482
|
|
|
$
|
(16,700
|
)
|
|
$
|
266,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
(1) |
|
Amortized cost includes unamortized
premiums, discounts and other cost basis adjustments as well as
other-than-temporary impairments. As of December 31, 2009,
amortized cost includes only the credit component of
other-than-temporary impairments recognized in our consolidated
statements of operations.
|
|
(2) |
|
Represents the noncredit component
of other-than-temporary impairment losses recorded in other
comprehensive loss as well as cumulative changes in fair value
for securities for which we previously recognized an
other-than-temporary impairment.
|
|
(3) |
|
Represents the gross unrealized
losses on securities for which we have not recognized
other-than-temporary impairment.
|
|
(4) |
|
Certain amounts have been
reclassified to conform to the current period presentation.
|
The following tables display additional information regarding
gross unrealized losses by major security type for AFS
securities in an unrealized loss position we held as of
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Less Than 12
|
|
|
12 Consecutive
|
|
|
|
Consecutive Months
|
|
|
Months or Longer
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
|
|
$
|
(36
|
)
|
|
$
|
1,461
|
|
|
$
|
(32
|
)
|
|
$
|
544
|
|
Freddie Mac
|
|
|
(2
|
)
|
|
|
85
|
|
|
|
(2
|
)
|
|
|
164
|
|
Ginnie Mae
|
|
|
(2
|
)
|
|
|
139
|
|
|
|
|
|
|
|
26
|
|
Alt-A
|
|
|
(2,439
|
)
|
|
|
7,018
|
|
|
|
(1,288
|
)
|
|
|
6,929
|
|
Subprime
|
|
|
(998
|
)
|
|
|
4,595
|
|
|
|
(1,521
|
)
|
|
|
5,860
|
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
(2,604
|
)
|
|
|
13,193
|
|
Mortgage revenue bonds
|
|
|
(54
|
)
|
|
|
2,392
|
|
|
|
(850
|
)
|
|
|
5,664
|
|
Other mortgage-related securities
|
|
|
(96
|
)
|
|
|
536
|
|
|
|
(606
|
)
|
|
|
2,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,627
|
)
|
|
$
|
16,226
|
|
|
$
|
(6,903
|
)
|
|
$
|
35,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2008(1)
|
|
|
|
Less Than 12
|
|
|
12 Consecutive
|
|
|
|
Consecutive Months
|
|
|
Months or Longer
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
|
|
$
|
(169
|
)
|
|
$
|
7,313
|
|
|
$
|
(96
|
)
|
|
$
|
2,844
|
|
Freddie Mac
|
|
|
(38
|
)
|
|
|
2,290
|
|
|
|
(5
|
)
|
|
|
693
|
|
Ginnie Mae
|
|
|
|
|
|
|
20
|
|
|
|
(1
|
)
|
|
|
42
|
|
Alt-A
|
|
|
(516
|
)
|
|
|
1,401
|
|
|
|
(3,791
|
)
|
|
|
7,651
|
|
Subprime
|
|
|
(422
|
)
|
|
|
1,827
|
|
|
|
(4,011
|
)
|
|
|
9,666
|
|
CMBS
|
|
|
(2,533
|
)
|
|
|
6,821
|
|
|
|
(2,017
|
)
|
|
|
4,666
|
|
Mortgage revenue bonds
|
|
|
(854
|
)
|
|
|
6,230
|
|
|
|
(1,323
|
)
|
|
|
4,890
|
|
Other mortgage-related securities
|
|
|
(694
|
)
|
|
|
2,117
|
|
|
|
(230
|
)
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily-impaired available-for-sale
|
|
$
|
(5,226
|
)
|
|
$
|
28,019
|
|
|
$
|
(11,474
|
)
|
|
$
|
31,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain amounts have been
reclassified to conform to the current presentation.
|
F-53
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Other-Than-Temporary
Impairments
We adopted the provisions of the FASB modified guidance on the
model for assessing other-than-temporary impairments as of
April 1, 2009. As prescribed by this new guidance, we
recognize the credit component of other-than-temporary
impairments of our debt securities in our consolidated statement
of operations and the noncredit component in Other
comprehensive loss for those securities that we do not
intend to sell and for which it is not more likely than not that
we will be required to sell before recovery.
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. $6.9 billion of the
$10.5 billion of gross unrealized losses on AFS securities
of December 31, 2009 have existed for a period of 12
consecutive months or longer. Gross unrealized losses on AFS
securities as of December 31, 2009 includes unrealized
losses on securities with other-than-temporary impairment in
which a portion of the impairment remains in AOCI. The
securities with unrealized losses for 12 consecutive months or
longer, on average, had a market value as of December 31,
2009 that was 84% 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.
The following table displays our net other-than-temporary
impairments by major security type for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
|
|
$
|
(117
|
)
|
|
$
|
(7
|
)
|
|
$
|
(203
|
)
|
Freddie Mac
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
(3,956
|
)
|
|
|
(4,820
|
)
|
|
|
|
|
Subprime
|
|
|
(5,660
|
)
|
|
|
(1,932
|
)
|
|
|
(160
|
)
|
Mortgage revenue bonds
|
|
|
(22
|
)
|
|
|
(21
|
)
|
|
|
(4
|
)
|
Other
|
|
|
(105
|
)
|
|
|
(194
|
)
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairments
|
|
$
|
(9,861
|
)
|
|
$
|
(6,974
|
)
|
|
$
|
(814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, we recorded net
other-than-temporary impairment of $9.9 billion. This
other-than-temporary impairment reflects current market
conditions and was primarily driven by an increase in our loss
projections on securities due to:
|
|
|
|
|
model refinements;
|
|
|
|
interest rates; and
|
|
|
|
net projected home price impact.
|
Model refinements were made to the collateral default and
severity models for Alt-A and subprime securities
to more closely align with the observed deterioration of the
loans underlying the securities. While expectations for
collateral default declined from prior expectations, there was
an increase in severity expectations that drove the increased
loss. Since cash flow expectations are very sensitive to these
model assumptions, these refinements were estimated to account
for approximately 40% of the increase in projected losses.
Higher expectations for interest rates were estimated to account
for approximately 20% of the increase in projected
F-54
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
losses, primarily in subprime securities. Our projections for
interest rates are generally based on the implied forward curve
for interest rates in the market as of the last day of each
respective reporting period. We would consider higher interest
rates to be unfavorable in the context of estimated credit
losses on subprime securities because the subprime securities
held by us are typically floating rate instruments. In lower
interest rate environments, the cash flows provided by the
underlying subprime mortgage loans are typically greater than
the floating rate liabilities of the bonds and therefore more
cash flow is available to protect against credit losses than in
a higher rate interest environment where the difference between
the rate on the subprime mortgage loans and the coupon on the
bonds is smaller. While current market interest rates are still
low by historical standards, the forward curve is now higher
than prior expectations, leading to increased loss expectations.
The net projected home price impact for the year was estimated
to account for approximately 20% of the increase in projected
losses, mostly due to the continued weakening in credit markets.
Other factors combined were estimated to contribute the
remaining approximately 20% of the increase in projected losses.
The following table displays activity related to the credit
component recognized in earnings on debt securities held by us
for which we recognized a portion of other-than-temporary
impairment in AOCI for the year ended December 31, 2009.
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2009
|
|
|
|
(Dollars in millions)
|
|
|
Balance, January 1
|
|
$
|
|
|
Credit component of other-than-temporary impairment not
reclassified to AOCI in conjunction with the cumulative effect
transition adjustment at April 1, 2009
|
|
|
4,265
|
|
Additions for the credit component on debt securities for which
OTTI was not previously recognized
|
|
|
1,090
|
|
Additions for credit losses on debt securities for which OTTI
was previously recognized
|
|
|
3,118
|
|
Reductions for increases in cash flows expected to be collected
over the remaining life of the security
|
|
|
(282
|
)
|
|
|
|
|
|
Balance, December 31
|
|
$
|
8,191
|
|
|
|
|
|
|
As of December 31, 2009, those debt securities with
other-than-temporary impairment in which we recognized in our
consolidated statement of operations only the amount of loss
related to credit consisted predominantly of Alt-A and subprime
securities. For these residential mortgage-backed securities, we
estimate the portion of loss attributable to credit using
discounted cash flow models. We create the models based on the
performance of first-lien loans in a loan performance
asset-backed securities database, which reflect the average
performance of all private-label mortgage-related securities. We
employ 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. We first aggregate loan-level performance
projections by pool. We then input the prepayment, default,
severity and delinquency vectors for these pools in cash flow
modeling software which projects our bond cash flows, including
projections of bond principal losses and interest shortfalls.
The software contains detailed information on security-level
subordination levels and cash flow priority of payments. We
model all securities without assuming the benefit of any
external financial guarantees; we then perform a separate
assessment to assess whether we can rely upon the guaranty. We
have recorded other-than-temporary impairments for the year
ended December 31, 2009 based on this analysis, with
amounts related to credit loss recognized in our consolidated
statement of operations. For securities we determined were not
other-than-temporarily impaired, we concluded that either the
bond did not project any credit loss or if we projected a loss,
that the present value of expected cash flows was greater than
the securitys cost basis.
F-55
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
We analyze CMBS using a third party loan level model that
incorporates such factors as debt service coverage,
loan-to-value ratio, geographic location, property type, and
amortization type to determine the level of projected losses. We
then compare the projected loss to the amount of subordination
in the bonds that we hold to determine whether we expect any
loss on those bonds. As of December 31, 2009, we have no
other-than-temporary impairments in our holdings of CMBS as we
project the remaining subordination to be more than sufficient
to absorb the level of projected losses. We believe the decline
in fair value for these securities results from the lower level
of liquidity in the marketplace and the resultant higher
investor required returns, and not from an expectation of credit
loss. While downgrades have occurred in this sector in recent
months, all of our holdings remain investment grade.
For mortgage revenue bonds, where we cannot utilize
credit-sensitized cash flows, we perform a qualitative and
quantitative analysis to assess whether a bond is
other-than-temporarily impaired. If a bond is deemed to be
other-than-temporarily impaired, the projected contractual cash
flows of the security are reduced by a default loss amount based
on the securitys lowest credit rating as provided by the
major nationally recognized statistical rating organizations.
The lower the securitys credit rating, the larger the
amount by which the contractual cash flows are reduced. These
adjusted cash flows are then used in the present value
calculation to determine the credit portion of the
other-than-temporary impairment. While we have recognized
other-than-temporary impairment on these bonds, we expect to
realize no credit losses on the vast majority of our holdings
due to the inherent financial strength of the issuers, or in
some cases, the amount of external credit support from mortgage
collateral or financial guarantees. The fair values of these
bonds are likewise impacted by the low levels of market
liquidity and high required returns, which has led to unrealized
losses in the portfolio that we deem to be temporary.
Other mortgage-related securities include manufactured
housing securities, which have been other-than-temporarily
impaired in 2009. For manufactured housing securities, we
utilize models that incorporate recent historical performance
information and other relevant public data to run cash flows and
assess for other-than-temporary impairment. Given the
significant seasoning of these securities we expect that the
future performance will be in line with how the securities are
currently performing. We model all of these securities assuming
no benefit of any external financial guarantees and then
separately assess whether we can rely on the guaranty. If we
determined that securities were not other-than-temporarily
impaired, we concluded that either the bond did not project any
credit loss or, if a loss was projected, that present value of
expected cash flows was greater than the securitys cost
basis.
The following table displays the modeled attributes for
securities that were other-than-temporarily impaired as of
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment Rates
|
|
|
Default Rates
|
|
|
Loss Severity
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Range
|
|
|
Average
|
|
|
Range
|
|
|
Average
|
|
|
Range
|
|
|
Alt-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and prior
|
|
|
7.4
|
|
|
|
4.5 - 10.2
|
|
|
|
55.4
|
|
|
|
34.2 - 72.1
|
|
|
|
41.2
|
|
|
|
29.7 - 55.5
|
|
2005
|
|
|
5.3
|
|
|
|
2.4 - 8.9
|
|
|
|
59.8
|
|
|
|
15.6 - 86.0
|
|
|
|
57.1
|
|
|
|
40.2 - 69.0
|
|
2006
|
|
|
4.8
|
|
|
|
2.3 - 8.2
|
|
|
|
68.2
|
|
|
|
18.4 - 87.0
|
|
|
|
59.7
|
|
|
|
42.6 - 74.7
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2.0
|
|
|
|
1.9 - 2.2
|
|
|
|
80.3
|
|
|
|
78.4 - 81.9
|
|
|
|
76.7
|
|
|
|
75.5 - 78.2
|
|
2006
|
|
|
2.0
|
|
|
|
0.5 - 2.6
|
|
|
|
80.2
|
|
|
|
69.3 - 91.6
|
|
|
|
76.9
|
|
|
|
73.7 - 85.1
|
|
2007
|
|
|
2.8
|
|
|
|
2.3 - 3.0
|
|
|
|
73.7
|
|
|
|
71.5 - 80.4
|
|
|
|
72.3
|
|
|
|
66.5 - 77.2
|
|
Manufactured Housing 2004 and prior
|
|
|
2.7
|
|
|
|
1.7 - 4.0
|
|
|
|
36.1
|
|
|
|
23.7 - 54.1
|
|
|
|
82.0
|
|
|
|
75.6 - 106.9
|
|
F-56
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Maturity
Information
The following table displays the amortized cost and fair value
of our AFS securities by major security type and remaining
maturity, assuming no principal prepayments, as of
December 31, 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 December 31, 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
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae
|
|
$
|
148,074
|
|
|
$
|
154,419
|
|
|
$
|
20
|
|
|
$
|
21
|
|
|
$
|
681
|
|
|
$
|
718
|
|
|
$
|
21,743
|
|
|
$
|
22,719
|
|
|
$
|
125,630
|
|
|
$
|
130,961
|
|
Freddie Mac
|
|
|
26,281
|
|
|
|
27,469
|
|
|
|
25
|
|
|
|
25
|
|
|
|
62
|
|
|
|
64
|
|
|
|
1,738
|
|
|
|
1,822
|
|
|
|
24,456
|
|
|
|
25,558
|
|
Ginnie Mae
|
|
|
1,253
|
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
1,248
|
|
|
|
1,348
|
|
Alt-A
|
|
|
17,836
|
|
|
|
14,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351
|
|
|
|
332
|
|
|
|
17,485
|
|
|
|
13,818
|
|
Subprime
|
|
|
13,232
|
|
|
|
10,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,232
|
|
|
|
10,746
|
|
CMBS
|
|
|
15,797
|
|
|
|
13,193
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
|
366
|
|
|
|
15,057
|
|
|
|
12,584
|
|
|
|
365
|
|
|
|
243
|
|
Mortgage revenue bonds
|
|
|
13,679
|
|
|
|
12,846
|
|
|
|
29
|
|
|
|
29
|
|
|
|
377
|
|
|
|
388
|
|
|
|
822
|
|
|
|
823
|
|
|
|
12,451
|
|
|
|
11,606
|
|
Other mortgage-related securities
|
|
|
4,225
|
|
|
|
3,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
4,225
|
|
|
|
3,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
240,377
|
|
|
$
|
237,728
|
|
|
$
|
74
|
|
|
$
|
75
|
|
|
$
|
1,495
|
|
|
$
|
1,536
|
|
|
$
|
39,716
|
|
|
$
|
38,306
|
|
|
$
|
199,092
|
|
|
$
|
197,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Loss
The following table displays the details of accumulated other
comprehensive loss as of December 31, 2009, 2008, and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Net unrealized gains (losses) on available-for-sale securities
for which we have not recorded other-than-temporary impairment
|
|
$
|
1,337
|
|
|
$
|
(7,291
|
)
|
|
$
|
(1,644
|
)
|
Net unrealized losses on available-for-sale securities for which
we have recorded other-than-temporary impairment
|
|
|
(3,059
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(10
|
)
|
|
|
(382
|
)
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(1,732
|
)
|
|
$
|
(7,673
|
)
|
|
$
|
(1,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
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 years
ended December 31, 2009 and 2008, the unpaid principal
balance of portfolio securitizations was $216.1 billion and
$41.1 billion, respectively.
For the transfers we 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.
F-57
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays our continuing involvement in the
form of Fannie Mae MBS, guaranty asset, guaranty obligation, MSA
and MSL as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Fannie Mae MBS
|
|
$
|
55,679
|
|
|
$
|
45,705
|
|
Guaranty asset
|
|
|
1,412
|
|
|
|
438
|
|
MSA
|
|
|
15
|
|
|
|
10
|
|
Guaranty obligation (excluding deferred profit)
|
|
|
(1,222
|
)
|
|
|
(769
|
)
|
MSL
|
|
|
(37
|
)
|
|
|
(27
|
)
|
We have recorded our exposure to credit losses on the loans
underlying our Fannie Mae MBS resulting from our guaranty in our
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. For additional information
surrounding the key assumptions utilized, refer to Master
Servicing in Note 1, Summary of Significant
Accounting Policies.
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, REMICs and SMBS are interests in securities with 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. We
approximate the fair value of our interests 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. We express all prepayment speeds 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 we receive from pricing services
are typically based on information they obtain on current
trading activity, but may be based on models where trading
activity is not observed. We evaluate the reasonableness of fair
value estimates obtained from pricing services through multiple
means, including our internal price verification group which
uses alternate forms of pricing information to validate the
prices. Given that we do not base prices for the retained
securities on internal models, but rather base them on
observable market inputs obtained by our pricing services, we
believe it would not be meaningful to provide sensitivities to
changes in assumptions on the fair value of the retained
securities.
F-58
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 December 31, 2009
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
34,260
|
|
|
$
|
19,472
|
|
Fair value
|
|
|
35,455
|
|
|
|
20,224
|
|
Impact on value from a 10% adverse change
|
|
|
(3,546
|
)
|
|
|
(2,022
|
)
|
Impact on value from a 20% adverse change
|
|
|
(7,091
|
)
|
|
|
(4,045
|
)
|
Weighted-average coupon
|
|
|
5.62
|
%
|
|
|
6.82
|
%
|
Weighted-average loan age
|
|
|
2.9 years
|
|
|
|
4.6 years
|
|
Weighted-average maturity
|
|
|
24.2 years
|
|
|
|
26.1 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 we 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 years
ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
Guaranty
|
|
|
|
Assets(1)
|
|
|
For the year ended December 31, 2009
|
|
|
|
|
Weighted-average
life(2)
|
|
|
5.1 years
|
|
Average
12-month
CPR(3)
|
|
|
27.4
|
%
|
Average discount rate
assumption(4)
|
|
|
4.3
|
%
|
For the year ended December 31, 2008
|
|
|
|
|
Weighted-average
life(2)
|
|
|
7.5 years
|
|
Average
12-month
CPR(3)
|
|
|
11.5
|
%
|
Average discount rate
assumption(4)
|
|
|
6.7
|
%
|
|
|
|
(1) |
|
The weighted-average life and
average
12-month CPR
assumptions for our guaranty assets approximate the assumptions
used for our guaranty obligation at time of securitization.
|
|
(2) |
|
The average number of years for
which each dollar of unpaid principal on a loan or
mortgage-related security remains outstanding.
|
|
(3) |
|
Represents the expected
12-month
average prepayment rate, which is based on the constant
annualized prepayment rate for mortgage loans.
|
|
(4) |
|
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.
|
F-59
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the key assumptions we used in
measuring the fair value of our continuing involvement,
excluding our MSA and MSL, which are not significant, related to
portfolio securitization transactions as of December 31,
2009 and 2008, and a sensitivity analysis showing the impact of
changes in key assumptions.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Guaranty Assets
|
|
|
|
|
|
|
|
|
Valuation at period end:
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
1,414
|
|
|
$
|
440
|
|
Weighted-average
life(1)
|
|
|
5.6 years
|
|
|
|
2.2 years
|
|
Prepayment speed assumptions:
|
|
|
|
|
|
|
|
|
Average
12-month CPR
prepayment speed
assumption(2)
|
|
|
22.7
|
%
|
|
|
59.3
|
%
|
Impact on value from a 10% adverse change
|
|
$
|
(68
|
)
|
|
$
|
(38
|
)
|
Impact on value from a 20% adverse change
|
|
|
(128
|
)
|
|
|
(71
|
)
|
Discount rate assumptions:
|
|
|
|
|
|
|
|
|
Average discount rate
assumption(3)
|
|
|
3.7
|
%
|
|
|
5.7
|
%
|
Impact on value from a 10% adverse change
|
|
$
|
(26
|
)
|
|
$
|
(10
|
)
|
Impact on value from a 20% adverse change
|
|
|
(52
|
)
|
|
|
(19
|
)
|
Guaranty Obligations
|
|
|
|
|
|
|
|
|
Valuation at period end:
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
5,202
|
|
|
$
|
2,703
|
|
Anticipated credit
losses(4)
|
|
|
3,317
|
|
|
|
2,246
|
|
Weighted-average
life(1)
|
|
|
5.6 years
|
|
|
|
2.2 years
|
|
Home price assumptions:
|
|
|
|
|
|
|
|
|
24 month average home price assumption
|
|
|
(1.3
|
)%
|
|
|
(5.0
|
)%
|
Impact on credit losses due to a 2.5% decline in home prices
|
|
$
|
273
|
|
|
$
|
454
|
|
Impact on credit losses due to a 5% decline in home prices
|
|
|
668
|
|
|
|
723
|
|
Loan-to-value assumptions:
|
|
|
|
|
|
|
|
|
Average estimated current loan-to-value ratio
|
|
|
71.9
|
%
|
|
|
72.3
|
%
|
Impact on credit losses due to a 2.5% increase in loan-to-value
|
|
$
|
327
|
|
|
$
|
585
|
|
Impact on credit losses due to a 5% increase in loan-to-value
|
|
|
672
|
|
|
|
905
|
|
|
|
|
(1) |
|
The estimated average number of
years for which each dollar of unpaid principal on a loan or
mortgage-related security will remain outstanding.
|
|
(2) |
|
Represents the
12-month
average prepayment 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. Actual results may vary materially from these amounts.
|
The preceding sensitivity analysis is hypothetical and may not
be indicative of actual results. We calculate the effect of a
variation in a particular assumption on the fair value of the
interest 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
assumption or
F-60
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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. We allocate the carrying amount of the financial
assets sold between the assets sold and the interests retained,
if any, based on their relative fair value at the date of sale.
Further, we recognize our recourse obligations 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 $1.0 billion and
$49 million and a net loss on portfolio securitizations of
$403 million for the years ended December 31, 2009,
2008 and 2007, respectively. We recognize these amounts as a
component of Investment gains (losses), net in our
consolidated statements of operations.
The following table displays cash flows from our securitization
trusts related to portfolio securitizations accounted for as
sales for the years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Proceeds from the initial sale of securities (new
securitizations)
|
|
$
|
85,719
|
|
|
$
|
30,084
|
|
|
$
|
31,271
|
|
Guaranty and other income
|
|
|
269
|
|
|
|
176
|
|
|
|
143
|
|
Principal and interest received on retained interests
|
|
|
9,714
|
|
|
|
7,898
|
|
|
|
6,859
|
|
Purchases of previously transferred financial assets
|
|
|
(1,501
|
)
|
|
|
(152
|
)
|
|
|
(292
|
)
|
We define managed loans as on-balance sheet mortgage
loans as well as mortgage loans that we have securitized in
portfolio securitizations that have qualified as sales pursuant
to the FASB guidance on accounting for transfers of financial
assets. The following table displays the unpaid principal
balances of managed loans, including those managed loans that
are delinquent as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
Principal Amount of
|
|
|
|
Balance
|
|
|
Delinquent
Loans(1)
|
|
|
|
(Dollars in millions)
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
395,551
|
|
|
$
|
51,051
|
|
Loans held for sale
|
|
|
20,992
|
|
|
|
140
|
|
Securitized loans
|
|
|
187,922
|
|
|
|
5,161
|
|
|
|
|
|
|
|
|
|
|
Total loans managed
|
|
$
|
604,465
|
|
|
$
|
56,352
|
|
|
|
|
|
|
|
|
|
|
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 we are no longer accruing interest. We discontinue
accruing interest when payment of principal and interest in full
is not reasonably assured.
|
Net credit losses incurred during the years ended
December 31, 2009, 2008 and 2007 related to loans held in
our portfolio and loans underlying Fannie Mae MBS issued from
our portfolio were $3.4 billion, $2.7 billion and
$516 million, respectively.
F-61
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the carrying amount and
classification of assets and associated liabilities recognized
as of December 31, 2009 and 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 December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
79,651
|
|
|
$
|
83
|
|
Available-for-sale securities
|
|
|
8,176
|
|
|
|
9,660
|
|
Loans held for sale
|
|
|
8,473
|
|
|
|
2,383
|
|
Trading securities
|
|
|
499
|
|
|
|
593
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96,799
|
|
|
$
|
12,719
|
|
|
|
|
|
|
|
|
|
|
LiabilitiesLong-term debt
|
|
$
|
949
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
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 (1) guarantees on
lender swap transactions issued or modified on or after
January 1, 2003, (2) guarantees on portfolio
securitization transactions, (3) credit enhancements on
mortgage revenue bonds, and (4) 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 $12.4 billion
and $9.7 billion as of December 31, 2009 and 2008,
respectively. We also record an estimate of incurred credit
losses on these guarantees in the Reserve for guaranty
losses in our consolidated balance sheets, as discussed
further in Note 4, Allowance for Loan Losses and
Reserve for Guaranty Losses.
We have a portion of our guarantees reflected in our
consolidated balance sheets. For those guarantees recorded in
our consolidated balance sheets, our maximum potential exposure
under 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 December 31,
2009 and 2008, respectively. In addition, we had exposure of
$135.7 billion and $172.2 billion for other guarantees
not recorded in our consolidated balance sheets as of
December 31, 2009 and 2008, respectively, which primarily
represents the unpaid principal balance of loans underlying
guarantees issued prior to the effective date of the current
FASB guidance on guaranty accounting.
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
F-62
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
third parties on guarantees recorded in our consolidated balance
sheets was $113.4 billion and $124.4 billion as of
December 31, 2009 and 2008, respectively. The maximum
amount we could recover through available credit enhancements
and recourse with all third parties on guarantees not recorded
in our consolidated balance sheets was $13.6 billion and
$17.6 billion as of December 31, 2009 and 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.
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 and operating debt service coverage. We use
this information, in conjunction with housing market and
economic conditions, to structure our pricing and our
eligibility and underwriting criteria to accurately reflect the
current risk of loans with these high-risk characteristics. 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 guaranty book of business as of
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
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 conventional single-family guaranty book
of business(3)
|
|
|
2.38
|
%
|
|
|
1.15
|
%
|
|
|
6.68
|
%
|
|
|
2.53
|
%
|
|
|
1.10
|
%
|
|
|
2.96
|
%
|
Percentage of conventional single-family
loans(4)
|
|
|
2.46
|
|
|
|
1.07
|
|
|
|
5.38
|
|
|
|
2.52
|
|
|
|
1.00
|
|
|
|
2.42
|
|
F-63
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
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)(4)
|
|
|
of
Business(3)
|
|
|
Delinquent(2)(4)
|
|
|
Estimated mark-to-market loan-to-value ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.01% to 110%
|
|
|
5
|
%
|
|
|
14.79
|
%
|
|
|
5
|
%
|
|
|
7.12
|
%
|
110.01% to 120%
|
|
|
3
|
|
|
|
18.55
|
|
|
|
3
|
|
|
|
9.91
|
|
120.01% to 125%
|
|
|
1
|
|
|
|
21.39
|
|
|
|
1
|
|
|
|
11.79
|
|
Greater than 125%
|
|
|
5
|
|
|
|
31.05
|
|
|
|
3
|
|
|
|
18.43
|
|
Geographical Distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
|
|
|
3
|
|
|
|
8.80
|
|
|
|
3
|
|
|
|
3.41
|
|
California
|
|
|
17
|
|
|
|
5.73
|
|
|
|
16
|
|
|
|
2.30
|
|
Florida
|
|
|
7
|
|
|
|
12.82
|
|
|
|
7
|
|
|
|
6.14
|
|
Nevada
|
|
|
1
|
|
|
|
13.00
|
|
|
|
1
|
|
|
|
4.74
|
|
Select Midwest
states(5)
|
|
|
11
|
|
|
|
5.62
|
|
|
|
11
|
|
|
|
2.70
|
|
All other states
|
|
|
61
|
|
|
|
4.11
|
|
|
|
62
|
|
|
|
1.86
|
|
Product Distribution (not mutually
exclusive):(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
9
|
|
|
|
15.63
|
|
|
|
11
|
|
|
|
7.03
|
|
Subprime
|
|
|
*
|
|
|
|
30.68
|
|
|
|
*
|
|
|
|
14.29
|
|
Negatively amortizing adjustable rate
|
|
|
1
|
|
|
|
10.29
|
|
|
|
1
|
|
|
|
5.61
|
|
Interest only
|
|
|
7
|
|
|
|
20.17
|
|
|
|
8
|
|
|
|
8.42
|
|
Investor property
|
|
|
6
|
|
|
|
5.54
|
|
|
|
6
|
|
|
|
2.95
|
|
Condo/Coop
|
|
|
9
|
|
|
|
5.99
|
|
|
|
9
|
|
|
|
2.73
|
|
Original loan-to-value ratio
>90%(7)
|
|
|
9
|
|
|
|
13.05
|
|
|
|
10
|
|
|
|
6.33
|
|
FICO score
<620(7)
|
|
|
4
|
|
|
|
18.20
|
|
|
|
5
|
|
|
|
9.03
|
|
Original loan-to-value ratio >90% and FICO score
<620(7)
|
|
|
1
|
|
|
|
27.96
|
|
|
|
1
|
|
|
|
15.97
|
|
Vintages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
10
|
|
|
|
7.27
|
|
|
|
13
|
|
|
|
2.99
|
|
2006
|
|
|
11
|
|
|
|
12.87
|
|
|
|
14
|
|
|
|
5.11
|
|
2007
|
|
|
15
|
|
|
|
14.06
|
|
|
|
20
|
|
|
|
4.70
|
|
2008
|
|
|
13
|
|
|
|
3.98
|
|
|
|
16
|
|
|
|
0.67
|
|
All other vintages
|
|
|
51
|
|
|
|
2.19
|
|
|
|
37
|
|
|
|
1.35
|
|
|
|
|
*
|
|
Represents less than 0.5% of the
single-family conventional guaranty book of business.
|
|
(1) |
|
Consists of the portion of our
conventional single-family guaranty book of business for which
we have detailed loan level information, which constituted over
98% and 99% of our total conventional single-family guaranty
book of business as of December 31, 2009 and 2008,
respectively.
|
|
(2) |
|
Includes conventional single-family
loans that were three months or more past due or in foreclosure
as December 31, 2009 and 2008.
|
|
(3) |
|
Calculated based on the aggregate
unpaid principal balance of delinquent conventional
single-family loans divided by the aggregate unpaid principal
balance of loans in our conventional single-family guaranty book
of business.
|
|
(4) |
|
Calculated based on the number of
conventional single-family loans that were delinquent divided by
the total number of loans in our conventional single-family
guaranty book of business.
|
|
(5) |
|
Consists of Illinois, Indiana,
Michigan, and Ohio.
|
|
(6) |
|
Categories are not mutually
exclusive. Loans with multiple product features are included in
all applicable categories.
|
|
(7) |
|
Includes housing goals-oriented
products such as
MyCommunityMortgage®
and Expanded
Approval®.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009(1)(2)
|
|
2008(1)(2)
|
|
|
30 days
|
|
Seriously
|
|
30 days
|
|
Seriously
|
|
|
Delinquent
|
|
Delinquent(3)
|
|
Delinquent
|
|
Delinquent(3)
|
|
Percentage of multifamily guaranty book of business
|
|
|
0.28
|
%
|
|
|
0.63
|
%
|
|
|
0.12
|
%
|
|
|
0.30
|
%
|
F-64
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2009(1)(2)
|
|
|
As of December 31,
2008(1)(2)
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Multifamily
|
|
|
Percentage
|
|
|
Multifamily
|
|
|
Percentage
|
|
|
|
Guaranty
|
|
|
Seriously
|
|
|
Guaranty
|
|
|
Seriously
|
|
|
|
Book of Business
|
|
|
Delinquent
|
|
|
Book of Business
|
|
|
Delinquent
|
|
|
Originating
loan-to-value
ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 80%
|
|
|
5
|
%
|
|
|
0.50
|
%
|
|
|
5
|
%
|
|
|
0.92
|
%
|
Less than or equal to 80%
|
|
|
95
|
|
|
|
0.63
|
|
|
|
95
|
|
|
|
0.27
|
|
Originating debt service coverage ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to 1.10
|
|
|
10
|
|
|
|
0.17
|
|
|
|
11
|
|
|
|
|
|
Greater than 1.10
|
|
|
90
|
|
|
|
0.68
|
|
|
|
89
|
|
|
|
0.33
|
|
Acquisition loan size distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to $750,000
|
|
|
3
|
|
|
|
1.27
|
|
|
|
3
|
|
|
|
0.55
|
|
Greater than $750,000 and less than or equal to $3 million
|
|
|
13
|
|
|
|
1.01
|
|
|
|
13
|
|
|
|
0.52
|
|
Greater than $3 million and less than or equal to
$5 million
|
|
|
9
|
|
|
|
1.08
|
|
|
|
10
|
|
|
|
0.39
|
|
Greater than $5 million and less than or equal to
$25 million
|
|
|
41
|
|
|
|
0.60
|
|
|
|
41
|
|
|
|
0.43
|
|
Greater than $25 million
|
|
|
34
|
|
|
|
0.34
|
|
|
|
33
|
|
|
|
|
|
Maturing dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in 2010
|
|
|
2
|
|
|
|
1.55
|
|
|
|
3
|
|
|
|
0.32
|
|
Maturing in 2011
|
|
|
5
|
|
|
|
0.64
|
|
|
|
5
|
|
|
|
0.37
|
|
Maturing in 2012
|
|
|
10
|
|
|
|
1.13
|
|
|
|
10
|
|
|
|
0.16
|
|
Maturing in 2013
|
|
|
12
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
Maturing in 2014
|
|
|
9
|
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of the portion of our
multifamily guaranty book of business for which we have detailed
loan level information, which constituted over 98% and 99% of
our total multifamily guaranty book of business as of
December 31, 2009 and 2008, respectively.
|
|
(2) |
|
Calculated based on the aggregate
unpaid principal balance of delinquent multifamily loans divided
by the aggregate unpaid principal balance of loans in our
multifamily guaranty book of business.
|
|
(3) |
|
Includes multifamily loans that
were two months or more past due as of December 31, 2009
and 2008.
|
Guaranty
Obligations
The following table displays changes in our Guaranty
obligations in our consolidated balance sheets for the
years ended December 31, 2009, 2008, and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Balance as of beginning, January 1
|
|
$
|
12,147
|
|
|
$
|
15,393
|
|
|
$
|
11,145
|
|
Additions to guaranty
obligations(1)
|
|
|
7,577
|
|
|
|
7,279
|
|
|
|
8,460
|
|
Amortization of guaranty obligation into guaranty fee income
|
|
|
(5,260
|
)
|
|
|
(9,585
|
)
|
|
|
(3,560
|
)
|
Impact of consolidation
activity(2)
|
|
|
(468
|
)
|
|
|
(940
|
)
|
|
|
(652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
13,996
|
|
|
$
|
12,147
|
|
|
$
|
15,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
F-65
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Deferred profit is a component of Guaranty
obligations in our consolidated balance sheets and is
included in the table above. We recorded deferred profit on
guarantees issued or modified between 2003 (when we adopted
accounting guidance related to financial guarantees) and before
2008 (after which we adopted accounting guidance on fair value
measurement). We recorded deferred profit 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 $1.6 billion and
$2.5 billion as of December 31, 2009 and 2008,
respectively. We recognized deferred profit amortization of
$830 million, $2.0 billion and $986 million for
the years ended December 31, 2009, 2008 and 2007.
Guaranty
Assets
As guarantor at inception of a guaranty to an unconsolidated
entity, we recognize a non-contingent liability for the fair
value of our obligation to stand ready to perform over the term
of the guaranty in the event that specified triggering events or
conditions occur. We also record a guaranty asset that
represents the present value of cash flows expected to be
received as compensation over the life of the guaranty.
The following table displays changes in Guaranty
assets in our consolidated balance sheets for the years
ended December 31, 2009, 2008, and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Beginning balance, January 1
|
|
$
|
7,043
|
|
|
$
|
9,666
|
|
|
$
|
7,692
|
|
Fair Value of expected cash flows at issuance for new guaranteed
Fannie Mae MBS issuance
|
|
|
4,135
|
|
|
|
3,938
|
|
|
|
4,658
|
|
Net change in fair value of guaranty assets from portfolio
securitizations
|
|
|
511
|
|
|
|
(136
|
)
|
|
|
29
|
|
Impact of amortization on guaranty contracts
|
|
|
(2,719
|
)
|
|
|
(2,767
|
)
|
|
|
(1,898
|
)
|
Other-than-temporary
impairments
|
|
|
(347
|
)
|
|
|
(3,270
|
)
|
|
|
(425
|
)
|
Impact of consolidation of MBS
trusts(1)
|
|
|
(267
|
)
|
|
|
(388
|
)
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
8,356
|
|
|
$
|
7,043
|
|
|
$
|
9,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
When we consolidate Fannie Mae MBS
trusts, we derecognize the guaranty assets and guaranty
obligation associated with the respective trust.
|
Fannie
Mae MBS Included in Investments in Securities
For Fannie Mae MBS included in Investments in
securities in our consolidated balance sheets, we do not
eliminate or extinguish the guaranty arrangement because it is a
contractual arrangement with the unconsolidated MBS trusts. We
determine the fair value of Fannie Mae MBS based on observable
market prices because most Fannie Mae MBS are actively traded.
Fannie Mae MBS receive high credit quality ratings primarily
because of our guaranty. Absent our guaranty, Fannie Mae MBS
would be subject to the credit risk on the underlying loans. We
continue to recognize a guaranty obligation and a reserve for
guaranty losses associated with these securities because we
carry these securities in our consolidated financial statements
as guaranteed Fannie Mae MBS. The fair value of the guaranty
obligation, net of deferred profit, associated with Fannie Mae
MBS included in Investments in securities
approximates the fair value of the credit risk that exists on
these Fannie Mae MBS absent our guaranty. The fair value of the
guaranty obligation, net of deferred profit, associated with the
Fannie Mae MBS included in Investments in securities
was $4.8 billion and $3.8 billion as of
December 31, 2009 and 2008, respectively.
F-66
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Master
Servicing
We do not perform the
day-to-day
servicing of mortgage loans in a MBS trust in a Fannie Mae
securitization transaction. We are compensated, however, for
carrying out administrative functions for the trust and
overseeing 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.
The following table displays the carrying value and fair value
of our MSA for the years ended December 31, 2009, 2008, and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Cost basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
764
|
|
|
$
|
1,171
|
|
|
$
|
1,017
|
|
Additions
|
|
|
56
|
|
|
|
302
|
|
|
|
459
|
|
Amortization
|
|
|
(44
|
)
|
|
|
(190
|
)
|
|
|
(267
|
)
|
Other-than-temporary
impairments
|
|
|
(579
|
)
|
|
|
(491
|
)
|
|
|
(4
|
)
|
Reductions for MBS trusts paid-off and impact of consolidation
activity
|
|
|
(1
|
)
|
|
|
(28
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
196
|
|
|
|
764
|
|
|
|
1,171
|
|
Valuation allowance
|
|
|
40
|
|
|
|
73
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
156
|
|
|
$
|
691
|
|
|
$
|
1,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, beginning of period
|
|
$
|
855
|
|
|
$
|
1,808
|
|
|
$
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period
|
|
$
|
179
|
|
|
$
|
855
|
|
|
$
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of our MSL, which approximates its fair
value, was $481 million and $42 million as of
December 31, 2009 and 2008, respectively. The decrease in
our MSA and increase in our MSL during 2009 was primarily due to
an increase in estimated adequate compensation for a significant
portion of our master servicing assets.
We recognized servicing income, referred to as Trust
management income in our consolidated statements of
operations, of $40 million, $261 million and
$588 million for the years ended December 31, 2009,
2008 and 2007, respectively.
|
|
8.
|
Acquired
Property, Net
|
Acquired property, net consists of held for sale 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. We classify as held for
sale those properties that we intend to sell and are actively
marketed for sale. The following table
F-67
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
displays the activity in acquired property and the related
valuation allowance for the years ended December 31, 2009,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
Valuation
|
|
|
Acquired
|
|
|
|
Property
|
|
|
Allowance(1)
|
|
|
Property, Net
|
|
|
|
(Dollars in millions)
|
|
|
Balance, January 1, 2007
|
|
$
|
2,257
|
|
|
$
|
(116
|
)
|
|
$
|
2,141
|
|
Additions
|
|
|
5,131
|
|
|
|
(18
|
)
|
|
|
5,113
|
|
Disposals
|
|
|
(3,535
|
)
|
|
|
291
|
|
|
|
(3,244
|
)
|
Write-downs, net of recoveries
|
|
|
|
|
|
|
(408
|
)
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
3,853
|
|
|
|
(251
|
)
|
|
|
3,602
|
|
Additions
|
|
|
10,853
|
|
|
|
(75
|
)
|
|
|
10,778
|
|
Disposals
|
|
|
(6,666
|
)
|
|
|
664
|
|
|
|
(6,002
|
)
|
Write-downs, net of recoveries
|
|
|
|
|
|
|
(1,460
|
)
|
|
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
8,040
|
|
|
|
(1,122
|
)
|
|
|
6,918
|
|
Additions
|
|
|
14,165
|
|
|
|
(79
|
)
|
|
|
14,086
|
|
Disposals
|
|
|
(12,489
|
)
|
|
|
1,379
|
|
|
|
(11,110
|
)
|
Write-downs, net of recoveries
|
|
|
|
|
|
|
(752
|
)
|
|
|
(752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
9,716
|
|
|
$
|
(574
|
)
|
|
$
|
9,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects activities in the
valuation allowance for acquired properties held primarily by
our single-family segment.
|
We classify as held for use those properties that we do not
intend to sell or that are not ready for immediate sale in their
current condition and are reflected in Other assets
in our consolidated balance sheets. The following table displays
the carrying amount of acquired properties held for use for the
years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Beginning balance, January 1
|
|
$
|
11
|
|
|
$
|
107
|
|
|
$
|
224
|
|
Transfers in from held for sale, net
|
|
|
45
|
|
|
|
1
|
|
|
|
4
|
|
Transfers to held for sale, net
|
|
|
(11
|
)
|
|
|
(93
|
)
|
|
|
(113
|
)
|
Depreciation and asset write-downs
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
44
|
|
|
$
|
11
|
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Short-term
Borrowings and Long-term Debt
|
We obtain the funds to finance our mortgage purchases and other
business activities primarily by selling debt securities in the
domestic and international capital markets. We issue a variety
of debt securities to fulfill our ongoing funding needs.
F-68
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 consolidated balance sheets. The following table displays
our outstanding short-term borrowings and weighted-average
interest rates as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
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-rate short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
$
|
199,987
|
|
|
|
0.27
|
%
|
|
$
|
322,932
|
|
|
|
1.75
|
%
|
Foreign exchange discount notes
|
|
|
300
|
|
|
|
1.50
|
|
|
|
141
|
|
|
|
2.50
|
|
Other short-term debt
|
|
|
100
|
|
|
|
0.53
|
|
|
|
333
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate short-term debt
|
|
|
200,387
|
|
|
|
0.27
|
|
|
|
323,406
|
|
|
|
1.75
|
|
Floating-rate short-term
debt(2)
|
|
|
50
|
|
|
|
0.02
|
|
|
|
7,585
|
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
$
|
200,437
|
|
|
|
0.27
|
%
|
|
$
|
330,991
|
|
|
|
1.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the effects of 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.
|
Our federal funds purchased and securities sold under agreements
to repurchase represent agreements to repurchase securities from
banks with excess reserves on a particular day for a specified
price, with repayment generally occurring on the following day.
Our short-term debt includes discount notes and foreign exchange
discount notes, as well as other short-term debt. Our discount
notes are unsecured general obligations and have maturities
ranging from overnight to 360 days from the date of
issuance.
Additionally, we issue foreign exchange discount notes in the
Euro money market enabling investors to hold short-term
investments in different currencies. We have the ability to
issue foreign exchange discount notes in all tradable currencies
in maturities ranging from 5 to 360 days.
F-69
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(2)
|
|
|
Maturities
|
|
|
Outstanding
|
|
|
Rate(2)
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Senior fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark notes and bonds
|
|
|
2010 - 2030
|
|
|
$
|
279,945
|
|
|
|
4.10
|
%
|
|
|
2009-2030
|
|
|
$
|
251,063
|
|
|
|
4.92
|
%
|
Medium-term notes
|
|
|
2010 - 2019
|
|
|
|
171,207
|
|
|
|
2.97
|
|
|
|
2009-2018
|
|
|
|
151,277
|
|
|
|
4.20
|
|
Foreign exchange notes and bonds
|
|
|
2010 - 2028
|
|
|
|
1,239
|
|
|
|
5.64
|
|
|
|
2009-2028
|
|
|
|
1,513
|
|
|
|
4.70
|
|
Other long-term
debt(3)
|
|
|
2010 - 2039
|
|
|
|
62,783
|
|
|
|
5.80
|
|
|
|
2009-2038
|
|
|
|
73,061
|
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior fixed
|
|
|
|
|
|
|
515,174
|
|
|
|
3.94
|
|
|
|
|
|
|
|
476,914
|
|
|
|
4.85
|
|
Senior floating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
|
2010 - 2014
|
|
|
|
41,911
|
|
|
|
0.26
|
|
|
|
2009-2017
|
|
|
|
45,737
|
|
|
|
2.21
|
|
Other long-term
debt(3)
|
|
|
2020 - 2037
|
|
|
|
1,041
|
|
|
|
4.12
|
|
|
|
2020-2037
|
|
|
|
874
|
|
|
|
7.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior floating
|
|
|
|
|
|
|
42,952
|
|
|
|
0.34
|
|
|
|
|
|
|
|
46,611
|
|
|
|
2.30
|
|
Subordinated fixed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying
subordinated(4)
|
|
|
2011 - 2014
|
|
|
|
7,391
|
|
|
|
5.47
|
|
|
|
2011-2014
|
|
|
|
7,391
|
|
|
|
5.47
|
|
Subordinated debentures
|
|
|
2019
|
|
|
|
2,433
|
|
|
|
9.89
|
|
|
|
2019
|
|
|
|
2,225
|
|
|
|
9.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subordinated fixed
|
|
|
|
|
|
|
9,824
|
|
|
|
6.57
|
|
|
|
|
|
|
|
9,616
|
|
|
|
6.50
|
|
Debt from consolidations
|
|
|
2010 - 2039
|
|
|
|
6,167
|
|
|
|
5.63
|
|
|
|
2009-2039
|
|
|
|
6,261
|
|
|
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
debt(5)
|
|
|
|
|
|
$
|
574,117
|
|
|
|
3.73
|
%
|
|
|
|
|
|
$
|
539,402
|
|
|
|
4.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have reclassified certain prior
year amounts to conform to the current period presentation.
|
|
(2) |
|
Includes the effects of discounts,
premiums and other cost basis adjustments.
|
|
(3) |
|
Includes a portion of structured
debt instruments that is reported at fair value.
|
|
(4) |
|
Consists of subordinated debt
issued with an interest deferral feature.
|
|
(5) |
|
Reported amounts include a net
discount and other cost basis adjustments of $15.6 billion
and $15.5 billion as of December 31, 2009 and 2008,
respectively.
|
Our long-term debt includes a variety of debt types. We issue
both fixed and floating-rate medium-term notes with maturities
greater than one year that are issued through dealer banks. We
also offer Benchmark Notes and other bonds in large,
regularly-scheduled issuances that provide increased efficiency,
liquidity and tradability to the market. Additionally, we have
issued notes and bonds denominated in several foreign currencies
and are able to issue debt in numerous other currencies. We
effectively convert all foreign currency-denominated
transactions into U.S. dollars through the use of foreign
currency swaps for the purpose of funding our mortgage assets.
Our other long-term debt includes callable and non-callable
securities, which include all long-term non-Benchmark
securities, such as zero-coupon bonds, fixed rate and other
long-term securities, and are generally negotiated underwritings
with one or more dealers or dealer banks.
F-70
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Debt
from Consolidations and Secured Borrowings
Debt from consolidations includes debt from both MBS trust
consolidations and certain secured borrowings. Debt from MBS
trust consolidations represents our liability to third-party
beneficial interest holders when we have included the assets of
a corresponding trust in our consolidated balance sheets and we
do not own all of the beneficial interests in the trust.
Long-term debt from these transactions recognized in our
consolidated balance sheets as of December 31, 2009 and
2008 was $5.2 billion and $5.1 billion, respectively.
Additionally, we record a secured borrowing, to the extent of
proceeds received, upon a transfer of financial assets from our
consolidated balance sheets that does not qualify as a sale.
Long-term debt from these transactions in our consolidated
balance sheets as of December 31, 2009 and 2008 was
$949 million and $1.2 billion, respectively.
Characteristics
of Debt
As of December 31, 2009 and 2008, the face amount of our
debt securities was $784.0 billion and $881.2 billion,
respectively. As of December 31, 2009 and 2008, we had
zero-coupon debt with a face amount of $226.5 billion and
$350.5 billion, respectively, which had an effective
interest rate of 0.67% and 1.9%, respectively.
We issue callable debt instruments to manage the duration and
prepayment risk of expected cash flows of the mortgage assets we
own. Our outstanding debt as of December 31, 2009 and 2008
included $210.2 billion and $192.5 billion,
respectively, of callable debt that could be redeemed in whole
or in part at our option any time on or after a specified date.
The following table displays the amount of our long-term debt as
of December 31, 2009 by year of maturity for each of the
years 2010 through 2014 and thereafter. The first column assumes
that we pay off this debt at maturity or on the call date if the
call has been announced, while the second column assumes that we
redeem our callable debt at the next available call date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming Callable Debt
|
|
|
|
Long-Term Debt by
|
|
|
Redeemed at Next
|
|
|
|
Year of Maturity
|
|
|
Available Call Date
|
|
|
|
(Dollars in millions)
|
|
|
2010
|
|
$
|
115,095
|
|
|
$
|
296,629
|
|
2011
|
|
|
116,642
|
|
|
|
89,486
|
|
2012
|
|
|
79,532
|
|
|
|
46,906
|
|
2013
|
|
|
40,708
|
|
|
|
28,426
|
|
2014
|
|
|
75,564
|
|
|
|
44,345
|
|
Thereafter
|
|
|
140,409
|
|
|
|
62,158
|
|
Debt from
consolidations(1)
|
|
|
6,167
|
|
|
|
6,167
|
|
|
|
|
|
|
|
|
|
|
Total(2)(3)
|
|
$
|
574,117
|
|
|
$
|
574,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contractual maturity of debt from
consolidations is not a reliable indicator of expected maturity
because borrowers of the underlying mortgage loans generally
have the right to prepay their obligations at any time.
|
|
(2) |
|
Reported amount includes a net
discount and other cost basis adjustments of $15.6 billion.
|
|
(3) |
|
Includes a portion of structured
debt instruments that is reported at fair value.
|
F-71
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the amount of our debt that was
called and repurchased and the associated weighted-average
interest rates for the years ended December 31, 2009, 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Debt called
|
|
$
|
166,777
|
|
|
$
|
158,988
|
|
|
$
|
86,321
|
|
Weighted-average interest rate of debt called
|
|
|
4.2
|
%
|
|
|
5.3
|
%
|
|
|
5.6
|
%
|
Debt repurchased
|
|
$
|
6,919
|
|
|
$
|
13,214
|
|
|
$
|
15,217
|
|
Weighted-average interest rate of debt repurchased
|
|
|
4.3
|
%
|
|
|
4.8
|
%
|
|
|
5.6
|
%
|
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 be
unable to draw on them if and when needed. We had secured
uncommitted lines of credit of $25.0 billion and
$30.0 billion as of December 31, 2009 and 2008,
respectively, and unsecured uncommitted lines of credit of
$500 million as of both December 31, 2009 and 2008. We
had no borrowings outstanding from these lines of credit as of
December 31, 2009.
Credit
Facility with Treasury
On September 19, 2008, we entered into a lending agreement
with Treasury under which we could have requested loans until
December 31, 2009. Loans under the Treasury credit facility
require approval from Treasury at the time of request. Treasury
was not obligated under the credit facility to make, increase,
renew or extend any loan to us. The credit facility did not
specify a maximum amount that we could borrow under the credit
facility, but required that any loans made to us by Treasury
pursuant to the credit facility be collateralized by agency
mortgage-backed securities. The credit facility expired in
accordance with its terms on December 31, 2009. We did not
request any funds or borrow any amounts under the Treasury
credit facility.
|
|
10.
|
Derivative
Instruments and Hedging Activities
|
Derivative instruments are an integral part of our strategy in
managing interest rate risk. Derivative instruments may be
privately negotiated contracts, which are often referred to as
over-the-counter
(OTC) derivatives, or they may be listed and traded
on an exchange. When deciding whether to use derivatives, we
consider a number of factors, such as cost, efficiency, the
effect on our liquidity, results of operations, and our overall
interest rate risk management strategy. We choose to use
derivatives when we believe they will provide greater relative
value or more efficient execution of our strategy than debt
securities. We typically do not settle the notional amount of
our risk management derivatives; rather notional amounts provide
the basis for calculating actual payments or settlement amounts.
The derivatives we use for interest rate risk management
purposes consist primarily of OTC contracts that fall into three
broad categories:
|
|
|
Interest rate swap contracts. An interest rate
swap is a transaction between two parties in which each party
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. A swaption
is an option contract that allows us to enter into a pay-fixed
or receive-fixed swap at some point in the future.
|
F-72
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
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.
|
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. We typically
settle the notional amount of our mortgage commitments that are
accounted for as derivatives.
We account for our derivatives pursuant to the FASB standard on
derivative instruments and hedging activities, and recognize all
derivatives as either assets or liabilities in our consolidated
balance sheets at their fair value on a trade date basis. Fair
value amounts, which are netted at the counterparty level and
are inclusive of cash collateral posted or received, are
recorded in Derivative assets, at fair value or
Derivative liabilities, at fair value in our
consolidated balance sheets. We record all derivative gains and
losses, including accrued interest, in Fair value losses,
net in our consolidated statements of operations.
Hedging
Activities
In 2008, we began to employ 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. Because we discontinued hedge accounting during
2008, as of December 31, 2009 and 2008, we had no
derivatives in hedging relationships.
For the year ended December 31, 2008, we recorded a
$2.2 billion increase in the carrying value of the hedged
assets before related amortization due to hedge accounting. This
gain on the hedged assets was offset by fair value losses of
$2.2 billion, which excluded valuation changes due to the
passage of time, on the pay-fixed swaps designated as hedging
instruments.
In addition, we recorded a loss for the ineffective portion of
our hedged assets of $94 million, which excluded a loss of
$81 million that was not related to changes in the
benchmark interest rate.
F-73
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Notional
|
|
|
Estimated
|
|
|
Notional
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
68,099
|
|
|
$
|
1,422
|
|
|
$
|
314,501
|
|
|
$
|
(17,758
|
)
|
Receive-fixed
|
|
|
160,384
|
|
|
|
8,250
|
|
|
|
115,033
|
|
|
|
(2,832
|
)
|
Basis
|
|
|
2,715
|
|
|
|
61
|
|
|
|
510
|
|
|
|
(4
|
)
|
Foreign currency
|
|
|
727
|
|
|
|
107
|
|
|
|
810
|
|
|
|
(49
|
)
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
97,100
|
|
|
|
2,012
|
|
|
|
2,200
|
|
|
|
(1
|
)
|
Receive-fixed
|
|
|
75,380
|
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
|
7,000
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
Other(1)
|
|
|
740
|
|
|
|
84
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross risk management derivatives
|
|
|
412,145
|
|
|
|
16,107
|
|
|
|
433,062
|
|
|
|
(20,644
|
)
|
Collateral receivable
(payable)(2)
|
|
|
|
|
|
|
5,437
|
|
|
|
|
|
|
|
(1,023
|
)
|
Accrued interest receivable (payable)
|
|
|
|
|
|
|
2,596
|
|
|
|
|
|
|
|
(2,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net risk management derivatives
|
|
$
|
412,145
|
|
|
$
|
24,140
|
|
|
$
|
433,062
|
|
|
$
|
(24,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitment derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage commitments to purchase whole loans
|
|
$
|
273
|
|
|
$
|
|
|
|
$
|
4,453
|
|
|
$
|
(66
|
)
|
Forward contracts to purchase mortgage-related securities
|
|
|
3,403
|
|
|
|
7
|
|
|
|
23,287
|
|
|
|
(283
|
)
|
Forward contracts to sell mortgage-related securities
|
|
|
83,299
|
|
|
|
1,141
|
|
|
|
7,232
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage commitment derivatives
|
|
$
|
86,975
|
|
|
$
|
1,148
|
|
|
$
|
34,972
|
|
|
$
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives at fair value
|
|
$
|
499,120
|
|
|
$
|
25,288
|
|
|
$
|
468,034
|
|
|
$
|
(24,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes swap credit enhancements
and mortgage insurance contracts that we account for as
derivatives. The mortgage insurance contracts have payment
provisions that are not based on a notional amount.
|
|
(2) |
|
Collateral receivable represents
cash collateral posted by us for derivatives in a loss position.
Collateral payable represents cash 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 senior unsecured debt to maintain a minimum credit
rating from each of the major credit rating agencies. If our
senior unsecured 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
December 31, 2009 is $6.1 billion for which we have
posted collateral of $5.4 billion in the normal course of
business. If the credit-risk-related contingency features
underlying these agreements were triggered as of
December 31, 2009, we would be required to post an
additional $666 million of collateral to our counterparties.
F-74
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 swap credit enhancements
and mortgage insurance contracts that we account for as
derivatives. The mortgage insurance contracts have payment
provisions that are not based on a notional amount.
|
F-75
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays, by type of derivative instrument,
the fair value gains and losses, net on our derivatives for the
years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Risk management derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
$
|
15,012
|
|
|
$
|
(64,764
|
)
|
|
$
|
(12,065
|
)
|
Receive-fixed
|
|
|
(11,737
|
)
|
|
|
44,553
|
|
|
|
5,928
|
|
Basis
|
|
|
96
|
|
|
|
(102
|
)
|
|
|
91
|
|
Foreign
currency(1)
|
|
|
166
|
|
|
|
(130
|
)
|
|
|
111
|
|
Swaptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed
|
|
|
453
|
|
|
|
(666
|
)
|
|
|
(196
|
)
|
Receive-fixed
|
|
|
(8,706
|
)
|
|
|
6,153
|
|
|
|
1,956
|
|
Interest rate caps
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
5
|
|
Other(2)(3)
|
|
|
9
|
|
|
|
(6
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk management derivatives fair value losses, net
|
|
|
(4,696
|
)
|
|
|
(14,963
|
)
|
|
|
(4,158
|
)
|
Mortgage commitment derivatives fair value gains (losses), net
|
|
|
(1,654
|
)
|
|
|
(453
|
)
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives fair value losses, net
|
|
$
|
(6,350
|
)
|
|
$
|
(15,416
|
)
|
|
$
|
(4,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the effect of net
contractual interest income of approximately $38 million
and $9 million for 2009 and 2008, respectively, and net
contractual interest expense of approximately $59 million
for 2007.
|
|
(2) |
|
Includes MBS options, swap credit
enhancements and mortgage insurance contracts.
|
|
(3) |
|
Includes losses of approximately
$104 million for 2008, which resulted from the termination
of our derivative contracts with a subsidiary of Lehman Brothers.
|
F-76
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Volume
and Activity of our Derivatives
Risk
Management Derivatives
The following table displays, by derivative instrument type, our
risk management derivative activity for the year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
Interest Rate Swaps
|
|
|
Interest Rate Swaptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-
|
|
|
Receive-
|
|
|
|
|
|
Foreign
|
|
|
Pay-
|
|
|
Receive-
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Fixed
|
|
|
Basis
|
|
|
Currency(1)
|
|
|
Fixed
|
|
|
Fixed
|
|
|
Rate Caps
|
|
|
Other(2)
|
|
|
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
|
|
|
297,379
|
|
|
|
279,854
|
|
|
|
2,765
|
|
|
|
577
|
|
|
|
32,825
|
|
|
|
19,175
|
|
|
|
6,500
|
|
|
|
13
|
|
|
|
639,088
|
|
Terminations(3)
|
|
|
(461,695
|
)
|
|
|
(455,518
|
)
|
|
|
(24,100
|
)
|
|
|
(692
|
)
|
|
|
(13,025
|
)
|
|
|
(37,355
|
)
|
|
|
|
|
|
|
(92
|
)
|
|
|
(992,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of December 31, 2009
|
|
$
|
382,600
|
|
|
$
|
275,417
|
|
|
$
|
3,225
|
|
|
$
|
1,537
|
|
|
$
|
99,300
|
|
|
$
|
75,380
|
|
|
$
|
7,000
|
|
|
$
|
748
|
|
|
$
|
845,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Terminations include exchange rate
adjustments to foreign currency swaps existing at both the
beginning and the end of the period.
|
|
(2) |
|
Includes swap credit enhancements
and mortgage insurance contracts.
|
|
(3) |
|
Includes matured, called,
exercised, assigned and terminated amounts.
|
Mortgage
Commitment Derivatives
The following table displays, by commitment type, our mortgage
commitment derivative activity for the year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2009
|
|
|
|
Purchase
|
|
|
Sale
|
|
|
|
Commitments
|
|
|
Commitments
|
|
|
|
(Dollars in millions)
|
|
|
Notional balance as of the beginning of the
period(1)
|
|
$
|
35,004
|
|
|
$
|
36,232
|
|
Mortgage related securities:
|
|
|
|
|
|
|
|
|
Open
commitments(2)
|
|
|
833,221
|
|
|
|
1,089,500
|
|
Settled
commitments(3)
|
|
|
(832,279
|
)
|
|
|
(1,035,201
|
)
|
Loans:
|
|
|
|
|
|
|
|
|
Open
commitments(2)
|
|
|
114,054
|
|
|
|
|
|
Settled
commitments(3)
|
|
|
(118,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional balance as of the end of the
period(1)
|
|
$
|
31,416
|
|
|
$
|
90,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the balance of open
mortgage commitment derivatives.
|
|
(2) |
|
Represents open mortgage commitment
derivatives traded in 2009.
|
|
(3) |
|
Represents mortgage commitment
derivatives settled in 2009.
|
Derivative
Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally
to interest rate and foreign currency derivative contracts. We
are exposed to the risk that a counterparty in a derivative
transaction will default on payments due to us. If there is a
default, we may need to acquire a replacement derivative from a
different counterparty
F-77
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
at a higher cost or may be unable to find a suitable
replacement. 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.
Typically, we seek to manage credit exposure 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 by requiring counterparties to post
collateral. 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 2009 and non-cash collateral posted to us at any time is
held and monitored daily by a third-party custodian. Since July
2009, cash collateral posted to us is held and monitored by us
and transacted through a third party. 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 our credit exposure on outstanding risk
management derivative instruments in a gain position by
counterparty credit ratings, as well as the notional amount
outstanding and the number of counterparties for all risk
management derivatives as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Credit
Rating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
AA+/AA/AA-
|
|
|
A+/A/A-
|
|
|
Subtotal
|
|
|
Other(2)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Credit loss
exposure(3)
|
|
$
|
|
|
|
$
|
658
|
|
|
$
|
583
|
|
|
$
|
1,241
|
|
|
$
|
84
|
|
|
$
|
1,325
|
|
Less: Collateral
held(4)
|
|
|
|
|
|
|
580
|
|
|
|
507
|
|
|
|
1,087
|
|
|
|
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure net of collateral
|
|
$
|
|
|
|
$
|
78
|
|
|
$
|
76
|
|
|
$
|
154
|
|
|
$
|
84
|
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount(5)
|
|
$
|
|
|
|
$
|
220,791
|
|
|
$
|
623,668
|
|
|
$
|
844,459
|
|
|
$
|
748
|
|
|
$
|
845,207
|
|
Number of
counterparties(5)
|
|
|
|
|
|
|
7
|
|
|
|
9
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
(2) |
|
Includes defined benefit mortgage
insurance contracts and swap credit enhancements as of
December 31, 2009 and 2008, and guaranteed grantor trust
swaps as of December 31, 2008, accounted for as derivatives
where the right of legal offset does not exist.
|
F-78
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
(3) |
|
Represents the exposure to credit
loss on derivative instruments, which we estimate using the fair
value of all outstanding derivative contracts in a gain
position. We net derivative gains and losses with the same
counterparty 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 non-cash
collateral posted by our counterparties to us. We reduce the
value of non-cash collateral in accordance with the counterparty
agreements to help ensure recovery of any loss through the
disposition of the collateral. We posted cash collateral of
$5.4 billion and $15.0 billion related to our
counterparties credit exposure to us as of
December 31, 2009 and 2008, respectively.
|
|
(5) |
|
Interest rate and foreign currency
derivatives in a net gain position had a total notional amount
of $310 billion and $103.1 billion as of
December 31, 2009 and 2008, respectively. The total number
of interest rate and foreign currency counterparties in a net
gain position was 6 and 2 as of December 31, 2009 and 2008,
respectively.
|
Provision
(Benefit) for Income Taxes
We operate as a government-sponsored enterprise. We are subject
to federal income tax, but we are exempt from state and local
income taxes. The following table displays the components of our
provision (benefit) for federal income taxes for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Current income tax expense
(benefit)(1)
|
|
$
|
(999
|
)
|
|
$
|
403
|
|
|
$
|
757
|
|
Deferred income tax expense
(benefit)(2)
|
|
|
14
|
|
|
|
13,346
|
|
|
|
(3,809
|
)
|
Other, non-current tax benefit
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for federal income taxes
|
|
$
|
(985
|
)
|
|
$
|
13,749
|
|
|
$
|
(3,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not reflect the tax impact of
extraordinary losses as this amount is recorded in our
consolidated statements of operations, net of tax effect. We
recorded a tax benefit of $8 million related to
extraordinary losses recognized in 2007. We recorded no tax
benefit for extraordinary losses recognized in 2008.
|
|
(2) |
|
Amount excludes the income tax
effect of items recognized directly in Fannie Mae
stockholders equity (deficit) where we did not
establish a valuation allowance.
|
The following table displays the difference between our
effective tax rates and the statutory federal tax rates for the
years ended December 31, 2009, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory corporate tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Tax-exempt interest and dividends-received deductions
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
4.6
|
|
Equity investments in affordable housing projects
|
|
|
1.3
|
|
|
|
2.1
|
|
|
|
20.1
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
Valuation allowance
|
|
|
(35.2
|
)
|
|
|
(68.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
1.4
|
%
|
|
|
(30.6
|
)%
|
|
|
60.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Our effective tax rates were different from the
federal statutory rate of 35% for the years ended
December 31, 2009, 2008, and 2007 due partially to the
benefits of our holdings of tax-exempt investments, investments
in housing projects
F-79
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
eligible for the low-income housing tax credit and other equity
investments that provide tax credits. In addition, our effective
tax rates for the years ended December 31, 2009 and 2008
were impacted by the increase to and establishment of a
valuation allowance for our net deferred tax assets of
$25.7 billion and $30.8 billion, respectively. A
valuation allowance was not recorded for 2007.
Deferred
Tax Assets and Liabilities
The following table displays our deferred tax assets, deferred
tax liabilities, and valuation allowance as of December 31,
2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Deferred tax
assets:(1)
|
|
|
|
|
|
|
|
|
Allowance for loan losses and basis in acquired property, net
|
|
$
|
23,615
|
|
|
$
|
10,762
|
|
Mortgage and mortgage-related assets, including acquired
credit-impaired loans
|
|
|
10,547
|
|
|
|
6,365
|
|
Debt and derivative instruments
|
|
|
8,255
|
|
|
|
8,604
|
|
Partnership credits
|
|
|
3,587
|
|
|
|
2,157
|
|
Partnership and other equity investments
|
|
|
2,411
|
|
|
|
257
|
|
Cash fees and other upfront payments
|
|
|
1,532
|
|
|
|
1,540
|
|
Unrealized losses on AFS securities
|
|
|
927
|
|
|
|
3,926
|
|
Net guaranty assets and obligations and related credits
|
|
|
1,113
|
|
|
|
858
|
|
Net operating loss and alternative minimum tax credit
carryforwards
|
|
|
688
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
206
|
|
|
|
289
|
|
Other, net
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
53,691
|
|
|
|
34,758
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
45
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
45
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(52,737
|
)
|
|
|
(30,825
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
909
|
|
|
$
|
3,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain prior year amounts have
been reclassified to conform to the current period presentation.
|
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 net operating loss and
tax credit carryforwards. Our deferred tax assets, net of a
valuation allowance, totaled $909 million and
$3.9 billion as of December 31, 2009 and 2008,
respectively. We evaluate our deferred tax assets for
recoverability using a consistent approach which considers the
relative impact of both 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
consolidated statements of operations or in Fannie Mae
stockholders 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
F-80
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 three-year 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 and continued in 2009,
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.
During 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 net 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 December 31, 2009.
As a result of adopting the new accounting standard for
assessing
other-than-temporary
impairments, 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 consolidated statements of operations based
upon the assertion of our intent and ability to hold certain AFS
securities until recovery.
As of December 31, 2009, we had $3.3 billion of net
operating loss carryforwards that expire in 2029,
$1.4 billion of capital loss carryforwards that expire in
2013 and 2014, $3.6 billion of partnership tax credit
carryforwards that expire in various years through 2029, and
$126 million of alternative minimum tax credit
carryforwards that have an indefinite carryforward period.
Unrecognized
Tax Benefits
We had $911 million, $1.7 billion, and
$124 million of unrecognized tax benefits as of
December 31, 2009, 2008 and 2007, respectively. Of these
amounts, we had $29 million as of December 31, 2009
and $8 million as of both December 31, 2008 and 2007,
which, if resolved favorably, would reduce our effective tax
rate in future periods. As of December 31, 2009 and 2008,
we had accrued interest payable related to unrecognized tax
benefits of $41 million and $251 million,
respectively, and did not recognize any tax penalty payable. For
the years ended December 31, 2009, 2008 and 2007, we had
total interest expense related to unrecognized tax benefits of
$32 million, $223 million and $7 million,
respectively, and did not have any tax expense related to tax
penalties.
During 2009, we reached an agreement of $1.2 billion, net
of tax credits, with the IRS on the audits of our 2005 and 2006
federal income tax returns. The decrease in our unrecognized tax
benefits during the year ended December 31, 2009 is due to
our settlement reached with the IRS regarding certain tax
positions related
F-81
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
to fair market value losses and the settlement of tax years 2005
through 2006. The decrease in our unrecognized tax benefits
represents a temporary difference, and therefore does not result
in a change to our effective tax rate. During the first quarter
of 2010, we and the IRS appeals division also reached an
agreement for all issues related to the tax years 1999 through
2004. As a result of this conclusion, it is reasonably possible
that a $99 million reduction in our gross balance of
unrecognized tax benefits may occur within the next
12 months for the tax years 1999 through 2004. The IRS is
currently examining our federal income tax returns for the tax
years 2007 and 2008.
The following table displays the changes in our unrecognized tax
benefits for the years ended December 31, 2009, 2008 and
2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Unrecognized tax benefits as of January 1
|
|
$
|
1,745
|
|
|
$
|
124
|
|
|
$
|
163
|
|
Gross increasestax positions in prior years
|
|
|
38
|
|
|
|
49
|
|
|
|
|
|
Gross decreasestax positions in prior years
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
(48
|
)
|
Gross increasestax positions in current year
|
|
|
761
|
|
|
|
|
|
|
|
9
|
|
Settlements
|
|
|
(1,632
|
)
|
|
|
1,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits as of December
31(1)
|
|
$
|
911
|
|
|
$
|
1,745
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts exclude tax credits of
$716 million, $456 million and $50 million as of
December 31, 2009, 2008 and 2007, respectively.
|
The following table displays the computation of basic and
diluted loss per share of common stock for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars and shares in millions, except per share amounts)
|
|
|
Loss before extraordinary losses
|
|
$
|
(72,022
|
)
|
|
$
|
(58,319
|
)
|
|
$
|
(2,056
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(409
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(72,022
|
)
|
|
|
(58,728
|
)
|
|
|
(2,071
|
)
|
Less: Net loss attributable to the noncontrolling interest
|
|
|
53
|
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
|
(71,969
|
)
|
|
|
(58,707
|
)
|
|
|
(2,050
|
)
|
Preferred stock dividends and issuance costs at
redemption(1)
|
|
|
(2,474
|
)
|
|
|
(1,069
|
)
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders-basic and diluted
|
|
$
|
(74,443
|
)
|
|
$
|
(59,776
|
)
|
|
$
|
(2,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding-basic and
diluted(2)
|
|
|
5,680
|
|
|
|
2,487
|
|
|
|
973
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary losses
|
|
$
|
(13.11
|
)
|
|
$
|
(23.88
|
)
|
|
$
|
(2.62
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
(0.16
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(13.11
|
)
|
|
$
|
(24.04
|
)
|
|
$
|
(2.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-82
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
(1) |
|
Amounts include $2.5 billion
and $31 million of dividends declared and paid on our
outstanding cumulative senior preferred stock as of
December 31, 2009 and 2008, respectively. Amount for 2009
also includes $4 million of dividends accumulated, but
undeclared, on our outstanding cumulative senior preferred stock
as of December 31, 2009.
|
|
(2) |
|
Amounts include 4.6 billion
and 1.4 billion weighted-average shares of common stock for
the year ended December 31, 2009 and 2008, respectively,
that would be issued upon the full exercise of the warrant
issued to Treasury from the date the warrant was issued through
December 31, 2009 and 2008, respectively.
|
Weighted-average options and performance awards to purchase
approximately 14 million, 22 million and
23 million shares of common stock were outstanding for the
years ended December 31, 2009, 2008 and 2007, respectively,
and were excluded from the computation of diluted EPS in the
table above as they would have been anti-dilutive.
|
|
13.
|
Stock-Based
Compensation
|
We have two stock-based compensation plans, the 1985 Employee
Stock Purchase Plan and the Stock Compensation Plan of 2003.
Under these plans, we previously offered various stock-based
compensation programs where we provided employees an opportunity
to purchase Fannie Mae common stock or periodically made stock
awards to certain employees in the form of nonqualified stock
options, performance share awards, restricted stock awards,
restricted stock units or stock bonus awards. Under the senior
preferred stock purchase agreement with Treasury, we may not
issue Fannie Mae equity securities without the consent of
Treasury, other than the senior preferred stock, the Treasury
warrant, common stock issuable upon exercise of the warrant, or
as required by the terms of any binding agreement in effect on
the date of the senior preferred stock purchase agreement. As
such, we currently do not intend to grant equity compensation to
employees under these plans.
In connection with our stock-based compensation plans for shares
or awards issued prior to conservatorship, we recorded
compensation expense of $52 million, $97 million and
$118 million for 2009, 2008 and 2007, respectively.
Stock-Based
Compensation Plans
The 1985 Employee Stock Purchase Plan (the 1985 Purchase
Plan) provided employees an opportunity to purchase shares
of Fannie Mae common stock at a discount to the fair market
value of the stock during specified purchase periods. Our Board
of Directors sets the terms and conditions of offerings under
the 1985 Purchase Plan, including the number of available shares
and the size of the discount. There were no offerings under the
1985 Purchase Plan in any year presented. The aggregate maximum
number of shares of common stock available for employee purchase
is 50 million. Since inception, we have made available
38,039,742 shares for purchase by employees under this plan.
The Stock Compensation Plan of 2003 (the 2003 Plan)
is the successor to the Stock Compensation Plan of 1993 (the
1993 Plan). The 2003 Plan enabled us to make stock
awards in various forms and combinations, including stock
options, stock appreciation rights, restricted stock, restricted
stock units, performance share awards and stock bonus awards.
The aggregate maximum number of shares of common stock available
for award to employees and non-management directors under the
2003 Plan is 40 million. Including the effects of share
cancellations, we have awarded 11,252,405 shares under this
plan since its inception. The shares awarded under the 2003 Plan
were authorized and unissued shares, treasury shares or shares
purchased on the open market.
F-83
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Restricted
Stock Program
Under the 1993 and 2003 Plans, prior to conservatorship,
employees could have received restricted stock awards
(RSAs) and, under the 2003 Plan, employees may have
received restricted stock units (RSUs). The type of
award employees received under the 2003 Plan generally depended
upon years of service and age at the time of grant. Each RSU
represented the right to receive a share of common stock at the
time of vesting. As a result, RSUs are generally similar to
restricted stock, except that RSUs do not confer voting rights
on their holders. By contrast, holders of the RSAs do have
voting rights. Vesting of the grants is based on continued
employment. In general, grants vest in equal annual installments
over three or four years beginning on the first anniversary of
the date of grant. Based on the fair value of our common stock
on the respective grant dates, the fair value of restricted
stock that vested in 2009, 2008 and 2007 was $83 million,
$103 million, and $91 million, respectively. The
compensation expense related to restricted stock is based on the
grant date fair value of our common stock. We recorded
compensation expense for these restricted stock grants of
$52 million, $97 million, and $108 million for
2009, 2008 and 2007, respectively.
The following table displays restricted stock activity for 2009,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Number of
|
|
|
Value at
|
|
|
Number of
|
|
|
Value at
|
|
|
Number of
|
|
|
Value at
|
|
|
|
Shares
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Grant Date
|
|
|
|
(Shares in thousands)
|
|
|
Nonvested as of January 1
|
|
|
5,934
|
|
|
$
|
41.19
|
|
|
|
4,375
|
|
|
$
|
57.67
|
|
|
|
3,399
|
|
|
$
|
60.15
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
4,518
|
|
|
|
31.96
|
|
|
|
2,886
|
|
|
|
56.95
|
|
Vested
|
|
|
(1,858
|
)
|
|
|
44.78
|
|
|
|
(1,768
|
)
|
|
|
58.25
|
|
|
|
(1,457
|
)
|
|
|
62.25
|
|
Forfeited
|
|
|
(1,203
|
)
|
|
|
39.61
|
|
|
|
(1,191
|
)
|
|
|
41.58
|
|
|
|
(453
|
)
|
|
|
57.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31
|
|
|
2,873
|
|
|
$
|
39.53
|
|
|
|
5,934
|
|
|
$
|
41.19
|
|
|
|
4,375
|
|
|
$
|
57.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table displays information related to unvested
restricted stock as of December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in millions)
|
|
Unrecognized compensation cost
|
|
$
|
56
|
|
|
$
|
148
|
|
|
$
|
148
|
|
Expected weighted-average life of unvested restricted stock
|
|
|
1.6 years
|
|
|
|
2.4 years
|
|
|
|
2.4 years
|
|
Nonqualified
Stock Options
Under the 2003 Plan and prior to conservatorship, we could have
granted stock options to eligible employees and non-management
members of the Board of Directors. Generally, employees and
non-management directors may not exercise their options until at
least one year subsequent to the grant date, and the options
expire ten years from the date of grant. Typically, options vest
25% per year beginning on the first anniversary of the date of
grant. The exercise price of each option is equal to the fair
market value of our common stock on the date we grant the option.
F-84
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays nonqualified stock option activity
for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Fair
|
|
|
|
|
|
Average
|
|
|
Fair
|
|
|
|
|
|
Average
|
|
|
Fair
|
|
|
|
|
|
|
Exercise
|
|
|
Value at
|
|
|
|
|
|
Exercise
|
|
|
Value at
|
|
|
|
|
|
Exercise
|
|
|
Value at
|
|
|
|
Options
|
|
|
Price
|
|
|
Grant Date
|
|
|
Options
|
|
|
Price
|
|
|
Grant Date
|
|
|
Options
|
|
|
Price
|
|
|
Grant Date
|
|
|
|
(Shares in thousands)
|
|
|
Beginning balance, January 1
|
|
|
12,293
|
|
|
$
|
72.12
|
|
|
$
|
23.62
|
|
|
|
17,031
|
|
|
$
|
71.90
|
|
|
$
|
23.49
|
|
|
|
19,749
|
|
|
$
|
70.44
|
|
|
$
|
22.97
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(999
|
)
|
|
|
51.17
|
|
|
|
15.95
|
|
Forfeited and/or expired
|
|
|
(3,534
|
)
|
|
|
71.45
|
|
|
|
23.66
|
|
|
|
(4,738
|
)
|
|
|
71.19
|
|
|
|
23.13
|
|
|
|
(1,719
|
)
|
|
|
67.27
|
|
|
|
21.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
|
8,759
|
|
|
$
|
72.39
|
|
|
$
|
23.60
|
|
|
|
12,293
|
|
|
$
|
72.12
|
|
|
$
|
23.62
|
|
|
|
17,031
|
|
|
$
|
71.90
|
|
|
$
|
23.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31
|
|
|
8,759
|
|
|
$
|
72.39
|
|
|
$
|
23.60
|
|
|
|
12,291
|
|
|
$
|
72.12
|
|
|
$
|
23.62
|
|
|
|
16,726
|
|
|
$
|
71.79
|
|
|
$
|
23.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest as of December
31(1)
|
|
|
8,759
|
|
|
$
|
72.39
|
|
|
$
|
23.60
|
|
|
|
12,293
|
|
|
$
|
72.12
|
|
|
$
|
23.62
|
|
|
|
17,030
|
|
|
$
|
71.90
|
|
|
$
|
23.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes vested and unvested shares
after applying an estimated forfeiture rate.
|
Performance
Share Program
Under the 1993 and 2003 Plans, prior to conservatorship, Senior
Vice Presidents and above could have been awarded performance
shares. Under the plans, the terms and conditions of the awards
were established by the Compensation Committee for the 2003 Plan
and by the non-management members of the Board of Directors for
the 1993 Plan. Performance shares entitled recipients to receive
shares of common stock if the goals for the multi-year
performance cycle were attained. At the end of the performance
period, we typically distributed common stock in two or three
installments over a period not longer than three years as long
as the participant remained employed by Fannie Mae.
In 2008 and 2007, we issued 125,000 and 161,000 shares,
respectively, related to previous grants. No shares were issued
in 2009.
|
|
14.
|
Employee
Retirement Benefits
|
We sponsor both defined benefit plans and defined contribution
plans for our employees, as well as a healthcare plan that
provides certain health benefits for retired employees and their
dependents. Net periodic benefit costs for defined benefit and
healthcare plans, which are determined on an actuarial basis,
and expenses for our defined contribution plans, are included in
Salaries and employee benefits expense in our
consolidated statements of operations. For the years ended
December 31, 2009, 2008 and 2007, we recognized net
periodic benefit costs for our defined benefit and healthcare
plans and expenses for our defined contributions plans of
$131 million, $95 million, and $143 million,
respectively.
Defined
Benefit Pension Plans and Postretirement Health Care
Plan
Our defined benefit pension plans include qualified and
nonqualified noncontributory plans. Pension plan benefits are
based on years of credited service and a percentage of eligible
compensation. In 2007, the defined benefit pension plans were
amended to cease benefits accruals for employees that did not
meet certain criteria to be grandfathered under the plan and to
vest those employees in their frozen accruals.
F-85
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
We fund our qualified pension plan through employer
contributions to a qualified irrevocable trust that is
maintained for the sole benefit of plan participants and their
beneficiaries. Contributions to our qualified pension plan are
subject to a minimum funding requirement and a maximum funding
limit under the Employee Retirement Income Security Act of 1974
(ERISA) and IRS regulations.
Our nonqualified defined benefit pension plans consist of an
Executive Pension Plan, Supplemental Pension Plan and the
Supplemental Pension Plan 2003, which is a bonus-based plan.
These plans cover certain employees and supplement the benefits
payable under the qualified pension plan. The Compensation
Committee of the Board of Directors selects those who can
participate in the Executive Pension Plan. In 2007, the Board of
Directors approved an amendment to close the Executive Pension
Plan to new participants and in 2009, the plan was frozen.
Participants typically vested in their benefits under the
Executive Pension Plan after ten years of service as a
participant, with partial vesting usually beginning after five
years. Benefits under the Executive Pension Plan are paid
through a rabbi trust.
The Supplemental Pension Plan provides retirement benefits to
employees who participate in our qualified pension plan and do
not receive a benefit from the Executive Pension Plan, and whose
salary exceeds the statutory compensation cap applicable to the
qualified plan or whose benefit is limited by the statutory
benefit cap. Similarly, the Supplemental Pension Plan 2003
provides additional benefits to our officers based on eligible
bonuses, if any, received by an officer, but the amount of bonus
considered is limited to 50% of the officers salary. We
pay benefits for our unfunded defined benefit Supplemental
Pension Plans from our cash and cash equivalents.
We also sponsor a contributory postretirement Health Care Plan
that covers substantially all regular full-time employees who
meet the applicable age and service requirements. We subsidize
premium costs for medical coverage for employees who meet the
age and service requirements and were hired before 2008.
However, for those who retire after 2007 (other than employees
who retired under early retirement programs offered in 2007 and
2008) the subsidy amount was frozen at the 2008 dollar
amount with no subsequent increases in our contribution.
Employees hired after 2007 will receive access to our retiree
medical plan, when eligible, but they will not qualify for the
subsidy. We accrue and pay the benefits for our unfunded
postretirement Health Care Plan from our cash and cash
equivalents.
F-86
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays components of our net periodic
benefit cost for our qualified and nonqualified pension plans
and other postretirement plan for the years ended
December 31, 2009, 2008 and 2007. The net periodic benefit
cost for each period is calculated based on assumptions at the
end of the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
36
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
38
|
|
|
$
|
8
|
|
|
$
|
5
|
|
|
$
|
58
|
|
|
$
|
11
|
|
|
$
|
14
|
|
Interest cost
|
|
|
53
|
|
|
|
9
|
|
|
|
9
|
|
|
|
48
|
|
|
|
10
|
|
|
|
9
|
|
|
|
48
|
|
|
|
10
|
|
|
|
11
|
|
Expected return on plan assets
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial (gain) loss
|
|
|
23
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
Amortization of net prior service cost (credit)
|
|
|
1
|
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
2
|
|
|
|
(1
|
)
|
Amortization of initial transition obligation
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Curtailment (gain) loss
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
9
|
|
Special termination benefit charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
69
|
|
|
$
|
8
|
|
|
$
|
12
|
|
|
$
|
29
|
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
55
|
|
|
$
|
22
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs, which are changes in benefit obligations
due to plan amendments, are amortized over the average remaining
service period for active employees for our pension plans and
prior to the full eligibility date for the other postretirement
Health Care Plan.
The following table displays amounts recorded in AOCI that have
not been recognized as a component of net periodic benefit cost
for the years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Net actuarial (gain) loss
|
|
$
|
171
|
|
|
$
|
(9
|
)
|
|
$
|
39
|
|
|
$
|
279
|
|
|
$
|
(3
|
)
|
|
$
|
32
|
|
Net prior service cost (credit)
|
|
|
5
|
|
|
|
2
|
|
|
|
(61
|
)
|
|
|
6
|
|
|
|
4
|
|
|
|
(66
|
)
|
Net transition obligation
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax amount recorded in AOCI
|
|
$
|
176
|
|
|
$
|
(7
|
)
|
|
$
|
(17
|
)
|
|
$
|
285
|
|
|
$
|
1
|
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax amount recorded in
AOCI(1)
|
|
$
|
176
|
|
|
$
|
(7
|
)
|
|
$
|
(17
|
)
|
|
$
|
285
|
|
|
$
|
1
|
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During 2008, we established a
valuation allowance for our deferred tax assets, which has
resulted in the reversal of the tax benefit amounts recorded in
AOCI for our pension and other postretirement plans. Refer to
Note 11, Income Taxes for additional
information.
|
F-87
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the changes in the pre-tax amounts
recognized in AOCI for the years ended December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Actuarial (Gain) Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1
|
|
$
|
279
|
|
|
$
|
(3
|
)
|
|
$
|
32
|
|
|
$
|
(38
|
)
|
|
$
|
(5
|
)
|
|
$
|
28
|
|
Current year actuarial (gain) loss
|
|
|
(85
|
)
|
|
|
(7
|
)
|
|
|
8
|
|
|
|
317
|
|
|
|
1
|
|
|
|
5
|
|
Actuarial gain due to curtailments
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(23
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
171
|
|
|
$
|
(9
|
)
|
|
$
|
39
|
|
|
$
|
279
|
|
|
$
|
(3
|
)
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost (Credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
(66
|
)
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
(71
|
)
|
Prior service cost (credit) due to curtailments
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Amortization
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
(61
|
)
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table displays pre-tax amounts in AOCI as of
December 31, 2009 that are expected to be recognized as
components of net periodic benefit cost in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Other Post-
|
|
|
|
Pension Plans
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Non-Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Net actuarial (gain) loss
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
Net prior service cost (credit)
|
|
|
1
|
|
|
|
1
|
|
|
|
(5
|
)
|
Net transition obligation
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-88
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the status of our pension and other
postretirement plans as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
Pension Plans
|
|
|
Other Post-
|
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
|
|
Non-
|
|
|
Retirement
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Plan
|
|
|
|
(Dollars in millions)
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
801
|
|
|
$
|
158
|
|
|
$
|
151
|
|
|
$
|
744
|
|
|
$
|
148
|
|
|
$
|
134
|
|
Service cost
|
|
|
36
|
|
|
|
1
|
|
|
|
5
|
|
|
|
38
|
|
|
|
8
|
|
|
|
5
|
|
Interest cost
|
|
|
53
|
|
|
|
9
|
|
|
|
9
|
|
|
|
48
|
|
|
|
10
|
|
|
|
9
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Net actuarial (gain) loss
|
|
|
36
|
|
|
|
(7
|
)
|
|
|
8
|
|
|
|
(10
|
)
|
|
|
1
|
|
|
|
5
|
|
Curtailment (gain) loss
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Benefits paid
|
|
|
(22
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
(19
|
)
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
904
|
|
|
|
151
|
|
|
|
166
|
|
|
|
801
|
|
|
|
158
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
76
|
|
|
|
6
|
|
|
|
8
|
|
|
|
80
|
|
|
|
6
|
|
|
|
6
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Benefits paid
|
|
|
(22
|
)
|
|
|
(6
|
)
|
|
|
(10
|
)
|
|
|
(19
|
)
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(105
|
)
|
|
$
|
(151
|
)
|
|
$
|
(166
|
)
|
|
$
|
(222
|
)
|
|
$
|
(158
|
)
|
|
$
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in our Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
$
|
(105
|
)
|
|
$
|
(151
|
)
|
|
$
|
(166
|
)
|
|
$
|
(222
|
)
|
|
$
|
(158
|
)
|
|
$
|
(151
|
)
|
Accumulated other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(income) loss
|
|
|
176
|
|
|
|
(7
|
)
|
|
|
(17
|
)
|
|
|
285
|
|
|
|
1
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
71
|
|
|
$
|
(158
|
)
|
|
$
|
(183
|
)
|
|
$
|
63
|
|
|
$
|
(157
|
)
|
|
$
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gains or losses reflect annual changes in the amount
of either the benefit obligation or the fair value of plan
assets that result from the difference between actual experience
and projected amounts or from changes in assumptions.
The following table displays the amount of the projected benefit
obligation, accumulated benefit obligation and fair value of
plan assets for our pension plans as of December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension Plans
|
|
|
Pension Plans
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Non-
|
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Qualified
|
|
|
Qualified
|
|
|
|
(Dollars in millions)
|
|
|
Projected benefit obligation
|
|
$
|
904
|
|
|
$
|
151
|
|
|
$
|
801
|
|
|
$
|
158
|
|
Accumulated benefit obligation
|
|
|
785
|
|
|
|
141
|
|
|
|
695
|
|
|
|
141
|
|
Fair value of plan assets
|
|
|
799
|
|
|
|
|
|
|
|
579
|
|
|
|
|
|
F-89
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Contributions
Contributions to the qualified pension plan increase the plan
assets while contributions to the unfunded plans are made to
fund current period benefit payments or to fulfill annual
funding requirements. We were not required to make minimum
contributions to our qualified pension plan for each of the
years in the three-year period ended December 31, 2009
since we met the minimum funding requirements as prescribed by
ERISA. However, we did make a discretionary contribution to our
qualified pension plan of $76 million and $80 million
during 2009 and 2008, respectively. We did not make a
discretionary contribution to our qualified pension plan during
2007.
During 2009, we contributed $76 million to our qualified
pension plan, $6 million to our nonqualified pension plans
and $8 million to our other postretirement benefit plan.
During 2010, we anticipate contributing $57 million to our
benefit plans, consisting of $43 million to our qualified
pension plan, $6 million to our nonqualified pension plans
and $8 million to our other postretirement plan.
The fair value of plan assets of our funded qualified pension
plan was greater than our accumulated benefit obligation by
$14 million as of December 31, 2009 and less than our
accumulated benefit obligation by $116 million as of
December 31, 2008. There were no plan assets returned to us
as of February 26, 2010 and we do not expect any plan
assets to be returned to us during the remainder of 2010.
Assumptions
Pension and other postretirement benefit amounts recognized in
our consolidated financial statements are determined on an
actuarial basis using several different assumptions that are
measured as of December 31, 2009, 2008 and 2007. The
following table displays the actuarial assumptions for our plans
used in determining the net periodic benefit costs for the years
ended December 31, 2009, 2008 and 2007 and the projected
and accumulated benefit obligations as of December 31,
2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average assumptions used to determine net periodic
benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.15
|
%
|
|
|
6.40
|
%
|
|
|
6.20
|
%(1)
|
|
|
6.15
|
%
|
|
|
6.40
|
%
|
|
|
6.20
|
%(1)
|
Average rate of increase in future compensation
|
|
|
4.00
|
|
|
|
5.00
|
|
|
|
5.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected long-term weighted-average rate of return on plan assets
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine benefit
obligation at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.10
|
%
|
|
|
6.15
|
%
|
|
|
6.40
|
%
|
|
|
5.75
|
%
|
|
|
6.15
|
%
|
|
|
6.40
|
%
|
Average rate of increase in future compensation
|
|
|
4.00
|
|
|
|
4.00
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed for next year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
Post-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.00
|
|
|
|
8.00
|
|
|
|
8.00
|
|
Rate that cost trend rate gradually declines to and remains
at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
Year that rate reaches the ultimate trend rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
|
(1) |
|
The pension and other
postretirement benefit plans were remeasured as of
August 31, 2007 and November 30, 2007. As a result, a
discount rate of 6.00% was used for the period January 1 through
August 31, a discount rate of 6.35% was used for the period
September 1 through November 30, and a discount rate of
6.20% was used for the period December 1 through
December 31.
|
F-90
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
As of December 31, 2009, the effect of a 1% increase in the
assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation by
$2 million. The effect of a 1% decrease in this rate would
decrease the accumulated postretirement benefit obligation by
$2 million.
As a result of our reduction in workforce from voluntary and
involuntary terminations in 2007, our pension and other
postretirement assets and liabilities were remeasured, resulting
in curtailment charges of $11 million.
We review our pension and other postretirement benefit plan
assumptions on an annual basis. We calculate the net periodic
benefit cost each year based on assumptions established at the
end of the previous calendar year, unless we remeasure as a
result of a curtailment. In determining our net periodic benefit
costs, we assess the discount rate to be used in the annual
actuarial valuation of our pension and other postretirement
benefit obligations at year-end. We consider the current yields
on high-quality, corporate fixed-income debt instruments with
maturities corresponding to the expected duration of our benefit
obligations and supported by cash flow matching analysis based
on expected cash flows specific to the characteristics of our
plan participants, such as age and gender. As of
December 31, 2009, the discount rate used to determine our
obligation decreased by 5 basis points for pension and
40 basis points for postretirement, reflecting a
corresponding rate decrease in corporate-fixed income debt
instruments during 2009. We also assess the long-term rate of
return on plan assets for our qualified pension plan. The return
on asset assumption reflects our expectations for plan-level
returns over a term of approximately seven to ten years. Given
the longer-term nature of the assumption and a stable investment
policy, it may or may not change from year to year. However, if
longer-term market cycles or other economic developments impact
the global investment environment, or asset allocation changes
are made, we may adjust our assumption accordingly. The expected
long-term rate of return on plan assets for 2009 remained
unchanged from the 2008 rate of 7.5%. Changes in assumptions
used in determining pension and other postretirement benefit
plan expense resulted in a decrease in expense of
$4 million, $15 million and $10 million in our
consolidated statements of operations for the years ended
December 31, 2009, 2008 and 2007, respectively.
Qualified
Pension Plan Assets
As of December 31, 2009, we have adopted the new accounting
standard requiring various disclosures about postretirement
benefit plan assets. The following table displays our qualified
pension plan assets by asset category at their fair value as of
December 31, 2009. The fair value of assets in Level 1
have been determined based on quoted prices of identical assets
in active markets as of year end, while the fair value of assets
in
F-91
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Level 2 have been determined based on the net asset value
per share of the investments as of year end. None of the fair
values for plan assets were determined by using significant
unobservable inputs, or Level 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2009
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Cash equivalents
|
|
$
|
|
|
|
$
|
14
|
|
|
$
|
14
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
large-cap(1)
|
|
|
408
|
|
|
|
|
|
|
|
408
|
|
U.S. mid/small
blend(2)
|
|
|
116
|
|
|
|
|
|
|
|
116
|
|
International large/mid
blend(3)
|
|
|
|
|
|
|
115
|
|
|
|
115
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds(4)
|
|
|
|
|
|
|
146
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
|
$
|
524
|
|
|
$
|
275
|
|
|
$
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of a publicly traded
low-cost equity index fund that tracks to the S&P 500.
|
|
(2) |
|
Consists of a publicly traded
low-cost equity index fund that tracks to all regularly traded
U.S. stocks except those in the S&P 500.
|
|
(3) |
|
Consists of a single equity fund
that tracks to an index that consists of approximately 4,000
securities across over 40 countries with not more than 15% in
any single country.
|
|
(4) |
|
Consists of a single bond fund that
tracks to an index that consists of approximately 2,400
issuances of investment grade bonds from diverse industries
within international markets representing approximately 19%.
|
Our investment strategy is to diversify our plan assets in order
to reduce our concentration risk, reflect the plans
profile over time, and maintain an asset allocation that allows
us to meet current and future benefit obligations. The assets of
the qualified pension plan consist primarily of exchange-listed
stocks, held in broadly diversified index funds. We also invest
in a broadly diversified indexed fixed income account. In
addition, the plan holds liquid short-term investments that
provide for monthly pension payments, plan expenses and, from
time to time, may represent uninvested contributions or
reallocation of plan assets. The target allocations for plan
assets are from 75% to 85% for equity securities, 12% to 20% for
fixed income securities and 0% to 2% for all other types of
investments. Our 2009 asset allocation policy provided for a
larger equity weighting than many companies because our active
employee base is relatively young, and we have a relatively
small number of retirees currently receiving benefits, both of
which suggest a longer investment horizon and consequently a
higher risk tolerance level. The plan fiduciary periodically
assesses our asset allocation to assure it is consistent with
our plan objective.
F-92
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Expected
Benefit Payments
The following table displays the benefits we expect to pay in
each of the next five years and in the aggregate for the
subsequent five years for our pension plans and other
postretirement plan and are based on the same assumptions used
to measure our benefit obligation as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Retirement Plan Benefit Payments
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
|
|
Pension Benefits
|
|
|
Before Medicare
|
|
|
Medicare
|
|
|
|
Qualified
|
|
|
Nonqualified
|
|
|
Part D Subsidy
|
|
|
Part D Subsidy
|
|
|
|
(Dollars in millions)
|
|
|
2010
|
|
$
|
23
|
|
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
|
|
2011
|
|
|
24
|
|
|
|
7
|
|
|
|
9
|
|
|
|
1
|
|
2012
|
|
|
27
|
|
|
|
7
|
|
|
|
10
|
|
|
|
1
|
|
2013
|
|
|
29
|
|
|
|
8
|
|
|
|
11
|
|
|
|
1
|
|
2014
|
|
|
33
|
|
|
|
8
|
|
|
|
12
|
|
|
|
1
|
|
20152019
|
|
|
244
|
|
|
|
47
|
|
|
|
75
|
|
|
|
7
|
|
Defined
Contribution Plans
Retirement
Savings Plan
The Retirement Savings Plan is a defined contribution plan that
includes a 401(k) before-tax feature, a regular after-tax
feature and a Roth after-tax feature. Under the plan, eligible
employees may allocate investment balances to a variety of
investment options.
We match employee contributions in cash up to 3% of base salary
for grandfathered employees and of eligible earnings for other
employees. Eligible earnings consists of base pay, overtime pay
and eligible bonuses. For new hires after 2007 and for
non-grandfathered employees, we match an additional 3%. All
non-grandfathered employees and new hires are 100% vested in our
matching contributions. Grandfathered employees continue to
receive benefits under the 3% of base salary matching program
and are fully vested in our matching contributions after five
years of service.
All employees, with the exception of those participating in the
Executive Pension Plan, receive a 2% contribution regardless of
employee contributions to this plan. Participants are fully
vested in this 2% contribution after three years of service.
For the years ended December 31, 2009, 2008 and 2007, the
maximum employee contribution as established by the IRS was
$16,500, $15,500 and $15,500, respectively, with additional
catch- up contributions permitted for participants
aged 50 and older of $5,500, $5,000 and $5,000, respectively.
There was no option to invest directly in our common stock for
the years ended December 31, 2009, 2008 and 2007. We
recorded expense for this plan of $42 million,
$35 million and $18 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Supplemental
Retirement Savings Plan
The Supplemental Retirement Savings Plan is an unfunded,
nonqualified defined contribution plan that became effective
July 1, 2008. This plan supplements our Retirement Savings
Plan to provide benefits to employees who are not grandfathered
under our defined benefit pension plan and whose annual eligible
earnings exceed the IRS annual limit on eligible compensation
for 401(k) plans.
We credit to the plan 8% of a participants eligible
compensation that exceeds the IRS annual limit. Eligible
compensation consists of base salary plus eligible bonuses
earned, if any, up to a combined maximum of two
F-93
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
times base salary. The 8% credit consists of (1) a 6%
credit that vests immediately, and (2) a 2% credit that
vests after three years of service.
For the years ended December 31, 2009 and 2008, we
recognized expense related to this plan of less than
$1 million in each year.
Employee
Stock Ownership Plan
We have an Employee Stock Ownership Plan (ESOP) for
eligible employees who are regularly scheduled to work at least
1,000 hours in a calendar year. Participation is not
available to participants in the Executive Pension Plan. In
2007, the Plan was amended to freeze participation and provides
no contributions subsequent to the contribution for 2007.
Prior to this change, we contributed annually to the ESOP an
amount up to 4% of the aggregate eligible salary for all
participants at the discretion of the Board of Directors or
based on achievement of defined corporate goals as determined by
the Board. We contributed either shares of Fannie Mae common
stock or cash to purchase Fannie Mae common stock.
The following table displays our ESOP activity for the years
ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Shares in thousands)
|
|
|
Common shares allocated to employees
|
|
|
1,229
|
|
|
|
1,702
|
|
|
|
1,840
|
|
Common shares committed to be released to employees
|
|
|
|
|
|
|
|
|
|
|
349
|
|
Unallocated common shares
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Compensation cost is measured as the fair value of the shares or
cash contributed to, or to be contributed to, the ESOP. Expense
recorded in connection with the ESOP was $12 million in
2007 based on actual contributions of 2% of salary for each of
the reported years. We recorded no expense in 2009 and 2008.
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. These activities are
discussed below.
Our Chief Executive Officer has been delegated the authority by
FHFA to conduct
day-to-day
management activities, and as such, our Chief Executive Officer
continues to be the chief operating decision maker who makes
decisions about resources to be allocated to each segment and
assesses segment performance.
Description
of Business Segments
Single-Family
Our Single-Family segment works with our lender customers to
securitize single-family mortgage loans into Fannie Mae MBS and
to facilitate the purchase of single-family mortgage loans for
our mortgage portfolio. Single-family mortgage loans relate to
properties with four or fewer residential units. Our
Single-Family segment has responsibility for managing our credit
risk exposure relating to the single-family Fannie Mae MBS held
by third parties (such as lenders, depositories and global
investors), as well as the single-family mortgage loans and
single-family Fannie Mae MBS held in our mortgage portfolio. Our
Single-Family segment also has responsibility for pricing the
credit risk of the single-family mortgage loans we purchase for
our mortgage portfolio.
F-94
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
We derive revenues in this segment primarily from the guaranty
fees the segment receives as compensation for assuming the
credit risk on the mortgage loans underlying single-family
Fannie Mae MBS and on the single-family mortgage loans held in
our portfolio. The primary source of profit for the
Single-Family segment is the difference between the guaranty
fees earned and the costs of providing this service, including
credit-related losses.
Housing
and Community Development
Our HCD segment makes debt and equity investments to expand the
supply of affordable and market-rate rental housing in the
United States primarily by: (i) working with our lender
customers to securitize multifamily mortgage loans into Fannie
Mae MBS and to facilitate the purchase of multifamily mortgage
loans for our mortgage portfolio; and (ii) making
investments in rental and for-sale housing projects, including
investments in rental housing that is eligible for federal
low-income housing tax credits. Our HCD segment has
responsibility for managing our credit risk exposure relating to
the multifamily Fannie Mae MBS held by third parties, as well as
the multifamily mortgage loans and multifamily Fannie Mae MBS
held in our mortgage portfolio. HCD also manages the credit risk
of its LIHTC and other debt and equity investments.
We derive revenues in this segment from a variety of sources,
including the guaranty fees the segment receives as compensation
for assuming the credit risk 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, HCDs investments in rental housing projects
eligible for the federal low-income housing tax credit generate
both tax credits and net operating losses that may reduce our
federal income tax liability. As a result of our tax position,
we did not make any new LIHTC investments in 2009 other than
pursuant to commitments existing prior to 2008 and we currently
do not recognize in our consolidated financial statements any
tax benefits associated with tax credits and net operating
losses of our LIHTC investments. Given our current tax position,
it is unlikely that we will be able to use the tax benefits that
we expect to receive in the future from these investments. Other
investments in rental and for-sale housing generate revenue and
losses from operations and the eventual sale of the assets.
While the HCD guaranty business is similar to our Single-Family
business, neither the economic return nor the nature of the
credit risk is similar to that of Single-Family.
Capital
Markets Group
Our Capital Markets segment manages our investment activity in
mortgage loans, mortgage-related securities and other
investments, our debt financing activity, and our liquidity and
capital positions. We fund our investments primarily through
proceeds from our issuance of debt securities in the domestic
and international capital markets. The Capital Markets segment
also has responsibility for managing our interest rate risk.
Our Capital Markets segment generates most of its revenue from
the difference, or spread, between the interest we earn on our
mortgage assets and the interest we pay on the debt we issue to
fund these assets. We refer to this spread as our net interest
yield. Changes in the fair value of the derivative instruments
and trading securities we hold impact the net income or loss
reported by the Capital Markets segment. The net income or loss
reported by the Capital Markets segment is also affected by the
impairment of AFS securities.
Segment
Allocations and Results
Our segment financial results include directly attributable
revenues and expenses. Additionally, we allocate to each of our
segments: (1) capital using FHFA minimum capital
requirements adjusted for over- or under-capitalization;
(2) indirect administrative costs; and (3) 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.
F-95
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays our segment results for the years
ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Single-Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
428
|
|
|
$
|
(193
|
)
|
|
$
|
14,275
|
|
|
$
|
14,510
|
|
Guaranty fee income
(expense)(2)
|
|
|
8,002
|
|
|
|
675
|
|
|
|
(1,466
|
)
|
|
|
7,211
|
|
Trust management income
|
|
|
39
|
|
|
|
1
|
|
|
|
|
|
|
|
40
|
|
Investment gains (losses), net
|
|
|
(2
|
)
|
|
|
|
|
|
|
1,460
|
|
|
|
1,458
|
|
Net
other-than-temporary
impairments
|
|
|
|
|
|
|
|
|
|
|
(9,861
|
)
|
|
|
(9,861
|
)
|
Fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(2,811
|
)
|
|
|
(2,811
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(325
|
)
|
|
|
(325
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(6,735
|
)
|
|
|
|
|
|
|
(6,735
|
)
|
Fee and other income
|
|
|
315
|
|
|
|
99
|
|
|
|
319
|
|
|
|
733
|
|
Administrative expenses
|
|
|
(1,419
|
)
|
|
|
(363
|
)
|
|
|
(425
|
)
|
|
|
(2,207
|
)
|
Provision for credit losses
|
|
|
(70,463
|
)
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
(72,626
|
)
|
Foreclosed property expense
|
|
|
(857
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
(910
|
)
|
Other expenses
|
|
|
(1,216
|
)
|
|
|
(38
|
)
|
|
|
(230
|
)
|
|
|
(1,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes
|
|
|
(65,173
|
)
|
|
|
(8,770
|
)
|
|
|
936
|
|
|
|
(73,007
|
)
|
Provision (benefit) for federal income taxes
|
|
|
(1,375
|
)
|
|
|
311
|
|
|
|
79
|
|
|
|
(985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(63,798
|
)
|
|
|
(9,081
|
)
|
|
|
857
|
|
|
|
(72,022
|
)
|
Less: Net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
(63,798
|
)
|
|
$
|
(9,028
|
)
|
|
$
|
857
|
|
|
$
|
(71,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
F-96
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Single-Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Net interest income (expense)
(1)
|
|
$
|
461
|
|
|
$
|
(343
|
)
|
|
$
|
8,664
|
|
|
$
|
8,782
|
|
Guaranty fee income
(expense)(2)
|
|
|
8,390
|
|
|
|
633
|
|
|
|
(1,402
|
)
|
|
|
7,621
|
|
Trust management income
|
|
|
256
|
|
|
|
5
|
|
|
|
|
|
|
|
261
|
|
Investment losses, net
(3)
|
|
|
(72
|
)
|
|
|
|
|
|
|
(174
|
)
|
|
|
(246
|
)
|
Net
other-than-temporary
impairments(3)
|
|
|
|
|
|
|
|
|
|
|
(6,974
|
)
|
|
|
(6,974
|
)
|
Fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(20,129
|
)
|
|
|
(20,129
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
|
|
(222
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(1,554
|
)
|
|
|
|
|
|
|
(1,554
|
)
|
Fee and other income
|
|
|
327
|
|
|
|
181
|
|
|
|
264
|
|
|
|
772
|
|
Administrative expenses
|
|
|
(1,127
|
)
|
|
|
(404
|
)
|
|
|
(448
|
)
|
|
|
(1,979
|
)
|
Provision for credit losses
|
|
|
(27,881
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
(27,951
|
)
|
Foreclosed property
expense(3)
|
|
|
(1,844
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
(1,858
|
)
|
Other
expenses(3)
|
|
|
(823
|
)
|
|
|
(133
|
)
|
|
|
(137
|
)
|
|
|
(1,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary losses
|
|
|
(22,313
|
)
|
|
|
(1,699
|
)
|
|
|
(20,558
|
)
|
|
|
(44,570
|
)
|
Provision for federal income taxes
|
|
|
4,788
|
|
|
|
511
|
|
|
|
8,450
|
|
|
|
13,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary losses
|
|
|
(27,101
|
)
|
|
|
(2,210
|
)
|
|
|
(29,008
|
)
|
|
|
(58,319
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
(409
|
)
|
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(27,101
|
)
|
|
|
(2,210
|
)
|
|
|
(29,417
|
)
|
|
|
(58,728
|
)
|
Less: Net loss attributable to the noncontrolling
interest(3)
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
$
|
(27,101
|
)
|
|
$
|
(2,189
|
)
|
|
$
|
(29,417
|
)
|
|
$
|
(58,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
(3) |
|
Certain prior period amounts have
been reclassified to conform to the current period presentation.
|
F-97
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
Single-
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
Family
|
|
|
HCD
|
|
|
Markets
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
(expense)(1)
|
|
$
|
365
|
|
|
$
|
(404
|
)
|
|
$
|
4,620
|
|
|
$
|
4,581
|
|
Guaranty fee income
(expense)(2)
|
|
|
5,816
|
|
|
|
470
|
|
|
|
(1,215
|
)
|
|
|
5,071
|
|
Losses on certain guaranty contracts
|
|
|
(1,387
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
(1,424
|
)
|
Trust management income
|
|
|
553
|
|
|
|
35
|
|
|
|
|
|
|
|
588
|
|
Investment gains (losses), net
(3)
|
|
|
(64
|
)
|
|
|
|
|
|
|
11
|
|
|
|
(53
|
)
|
Net
other-than-temporary
impairments(3)
|
|
|
|
|
|
|
|
|
|
|
(814
|
)
|
|
|
(814
|
)
|
Fair value losses, net
|
|
|
|
|
|
|
|
|
|
|
(4,668
|
)
|
|
|
(4,668
|
)
|
Debt extinguishment losses, net
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
(47
|
)
|
Losses from partnership investments
|
|
|
|
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
(1,005
|
)
|
Fee and other income
(3)
|
|
|
328
|
|
|
|
324
|
|
|
|
313
|
|
|
|
965
|
|
Administrative expenses
|
|
|
(1,478
|
)
|
|
|
(548
|
)
|
|
|
(643
|
)
|
|
|
(2,669
|
)
|
Provision for credit losses
|
|
|
(4,559
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(4,564
|
)
|
Foreclosed property
expense(3)
|
|
|
(444
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(448
|
)
|
Other
expenses(3)
|
|
|
(450
|
)
|
|
|
(199
|
)
|
|
|
(11
|
)
|
|
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary events
|
|
|
(1,320
|
)
|
|
|
(1,373
|
)
|
|
|
(2,454
|
)
|
|
|
(5,147
|
)
|
Benefit for federal income taxes
|
|
|
(462
|
)
|
|
|
(1,509
|
)
|
|
|
(1,120
|
)
|
|
|
(3,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary losses
|
|
|
(858
|
)
|
|
|
136
|
|
|
|
(1,334
|
)
|
|
|
(2,056
|
)
|
Extraordinary losses, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(858
|
)
|
|
|
136
|
|
|
|
(1,349
|
)
|
|
|
(2,071
|
)
|
Less: Net loss attributable to the noncontrolling
interest(3)
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fannie Mae
|
|
$
|
(858
|
)
|
|
$
|
157
|
|
|
$
|
(1,349
|
)
|
|
$
|
(2,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
(3) |
|
Certain prior period amounts have
been reclassified to conform to the current period presentation.
|
The following table displays total assets by segment as of
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Single-Family
|
|
$
|
19,991
|
|
|
$
|
24,115
|
|
HCD
|
|
|
5,698
|
|
|
|
10,994
|
|
Capital Markets
|
|
|
843,452
|
|
|
|
877,295
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
869,141
|
|
|
$
|
912,404
|
|
|
|
|
|
|
|
|
|
|
We operate our business solely in the United States and its
territories, and accordingly, we generate no revenue from and
have no assets in geographic locations other than the United
States and its territories.
F-98
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Common
Stock
Shares of common stock outstanding, net of shares held as
treasury stock, totaled 1.1 billion as of both
December 31, 2009 and 2008. In May 2008, we received gross
proceeds of $2.6 billion from the issuance of
94 million new shares of no par value common stock with a
stated value of $0.5250 per share.
During the conservatorship, the rights and powers of
shareholders are suspended. Accordingly, our common shareholders
have no ability to elect directors or to vote on other matters
during the conservatorship unless FHFA elects to delegate this
authority to them. The senior preferred stock purchase agreement
with Treasury prohibits the payment of dividends on common stock
without the prior written consent of Treasury. The conservator
also has eliminated common stock dividends. In addition, we
issued a warrant to Treasury that provides Treasury with the
right to purchase for a nominal price shares of our common stock
equal to 79.9% of the total number of shares of common stock
outstanding on a fully diluted basis on the date of exercise,
which would substantially dilute the ownership in Fannie Mae of
our common stockholders at the time of exercise. Refer to
Senior Preferred Stock and Common Stock Warrant
section below.
F-99
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Preferred
Stock
The following table displays our senior preferred stock and
preferred stock outstanding as of December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
|
|
|
|
|
|
|
Issued and Outstanding as of
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Stated
|
|
|
as of
|
|
|
|
|
|
|
Issue
|
|
|
2009
|
|
|
2008
|
|
|
Value
|
|
|
December 31,
|
|
|
Redeemable on
|
|
Title
|
|
Date
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
per share
|
|
|
2009
|
|
|
or After
|
|
|
|
(Dollars and shares in millions except per share amounts)
|
|
|
Senior Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2008-2
|
|
|
September 8, 2008
|
|
|
|
1
|
|
|
$
|
60,900
|
|
|
|
1
|
|
|
$
|
1,000
|
|
|
$
|
60,900
|
(3)
|
|
|
10.000
|
%(2)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
1
|
|
|
$
|
60,900
|
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D
|
|
|
September 30, 1998
|
|
|
|
3
|
|
|
$
|
150
|
|
|
|
3
|
|
|
$
|
150
|
|
|
$
|
50
|
|
|
|
5.250
|
%
|
|
|
September 30, 1999
|
|
Series E
|
|
|
April 15, 1999
|
|
|
|
3
|
|
|
|
150
|
|
|
|
3
|
|
|
|
150
|
|
|
|
50
|
|
|
|
5.100
|
|
|
|
April 15, 2004
|
|
Series F
|
|
|
March 20, 2000
|
|
|
|
14
|
|
|
|
690
|
|
|
|
14
|
|
|
|
690
|
|
|
|
50
|
|
|
|
1.360
|
(4)
|
|
|
March 31, 2002
|
(9)
|
Series G
|
|
|
August 8, 2000
|
|
|
|
6
|
|
|
|
288
|
|
|
|
6
|
|
|
|
288
|
|
|
|
50
|
|
|
|
1.670
|
(5)
|
|
|
September 30, 2002
|
(9)
|
Series H
|
|
|
April 6, 2001
|
|
|
|
8
|
|
|
|
400
|
|
|
|
8
|
|
|
|
400
|
|
|
|
50
|
|
|
|
5.810
|
|
|
|
April 6, 2006
|
|
Series I
|
|
|
October 28, 2002
|
|
|
|
6
|
|
|
|
300
|
|
|
|
6
|
|
|
|
300
|
|
|
|
50
|
|
|
|
5.375
|
|
|
|
October 28, 2007
|
|
Series L
|
|
|
April 29, 2003
|
|
|
|
7
|
|
|
|
345
|
|
|
|
7
|
|
|
|
345
|
|
|
|
50
|
|
|
|
5.125
|
|
|
|
April 29, 2008
|
|
Series M
|
|
|
June 10, 2003
|
|
|
|
9
|
|
|
|
460
|
|
|
|
9
|
|
|
|
460
|
|
|
|
50
|
|
|
|
4.750
|
|
|
|
June 10, 2008
|
|
Series N
|
|
|
September 25, 2003
|
|
|
|
5
|
|
|
|
225
|
|
|
|
5
|
|
|
|
225
|
|
|
|
50
|
|
|
|
5.500
|
|
|
|
September 25, 2008
|
|
Series O
|
|
|
December 30, 2004
|
|
|
|
50
|
|
|
|
2,500
|
|
|
|
50
|
|
|
|
2,500
|
|
|
|
50
|
|
|
|
7.000
|
(6)
|
|
|
December 31, 2007
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2004-1(11)
|
|
|
December 30, 2004
|
|
|
|
|
|
|
|
2,492
|
|
|
|
|
|
|
|
2,500
|
|
|
|
100,000
|
|
|
|
5.375
|
|
|
|
January 5, 2008
|
|
Series P
|
|
|
September 28, 2007
|
|
|
|
40
|
|
|
|
1,000
|
|
|
|
40
|
|
|
|
1,000
|
|
|
|
25
|
|
|
|
4.500
|
(7)
|
|
|
September 30, 2012
|
|
Series Q
|
|
|
October 4, 2007
|
|
|
|
15
|
|
|
|
375
|
|
|
|
15
|
|
|
|
375
|
|
|
|
25
|
|
|
|
6.750
|
|
|
|
September 30, 2010
|
|
Series R(12)
|
|
|
November 21, 2007
|
|
|
|
21
|
|
|
|
530
|
|
|
|
21
|
|
|
|
530
|
|
|
|
25
|
|
|
|
7.625
|
|
|
|
November 21, 2012
|
|
Series S
|
|
|
December 11, 2007
|
|
|
|
280
|
|
|
|
7,000
|
|
|
|
280
|
|
|
|
7,000
|
|
|
|
25
|
|
|
|
8.250
|
(8)
|
|
|
December 31, 2010
|
(10)
|
Mandatory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2008-1
|
|
|
May 14, 2008
|
|
|
|
24
|
|
|
|
1,218
|
|
|
|
41
|
|
|
|
2,084
|
|
|
|
50
|
|
|
|
8.750
|
|
|
|
N/A
|
|
Series T(13)
|
|
|
May 19, 2008
|
|
|
|
89
|
|
|
|
2,225
|
|
|
|
89
|
|
|
|
2,225
|
|
|
|
25
|
|
|
|
8.250
|
|
|
|
May 20, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
580
|
|
|
$
|
20,348
|
|
|
|
597
|
|
|
$
|
21,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Any liquidation preference of our
senior preferred stock in excess of $1.0 billion may be
repaid through an issuance of common or preferred stock. The
initial $1.0 billion investment may be repaid only in
conjunction with termination of the senior preferred stock
purchase agreement. The provisions for termination under the
senior preferred stock purchase agreement are very restrictive
and cannot occur while we are in conservatorship.
|
|
(2) |
|
Rate effective September 9,
2008. 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.
|
|
(3) |
|
Initial Stated Value per share was
$1,000. Based on our draws of funds under the Senior Preferred
Stock Variable Liquidation Preference agreement with Treasury,
the Stated Value per share on December 31, 2009 was $60,900.
|
|
(4) |
|
Rate effective March 31, 2008.
Variable dividend rate resets every two years at a per annum
rate equal to the two-year Maturity U.S. Treasury Rate
(CMT) minus 0.16% with a cap of 11% per year. As of
December 31, 2008, the annual dividend rate was 1.36%.
|
F-100
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
(5) |
|
Rate effective September, 30 2008.
Variable dividend rate resets every two years at a per annum
rate equal to the two-year CMT rate minus 0.18% with a cap of
11% per year. As of December 31, 2008, the annual dividend
rate was 1.67%.
|
|
(6) |
|
Rate effective December 31,
2009. Variable dividend rate resets quarterly thereafter at a
per annum rate equal to the greater of 7.00% and
10-year CMT
rate plus 2.375%. As of December 31, 2008, the annual
dividend rate was 7.00%.
|
|
(7) |
|
Rate effective December 31,
2009. Variable dividend rate resets quarterly thereafter at a
per annum rate equal to the greater of 4.50% and
3-Month
LIBOR plus 0.75%. As of December 31, 2008, the annual
dividend rate was 4.50%.
|
|
(8) |
|
Rate effective December 11,
2007 to but excluding December 31, 2010. Variable dividend
rate resets quarterly thereafter at a per annum rate equal to at
the greater of 7.75% and
3-Month
LIBOR plus 4.23%. As of December 31, 2008, the annual
dividend rate was 8.25%.
|
|
(9) |
|
Represents initial call date.
Redeemable every two years thereafter.
|
|
(10) |
|
Represents initial call date.
Redeemable every five years thereafter.
|
|
(11) |
|
Issued and outstanding shares were
24,922 and 25,000 as of December 31, 2009 and 2008,
respectively.
|
|
(12) |
|
On November 21, 2007, we
issued 20 million shares of preferred stock in the amount
of $500 million. Subsequent to the initial issuance, we
issued an additional 1.2 million shares in the amount of
$30 million on December 14, 2007 under the same terms
as the initial issuance.
|
|
(13) |
|
On May 19, 2008, we issued
80 million shares of preferred stock with an aggregate
stated value of $2.0 billion. Subsequent to the initial
issuance, we issued an additional 8 million shares with an
aggregate stated value of $200 million on May 22, 2008
and one million shares with an aggregate stated value of
$25 million on June 4, 2008 under the same terms as
the initial issuance.
|
As described under Senior Preferred Stock and Common Stock
Warrant we issued senior preferred stock that ranks senior
to all other series of preferred stock as to both dividends and
distributions upon dissolution, liquidation or winding up of the
company. During the conservatorship, the rights and powers of
preferred stockholders (other than holders of senior preferred
stock) are suspended. The senior preferred stock purchase
agreement with Treasury also prohibits the payment of dividends
on preferred stock (other than the senior preferred stock)
without the prior written consent of Treasury. The conservator
also has eliminated preferred stock dividends, other than
dividends on the senior preferred stock.
In 2007, the Board of Directors increased our authorized shares
of preferred stock to 700 million shares from
200 million shares, in one or more series. Each series of
our preferred stock has no par value, is non-participating, is
non-voting and has a liquidation preference equal to the stated
value per share. None of our preferred stock is convertible into
or exchangeable for any of our other stock or obligations, with
the exception of the Convertible
Series 2004-1
issued in December 2004 and Non-cumulative Mandatory Convertible
Series 2008-1
issued in May 2008.
Shares of the Convertible
Series 2004-1
Preferred Stock are convertible at any time, at the option of
the holders, into shares of Fannie Mae common stock at a
conversion price of $94.31 per share of common stock (equivalent
to a conversion rate of 1,060.3329 shares of common stock
for each share of
Series 2004-1
Preferred Stock). The conversion price is adjustable, as
necessary, to maintain the stated conversion rate into common
stock. Events which may trigger an adjustment to the conversion
price include certain changes in our common stock dividend rate,
subdivisions of our outstanding common stock into a greater
number of shares, combinations of our outstanding common stock
into a smaller number of shares and issuances of any shares by
reclassification of our common stock. No such events have
occurred.
Holders of preferred stock (other than the senior preferred
stock) are entitled to receive non-cumulative, quarterly
dividends when, and if, declared by our Board of Directors, but
have no right to require redemption of any shares of preferred
stock. Payment of dividends on preferred stock (other than the
senior preferred stock) is not mandatory, but has priority over
payment of dividends on common stock, which are also declared by
the Board of Directors. If dividends on the preferred stock are
not paid or set aside for payment for a given dividend period,
dividends may not be paid on our common stock for that period.
For the years ended December 31, 2008 and 2007, dividends
declared on preferred stock (excluding the senior preferred
stock)
F-101
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
were $1.0 billion and $503 million, respectively.
There were no dividends declared or paid on preferred stock
(other than the senior preferred stock) for the year ended
December 31, 2009.
After a specified period, we have the option to redeem preferred
stock (other than the senior preferred stock) at its redemption
price plus the dividend (whether or not declared) for the
then-current period accrued to, but excluding, the date of
redemption. The redemption price is equal to the stated value
for all issues of preferred stock except Series O, which
has a redemption price of $50 to $52.50 depending on the year of
redemption, Convertible
Series 2004-1,
which has a redemption price of $105,000 per share, and
Mandatory Convertible
Series 2008-1
which is not redeemable.
All of our preferred stock, except those of Series D, E, O,
the Convertible
Series 2004-1
and the senior preferred stock, is listed on the New York Stock
Exchange.
Issuance
of Preferred Stock
On May 14, 2008, we received gross proceeds of
$2.6 billion from the issuance of 52 million shares of
8.75% Non-Cumulative Mandatory Convertible Preferred Stock,
Series 2008-1,
with a stated value of $50 per share. Each share has a
liquidation preference equal to its stated value of $50 per
share plus an amount equal to the dividend for the then-current
quarterly dividend period. The Mandatory Convertible
Series 2008-1
Preferred Stock is not redeemable by us. On May 13, 2011,
the mandatory conversion date, each share of the Preferred Stock
will automatically convert into between 1.5408 and
1.8182 shares of our common stock, subject to anti-dilution
adjustments, depending on the average of the closing prices per
share of our common stock for each of the 20 consecutive trading
days ending on the third trading day prior to such date. At any
time prior to the mandatory conversion date, holders may elect
to convert each share of our Preferred Stock into a minimum of
1.5408 shares of common stock, subject to anti-dilution
adjustments. The Mandatory Convertible
Series 2008-1 shares
are considered participating securities for purposes of
calculating earnings per share.
On May 19, 2008, we received gross proceeds of
$2.0 billion from the issuance of 80 million shares of
8.25% Non-Cumulative Preferred Stock, Series T, with a
stated value of $25 per share. Subsequent to the initial
issuance, we received gross proceeds of $200 million from
the additional issuance of 8 million shares on May 22,
2008 and $25 million from the additional issuance of one
million shares on June 4, 2008. Each share has a
liquidation preference equal to its stated value of $25 per
share plus accrued dividends for the then-current quarterly
dividend period. The Series T Preferred Stock may be
redeemed, at our option, on or after May 20, 2013. Pursuant
to the covenants set forth in the senior preferred stock
purchase agreement described below, we must obtain the prior
written consent of Treasury in order to exercise our option to
redeem the Series T Preferred Stock.
Conversions
of Preferred Stock to Common Stock
For the year ended December 31, 2009,
17,335,866 shares of Mandatory Convertible
Series 2008-1
were converted to 26,711,068 shares of common stock. Also
78 shares of Mandatory Convertible
Series 2004-1
were converted to 82,705 shares of common stock. For the
year ended December 31, 2008, 10,053,599 shares of
Mandatory Convertible
Series 2008-1
were converted to 15,490,568 shares of common stock.
Senior
Preferred Stock and Common Stock Warrant
On September 8, 2008, we issued one million shares of
Variable Liquidation Preference Senior Preferred Stock,
Series 2008-2
(senior preferred stock), with an aggregate stated
value and initial liquidation preference of $1.0 billion.
On September 7, 2008, we issued a warrant to purchase
common stock to Treasury. The warrant gives Treasury the right
to purchase shares of our common stock equal to 79.9% of the
total number of shares of common stock outstanding on a fully
diluted basis on the date of exercise. The senior
F-102
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
preferred stock and the warrant were issued in consideration for
the commitment from Treasury to provide up to
$100.0 billion in cash to us under the terms set forth in
the senior preferred stock purchase agreement prior to
subsequent amendments. We did not receive any cash proceeds as a
result of issuing these shares or the warrant. We have assigned
a value of $4.5 billion to Treasurys commitment,
which has been recorded as a reduction to additional
paid-in-capital
and was partially offset by the aggregate fair value of the
warrant. There was no impact to the total balance of
stockholders equity (deficit) as a result of the issuance
as reported in our consolidated statement of changes in
stockholders equity (deficit).
Variable
Liquidation Preference Senior Preferred Stock,
Series 2008-2
Shares of the senior preferred stock have no par value and have
a stated value and initial liquidation preference equal to
$1,000 per share. The liquidation preference of the senior
preferred stock is subject to adjustment. To the extent
dividends are not paid in cash for any dividend period, the
dividends will accrue and be added to the liquidation preference
of the senior preferred stock. In addition, any amounts paid by
Treasury to us pursuant to Treasurys funding commitment
provided in the senior preferred stock purchase agreement and
any quarterly commitment fee payable under the senior preferred
stock purchase agreement that is not paid in cash to or waived
by Treasury will be added to the liquidation preference of the
senior preferred stock. We may not make payments to reduce the
liquidation preference of the senior preferred stock below an
aggregate of $1.0 billion, unless Treasury is also
terminating its funding commitment. As of February 26,
2010, we have received a total of $59.9 billion under
Treasurys funding commitment and the Acting Director of
FHFA has submitted a request for an additional
$15.3 billion from Treasury to eliminate our net worth
deficit as of December 31, 2009.
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
an annual rate of 10% per year based on the then-current
liquidation preference of the senior preferred stock. FHFA also
has authority to declare 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
declared and paid on our senior preferred stock were
$2.5 billion and $31 million for the years ended
December 31, 2009 and 2008, respectively.
The senior preferred stock ranks prior to our common stock and
all other outstanding series of our preferred stock as to both
dividends and rights upon liquidation. We may not declare or pay
dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect
to, any common stock or other securities ranking junior to the
senior preferred stock without the prior written consent of
Treasury. Shares of the senior preferred stock are not
convertible. Shares of the senior preferred stock have no
general or special voting rights, other than those set forth in
the certificate of designation for the senior preferred stock or
otherwise required by law. The consent of holders of at least
two-thirds of all outstanding shares of senior preferred stock
is generally required to amend the terms of the senior preferred
stock or to create any class or series of stock that ranks prior
to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock in
full prior to the termination of Treasurys funding
commitment under the senior preferred stock purchase agreement.
However, we are permitted to pay down the liquidation preference
of the outstanding shares of senior preferred stock to the
extent of (1) accrued and unpaid dividends previously added
to the liquidation preference and not previously paid down; and
(2) quarterly commitment fees previously added to the
liquidation preference and not previously paid down. In
addition, to the extent we issue any shares of capital stock for
cash at any time the senior preferred stock is outstanding
(which requires Treasurys approval), we are required to
use the net proceeds of the issuance to
F-103
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
pay down the liquidation preference of the senior preferred
stock; however, the liquidation preference of each share of
senior preferred stock may not be paid down below $1,000 per
share prior to the termination of Treasurys funding
commitment. Following the termination of Treasurys funding
commitment, we may pay down the liquidation preference of all
outstanding shares of senior preferred stock at any time, in
whole or in part. If we pay down the liquidation preference of
each outstanding share of senior preferred stock in full, the
shares will be considered redeemed as of the payment date.
Common
Stock Warrant
The warrant gives Treasury the right to purchase shares of our
common stock equal to 79.9% of the total number of shares of
common stock outstanding on a fully diluted basis on the date of
exercise. The warrant may be exercised in whole or in part at
any time on or before September 7, 2028, by delivery to
Fannie Mae of: (a) a notice of exercise; (b) payment
of the exercise price of $0.00001 per share; and (c) the
warrant. If the market price of one share of common stock is
greater than the exercise price, in lieu of exercising the
warrant by payment of the exercise price, Treasury may elect to
receive shares equal to the value of the warrant (or portion
thereof being canceled) pursuant to the formula specified in the
warrant. Upon exercise of the warrant, Treasury may assign the
right to receive the shares of common stock issuable upon
exercise to any other person. We recorded the aggregate fair
value of the warrant of $3.5 billion as a component of
additional
paid-in-capital
upon issuance of the warrant. If the warrant is exercised, the
stated value of the common stock issued will be reclassified as
Common stock in our consolidated balance sheet. As
of February 26, 2010, Treasury had not exercised the
warrant.
Senior
Preferred Stock Purchase Agreement with Treasury
Commitment
Fee
Pursuant to the terms of the amended agreement, we are required
to pay a quarterly commitment fee to Treasury beginning
March 31, 2011. The fee, to be mutually agreed upon by us
and Treasury and to be determined with reference to the market
value of Treasurys commitment as then in effect, will be
determined by or before December 31, 2010, and will be
reset every five years. Treasury may waive the periodic
commitment fee for up to one year at a time, in its sole
discretion, based on adverse conditions in the
U.S. mortgage market. We may elect to pay the periodic
commitment fee in cash or add the amount of the fee to the
liquidation preference of the senior preferred stock.
Funding
Commitment
Treasurys funding commitment under the senior preferred
stock purchase agreement is intended to ensure that we maintain
a positive net worth. The senior preferred stock purchase
agreement provides that, on a quarterly basis, we generally may
draw funds up to the amount, if any, by which our total
liabilities exceed our total assets, as reflected on our
consolidated balance sheet for the applicable fiscal quarter
(referred to as the deficiency amount), provided
that the aggregate amount funded under the agreement may not
exceed the greater of (a) $200.0 billion, or
(b) $200.0 billion plus the cumulative total of
deficiency amounts for each calendar quarter in 2010, 2011, and
2012, less the amount by which our total assets exceed our total
liabilities as of December 31, 2012. The senior preferred
stock purchase agreement provides that the deficiency amount
will be calculated differently if we become subject to
receivership or other liquidation process. The deficiency amount
may be increased above the otherwise applicable amount upon our
mutual written agreement with Treasury. In addition, if the
Director of FHFA determines that the Director will be mandated
by law to appoint a receiver for us unless our capital is
increased by receiving funds under the commitment in an amount
up to the deficiency amount (subject to the maximum amount that
may be funded under the agreement), then FHFA, in its capacity
as our conservator, may request that Treasury provide funds to
us in such amount. The senior
F-104
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
preferred stock purchase agreement also provides that, if we
have a deficiency amount as of the date of completion of the
liquidation of our assets, we may request funds from Treasury in
an amount up to the deficiency amount (subject to the maximum
amount that may be funded under the agreement). Any amounts that
we draw under the senior preferred stock purchase agreement will
be added to the liquidation preference of the senior preferred
stock. No additional shares of senior preferred stock are
required to be issued under the senior preferred stock purchase
agreement.
Covenants
The senior preferred stock purchase agreement, as amended,
provides that, until the senior preferred stock is repaid or
redeemed in full, we may not, without the prior written consent
of Treasury:
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Declare or pay any dividend (preferred or otherwise) or make any
other distribution with respect to any Fannie Mae equity
securities (other than with respect to the senior preferred
stock or warrant);
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Redeem, purchase, retire or otherwise acquire any Fannie Mae
equity securities (other than the senior preferred stock or
warrant);
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Sell or issue any Fannie Mae equity securities (other than the
senior preferred stock, the warrant and the common stock
issuable upon exercise of the warrant and other than as required
by the terms of any binding agreement in effect on the date of
the senior preferred stock purchase agreement);
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Terminate the conservatorship (other than in connection with a
receivership);
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Sell, transfer, lease or otherwise dispose of any assets, other
than dispositions for fair market value: (a) to a limited
life regulated entity (in the context of receivership);
(b) of assets and properties in the ordinary course of
business, consistent with past practice; (c) in connection
with a liquidation of Fannie Mae by a receiver; (d) of cash
or cash equivalents for cash or cash equivalents; or (e) to
the extent necessary to comply with the covenant described below
relating to the reduction of our mortgage assets beginning in
2010;
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Incur indebtedness that would result in our aggregate
indebtedness exceeding $1,080 billion through
December 31, 2010. 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 hold on
December 31 of the immediately preceding calendar year;
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Issue any subordinated debt;
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Enter into a corporate reorganization, recapitalization, merger,
acquisition or similar event; or
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Engage in transactions with affiliates unless the transaction is
(a) pursuant to the senior preferred stock purchase
agreement, the senior preferred stock or the warrant,
(b) upon arms-length terms or (c) a transaction
undertaken in the ordinary course or pursuant to a contractual
obligation or customary employment arrangement in existence on
the date of the senior preferred stock purchase agreement.
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The agreement also provides that we may not own mortgage assets
in excess of $900 billion as of December 31, 2009. We
are also required to reduce our mortgage assets, beginning on
December 31, 2010 and each year thereafter, to 90% of the
amount of the mortgage assets we were allowed to hold as of
December 31 of the immediately preceding calendar year, until
the amount of our mortgage assets reaches $250 billion.
Under the agreement, 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 sheets will not be considered
for purposes of evaluating our compliance with the limitation on
the amount of mortgage assets we may own. In addition, the
definition of indebtedness in the agreement was
F-105
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
revised to clarify that it also does not give effect to any
change that may be made in respect of the FASB guidance on
accounting for transfers of financial assets or any similar
accounting standard.
In addition, the agreement provides that we may not enter into
any new compensation arrangements or increase amounts or
benefits payable under existing compensation arrangements with
our named executive officers (as defined by SEC rules) without
the consent of the Director of FHFA, in consultation with the
Secretary of the Treasury. As of December 31, 2009, we were
in compliance with the senior preferred stock purchase agreement
covenants.
Termination
Provisions
The senior preferred stock purchase agreement provides that
Treasurys funding commitment will terminate under any the
following circumstances: (1) the completion of our
liquidation and fulfillment of Treasurys obligations under
its funding commitment at that time, (2) the payment in
full of, or reasonable provision for, all of our liabilities
(whether or not contingent, including mortgage guaranty
obligations), or (3) the funding by Treasury of the maximum
amount under the agreement. In addition, Treasury may terminate
its funding commitment and declare the senior preferred stock
purchase agreement null and void if a court vacates, modifies,
amends, conditions, enjoins, stays or otherwise affects the
appointment of the conservator or otherwise curtails the
conservators powers. Treasury may not terminate its
funding commitment solely by reason of our being in
conservatorship, receivership or other insolvency proceeding, or
due to our financial condition or any adverse change in our
financial condition.
Waivers
and Amendments
The senior preferred stock purchase agreement provides that most
provisions of the agreement may be waived or amended by mutual
written agreement of the parties. No waiver or amendment of the
agreement, however, may decrease Treasurys aggregate
funding commitment or add conditions to Treasurys funding
commitment if the waiver or amendment would adversely affect in
any material respect the holders of our debt securities or
guaranteed Fannie Mae MBS.
Third-party
Enforcement Rights
If we default on payments with respect to our debt securities or
guaranteed Fannie Mae MBS and Treasury fails to perform its
obligations under its funding commitment, and if we
and/or the
conservator are not diligently pursuing remedies in respect of
that failure, the holders of these debt securities or Fannie Mae
MBS may file a claim for relief in the United States Court of
Federal Claims. The relief, if granted, would require Treasury
to fund to us the lesser of (1) the amount necessary to
cure the payment defaults on our debt and Fannie Mae MBS and
(2) the lesser of (a) the deficiency amount and
(b) the maximum amount available under the agreement less
the aggregate amount of funding previously provided under the
commitment. Any payment that Treasury makes under those
circumstances would be treated for all purposes as a draw under
the senior preferred stock purchase agreement that would
increase the liquidation preference of the senior preferred
stock.
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17.
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Regulatory
Capital Requirements
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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 December 31,
2009 and 2008, we had a minimum capital deficiency of
$107.6 billion and $42.2 billion,
F-106
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
respectively. These amounts exclude the funds provided to us by
Treasury pursuant to the senior preferred stock purchase
agreement, as the senior preferred stock does not qualify as
core capital due to its cumulative dividend provisions.
Pursuant to the GSE Act, if our total assets are less than our
total obligations (a net worth deficit) for a period of
60 days, FHFA is 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 order to avoid this mandatory
trigger of receivership. In order to avoid a net worth deficit,
we may draw funds from Treasury under the senior preferred stock
purchase agreement.
FHFA has directed us, during the time we are under
conservatorship, to focus on managing to a positive net worth.
As of December 31, 2009 and 2008, we had a net worth
deficit of $15.3 billion and $15.2 billion,
respectively.
The following table displays our regulatory capital
classification measures as of December 31, 2009 and 2008.
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As of December 31
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2009
(1)
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2008
(1)
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(Dollars in millions)
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Core
capital(2)
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$
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(74,540
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)
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$
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(8,641
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)
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Statutory minimum capital
requirement(3)
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33,057
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33,552
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Deficit of core capital over statutory minimum capital
requirement
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$
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(107,597
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)
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$
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(42,193
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)
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Deficit of core capital percentage over statutory minimum
capital requirement
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(325.5
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)%
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(125.8
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)%
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(1) |
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Amounts as of December 31,
2009 and 2008 represent estimates that have been submitted to
FHFA. As noted above, FHFA is not issuing capital
classifications during conservatorship.
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(2) |
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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.
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(3) |
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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).
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Capital
Classification
The GSE Act establishes minimum capital, critical capital and
risk-based capital requirements for Fannie Mae. Before the
conservatorship, our regulator classified us on a quarterly
basis as either adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized.
We must meet the minimum and risk-based capital requirements to
be classified as adequately capitalized. We were determined to
be undercapitalized as of June 30, 2008.
Our minimum capital and critical capital requirements are based
on core capital holdings. As defined in the GSE Act, core
capital is equal to the sum of the stated value of outstanding
common stock (common stock less treasury stock), the stated
value of outstanding non-cumulative perpetual preferred stock,
paid-in capital and retained earnings, as determined in
accordance with GAAP. The statutory minimum capital requirement
is generally equal to the sum of: (1) 2.50% of on-balance
sheet assets; (2) 0.45% of the unpaid principal balance of
outstanding Fannie Mae MBS held by third parties; and
(3) 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 of FHFA). The critical capital requirement
is generally equal to the sum of: (1) 1.25% of on-balance
sheet assets; (2) 0.25% of the unpaid principal balance of
outstanding Fannie Mae
F-107
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
MBS held by third parties; and (3) 0.25% of other
off-balance sheet obligations, which may be adjusted by the
Director of FHFA under certain circumstances.
FHFAs risk-based capital requirement ties our capital
requirements to the performance of our risk positions when
subjected to a stress test. The stress test simulates our
financial performance over a ten- year period of severe economic
conditions characterized by both extreme interest rate movements
and high mortgage default rates. Simulation results indicate the
amount of capital required to survive this prolonged period of
economic stress without new business or active risk management
action. In addition to this model-based amount, the risk-based
capital requirement includes a 30% surcharge to cover
unspecified management and operations risks.
Compliance
with Agreement
Under the terms of the senior preferred stock purchase
agreement, we are required to comply with certain restrictions
and covenants. Set forth below are additional restrictions
related to our capital requirements:
Restrictions Under GSE Act. Under the GSE Act,
FHFA has the authority to prohibit capital distributions,
including payment of dividends, if we fail to meet our capital
requirements. If FHFA classifies us as significantly
undercapitalized, we must obtain the approval of the Director of
FHFA for any dividend payment. Under the GSE Act, we are not
permitted to make a capital distribution if, after making the
distribution, we would be undercapitalized. The Director of
FHFA, however, 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. Our qualifying subordinated debt
provides for the deferral of the payment of interest for up to
five years if either: our core capital is below 125% of our
critical capital requirement; or our core capital is below our
statutory minimum capital requirement, and the
U.S. Secretary of the Treasury, acting on our request,
exercises his or her discretionary authority pursuant to
Section 304(c) of the Charter Act to purchase our debt
obligations. As of December 31, 2009 and 2008, our core
capital was below 125% of our critical capital requirement;
however, we have been directed by FHFA 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.
Prior to conservatorship, we had other restrictions and
covenants to meet, including minimum capital requirements, under
the terms of various agreements and consent orders with FHFA. We
were in compliance with these restrictions until they were
suspended October 9, 2008 following our entry into
conservatorship.
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18.
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Concentrations
of Credit Risk
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Concentrations of credit risk arise when a number of customers
and counterparties engage in similar activities or have similar
economic characteristics that make them susceptible to similar
changes in industry conditions, which could affect their ability
to meet their contractual obligations. Based on our assessment
of business conditions that could impact our financial results,
including those conditions arising through February 26,
2010, we have determined that concentrations of credit risk
exist among single-family and multifamily borrowers (including
geographic concentrations and loans with certain non-traditional
features), mortgage insurers, mortgage servicers, derivative
counterparties and parties associated with our off-balance sheet
transactions. Concentrations for each of these groups are
discussed below.
F-108
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Single-Family
Loan Borrowers
Regional economic conditions may affect a borrowers
ability to repay his or her mortgage loan and the property value
underlying the loan. Geographic concentrations increase the
exposure of our portfolio to changes in credit risk.
Single-family borrowers are primarily affected by home prices
and interest rates. The geographic dispersion of our
Single-Family business has been consistently diversified over
the three years ended December 31, 2009, with our largest
exposures in the Western region of the United States, which
represented 26% of our single-family conventional mortgage
credit book of business as of December 31, 2009. Except for
California, where 17% and 16% of the gross unpaid principal
balance of our conventional single-family mortgage loans held or
securitized in Fannie Mae MBS as of December 31, 2009 and
2008, respectively, were located, no other significant
concentrations existed in any state.
To manage credit risk and comply with legal requirements, we
typically require primary mortgage insurance or other credit
enhancements if the current LTV ratio (i.e., the ratio of
the unpaid principal balance of a loan to the current value of
the property that serves as collateral) of a single-family
conventional mortgage loan is greater than 80% when the loan is
delivered to us. We may also require credit enhancements if the
original LTV ratio of a single-family conventional mortgage loan
is less than 80%.
Multifamily
Loan Borrowers
Numerous factors affect a multifamily borrowers ability to
repay his or her loan and the value of the property underlying
the loan. The most significant factors affecting credit risk are
rental vacancy rates and capitalization rates for the mortgaged
property. Vacancy rates vary among geographic regions of the
United States. The average mortgage amounts for multifamily
loans are significantly larger than those for single-family
borrowers and, therefore, individual defaults for multifamily
borrowers can be more significant to us. However, these loans,
while individually large, represent a small percentage of our
total loan portfolio. Our multifamily geographic concentrations
have been consistently diversified over the three years ended
December 31, 2009, with our largest exposure in the Western
region of the United States, which represented 34% of our
multifamily mortgage credit book of business. Except for
California, where 27%, and New York, where 14%, of the gross
unpaid principal balance of our portfolio of multifamily
mortgage loans held by us or securitized in Fannie Mae MBS as of
December 31, 2009 and 2008, respectively, were located, no
other significant concentrations existed in any state as of
December 31, 2009 and 2008.
As part of our multifamily risk management activities, we
perform detailed loan reviews that evaluate borrower and
geographic concentrations, lender qualifications, counterparty
risk, property performance and contract compliance. We generally
require servicers to submit periodic property operating
information and condition reviews, allowing us to monitor the
performance of individual loans. We use this information to
evaluate the credit quality of our portfolio, identify potential
problem loans and initiate appropriate loss mitigation
activities.
F-109
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the regional geographic
concentration of single-family and multifamily loans in our
mortgage portfolio and those loans held or securitized in Fannie
Mae MBS as of December 31, 2009 and 2008.
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Geographic
Concentration(1)
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Percentage of
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Percentage of
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Single-Family Guaranty
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Multifamily Guaranty
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Book of
Business(2)
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Book of
Business(3)
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As of December 31,
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As of December 31,
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2009
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2008
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2009
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2008
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Midwest
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16
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%
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16
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%
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9
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%
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9
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%
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Northeast
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19
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19
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23
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23
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Southeast
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24
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25
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19
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19
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Southwest
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15
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16
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15
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|
|
15
|
|
West
|
|
|
26
|
|
|
|
24
|
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Midwest includes IL, IN, IA, MI,
MN, NE, ND, OH, SD, WI; Northeast includes CT, DE ME, MA, NH,
NJ, NY, PA, PR, RI, VT, VI; Southeast includes AL, DC, FL, GA,
KY, MD, NC, MS, SC, TN, VA, WV; Southwest includes AZ, AR, CO,
KS, LA, MO, NM, OK, TX, UT; West include
AK,CA,GU,HI,ID,MT,NV,OR,WA and WY.
|
|
(2) |
|
Consists of the portion of our
single-family conventional guaranty book of business for which
we have detailed loan level information, which constituted over
98% and 99% of our total single-family conventional guaranty
book of business as of December 31, 2009 and 2008,
respectively.
|
|
(3) |
|
Consists of the portion of our
multifamily guaranty book of business for which we have detailed
loan level information, which constituted over 98% and 99% of
our total multifamily guaranty book of business as of
December 31, 2009 and 2008, respectively.
|
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 has been 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 are more likely to 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 were 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 some of these loans through credit enhancements,
as described below under Mortgage Insurers.
F-110
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table displays the percentage of our conventional
single-family guaranty 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) ratios greater than 80% as of
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Percentage of Conventional Single-
|
|
|
|
Family Guaranty
|
|
|
|
Book of Business
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest-only loans
|
|
|
7
|
%
|
|
|
8
|
%
|
Negative-amortizing
ARMs
|
|
|
1
|
|
|
|
1
|
|
80%+ LTV loans
|
|
|
37
|
|
|
|
34
|
|
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
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
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)
|
|
$
|
251,111
|
|
|
|
8
|
%
|
|
$
|
295,622
|
|
|
|
10
|
%
|
Subprime(3)
|
|
|
16,268
|
|
|
|
1
|
|
|
|
19,086
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
267,379
|
|
|
|
9
|
%
|
|
$
|
314,708
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A(4)
|
|
$
|
24,505
|
|
|
|
1
|
%
|
|
$
|
27,858
|
|
|
|
1
|
%
|
Subprime(5)
|
|
|
20,527
|
|
|
|
1
|
|
|
|
24,551
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,032
|
|
|
|
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 mortgage servicers is concentrated.
Our ten largest single-family mortgage servicers, including
their affiliates, serviced 80% and 81% of our single-family
mortgage credit book of business as of December 31, 2009
and 2008, respectively. Our ten largest multifamily mortgage
servicers including their affiliates serviced 75% of our
multifamily mortgage credit book of business as of both
December 31, 2009 and 2008.
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.
F-111
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Mortgage Insurers. 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
$106.5 billion on the single-family mortgage loans in our
guaranty book of business as of December 31, 2009, which
represented approximately 4% of our single-family guaranty book
of business. Our primary and pool mortgage insurance coverage
risk in force on single-family mortgage loans in our guaranty
book of business of $99.6 billion and $6.9 billion,
respectively, as of December 31, 2009, compared with
$109.0 billion and $9.7 billion, respectively, as of
December 31, 2008. Eight mortgage insurance companies
provided over 99% of our mortgage insurance as of both
December 31, 2009 and 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. 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.
As of December 31, 2009, our Allowance for loan losses of
$10.5 billion and Reserve for guaranty losses of
$54.4 billion incorporated an estimated recovery amount of
approximately $16.3 billion from mortgage insurance related
both to loans that are individually measured for impairment and
those that are measured collectively for impairment. This amount
is comprised of the contractual recovery of approximately
$18.5 billion as of December 31, 2009 and an
adjustment of approximately $2.2 billion which reduces the
contractual recovery for our assessment of our mortgage insurer
counterparties inability to fully pay those claims.
We had outstanding receivables from mortgage insurers of
$2.5 billion as of December 31, 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 assessed the receivables for collectibility, and
they are recorded net of a valuation allowance of
$51 million as of December 31, 2009 and
$8 million as of December 31, 2008 in Other
assets. These mortgage insurance receivables are
short-term in nature, having a duration of approximately three
to six months, and the valuation allowance reduces our claim
receivable to the amount which is considered probable of
collection as of December 31, 2009 and 2008. We received
proceeds under our primary and pool mortgage insurance policies
for single-family loans of $3.6 billion for the year ended
December 31, 2009 and $1.8 billion for the year ended
December 31, 2008. The proceeds received in 2009 include
lump-sum payments of $668 million received from the
cancellation and restructurings of some of our mortgage
insurance coverage, which were recorded in Foreclosed
property expense in our consolidated statements of
operations.
From time to time, we may enter into negotiated transactions
with mortgage insurer counterparties pursuant to which we agree
to cancel or restructure insurance coverage in exchange for a
fee. For example, in the third and fourth quarter of 2009, we
agreed to cancel and restructure mortgage insurance coverage
provided by a mortgage insurer counterparty on a number of
mortgage pools in exchange for a fee that represented an
acceleration of, and discount on, claims to be paid pursuant to
the coverage. As these insurance cancellations and
restructurings provide our counterparties with capital relief
and provide us with cash in lieu of future claims that the
counterparty may not be able to pay, thereby reducing our future
credit exposure, we anticipate negotiating additional insurance
coverage restructurings in 2010.
Financial Guarantors. We were the beneficiary
of financial guarantees totaling $9.6 billion and
$10.2 billion as of December 31, 2009 and 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 $51.3 billion and $43.5 billion as
of December 31, 2009 and 2008, respectively, obtained from
Freddie Mac, the federal government, and its agencies. These
financial guaranty contracts assure
F-112
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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. Nine financial
guarantors provided bond insurance coverage to us as of
December 31, 2009, of which only one of the financial
guarantors had an investment grade rating. 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 10, Derivative Instruments and Hedging
Activities.
Parties Associated with Our Off-Balance Sheet
Transactions. We enter into financial instrument
transactions that create off-balance sheet credit risk in the
normal course of our business. These transactions are designed
to meet the financial needs of our customers, and manage our
credit, market or liquidity risks.
We have entered into guarantees for which we have not recognized
a guaranty obligation in our consolidated balance sheets
relating to periods prior to 2003, the effective date of
accounting pronouncements related to guaranty accounting. Our
maximum potential exposure under these guaranties is
$135.7 billion and $172.2 billion as of
December 31, 2009 and 2008, respectively. If we were
required to make payments under these guaranties, we would
pursue recovery through our right to the collateral backing the
underlying loans, available credit enhancements and recourse
with third parties that provide a maximum coverage of
$13.6 billion and $17.6 billion as of
December 31, 2009 and 2008, respectively.
The following table displays the contractual amount of
off-balance sheet financial instruments as of December 31,
2009 and 2008. Contractual or notional amounts do not
necessarily represent the credit risk of the positions.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollars in millions)
|
|
Fannie Mae MBS and other
guarantees(1)
|
|
$
|
135,697
|
|
|
$
|
172,188
|
|
Loan purchase commitments
|
|
|
486
|
|
|
|
4,951
|
|
|
|
|
(1) |
|
Represents maximum exposure on
guarantees not reflected in our consolidated balance sheets.
|
We use fair value measurements for the initial recording of
certain assets and liabilities, periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring
basis, and the recording of assets and liabilities for which we
have elected the fair value option.
Fair
Value Measurement
Fair value measurement guidance defines fair value, establishes
a framework for measuring fair value and expands disclosures
around fair value measurements. We adopted the fair value
measurement guidance on January 1, 2008. This guidance
applies whenever other accounting pronouncements require or
permit assets or liabilities to be measured at fair value. The
guidance establishes a three-level fair value hierarchy that
prioritizes the inputs into the valuation techniques used to
measure fair value. The fair value hierarchy gives the highest
priority, Level 1, to measurements based on unadjusted
quoted prices in active markets for identical assets or
liabilities and lowest priority, Level 3, to measurements
based on unobservable inputs and classifies assets and
liabilities with limited observable inputs or observable inputs
for similar assets or liabilities as Level 2 measurements.
F-113
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Recurring
Changes in Fair Value
The following tables display our assets and liabilities measured
on our 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
December 31, 2009 and 2008. Specifically, total assets
measured at fair value on a recurring basis and classified as
Level 3 were $47.7 billion, or 5% of Total
assets, and $62.0 billion, or 7% of Total
assets, in our consolidated balance sheets as of
December 31, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 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
|
|
$
|
|
|
|
$
|
69,094
|
|
|
$
|
5,656
|
|
|
$
|
|
|
|
$
|
74,750
|
|
Freddie Mac
|
|
|
|
|
|
|
15,082
|
|
|
|
|
|
|
|
|
|
|
|
15,082
|
|
Ginnie Mae
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Alt-A
|
|
|
|
|
|
|
791
|
|
|
|
564
|
|
|
|
|
|
|
|
1,355
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
1,780
|
|
|
|
|
|
|
|
1,780
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
9,335
|
|
|
|
|
|
|
|
|
|
|
|
9,335
|
|
Mortgage revenue bonds
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
|
|
|
|
154
|
|
Non-mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
8,408
|
|
|
|
107
|
|
|
|
|
|
|
|
8,515
|
|
Corporate debt securities
|
|
|
|
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
364
|
|
Other
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
3
|
|
|
|
103,075
|
|
|
|
8,861
|
|
|
|
|
|
|
|
111,939
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
|
|
|
|
|
153,823
|
|
|
|
596
|
|
|
|
|
|
|
|
154,419
|
|
Freddie Mac
|
|
|
|
|
|
|
27,442
|
|
|
|
27
|
|
|
|
|
|
|
|
27,469
|
|
Ginnie Mae
|
|
|
|
|
|
|
1,230
|
|
|
|
123
|
|
|
|
|
|
|
|
1,353
|
|
Alt-A
|
|
|
|
|
|
|
5,838
|
|
|
|
8,312
|
|
|
|
|
|
|
|
14,150
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
10,746
|
|
|
|
|
|
|
|
10,746
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
13,193
|
|
|
|
|
|
|
|
|
|
|
|
13,193
|
|
Mortgage revenue bonds
|
|
|
|
|
|
|
26
|
|
|
|
12,820
|
|
|
|
|
|
|
|
12,846
|
|
Other
|
|
|
|
|
|
|
22
|
|
|
|
3,530
|
|
|
|
|
|
|
|
3,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
|
|
|
|
201,574
|
|
|
|
36,154
|
|
|
|
|
|
|
|
237,728
|
|
Derivative assets
|
|
|
|
|
|
|
19,724
|
|
|
|
150
|
|
|
|
(18,400
|
)
|
|
|
1,474
|
|
Guaranty assets and
buy-ups
|
|
|
|
|
|
|
|
|
|
|
2,577
|
|
|
|
|
|
|
|
2,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
3
|
|
|
$
|
324,373
|
|
|
$
|
47,742
|
|
|
$
|
(18,400
|
)
|
|
$
|
353,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
2,673
|
|
|
$
|
601
|
|
|
$
|
|
|
|
$
|
3,274
|
|
Derivative liabilities
|
|
|
|
|
|
|
23,815
|
|
|
|
27
|
|
|
|
(22,813
|
)
|
|
|
1,029
|
|
Other liabilities
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
26,758
|
|
|
$
|
628
|
|
|
$
|
(22,813
|
)
|
|
$
|
4,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-114
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
F-115
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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
years ended December 31, 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
consolidated statements of operations for Level 3 assets
and liabilities for the years ended December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
|
|
|
Total Gains or (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Realized/Unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
|
|
|
|
|
|
|
|
|
Included in Net Loss
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
Issuances,
|
|
|
|
|
|
|
|
|
Related to Assets
|
|
|
|
Balance,
|
|
|
|
|
|
Other
|
|
|
and
|
|
|
Transfers
|
|
|
Balance,
|
|
|
and Liabilities Still
|
|
|
|
January 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Settlements,
|
|
|
in/out of
|
|
|
December 31,
|
|
|
Held as of
|
|
|
|
2009
|
|
|
Net Loss
|
|
|
Loss
|
|
|
Net
|
|
|
Level 3,
Net(1)
|
|
|
2009
|
|
|
December 31,
2009(2)
|
|
|
|
(Dollars in millions)
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
6,935
|
|
|
$
|
278
|
|
|
$
|
|
|
|
$
|
(1,277
|
)
|
|
$
|
(280
|
)
|
|
$
|
5,656
|
|
|
$
|
274
|
|
Alt-A
|
|
|
1,118
|
|
|
|
57
|
|
|
|
|
|
|
|
(154
|
)
|
|
|
(457
|
)
|
|
|
564
|
|
|
|
(25
|
)
|
Subprime
|
|
|
2,318
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
(455
|
)
|
|
|
|
|
|
|
1,780
|
|
|
|
(74
|
)
|
Mortgage revenue bonds
|
|
|
695
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
600
|
|
|
|
(75
|
)
|
Other
|
|
|
167
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
154
|
|
|
|
(1
|
)
|
Non-mortgage-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
1,475
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
(108
|
)
|
|
|
(1,222
|
)
|
|
|
107
|
|
|
|
2
|
|
Corporate debt securities
|
|
|
57
|
|
|
|
3
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
12,765
|
|
|
$
|
141
|
|
|
$
|
|
|
|
$
|
(2,142
|
)
|
|
$
|
(1,903
|
)
|
|
$
|
8,861
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
5,609
|
|
|
$
|
(47
|
)
|
|
$
|
191
|
|
|
$
|
(569
|
)
|
|
$
|
(4,588
|
)
|
|
$
|
596
|
|
|
$
|
|
|
Freddie Mac
|
|
|
80
|
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
(21
|
)
|
|
|
(29
|
)
|
|
|
27
|
|
|
|
|
|
Ginnie Mae
|
|
|
190
|
|
|
|
|
|
|
|
1
|
|
|
|
(7
|
)
|
|
|
(61
|
)
|
|
|
123
|
|
|
|
|
|
Alt-A
|
|
|
11,675
|
|
|
|
(1,717
|
)
|
|
|
2,192
|
|
|
|
(1,554
|
)
|
|
|
(2,284
|
)
|
|
|
8,312
|
|
|
|
|
|
Subprime
|
|
|
14,318
|
|
|
|
(5,290
|
)
|
|
|
4,862
|
|
|
|
(3,144
|
)
|
|
|
|
|
|
|
10,746
|
|
|
|
|
|
Mortgage revenue bonds
|
|
|
12,456
|
|
|
|
(16
|
)
|
|
|
1,349
|
|
|
|
(969
|
)
|
|
|
|
|
|
|
12,820
|
|
|
|
|
|
Other
|
|
|
3,509
|
|
|
|
(81
|
)
|
|
|
651
|
|
|
|
(549
|
)
|
|
|
|
|
|
|
3,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
47,837
|
|
|
$
|
(7,148
|
)
|
|
$
|
9,240
|
|
|
$
|
(6,813
|
)
|
|
$
|
(6,962
|
)
|
|
$
|
36,154
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivatives
|
|
|
310
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
(48
|
)
|
|
|
(97
|
)
|
|
|
123
|
|
|
|
3
|
|
Guaranty assets and
buy-ups
|
|
|
1,083
|
|
|
|
466
|
|
|
|
243
|
|
|
|
785
|
|
|
|
|
|
|
|
2,577
|
|
|
|
783
|
|
Long-term debt
|
|
|
(2,898
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
1,791
|
|
|
|
524
|
|
|
|
(601
|
)
|
|
|
(49
|
)
|
F-116
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
For the Year Ended December 31, 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
|
|
|
(1,881
|
)
|
|
|
(3,152
|
)
|
|
|
282
|
|
|
|
(512
|
)
|
|
|
(73
|
)
|
Unrealized losses included in other comprehensive loss
|
|
|
|
|
|
|
(4,136
|
)
|
|
|
|
|
|
|
(342
|
)
|
|
|
|
|
Purchases, sales, issuances, and settlements, net
|
|
|
(4,337
|
)
|
|
|
(3,640
|
)
|
|
|
(227
|
)
|
|
|
369
|
|
|
|
5,396
|
|
Transfers in/out of Level 3,
net(3)
|
|
|
475
|
|
|
|
37,845
|
|
|
|
94
|
|
|
|
|
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance as of December 31, 2008
|
|
$
|
12,765
|
|
|
$
|
47,837
|
|
|
$
|
310
|
|
|
$
|
1,083
|
|
|
$
|
(2,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) included in net loss related to
assets and liabilities still held as of December 31,
2008(2)
|
|
$
|
(1,293
|
)
|
|
$
|
|
|
|
$
|
159
|
|
|
$
|
(26
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The net transfers to Level 2
from Level 3 consisted primarily of Fannie Mae guaranteed
mortgage-related securities, which include securities backed by
jumbo conforming loans, and private-label mortgage-related
securities backed by non-fixed rate Alt-A loans. Price
transparency improved as a result of increased market activity,
and we noted some convergence in prices obtained from
third-party vendors. As a result, we determined that our fair
value estimates for these securities did not rely on significant
unobservable inputs.
|
|
(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 year ended
December 31, 2008, transfers into Level 3 consisted
primarily of private-label mortgage-related securities backed by
Alt-A and subprime mortgage loans.
|
The following tables display realized and unrealized gains and
losses recorded in our consolidated statements of operations for
the years ended December 31, 2009 and 2008, for assets and
liabilities transferred into Level 3 and measured in our
consolidated balance sheets at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
Trading
|
|
|
Available-for-Sale
|
|
|
Net
|
|
|
Long-Term
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Debt
|
|
|
|
(Dollars in millions)
|
|
|
Realized and unrealized gains (losses) included in net loss
|
|
$
|
(6
|
)
|
|
$
|
62
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
Unrealized gains included in other comprehensive loss
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses)
|
|
$
|
(6
|
)
|
|
$
|
236
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Level 3 transfers in
|
|
$
|
1,136
|
|
|
$
|
7,877
|
|
|
$
|
107
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-117
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
Trading
|
|
|
Available-for-Sale
|
|
|
Net
|
|
|
Long-term
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Debt
|
|
|
|
(Dollars in millions)
|
|
|
Realized and unrealized gains (losses) included in net loss
|
|
$
|
(679
|
)
|
|
$
|
(2,014
|
)
|
|
$
|
18
|
|
|
$
|
(35
|
)
|
Unrealized losses included in other comprehensive loss
|
|
|
|
|
|
|
(2,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses)
|
|
$
|
(679
|
)
|
|
$
|
(4,275
|
)
|
|
$
|
18
|
|
|
$
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Level 3 transfers in
|
|
$
|
10,189
|
|
|
$
|
55,621
|
|
|
$
|
18
|
|
|
$
|
(531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables display realized and unrealized gains and
losses included in our consolidated statements of operations for
the years ended December 31, 2009 and 2008, for our
Level 3 assets and liabilities measured in our consolidated
balance sheets at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
Interest
|
|
|
|
|
|
|
|
Other than
|
|
|
|
|
Income
|
|
Guaranty
|
|
Investment
|
|
Fair Value
|
|
Temporary
|
|
|
|
|
Investment in
|
|
Fee
|
|
Gains
|
|
Gains
|
|
Impairments,
|
|
|
|
|
Securities
|
|
Income
|
|
(Losses), net
|
|
(Losses), net
|
|
net
|
|
Total
|
|
|
(Dollars in millions)
|
|
Total realized and unrealized gains (losses) included in net loss
|
|
$
|
545
|
|
|
$
|
466
|
|
|
$
|
|
|
|
$
|
94
|
|
|
$
|
(7,706
|
)
|
|
$
|
(6,601
|
)
|
Net unrealized gains (losses) related to Level 3 assets and
liabilities still held as of December 31, 2009
|
|
|
|
|
|
|
783
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
|
Interest
|
|
|
|
|
|
Fair
|
|
Other than
|
|
|
|
|
|
|
Income
|
|
Guaranty
|
|
Investment
|
|
Value Gains
|
|
Temporary
|
|
|
|
|
|
|
Investment
|
|
Fee
|
|
Gains
|
|
(Losses),
|
|
Impairments,
|
|
Extraordinary
|
|
|
|
|
in Securities
|
|
Income
|
|
(Losses), Net
|
|
net
|
|
net
|
|
Losses
|
|
Total
|
|
|
(Dollars in millions)
|
|
Total realized and unrealized gains (losses) included in net loss
|
|
$
|
90
|
|
|
$
|
(915
|
)
|
|
$
|
448
|
|
|
$
|
(1,640
|
)
|
|
$
|
(3,260
|
)
|
|
$
|
(59
|
)
|
|
$
|
(5,336
|
)
|
Net unrealized gains (losses) related to level 3 assets
and liabilities still held as of December 31, 2008
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
(1,152
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,178
|
)
|
We use valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. The
following is a description of the fair valuation techniques used
for assets and liabilities measured at fair value on a recurring
basis as well as the basis for classification of such
instruments pursuant to the valuation hierarchy established
under fair value measurement guidance.
Trading Securities and
Available-for-Sale
SecuritiesThese securities are recorded in our
consolidated balance sheets at fair value on a recurring basis.
Fair value is measured 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
F-118
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
absence of observable or corroborated market data, we use
internally developed estimates, incorporating 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.
Derivatives Assets and Liabilities (collectively
derivatives)Derivatives are recorded in
our consolidated balance sheets at fair value on a recurring
basis. 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 based on internal model results
that cannot be corroborated by observable market data are
classified as Level 3.
Guaranty Assets and
Buy-upsGuaranty
assets related to our portfolio securitizations are recorded in
our consolidated balance sheets at fair value on a recurring
basis and are classified within Level 3 of the valuation
hierarchy. Guaranty assets in lender swap transactions are
recorded in our consolidated balance sheets at the lower of cost
or fair value. These assets, which are measured at fair value on
a non-recurring basis are classified within Level 3 of the
fair value hierarchy.
We 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 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 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 the current FASB guidance on
guarantors accounting and disclosure requirements for
guarantees.
Short-Term Debt and Long-Term Debt (collectively
debt)The majority of our debt is recorded
in our consolidated balance sheets at the principal amount
outstanding, net of cost basis adjustments. We elected the fair
value option for all structured debt instruments which are
recorded in our consolidated balance sheets at fair value on a
recurring basis. We use pricing services to measure the fair
value of our debt instruments. 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. 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.
F-119
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Other Liabilities - Represents dollar roll repurchase
transactions that reflect prices for similar securities in the
market. They are recorded in our consolidated balance sheets at
fair value on a recurring basis. Fair value is 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.
Non-recurring
Changes in Fair Value
The following tables display assets and liabilities measured in
our consolidated balance sheets 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 year ended December 31, 2009 and
2008, as a result of fair value measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Fair Value Measurements
|
|
|
Ended
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
December 31, 2009
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Estimated
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
Total Losses
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale, at lower of cost or fair value
|
|
$
|
|
|
|
$
|
22,238
|
|
|
$
|
3,557
|
|
|
$
|
25,795
|
(1)
|
|
$
|
(1,210
|
)
|
Mortgage loans held for investment, at amortized cost
|
|
|
|
|
|
|
330
|
|
|
|
4,820
|
|
|
|
5,150
|
(2)
|
|
|
(1,173
|
)
|
Acquired property, net
|
|
|
|
|
|
|
|
|
|
|
10,132
|
|
|
|
10,132
|
(3)
|
|
|
(503
|
)
|
Guaranty assets
|
|
|
|
|
|
|
|
|
|
|
2,327
|
|
|
|
2,327
|
|
|
|
(231
|
)
|
Master servicing assets
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
147
|
|
|
|
(546
|
)
|
Partnership investments
|
|
|
|
|
|
|
|
|
|
|
212
|
|
|
|
212
|
|
|
|
(5,943
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
|
|
|
$
|
22,568
|
|
|
$
|
21,195
|
|
|
$
|
43,763
|
|
|
$
|
(9,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master servicing liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
254
|
|
|
$
|
254
|
|
|
$
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
254
|
|
|
$
|
254
|
|
|
$
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-120
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Fair Value Measurements
|
|
|
Ended
|
|
|
|
For the Year Ended December 31, 2008
|
|
|
December 31, 2008
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Estimated
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
Total Losses
|
|
|
|
(Dollars in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale, at lower of cost or fair value
|
|
$
|
|
|
|
$
|
26,303
|
|
|
$
|
1,294
|
|
|
$
|
27,597
|
(1)
|
|
$
|
(433
|
)
|
Mortgage loans held for investment, at amortized cost
|
|
|
|
|
|
|
|
|
|
|
1,838
|
|
|
|
1,838
|
(2)
|
|
|
(107
|
)
|
Acquired property, net
|
|
|
|
|
|
|
|
|
|
|
9,624
|
|
|
|
9,624
|
(3)
|
|
|
(1,533
|
)
|
Guaranty assets
|
|
|
|
|
|
|
|
|
|
|
5,473
|
|
|
|
5,473
|
|
|
|
(2,967
|
)
|
Master servicing assets
|
|
|
|
|
|
|
|
|
|
|
547
|
|
|
|
547
|
|
|
|
(553
|
)
|
Partnership investments
|
|
|
|
|
|
|
|
|
|
|
4,877
|
|
|
|
4,877
|
|
|
|
(764
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
|
|
|
$
|
26,303
|
|
|
$
|
23,653
|
|
|
$
|
49,956
|
|
|
$
|
(6,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master servicing liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $15.1 billion and
$25.2 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 December 31, 2009
and 2008, respectively.
|
|
(2) |
|
Includes $1.1 billion and
$157 million of mortgage loans held for investment that
were redesignated to mortgage loans held for sale, liquidated or
transferred to foreclosed properties as of December 31,
2009 and 2008, respectively.
|
|
(3) |
|
Includes $7.1 billion and
$4.0 billion of foreclosed properties that were sold as of
December 31, 2009 and 2008, respectively.
|
|
(4) |
|
Represents impairment charges
related to LIHTC partnerships and other equity investments in
multifamily properties as of December 31, 2009 and 2008,
respectively. We recognized other-than-temporary impairment
losses of $5.5 billion and $506 million related to
LIHTC partnerships for the years ended December 31, 2009
and 2008, respectively.
|
The following is a description of the fair valuation techniques
used for assets and liabilities measured at fair value on a
non-recurring basis under the FASB guidance on fair value
measurements as well as the basis for classification of such
instruments pursuant to the valuation hierarchy established
under this guidance.
Mortgage Loans Held for SaleHFS loans are reported
at the lower of cost or fair value in our consolidated balance
sheets. Fair value is determined based on comparisons to Fannie
Mae MBS with similar characteristics, either on a pool or loan
level. For Level 2 valuations, 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 arrangement.
Level 3 inputs include MBS values where price is influenced
significantly by extrapolation from observable market data,
products in inactive markets or unobservable inputs. Valuations
are based on indicative dealer prices and Level 3 inputs
include the estimated value of primary mortgage insurance on
loans that have coverage.
Mortgage Loans Held for InvestmentHFI loans are
reported in our consolidated balance sheets at the principal
amount outstanding, net of cost basis adjustments and an
allowance for loan losses. A portion of the
F-121
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
impaired HFI loans are measured at fair value on non-recurring
basis and recorded in our consolidated balance sheets at fair
value.
Fair value is determined 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. For Level 2 valuations, we
use the observable market value of our Fannie Mae MBS as a base
value. Level 3 inputs include MBS values where price is
influenced significantly by extrapolation from observable market
data, products in inactive markets or unobservable inputs.
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, Netmainly represents foreclosed
property received in full satisfaction of a loan. Acquired
property is initially recorded in our consolidated balance
sheets at its fair value less its estimated cost to sell. The
foreclosed properties that we intend to sell are reported at the
lower of the carrying amount or fair value less estimated cost
to sell. 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. Acquired
property is classified within Level 3 of the valuation
hierarchy because significant inputs are unobservable.
Master Servicing Assets and Liabilitiesare reported
at the lower of cost or fair value in our consolidated balance
sheets. We measure the fair value of 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. Master servicing assets and liabilities are classified
within Level 3 of the valuation hierarchy.
Partnership InvestmentsUnconsolidated investments
in limited partnerships are primarily accounted for under the
equity method of accounting. Investments in LIHTC partnerships
trade in a market with limited observable transactions. We
measure the fair value of 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 our model results to independent
third-party valuations to validate the reasonableness of our
assumptions and valuation results. We also compare our 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. Our equity investments in LIHTC limited
partnerships are classified within the Level 3 hierarchy of
fair value measurement.
Fair
Value of Financial Instruments
The following table displays the carrying value and estimated
fair value of our financial instruments as of December 31,
2009 and 2008. Our disclosures of the fair value of financial
instruments include commitments to purchase single-family and
multifamily mortgage loans, which are off-balance sheet
financial instruments that we do not record in our 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
F-122
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
financial instruments, such as plan obligations for pension and
postretirement health care 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
(Dollars in millions)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(1)
|
|
$
|
9,882
|
|
|
$
|
9,882
|
|
|
$
|
18,462
|
|
|
$
|
18,462
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
53,684
|
|
|
|
53,656
|
|
|
|
57,418
|
|
|
|
57,420
|
|
Trading securities
|
|
|
111,939
|
|
|
|
111,939
|
|
|
|
90,806
|
|
|
|
90,806
|
|
Available-for-sale securities
|
|
|
237,728
|
|
|
|
237,728
|
|
|
|
266,488
|
|
|
|
266,488
|
|
Mortgage loans held for sale
|
|
|
18,462
|
|
|
|
18,615
|
|
|
|
13,270
|
|
|
|
13,458
|
|
Mortgage loans held for investment, net of allowance for loan
losses
|
|
|
375,563
|
|
|
|
370,845
|
|
|
|
412,142
|
|
|
|
406,233
|
|
Advances to lenders
|
|
|
5,449
|
|
|
|
5,144
|
|
|
|
5,766
|
|
|
|
5,412
|
|
Derivative assets
|
|
|
1,474
|
|
|
|
1,474
|
|
|
|
869
|
|
|
|
869
|
|
Guaranty assets and
buy-ups
|
|
|
9,520
|
|
|
|
14,624
|
|
|
|
7,688
|
|
|
|
9,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
823,701
|
|
|
$
|
823,907
|
|
|
$
|
872,909
|
|
|
$
|
868,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$
|
|
|
|
$
|
|
|
|
$
|
77
|
|
|
$
|
77
|
|
Short-term debt
|
|
|
200,437
|
|
|
|
200,493
|
|
|
|
330,991
|
|
|
|
332,290
|
|
Long-term debt
|
|
|
574,117
|
|
|
|
593,733
|
|
|
|
539,402
|
|
|
|
574,281
|
|
Derivative liabilities
|
|
|
1,029
|
|
|
|
1,029
|
|
|
|
2,715
|
|
|
|
2,715
|
|
Guaranty obligations
|
|
|
13,996
|
|
|
|
138,582
|
|
|
|
12,147
|
|
|
|
90,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
789,579
|
|
|
$
|
933,837
|
|
|
$
|
885,332
|
|
|
$
|
1,000,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes restricted cash of
$3.1 billion and $529 million as of December 31,
2009 and 2008, respectively.
|
The following are valuation techniques for items not subject to
the fair value hierarchy either because they are not measured at
fair value other than for the purpose of the above table or are
only measured at fair value at inception.
Financial Instruments for which fair value approximates
carrying valueWe hold certain financial instruments
which are not carried at fair value but the carrying value
approximates fair value due to the short-term nature and
negligible credit risk inherent in them. These financial
instruments include cash and cash equivalents, federal funds and
securities sold/purchased under agreements to repurchase/resell
(exclusive of dollar roll repurchase transactions) and the
majority of advances to lenders.
Advances to Lenders - The carrying value for the majority
of the advances to lenders approximates the fair value due to
the short-term nature of the specific instruments. Other
instruments include loans for which the carrying value does not
approximate fair value. These loans are valued using collateral
values of similar loans as a proxy.
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
F-123
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
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 GO. 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 the current FASB guidance on
guarantors accounting and disclosure requirements for
guarantees.
Fair
Value Option
The FASB guidance on the fair value option for financial
instruments 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.
Fair
Value 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
$8.8 billion and $16.5 billion as of December 31,
2009 and 2008, respectively.
Prior to the adoption of the FASB guidance on the fair value
option for financial instruments, these available-for-sale
securities were recorded at fair value in accordance with the
FASB guidance on accounting for investments in debt and equity
securities, 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 consolidated balance sheets and are now recorded at fair
value with subsequent changes in fair value recorded in
Fair value losses, net in our consolidated
statements of operations.
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 $13.4 billion and
$16.4 billion as of December 31, 2009 and 2008,
respectively.
Prior to the adoption of the FASB guidance on the fair value
option for financial instruments, these available-for-sale
securities were recorded at fair value in accordance with the
FASB guidance on accounting for investments in debt and equity
securities 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 consolidated balance sheets and are now recorded at fair
value with subsequent changes in fair value recorded in
Fair value losses, net in our consolidated
statements of operations.
F-124
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Structured
debt instruments
We elected the fair value option for all 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 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 recording these structured debt instruments at
cost while recording the related derivatives at fair value.
As of December 31, 2009, these instruments had an aggregate
fair value and unpaid principal balance of $3.3 billion and
$3.2 billion, respectively, recorded in Long-term
debt, in our consolidated balance sheet. There were no
outstanding short-term structured debt instruments elected under
the fair value option remaining as of December 31, 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 consolidated
balance sheets.
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 in
our consolidated statements of operations. These structured debt
instruments continue to be classified as either Short-term
debt or Long-term debt in our consolidated
balance sheets based on their original contractual maturities.
Changes
in Fair Value under the Fair Value Option Election
The following table displays debt fair value losses, net,
including changes attributable to instrument-specific credit
risk, for financial instruments for which the fair value
election was made. Amounts are recorded as a component of
Fair value losses, net in our consolidated
statements of operations for the years ended December 31,
2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total Gains
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total Gains
|
|
|
|
Debt
|
|
|
Debt
|
|
|
(Losses)
|
|
|
Debt
|
|
|
Debt
|
|
|
(Losses)
|
|
|
|
(Dollars in millions)
|
|
|
Changes in instrument-specific credit risk
|
|
$
|
|
|
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
6
|
|
|
$
|
94
|
|
|
$
|
100
|
|
Other changes in fair value
|
|
|
|
|
|
|
(64
|
)
|
|
|
(64
|
)
|
|
|
(6
|
)
|
|
|
(151
|
)
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt fair value losses, net
|
|
$
|
|
|
|
$
|
(31
|
)
|
|
$
|
(31
|
)
|
|
$
|
|
|
|
$
|
(57
|
)
|
|
$
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for financial instruments. 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.
|
|
20.
|
Commitments
and Contingencies
|
Litigation
and Regulatory Matters
We are party to various types of legal actions and proceedings,
including actions brought on behalf of various classes of
claimants. We also are subject to regulatory examinations,
inquiries and investigations and other
F-125
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
information gathering requests. 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.
In view of the inherent difficulty of predicting the outcome of
these proceedings, we cannot determine the ultimate resolution
of the matters described below. We establish reserves for
litigation and regulatory matters when losses associated with
the claims become probable and the amounts can reasonably be
estimated. The actual costs of resolving legal matters may be
substantially higher or lower than the amounts reserved for
those matters. For matters where the likelihood or extent of a
loss is not probable or cannot be reasonably estimated as of
February 26, 2010, we have not recorded a loss reserve. 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. Based on our
current knowledge with respect to the lawsuits described below,
we believe we have valid defenses to the claims in these
lawsuits and intend to defend these lawsuits vigorously
regardless of whether or not we have recorded a loss reserve.
In addition to the matters specifically described below, 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. We have advanced
fees and expenses of certain current and former officers and
directors in connection with various legal proceedings pursuant
to indemnification agreements.
2004
Class Action Lawsuits
Fannie Mae is a defendant in two consolidated class action suits
filed in 2004 and currently pending in the U.S. District
Court for the District of Columbia In re Fannie
Mae Securities Litigation and In re Fannie Mae ERISA
Litigation. Both cases rely on factual allegations that
Fannie Maes accounting statements were inconsistent with
the GAAP requirements relating to hedge accounting and the
amortization of premiums and discounts. Based largely on the
overlapping factual allegations, the Judicial Panel on
Multidistrict Litigation ordered that the cases be coordinated
for pretrial proceedings on May 17, 2005. On
October 17, 2008, FHFA, as conservator for Fannie Mae,
intervened in both of these cases.
In re
Fannie Mae Securities Litigation
In a consolidated complaint filed on March 4, 2005, lead
plaintiffs Ohio Public Employees Retirement System
(OPERS) and the State Teachers Retirement System of
Ohio (STRS) allege that we and certain former
officers, as well as our former outside auditor, 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, and 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
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,
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.
Discovery is ongoing.
F-126
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
In re
Fannie Mae ERISA Litigation
In a consolidated complaint filed on June 15, 2005,
plaintiffs David Gwyer, Gloria Sheppard, and Terry Gagliolo
allege that we and certain former officers and directors, as
well as the Compensation Committee of our Board of Directors,
violated the Employee Retirement Income Security Act of 1974
(ERISA) 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 December 18, 2009, the parties reached an agreement in
principle to settle the suit. The amount of the settlement is
not material.
2008
Class Action Lawsuits
Fannie Mae is a defendant in two consolidated class actions
filed in 2008 and currently pending in the U.S. District
Court for the Southern District of New YorkIn re Fannie
Mae 2008 Securities Litigation and In re 2008 Fannie Mae
ERISA Litigation. On February 11, 2009, the Judicial
Panel on Multidistrict Litigation ordered that the cases be
coordinated for pretrial proceedings. On October 13, 2009,
the Court entered an order allowing FHFA to intervene in this
case.
In re
Fannie Mae 2008 Securities Litigation
In a consolidated complaint filed on June 22, 2009, lead
plaintiffs Massachusetts Pension Reserves Investment Management
Board and Boston Retirement Board (for common shareholders) and
Tennessee Consolidated Retirement System (for preferred
shareholders) allege that we, certain of our former officers,
and certain of our underwriters violated of
Sections 12(a)(2) and 15 of the Securities Act of 1933.
Lead plaintiffs also allege that we, certain of our former
officers, and our outside auditor, violated Sections 10(b)
(and
Rule 10b-5
promulgated thereunder) and 20(a) of the Securities Exchange Act
of 1934. Lead plaintiffs purport to represent a class of persons
who, between November 8, 2006 and September 5, 2008,
inclusive, purchased or acquired (a) Fannie Mae common
stock and options or (b) Fannie Mae preferred stock. Lead
plaintiffs seek various forms of relief, including rescission,
damages, interest, costs, attorneys and experts
fees, and other equitable and injunctive relief.
On July 13, 2009, we and the other defendants against whom
the Securities Act claims were asserted filed a motion to
dismiss those claims. The Court granted this motion on
November 24, 2009. On September 18, 2009, we and the
remaining defendants filed motions to dismiss the Securities
Exchange Act claims.
An individual plaintiff, Daniel Kramer, is seeking to have his
Securities Act case heard in state court. Although the Court
denied his motion to remand his case to state court, Kramer
moved for the court to certify its ruling to the court of
appeals for review. We opposed his motion, arguing that
Kramers arguments on appeal are insufficient to support
reversal.
In re
2008 Fannie Mae ERISA Litigation
In a consolidated complaint filed on September 11, 2009,
plaintiffs allege that certain of our current and former
officers and directors, including former members of Fannie
Maes Benefit Plans Committee and the Compensation
Committee of Fannie Maes Board of Directors, as
fiduciaries of Fannie Maes ESOP, breached their duties to
ESOP participants and beneficiaries by investing ESOP funds 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 plaintiffs seek unspecified damages, attorneys
fees and other fees and costs and injunctive and other equitable
relief. On November 2, 2009, defendants filed motions to
dismiss these claims, which are now fully briefed.
F-127
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Comprehensive
Investment Services v. Mudd, et al.
On May 13, 2009, Comprehensive Investment Services, Inc.
filed an individual securities action against certain of our
former officers and directors, and certain of our underwriters
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 July 7, 2009, the Judicial Panel on
Multidistrict Litigation transferred the case to the Southern
District of New York, where it is currently coordinated with
In re Fannie Mae 2008 Securities Litigation and In re
2008 Fannie Mae ERISA Litigation for pretrial purposes.
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
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 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. Plaintiffs have appealed the Courts denial
to the U.S. Court of Appeals for the Fifth Circuit and
filed their opening brief on December 14, 2009. We filed an
opposition brief on January 20, 2010.
F-128
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Unconditional
Purchase and Lease Commitments
We have unconditional commitments related to the purchase of
loans and mortgage-related securities. These include both on-
and off-balance sheet commitments wherein a portion of these
have been recorded as derivatives on our consolidated balance
sheets. Unfunded lending represents off-balance sheet
commitments for unutilized portion of lending agreements entered
into with multi family borrowers.
We lease certain premises and equipment under agreements that
expire at various dates through 2029. Some of these leases
provide for payment by the lessee of property taxes, insurance
premiums, cost of maintenance and other costs. Rental expenses
for operating leases were $62 million, $50 million and
$55 million for the years ended December 31, 2009,
2008 and 2007, respectively.
The following table summarizes by remaining maturity, non
cancelable future commitments related to loan and mortgage
purchases, unfunded lending and operating leases as of
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Loans and Mortgage-
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
Securities(1)
|
|
|
Unfunded Lending
|
|
|
Operating Leases
|
|
|
Other(2)
|
|
|
|
(Dollars in millions)
|
|
|
2010
|
|
$
|
31,870
|
|
|
$
|
194
|
|
|
$
|
41
|
|
|
$
|
112
|
|
2011
|
|
|
31
|
|
|
|
207
|
|
|
|
39
|
|
|
|
22
|
|
2012
|
|
|
1
|
|
|
|
247
|
|
|
|
34
|
|
|
|
14
|
|
2013
|
|
|
|
|
|
|
44
|
|
|
|
22
|
|
|
|
8
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
1
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,902
|
|
|
$
|
693
|
|
|
$
|
188
|
|
|
$
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $31.4 billion, which
have been accounted for as mortgage commitment derivatives.
|
|
(2) |
|
Includes purchase commitments for
certain telecom services, computer software and services, and
other agreements.
|
|
|
21.
|
Selected
Quarterly Financial Information (Unaudited)
|
The condensed consolidated statements of operations for the
quarterly periods in 2009 and 2008 are unaudited and in the
opinion of management include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation
of our condensed consolidated statements of operations. The
operating results for the interim periods are not necessarily
indicative of the operating results to be expected for a full
year or for other interim periods.
F-129
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2009 Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars and shares in millions, except per share amounts)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
990
|
|
|
$
|
923
|
|
|
$
|
862
|
|
|
$
|
1,084
|
|
Available-for-sale securities
|
|
|
3,721
|
|
|
|
3,307
|
|
|
|
3,475
|
|
|
|
3,115
|
|
Mortgage loans
|
|
|
5,598
|
|
|
|
5,611
|
|
|
|
5,290
|
|
|
|
5,022
|
|
Other
|
|
|
127
|
|
|
|
139
|
|
|
|
48
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,436
|
|
|
|
9,980
|
|
|
|
9,675
|
|
|
|
9,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
1,107
|
|
|
|
600
|
|
|
|
390
|
|
|
|
209
|
|
Long-term debt
|
|
|
6,081
|
|
|
|
5,645
|
|
|
|
5,455
|
|
|
|
5,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
7,188
|
|
|
|
6,245
|
|
|
|
5,845
|
|
|
|
5,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
3,248
|
|
|
|
3,735
|
|
|
|
3,830
|
|
|
|
3,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
|
|
|
1,752
|
|
|
|
1,659
|
|
|
|
1,923
|
|
|
|
1,877
|
|
Trust management income
|
|
|
11
|
|
|
|
13
|
|
|
|
12
|
|
|
|
4
|
|
Investment gains (losses), net
|
|
|
223
|
|
|
|
(45
|
)
|
|
|
785
|
|
|
|
495
|
|
Other-than-temporary impairments
|
|
|
(5,653
|
)
|
|
|
(1,097
|
)
|
|
|
(1,018
|
)
|
|
|
(1,289
|
)
|
Less: Noncredit portion of other-than-temporary impairments
recognized in other comprehensive loss
|
|
|
|
|
|
|
344
|
|
|
|
79
|
|
|
|
(1,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairments
|
|
|
(5,653
|
)
|
|
|
(753
|
)
|
|
|
(939
|
)
|
|
|
(2,516
|
)
|
Fair value gains (losses), net
|
|
|
(1,460
|
)
|
|
|
823
|
|
|
|
(1,536
|
)
|
|
|
(638
|
)
|
Debt extinguishment losses, net
|
|
|
(79
|
)
|
|
|
(190
|
)
|
|
|
(11
|
)
|
|
|
(45
|
)
|
Losses from partnership investments
|
|
|
(357
|
)
|
|
|
(571
|
)
|
|
|
(520
|
)
|
|
|
(5,287
|
)
|
Fee and other income
|
|
|
181
|
|
|
|
184
|
|
|
|
182
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
(5,382
|
)
|
|
|
1,120
|
|
|
|
(104
|
)
|
|
|
(5,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
293
|
|
|
|
245
|
|
|
|
293
|
|
|
|
302
|
|
Professional services
|
|
|
143
|
|
|
|
180
|
|
|
|
178
|
|
|
|
183
|
|
Occupancy expenses
|
|
|
48
|
|
|
|
46
|
|
|
|
47
|
|
|
|
64
|
|
Other administrative expenses
|
|
|
39
|
|
|
|
39
|
|
|
|
44
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
523
|
|
|
|
510
|
|
|
|
562
|
|
|
|
612
|
|
Provision for credit losses
|
|
|
20,334
|
|
|
|
18,225
|
|
|
|
21,896
|
|
|
|
12,171
|
|
Foreclosed property expense (income)
|
|
|
538
|
|
|
|
559
|
|
|
|
64
|
|
|
|
(251
|
)
|
Other expenses
|
|
|
279
|
|
|
|
318
|
|
|
|
231
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
21,674
|
|
|
|
19,612
|
|
|
|
22,753
|
|
|
|
13,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes
|
|
|
(23,808
|
)
|
|
|
(14,757
|
)
|
|
|
(19,027
|
)
|
|
|
(15,415
|
)
|
Provision (benefit) for federal income taxes
|
|
|
(623
|
)
|
|
|
23
|
|
|
|
(143
|
)
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(23,185
|
)
|
|
|
(14,780
|
)
|
|
|
(18,884
|
)
|
|
|
(15,173
|
)
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
|
|
17
|
|
|
|
26
|
|
|
|
12
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
|
(23,168
|
)
|
|
|
(14,754
|
)
|
|
|
(18,872
|
)
|
|
|
(15,175
|
)
|
Preferred stock dividends
|
|
|
(29
|
)
|
|
|
(411
|
)
|
|
|
(883
|
)
|
|
|
(1,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(23,197
|
)
|
|
$
|
(15,165
|
)
|
|
$
|
(19,755
|
)
|
|
$
|
(16,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per shareBasic and Diluted
|
|
$
|
(4.09
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(3.47
|
)
|
|
$
|
(2.87
|
)
|
Weighted-average common shares outstandingBasic and Diluted
|
|
|
5,666
|
|
|
|
5,681
|
|
|
|
5,685
|
|
|
|
5,687
|
|
F-130
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2008 Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars and shares in millions, except per share amounts)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
1,737
|
|
|
$
|
1,376
|
|
|
$
|
1,416
|
|
|
$
|
1,349
|
|
Available-for-sale securities
|
|
|
3,085
|
|
|
|
3,087
|
|
|
|
3,295
|
|
|
|
3,747
|
|
Mortgage loans
|
|
|
5,662
|
|
|
|
5,769
|
|
|
|
5,742
|
|
|
|
5,519
|
|
Other
|
|
|
458
|
|
|
|
232
|
|
|
|
310
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,942
|
|
|
|
10,464
|
|
|
|
10,763
|
|
|
|
10,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
2,561
|
|
|
|
1,687
|
|
|
|
1,680
|
|
|
|
1,887
|
|
Long-term debt
|
|
|
6,691
|
|
|
|
6,720
|
|
|
|
6,728
|
|
|
|
6,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
9,252
|
|
|
|
8,407
|
|
|
|
8,408
|
|
|
|
8,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,690
|
|
|
|
2,057
|
|
|
|
2,355
|
|
|
|
2,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty fee income
|
|
|
1,752
|
|
|
|
1,608
|
|
|
|
1,475
|
|
|
|
2,786
|
|
Trust management income
|
|
|
107
|
|
|
|
75
|
|
|
|
65
|
|
|
|
14
|
|
Investment gains (losses), net
|
|
|
(56
|
)
|
|
|
(376
|
)
|
|
|
219
|
|
|
|
(33
|
)
|
Net other-than-temporary impairments
|
|
|
(55
|
)
|
|
|
(507
|
)
|
|
|
(1,843
|
)
|
|
|
(4,569
|
)
|
Fair value gains (losses), net
|
|
|
(4,377
|
)
|
|
|
517
|
|
|
|
(3,947
|
)
|
|
|
(12,322
|
)
|
Debt extinguishment gains (losses), net
|
|
|
(145
|
)
|
|
|
(36
|
)
|
|
|
23
|
|
|
|
(64
|
)
|
Losses from partnership investments
|
|
|
(141
|
)
|
|
|
(195
|
)
|
|
|
(587
|
)
|
|
|
(631
|
)
|
Fee and other income
|
|
|
227
|
|
|
|
225
|
|
|
|
164
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (loss)
|
|
|
(2,688
|
)
|
|
|
1,311
|
|
|
|
(4,431
|
)
|
|
|
(14,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
286
|
|
|
|
304
|
|
|
|
167
|
|
|
|
275
|
|
Professional services
|
|
|
136
|
|
|
|
114
|
|
|
|
139
|
|
|
|
140
|
|
Occupancy expenses
|
|
|
54
|
|
|
|
55
|
|
|
|
52
|
|
|
|
66
|
|
Other administrative expenses
|
|
|
36
|
|
|
|
39
|
|
|
|
43
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
|
512
|
|
|
|
512
|
|
|
|
401
|
|
|
|
554
|
|
Provision for credit losses
|
|
|
3,073
|
|
|
|
5,085
|
|
|
|
8,763
|
|
|
|
11,030
|
|
Foreclosed property expense
|
|
|
170
|
|
|
|
264
|
|
|
|
478
|
|
|
|
946
|
|
Other expenses
|
|
|
360
|
|
|
|
247
|
|
|
|
195
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,115
|
|
|
|
6,108
|
|
|
|
9,837
|
|
|
|
12,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before federal income taxes and extraordinary losses
|
|
|
(5,113
|
)
|
|
|
(2,740
|
)
|
|
|
(11,913
|
)
|
|
|
(24,804
|
)
|
Provision (benefit) for federal income taxes
|
|
|
(2,928
|
)
|
|
|
(476
|
)
|
|
|
17,011
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary losses
|
|
|
(2,185
|
)
|
|
|
(2,264
|
)
|
|
|
(28,924
|
)
|
|
|
(24,946
|
)
|
Extraordinary losses, net of tax effect
|
|
|
(1
|
)
|
|
|
(33
|
)
|
|
|
(95
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,186
|
)
|
|
|
(2,297
|
)
|
|
|
(29,019
|
)
|
|
|
(25,226
|
)
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
|
|
|
|
|
|
(3
|
)
|
|
|
25
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Fannie Mae
|
|
|
(2,186
|
)
|
|
|
(2,300
|
)
|
|
|
(28,994
|
)
|
|
|
(25,227
|
)
|
Preferred stock dividends
|
|
|
(322
|
)
|
|
|
(303
|
)
|
|
|
(419
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(2,508
|
)
|
|
$
|
(2,603
|
)
|
|
$
|
(29,413
|
)
|
|
$
|
(25,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary losses
|
|
$
|
(2.57
|
)
|
|
$
|
(2.51
|
)
|
|
$
|
(12.96
|
)
|
|
$
|
(4.42
|
)
|
Extraordinary loss, net of tax effect
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted loss per share
|
|
$
|
(2.57
|
)
|
|
$
|
(2.54
|
)
|
|
$
|
(13.00
|
)
|
|
$
|
(4.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.05
|
|
|
$
|
|
|
Weighted-average common shares outstandingBasic and Diluted
|
|
|
975
|
|
|
|
1,025
|
|
|
|
2,262
|
|
|
|
5,652
|
|
F-131
FANNIE
MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
With the adoption of new accounting standards on January 1,
2010, we will no longer recognize the acquisition of loans from
the MBS trusts that we have consolidated as a purchase with an
associated fair value loss for the difference between the fair
value of the acquired loan and its acquisition cost, as these
loans will already be reflected on our consolidated balance
sheet. Currently, the cost of purchasing most delinquent loans
from Fannie Mae MBS trusts and holding them in our portfolio is
less than the cost of advancing delinquent payments to security
holders. In light of these factors, on February 10, 2010,
we announced that we expect to significantly increase our
purchases of delinquent loans from single-family MBS trusts. We
will begin purchasing these loans in March 2010. We expect to
purchase a significant portion of the current delinquent
population within a few months period subject to market,
servicer capacity, and other constraints including the limit on
the mortgage assets that we may own pursuant to the senior
preferred stock purchase agreement. We will continue to review
the economics of purchasing loans that are four or more months
delinquent in the future and may reevaluate our delinquent loan
purchase practices and alter them if circumstances warrant.
F-132