e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2011
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
 
Commission File No.: 0-50231
 
 
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
 
 
Fannie Mae
 
 
     
Federally chartered corporation   52-0883107
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
3900 Wisconsin Avenue, NW
Washington, DC
(Address of principal executive offices)
  20016
(Zip Code)
     
 
 
Registrant’s telephone number, including area code:
(202) 752-7000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 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):
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(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 Exchange Act).  Yes o     No þ
 
As of September 30, 2011, there were 1,158,227,237 shares of common stock of the registrant outstanding.
 


 

 
TABLE OF CONTENTS
 
                 
Part I—Financial Information     1  
  Item 1.     Financial Statements     101  
        Condensed Consolidated Balance Sheets     101  
        Condensed Consolidated Statements of Operations and Comprehensive Loss     102  
        Condensed Consolidated Statements of Cash Flows     103  
          Note 1—Summary of Significant Accounting Policies     104  
          Note 2—Consolidations and Transfers of Financial Assets     115  
          Note 3—Mortgage Loans     118  
          Note 4—Allowance for Loan Losses     125  
          Note 5—Investments in Securities     129  
          Note 6—Financial Guarantees     136  
          Note 7—Acquired Property, Net     140  
          Note 8—Short-Term Borrowings and Long-Term Debt     141  
          Note 9—Derivative Instruments     143  
          Note 10—Segment Reporting     146  
          Note 11—Regulatory Capital Requirements     151  
          Note 12—Concentration of Credit Risk     151  
          Note 13—Fair Value     154  
          Note 14—Commitments and Contingencies     172  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     1  
        Introduction     1  
        Executive Summary     2  
        Legislative and Regulatory Developments     19  
        Critical Accounting Policies and Estimates     22  
        Consolidated Results of Operations     24  
        Business Segment Results     40  
        Consolidated Balance Sheet Analysis     50  
        Supplemental Non-GAAP Information—Fair Value Balance Sheets     55  
        Liquidity and Capital Management     59  
        Off-Balance Sheet Arrangements     68  
        Risk Management     68  
        Impact of Future Adoption of New Accounting Pronouncements     97  
        Forward-Looking Statements     97  
  Item 3.     Quantitative and Qualitative Disclosures about Market Risk     177  
  Item 4.     Controls and Procedures     177  
PART II—Other Information     180  
  Item 1.     Legal Proceedings     180  
  Item 1A.     Risk Factors     181  
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds     188  
  Item 3.     Defaults Upon Senior Securities     190  
  Item 4.     [Removed and reserved]     190  
  Item 5.     Other Information     190  
  Item 6.     Exhibits     190  
 Ex-31.1
 Ex-31.2
 Ex-32.1
 Ex-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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MD&A TABLE REFERENCE
 
                 
Table
 
Description
  Page
 
 
1
    Treasury Dividend Payments and Draw     4  
 
2
    Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First Nine Months of 2011     6  
 
3
    Single-Family Serious Delinquency Rates by Year of Acquisition     8  
 
4
    Credit Profile of Single-Family Conventional Loans Acquired     9  
 
5
    Credit Statistics, Single-Family Guaranty Book of Business     15  
 
6
    Level 3 Recurring Financial Assets at Fair Value     23  
 
7
    Summary of Condensed Consolidated Results of Operations     24  
 
8
    Analysis of Net Interest Income and Yield     25  
 
9
    Rate/Volume Analysis of Changes in Net Interest Income     27  
 
10
    Impact of Nonaccrual Loans on Net Interest Income     28  
 
11
    Fair Value (Losses) Gains, Net     29  
 
12
    Total Loss Reserves     31  
 
13
    Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)     32  
 
14
    Nonperforming Single-Family and Multifamily Loans     36  
 
15
    Credit Loss Performance Metrics     38  
 
16
    Single-Family Credit Loss Sensitivity     39  
 
17
    Single-Family Business Results     41  
 
18
    Multifamily Business Results     43  
 
19
    Capital Markets Group Results     45  
 
20
    Capital Markets Group’s Mortgage Portfolio Activity     47  
 
21
    Capital Markets Group’s Mortgage Portfolio Composition     49  
 
22
    Summary of Condensed Consolidated Balance Sheets     50  
 
23
    Summary of Mortgage-Related Securities at Fair Value     51  
 
24
    Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities     52  
 
25
    Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities (Including Wraps)     53  
 
26
    Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net     55  
 
27
    Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect)     56  
 
28
    Supplemental Non-GAAP Consolidated Fair Value Balance Sheets     58  
 
29
    Activity in Debt of Fannie Mae     61  
 
30
    Outstanding Short-Term Borrowings and Long-Term Debt     63  
 
31
    Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year     64  
 
32
    Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year     65  
 
33
    Cash and Other Investments Portfolio     65  
 
34
    Fannie Mae Credit Ratings     66  
 
35
    Composition of Mortgage Credit Book of Business     69  


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Table
 
Description
  Page
 
 
36
    Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business     72  
 
37
    Delinquency Status of Single-Family Conventional Loans     77  
 
38
    Single-Family Serious Delinquency Rates     78  
 
39
    Single-Family Conventional Serious Delinquency Rate Concentration Analysis     79  
 
40
    Statistics on Single-Family Loan Workouts     80  
 
41
    Single-Family Loan Modification Profile     81  
 
42
    Single-Family Foreclosed Properties     82  
 
43
    Single-Family Acquired Property Concentration Analysis     83  
 
44
    Multifamily Serious Delinquency Rates     85  
 
45
    Multifamily Concentration Analysis     85  
 
46
    Multifamily Foreclosed Properties     86  
 
47
    Mortgage Insurance Coverage     89  
 
48
    Unpaid Principal Balance of Financial Guarantees     91  
 
49
    Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve     95  
 
50
    Derivative Impact on Interest Rate Risk (50 Basis Points)     96  


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PART I—FINANCIAL INFORMATION
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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. Our directors do not have any duties to any person or entity except to the conservator and, accordingly, 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. 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 our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”
 
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes and the more detailed information in our 2010 Form 10-K.
 
This report contains forward-looking statements that are based on management’s 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. Our actual results may differ materially from those reflected in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Risk Factors” and elsewhere in this report and in “Risk Factors” in our 2010 Form 10-K.
 
You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2010 Form 10-K.
 
 
INTRODUCTION
 
Fannie Mae is a government-sponsored enterprise (“GSE”) 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 or lend money directly to consumers in the primary mortgage market. Our most significant activity is securitizing mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. We also purchase mortgage loans and mortgage-related securities for our mortgage portfolio. We use the term “acquire” in this report to refer to both our guarantees and our purchases of mortgage loans. We obtain funds to support our business activities by issuing a variety of debt securities in the domestic and international capital markets.
 
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 was delisted from the New York Stock Exchange and the Chicago Stock Exchange on July 8, 2010 and since then has been traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.


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EXECUTIVE SUMMARY
 
In the first nine months of 2011, we continued our work to provide liquidity and support to the mortgage market, grow the strong new book of business we have been acquiring since January 1, 2009, and minimize losses on loans we acquired prior to 2009.
 
Providing Liquidity and Support to the Mortgage Market
 
Our Liquidity and Support Activities
 
We provide liquidity and support to the U.S. mortgage market in a number of important ways:
 
  •  We serve as a stable source of liquidity for purchases of homes and multifamily rental housing, as well as for refinancing existing mortgages. We provided approximately $2.1 trillion in liquidity to the mortgage market from January 1, 2009 through September 30, 2011 through our purchases and guarantees of loans, including over 7.6 million single-family mortgage loans, which enabled borrowers to purchase homes or refinance their mortgages, and multifamily loans that financed nearly 967,000 units of multifamily housing.
 
  •  We are a consistent market presence as we continue to provide liquidity to the mortgage market even when other sources of capital have exited the market, as evidenced by the events of the last few years. We estimate that we, Freddie Mac and Ginnie Mae have collectively guaranteed more than 80% of the single-family mortgages originated in the United States since January 1, 2009.
 
  •  We have strengthened our underwriting and eligibility standards to support sustainable homeownership. Our support enables borrowers to have access to a variety of conforming mortgage products, including long-term, fixed-rate mortgages, such as the prepayable 30-year fixed-rate mortgage that protects homeowners from interest rate swings.
 
  •  We helped more than 960,000 homeowners struggling to pay their mortgages work out their loans from January 1, 2009 through September 30, 2011, which helped to support neighborhoods, home prices and the housing market.
 
  •  We support affordability in the multifamily rental market. Over 85% of the multifamily units we financed during 2009 and 2010 were affordable to families earning at or below the median income in their area.
 
  •  Borrowers typically pay a lower interest rate on loans eligible for purchase or guarantee by Fannie Mae, Freddie Mac or Ginnie Mae. Mortgage originators are generally able to offer borrowers lower mortgage rates on conforming loan products, including ours, in part because of the value investors place on GSE-guaranteed mortgage-related securities.
 
  •  In addition to purchasing and guaranteeing loans, we provide funds to the mortgage market through short-term financing and other activities. These activities are described in more detail in our 2010 Form 10-K in “Business—Business Segments—Capital Markets.”
 
2011 Acquisitions and Market Share
 
In the first nine months of 2011, we purchased or guaranteed approximately $445 billion in loans, measured by unpaid principal balance, which includes approximately $51 billion in delinquent loans we purchased from our single-family MBS trusts. These activities enabled our lender customers to finance approximately 1,826,000 single-family conventional loans and loans for approximately 289,000 units in multifamily properties during the first nine months of 2011.
 
We remained the largest single issuer of mortgage-related securities in the secondary market during the third quarter of 2011, with an estimated market share of new single-family mortgage-related securities issuances of 43.3%. Our estimated market share of new single-family mortgage-related securities issuances was 43.2% in the second quarter of 2011 and 44.5% in the third quarter of 2010.


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We remained a constant source of liquidity in the multifamily market. We owned or guaranteed approximately 20% of the outstanding debt on multifamily properties as of June 30, 2011 (the latest date for which information was available).
 
Summary of Our Financial Performance for the Third Quarter and First Nine Months of 2011
 
Our financial results for the third quarter and the first nine months of 2011 reflect the continued weakness in the housing and mortgage markets, which remain under pressure from high levels of unemployment, underemployment and the prolonged decline in home prices since their peak in the third quarter of 2006. Credit-related expenses continue to be a key driver of our net losses for each period presented. Our credit-related expenses vary from period to period primarily based on changes in home prices, borrower payment behavior, the types and volumes of loss mitigation activities completed, and actual and estimated recoveries from our lender and mortgage insurer counterparties. The decline in interest rates during the third quarter of 2011 had a significant impact on the company’s derivative losses; however, these losses were mostly offset by fair value gains in the period related to our hedged mortgage investments for which only a portion are recorded at fair value in our financial statements. Derivative instruments are an integral part of how we manage interest rate risk and an inherent part of the cost of funding and hedging our mortgage investments. We expect high levels of period-to-period volatility in our results because our derivatives are recorded at fair value in our financial statements while some of the instruments they hedge are not recorded at fair value in our financial statements.
 
Comprehensive Loss
 
We recognized a total comprehensive loss of $5.3 billion in the third quarter of 2011, consisting of a net loss of $5.1 billion and other comprehensive loss of $197 million. In comparison, we recognized a total comprehensive loss of $2.9 billion in the second quarter of 2011, consisting of a net loss of $2.9 billion and other comprehensive income of $2 million. We recognized a total comprehensive loss of $429 million in the third quarter of 2010, consisting of a net loss of $1.3 billion and other comprehensive income of $902 million (other comprehensive income in the third quarter of 2010 was primarily driven by a reduction in our unrealized losses due to significantly improved fair value of available-for-sale securities).
 
Our total comprehensive loss for the first nine months of 2011 was $14.5 billion, consisting of a net loss of $14.4 billion and other comprehensive loss of $14 million. In comparison, we recognized a total comprehensive loss of $10.1 billion in the first nine months of 2010, consisting of a net loss of $14.1 billion and other comprehensive income of $3.9 billion (other comprehensive income in the first nine months of 2010 was primarily driven by a reduction in our unrealized losses due to significantly improved fair value of available-for-sale securities).
 
Net Loss
 
Third Quarter 2011 vs. Second Quarter 2011.  The $2.2 billion increase in our net loss was primarily due to $4.5 billion in net fair value losses in the third quarter of 2011 primarily driven by losses on our risk management derivatives due to a significant decline in swap interest rates during the quarter, compared with $1.6 billion in net fair value losses in the second quarter of 2011 driven by losses on risk management derivatives. In addition, we recognized foreclosed property expense of $733 million in the third quarter of 2011 compared with foreclosed property income of $478 million in the second quarter of 2011 because our estimate of amounts due to us related to outstanding repurchase requests remained relatively flat during the third quarter compared with a substantial increase in the second quarter of 2011. These losses and expenses were partially offset by a $2.4 billion decrease in our provision for credit losses primarily driven by a lower provision on individually impaired loans as the continued lower interest rate environment improved our expected cash flow projections on those loans, therefore reducing our estimated impairment.
 
Third Quarter 2011 vs. Third Quarter 2010.  The $3.8 billion increase in our net loss was primarily due to $4.5 billion in net fair value losses in the third quarter of 2011 primarily driven by losses on our risk management derivatives due to a significant decline in swap interest rates during the quarter, compared with


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$525 million in net fair value gains in the third quarter of 2010 primarily driven by gains on our trading securities. These losses were partially offset by a $677 million decrease in credit-related expenses which was primarily driven by a lower provision on individually impaired loans as the continued lower interest rate environment improved our expected cash flow projections on those loans, therefore reducing our estimated impairment. Additionally, there was a $410 million increase in net interest income primarily from lower interest expense on funding debt.
 
Nine Months of 2011 vs. Nine Months of 2010.  Our net loss remained flat for the first nine months of 2011 compared with the first nine months of 2010. The key components of our net loss in both the first nine months of 2011 and the first nine months of 2010 were credit-related expenses and fair value losses, which were partially offset by net interest income.
 
See “Consolidated Results of Operations” for more information on our results.
 
Net Worth
 
Our net worth deficit of $7.8 billion as of September 30, 2011 reflects the recognition of our total comprehensive loss of $5.3 billion and our payment to Treasury of $2.5 billion in senior preferred stock dividends during the third quarter of 2011. The Acting Director of FHFA will submit a request to Treasury on our behalf for $7.8 billion to eliminate our net worth deficit.
 
In the third quarter of 2011, we received $5.1 billion in funds from Treasury to eliminate our net worth deficit as of June 30, 2011. Upon receipt of the additional funds requested to eliminate our net worth deficit as of September 30, 2011, the aggregate liquidation preference on the senior preferred stock will be $112.6 billion, which will require an annualized dividend payment of $11.3 billion. The amount of this dividend payment exceeds our reported annual net income for any year since our inception. Through September 30, 2011, we have paid an aggregate of $17.2 billion to Treasury in dividends on the senior preferred stock.
 
Table 1 below displays our senior preferred stock dividend payments to Treasury and Treasury draws since entering conservatorship on September 6, 2008.
 
Table 1:  Treasury Dividend Payments and Draw
 
                                         
                2011 to date
  Cumulative
    2008   2009   2010   (first nine months)   Total
    (Dollars in billions)
 
Senior preferred stock dividends(1)
  $     $ 2.5     $ 7.7     $ 7.0     $ 17.2  
Treasury draws(2)(3)
    15.2       60.0       15.0       21.4       111.6  
Cumulative percentage of senior preferred stock dividends to Treasury draws
    0.2 %     3.3 %     11.3 %     15.4 %     15.4 %
 
 
(1) Represents total quarterly cash dividends paid to Treasury, during the periods presented, based on an annual rate of 10% per year on the aggregate liquidation preference of the senior preferred stock.
 
(2) Represents the total draws received from Treasury and / or currently requested based on our quarterly net worth deficits for the periods presented. Draw requests were funded in the quarter following each quarterly net worth deficit.
 
(3) Treasury draws do not include the initial $1.0 billion liquidation preference of the senior preferred stock, for which we did not receive any cash proceeds.
 
Total Loss Reserves
 
Our total loss reserves, which reflect our estimate of the probable losses we have incurred in our guaranty book of business, increased to $75.6 billion as of September 30, 2011 from $74.8 billion as of June 30, 2011 and increased from $66.3 billion as of December 31, 2010. Our total loss reserve coverage to total nonperforming loans was 37.07% as of September 30, 2011, compared with 36.91% as of June 30, 2011 and 30.85% as of December 31, 2010. The continued stress on a broad segment of borrowers from continued high levels of unemployment and underemployment and the prolonged decline in home prices have caused our total loss reserves to remain high for the past few years. Further, the shift in our nonperforming loan balance from


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loans in our collective reserve to loans that are individually impaired has caused our coverage ratio to increase.
 
Our Strong New Book of Business and Expected Losses on Our Legacy Book of Business
 
We refer to the single-family loans we have acquired since the beginning of 2009 as our “new single-family book of business” and the single-family loans we acquired prior to 2009 as our “legacy book of business.” In this section, we discuss our expectations regarding the profitability of our new single-family book of business, as well as the performance and credit profile of these loans to date. We also discuss our expectations regarding losses on the loans in our legacy book of business.
 
Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations
 
We present a number of estimates and expectations in this executive summary regarding the profitability of single-family loans we have acquired, our single-family credit losses and credit-related expenses, and our draws from and dividends to be paid to Treasury. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors, including future home prices and the future performance of our loans. Home prices are a key factor affecting the amount of credit losses and profitability we expect. As home prices decline, the loan-to-value ratios on our loans shift higher, and both the probability of default and the severity of loss increase. Furthermore, the level of regional variation in home price declines affects our results, as we will incur greater credit losses if home prices decline more significantly in regions where we have a greater concentration of loans. Our future estimates of our performance, as well as the actual amounts, may differ materially from our current estimates and expectations as a result of the timing, level and regional variation in home price changes, changes in interest rates, unemployment, other macroeconomic variables, direct and indirect consequences resulting from failures by servicers to follow proper procedures in the administration of foreclosure cases, government policy, changes in generally accepted accounting principles (“GAAP”), credit availability, social behaviors, the volume of loans we modify, the effectiveness of our loss mitigation strategies, management of our real-estate owned (“REO”) inventory and pursuit of contractual remedies, changes in the fair value of our assets and liabilities, impairments of our assets, and many other factors, including those discussed in “Risk Factors,” “Forward-Looking Statements” and elsewhere in this report and in “Risk Factors” in our 2010 Form 10-K. For example, if the economy were to enter a deep recession, we would expect actual outcomes to differ substantially from our current expectations.
 
Building a Strong New Single-Family Book of Business
 
Expected Profitability of Our Single-Family Acquisitions
 
Our new single-family book of business has a strong overall credit profile and is performing well. While it is too early to know how loans in our new single-family book of business will ultimately perform, given their strong credit risk profile, low levels of payment delinquencies shortly after acquisition, and low serious delinquency rates, we expect that, over their lifetime, these loans will be profitable, by which we mean our fee income on these loans will exceed our credit losses and administrative costs for them. Table 2 provides information about whether we expect loans we acquired in 1991 through the first nine months of 2011 to be profitable, and the percentage of our single-family guaranty book of business represented by these loans as of September 30, 2011. The expectations reflected in Table 2 are based on the credit risk profile of the loans we have acquired, which we discuss in more detail in “Table 4: Credit Profile of Single-Family Conventional Loans Acquired” and in “Table 36: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business.” These expectations are also based on numerous other assumptions, including our expectations regarding home price declines set forth in “Outlook” and other macroeconomic factors. As shown in Table 2, we expect loans we have acquired in 2009, 2010 and the first nine months of 2011 to be profitable over their lifetime. If future macroeconomic conditions turn out to be more adverse than our expectations, these loans could become unprofitable. For example, we believe that credit losses on these loans would exceed guaranty fee revenue if home prices declined nationally by approximately 10% from their September 2011 levels over the next five years based on our home price index. See “Outlook” for our expectations regarding home price declines.


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Table 2:  Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First Nine Months of 2011
 
(GRAPH)
 
As Table 2 shows, the years in which we acquired single-family loans that we expect will be unprofitable are 2004 through 2008. A substantial majority of our realized credit losses since the beginning of 2009 were attributable to loans we acquired in 2005 through 2008. Although the 2004 vintage has been profitable to date, we currently believe that this vintage will not be profitable over its lifetime. While we previously believed the 2004 vintage would perform close to break-even, in 2011 our expectations for long-term home price changes have worsened, which has changed our expectation of future borrower behavior regarding these loans. We expect the 2005 through 2008 vintages to be significantly more unprofitable than the 2004 vintage. The loans we acquired in 2004 were originated under more conservative acquisition policies than loans we acquired from 2005 through 2008; however, because our 2004 acquisitions were made during a time when home prices were rapidly increasing, their performance is expected to suffer from the significant decline in home prices since 2006. The ultimate long-term performance and profitability of the 2004 vintage will depend on many factors, including changes in home prices, other economic conditions and borrower behavior.


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Loans we have acquired since the beginning of 2009 comprised 49% of our single-family guaranty book of business as of September 30, 2011. Our 2005 to 2008 acquisitions are becoming a smaller percentage of our single-family guaranty book of business, having decreased from 39% of our single-family guaranty book of business as of December 31, 2010 to 33% as of September 30, 2011. Our 2004 acquisitions constituted 5% of our single-family guaranty book of business as of September 30, 2011.
 
Serious Delinquency Rates by Year of Acquisition
 
In our experience, an early predictor of the ultimate performance of a portfolio of loans is the rate at which the loans become seriously delinquent (three or more months past due or in the foreclosure process) within a short period of time after acquisition. Loans we acquired in 2009 and 2010 have experienced historically low levels of delinquencies shortly after their acquisition. Table 3 shows, for single-family loans we acquired in each year from 2001 to 2010, the percentage that were seriously delinquent as of the end of the third quarter following the year of acquisition. Loans we acquired in 2011 are not included in this table because they were originated so recently that many of them could not yet have become seriously delinquent. As Table 3 shows, the percentage of our 2009 acquisitions that were seriously delinquent as of the end of the third quarter following their acquisition year was approximately nine times lower than the average comparable serious delinquency rate for loans acquired in 2005 through 2008. For loans originated in 2010, this percentage was approximately ten times lower than the average comparable rate for loans acquired in 2005 through 2008. Table 3 also shows serious delinquency rates for each year’s acquisitions as of September 30, 2011. Except for 2008 acquisitions, whose performance has been affected by changes in underwriting and eligibility standards that became effective during the course of 2008, and more recent acquisition years, whose serious delinquency rates are likely lower than they will be after the loans have aged, Table 3 shows that the current serious delinquency rate generally tracks the trend of the serious delinquency rate as of the end of the third quarter following the year of acquisition. Below the table we provide information about the economic environment in which the loans were acquired, specifically home price appreciation and unemployment levels.


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Table 3:  Single-Family Serious Delinquency Rates by Year of Acquisition
 
(BAR GRAPH)
 
 
* For 2010, the serious delinquency rate as of September 30, 2011 is the same as the serious delinquency rate as of the end of the third quarter following the acquisition year.
 
(1) Based on Fannie Mae’s Home Price Index (HPI), which measures average price changes based on repeat sales on the same properties. For 2011, the data show an initial estimate based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of September 2011, supplemented by preliminary data available for October 2011. Previously reported data have been revised to reflect additional available historical data. Including subsequently available data may lead to materially different results. We recently enhanced our home price estimates to identify and exclude a greater portion of foreclosed home sales. As a result, some period to period comparisons of home prices differ from those indicated by our prior estimates.
 
(2) Based on the average national unemployment rates for each month reported in the labor force statistics current population survey (CPS), Bureau of Labor Statistics.
 
Credit Profile of Our Single-Family Acquisitions
 
Single-family loans we purchased or guaranteed from 2005 through 2008 were acquired during a period when home prices were rising rapidly, peaked, and then started to decline sharply, and underwriting and eligibility standards were more relaxed than they are now. These loans were characterized, on average and as discussed


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below, by higher loan-to-value (“LTV”) ratios and lower FICO credit scores than loans we have acquired since January 1, 2009. In addition, many of these loans were Alt-A loans or had other higher-risk loan attributes such as interest-only payment features. As a result of the sharp declines in home prices, 34% of the loans that we acquired from 2005 through 2008 had mark-to-market LTV ratios that were greater than 100% as of September 30, 2011, which means the principal balance of the borrower’s primary mortgage exceeded the current market value of the borrower’s home. This percentage is higher when second lien loans are included. The sharp decline in home prices, the severe economic recession that began in December 2007 and continued through June 2009, and continuing high unemployment and underemployment have significantly and adversely impacted the performance of loans we acquired from 2005 through 2008. We are continuing to take a number of actions to reduce our credit losses. We discuss these actions and our strategy in “Reducing Credit Losses on Our Legacy Book of Business” and “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
 
In 2009, we began to see the effect of actions we took, beginning in 2008, to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. As a result of these changes and other market dynamics, we reduced our acquisitions of loans with higher-risk attributes. Compared with the loans we acquired in 2005 through 2008, the loans we have acquired since January 1, 2009 have had better overall credit risk profiles at the time we acquired them and their early performance has been strong. Our experience has been that loans with characteristics such as lower original LTV ratios (that is, more equity held by the borrowers in the underlying properties), higher FICO credit scores and more stable payments will perform better than loans with risk characteristics such as higher original LTV ratios, lower FICO credit scores, Alt-A underwriting and payments that may adjust over the term of the loan.
 
Table 4 shows the credit risk profile of the single-family loans we have acquired since January 1, 2009 compared to the loans we acquired from 2005 through 2008.
 
Table 4:  Credit Profile of Single-Family Conventional Loans Acquired(1)
 
                 
    Acquisitions from 2009
  Acquisitions from 2005
    through the first nine months of 2011   through 2008
 
Weighted average loan-to-value ratio at origination
    68 %     73 %
Weighted average FICO credit score at origination
    761       722  
Fully amortizing, fixed-rate loans
    95 %     86 %
Alt-A loans(2)
    1 %     14 %
Interest-only
    1 %     12 %
Original loan-to-value ratio > 90%
    6 %     11 %
FICO credit score < 620
    *     5 %
 
 
Represents less than 0.5% of the total acquisitions.
 
(1) Loans that meet more than one category are included in each applicable category.
 
(2) Newly originated Alt-A loans acquired in 2009 through 2011 consist of the refinance of existing Alt-A loans.
 
Improvements in the credit risk profile of our acquisitions since the beginning of 2009 over acquisitions in prior years reflect changes that we made to our pricing and eligibility standards, as well as changes that mortgage insurers made to their eligibility standards. We discuss these changes in our 2010 Form 10-K in “Business—Executive Summary—Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in 2009, and Credit Losses—Credit Profile of Our Single-Family Acquisitions.”
 
The credit risk profile of our acquisitions since the beginning of 2009 has been influenced further by the significant percentage of refinanced loans. Historically, refinanced loans generally have better credit profiles than purchase money loans. As we discuss in “Outlook” below, we expect fewer refinancings in 2011 and 2012 than in 2010.
 
Since 2009, our acquisitions have included a significant number of loans refinanced under our Refi Plustm initiative, which provides expanded refinance opportunities for eligible Fannie Mae borrowers. Our


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acquisitions under Refi Plus include our acquisitions under the Home Affordable Refinance Program (“HARP”), which was established by the Administration to help borrowers who may be unable to refinance the mortgage loan on their primary residence due to a decline in home values. The approximately 536,000 loans we acquired under Refi Plus in the first nine months of 2011 constituted approximately 27% of our total single-family acquisitions for the period, compared with approximately 23% of total single-family acquisitions in all of 2010. Under Refi Plus we acquire refinancings of performing Fannie Mae loans that have current LTV ratios up to 125% and, in some cases, lower FICO credit scores than we generally require. While it is too early to determine whether loans with higher risk characteristics refinanced under the Refi Plus program will perform differently from other refinanced loans, we expect Refi Plus loans will perform better than the loans they replace because Refi Plus loans reduce the borrowers’ monthly payments or otherwise should provide more sustainability than the borrowers’ old loans (for example, by having a fixed rate instead of an adjustable rate). Loans refinanced through the Refi Plus initiative in the first nine months of 2011 reduced borrowers’ monthly mortgage payments by an average of $171. This figure reflects all refinancings under Refi Plus, even those that involved a reduced term, and therefore higher monthly payments.
 
The LTV ratios at origination for our 2010 and 2011 acquisitions are higher than for our 2009 acquisitions, primarily due to our acquisition of Refi Plus loans. The percentage of loans with LTV ratios at origination greater than 90% has increased from 4% for 2009 acquisitions to 7% for 2010 acquisitions and 10% for acquisitions in the first nine months of 2011. We expect our acquisition of loans with high LTV ratios will increase in 2012 as a result of recently announced changes to HARP, which we discuss in “Legislative and Regulatory Developments—Changes to the Home Affordable Refinance Program.”
 
Despite the increases in LTV ratios at origination associated with Refi Plus, the overall credit profile of our 2010 and 2011 acquisitions, like that of our 2009 acquisitions, is significantly stronger than the credit profile of our 2005 through 2008 acquisitions. Whether the loans we acquire in the future will exhibit an overall credit profile similar to our acquisitions since the beginning of 2009 will depend on a number of factors, including our future eligibility standards and those of mortgage insurers, the percentage of loan originations representing refinancings, the volume and characteristics of loans we acquire under the recently announced changes to HARP terms, our future objectives, government policy, and market and competitive conditions.
 
Expected Losses on Our Legacy Book of Business
 
The single-family credit losses we realized from January 1, 2009 through September 30, 2011, combined with the amounts we have reserved for single-family credit losses as of September 30, 2011, as described below, total approximately $135 billion. A substantial majority of these losses are attributable to single-family loans we purchased or guaranteed from 2005 through 2008.
 
While loans we acquired in 2005 through 2008 will give rise to additional credit losses that we will realize when the loans are charged off (upon foreclosure or our acceptance of a short sale or deed-in-lieu of foreclosure), we estimate that we have reserved for the substantial majority of the remaining losses on these loans. Even though we believe a substantial majority of the credit losses we have yet to realize on these loans has already been reflected in our results of operations as credit-related expenses, our credit-related expenses remain high as weakness in the housing and mortgage markets continues. We also expect that future defaults on loans in our legacy book of business and the resulting charge-offs will occur over a period of years. In addition, given the large current and anticipated supply of single-family homes in the market, we anticipate that it will take years before our REO inventory is reduced to pre-2008 levels.
 
We show how we calculate our realized credit losses in “Table 15: Credit Loss Performance Metrics.” Our reserves for credit losses described in this discussion consist of (1) our allowance for loan losses, (2) our allowance for accrued interest receivable, (3) our allowance for preforeclosure property taxes and insurance receivables, and (4) our reserve for guaranty losses (collectively, our “total loss reserves”), plus the portion of fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets that we estimate represents accelerated credit losses we expect to realize. For more information on our reserves for credit losses, see “Table 12: Total Loss Reserves.”


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The fair value losses that we consider part of our reserves are not included in our “total loss reserves.” We recorded the majority of these fair value losses prior to our adoption in 2010 of accounting standards on the transfers of financial assets and the consolidation of variable interest entities. Before we adopted these standards, upon our acquisition of credit-impaired loans out of unconsolidated MBS trusts, we recorded fair value loss charge-offs against our reserve for guaranty losses. The amount of these charge-offs was the amount by which the acquisition cost of these loans exceeded their estimated fair value. We expect to realize a portion of these fair value losses as credit losses in the future (for loans that eventually involve charge-offs or foreclosure), yet these fair value losses have already reduced the mortgage loan balances reflected in our condensed consolidated balance sheets and have effectively been recognized in our condensed consolidated statements of operations and comprehensive loss through our provision for guaranty losses. We consider these fair value losses as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize credit losses on the acquired loans in the future.
 
Reducing Credit Losses on Our Legacy Book of Business
 
To reduce the credit losses we ultimately incur on our legacy book of business, we have been focusing our efforts on the following strategies:
 
  •  Reducing defaults by offering borrowers solutions that enable them to keep their homes (“home retention solutions”);
 
  •  Pursuing “foreclosure alternatives,” which help borrowers avoid foreclosure, to reduce the severity of the losses we incur;
 
  •  Efficiently managing timelines for home retention solutions, foreclosure alternatives, and foreclosures;
 
  •  Improving servicing standards and execution;
 
  •  Managing our REO inventory to minimize costs and maximize sales proceeds; and
 
  •  Pursuing contractual remedies from lenders, servicers and providers of credit enhancement.
 
As we work to reduce credit losses, we also seek to assist distressed borrowers, help stabilize communities, and support the housing market. In dealing with distressed borrowers, we first seek home retention solutions before turning to foreclosure alternatives. When there is no viable home retention solution or foreclosure alternative that can be applied, we seek to move to foreclosure expeditiously. Prolonged delinquencies can hurt local home values and destabilize communities, as these homes often go into disrepair. As a general rule, the longer borrowers remain delinquent, the greater our costs.
 
Reducing Defaults.  Home retention solutions are a key element of our strategy to reduce defaults, and the majority of our home retention solutions are loan modifications. Successful modifications allow borrowers who were having problems making their pre-modification mortgage payments to remain in their homes. While loan modifications contribute to higher credit-related expenses in the near term, we believe that successful modifications (those that enable borrowers to remain current on their loans) will ultimately reduce our credit losses over the long term from what they otherwise would have been if we had taken the loans to foreclosure. We completed approximately 161,000 loan modifications in the first nine months of 2011, bringing the total number of loan modifications we have completed since January 2009 to over 660,000. The substantial majority of these modifications involved deferring or lowering borrowers’ monthly mortgage payments, which we believe increases the likelihood borrowers will be able to remain current on their modified loans. Whether our modifications are ultimately successful depends heavily on economic factors, such as unemployment rates, household wealth and income, and home prices. See “Table 40: Statistics on Single-Family Loan Workouts” and the accompanying discussion for additional information on our home retention efforts, including our modifications, as well as our foreclosure alternatives. For a description of the impact of modifications on our credit-related expenses, see “Consolidated Results of Operations—Credit-Related Expenses—Provision for Credit Losses.”
 
Pursuing Foreclosure Alternatives.  If we are unable to provide a viable home retention solution for a distressed borrower, we seek to offer a foreclosure alternative and complete it in a timely manner. Our


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foreclosure alternatives are primarily preforeclosure sales, which are sometimes referred to as “short sales,” as well as deeds-in-lieu of foreclosure. These alternatives are intended to reduce the severity of our loss resulting from a borrower’s default while enabling the borrower to avoid going through a foreclosure. We provide information about the volume of foreclosure alternatives we completed in the first nine months of 2011 in “Table 5: Credit Statistics, Single-Family Guaranty Book of Business.”
 
Managing Timelines for Workouts and Foreclosures.  We refer to home retention solutions and foreclosure alternatives as “workouts.” We believe that home retention solutions are most effective in preventing defaults when completed at an early stage of delinquency. Similarly, our foreclosure alternatives are more likely to be successful in reducing our loss severity if they are executed expeditiously. Accordingly, it is important to us for our servicers to work with delinquent borrowers early in the delinquency to determine whether home retention solutions or foreclosure alternatives will be viable and, where no workout solution is viable, to reduce delays in proceeding to foreclosure.
 
Circumstances in the foreclosure environment have resulted in foreclosures proceeding at a slow pace. As a result of the housing market downturn that began in 2006 and significantly worsened in 2008, the volume of foreclosures to be processed by servicers and states significantly increased in 2009 and the first nine months of 2010. In October 2010, a number of single-family mortgage servicers temporarily halted some or all of the foreclosures they were processing after discovering deficiencies in their foreclosure processes and the processes of their service providers. In response to the foreclosure process deficiencies, some states changed their foreclosure processes to require additional review and verification of the accuracy of pending and future foreclosure filings. Some states also added requirements to the foreclosure process, including mediation processes and requirements to file new affidavits. Further, some state courts have issued rulings calling into question the validity of some existing foreclosure practices. These actions halted or significantly delayed not only existing, but new foreclosures. As an example, in December 2010, the New Jersey Supreme Court halted all uncontested residential foreclosure proceedings by six large loan servicers for a period of approximately nine months until those servicers demonstrated that their foreclosure processes were compliant with law. New Jersey also imposed a new requirement that counsel certify the accuracy of all pending and future foreclosure complaints. In addition, in August 2011 a New Jersey appellate decision held that defects in notices of intent to foreclose required dismissal and restart of the pending foreclosure process rather than simply correcting the defective notices. We had more than 22,000 loans in foreclosure in New Jersey as of the beginning of the third quarter of 2011, but foreclosures during the quarter led to our acquiring only 151 REO properties.
 
While servicers have generally ended their outright foreclosure halts, they continue to process foreclosures at a slow pace as they update their procedures to remediate their process deficiencies and meet new legislative, regulatory and judicial requirements. In addition, servicers and states are dealing with the backlog of foreclosures resulting from these delays and from the elevated level of foreclosures resulting from the housing market downturn. For foreclosures completed in the third quarter of 2011, measuring from the last monthly period for which the borrowers fully paid their mortgages to when we added the related properties to our REO inventory, the average number of days it took in each state to ultimately foreclose ranged from 374 days in Missouri to 906 days in Florida. Florida accounted for 29% of our loans that were in the foreclosure process as of September 30, 2011.
 
These extended time periods to complete foreclosures increase our costs of holding these loans. In addition, to the extent home prices decline while foreclosure proceedings are drawn out, the proceeds we ultimately receive from the sale of the foreclosed properties will be lower. Slower foreclosures also result in loans remaining seriously delinquent in our book of business for a longer time, which has caused our serious delinquency rate to decrease more slowly in the last year than it would have if the pace of foreclosures had been faster. We believe the changes in the foreclosure environment discussed above will continue to negatively affect our single-family serious delinquency rates, foreclosure timelines and credit-related expenses. Moreover, we believe these conditions will delay the recovery of the housing market because it will take longer to clear the market’s supply of distressed homes. Distressed homes typically sell at a discount compared to non-distressed homes and, therefore, a lingering population of distressed homes will continue to negatively affect overall home prices. See “Risk Factors” for further information about the potential impact of the foreclosure


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process deficiencies and resulting changes in the foreclosure environment on our business, results of operations, financial condition and net worth.
 
Improving Servicing Standards and Execution.  The performance of our mortgage servicers is critical to our success in reducing defaults, completing foreclosure alternatives and managing workout and foreclosure timelines efficiently, because servicers are the primary point of contact with borrowers. Improving servicing standards is therefore a key aspect of our strategy to reduce our credit losses. We have taken a number of steps to improve the servicing of our delinquent loans.
 
  •  In June 2011, we issued new standards for mortgage servicers under FHFA’s Servicing Alignment Initiative. The initiative is aimed at establishing consistency in the servicing of delinquent loans owned or guaranteed by Fannie Mae and Freddie Mac. Among other things, the new servicing standards, which became effective October 1, 2011, are designed to result in earlier, more frequent and more effective contact with borrowers and to improve servicer performance by providing servicers monetary incentives for exceeding loan workout benchmarks and by imposing fees on servicers for failing to meet loan workout benchmarks or foreclosure timelines.
 
  •  In some cases, we transfer servicing on loan populations that include loans with higher-risk characteristics to special servicers with whom we have worked to develop high-touch protocols for servicing these loans. These protocols include lowering the ratio of loans per servicer employee, prescribing borrower outreach strategies to be used at earlier stages of delinquency, and providing distressed borrowers a single point of contact to resolve issues. Transferring servicing on higher-risk loans enables the borrowers (and loans) to benefit from these high-touch protocols while increasing the original servicer’s capacity to service the remaining loans, creating an opportunity to improve service to the remaining borrowers.
 
  •  In September 2011, we issued our first ratings of servicers’ performance under our Servicer Total Achievement and Rewards (“STAR”) program. The STAR program is designed to encourage improvements in customer service and foreclosure prevention outcomes for homeowners by rating servicers on their performance in these areas.
 
While we believe these steps will improve the servicing on our loans, ultimately we are dependent on servicers’ willingness, efficiency and ability to implement our home retention solutions and foreclosure alternatives, and to manage timelines for workouts and foreclosures.
 
Managing Our REO Inventory.  Efficient management of our REO inventory of homes acquired through deed-in-lieu of foreclosure or foreclosure is another critical element of our strategy for reducing credit losses. Since January 2009, we have strengthened our REO sales capabilities by increasing resources in this area, as we continue to manage our REO inventory to reduce costs and maximize sales proceeds. As Table 5 shows, in the first nine months of 2011 we have already disposed of as many properties as we did in all of 2010, and our dispositions in 2010 represented a 51% increase over our dispositions in 2009.
 
Neighborhood stabilization is a core principle in our approach to managing our REO inventory. In the first nine months of 2011, we completed repairs to approximately 69,300 properties sold from our single-family REO inventory, at an average cost of $6,122 per property. Repairing REO properties increases sales to owner occupants and increases financing options for REO buyers. In addition, our “First Look” marketing period contributes to neighborhood stabilization by encouraging homeownership. During this “First Look” period, owner occupants, some nonprofit organizations and public entities may submit offers and purchase properties without competition from investors. During the first nine months of 2011, approximately 113,900 of the single-family properties we sold were purchased by owner-occupants, nonprofit organizations or public entities.
 
We currently lease properties to tenants who occupied the properties before we acquired them into our REO inventory, which can minimize disruption by providing additional time to find alternate housing, help stabilize local communities, provide us with rental income, and support our compliance with federal and state laws protecting tenants in foreclosed properties. As of September 30, 2011, approximately 10,000 tenants leased our REO properties.


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The changing foreclosure environment discussed above has delayed our acquisitions of REO properties. Given the large number of seriously delinquent loans in our single-family guaranty book of business and the large existing and anticipated supply of single-family homes in the market, we expect it will take years before our REO inventory approaches pre-2008 levels.
 
Pursuing Contractual Remedies.  We conduct targeted reviews of our loans and, when we discover loans that do not meet our underwriting or eligibility requirements, we may make demands for lenders to repurchase these loans or compensate us for losses sustained on the loans. We also make demands for lenders to repurchase or compensate us for loans for which the mortgage insurer rescinds coverage. The volume of our repurchase requests rose in 2010 as compared with 2009 and has remained high through the first nine months of 2011. During the first nine months of 2011, lenders repurchased from us or reimbursed us for losses on approximately $8.8 billion in loans, measured by unpaid principal balance, pursuant to their contractual obligations. In addition, as of September 30, 2011, we had outstanding requests for lenders to repurchase from us or reimburse us for losses on $9.5 billion in loans, of which 25.4% had been outstanding for more than 120 days.
 
These dollar amounts represent the unpaid principal balance of the loans underlying the repurchase requests, not the actual amounts we have received or requested from the lenders. When lenders pay us for these requests, they pay us either to repurchase the loans or else to make us whole for our losses in cases where we have acquired and disposed of the property underlying the loans. Make-whole payments are typically for less than the unpaid principal balance because we have already recovered some of the balance through the sale of the REO. As a result, our actual cash receipts relating to these outstanding repurchase requests are significantly lower than the unpaid principal balance of the loans.
 
We are also pursuing contractual remedies from providers of credit enhancement on our loans, including mortgage insurers. We received proceeds under our mortgage insurance policies for single-family loans of $4.6 billion for the first nine months of 2011. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” for a discussion of our repurchase and reimbursement requests and outstanding receivables from mortgage insurers, as well as the risk that one or more of these counterparties fails to fulfill its obligations to us.
 
We believe the actions we have taken to stabilize the housing market and minimize our credit losses will reduce our future credit losses below what they otherwise would have been. However, continuing change in broader market conditions makes it difficult to predict how effective these actions ultimately will be in reducing our credit losses. Moreover, it will be difficult to measure the ultimate impact of our actions, given that current conditions in the housing market are unprecedented.
 
For more information on the strategies and actions we are taking to minimize our credit losses, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in our 2010 Form 10-K and in this report.
 
Credit Performance
 
Table 5 presents information for each of the last seven quarters about the credit performance of mortgage loans in our single-family guaranty book of business and our workouts. The workout information in Table 5 does not reflect repayment plans and forbearances that have been initiated but not completed, nor does it reflect trial modifications that have not become permanent.


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Table 5:  Credit Statistics, Single-Family Guaranty Book of Business(1)
 
                                                                         
    2011     2010  
    Q3
                      Full
                         
    YTD     Q3     Q2     Q1     Year     Q4     Q3     Q2     Q1  
    (Dollars in millions)  
 
As of the end of each period:
                                                                       
Serious delinquency rate(2)
    4.00 %     4.00 %     4.08 %     4.27 %     4.48 %     4.48 %     4.56 %     4.99 %     5.47 %
Nonperforming loans(3)
  $ 202,522     $ 202,522     $ 200,793     $ 206,098     $ 212,858     $ 212,858     $ 212,305     $ 217,216     $ 222,892  
Foreclosed property inventory:
                                                                       
Number of properties
    122,616       122,616       135,719       153,224       162,489       162,489       166,787       129,310       109,989  
Carrying value
  $ 11,039     $ 11,039     $ 12,480     $ 14,086     $ 14,955     $ 14,955     $ 16,394     $ 13,043     $ 11,423  
Combined loss reserves(4)
  $ 70,741     $ 70,741     $ 68,887     $ 66,240     $ 60,163     $ 60,163     $ 58,451     $ 59,087     $ 58,900  
Total loss reserves(5)
  $ 73,973     $ 73,973     $ 73,116     $ 70,466     $ 64,469     $ 64,469     $ 63,105     $ 64,877     $ 66,479  
During the period:
                                                                       
Foreclosed property (number of properties):
                                                                       
Acquisitions(6)
    152,440       45,194       53,697       53,549       262,078       45,962       85,349       68,838       61,929  
Dispositions
    (192,313 )     (58,297 )     (71,202 )     (62,814 )     (185,744 )     (50,260 )     (47,872 )     (49,517 )     (38,095 )
Credit-related expenses(7)
  $ 21,821     $ 4,782     $ 5,933     $ 11,106     $ 26,420     $ 4,064     $ 5,559     $ 4,871     $ 11,926  
Credit losses(8)
  $ 13,798     $ 4,384     $ 3,810     $ 5,604     $ 23,133     $ 3,111     $ 8,037     $ 6,923     $ 5,062  
Loan workout activity (number of loans):
                                                                       
Home retention loan workouts(9)
    188,205       68,227       59,019       60,959       440,276       89,691       113,367       132,192       105,026  
Preforeclosure sales and deeds-in-lieu of foreclosure
    57,602       19,306       21,176       17,120       75,391       15,632       20,918       21,515       17,326  
                                                                         
Total loan workouts
    245,807       87,533       80,195       78,079       515,667       105,323       134,285       153,707       122,352  
                                                                         
Loan workouts as a percentage of delinquent loans in our guaranty book of business(10)
    26.58 %     28.39 %     25.71 %     25.01 %     37.30 %     30.47 %     37.86 %     41.18 %     31.59 %
 
 
(1) Our single-family guaranty book of business consists of (a) single-family mortgage loans held in our mortgage portfolio, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) 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 mortgage portfolio for which we do not provide a guaranty.
 
(2) Calculated based on the number of single-family conventional 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 single-family conventional guaranty book of business. We include all of the single-family conventional 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 (“HSA”) first-lien loans. A troubled debt restructuring is a restructuring of a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. HSA first-lien loans are unsecured personal loans in the amount of past due payments used to bring mortgage loans current. 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 recognized in our condensed consolidated balance sheets and the reserve for guaranty losses related to both single-family loans backing Fannie Mae MBS that we do not consolidate in our condensed consolidated balance sheets and single-family loans that we have guaranteed under long-term standby commitments. For additional information on the change in our loss reserves see “Consolidated Results of Operations—Credit-Related Expenses—Provision for Credit Losses.”
 
(5) Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable, and (c) allowance for preforeclosure property taxes and insurance receivables.
 
(6) Includes acquisitions through deeds-in-lieu of foreclosure.
 
(7) Consists of the provision for loan losses, the provision (benefit) for guaranty losses and foreclosed property expense (income).
 
(8) 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.


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(9) Consists of (a) modifications, which do not include trial modifications or repayment plans or forbearances that have been initiated but not completed; (b) repayment plans and forbearances completed and (c) HomeSaver Advance first-lien loans. See “Table 40: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk Management” for additional information on our various types of loan workouts.
 
(10) 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.
 
Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010. This decrease is primarily the result of home retention solutions, as well as foreclosure alternatives and completed foreclosures. The decrease is also attributable to our acquisition of loans with stronger credit profiles since the beginning of 2009, as these loans have become an increasingly larger portion of our single-family guaranty book of business, resulting in a smaller percentage of our loans becoming seriously delinquent.
 
Although our single-family serious delinquency rate has decreased significantly since the first quarter of 2010, our serious delinquency rate and the period of time that loans remain seriously delinquent has been negatively affected in recent periods by the increase in the average number of days it is taking to complete a foreclosure. As described in “Reducing Credit Losses on Our Legacy Book of Business—Managing Timelines for Workouts and Foreclosures,” high levels of foreclosures, continuing issues in the servicer foreclosure process, changes in state foreclosure laws, and new court rules and proceedings have lengthened the time it takes to foreclose on a mortgage loan in many states. We expect serious delinquency rates will continue to be affected in the future by home price changes, changes in other macroeconomic conditions, the length of the foreclosure process, the volume of loan modifications, and the extent to which borrowers with modified loans continue to make timely payments.
 
We provide additional information on our credit-related expenses in “Consolidated Results of Operations—Credit-Related Expenses” and on the credit performance of mortgage loans in our single-family book of business and our loan workouts in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
 
Housing and Mortgage Market and Economic Conditions
 
During the third quarter of 2011, economic activity picked up from the pace of the second quarter. The inflation-adjusted U.S. gross domestic product, or GDP, rose by 2.5% on an annualized basis during the quarter, according to the Bureau of Economic Analysis advance estimate. The overall economy gained an estimated 389,000 jobs in the third quarter as a result of employment growth in the private sector. According to the U.S. Bureau of Labor Statistics, as of October 2011, over the past 12 months through September there has been an increase of 1.6 million non-farm jobs. The unemployment rate was 9.1% in September 2011, compared with 9.2% in June 2011, based on data from the U.S. Bureau of Labor Statistics. Employment will likely need to post sustained improvement for an extended period to have a positive impact on housing. We estimate the likelihood of a recession by the end of next year at close to 50%.
 
Existing home sales remained weak during the third quarter of 2011, averaging slightly below second quarter levels. Sales of foreclosed homes and short sales (“distressed sales”) continued to represent an outsized portion of the market. Distressed sales accounted for 30% of existing home sales in September 2011, down from 35% in September 2010, according to the National Association of REALTORS®. New home sales during the third quarter of 2011 were also below second quarter levels, remaining at historically low levels.
 
The overall mortgage market serious delinquency rate has trended down since peaking in the fourth quarter of 2009 but has remained historically high at 7.9% as of June 30, 2011, according to the Mortgage Bankers Association National Delinquency Survey. While the supply of new single-family homes as measured by the inventory/sales ratio declined to its long-term average level in September, the inventory/sales ratio for existing single-family homes remained above average. Properties that are vacant and held off the market, combined with the portion of properties backing seriously delinquent mortgages not currently listed for sale, represent a significant shadow inventory putting downward pressure on home prices.


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We estimate that home prices on a national basis decreased by 0.2% in the third quarter of 2011 and have declined by 21.0% from their peak in the third quarter of 2006. We recently enhanced our method for estimating home price changes to exclude a greater portion of foreclosed home sales, as we discuss below in “Outlook.” If these enhancements had been in place last quarter, instead of reporting a 21.6% decline in home prices through the second quarter of 2011 from their peak, we would have reported a 20.9% decline. Our home price estimates are based on preliminary data and are subject to change as additional data become available. The decline in home prices has left many homeowners with “negative equity” in their mortgages, which means their principal mortgage balance exceeds the current market value of their home. According to CoreLogic, approximately 11 million, or 23%, of all residential properties with mortgages were in a negative equity position in the second quarter of 2011. This increases the risk that borrowers might walk away from their mortgage obligations, causing the loans to become delinquent and proceed to foreclosure.
 
During the third quarter of 2011, national multifamily market fundamentals, which include factors such as effective rents and vacancy rates, continued to improve, benefiting from rental demand. Based on preliminary third-party data, we estimate that the national multifamily vacancy rate fell to 6.50% in the third quarter of 2011, after having fallen to 6.75% in the second quarter of 2011. In addition, we estimate that average asking rents increased for the sixth quarter in a row, climbing by 1.0% in the third quarter of 2011 on a national basis. As indicated by data from Axiometrics, Inc., multifamily concession rates, the rental discount rate as a percentage of asking rents, declined to about -3.0% as of September 2011. The increase in overall rental demand was also reflected in an estimated increase of 36,000 units in the net number of occupied rental units during the third quarter of 2011, according to preliminary data from Reis, Inc. Although national multifamily market fundamentals continued to improve, certain local markets and properties continued to underperform compared to the rest of the country due to localized underlying economic conditions.
 
Outlook
 
Overall Market Conditions.  We expect weakness in the housing and mortgage markets to continue in the fourth quarter of 2011. The high level of delinquent mortgage loans will ultimately result in high levels of foreclosures, which is likely to add to the excess housing inventory. Home sales are unlikely to rise before the unemployment rate improves further.
 
We expect that single-family default and severity rates, as well as the level of single-family foreclosures, will remain high in 2011. Despite signs of multifamily sector improvement at the national level, we expect multifamily charge-offs in 2011 to remain generally commensurate with 2010 levels as certain local markets and properties continue to exhibit weak fundamentals. Conditions may worsen if the unemployment rate increases on either a national or regional basis.
 
Although we expect the recently announced changes to HARP will result in our acquiring more refinancings in 2012 than we would have acquired in the absence of the changes, we expect fewer refinancings overall in each of 2011 and 2012 than in 2010 as a result of the high number of mortgages that have already refinanced to low rates in recent years. As a result, we expect the pace of our loan acquisitions for each of 2011 and for 2012 will be lower than in 2010. Our loan acquisitions also could be negatively affected by the decrease in the fourth quarter of 2011 in the maximum size of loans we may acquire in specified high-cost areas from $729,750 to $625,500. In addition, if the Federal Housing Administration (“FHA”) continues to be the lower-cost option for some consumers, and in some cases the only option, for loans with higher LTV ratios, our market share could be adversely impacted. As our acquisitions decline, our future revenues will be negatively impacted.
 
We estimate that total originations in the U.S. single-family mortgage market in 2011 will decrease from 2010 levels by approximately 23%, from an estimated $1.7 trillion to an estimated $1.3 trillion, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decline from approximately $1.1 trillion to approximately $905 billion. Refinancings comprised approximately 74% of our single-family business volume in the first nine months of 2011, compared with 78% for all of 2010.
 
Home Price Declines.  While the rate of decline in home prices has moderated in recent quarters, we continue to expect that home prices on a national basis will decline further before stabilizing in 2012. We


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currently expect a peak-to-trough home price decline on a national basis ranging from 22% to 28%, and that it would take the occurrence of an additional adverse economic event to reach the high end of the range. Future home price changes may be very different from our estimates as a result of significant inherent uncertainty in the current market environment, including uncertainty about the effect of actions the federal government has taken and may take with respect to housing finance reform; the management of the Federal Reserve’s MBS holdings; 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 and stabilization.
 
Our estimates of home price declines 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. Our 22% to 28% peak-to-trough home price decline estimate corresponds to an approximate 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 by number of properties, whereas the S&P/Case-Shiller index weights expectations based on property value, causing home price declines on higher priced homes to have a greater effect on the overall result; and (2) the S&P/Case-Shiller index includes sales of foreclosed homes while our estimates attempt to exclude foreclosed home sales, because we believe that differing maintenance practices and the forced nature of the sales make foreclosed home prices less representative of market values. We believe, however, that the impact of sales of foreclosed homes is indirectly reflected in our estimates as a result of their impact on the pricing of non-distressed sales. We recently enhanced our home price estimates to identify and exclude a greater portion of foreclosed home sales. As a result, some period to period comparisons of home prices differ from those indicated by our prior estimates. We calculate the S&P/Case-Shiller comparison numbers by modifying our internal home price estimates to account for weighting based on property value and the impact 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 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 and Credit Losses.  Our credit-related expenses, which include our provision for credit losses, reflect our recognition of losses on our loans. Through our provision for credit losses, we recognize credit-related expenses on loans in the period in which we determine that we have incurred a probable loss on the loans as of the end of the period, or in which we have granted concessions to the borrowers. Accordingly, our credit-related expenses are affected by changes in home prices, borrower payment behavior, the types and volumes of loss mitigation activities we complete, and estimated recoveries from our lender and mortgage insurer counterparties. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. We realize losses on loans, through our charge-offs, when foreclosure sales are completed or when we accept short sales or deeds in lieu of foreclosure. We expect our credit losses in 2011 to be lower than in 2010, as delays in foreclosures keep us from realizing credit losses until later periods. We describe our credit loss outlook above under “Our Strong New Book of Business and Expected Losses on our Legacy Book of Business—Expected Losses on Our Legacy Book of Business.”
 
Uncertainty Regarding our Long-Term Financial Sustainability and Future Status.  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 and credit losses to vary significantly from our current expectations. Although Treasury’s funds under the senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend payments are substantial. We do not expect to earn profits in excess of our annual dividend obligation to Treasury for the indefinite future. We expect to request additional draws under the senior preferred stock purchase agreement in future periods, which will further increase the dividends we owe to Treasury on the senior preferred stock. We expect that, over time, our dividend obligation to Treasury will


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constitute an increasing portion of our future draws under the senior preferred stock purchase agreement. As a result of these factors, there is significant uncertainty about our long-term financial sustainability.
 
In addition, there is significant uncertainty regarding the future of our company, including how long we will continue to be in existence, the extent of our role in the market, what form we will have, and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated. We expect this uncertainty to continue. On February 11, 2011 Treasury and the Department of Housing and Urban Development (“HUD”) released a report to Congress on reforming America’s housing finance market. The report states that the Administration will work with FHFA to determine the best way to responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance of providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding long-term reform of the GSEs. See “Legislative and Regulatory Developments” in this report and “Legislation and GSE Reform” in our 2010 Form 10-K for discussions of recent legislative reform of the financial services industry and proposals for GSE reform that could affect our business. See “Risk Factors” in this report for a discussion of the risks to our business relating to the uncertain future of our company.
 
 
LEGISLATIVE AND REGULATORY DEVELOPMENTS
 
GSE Reform
 
As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), on February 11, 2011, Treasury and HUD released their report to Congress on ending the conservatorships of Fannie Mae and Freddie Mac and reforming the housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both institutions.
 
The report identifies a number of policy steps that could be used to wind down Fannie Mae and Freddie Mac, reduce the government’s role in housing finance and help bring private capital back to the mortgage market. These steps include (1) increasing guaranty fees, (2) gradually increasing the level of required down payments so that any mortgages insured by Fannie Mae or Freddie Mac eventually have at least a 10% down payment, (3) reducing conforming loan limits to those established in the Federal Housing Finance Regulatory Reform Act of 2008 (the “2008 Reform Act”), (4) encouraging Fannie Mae and Freddie Mac to pursue additional credit loss protection and (5) reducing Fannie Mae’s and Freddie Mac’s portfolios, consistent with Treasury’s senior preferred stock purchase agreements with the companies.
 
In addition, the report outlines three potential options for a new long-term structure for the housing finance system following the wind-down of Fannie Mae and Freddie Mac. The first option would privatize housing finance almost entirely. The second option would add a government guaranty mechanism that could scale up during times of crisis. The third option would involve the government offering catastrophic reinsurance behind private mortgage guarantors. Each of these options assumes the continued presence of programs operated by FHA, the Department of Agriculture and the Veterans Administration to assist targeted groups of borrowers. The report does not state whether or how the existing infrastructure or human capital of Fannie Mae may be used in the establishment of such a reformed system. The report emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. A copy of the report can be found on the Housing Finance Reform section of Treasury’s Web site, www.Treasury.gov. We are providing Treasury’s Web site address solely for your information, and information appearing on Treasury’s Web site is not incorporated into this quarterly report on Form 10-Q.
 
We expect that Congress will continue to hold hearings and consider legislation in the remainder of 2011 and in 2012 on the future status of Fannie Mae and Freddie Mac. Several bills have been introduced that would place the GSEs into receivership after a period of time and either grant federal charters to new entities to engage in activities similar to those currently engaged in by the GSEs or leave secondary mortgage market activities to entities in the private sector. For example, legislation has been introduced in both the House of


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Representatives and the Senate that would require FHFA to make a determination within two years of enactment whether the GSEs were financially viable and, if the GSEs were determined not to be financially viable, to place them into receivership. As drafted, these bills may upon enactment impair our ability to issue securities in the capital markets and therefore our ability to conduct our business, absent the federal government providing an explicit guarantee of our existing and ongoing liabilities.
 
In addition to bills that seek to resolve the status of the GSEs, numerous bills have been introduced and considered in the House of Representatives that could constrain the current operations of the GSEs or alter the existing authority that FHFA or Treasury have over the enterprises. The Subcommittee on Capital Markets and Government Sponsored Enterprises of the Financial Services Committee has approved bills that would:
 
  •  suspend current compensation packages and apply a government pay scale for GSE employees;
 
  •  require the GSEs to increase guaranty fees;
 
  •  subject GSE loans to the risk retention standards in the Dodd-Frank Act;
 
  •  require a quicker reduction of GSE portfolios than required under the senior preferred stock purchase agreement;
 
  •  require Treasury to pre-approve all GSE debt issuances;
 
  •  repeal the GSEs’ affordable housing goals;
 
  •  provide additional authority to FHFA’s Inspector General;
 
  •  prohibit FHFA from approving any new GSE products during conservatorship or receivership, with certain exceptions;
 
  •  prevent Treasury from amending the senior preferred stock purchase agreement to reduce the current dividend rate on our senior preferred stock;
 
  •  abolish the Affordable Housing Trust Fund that the GSEs are required to fund except when such contributions have been temporarily suspended by FHFA;
 
  •  require FHFA to identify mission critical assets of the GSEs and require the GSEs to dispose of non-mission critical assets;
 
  •  cap the maximum aggregate amount of funds Treasury or any other agency or entity of the federal government can provide to the GSEs subject to certain qualifications;
 
  •  grant FHFA the authority to revoke the enterprises’ charters following receivership under certain circumstances; and
 
  •  subject the GSEs to the Freedom of Information Act.
 
We expect additional legislation relating to the GSEs to be introduced and considered by Congress in the remainder of 2011 and in 2012. 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 how long we will continue to be in existence, the extent of our role in the market, what form we will have, and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated. See “Risk Factors” for a discussion of the risks to our business relating to the uncertain future of our company. Also see “Risk Factors” in our 2010 Form 10-K for a discussion of how the uncertain future of our company may adversely affect our ability to retain and recruit well-qualified employees, including senior management.
 
Changes to the Home Affordable Refinance Program
 
On October 24, 2011, FHFA, Fannie Mae, and Freddie Mac announced changes to HARP aimed at making refinancing under the program easier and potentially less expensive for qualifying homeowners and


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encouraging lenders to participate in the program. While HARP previously limited eligibility to borrowers with mortgage loans that had LTV ratios no greater than 125%, the new HARP guidelines remove that ceiling when a borrower refinances into a new fixed-rate mortgage. Other changes to HARP include:
 
  •  eliminating certain risk-based fees for borrowers who refinance into shorter-term loans and lowering fees for other borrowers;
 
  •  eliminating the need for a new property appraisal in many cases;
 
  •  extending the ending date for HARP from June 2012 to December 2013; and
 
  •  reducing the extent to which lenders will be liable for violations of representations and warranties in connection with refinancings under HARP.
 
We are working with FHFA to finalize the fees that we will charge for loans refinanced under HARP’s new terms. We expect these fees to be announced in the fourth quarter of 2011. At this time, we do not know how many eligible borrowers are likely to refinance under the program and, therefore, how many HARP loans we will acquire.
 
We may incur additional credit-related expenses as a result of these changes to HARP. However, we believe the expanded refinance opportunities for borrowers under HARP may help prevent future delinquencies and defaults, because loans refinanced under the program reduce the borrowers’ monthly payments or otherwise should provide more sustainability than the borrowers’ old loans (for example, by having a fixed rate instead of an adjustable rate). The extent to which these factors will impact our results of operations will depend on a number of factors, including the terms, credit profile and volume of our acquisitions under the revised program. See “Risk Factors” for a discussion of how efforts we may undertake in support of the housing market may affect us.
 
Discontinuation of Our Retained Attorney Network
 
On October 18, 2011, FHFA directed us to phase out the practice of requiring mortgage servicers to use our network of retained attorneys to perform default- and foreclosure-related legal services for our loans. FHFA also directed us to work with Freddie Mac, through FHFA’s Servicing Alignment Initiative, to develop and implement consistent requirements, policies and processes for default- and foreclosure-related legal services. As set forth in FHFA’s directive, we will conduct these activities over a transitional period and will seek to minimize disruption to pending matters. During the transitional period, servicers will continue to be directly responsible for managing the foreclosure process and monitoring network firm performance, in accordance with our current requirements and contractual arrangements. Phasing out the use of our retained attorney network may make it more difficult for us to oversee the performance of default- and foreclosure-related legal services for our loans, which may adversely impact our efforts to reduce our credit losses.
 
Proposed Changes to Our Single-Family Guaranty Fee Pricing
 
Consistent with the recommendation in the Administration’s report on ending the conservatorships of Fannie Mae and Freddie Mac, we expect that single-family guaranty fees will increase in the coming years, although we do not know the timing, form or extent of these increases. There have been recent public discussions of potential fee increases by the Administration, members of Congress, and FHFA. On September 23, 2011, the Administration submitted a legislative proposal to the Joint Select Committee on Deficit Reduction which would, among other matters, mandate FHFA to require Fannie Mae and Freddie Mac to impose an additional fee, the Conservatorship Recoupment Guarantee Fee, on all single-family mortgages guaranteed on or after January 1, 2013. The proposal requires that the new fee be not less than 10 basis points. The proposal also provides discretion for FHFA to mandate the imposition of a delivery fee in lieu of a guaranty fee increase. Certain members of Congress have also recommended that the Joint Select Committee on Deficit Reduction mandate that FHFA require the GSEs to increase their guaranty fees. In addition, FHFA’s Acting Director expressed in a public speech in September 2011 that he expects guaranty fees to increase beginning in 2012.


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Servicing Compensation Initiative
 
In September 2011, FHFA issued a discussion paper to propose and seek comments on two new possible mortgage servicing compensation structures in connection with its joint initiative on servicing compensation announced earlier this year. The joint initiative, which FHFA directed Fannie Mae and Freddie Mac to work on in coordination with FHFA and HUD, was established to consider alternatives for future mortgage servicing structures and servicing compensation for single-family mortgage loans. One possible structure presented in the discussion paper, which FHFA described as representing a modest change to the current model, provides for a reduced minimum servicing fee accompanied by a reserve account. The reserve account would be available to offset unexpectedly high servicing costs resulting from extraordinary deteriorations in industry conditions. The second possible structure, which FHFA characterized as a fundamental change to the current model, introduces a fee for service structure that provides for a base servicing fee for performing loans and incentive compensation and compensatory fees for servicing non-performing loans, with the possibility of avoiding capitalization of mortgage servicing rights. We provide additional information on FHFA’s initiative on servicing compensation in “Business—Business Segments—Single-Family Business—Single-Family Mortgage Servicing” in our 2010 Form 10-K.
 
For additional information on legislative and regulatory matters affecting us, refer to “Business—Legislation and GSE Reform” and “Business—Our Charter and Regulation of Our Activities” in our 2010 Form 10-K, “MD&A—Legislative and Regulatory Developments—Proposed Rules Implementing the Dodd-Frank Act” in our quarterly report for the quarter ended March 31, 2011 (“First Quarter 2011 Form 10-Q”), and “MD&A—Legislative and Regulatory Developments” in our quarterly report for the quarter ended June 30, 2011 (“Second Quarter 2011 Form 10-Q”).
 
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” of this report and in our 2010 Form 10-K.
 
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 our Board of Directors. 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
 
  •  Total Loss Reserves
 
  •  Other-Than-Temporary Impairment of Investment Securities
 
See “MD&A—Critical Accounting Policies and Estimates” in our 2010 Form 10-K for a detailed discussion of these critical accounting policies and estimates. We provide below information about our Level 3 assets and liabilities as of September 30, 2011 as compared with December 31, 2010. We also describe any significant changes in the judgments and assumptions we made during the first nine months of 2011 in applying our critical accounting policies and significant changes to critical estimates.
 
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 portion of our assets and liabilities at fair


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value. In determining fair value, we use various valuation techniques. We describe the valuation techniques and inputs used to determine the fair value of our assets and liabilities and disclose their carrying value and fair value in “Note 13, Fair Value.”
 
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 the fair value of Level 3 instruments involve significant unobservable inputs, which generally are more subjective and involve a high degree of management judgment and assumptions. Our Level 3 assets and liabilities consist of certain mortgage- and asset-backed securities and residual interests, certain mortgage loans, certain acquired property, certain long-term debt arrangements and certain highly structured, complex derivative instruments.
 
Table 6 presents a comparison of the amount of financial assets carried in our condensed consolidated balance sheets at fair value on a recurring basis (“recurring assets”) that were classified as Level 3 as of September 30, 2011 and December 31, 2010. 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 6:  Level 3 Recurring Financial Assets at Fair Value
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Trading securities
  $ 4,145     $ 4,576  
Available-for-sale securities
    29,519       31,934  
Mortgage loans
    2,284       2,207  
Other assets
    227       247  
                 
Level 3 recurring assets
  $ 36,175     $ 38,964  
                 
Total assets
  $ 3,213,877     $ 3,221,972  
Total recurring assets measured at fair value
  $ 161,093     $ 161,696  
Level 3 recurring assets as a percentage of total assets
    1 %     1 %
Level 3 recurring assets as a percentage of total recurring assets measured at fair value
    22 %     24 %
Total recurring assets measured at fair value as a percentage of total assets
    5 %     5 %
 
Assets measured at fair value on a nonrecurring basis and classified as Level 3, which are not presented in the table above, primarily include mortgage loans and acquired property. The fair value of Level 3 nonrecurring assets totaled $62.2 billion during the nine months ended September 30, 2011 and $63.0 billion during the year ended December 31, 2010.
 
Financial liabilities measured at fair value on a recurring basis and classified as Level 3 consisted of long-term debt with a fair value of $1.1 billion as of September 30, 2011 and $1.0 billion as of December 31, 2010, and other liabilities with a fair value of $173 million as of September 30, 2011 and $143 million as of December 31, 2010.
 
Total Loss Reserves
 
Our total loss reserves consist of the following components:
 
  •  Allowance for loan losses;
 
  •  Allowance for accrued interest receivable;
 
  •  Reserve for guaranty losses; and
 
  •  Allowance for preforeclosure property tax and insurance receivable.


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These components can be further divided into single-family portions, which collectively make up our single-family loss reserves, and multifamily portions, which collectively make up our multifamily loss reserves.
 
In the third quarter of 2011, we updated our allowance for loan loss models for individually impaired loans to incorporate more home price data at the regional level rather than at the national level. We believe this approach is a better estimation of possible home price paths and related default expectations; it has resulted in a decrease to our allowance for loan losses and a reduction of credit-related expenses of approximately $800 million.
 
In the second quarter of 2011, we updated our loan loss models to incorporate more recent data on prepayments of modified loans, which resulted in an increase to our allowance for loan losses and an increase to credit-related expenses of approximately $1.5 billion. The change resulted in slower expected prepayment speeds, which extended the expected lives of modified loans and lowered the present value of cash flows on those loans. Also in the second quarter of 2011, we updated our estimate of the reserve for guaranty losses related to private-label mortgage-related securities that we have guaranteed to increase our focus on earlier stage delinquency, rather than foreclosure trends, as the primary driver in estimating incurred losses. We believe delinquencies are a better indicator of incurred losses compared to foreclosure trends because the recent delays in the foreclosure process have interrupted the normal flow of delinquent mortgages into foreclosure. This update resulted in an increase to our reserve for guaranty losses included within “Other liabilities” and an increase to credit related-expenses of approximately $700 million.
 
 
CONSOLIDATED RESULTS OF OPERATIONS
 
In this section we discuss our condensed consolidated results of operations for the periods indicated. You should read this section together with our condensed consolidated financial statements, including the accompanying notes.
 
Table 7 summarizes our condensed consolidated results of operations for the periods indicated.
 
Table 7:  Summary of Condensed Consolidated Results of Operations
 
                                                 
    For the Three Months Ended
    For the Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     Variance     2011     2010     Variance  
    (Dollars in millions)  
 
Net interest income
  $ 5,186     $ 4,776     $ 410     $ 15,118     $ 11,772     $ 3,346  
Fee and other income
    291       304       (13 )     793       831       (38 )
                                                 
Net revenues
  $ 5,477     $ 5,080     $ 397     $ 15,911     $ 12,603     $ 3,308  
                                                 
Investment gains, net
    73       82       (9 )     319       271       48  
Net other-than-temporary impairments
    (262 )     (326 )     64       (362 )     (699 )     337  
Fair value (losses) gains, net
    (4,525 )     525       (5,050 )     (5,870 )     (877 )     (4,993 )
Administrative expenses
    (591 )     (730 )     139       (1,765 )     (2,005 )     240  
Credit-related expenses(1)
    (4,884 )     (5,561 )     677       (21,985 )     (22,296 )     311  
Other non-interest expenses(2)
    (373 )     (410 )     37       (787 )     (1,147 )     360  
                                                 
Loss before federal income taxes
    (5,085 )     (1,340 )     (3,745 )     (14,539 )     (14,150 )     (389 )
Benefit for federal income taxes
          9       (9 )     91       67       24  
                                                 
Net loss
    (5,085 )     (1,331 )     (3,754 )     (14,448 )     (14,083 )     (365 )
Less: Net income attributable to the noncontrolling interest
          (8 )     8       (1 )     (4 )     3  
                                                 
Net loss attributable to Fannie Mae
  $ (5,085 )   $ (1,339 )   $ (3,746 )   $ (14,449 )   $ (14,087 )   $ (362 )
                                                 
Total comprehensive loss attributable to Fannie Mae
  $ (5,282 )   $ (437 )   $ (4,845 )   $ (14,463 )   $ (10,143 )   $ (4,320 )
                                                 
 
 
(1) Consists of provision for loan losses, provision for guaranty losses, and foreclosed property expense.
 
(2) Consists of debt extinguishment losses, net and other expenses.


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Net Interest Income
 
Table 8 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 monthly averages. Table 9 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. In the fourth quarter of 2010, we changed the presentation to distinguish the change in net interest income of Fannie Mae from the change in net interest income of consolidated trusts. We have revised the presentation of results for prior periods to conform to the current period presentation.
 
Table 8:  Analysis of Net Interest Income and Yield
 
                                                 
    For the Three Months Ended September 30,  
    2011     2010  
          Interest
    Average
          Interest
    Average
 
    Average
    Income/
    Rates
    Average
    Income/
    Rates
 
    Balance     Expense     Earned/Paid     Balance     Expense     Earned/Paid  
    (Dollars in millions)  
 
Interest-earning assets:
                                               
Mortgage loans of Fannie Mae(1)
  $ 386,067     $ 3,701       3.83 %   $ 408,523     $ 3,859       3.78 %
Mortgage loans of consolidated trusts(1)
    2,598,264       30,633       4.72       2,565,431       32,807       5.12  
                                                 
Total mortgage loans
    2,984,331       34,334       4.60       2,973,954       36,666       4.93  
Mortgage-related securities
    312,482       3,930       5.03       368,886       4,681       5.08  
Elimination of Fannie Mae MBS held in portfolio
    (199,691 )     (2,520 )     5.05       (236,355 )     (3,120 )     5.28  
                                                 
Total mortgage-related securities, net
    112,791       1,410       5.00       132,531       1,561       4.71  
Non-mortgage securities(2)
    72,333       24       0.13       102,103       62       0.24  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    27,217       7       0.10       14,193       10       0.28  
Advances to lenders
    3,417       19       2.18       3,643       21       2.26  
                                                 
Total interest-earning assets
  $ 3,200,089     $ 35,794       4.47 %   $ 3,226,424     $ 38,320       4.75 %
                                                 
Interest-bearing liabilities:
                                               
Short-term debt(3)
  $ 181,495     $ 63       0.14 %   $ 244,823     $ 190       0.30 %
Long-term debt
    552,191       3,385       2.45       578,775       4,472       3.09  
                                                 
Total short-term and long-term funding debt
    733,686       3,448       1.88       823,598       4,662       2.26  
Debt securities of consolidated trusts
    2,650,256       29,680       4.48       2,624,253       32,002       4.88  
Elimination of Fannie Mae MBS held in portfolio
    (199,691 )     (2,520 )     5.05       (236,355 )     (3,120 )     5.28  
                                                 
Total debt securities of consolidated trusts held by third parties
    2,450,565       27,160       4.43       2,387,898       28,882       4.84  
                                                 
Total interest-bearing liabilities
  $ 3,184,251     $ 30,608       3.84 %   $ 3,211,496     $ 33,544       4.18 %
                                                 
Impact of net non-interest bearing funding
  $ 15,838               0.02 %   $ 14,928               0.02 %
                                                 
Net interest income/net interest yield
          $ 5,186       0.65 %           $ 4,776       0.59 %
                                                 
Net interest income/net interest yield of consolidated trusts(4)
          $ 953       0.15 %           $ 805       0.13 %
                                                 
 


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    For the Nine Months Ended September 30,  
    2011     2010  
          Interest
    Average
          Interest
    Average
 
    Average
    Income/
    Rates
    Average
    Income/
    Rates
 
    Balance     Expense     Earned/Paid     Balance     Expense     Earned/Paid  
    (Dollars in millions)  
 
Interest-earning assets:
                                               
Mortgage loans of Fannie Mae(1)
  $ 395,686     $ 11,146       3.76 %   $ 348,835     $ 11,107       4.25 %
Mortgage loans of consolidated trusts(1)
    2,601,710       94,111       4.82       2,634,064       100,810       5.10  
                                                 
Total mortgage loans
    2,997,396       105,257       4.68       2,982,899       111,917       5.00  
Mortgage-related securities
    321,979       12,204       5.05       399,890       15,271       5.09  
Elimination of Fannie Mae MBS held in portfolio
    (206,176 )     (7,956 )     5.15       (259,740 )     (10,306 )     5.29  
                                                 
Total mortgage-related securities, net
    115,803       4,248       4.89       140,150       4,965       4.72  
Non-mortgage securities(2)
    76,266       99       0.17       93,548       165       0.23  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    20,980       20       0.13       33,849       54       0.21  
Advances to lenders
    3,548       59       2.19       2,947       57       2.55  
                                                 
Total interest-earning assets
  $ 3,213,993     $ 109,683       4.55 %   $ 3,253,393     $ 117,158       4.80 %
                                                 
Interest-bearing liabilities:
                                               
Short-term debt(3)
  $ 160,961     $ 246       0.20 %   $ 221,665     $ 470       0.28 %
Long-term debt
    591,126       11,383       2.57       574,280       14,528       3.37  
                                                 
Total short-term and long-term funding debt
    752,087       11,629       2.06       795,945       14,998       2.51  
Debt securities of consolidated trusts
    2,652,057       90,892       4.57       2,694,986       100,694       4.98  
Elimination of Fannie Mae MBS held in portfolio
    (206,176 )     (7,956 )     5.15       (259,740 )     (10,306 )     5.29  
                                                 
Total debt securities of consolidated trusts held by third parties
    2,445,881       82,936       4.52       2,435,246       90,388       4.95  
                                                 
Total interest-bearing liabilities
  $ 3,197,968     $ 94,565       3.94 %   $ 3,231,191     $ 105,386       4.35 %
                                                 
Impact of net non-interest bearing funding
  $ 16,025               0.02 %   $ 22,202               0.03 %
                                                 
Net interest income/net interest yield
          $ 15,118       0.63 %           $ 11,772       0.48 %
                                                 
Net interest income/net interest yield of consolidated trusts(4)
          $ 3,219       0.16 %           $ 116       0.01 %
                                                 
 
                 
    As of September 30,
Selected benchmark interest rates(5)
  2011   2010
 
3-month LIBOR
    0.37 %     0.30 %
2-year swap interest rate
    0.58       0.60  
5-year swap interest rate
    1.26       1.51  
30-year Fannie Mae MBS par coupon rate
    2.96       3.39  
 
 
(1) Interest income includes interest income on acquired credit-impaired loans of $545 million and $466 million for the three months ended September 30, 2011 and 2010, respectively, and $1.5 billion and $1.6 billion for the nine months ended September 30, 2011 and 2010, respectively. These amounts include accretion income of $288 million and $231 million for the three months ended September 30, 2011 and 2010, respectively, and $769 million and $785 million for the nine months ended September 30, 2011 and 2010, respectively, relating to a portion of the fair value losses recorded upon the acquisition of the loans. Average balance includes loans on nonaccrual status, for which interest income is recognized when collected.
 
(2) Includes cash equivalents.
 
(3) Includes federal funds purchased and securities sold under agreements to repurchase.

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(4) Net interest income of consolidated trusts represents interest income from mortgage loans of consolidated trusts less interest expense from debt securities of consolidated trusts. Net interest yield is calculated based on net interest income from consolidated trusts divided by average balance of mortgage loans of consolidated trusts.
 
(5) Data from British Bankers’ Association, Thomson Reuters Indices and Bloomberg L.P.
 
Table 9:  Rate/Volume Analysis of Changes in Net Interest Income
 
                                                 
    For the Three Months Ended
    For the Nine Months Ended
 
    September 30, 2011 vs. 2010     September 30, 2011 vs. 2010  
    Total
    Variance Due to:(1)     Total
    Variance Due to:(1)  
    Variance     Volume     Rate     Variance     Volume     Rate  
                (Dollars in millions)              
 
Interest income:
                                               
Mortgage loans of Fannie Mae
  $ (158 )   $ (215 )   $ 57     $ 39     $ 1,399     $ (1,360 )
Mortgage loans of consolidated trusts
    (2,174 )     415       (2,589 )     (6,699 )     (1,226 )     (5,473 )
                                                 
Total mortgage loans
    (2,332 )     200       (2,532 )     (6,660 )     173       (6,833 )
Mortgage-related securities
    (751 )     (710 )     (41 )     (3,067 )     (2,954 )     (113 )
Elimination of Fannie Mae MBS held in portfolio
    600       467       133       2,350       2,074       276  
                                                 
Total mortgage-related securities, net
    (151 )     (243 )     92       (717 )     (880 )     163  
Non-mortgage securities(2)
    (38 )     (15 )     (23 )     (66 )     (27 )     (39 )
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    (3 )     6       (9 )     (34 )     (17 )     (17 )
Advances to lenders
    (2 )     (1 )     (1 )     2       11       (9 )
                                                 
Total interest income
    (2,526 )     (53 )     (2,473 )     (7,475 )     (740 )     (6,735 )
                                                 
Interest expense:
                                               
Short-term debt
    (127 )     (40 )     (87 )     (224 )     (111 )     (113 )
Long-term debt
    (1,087 )     (198 )     (889 )     (3,145 )     415       (3,560 )
                                                 
Total short-term and long-term funding debt
    (1,214 )     (238 )     (976 )     (3,369 )     304       (3,673 )
Debt securities of consolidated trusts
    (2,322 )     314       (2,636 )     (9,802 )     (1,583 )     (8,219 )
Elimination of Fannie Mae MBS held in portfolio
    600       467       133       2,350       2,074       276  
                                                 
Total debt securities of consolidated trusts held by third parties
    (1,722 )     781       (2,503 )     (7,452 )     491       (7,943 )
                                                 
Total interest expense
    (2,936 )     543       (3,479 )     (10,821 )     795       (11,616 )
                                                 
Net interest income
  $ 410     $ (596 )   $ 1,006     $ 3,346     $ (1,535 )   $ 4,881  
                                                 
 
 
(1) Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.
 
(2) Includes cash equivalents.
 
Net interest income increased in the third quarter and first nine months of 2011, as compared with the third quarter and first nine months of 2010, due to lower interest expense on debt, which was partially offset by lower interest income on loans and securities. The primary drivers of these changes were:
 
  •  a reduction in the interest expense of debt of consolidated trusts driven by a decrease in rates. The rate on debt of consolidated trusts is generally driven by mortgage rates of loans securitized in the MBS, and these mortgage rates declined in 2011.
 
  •  lower interest expense on funding debt due to lower borrowing rates which allowed us to continue to replace higher-cost debt with lower-cost debt;
 
  •  lower interest income on mortgage securities due to a decrease in the balance of our mortgage securities, as we continue to manage our portfolio requirements; and


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  •  lower yields on mortgage loans as new business acquisitions continue to replace higher-yielding loans with loans issued at lower mortgage rates. The reduction in interest income on loans due to lower yields was partially offset by a reduction in the amount of interest income not recognized for nonaccrual mortgage loans, due to a decline in the balance of nonaccrual loans in our condensed consolidated balance sheets as we continue to complete a high number of loan modifications and foreclosures.
 
Additionally, our net interest income and net interest yield were higher than they would have otherwise been in both the third quarter and first nine months of 2011 and 2010 because our debt funding needs were lower than would otherwise have been required as a result of funds we received from Treasury under the senior preferred stock purchase agreement. Further, dividends paid to Treasury are not recognized in interest expense.
 
Table 10 displays the interest income not recognized for loans on nonaccrual status and the resulting reduction in our total yield from mortgage loans.
 
Table 10:  Impact of Nonaccrual Loans on Net Interest Income
 
                                                                         
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
    Interest
          Interest
          Interest
                Interest
       
    Income not
          Income not
          Income not
                Income not
       
    Recognized
    Reduction
    Recognized
    Reduction
    Recognized
    Reduction
          Recognized
    Reduction
 
    for
    in Net
    for
    in Net
    for
    in Net
          for
    in Net
 
    Nonaccrual
    Interest
    Nonaccrual
    Interest
    Nonaccrual
    Interest
          Nonaccrual
    Interest
 
    Loans(1)     Yield(2)     Loans(1)     Yield(2)     Loans(1)     Yield(2)           Loans(1)     Yield (2)  
    (Dollars in millions)  
 
Mortgage loans of Fannie Mae
  $ (1,078 )           $ (1,512 )           $ (3,623 )                   $ (3,317 )        
Mortgage loans of consolidated trusts
    (212 )             (326 )             (690 )                     (3,393 )        
                                                                         
Total mortgage loans
  $ (1,290 )     (16 )bp   $ (1,838 )     (23 )bp   $ (4,313 )     (18 )bp           $ (6,710 )     (28 )bp
                                                                         
 
 
(1) Amount includes cash received for loans on nonaccrual status.
 
(2) Calculated based on annualized interest income not recognized divided by total interest-earning assets, expressed in basis points.
 
For a discussion of the interest income from the assets we have purchased and the interest expense from the debt we have issued, see the discussion of our Capital Markets group’s net interest income in “Business Segment Results.”


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Fair Value (Losses) Gains, Net
 
Table 11 presents the components of our fair value gains and losses.
 
Table 11:  Fair Value (Losses) Gains, Net
 
                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Risk management derivatives fair value (losses) gains attributable to:
                               
Net contractual interest expense accruals on interest rate swaps
  $ (497 )   $ (673 )   $ (1,790 )   $ (2,264 )
Net change in fair value during the period
    (3,570 )     732       (3,777 )     342  
                                 
Total risk management derivatives fair value (losses) gains, net
    (4,067 )     59       (5,567 )     (1,922 )
Mortgage commitment derivatives fair value losses, net
    (188 )     (183 )     (226 )     (1,361 )
                                 
Total derivatives fair value losses, net
    (4,255 )     (124 )     (5,793 )     (3,283 )
                                 
Trading securities (losses) gains, net
    (214 )     889       146       2,587  
Other, net
    (56 )     (240 )     (223 )     (181 )
                                 
Fair value (losses) gains, net
  $ (4,525 )   $ 525     $ (5,870 )   $ (877 )
                                 
                                 
                                 
                2011     2010  
 
5-year swap interest rate:
                               
As of January 1
                    2.18 %     2.98 %
As of March 31
                    2.47       2.73  
As of June 30
                    2.03       2.06  
As of September 30
                    1.26       1.51  
 
Risk Management Derivatives Fair Value Gains (Losses), Net
 
We supplement our issuance of debt securities with derivative instruments to further reduce duration and prepayment risks. We recorded risk management derivative fair value losses in the third quarter and first nine months of 2011 primarily as a result of a decrease in the fair value of our pay-fixed derivatives due to a significant decline in swap interest rates during the period.
 
We recorded risk management derivative gains in the third quarter of 2010 primarily due to gains on our foreign currency swaps, which were partially offset by time decay on our purchased options. Gains on our foreign currency swaps generally offset the fair value losses on our foreign currency denominated debt.
 
We recorded risk management derivative losses in the first nine months of 2010 primarily as a result of: (1) time decay on our purchased options; (2) a decrease in the fair value of our pay-fixed derivatives during the first quarter of 2010 due to a decline in swap interest rates during that period; and (3) a decrease in implied interest rate volatility, which reduced the fair value of our purchased options.
 
We present, by derivative instrument type, the fair value gains and losses on our derivatives for the three and nine months ended September 30, 2011 and 2010 in “Note 9, Derivative Instruments.”
 
Mortgage Commitment Derivatives Fair Value Gains (Losses), Net
 
Commitments to purchase or sell some mortgage-related securities and to purchase single-family mortgage loans are generally accounted for as derivatives. For open mortgage commitment derivatives, we include changes in their fair value in our condensed consolidated statements of operations and comprehensive loss. When derivative purchase commitments settle, we include the fair value of the commitment on the settlement date in the cost basis of the loan or security we purchase. When derivative commitments to sell securities settle, we include the fair value of the commitment on the settlement date in the cost basis of the security we sell. Purchases of securities issued by our consolidated MBS trusts are treated as extinguishments of debt; we


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recognize the fair value of the commitment on the settlement date as a component of debt extinguishment gains and losses. Sales of securities issued by our consolidated MBS trusts are treated as issuances of consolidated debt; we recognize the fair value of the commitment on the settlement date as a component of debt in the cost basis of the debt issued.
 
We recognized losses on our mortgage commitments in the third quarter and first nine months of both 2011 and 2010 primarily due to losses on commitments to sell mortgage-related securities as a result of a decline in interest rates during the commitment period.
 
Trading Securities Gains (Losses), Net
 
Losses from our trading securities in the third quarter of 2011 were primarily driven by the widening of credit spreads on commercial mortgage-backed securities (“CMBS”). However, these credit spreads narrowed over the first nine months of 2011, which primarily drove gains on trading securities for the nine-month period.
 
Gains from our trading securities in the third quarter and first nine months of 2010 were primarily driven by a decrease in interest rates and narrowing of credit spreads on CMBS.
 
Credit-Related Expenses
 
We refer to our provision for loan losses and the provision for guaranty losses collectively as our “provision for credit losses.” Credit-related expenses consist of our provision for credit losses and foreclosed property expense.
 
Provision for Credit Losses
 
Our total loss reserves provide for an estimate of credit losses incurred 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 a charge-off against our loss reserves. We record recoveries of previously charged-off amounts as a reduction to charge-offs, which results in an increase to our loss reserves.
 
Table 12 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets. Because these fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of business and consequently require lower total loss reserves. For these reasons, we consider these fair value losses as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize credit losses on the acquired loans in the future. We estimate that approximately two-thirds of this amount, as of September 30, 2011, represents credit losses we expect to realize in the future and approximately one-third will eventually be recovered, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan. We exclude these fair value losses from our credit loss calculation as described in “Credit Loss Performance Metrics.”


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Table 12:  Total Loss Reserves
 
                 
    As of  
    September 30, 2011     December 31, 2010  
    (Dollars in millions)  
 
Allowance for loan losses
  $ 71,435     $ 61,556  
Reserve for guaranty losses(1)
    916       323  
                 
Combined loss reserves
    72,351       61,879  
Allowance for accrued interest receivable
    2,179       3,414  
Allowance for preforeclosure property taxes and insurance receivable(2)
    1,111       958  
                 
Total loss reserves
    75,641       66,251  
Fair value losses previously recognized on acquired credit impaired loans(3)
    16,961       19,171  
                 
Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans
  $ 92,602     $ 85,422  
                 
 
 
(1) Amount included in “Other liabilities” in our condensed consolidated balance sheets.
 
(2) Amount included in “Other assets” in our condensed consolidated balance sheets.
 
(3) Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets.
 
We refer to our allowance for loan losses and reserve for guaranty losses collectively as our combined loss reserves. We summarize the changes in our combined loss reserves in Table 13.


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Table 13:  Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)
 
                                                 
    For the Three Months Ended September 30,  
    2011     2010  
    Of
    Of
          Of
    Of
       
    Fannie
    Consolidated
          Fannie
    Consolidated
       
    Mae     Trusts     Total     Mae     Trusts     Total  
    (Dollars in millions)  
 
Changes in combined loss reserves:
                                               
Allowance for loan losses:
                                               
Beginning balance
  $ 55,966     $ 13,540     $ 69,506     $ 42,844     $ 17,738     $ 60,582  
Provision for loan losses
    (196 )     4,355       4,159       2,144       2,552       4,696  
Charge-offs(1)(5)
    (3,853 )     (260 )     (4,113 )     (5,946 )     (1,243 )     (7,189 )
Recoveries
    848       35       883       205       304       509  
Transfers(2)
    1,770       (1,770 )           5,131       (5,131 )      
Other(3)
    863       137       1,000       895       247       1,142  
                                                 
Ending balance(4)
  $ 55,398     $ 16,037     $ 71,435     $ 45,273     $ 14,467     $ 59,740  
                                                 
Reserve for guaranty losses:
                                               
Beginning balance
  $ 960     $     $ 960     $ 246     $     $ 246  
Provision (benefit) for guaranty losses
    (8 )           (8 )     78             78  
Charge-offs
    (38 )           (38 )     (48 )           (48 )
Recoveries
    2             2                    
                                                 
Ending balance
  $ 916     $     $ 916     $ 276     $     $ 276  
                                                 
Combined loss reserves:
                                               
Beginning balance
  $ 56,926     $ 13,540     $ 70,466     $ 43,090     $ 17,738     $ 60,828  
Total provision for credit losses
    (204 )     4,355       4,151       2,222       2,552       4,774  
Charge-offs(1)(5)
    (3,891 )     (260 )     (4,151 )     (5,994 )     (1,243 )     (7,237 )
Recoveries
    850       35       885       205       304       509  
Transfers(2)
    1,770       (1,770 )           5,131       (5,131 )      
Other(3)
    863       137       1,000       895       247       1,142  
                                                 
Ending balance(4)
  $ 56,314     $ 16,037     $ 72,351     $ 45,549     $ 14,467     $ 60,016  
                                                 
 


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    For the Nine Months Ended September 30,  
    2011     2010  
    Of
    Of
          Of
    Of
       
    Fannie
    Consolidated
          Fannie
    Consolidated
       
    Mae     Trusts     Total     Mae     Trusts     Total  
    (Dollars in millions)  
 
Changes in combined loss reserves:
                                               
Allowance for loan losses:
                                               
Beginning balance
  $ 48,530     $ 13,026     $ 61,556     $ 8,078     $ 1,847     $ 9,925  
Adoption of new accounting standards
                            43,576       43,576  
Provision for loan losses
    10,003       10,545       20,548       11,008       9,922       20,930  
Charge-offs(1)(5)
    (15,018 )     (1,466 )     (16,484 )     (12,097 )     (6,645 )     (18,742 )
Recoveries
    3,197       1,537       4,734       367       872       1,239  
Transfers(2)
    7,739       (7,739 )           41,606       (41,606 )      
Other(3)
    947       134       1,081       (3,689 )     6,501       2,812  
                                                 
Ending balance(4)
  $ 55,398     $ 16,037     $ 71,435     $ 45,273     $ 14,467     $ 59,740  
                                                 
Reserve for guaranty losses:
                                               
Beginning balance
  $ 323     $     $ 323     $ 54,430     $     $ 54,430  
Adoption of new accounting standards
                      (54,103 )           (54,103 )
Provision for guaranty losses
    694             694       111             111  
Charge-offs
    (106 )           (106 )     (165 )           (165 )
Recoveries
    5             5       3             3  
                                                 
Ending balance
  $ 916     $     $ 916     $ 276     $     $ 276  
                                                 
Combined loss reserves:
                                               
Beginning balance
  $ 48,853     $ 13,026     $ 61,879     $ 62,508     $ 1,847     $ 64,355  
Adoption of new accounting standards
                      (54,103 )     43,576       (10,527 )
Total provision for credit losses
    10,697       10,545       21,242       11,119       9,922       21,041  
Charge-offs(1)(5)
    (15,124 )     (1,466 )     (16,590 )     (12,262 )     (6,645 )     (18,907 )
Recoveries
    3,202       1,537       4,739       370       872       1,242  
Transfers(2)
    7,739       (7,739 )           41,606       (41,606 )      
Other(3)
    947       134       1,081       (3,689 )     6,501       2,812  
                                                 
Ending balance(4)
  $ 56,314     $ 16,037     $ 72,351     $ 45,549     $ 14,467     $ 60,016  
                                                 
 

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    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Allocation of combined loss reserves:
               
Balance at end of each period attributable to:
               
Single-family
  $ 70,741     $ 60,163  
Multifamily
    1,610       1,716  
                 
Total
  $ 72,351     $ 61,879  
                 
Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:
               
Single-family
    2.49 %     2.10 %
Multifamily
    0.83       0.91  
Combined loss reserves as a percentage of:
               
Total guaranty book of business
    2.38 %     2.03 %
Total nonperforming loans
    35.46       28.81  
 
 
(1) Includes accrued interest of $289 million and $811 million for the three months ended September 30, 2011 and 2010, respectively, and $1.1 billion and $2.0 billion for the nine months ended September 30, 2011 and 2010, respectively.
 
(2) Includes transfers from trusts for delinquent loan purchases.
 
(3) Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and transfer activity included in this table reflects all changes for both the allowance for loan losses and the valuation allowances for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans.
 
(4) Includes $334 million and $397 million as of September 30, 2011 and 2010, respectively, for acquired credit-impaired loans.
 
(5) While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default.
 
The continued stress on a broad segment of borrowers from continued high levels of unemployment and underemployment and the prolonged decline in home prices have caused our total loss reserves to remain high for the past few years. Our provision for credit losses continues to be a key driver of our net losses for each period presented. The amount of provision for credit losses varies from period to period based on changes in home prices, borrower payment behavior, the types and volumes of loss mitigation activities completed, and actual and estimated recoveries from our lender and mortgage insurer counterparties.
 
Our provision for credit losses decreased in the third quarter of 2011 compared with the third quarter of 2010 primarily due to a lower provision on individually impaired loans. The lower provision was driven, in part, by accelerated expected prepayment speeds due to the lower interest rate environment, which reduced the expected lives of loans and increased the present value of cash flows expected on those loans. In addition, our provision decreased in the third quarter of 2011 compared with the third quarter of 2010 because of an increase in estimated amounts due to us or received by us for outstanding repurchase requests. The decrease in the provision for credit losses in the third quarter of 2011 was partially offset by: (1) the implementation of a new accounting standard that increased our troubled debt restructuring (“TDR”) population, which increased the number of loans that are individually impaired; and (2) a decrease in the estimated recovery amount from mortgage insurance coverage. A TDR is a loan restructuring that grants a concession to a borrower experiencing financial difficulties. For a detailed discussion of our mortgage insurer counterparties and the estimated recovery of mortgage insurance, see “Risk Management—Credit Risk Management—Institutional Counterparty Risk Management—Mortgage Insurers.”
 
Our provision for credit losses slightly increased in the first nine months of 2011 compared with the first nine months of 2010. In addition to the reasons described above, our provision for credit losses in the first nine

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months of 2011 was negatively impacted by higher loss severity rates and an increase in the average number of days loans remain delinquent.
 
In addition, during the third quarter and first nine months of 2011 and 2010 our provision for credit losses and loss reserves have been impacted by updates to our allowance for loan loss models that we use to estimate our loss reserves. For further information on estimates and assumptions that are used to calculate our loan loss reserves and the impacts of specific changes in estimates during 2010 and the first nine months of 2011, see “MD&A—Critical Accounting Policies and Estimates” in our 2010 Form 10-K and “Critical Accounting Policies and Estimates” in this report.
 
Because of the substantial volume of loan modifications we completed and the number of loans that entered a trial modification period in 2010 and the first nine months of 2011, approximately two-thirds of our total loss reserves are attributable to individual impairment rather than the collective reserve for loan losses. Individual impairment for a TDR is based on the restructured loan’s expected cash flows over the life of the loan, taking into account the effect of any concessions granted to the borrower, discounted at the loan’s original effective interest rate. The individual impairment model includes forward-looking assumptions using multiple scenarios of the future economic environment, including interest rates and home prices. Based on the structure of the modifications, in particular the size of the concession granted, and the performance of modified loans combined with the forward-looking assumptions used in our model, the allowance calculated for an individually impaired loan has generally been greater than the allowance that would be calculated under the collective reserve. Further, if we expect to recover our recorded investment in an individually impaired loan through probable foreclosure of the underlying collateral, we measure the impairment based on the fair value of the collateral.
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard regarding TDRs effective for the third quarter of 2011 that applies retrospectively to January 1, 2011. In the third quarter of 2011, we recognized an incremental increase of $514 million in our provision for credit losses due to loans that were reassessed as TDRs upon adoption of the new TDR standard. For additional information on the new TDR accounting standard, see “Note 1, Summary of Significant Accounting Policies.”
 
For additional discussion of our loan workout activities, delinquent loans and concentrations, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Problem Loan Management.” For a discussion of our charge-offs, see “Credit Loss Performance Metrics.”
 
Our balance of nonperforming single-family loans remained high as of September 30, 2011 due to both high levels of delinquencies and an increase in TDRs. When a TDR occurs, the loan may return to a current status, but it will continue to be classified as a nonperforming loan as the loan is not performing in accordance with the original terms. The composition of our nonperforming loans is shown in Table 14, which is based on the carrying value of both our single-family and multifamily held-for-investment and held-for-sale mortgage loans. For individually impaired loans, the amount displayed is net of any impairment amount. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”


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Table 14:  Nonperforming Single-Family and Multifamily Loans
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
On-balance sheet nonperforming loans including loans in consolidated Fannie Mae MBS trusts:
               
Nonaccrual loans
  $ 127,178     $ 152,756  
Troubled debt restructurings on accrual status(1)
    76,729       61,907  
                 
Total on-balance sheet nonperforming loans
    203,907       214,663  
                 
Off-balance sheet nonperforming loans in unconsolidated
               
Fannie Mae MBS trusts(2)
    147       89  
                 
Total nonperforming loans
  $ 204,054     $ 214,752  
                 
Accruing on-balance sheet loans past due 90 days or more(3)
  $ 769     $ 896  
 
                 
    For the
  For The
    Nine Months Ended
  Year Ended
    September 30,
  December 31,
    2011   2010
    (Dollars in millions)
 
Interest related to on-balance sheet nonperforming loans:
               
Interest income forgone(4)
  $ 6,475     $ 8,185  
Interest income recognized for the period(5)
    4,760       7,995  
 
 
(1) Includes HomeSaver Advance first-lien loans on accrual status.
 
(2) Represents loans that would meet our criteria for nonaccrual status if the loans had been on-balance sheet.
 
(3) Recorded investment in loans as of the end of each period that are 90 days or more past due and continuing to accrue interest. The majority of this amount consists of 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) 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 original 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. Includes primarily amounts accrued while loan was performing and cash payments received on nonaccrual loans.
 
Foreclosed Property Expense
 
Foreclosed property expense is displayed in Table 15. The decrease in foreclosed property expense in the third quarter and first nine months of 2011 compared with the third quarter and first nine months of 2010 was due, in part, to an increase in estimated amounts due to or received by us for outstanding repurchase requests. These amounts were recognized in our provision for credit losses and foreclosed property expense. In addition, we recorded lower valuation adjustments on our acquired property inventory in the third quarter and first nine months of 2011 because: (1) the rate of decline in home prices has moderated in recent quarters; and (2) the decrease in our REO inventory compared with the third quarter and first nine months of 2010 resulted in fewer properties subject to valuation adjustments. The decrease in foreclosed property expense was partially offset by a decrease in the estimated recovery amount from mortgage insurance coverage.
 
Foreclosed property expense in the first nine months of 2010 reflected the recognition of cash fees of $796 million from the cancellation and restructuring of some of our pool mortgage insurance coverage. The cancelled and restructured policies covered approximately $42 billion in unpaid principal balance. The fees represented an acceleration of, and discount on, claims expected to be received pursuant to the coverage net of premiums expected to be paid. These cancellations and restructurings resulted in operational savings from


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reduced claims processing and mitigated our counterparty credit risk given the weakened financial condition of our mortgage insurer counterparties.
 
Credit Loss Performance Metrics
 
Our credit-related expenses should be considered in conjunction with our credit loss performance. Our credit loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with the acquisition of credit-impaired loans. We also exclude interest forgone on nonperforming loans in our mortgage portfolio, 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 from credit losses.
 
Historically, management viewed our credit loss performance metrics, which include our historical credit losses and our credit loss ratio, as indicators of the effectiveness of our credit risk management strategies. As our credit losses are now at such high levels, management has shifted focus to our loss mitigation strategies and the reduction of our total credit losses and away from the credit loss ratio to measure performance. However, we believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. 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, investors are able to evaluate our credit performance on a more consistent basis among periods. Table 15 details the components of our credit loss performance metrics as well as our average single-family and multifamily default rate and initial charge-off severity rate.


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Table 15:  Credit Loss Performance Metrics
 
                                                                 
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
    Amount     Ratio(1)     Amount     Ratio(1)     Amount     Ratio(1)     Amount     Ratio(1)(2)  
                      (Dollars in millions)                    
 
Charge-offs, net of recoveries
  $ 3,266       42.8 bp   $ 6,728       88.4 bp   $ 11,851       51.6 bp   $ 17,665       76.9 bp
Foreclosed property expense
    733       9.6       787       10.3       743       3.2       1,255       5.5  
                                                                 
Credit losses including the effect of fair value losses on acquired credit- impaired loans
    3,999       52.4       7,515       98.7       12,594       54.8       18,920       82.4  
Less: Fair value losses resulting from acquired credit-impaired loans
    (31 )     (0.4 )     (41 )     (0.5 )     (93 )     (0.4 )     (146 )     (0.6 )
Plus: Impact of acquired credit- impaired loans on charge-offs and foreclosed property expense
    492       6.5       750       9.9       1,577       6.9       1,642       7.1  
                                                                 
Credit losses and credit loss ratio
  $ 4,460       58.5 bp   $ 8,224       108.1 bp   $ 14,078       61.3 bp   $ 20,416       88.9 bp
                                                                 
Credit losses attributable to:
                                                               
Single-family
  $ 4,384             $ 8,037             $ 13,798             $ 20,022          
Multifamily
    76               187               280               394          
                                                                 
Total
  $ 4,460             $ 8,224             $ 14,078             $ 20,416          
                                                                 
Average single-family default rate
            0.44 %             0.63 %             1.34 %             1.63 %
Average single-family initial charge- off severity rate(3)
            34.20 %             33.30 %             35.00 %             34.20 %
Average multifamily default rate
            0.08 %             0.24 %             0.38 %             0.48 %
Average multifamily initial charge- off severity rate(3)
            32.49 %             39.31 %             35.40 %             39.63 %
 
 
(1) Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period.
 
(2) Beginning in the second quarter of 2010, expenses relating to preforeclosure taxes and insurance were recorded as charge-offs. These expenses were recorded as foreclosed property expense in the first quarter of 2010. The impact of including these costs in charge-offs was 4.6 basis points for the nine months ended September 30, 2010.
 
(3) Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition; single-family rate excludes charge-offs from preforeclosure sales.
 
The decrease in our credit losses in the third quarter and first nine months of 2011 compared with the third quarter and first nine months of 2010 was driven by a decrease in net charge-offs primarily due to a decrease in the number of defaults and an increase in estimated amounts due to or received by us related to outstanding repurchase requests. While charge-offs remain high, charge-offs in the third quarter and first nine months of 2011 were lower than they otherwise would have been due to delays in the foreclosure process.
 
Our 2009, 2010 and 2011 vintages accounted for approximately 3% of our single-family credit losses for the third quarter of 2011 and 2% of our single-family credit losses for the first nine months of 2011. Typically, credit losses on mortgage loans do not peak until later years in the loan cycle following origination. We provide more detailed credit performance information, including serious delinquency rates by geographic region, statistics on nonperforming loans and foreclosure activity in “Risk Management—Credit Risk Management—Mortgage Credit Risk Management.”
 
Regulatory Hypothetical Stress Test Scenario
 
Under a September 2005 agreement with FHFA’s predecessor, the Office of Federal Housing Enterprise Oversight, we are required to disclose on a quarterly basis the present value of the change in future expected


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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 September 2005 agreement were suspended in March 2009 by FHFA until further notice, this 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 16 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 enhancements.
 
Table 16:  Single-Family Credit Loss Sensitivity(1)
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Gross single-family credit loss sensitivity
  $ 22,925     $ 25,937  
Less: Projected credit risk sharing proceeds
    (1,907 )     (2,771 )
                 
Net single-family credit loss sensitivity
  $ 21,018     $ 23,166  
                 
Outstanding single-family whole loans and loans underlying Fannie Mae MBS
  $ 2,764,981     $ 2,782,512  
Single-family net credit loss sensitivity as a percentage of outstanding single-family whole loans and Fannie Mae MBS
    0.76 %     0.83 %
 
 
(1) Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on 97% of our total single-family guaranty book of business as of September 30, 2011 and December 31, 2010, respectively. 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.
 
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.
 
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 have consisted mostly of limited administrative costs. However, under recently announced changes to HARP we may incur additional losses. See “Legislative and Regulatory Developments,” for a discussion on the recent changes to HARP.
 
Home Affordable Modification Program
 
We reduced our individually impaired allowance that relates to loans that had entered a trial modification under the Home Affordable Modification Program (“HAMP”) by $906 million during the third quarter of 2011 compared with impairments of $2.0 billion during the third quarter of 2010. Loans receiving a trial modification under HAMP are accounted for as TDRs and assessed individually for impairment. The reduction of our


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allowance on HAMP loans in the third quarter of 2011 was due to improved cash flow projections on existing HAMP loans, which more than offset the volume of new HAMP trial modifications during the period. We incurred impairments related to loans that had entered a trial modification under HAMP of $4.3 billion during the first nine months of 2011, compared with $11.8 billion during the first nine months of 2010. These include impairments on 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. These impairments have been included in the calculation of our provision for loan losses in our condensed consolidated results of operations and comprehensive loss. The impairments do not include the reduction in our collective loss reserves which occurred as a result of beginning to individually assess the loan for impairment upon entering a trial modification. Please see “MD&A—Consolidated Results of Operations—Financial Impact of the Making Home Affordable Program on Fannie Mae” in our 2010 Form 10-K for a more detailed discussion on these impairments.
 
We paid or accrued HAMP incentive fees for servicers of $86 million during the third quarter of 2011 compared with $93 million during the third quarter of 2010. We paid or accrued HAMP incentive fees for servicers of $254 million during the first nine months of 2011, compared with $276 million during the first nine months of 2010. These fees were related to loans modified under HAMP, which we recorded as part of “Other expenses.” Borrower incentive payments are included in the calculation of our allowance for loan losses for individually impaired loans. Additionally, our expenses under HAMP also include administrative costs.
 
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, how many foreclosures would have resulted nationwide, and at what pace, or the impact on housing prices if the program had not been put 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 have cost us if we did not have the program at all. See “Risk Factors” for a discussion of how efforts we may undertake in support of the housing market may affect us.
 
 
BUSINESS SEGMENT RESULTS
 
Results of our three business segments are intended to reflect each segment as if it were a stand-alone business. Under our segment reporting structure, the sum of the results for our three business segments does not equal our condensed consolidated results of operations as we separate the activity related to our consolidated trusts from the results generated by our three segments. In addition, because we apply accounting methods that differ from our condensed consolidated results for segment reporting purposes, we include an eliminations/adjustments category to reconcile our business segment results and the activity related to our consolidated trusts to our condensed consolidated results of operations. We describe the management reporting and allocation process used to generate our segment results in our 2010 Form 10-K in “Notes to Consolidated Financial Statements—Note 15, Segment Reporting.” We are working on reorganizing our company by function rather than by business in order to improve our operational efficiencies and effectiveness. In future periods, we may change some of our management reporting and how we report our business segment results.
 
In this section, we summarize our segment results for the third quarter and first nine months of 2011 and 2010 in the tables below and provide a comparative discussion of these results. This section should be read together with our comparative discussion of our condensed consolidated results of operations in “Consolidated Results of Operations.” See “Note 10, Segment Reporting” of this report for a reconciliation of our segment results to our condensed consolidated results.
 
Single-Family Business Results
 
Table 17 summarizes the financial results of our Single-Family business for the periods indicated. The primary sources of revenue for our Single-Family business are guaranty fee income and fee and other income. Expenses primarily include credit-related expenses, net interest loss and administrative expenses.


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Table 17:  Single-Family Business Results
 
                                                 
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     Variance     2011     2010     Variance  
                (Dollars in millions)              
 
Net interest loss
  $ (374 )   $ (1,108 )   $ 734     $ (1,952 )   $ (4,438 )   $ 2,486  
Guaranty fee income(1)
    1,867       1,804       63       5,618       5,367       251  
Credit-related expenses(2)
    (4,782 )     (5,559 )     777       (21,821 )     (22,356 )     535  
Other expenses(3)
    (456 )     (592 )     136       (1,414 )     (1,713 )     299  
                                                 
Loss before federal income taxes
    (3,745 )     (5,455 )     1,710       (19,569 )     (23,140 )     3,571  
(Provision) benefit for federal income taxes
    (1 )     1       (2 )     106       53       53  
                                                 
Net loss attributable to Fannie Mae
  $ (3,746 )   $ (5,454 )   $ 1,708     $ (19,463 )   $ (23,087 )   $ 3,624  
                                                 
Single-family effective guaranty fee rate (in basis points)(4)
    26.1       25.2               26.1       24.9          
Single-family average charged guaranty fee on new acquisitions (in basis points)(5)
    31.1       25.3               29.0       26.4          
Average single-family guaranty book of business(6)
  $ 2,859,814     $ 2,857,917             $ 2,870,557     $ 2,875,952          
Single-family Fannie Mae MBS issues(7)
  $ 111,808     $ 155,940             $ 381,135     $ 391,754          
 
 
(1) Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive loss.
 
(2) Consists of the provision for loan losses, provision for guaranty losses and foreclosed property expense.
 
(3) Consists of investment gains and losses, fair value losses, fee and other income, administrative expenses and other expenses.
 
(4) Calculated based on annualized Single-Family segment guaranty fee income divided by the average single-family guaranty book of business, expressed in basis points.
 
(5) Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points.
 
(6) Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.
 
(7) Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the period. Includes Housing Finance Agency (HFA) new issue bond program issuances, none of which occurred in 2011. There were HFA new issue bond program issuances of $3.1 billion in the first nine months of 2010, of which none occurred in the third quarter of 2010.
 
Net Interest Loss
 
Net interest loss for the Single-Family business segment primarily consists of: (1) the cost to reimburse the Capital Markets group for interest income not recognized for loans in our mortgage portfolio on nonaccrual status; (2) the cost to reimburse MBS trusts for interest income not recognized for loans in consolidated trusts on nonaccrual status; and (3) income from cash payments received on loans that have been placed on nonaccrual status.
 
Net interest loss decreased in the third quarter and first nine months of 2011 compared with the third quarter and first nine months of 2010 primarily due to a significant decrease in interest income not recognized for loans on nonaccrual status because of a decline in the total number of loans on nonaccrual status. This decline is due to loan workouts and foreclosures since the third quarter of 2010.


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Guaranty Fee Income
 
Guaranty fee income increased in the third quarter and first nine months of 2011 compared with the third quarter and first nine months of 2010 due to an increase in the amortization of risk based pricing adjustments, reflecting the impact of higher risk based pricing associated with our more recent acquisition vintages.
 
Our average single-family guaranty book of business was relatively flat period over period despite our continued high market share because of the decline in U.S. residential mortgage debt outstanding, which is primarily due to foreclosures. Our estimated market share of new single-family mortgage-related securities issuances, which is based on publicly available data and excludes previously securitized mortgages, remained high at 43.3% for the third quarter and 45.5% for the first nine months of 2011.
 
Credit-Related Expenses
 
Credit-related expenses and credit losses in the Single-Family business represent the substantial majority of our consolidated totals. We provide a discussion of our credit-related expenses and credit losses in “Consolidated Results of Operations—Credit-Related Expenses.”
 
Multifamily Business Results
 
Table 18 summarizes the financial results of our Multifamily business for the periods indicated. The primary sources of revenue for our Multifamily business are guaranty fee income and fee and other income. Expenses and other items that impact income or loss primarily include credit-related expenses, administrative expenses and net operating losses from our partnership investments.


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Table 18:  Multifamily Business Results
 
                                                 
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     Variance     2011     2010     Variance  
                (Dollars in millions)              
 
Guaranty fee income(1)
  $ 226     $ 205     $ 21     $ 651     $ 594     $ 57  
Fee and other income
    51       35       16       166       98       68  
(Losses) gains from partnership investments(2)
    (30 )     39       (69 )     (8 )     (41 )     33  
Credit-related (expense) income(3)
    (102 )     (2 )     (100 )     (164 )     60       (224 )
Other expenses(4)
    (73 )     (97 )     24       (178 )     (298 )     120  
                                                 
Income before federal income taxes
    72       180       (108 )     467       413       54  
Benefit (provision) for federal income taxes
          1       (1 )     (61 )     (14 )     (47 )
                                                 
Net income attributable to Fannie Mae
  $ 72     $ 181     $ (109 )   $ 406     $ 399     $ 7  
                                                 
Multifamily effective guaranty fee rate (in basis points)(5)
    47.0       43.9               45.4       42.5          
Credit loss performance ratio (in basis points)(6)
    15.8       40.1               19.5       28.2          
Average multifamily guaranty book of business(7)
  $ 192,357     $ 186,766             $ 191,185     $ 186,234          
Multifamily new business volumes(8)
    6,500       4,540               16,963       11,411          
Multifamily units financed from new business volumes(9)
    110,000       84,000               289,000       199,000          
Fannie Mae multifamily MBS issuances(10)
  $ 7,756     $ 4,437             $ 24,466     $ 11,238          
Fannie Mae multifamily structured securities issuances (issued by Capital Markets group)(11)
    1,495       1,122               4,517       3,715          
Additional net interest income earned on Fannie Mae multifamily mortgage loans and MBS (included in Capital Markets Group’s results)(12)
    210       206               662       608          
Average Fannie Mae multifamily mortgage loans and MBS in Capital Markets Group’s portfolio(13)
    109,608       116,096               112,092       116,744          
 
                 
    As of
    September 30
  December 31
    2011   2010
    (Dollars in millions)
 
Multifamily serious delinquency rate
    0.57 %     0.71 %
Percentage of guaranty book of business with credit enhancement
    90       89  
Fannie Mae percentage of total multifamily mortgage debt outstanding(14)
    20.8       20.5  
Fannie Mae multifamily MBS outstanding(15)
  $ 94,398     $ 77,251  
 
 
(1) Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive loss.
 
(2) (Losses) gains from partnership investments is included in other expenses in our condensed consolidated statements of operations and comprehensive loss.
 
(3) Consists of the benefit (provision) for loan losses, benefit (provision) for guaranty losses and foreclosed property expense.
 
(4) Consists of net interest income or loss, investment gains, other income or expenses, and administrative expenses.
 
(5) Calculated based on annualized Multifamily segment guaranty fee income divided by the average multifamily guaranty book of business, expressed in basis points.
 
(6) Calculated based on the annualized credit losses divided by the average multifamily guaranty book of business, expressed in basis points.
 
(7) Consists of multifamily mortgage loans held in our mortgage portfolio, multifamily mortgage loans held by consolidated trusts, multifamily Fannie Mae MBS issued from unconsolidated trusts held by either third parties or


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within our retained portfolio, and other credit enhancements that we provide on multifamily mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.
 
(8) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations) and multifamily loans purchased during the period. Includes HFA new issue bond program issuances, none of which occurred in 2011. There were HFA new issue bond program issuances of $1.0 billion in the first nine months of 2010, of which none occurred in the third quarter of 2010.
 
(9) Excludes HFA new issue bond program.
 
(10) Reflects unpaid principal balance of multifamily Fannie Mae MBS issued during the period. Includes: (a) issuances of new MBS, (b) $1.3 billion and $7.6 billion of Fannie Mae portfolio securitization transactions for the third quarter and first nine months of 2011, and (c) $69 million and $188 million of conversions of adjustable-rate loans to fixed-rate loans and DMBS securities to MBS securities for the third quarter and first nine months of 2011. There were $9 million and $265 million of new MBS issuances as a result of converting adjustable rate loans to fixed rate loans in the third quarter and first nine months of 2010. There were no Fannie Mae multifamily portfolio securitizations transactions for the third quarter or first nine months of 2010.
 
(11) Reflects original unpaid principal balance of out-of-portfolio multifamily structured securities issuances by our Capital Markets Group.
 
(12) Interest expense estimate based on allocated duration-matched funding costs. Net interest income was reduced by guaranty fees allocated to Multifamily from the Capital Markets Group on multifamily loans in Fannie Mae’s portfolio.
 
(13) Based on unpaid principal balance.
 
(14) Includes mortgage loans and Fannie Mae MBS issued and guaranteed by the Multifamily segment. Information as of September 30, 2011 is through June 30, 2011 and is based on the Federal Reserve’s September 2011 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Prior period amount may have been changed to reflect revised historical data from the Federal Reserve.
 
(15) Includes $26.5 billion and $19.9 billion of Fannie Mae multifamily MBS held in the mortgage portfolio, the vast majority of which have been consolidated to loans in our condensed consolidated balance sheets, as of September 30, 2011 and December 31, 2010, respectively; and $1.4 billion of bonds issued by HFAs as of both September 30, 2011 and December 31, 2010.
 
Guaranty Fee Income
 
Multifamily guaranty fee income increased in the third quarter and first nine months of 2011 compared with the third quarter and first nine months of 2010 primarily due to higher fees charged on new acquisitions in recent years. New acquisitions with higher guaranty fees have become an increasingly large part of our multifamily guaranty book of business.
 
Credit-Related (Expense) Income
 
Multifamily credit-related expenses increased in the third quarter and the first nine months of 2011 compared with 2010 primarily due to a stable allowance for loan losses in 2011 compared to a decrease in 2010. Although national multifamily market fundamentals continued to improve in the third quarter and first nine months of 2011, certain local markets and properties continued to underperform compared to the rest of the country due to localized economic conditions. In comparison, Multifamily credit-related expense in the third quarter of 2010 and credit-related income in the first nine months of 2010 were due to a decrease in the allowance for loan losses as credit trends stabilized.
 
Multifamily credit losses, which consist of net charge-offs and foreclosed property expense, were $76 million for the third quarter of 2011 compared with $187 million for the third quarter of 2010, and $280 million for the first nine months of 2011 compared with $394 million for the first nine months of 2010.


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(Losses) Gains from Partnership Investments
 
We incurred losses from partnership investments in the third quarter of 2011 compared with gains in the third quarter of 2010. Overall, the multifamily market has shown improvement but certain properties continued to show stress in the third quarter of 2011 resulting in a loss from partnership investments for the current quarter. Losses from partnership investments were lower in the first nine months of 2011 compared with the first nine months of 2010 as properties experienced improved operating performance due to stronger national multifamily market fundamentals.
 
Provision for Federal Income Taxes
 
In the second quarter of 2011, we reached an effective settlement of issues with the Internal Revenue Service relating to tax years 2007 and 2008, which reduced our total corporate tax liability. However, the reduction in our tax liability also reduced the low-income housing tax credits we were able to use, resulting in a provision for federal income taxes for the Multifamily segment in the first nine months of 2011.
 
Capital Markets Group Results
 
Table 19 summarizes the financial results of our Capital Markets group for the periods indicated. Following the table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s mortgage portfolio. For a discussion of the debt issued by the Capital Markets group to fund its investment activities, see “Liquidity and Capital Management.” For a discussion of the derivative instruments that Capital Markets uses to manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments” in this report and “Risk Management—Market Risk Management, Including Interest Rate Risk Management—Derivative Instruments” and “Notes to Consolidated Financial Statements—Note 10, Derivative Instruments and Hedging Activities” in our 2010 Form 10-K. The primary sources of revenue for our Capital Markets group are net interest income and fee and other income. Expenses and other items that impact income or loss primarily include fair value gains and losses, investment gains and losses, allocated guaranty fee expense, other-than-temporary impairment and administrative expenses.
 
Table 19:  Capital Markets Group Results
 
                                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2011     2010     Variance     2011     2010     Variance  
    (Dollars in millions)  
 
Net interest income(1)
  $ 3,904     $ 4,065     $ (161 )   $ 11,481     $ 10,671     $ 810  
Investment gains, net(2)
    801       1,270       (469 )     2,589       2,841       (252 )
Net other-than-temporary impairments
    (262 )     (323 )     61       (361 )     (696 )     335  
Fair value (losses) gains, net(3)
    (4,670 )     436       (5,106 )     (5,959 )     (119 )     (5,840 )
Fee and other income
    125       130       (5 )     309       370       (61 )
Other expenses(4)
    (610 )     (755 )     145       (1,723 )     (1,716 )     (7 )
                                                 
(Losses) income before federal income taxes
    (712 )     4,823       (5,535 )     6,336       11,351       (5,015 )
Benefit for federal income taxes
    1       7       (6 )     46       28       18  
                                                 
Net (loss) income attributable to Fannie Mae
  $ (711 )   $ 4,830     $ (5,541 )   $ 6,382     $ 11,379     $ (4,997 )
                                                 
 
 
(1) Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $1.6 billion for the third quarter of 2011 compared with $2.1 billion for the third quarter of 2010. Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $5.1 billion for the first nine months of 2011 compared with $4.4 billion for the first nine months of 2010. Capital Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest expense on the corresponding debt of such trusts.
 
(2) We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities.


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(3) Includes primarily fair value gains or losses on derivatives and trading securities that we own, regardless of whether the trust has been consolidated.
 
(4) Includes allocated guaranty fee expense, debt extinguishment gains or losses, net, administrative expenses, and other income or expenses. Gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group’s results because purchases of securities are recognized as such.
 
Net Interest Income
 
The Capital Markets group reports interest income and amortization of cost basis adjustments only on securities and loans that are held in our portfolio. For mortgage loans held in our mortgage portfolio, when interest income is no longer recognized in accordance with our nonaccrual accounting policy, the Capital Markets group recognizes interest income reimbursements that the group receives, primarily from Single-Family, for the contractual interest due. The interest expense recognized on the Capital Markets group’s statement of operations is limited to our funding debt, which is reported as “Debt of Fannie Mae” in our condensed consolidated balance sheets. Net interest expense also includes a cost of capital charge allocated among the three business segments.
 
The Capital Markets group’s net interest income decreased in the third quarter of 2011 compared with the third quarter of 2010 primarily due to a decline in interest income from our mortgage portfolio that more than offset the decline in funding costs as we replaced higher cost debt with lower cost debt. Interest income from our mortgage portfolio decreased primarily due to the reduction in our balance of mortgage-related securities. Additionally, the interest rate earned on our mortgage loans decreased due to the decrease in the contractual rate of modified loans. Loan modifications subsequently led to a decrease in reimbursements from the Single-Family business for contractual interest income on non-accrual loans.
 
The Capital Markets group’s net interest income increased in the first nine months of 2011 compared with the first nine months of 2010 primarily due to a decline in funding costs as we replaced higher cost debt with lower cost debt. This increase in net interest income due to lower funding costs was partially offset by a decline in interest income from our mortgage portfolio. The reimbursements of contractual interest due on nonaccrual loans from the Single-Family business were a significant portion of the Capital Markets group’s interest income during the first nine months of 2011. However, the increase in these reimbursements was offset by the decline in interest income on our mortgage-related securities because our securities portfolio balance has declined.
 
Our net interest income and net interest yield were higher than they would have otherwise been in the third quarter and first nine months of both 2011 and 2010 because our debt funding needs were lower than would otherwise have been required as a result of funds we received from Treasury under the senior preferred stock purchase agreement. Further, dividends paid to Treasury are not recognized in interest expense.
 
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 Capital Markets’ net interest income but is included in our results as a component of “Fair value (losses) gains, net” and is shown in “Table 11: Fair Value (Losses) Gains, Net.” If we had included the economic impact of adding the net contractual interest accruals on our interest rate swaps in our Capital Markets’ interest expense, Capital Markets’ net interest income would have decreased by $497 million for the third quarter of 2011 compared with a decrease of $673 million for the third quarter of 2010, and would have decreased $1.8 billion for the first nine months of 2011 compared with a decrease of $2.3 billion for the first nine months of 2010.
 
Investments Gains, Net
 
Investment gains decreased in the third quarter of 2011 compared with the third quarter of 2010 primarily due to a higher volume of securitizations in 2010. Investment gains decreased in the first nine months of 2011 compared with the first nine months of 2010 primarily due to decreased gains on sale of available-for-sale securities.


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Net Other-Than-Temporary Impairments
 
The net other-than-temporary impairments recognized by the Capital Markets group are consistent with the amount reported in our condensed consolidated results of operations. See “Note 5, Investments in Securities” for information on our other-than-temporary impairments by major security type and primary drivers for other-than-temporary impairments recorded in the third quarter and first nine months of 2011.
 
Fair Value (Losses) Gains, Net
 
The derivative gains and losses that are reported for the Capital Markets group are consistent with the derivative gains and losses reported in our condensed consolidated results of operations. We discuss details of these components of fair value gains and losses in “Consolidated Results of Operations—Fair Value (Losses) Gains, Net.”
 
The Capital Markets Group’s Mortgage Portfolio
 
The Capital Markets group’s mortgage portfolio consists of mortgage loans and mortgage-related securities that we own. Mortgage-related securities held by Capital Markets include Fannie Mae MBS and non-Fannie Mae mortgage-related securities. The Fannie Mae MBS that we own are maintained as securities on the Capital Markets group’s balance sheets. Mortgage-related assets held by consolidated MBS trusts are not included in the Capital Markets group’s mortgage portfolio.
 
We are restricted by our senior preferred stock purchase agreement with Treasury in the amount of mortgage assets that we may own. Each year on December 31, 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. The maximum allowable amount of mortgage assets we may own was reduced to $810 billion as of December 31, 2010 and will be reduced to $729 billion as of December 31, 2011. As of September 30, 2011, we owned $722.2 billion in mortgage assets, compared with $788.8 billion as of December 31, 2010.
 
Table 20 summarizes our Capital Markets group’s mortgage portfolio activity for the periods indicated.
 
Table 20:  Capital Markets Group’s Mortgage Portfolio Activity(1)
 
                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
          (Dollars in millions)        
 
Mortgage loans:
                               
Beginning balance
  $ 405,417     $ 426,185     $ 427,074     $ 281,162  
Purchases
    36,169       54,136       102,533       254,725  
Securitizations(2)
    (18,420 )     (24,052 )     (64,962 )     (52,218 )
Liquidations(3)
    (19,361 )     (26,436 )     (60,840 )     (53,836 )
                                 
Mortgage loans, ending balance
    403,805       429,833       403,805       429,833  
Mortgage securities:
                               
Beginning balance
  $ 326,384     $ 391,615     $ 361,697     $ 491,566  
Purchases(4)
    5,964       3,677       15,587       37,541  
Securitizations(2)
    18,420       24,052       64,962       52,218  
Sales
    (17,936 )     (25,598 )     (74,997 )     (140,986 )
Liquidations(3)
    (14,479 )     (20,728 )     (48,896 )     (67,321 )
                                 
Mortgage securities, ending balance
    318,353       373,018       318,353       373,018  
                                 
Total Capital Markets mortgage portfolio
  $ 722,158     $ 802,851     $ 722,158     $ 802,851  
                                 
 
 
(1) Based on unpaid principal balance.


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(2) Includes portfolio securitization transactions that do not qualify for sale treatment under the accounting standards on the transfers of financial assets.
 
(3) Includes scheduled repayments, prepayments, foreclosures and lender repurchases.
 
(4) Includes purchases of Fannie Mae MBS issued by consolidated trusts.
 
Purchases of mortgage loans decreased in the third quarter and first nine months of 2011 compared with both the third quarter and first nine months of 2010 because we purchased fewer loans that were four or more months delinquent from MBS trusts in the third quarter and first nine months of 2011. We significantly increased our purchases of delinquent loans in 2010 and purchased the substantial majority of our delinquent loan population during the first half of 2010, which included $127 billion of loans that were four or more months delinquent as of December 31, 2009.
 
We expect to continue to purchase loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity, and other factors including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase agreement. We purchased approximately 293,000 delinquent loans with an unpaid principal balance of approximately $51 billion from our single-family MBS trusts in the first nine months of 2011. As of September 30, 2011, the total unpaid principal balance of all loans in single-family MBS trusts that were delinquent as to four or more consecutive monthly payments was $5.9 billion. In October 2011, we purchased approximately 31,000 delinquent loans with an unpaid principal balance of $5.3 billion from our single-family MBS trusts.
 
Table 21 shows the composition of the Capital Markets group’s mortgage portfolio as of September 30, 2011 and December 31, 2010.


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Table 21:  Capital Markets Group’s Mortgage Portfolio Composition(1)
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Capital Markets group’s mortgage loans:
               
Single-family loans
               
Government insured or guaranteed
  $ 41,619     $ 51,783  
Conventional:
               
Long-term, fixed-rate
    245,282       237,096  
Intermediate-term, fixed-rate
    9,644       11,446  
Adjustable-rate
    25,092       31,526  
                 
Total single-family conventional
    280,018       280,068  
                 
Total single-family loans
    321,637       331,851  
                 
Multifamily loans
               
Government insured or guaranteed
    379       431  
Conventional:
               
Long-term, fixed-rate
    3,746       4,413  
Intermediate-term, fixed-rate
    62,538       71,010  
Adjustable-rate
    15,505       19,369  
                 
Total multifamily conventional
    81,789       94,792  
                 
Total multifamily loans
    82,168       95,223  
                 
Total Capital Markets group’s mortgage loans
    403,805       427,074  
                 
Capital Markets group’s mortgage-related securities:
               
Fannie Mae
    224,687       260,429  
Freddie Mac
    15,516       17,332  
Ginnie Mae
    1,087       1,425  
Alt-A private-label securities
    20,286       22,283  
Subprime private-label securities
    16,909       18,038  
CMBS
    24,219       25,052  
Mortgage revenue bonds
    11,365       12,525  
Other mortgage-related securities
    4,284       4,613  
                 
Total Capital Markets group’s mortgage-related securities(2)
    318,353       361,697  
                 
Total Capital Markets group’s mortgage portfolio
  $ 722,158     $ 788,771  
                 
 
 
(1) Based on unpaid principal balance.
 
(2) The fair value of these mortgage-related securities was $324.7 billion and $365.8 billion as of September 30, 2011 and December 31, 2010, respectively.
 
The Capital Markets group’s mortgage portfolio decreased from December 31, 2010 to September 30, 2011 primarily due to liquidations and sales, partially offset by purchases of delinquent loans from MBS trusts. The total unpaid principal balance of nonperforming loans in the Capital Markets group’s mortgage portfolio was $233.0 billion as of September 30, 2011 and $228.0 billion as of December 31, 2010. This population includes loans that have been modified and have been classified as TDRs, as well as unmodified delinquent loans that are on nonaccrual status in our condensed consolidated financial statements. We expect our mortgage portfolio to continue to decrease due to the restrictions on the amount of mortgage assets we may own under the terms of our senior preferred stock purchase agreement with Treasury.


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CONSOLIDATED BALANCE SHEET ANALYSIS
 
The section below provides a discussion of our condensed consolidated balance sheets as of the dates indicated. You should read this section together with our condensed consolidated financial statements, including the accompanying notes.
 
Table 22 displays a summary of our condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010.
 
Table 22:  Summary of Condensed Consolidated Balance Sheets
 
                         
    As of        
    September 30,
    December 31,
       
    2011     2010     Variance  
    (Dollars in millions)  
 
Assets
                       
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
  $ 60,257     $ 29,048     $ 31,209  
Restricted cash
    55,961       63,678       (7,717 )
Investments in securities(1)
    150,859       151,248       (389 )
Mortgage loans
                       
Of Fannie Mae
    385,503       407,482       (21,979 )
Of consolidated trusts
    2,583,752       2,577,794       5,958  
Allowance for loan losses
    (71,435 )     (61,556 )     (9,879 )
                         
Mortgage loans, net of allowance for loan losses
    2,897,820       2,923,720       (25,900 )
Other assets(2)
    48,980       54,278       (5,298 )
                         
Total assets
  $ 3,213,877     $ 3,221,972     $ (8,095 )
                         
Liabilities and stockholders’ deficit
                       
Debt
                       
Of Fannie Mae
  $ 744,803     $ 780,044     $ (35,241 )
Of consolidated trusts
    2,446,973       2,416,956       30,017  
Other liabilities(3)
    29,892       27,489       2,403  
                         
Total liabilities
    3,221,668       3,224,489       (2,821 )
                         
Senior preferred stock
    104,787       88,600       16,187  
Other deficit(4)
    (112,578 )     (91,117 )     (21,461 )
                         
Total stockholders’ deficit
    (7,791 )     (2,517 )     (5,274 )
                         
Total liabilities and stockholders’ deficit
  $ 3,213,877     $ 3,221,972     $ (8,095 )
                         
 
 
(1) Includes $43.2 billion as of September 30, 2011 and $32.8 billion as of December 31, 2010 of non-mortgage-related securities that are included in our other investments portfolio, which we present in “Table 33: Cash and Other Investments Portfolio.”
 
(2) Consists of accrued interest receivable, net; acquired property, net; and other assets.
 
(3) Consists of accrued interest payable, federal funds purchased and securities sold under agreements to repurchase, and other liabilities.
 
(4) Consists of preferred stock, common stock, accumulated deficit, accumulated other comprehensive loss, treasury stock, and noncontrolling interest.
 
Cash and Other Investments Portfolio
 
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements are included in our cash and other investments portfolio. See “Liquidity and Capital


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Management—Liquidity Management—Cash and Other Investments Portfolio” for additional information on our cash and other investments portfolio.
 
Restricted Cash
 
Restricted cash primarily includes unscheduled borrower payments received by the servicer or consolidated trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash decreased as of September 30, 2011 compared with the balance as of December 31, 2010 primarily due to a decline in refinance activity, resulting in a decrease in unscheduled payments received.
 
Investments in Mortgage-Related Securities
 
Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as either trading or available-for-sale and are measured at fair value. Unrealized and realized gains and losses on trading securities are included as a component of “Fair value (losses) gains, net” and unrealized gains and losses on available-for-sale securities are included in “Other comprehensive (loss) income” in our condensed consolidated statements of operations and comprehensive loss. Realized gains and losses on available-for-sale securities are recognized when securities are sold in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive loss. See “Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities, including the composition of our trading and available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related to our available-for-sale securities as of September 30, 2011. Table 23 displays the fair value of our investments in mortgage-related securities, including trading and available-for-sale securities, as of September 30, 2011 and December 31, 2010.
 
Table 23:  Summary of Mortgage-Related Securities at Fair Value
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Mortgage-related securities:
               
Fannie Mae
  $ 26,767     $ 30,226  
Freddie Mac
    16,615       18,322  
Ginnie Mae
    1,236       1,629  
Alt-A private-label securities
    13,741       15,573  
Subprime private-label securities
    9,205       11,513  
CMBS
    24,990       25,608  
Mortgage revenue bonds
    11,325       11,650  
Other mortgage-related securities
    3,760       3,974  
                 
Total
  $ 107,639     $ 118,495  
                 
 
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-related securities that we have resecuritized to include our guaranty (“wraps”).
 
The continued negative impact of the current economic environment, including sustained weakness in the housing market and high unemployment, has adversely affected the performance of our Alt-A and subprime private-label securities. The unpaid principal balance of our investments in Alt-A and subprime securities was $37.2 billion as of September 30, 2011, of which $30.9 billion was rated below investment grade. Table 24 displays the unpaid principal balance and the fair value of our investments in Alt-A and subprime private-label securities along with an analysis of the cumulative losses on these investments as of September 30, 2011. As of September 30, 2011, we had realized actual cumulative principal shortfalls of approximately 5% compared


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with 2% as of December 31, 2010 of the total cumulative credit losses reported in this table and reflected in our condensed consolidated financial statements.
 
Table 24:  Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities
 
                                         
    As of September 30, 2011  
    Unpaid
          Total
             
    Principal
    Fair
    Cumulative
    Noncredit
    Credit
 
    Balance     Value     Losses(1)     Component(2)     Component(3)  
    (Dollars in millions)  
 
Trading securities:(4)
                                       
Alt-A private-label securities
  $ 2,806     $ 1,454     $ (1,309 )   $ (139 )   $ (1,170 )
Subprime private-label securities
    2,630       1,318       (1,312 )     (404 )     (908 )
                                         
Total
  $ 5,436     $ 2,772     $ (2,621 )   $ (543 )   $ (2,078 )
                                         
Available-for-sale securities:(4)
                                       
Alt-A private-label securities
  $ 17,480     $ 12,287     $ (5,574 )   $ (2,012 )   $ (3,562 )
Subprime private-label securities
    14,279       7,887       (6,431 )     (2,480 )     (3,951 )
                                         
Total
  $ 31,759     $ 20,174     $ (12,005 )   $ (4,492 )   $ (7,513 )
                                         
Grand Total
  $ 37,195     $ 22,946     $ (14,626 )   $ (5,035 )   $ (9,591 )
                                         
 
 
(1) Amounts reflect the difference between the fair value and unpaid principal balance net of unamortized premiums, discounts and certain other cost basis adjustments.
 
(2) 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.
 
(3) For securities classified as trading, amounts reflect the estimated portion of the total cumulative losses that is credit-related. For securities classified as available-for-sale, amounts reflect the estimated portion of total cumulative other-than-temporary credit impairment losses, net of accretion, that are recognized in earnings.
 
(4) Excludes resecuritizations, or wraps, of private-label securities backed by subprime loans that we have guaranteed and hold in our mortgage portfolio as Fannie Mae securities.
 
Table 25 displays 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 CoreLogic, LoanPerformance (“CoreLogic”). We also present the average credit enhancement and monoline financial guaranteed amount for these securities as of September 30, 2011. Based on the stressed condition of some of our financial guarantors, we believe some of these counterparties will not fully meet their obligation to us in the future. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Financial Guarantors” for additional information on our financial guarantor exposure and the counterparty risk associated with our financial guarantors.


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Table 25:   Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities (Including Wraps)
 
                                                         
    As of September 30, 2011  
    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(3)(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
  $     $ 487     $       31.8 %     58.1 %     16.3 %   $  
2005
          1,324             44.9       60.9       39.0       257  
2006
          1,241             46.7       62.2       26.4       117  
2007
    1,949                   45.4       70.4       55.8       684  
Other Alt-A mortgage loans:
                                                       
2004 and prior
          6,309             10.5       51.6       12.4       12  
2005
    85       4,131       119       23.3       61.0       5.6        
2006
    65       3,868             28.3       61.6       0.6        
2007
    707             177       43.3       70.8       27.6       286  
2008(8)
          120                                
                                                         
Total Alt-A mortgage loans:
    2,806       17,480       296                               1,356  
                                                         
Subprime mortgage loans:
                                                       
2004 and prior
          1,699       975       24.2       78.2       60.7       645  
2005(8)
          179       1,327       42.0       77.1       58.2       226  
2006
          11,792             47.6       78.7       17.8       52  
2007
    2,630       609       5,516       47.8       77.4       22.2       177  
                                                         
Total subprime mortgage loans:
    2,630       14,279       7,818                               1,100  
                                                         
Total Alt-A and subprime mortgage loans:
  $ 5,436     $ 31,759     $ 8,114                             $ 2,456  
                                                         
 
 
(1) Represents our exposure to private-label Alt-A and subprime mortgage-related securities that have been resecuritized (or wrapped) to include our guarantee.
 
(2) Delinquency data provided by Intex, where available, for loans backing Alt-A and subprime private-label mortgage-related securities that we own or guarantee. The reported Intex delinquency data reflect information from September 2011 remittances for August 2011 payments. For consistency purposes, we have adjusted the Intex delinquency data, where appropriate, to include all bankruptcies, foreclosures and REO in the delinquency rates.
 
(3) The average delinquency, severity and credit enhancement metrics are calculated for each loan pool associated with securities where Fannie Mae has exposure and are weighted based on the unpaid principal balance of those securities.
 
(4) Severity data obtained from CoreLogic, where available, for loans backing Alt-A and subprime private-label mortgage-related securities that we own or guarantee. The CoreLogic severity data reflect information from September 2011 remittances for August 2011 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 enhancements in the form of subordination or financial guarantee of the security divided by the


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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 $120 million for the 2008 vintage of other Alt-A loans and $17 million for the 2005 vintage of subprime loans. These securities are excluded from the delinquency, severity and credit enhancement statistics reported in this table.
 
Mortgage Loans
 
The decrease in mortgage loans, net of an allowance for loan losses, in the first nine months of 2011 was primarily driven by lower acquisition volumes. For additional information on our mortgage loans, see “Note 3, Mortgage Loans.” For additional information on the mortgage loan purchase and sale activities reported by our Capital Markets group, see “Business Segment Results—Capital Markets Group Results.”
 
Debt Instruments
 
Debt of Fannie Mae is the primary means of funding our mortgage investments. Debt of consolidated trusts represents our liability to third-party beneficial interest holders when we have included the assets of a corresponding trust in our condensed consolidated balance sheets. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in “Liquidity and Capital Management—Liquidity Management—Debt Funding.” Also see “Note 8, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.
 
The increase in debt of consolidated trusts in the first nine months of 2011 was primarily driven by the sale of Fannie Mae MBS, which are accounted for as reissuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party.
 
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 condensed consolidated balance sheets as either assets or liabilities.
 
Our derivative assets and liabilities consist of these risk management derivatives and our mortgage commitments. We refer to the difference between the derivative assets and derivative liabilities recorded in our condensed consolidated balance sheets as our net derivative asset or liability. We present, by derivative instrument type, the estimated fair value of derivatives recorded in our condensed consolidated balance sheets and the related outstanding notional amounts as of September 30, 2011 and December 31, 2010 in “Note 9, Derivative Instruments.” Table 26 provides an analysis of the factors driving the change from December 31, 2010 to September 30, 2011 in the estimated fair value of our net derivative liability related to our risk management derivatives recorded in our condensed consolidated balance sheets.


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Table 26:  Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net
 
         
    For the Nine
 
    Months Ended
 
    September 30, 2011  
    (Dollars in millions)  
 
Net risk management derivative liability as of December 31, 2010
  $ (789 )
Effect of cash payments:
       
Fair value at inception of contracts entered into during the period(1)
    51  
Fair value at date of termination of contracts settled during the period(2)
    1,214  
Net collateral received
    (17 )
Periodic net cash contractual interest payments(3)
    1,755  
         
Total cash payments
    3,003  
         
Statement of operations impact of recognized amounts:
       
Net contractual interest expense accruals on interest rate swaps
    (1,790 )
Net change in fair value during the period
    (3,777 )
         
Risk management derivatives fair value losses, net
    (5,567 )
         
Net risk management derivative liability as of September 30, 2011
  $ (3,353 )
         
 
 
(1) Cash receipts from sale of derivative option contracts increase the derivative liability recorded in our condensed consolidated balance sheets. Cash payments made to purchase derivative option contracts (purchased option premiums) increase the derivative asset recorded in our condensed consolidated balance sheets.
 
(2) Cash payments made to terminate derivative contracts reduce the derivative liability recorded in our condensed consolidated balance sheets. Primarily represents cash paid (received) upon termination of derivative contracts.
 
(3) 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 losses, net in our condensed consolidated statements of operations and comprehensive loss. Net periodic interest receipts reduce the derivative asset and net periodic interest payments reduce the derivative liability. Also includes cash paid (received) on other derivatives contracts.
 
For additional information on our derivative instruments, see “Consolidated Results of Operations—Fair Value (Losses) Gains, Net,” “Risk Management—Market Risk Management, Including Interest Rate Risk Management” and “Note 9, Derivative Instruments.”
 
Stockholders’ Deficit
 
Our net deficit increased as of September 30, 2011 compared with December 31, 2010. See Table 27 in “Supplemental Non-GAAP Information—Fair Value Balance Sheets” for details of the change in our net deficit.
 
 
SUPPLEMENTAL NON-GAAP INFORMATION—FAIR VALUE BALANCE SHEETS
 
As part of our disclosure requirements with FHFA, we disclose on a quarterly basis supplemental non-GAAP consolidated fair value balance sheets, which reflect our assets and liabilities at estimated fair value.
 
Table 27 summarizes changes in our stockholders’ deficit reported in our GAAP condensed consolidated balance sheets and in the fair value of our net assets in our non-GAAP consolidated fair value balance sheets for the nine months ended September 30, 2011. The estimated fair value of our net assets is calculated based on the difference between the fair value of our assets and the fair value of our liabilities, adjusted for noncontrolling interests. 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 13, Fair Value.”


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Table 27:   Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect)
 
         
    For the
 
    Nine Months Ended
 
    September 30, 2011  
    (Dollars in millions)  
 
GAAP consolidated balance sheets:
       
Fannie Mae stockholders’ deficit as of December 31, 2010(1)
  $ (2,599 )
Total comprehensive loss
    (14,462 )
Capital transactions:(2)
       
Funds received from Treasury under the senior preferred stock purchase agreement
    16,187  
Senior preferred stock dividends
    (6,992 )
         
Capital transactions, net
    9,195  
Other
    13  
         
Fannie Mae stockholders’ deficit as of September 30, 2011(1)
  $ (7,853 )
         
Non-GAAP consolidated fair value balance sheets:
       
Estimated fair value of net assets as of December 31, 2010
  $ (120,294 )
Capital transactions, net
    9,195  
Change in estimated fair value of net assets, excluding capital transactions
    (2,270 )
         
Increase in estimated fair value of net assets, net
    6,925  
         
Estimated fair value of net assets as of September 30, 2011
  $ (113,369 )
         
 
 
(1) Our net worth, as defined under the senior preferred stock purchase agreement, is equivalent to the “Total deficit” amount reported in our condensed consolidated balance sheets. Our net worth, or total deficit, consists of “Total Fannie Mae’s stockholders’ deficit” and “Noncontrolling interests” reported in our condensed consolidated balance sheets.
 
(2) Represents capital transactions, which are reported in our condensed consolidated financial statements.
 
During the first nine months of 2011, the fair value of our net assets, excluding capital transactions, decreased $2.3 billion which was attributable to a net decrease in the fair value of the net portfolio principally related to widening of the option-adjusted spread levels, which were partially offset by an increase in fair value attributable to the positive impact of the spread between mortgage assets and associated debt and derivatives.
 
Fair value decreases during the first half of 2011 were primarily attributable to credit-related items, principally related to declining actual and expected home prices. These fair value decreases have been reduced in the third quarter primarily by a decline in interest rates, which decreased the probability of default due to a higher expectation of prepayments.
 
Cautionary Language Relating to Supplemental Non-GAAP Financial Measures
 
In reviewing our non-GAAP consolidated 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 legislation or potential regulatory actions may have on us. As a result, the estimated fair value of our net assets presented in our non-GAAP consolidated 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 materially from the estimated fair values presented in our non-GAAP consolidated fair value balance sheets.


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In addition, the fair value of our net assets attributable to common stockholders presented in our fair value balance sheet does not represent an estimate of the value we expect to realize from operating the company or what we expect to draw from Treasury under the terms of our senior preferred stock purchase agreement, primarily because:
 
  •  The estimated fair value of our credit exposures significantly exceeds our projected credit losses as fair value takes into account certain assumptions about liquidity and required rates of return that a market participant may demand in assuming a credit obligation. Because we do not intend to have another party assume the credit risk inherent in our book of business, and therefore would not be obligated to pay a market premium for its assumption, we do not expect the current market premium portion of our current estimate of fair value to impact future Treasury draws;
 
  •  The fair value balance sheet does not reflect amounts we expect to draw in the future to pay dividends on the senior preferred stock; and
 
  •  The fair value of our net assets reflects a point in time estimate of the fair value of our existing assets and liabilities, and does not incorporate the value associated with new business that may be added in the future.
 
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.
 
Supplemental Non-GAAP Consolidated Fair Value Balance Sheets
 
We present our non-GAAP fair value balance sheets in Table 28 below.


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Table 28:  Supplemental Non-GAAP Consolidated Fair Value Balance Sheets
 
                                                 
    As of September 30, 2011     As of December 31, 2010  
    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
  $ 80,268     $     $ 80,268     $ 80,975     $     $ 80,975  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    35,950             35,950       11,751             11,751  
Trading securities
    68,149             68,149       56,856             56,856  
Available-for-sale securities
    82,710             82,710       94,392             94,392  
Mortgage loans:
                                               
Mortgage loans held for sale
    309             309       915             915  
Mortgage loans held for investment, net of allowance for loan losses:
                                               
Of Fannie Mae
    329,848       (25,895 )     303,953       358,698       (39,331 )     319,367  
Of consolidated trusts
    2,567,663       95,780 (2)     2,663,443 (3)     2,564,107       46,038 (2)     2,610,145 (3)
                                                 
Total mortgage loans
    2,897,820       69,885       2,967,705 (4)     2,923,720       6,707       2,930,427 (4)
Advances to lenders
    5,145       (116 )     5,029 (5)(6)     7,215       (225 )     6,990 (5)(6)
Derivative assets at fair value
    723             723 (5)(6)     1,137             1,137 (5)(6)
Guaranty assets and buy-ups, net
    480       378       858 (5)(6)     458       356       814 (5)(6)
                                                 
Total financial assets
    3,171,245       70,147       3,241,392 (7)     3,176,504       6,838       3,183,342 (7)
Credit enhancements
    469       2,502       2,971 (5)(6)     479       3,286       3,765 (5)(6)
Other assets
    42,163       (281 )     41,882 (5)(6)     44,989       (261 )     44,728 (5)(6)
                                                 
Total assets
  $ 3,213,877     $ 72,368     $ 3,286,245     $ 3,221,972     $ 9,863     $ 3,231,835  
                                                 
Liabilities:
                                               
Federal funds purchased and securities sold under agreements to repurchase
  $     $     $     $ 52     $ (1 )   $ 51  
Short-term debt:
                                               
Of Fannie Mae
    193,718       41       193,759       151,884       90       151,974  
Of consolidated trusts
    5,004             5,004       5,359             5,359  
Long-term debt:
                                               
Of Fannie Mae
    551,085 (8)     29,153       580,238       628,160 (8)     21,524       649,684  
Of consolidated trusts
    2,441,969 (8)     146,581 (2)     2,588,550       2,411,597 (8)     103,332 (2)     2,514,929  
Derivative liabilities at fair value
    4,273             4,273 (9)(10)     1,715             1,715 (9)(10)
Guaranty obligations
    765       3,155       3,920 (9)(10)     769       3,085       3,854 (9)(10)
                                                 
Total financial liabilities
    3,196,814       178,930       3,375,744 (7)     3,199,536       128,030       3,327,566 (7)
Other liabilities
    24,854       (1,046 )     23,808 (9)(10)     24,953       (472 )     24,481 (9)(10)
                                                 
Total liabilities
    3,221,668       177,884       3,399,552       3,224,489       127,558       3,352,047  
Equity (deficit):
                                               
Fannie Mae stockholders’ equity (deficit):
                                               
Senior preferred(11)
    104,787             104,787       88,600             88,600  
Preferred
    19,130       (17,784 )     1,346       20,204       (19,829 )     375  
Common
    (131,770 )     (87,732 )     (219,502 )     (111,403 )     (97,866 )     (209,269 )
                                                 
Total Fannie Mae stockholders’ deficit/non-GAAP fair value of net assets
  $ (7,853 )   $ (105,516 )   $ (113,369 )   $ (2,599 )   $ (117,695 )   $ (120,294 )
Noncontrolling interests
    62             62       82             82  
                                                 
Total deficit
    (7,791 )     (105,516 )     (113,307 )     (2,517 )     (117,695 )     (120,212 )
                                                 
Total liabilities and equity (deficit)
  $ 3,213,877     $ 72,368     $ 3,286,245     $ 3,221,972     $ 9,863     $ 3,231,835  
                                                 
 
 
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 condensed consolidated balance sheets and our best judgment of the estimated fair value of the listed item.
 
(2) Fair value exceeds carrying value of consolidated loans and consolidated debt as a significant portion of these were consolidated at unpaid principal balance as of January 1, 2010, upon adoption of accounting standards on transfers of financial assets and


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consolidation of variable interest entities (“VIEs”). Also impacting the difference between fair value and carrying value of the consolidated loans is the credit component included in consolidated loans, which has no corresponding impact on the consolidated debt.
 
(3) Includes certain mortgage loans that we elected to report at fair value in our GAAP condensed consolidated balance sheets of $3.4 billion and $3.0 billion as of September 30, 2011 and December 31, 2010, respectively.
 
(4) Performing loans had a fair value of $2.8 trillion and an unpaid principal balance of $2.7 trillion as of both September 30, 2011 and December 31, 2010. Nonperforming loans, which include loans that are delinquent by one or more payments, had a fair value of $133.8 billion and an unpaid principal balance of $232.1 billion as of September 30, 2011 compared with a fair value of $168.5 billion and an unpaid principal balance of $287.4 billion as of December 31, 2010. See “Note 13, Fair Value” for additional information on valuation techniques for performing and nonperforming loans.
 
(5) The following line items: (a) Advances to lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net; (d) Credit enhancements; and (e) Other assets, together consist of the following assets presented in our GAAP condensed consolidated balance sheets: (a) Accrued interest receivable, net; (b) Acquired property, net; and (c) Other assets.
 
(6) “Other assets” include the following GAAP condensed consolidated balance sheets line items: (a) Accrued interest receivable, net and (b) Acquired property, net. The carrying value of these items in our GAAP condensed consolidated balance sheets totaled $23.1 billion and $27.5 billion as of September 30, 2011 and December 31, 2010, respectively. “Other assets” in our GAAP condensed consolidated balance sheets include the following: (a) Advances to Lenders; (b) Derivative assets at fair value; (c) Guaranty assets and buy-ups, net; and (d) Credit enhancements. The carrying value of these items totaled $6.8 billion and $9.3 billion as of September 30, 2011 and December 31, 2010, respectively.
 
(7) We determined the estimated fair value of these financial instruments in accordance with the fair value accounting standard as described in “Note 13, Fair Value.”
 
(8) Includes certain long-term debt instruments that we elected to report at fair value in our GAAP condensed consolidated balance sheets of $4.7 billion and $3.2 billion as of September 30, 2011 and December 31, 2010, respectively.
 
(9) The following line items: (a) Derivative liabilities at fair value; (b) Guaranty obligations; and (c) Other liabilities, consist of the following liabilities presented in our GAAP condensed consolidated balance sheets: (a) Accrued interest payable and (b) Other liabilities.
 
(10) “Other liabilities” include Accrued interest payable in our GAAP condensed consolidated balance sheets. The carrying value of this item in our GAAP condensed consolidated balance sheets totaled $12.9 billion and $13.8 billion as of September 30, 2011 and December 31, 2010, respectively. We assume that certain other liabilities, such as deferred revenues, have no fair value. Although we report the “Reserve for guaranty losses” as part of “Other liabilities” in our GAAP condensed consolidated balance sheets, it is incorporated into and reported as part of the fair value of our guaranty obligations in our non-GAAP supplemental consolidated fair value balance sheets. “Other liabilities” in our GAAP condensed consolidated balance sheets include the following: (a) Derivative liabilities at fair value and (b) Guaranty obligations. The carrying value of these items totaled $5.0 billion and $2.5 billion as of September 30, 2011 and December 31, 2010, respectively.
 
(11) 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
 
Liquidity Management
 
Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity risk management policy is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. Liquidity risk management involves forecasting funding requirements, maintaining sufficient capacity to meet our needs based on our ongoing assessment of financial market liquidity and adhering to our regulatory requirements.
 
Our Treasury group is responsible for implementing our liquidity and contingency planning strategies. 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 without relying upon the issuance of unsecured debt. While our liquidity contingency planning attempts to address stressed market conditions and our status under conservatorship and Treasury support arrangements, we believe that our liquidity contingency plan may be difficult or impossible to execute for a company of our size in our circumstances. See “Liquidity and Capital Management—Liquidity Management—Liquidity Risk Management Practices and Contingency Planning” in our 2010 Form 10-K for a discussion of our liquidity contingency plans. Also see “Risk Factors” in this report for a description of the risks associated with our liquidity contingency planning.


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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, U.S. Treasury or other government agencies; legislation relating to us or our business; a U.S. government payment default on its debt obligations; a downgrade in the credit ratings of our senior unsecured debt or the U.S. government’s debt from any of the major ratings organizations; a systemic event leading to the withdrawal of liquidity from the market; an extreme market-wide widening of credit spreads; public statements by key policy makers; 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; or elimination of our GSE status.
 
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.
 
We have a diversified funding base of domestic and international investors. Purchasers of our debt securities are geographically diversified and include fund managers, commercial banks, pension funds, insurance companies, foreign central banks, corporations, state and local governments, and other municipal authorities.
 
Although our funding needs may vary from quarter to quarter depending on market conditions, we currently expect our debt funding needs will decline in future periods as we reduce the size of our mortgage portfolio in compliance with the requirement of the senior preferred stock purchase agreement that we reduce our mortgage portfolio 10% per year until it reaches $250 billion.
 
Fannie Mae Debt Funding Activity
 
Table 29 summarizes the activity in the debt of Fannie Mae for the periods indicated. This activity includes federal funds purchased and securities sold under agreements to repurchase but excludes the debt of consolidated trusts as well as intraday loans. The reported amounts of debt issued and paid off during the period represent the face amount of the debt at issuance and redemption, respectively. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year.


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Table 29:  Activity in Debt of Fannie Mae
 
                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Issued during the period:
                               
Short-term:
                               
Amount
  $ 134,500     $ 102,778     $ 362,752     $ 389,709  
Weighted-average interest rate
    0.12 %     0.25 %     0.12 %     0.25 %
Long-term:
                               
Amount
  $ 81,284     $ 138,672     $ 162,708     $ 341,526  
Weighted-average interest rate
    1.39 %     1.62 %     1.81 %     2.04 %
Total issued:
                               
Amount
  $ 215,784     $ 241,450     $ 525,460     $ 731,235  
Weighted-average interest rate
    0.60 %     1.03 %     0.65 %     1.08 %
Paid off during the period: (1)
                               
Short-term:
                               
Amount
  $ 102,760     $ 139,706     $ 320,962     $ 370,713  
Weighted-average interest rate
    0.16 %     0.23 %     0.21 %     0.23 %
Long-term:
                               
Amount
  $ 93,274     $ 132,407     $ 242,852     $ 316,009  
Weighted-average interest rate
    1.96 %     2.91 %     2.49 %     3.15 %
Total paid off:
                               
Amount
  $ 196,034     $ 272,113     $ 563,814     $ 686,722  
Weighted-average interest rate
    1.01 %     1.54 %     1.19 %     1.57 %
 
 
(1) Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases.
 
Debt funding activity in the third quarter and first nine months of 2011 decreased compared with the third quarter and first nine months of 2010 primarily due to lower funding needs as a result of (1) a reduction in the size of our mortgage portfolio pursuant to the requirements of the senior preferred stock purchase agreement, (2) a decrease in our redemption of debt with higher interest rates, which we replaced with issuances of debt with lower interest rates, and (3) a decrease in our purchases of delinquent loans from MBS trusts. Additionally, our debt funding needs were lower than would otherwise have been required as a result of funds we received from Treasury under the senior preferred stock purchase agreement.
 
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 government’s support could 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. On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. For more information on GSE reform, see “Legislative and Regulatory Developments—GSE Reform.”
 
In addition, due to our reliance on the U.S. government’s support, our access to debt funding or the cost of our debt funding also could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government. A downgrade in our credit ratings could reduce demand for our debt securities and increase our borrowing costs. Standard & Poor’s Ratings Services’ (“S&P”) downgrade of our credit rating on August 8, 2011, which was a result of a similar action on the U.S. government’s sovereign


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credit rating, has not adversely affected our access to debt funding or the cost of our debt funding. See our discussion of credit ratings in “Risk Factors” for information about factors that may lead to the U.S. government’s long-term debt rating being lowered, and “Credit Ratings” below for further discussion of our dependence on our credit ratings.
 
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 we face relating to (1) the uncertain future of our company; (2) our reliance on the issuance of debt securities to obtain funds for our operations; and (3) our liquidity contingency plans.
 
Outstanding Debt
 
Total outstanding debt of Fannie Mae includes federal funds purchased and securities sold under agreements to repurchase and short-term and long-term debt, excluding debt of consolidated trusts.
 
As of September 30, 2011, our outstanding short-term debt, based on its original contractual maturity, as a percentage of our total outstanding debt increased to 26% from 19% as of December 31, 2010. 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 of Fannie Mae.” In addition, the weighted-average interest rate on our long-term debt, based on its original contractual maturity, decreased to 2.58% as of September 30, 2011 from 2.77% as of December 31, 2010.
 
Pursuant to the terms of the senior preferred stock purchase agreement, our outstanding debt limit is 120% of the amount of mortgage assets we were allowed to own on December 31 of the immediately preceding calendar year. Our debt limit under the senior preferred stock purchase agreement was reduced to $972 billion in 2011. As of September 30, 2011, our aggregate indebtedness totaled $755.2 billion, which was $216.8 billion below our debt limit. The calculation of our indebtedness for purposes of complying with our debt limit reflects the unpaid principal balance and excludes debt basis adjustments and debt of consolidated trusts. Because of our debt limit, we may be restricted in the amount of debt we issue to fund our operations.
 
Table 30 displays information as of September 30, 2011 and December 31, 2010 on our outstanding short-term and long-term debt based on its original contractual terms.


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Table 30:  Outstanding Short-Term Borrowings and Long-Term Debt(1)
 
                                         
    As of  
    September 30, 2011     December 31, 2010  
              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
    $       %     $ 52       2.20 %
                                         
Short-term debt:
                                       
Fixed-rate:
                                       
Discount notes
    $ 193,385       0.13 %     $ 151,500       0.32 %
Foreign exchange discount notes
      333       2.01         384       2.43  
                                         
Total short-term debt of Fannie Mae(2)
        193,718       0.14           151,884       0.32  
Debt of consolidated trusts
      5,004       0.19         5,359       0.23  
                                         
Total short-term debt
      $ 198,722       0.14 %       $ 157,243       0.32 %
                                         
Long-term debt:
                                       
Senior fixed:
                                       
Benchmark notes and bonds
  2011 - 2030   $ 281,876       2.90 %   2011 - 2030   $ 300,344       3.20 %
Medium-term notes
  2011 - 2021     153,166       1.81     2011 - 2020     199,266       2.13  
Foreign exchange notes and bonds
  2021 - 2028     667       5.22     2017 - 2028     1,177       6.21  
Other(3)
  2011 - 2040     44,241       5.59     2011 - 2040     44,893       5.64  
                                         
Total senior fixed
        479,950       2.80           545,680       3.02  
Senior floating:
                                       
Medium-term notes
  2011 - 2016     62,970       0.30     2011 - 2015     72,039       0.31  
Other(3)
  2020 - 2037     421       6.61     2020 - 2037     386       4.92  
                                         
Total senior floating
        63,391       0.33           72,425       0.34  
Subordinated fixed-rate:
                                       
Qualifying subordinated(4)
  2012 - 2014     4,893       5.08     2011 - 2014     7,392       5.47  
Subordinated debentures
  2019     2,851       9.91     2019     2,663       9.91  
                                         
Total subordinated fixed-rate
        7,744       6.86           10,055       6.65  
                                         
Total long-term debt of Fannie Mae(5)
        551,085       2.58           628,160       2.77  
Debt of consolidated trusts(3)
  2011 - 2051     2,441,969       4.40     2011 - 2051     2,411,597       4.59  
                                         
Total long-term debt
      $ 2,993,054       4.06 %       $ 3,039,757       4.22 %
                                         
Outstanding callable debt of Fannie Mae(6)
      $ 158,150       2.40 %       $ 219,804       2.53 %
 
 
(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 include fair value gains and losses associated with debt that we elected to carry at fair value. The unpaid principal balance of outstanding debt of Fannie Mae, which excludes unamortized discounts, premiums and other cost basis adjustments and debt of consolidated trusts, totaled $754.2 billion and $792.6 billion as of September 30, 2011 and December 31, 2010, respectively.
 
(2) Short-term debt of Fannie Mae 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 $77 million and $128 million as of September 30, 2011 and December 31, 2010, respectively.
 
(3) Includes a portion of structured debt instruments that is reported at fair value.
 
(4) Consists of subordinated debt with an interest deferral feature.
 
(5) Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year. Reported amounts include the current portion of long-term debt that is due within one year, which totaled $99.9 billion and $95.4 billion as of September 30, 2011 and December 31, 2010, respectively. Reported amounts also include


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unamortized discounts, premiums and other cost basis adjustments of $9.5 billion and $12.4 billion as of September 30, 2011 and December 31, 2010, respectively. The unpaid principal balance of long-term debt of Fannie Mae, which excludes unamortized discounts, premiums, fair value adjustments and other cost basis adjustments and amounts related to debt of consolidated trusts, totaled $560.4 billion and $640.5 billion as of September 30, 2011 and December 31, 2010, respectively.
 
(6) Consists of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option at any time on or after a specified date. Includes the unpaid principal balance, and excludes unamortized discounts, premiums and other cost basis adjustments.
 
Maturity Profile of Outstanding Debt of Fannie Mae
 
Table 31 presents the maturity profile, as of September 30, 2011, of our outstanding debt maturing within one year, by month, including amounts we have announced for early redemption. Our outstanding debt maturing within one year, including the current portion of our long-term debt, increased as a percentage of our total outstanding debt, excluding debt of consolidated trusts and federal funds purchased and securities sold under agreements to repurchase, to 39% as of September 30, 2011, compared with 32% as of December 31, 2010. The weighted-average maturity of our outstanding debt that is maturing within one year was 139 days as of September 30, 2011, compared with 116 days as of December 31, 2010.
 
Table 31:  Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year(1)
 
(PERFORMANCE GRAPH)
 
 
(1) Includes unamortized discounts, premiums and other cost basis adjustments of $212 million as of September 30, 2011. Excludes debt of consolidated trusts maturing within one year of $8.0 billion as of September 30, 2011.
 
Table 32 presents the maturity profile, as of September 30, 2011, 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 for early redemption within one year. The weighted-average maturity of our outstanding debt maturing in more than one year was approximately 57 months as of September 30, 2011 compared with approximately 58 months as of December 31, 2010.


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Table 32:  Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year(1)
 
(PERFORMANCE GRAPH)
 
 
(1) Includes unamortized discounts, premiums and other cost basis adjustments of $9.3 billion as of September 30, 2011. Excludes debt of consolidated trusts of $2.4 trillion as of September 30, 2011.
 
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.
 
Cash and Other Investments Portfolio
 
Table 33 provides information on the composition of our cash and other investments portfolio for the periods indicated.
 
Table 33:  Cash and Other Investments Portfolio
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Cash and cash equivalents
  $ 24,307     $ 17,297  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    35,950       11,751  
Non-mortgage-related securities:
               
U.S. Treasury securities(1)
    40,755       27,432  
Asset-backed securities(2)
    2,465       5,321  
                 
Total non-mortgage-related securities
    43,220       32,753  
                 
Total cash and other investments
  $ 103,477     $ 61,801  
                 
 
 
(1) Excludes $1.1 billion and $4.0 billion of U.S. Treasury securities which are a component of cash equivalents as of September 30, 2011 and December 31, 2010, respectively, as these securities had a maturity at the date of acquisition of three months or less.
 
(2) Includes securities primarily backed by credit cards loans, student loans and automobile loans.
 
Our cash and other investments portfolio increased from December 31, 2010 to September 30, 2011. We have increased the amount of cash and highly liquid non-mortgage securities held in our portfolio to further bolster our liquidity position.


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Credit Ratings
 
Our credit ratings from the major credit ratings organizations, as well as the credit ratings of the U.S. government, are primary factors that could affect our ability to access the capital markets and our cost of funds. In addition, our credit ratings are important when we seek to engage in certain long-term transactions, such as derivative transactions.
 
On August 5, 2011, S&P lowered the long-term sovereign credit rating on the U.S. to “AA+.” As a result of this action, and because we directly rely on the U.S. government for capital support, on August 8, 2011, S&P lowered our long-term senior debt rating to “AA+” with a negative outlook. Previously, our long-term senior debt had been rated by S&P as “AAA” and had been on CreditWatch Negative. S&P affirmed our short-term senior debt rating of “A-1+” and removed it from CreditWatch Negative. If S&P further lowers the U.S. government’s sovereign credit rating, we expect that it would lower our long-term debt rating correspondingly.
 
Fitch Ratings (“Fitch”) affirmed its rating and stable outlook of our long-term debt and Moody’s Investors Service (“Moody’s”) confirmed the U.S. government’s rating and our long-term debt ratings. Moody’s also removed the designation that these ratings were under review for possible downgrade and revised the rating outlook for both the U.S. government’s rating and our long-term debt ratings to negative.
 
S&P, Moody’s and Fitch have all indicated that, if they were to lower the sovereign credit ratings on the U.S, they would likely lower their ratings on the debt of Fannie Mae and certain other government-related entities. We cannot predict whether one or more of these ratings agencies will lower our debt ratings in the future. See “Risk Factors” for a discussion of the possibility of further downgrades and the risks to our business relating to a decrease in our credit ratings, which could include an increase in our borrowing costs, limits on our ability to issue debt, and additional collateral requirements under our derivatives contracts and other borrowing arrangements.
 
Table 34 displays the credit ratings issued by the three major credit rating agencies as of November 3, 2011.
 
Table 34:  Fannie Mae Credit Ratings
 
             
    As of November 3, 2011
    S&P   Moody’s   Fitch
 
Long-term senior debt
  AA+   Aaa   AAA
Short-term senior debt
  A-1+   P-1   F1+
Qualifying subordinated debt
  A   Aa2   AA-
Preferred stock
  C   Ca   C/RR6
Bank financial strength rating
    E+  
Outlook
  Negative
(for Long Term Senior Debt and Qualifying
Subordinated Debt)
  Negative
(for Long Term Senior Debt and Qualifying
Subordinated Debt)
  Stable
(for AAA rated Long Term Issuer
Default Rating)
 
Cash Flows
 
Nine Months Ended September 30, 2011.  Cash and cash equivalents increased from December 31, 2010 by $7.0 billion to $24.3 billion as of September 30, 2011. Net cash generated from investing activities totaled $327.8 billion, resulting primarily from proceeds received from repayments of loans held for investment. These net cash inflows were offset by net cash used in operating activities of $6.7 billion and net cash used in financing activities of $314.1 billion primarily attributable to a significant amount of debt redemptions in excess of proceeds received from the issuances of debt as well as proceeds received from Treasury under the senior preferred stock purchase agreement.
 
Nine Months Ended September 30, 2010.  Cash and cash equivalents increased from December 31, 2009 by $4.6 billion to $11.4 billion as of September 30, 2010. Net cash generated from investing activities totaled


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$381.4 billion, resulting primarily from proceeds received from repayments of loans held for investment. These net cash inflows were partially offset by net cash used in operating activities of $42.4 billion resulting primarily from purchases of trading securities. The net cash used in financing activities of $334.4 billion was primarily attributable to a significant amount of debt redemptions in excess of proceeds received from the issuances of debt as well as proceeds received from Treasury under the senior preferred stock purchase agreement.
 
Capital Management
 
Regulatory Capital
 
FHFA has announced that, during the conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and FHFA will not issue quarterly capital classifications. We submit capital reports to FHFA during the conservatorship and FHFA monitors 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. For information on our minimum capital requirements see “Note 11, Regulatory Capital Requirements.”
 
Senior Preferred Stock Purchase Agreement
 
As a result of the covenants under the senior preferred stock purchase agreement, Treasury’s ownership of the warrant to purchase up to 79.9% of the total shares of our common stock outstanding and the uncertainty regarding our future, we effectively no longer have access to equity funding except through draws under the senior preferred stock purchase agreement.
 
Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficits in our net worth. We have received a total of $103.8 billion from Treasury pursuant to the senior preferred stock purchase agreement as of September 30, 2011. The Acting Director of FHFA will submit a request for $7.8 billion from Treasury under the senior preferred stock purchase agreement to eliminate our net worth deficit as of September 30, 2011, and request the receipt of those funds on or prior to December 31, 2011. 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 $112.6 billion.
 
We expect to have a net worth deficit in future periods and therefore will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement.
 
The senior preferred stock purchase agreement provides that the $200 billion maximum amount of the commitment from Treasury will increase as necessary to accommodate any net worth deficiencies attributable to periods during 2010, 2011 and 2012. If we do not have a positive net worth as of December 31, 2012, then the amount of funding available under the senior preferred stock purchase agreement after 2012 will be $124.8 billion ($200 billion less $75.2 billion in cumulative draws for net worth deficiencies through December 31, 2009).
 
In the event we have a positive net worth as of December 31, 2012, then the amount of funding available after 2012 under the senior preferred stock purchase agreement will depend on the size of that positive net worth relative to the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, as follows:
 
  •  If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will be $124.8 billion less our positive net worth as of December 31, 2012.
 
  •  If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011 and 2012, then the amount of available funding will be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011 and 2012.


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As of November 7, 2011, the amount of the quarterly commitment fee payable by us to Treasury under the senior preferred stock purchase agreement had not been established; however, Treasury has waived the quarterly commitment fee under the senior preferred stock purchase agreement for each quarter of 2011 due to the continued fragility of the U.S. mortgage market and Treasury’s belief that imposing the commitment fee would not generate increased compensation for taxpayers. Treasury stated that it will reevaluate the situation during the next calendar quarter to determine whether to set the quarterly commitment fee for the first quarter of 2012.
 
Dividends
 
Holders of the senior preferred stock are entitled to receive, when, as and if declared by our Board of Directors, cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current liquidation preference of the senior preferred stock. Treasury is the current holder of our senior preferred stock. As conservator and under our charter, FHFA has authority to declare and approve dividends on the senior preferred stock. If at any time we do not pay cash dividends on the senior preferred stock when they are due, then immediately following the period we did not pay dividends and for all dividend periods thereafter until the dividend period following the date on which we have paid in cash full cumulative dividends (including any unpaid dividends added to the liquidation preference), the dividend rate will be 12% per year. Dividends on the senior preferred stock that are not paid in cash for any dividend period will accrue and be added to the liquidation preference of the senior preferred stock.
 
Our third quarter dividend of $2.5 billion was declared by the conservator and paid by us on September 30, 2011. Upon receipt of the additional funds from Treasury in December 2011 that FHFA will request on our behalf, the annualized dividend on the senior preferred stock will be $11.3 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, the conservator requests additional funds on our behalf from Treasury under the senior preferred stock purchase agreement.
 
 
OFF-BALANCE SHEET ARRANGEMENTS
 
Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of $58.9 billion as of September 30, 2011 and $56.9 billion as of December 31, 2010.
 
Under the temporary credit and liquidity facilities program in which we provide assistance to housing finance agencies (“HFAs”) and in which Treasury has purchased participation interests, our outstanding commitments totaled $3.3 billion as of September 30, 2011 and $3.7 billion as of December 31, 2010. Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled $17.4 billion as of September 30, 2011 and $17.8 billion as of December 31, 2010. As of both September 30, 2011 and December 31, 2010, there were no liquidity guarantee advances outstanding. For a description of these programs, see “MD&A—Off-Balance Sheet Arrangements—Treasury Housing Finance Agency Initiative” in our 2010 Form 10-K.
 
 
RISK MANAGEMENT
 
Our business activities expose us to the following three major categories of financial risk: credit risk, market risk (including interest rate and liquidity risk) and operational risk. 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. In addition to these financial risks, there is significant uncertainty regarding the future of our company, including how long we will continue to be in existence, which we discuss in more detail in “Legislative and Regulatory Developments—GSE Reform” and “Risk Factors.” We are also subject to a number of other risks that could adversely impact our business, financial condition, earnings and cash flow, including model, legal and


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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.
 
In this section we provide an update on our management of our major risk categories. For a more complete discussion of the financial risks we face and how we manage credit risk, market risk and operational risk, see “MD&A—Risk Management” in our 2010 Form 10-K and “Risk Factors” in our 2010 Form 10-K and in this report.
 
Credit Risk Management
 
We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit risk. Continuing adverse market conditions have resulted in significant exposure to mortgage and institutional counterparty credit risk. The metrics used to measure credit risk are generated using internal models. Our internal models require numerous assumptions and there are inherent limitations in any methodology used to estimate macroeconomic factors such as home prices, unemployment and interest rates and their impact on borrower behavior. When market conditions change rapidly and dramatically, 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. See “Risk Factors” in our 2010 Form 10-K for a discussion of the risks associated with our use of models.
 
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 35 displays the composition of our entire mortgage credit book of business as of the dates indicated. Our total single-family mortgage credit book of business accounted for 93% of our total mortgage credit book of business as of both September 30, 2011 and December 31, 2010.
 
Table 35:  Composition of Mortgage Credit Book of Business(1)
 
                                                 
    As of September 30, 2011     As of December 31, 2010  
    Single-Family     Multifamily     Total     Single-Family     Multifamily     Total  
    (Dollars in millions)  
 
Mortgage loans and Fannie Mae MBS(2)
  $ 2,803,667     $ 174,779     $ 2,978,446     $ 2,826,994     $ 170,552     $ 2,997,546  
Unconsolidated Fannie Mae MBS, held by third parties(3)
    17,899       1,754       19,653       19,468       1,855       21,323  
Other credit guarantees(4)
    22,556       16,726       39,282       18,625       16,994       35,619  
                                                 
Guaranty book of business
  $ 2,844,122     $ 193,259     $ 3,037,381     $ 2,865,087     $ 189,401     $ 3,054,488  
                                                 
Agency mortgage-related securities(5)
    16,574       33       16,607       18,797       24       18,821  
Other mortgage-related securities
    44,330       32,732       77,062       48,678       34,205       82,883  
                                                 
Mortgage credit book of business
  $ 2,905,026     $ 226,024     $ 3,131,050     $ 2,932,562     $ 223,630     $ 3,156,192  
                                                 
Guaranty Book of Business Detail:
                                               
Conventional Guaranty Book of Business(6)
  $ 2,771,191     $ 190,760     $ 2,961,951     $ 2,790,590     $ 186,712     $ 2,977,302  
Government Guaranty Book of Business(7)
  $ 72,931     $ 2,499     $ 75,430     $ 74,497     $ 2,689     $ 77,186  


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(1) Based on unpaid principal balance. Prior period amounts have been reclassified to conform to the current period presentation.
 
(2) Consists of mortgage loans and Fannie Mae MBS recognized in our condensed consolidated balance sheets. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
 
(3) Reflects unpaid principal balance of unconsolidated Fannie Mae MBS, held by third-party investors. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
 
(4) Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table.
 
(5) Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.
 
(6) Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
 
(7) 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.
 
In the following sections, we discuss the mortgage credit risk of the single-family and multifamily loans in our guaranty book of business. The credit statistics reported below, unless otherwise noted, pertain generally to the portion of our guaranty book of business for which we have access to detailed loan-level information, which constituted approximately 99% of both our single-family conventional guaranty book of business and our multifamily guaranty book of business, excluding defeased loans, as of September 30, 2011 and December 31, 2010. 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 and we rely on lender representations regarding the accuracy of the characteristics of loans in our guaranty book of business. See “Risk Factors” in our 2010 Form 10-K for a discussion of the risk that we could experience mortgage fraud as a result of this reliance on lender representations.
 
Single-Family Mortgage Credit Risk Management
 
Our strategy in managing single-family mortgage credit risk consists of four primary components: (1) our acquisition and servicing policies and underwriting and servicing standards, including the use of credit enhancements; (2) portfolio diversification and monitoring; (3) management of problem loans; and (4) REO management. These strategies, which we discuss 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 Operations—Credit-Related Expenses.”
 
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 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, such as Alt-A 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.
 
Because we believe we have limited credit exposure on our government loans, the single-family credit statistics we focus on and report in the sections below generally relate to our single-family conventional guaranty book of business, which represents 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 Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related Securities.”


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Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
 
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 update our underwriting standards and eligibility guidelines to take into consideration changing market conditions.
 
Our mortgage servicers are the primary points of contact for borrowers and perform a vital role in our efforts to reduce defaults and pursue foreclosure alternatives. In the second quarter of 2011, we issued new standards for mortgage servicers regarding the management of delinquent loans, default prevention and foreclosure time frames under FHFA’s directive to align GSE policies for servicing delinquent mortgages. The new standards, reinforced by new incentives and compensatory fees, require servicers to take a more consistent approach for homeowner communications, loan modifications and other workouts, and, when necessary, foreclosures. The new standards are designed to: (1) achieve effective contact with the borrower, including creating a uniform standard for communicating with the homeowner, determining reasons for delinquency and assessing their ability to pay, and educating homeowners on the availability of foreclosure prevention options; (2) set clear timelines and establish clear and consistent policies in the foreclosure process; and (3) provide incentives to servicers to complete loan workouts earlier in the homeowner’s delinquency and charge servicers compensatory fees when they fail to have the proper contact with the borrower. We believe these standards, which became effective October 1, 2011, will bring greater consistency, clarity, fairness and efficiency to the process, help improve servicer performance, and hold servicers accountable for their effectiveness in assisting homeowners.
 
In addition to these new standards, we have taken other steps to improve the servicing of our delinquent loans including: (1) updating our Servicing Guide, which should improve our servicers’ ability to understand and comply with our requirements and allow them to complete workouts earlier in the delinquency process, thereby avoiding foreclosure; (2) implementing our STAR program, a servicer performance management system designed to encourage improvements in customer service and foreclosure prevention outcomes for homeowners by rating servicers on their performance in these areas; and (3) transferring servicing on loan populations that include loans with higher-risk characteristics to special servicers with whom we have worked to develop high-touch protocols for servicing these loans. For example, in the third quarter of 2011, we agreed to purchase from Bank of America, N.A. the mortgage servicing rights associated with up to $74 billion in unpaid principal balance of mortgage loans in our single-family guaranty book of business, which represented approximately 11% of our servicing portfolio with Bank of America as of September 30, 2011. We believe retaining special servicers to service these loans using high-touch protocols will reduce our future credit losses on the transferred loan portfolio, while enabling Bank of America to better focus on our remaining portfolio with them.
 
For discussion of our acquisition policy, underwriting standards, and use of mortgage insurance as a form of credit enhancement, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in our 2010 Form 10-K. For a discussion of our aggregate mortgage insurance coverage as of September 30, 2011 and December 31, 2010, see “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Mortgage Insurers.”
 
Single-Family Portfolio Diversification and Monitoring
 
Diversification within our single-family mortgage credit book of business by product type, loan characteristics and geography is an important factor that influences credit quality and performance and may reduce our credit risk. We monitor various loan attributes, in conjunction with housing market and economic conditions, to determine if 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 and to guide the development of our loss mitigation strategies.


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Table 36 presents our single-family conventional business volumes and our single-family conventional 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.
 
Table 36:  Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)
 
                                                 
    Percent of Single-Family
             
    Conventional Business Volume(2)              
    For the
    For the
    Percent of Single-Family
 
    Three Months
    Nine Months
    Conventional Guaranty
 
    Ended
    Ended
    Book of Business(3)(4)
 
    September 30,     September 30,     As of  
    2011     2010     2011     2010     September 30, 2011     December 31, 2010  
 
Original LTV ratio:(5)
                                               
<= 60%
    26 %     30 %     28 %     30 %     24 %     24 %
60.01% to 70%
    14       16       15       15       16       16  
70.01% to 80%
    38       40       38       39       40       41  
80.01% to 90%(6)
    10       8       9       9       10       9  
90.01% to 100%(6)
    9       5       7       5       9       9  
Greater than 100%(6)
    3       1       3       2       1       1  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
Weighted average
    71 %     68 %     70 %     69 %     71 %     71 %
Average loan amount
  $ 202,476     $ 218,328     $ 205,186     $ 219,551     $ 155,769     $ 155,531  
Estimated mark-to-market LTV ratio:(7)
                                               
<= 60%
                                    28 %     28 %
60.01% to 70%
                                    13       13  
70.01% to 80%
                                    19       19  
80.01% to 90%
                                    15       15  
90.01% to 100%
                                    9       9  
Greater than 100%
                                    16       16  
                                                 
Total
                                    100 %     100 %
                                                 
Weighted average
                                    78 %     77 %
Product type:
                                               
Fixed-rate:(8)
                                               
Long-term
    67 %     72 %     69 %     72 %     72 %     74 %
Intermediate-term
    25       22       24       21       15       14  
Interest-only
    *       *       *       *       2       2  
                                                 
Total fixed-rate
    92       94       93       93       89       90  
                                                 
Adjustable-rate:
                                               
Interest-only
    1       1       1       2       3       4  
Other ARMs
    7       5       6       5       8       6  
                                                 
Total adjustable-rate
    8       6       7       7       11       10  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
 


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    Percent of Single-Family
             
    Conventional Business Volume(2)              
    For the
    For the
    Percent of Single-Family
 
    Three Months
    Nine Months
    Conventional Guaranty
 
    Ended
    Ended
    Book of Business(3)(4)
 
    September 30,     September 30,     As of  
    2011     2010     2011     2010     September 30, 2011     December 31, 2010  
 
Number of property units:
                                               
1 unit
    97 %     98 %     97 %     98 %     97 %     97 %
2-4 units
    3       2       3       2       3       3  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
Property type:
                                               
Single-family homes
    91 %     92 %     91 %     91 %     91 %     91 %
Condo/Co-op
    9       8       9       9       9       9  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
Occupancy type:
                                               
Primary residence
    88 %     92 %     88 %     91 %     89 %     90 %
Second/vacation home
    5       4       5       4       5       4  
Investor
    7       4       7       5       6       6  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
FICO credit score at origination:
                                               
< 620
    1 %     *%     1 %     1 %     3 %     4 %
620 to < 660
    2       2       2       2       7       7  
660 to < 700
    8       6       8       7       14       15  
700 to < 740
    17       16       17       17       21       21  
>= 740
    72       76       72       73       55       53  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
Weighted average
    759       764       760       760       737       735  
Loan purpose:
                                               
Purchase
    32 %     27 %     26 %     26 %     32 %     33 %
Cash-out refinance
    15       19       17       20       28       29  
Other refinance
    53       54       57       54       40       38  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
Geographic concentration:(9)
                                               
Midwest
    15 %     16 %     15 %     15 %     15 %     15 %
Northeast
    19       19       20       20       19       19  
Southeast
    19       18       20       18       24       24  
Southwest
    16       15       16       15       15       15  
West
    31       32       29       32       27       27  
                                                 
Total
    100 %     100 %     100 %     100 %     100 %     100 %
                                                 
Origination year:
                                               
<= 2001
                                    2 %     2 %
2002
                                    3       3  
2003
                                    9       11  
2004
                                    6       7  
2005
                                    7       9  
2006
                                    7       8  
2007
                                    10       12  
2008
                                    8       9  
2009
                                    18       21  
2010
                                    20       18  
2011
                                    10        
                                                 
Total
                                    100 %     100 %
                                                 

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* Represents less than 0.5% of single-family conventional business volume or book of business.
 
(1) We reflect second lien mortgage loans in the original LTV ratio calculation only when we own both the first and second lien mortgage loans or we own only the second lien mortgage loan. Second lien mortgage loans represented less than 0.5% of our single-family conventional guaranty book of business as of both September 30, 2011 and December 31, 2010. Second lien mortgage loans held by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table.
 
(2) Calculated based on unpaid principal balance of single-family loans for each category 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 guarantee.
 
(3) Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of the end of each period.
 
(4) Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that represented approximately 4.6% of our single-family conventional guaranty book of business as of September 30, 2011 and 3.9% as of December 31, 2010. See “Business—Our Charter and Regulation of Our Activities—Charter Act—Loan Standards” in our 2010 Form 10-K and “Risk Management—Credit Risk Management—Single Family Mortgage Credit Risk Management—Credit Profile Summary” in this report for additional information on loan limits.
 
(5) 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.
 
(6) 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 Refi Plus, our charter generally requires primary mortgage insurance or other credit enhancement for loans that we acquire that have a LTV ratio over 80%.
 
(7) 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.
 
(8) Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate has maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their maturities.
 
(9) 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
 
We continue to see the positive effects of actions we took beginning in 2008 to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. The single-family loans we purchased or guaranteed in the first nine months of 2011 have a strong credit profile with a weighted average original LTV ratio of 70%, a weighted average FICO credit score of 760, and a product mix with a significant percentage of fully amortizing fixed-rate mortgage loans. Due to lower acquisition volume and the relatively high volume of Refi Plus loans (including HARP loans), the LTV ratios at origination for our 2011 acquisitions to date are higher than for our 2009 and 2010 acquisitions.
 
Whether our future acquisitions will exhibit the same credit profile as our recent acquisitions depends on many factors, including our future pricing and eligibility standards, our future objectives, mortgage insurers’ eligibility standards, our future volume of Refi Plus acquisitions, which typically include higher LTV ratios and lower FICO credit scores, and future market conditions. We expect the ultimate performance of all our loans will be affected by macroeconomic trends, including unemployment, the economy, and home prices.
 
The credit profile of our acquisitions in the first nine months of 2011 was further influenced by our acquisitions of refinanced loans. Refinanced loans, which include Refi Plus loans, comprised 74% of our single-family acquisitions in the first nine months of 2011. Refinanced loans generally have a strong credit profile because refinancing indicates borrowers’ ability to make their mortgage payment and desire to maintain homeownership, but Refi Plus loans, which may have original LTV ratios as high as 125% and in some cases lower FICO credit scores than we generally require, may not ultimately perform as well as traditional refinanced loans. However, it is too early to determine whether the performance of loans with higher risk characteristics refinanced under the Refi Plus program will perform differently from other refinanced loans. Refi Plus offers expanded refinance opportunities for eligible Fannie Mae borrowers that may help prevent


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future delinquencies and defaults. In the first quarter of 2011, our regulator granted our request for an extension of our ability to acquire loans under Refi Plus with LTV ratios greater than 80% and up to 125% for loans originated through June 2012. Approximately 19% of our total single-family conventional business volume for the first nine months of 2011 consisted of loans with LTV ratios higher than 80% at the time of purchase compared with 16% for the first nine months of 2010.
 
On October 24, 2011, FHFA, Fannie Mae, and Freddie Mac announced changes to HARP. While HARP previously limited eligibility to borrowers with mortgage loans that had LTV ratios no greater than 125 percent, the new HARP guidelines remove that ceiling when the refinancing is into a new fixed-rate mortgage. See “Legislative and Regulatory Developments” for a discussion on the changes to HARP.
 
The prolonged and severe decline in home prices has resulted in the overall estimated weighted average mark-to-market LTV ratio of our single-family conventional guaranty book of business to remain high at 78% as of September 30, 2011, and 77% as of December 31, 2010. The portion of our single-family conventional guaranty book of business with an estimated mark-to-market LTV ratio greater than 100% was 16% as of September 30, 2011 and December 31, 2010. If home prices decline further, more loans may have mark-to-market LTV ratios greater than 100%, which increases the risk of delinquency and default.
 
Alt-A and Subprime Loans
 
Our exposure to Alt-A and subprime loans included in our single-family conventional guaranty book of business, as defined in this section, 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. See “Consolidated Balance Sheet Analysis—Investments in Mortgage-Related Securities—Investments in Private-Label Mortgage-Related Securities” for a discussion of our exposure to private-label mortgage-related securities backed by Alt-A and subprime loans. As a result of our decision to discontinue the purchase of newly originated Alt-A loans, except for those that represent the refinancing of an existing Fannie Mae loan, 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 will continue to decrease over time. We are also not currently acquiring newly originated subprime loans.
 
We have classified a mortgage loan as Alt-A if the lender that delivered the loan to us classified the loan as Alt-A based on documentation or other features. We have classified a mortgage loan as subprime if the loan was originated by a lender specializing in subprime business or by a subprime division of a large lender. We exclude from the subprime classification loans originated by these lenders if we acquired the loans in accordance with our standard underwriting criteria, which typically require compliance by the seller with our Selling Guide (including standard representations and warranties) and/or evaluation of the loans through our Desktop Underwriter system. We apply our 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 loans included in our single-family conventional guaranty book of business of $188.4 billion as of September 30, 2011, represented approximately 6.8% of our single-family conventional guaranty book of business. The unpaid principal balance of subprime loans included in our single-family conventional guaranty book of business of $6.0 billion as of September 30, 2011, represented approximately 0.2% of our single-family conventional guaranty book of business. See “Table 36: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” for additional information on our single-family book of business.
 
Jumbo-Conforming and High-Balance Loans
 
The outstanding unpaid principal balance of our jumbo-conforming and high-balance loans was $125.8 billion, or 4.6% of our single-family conventional guaranty book of business, as of September 30, 2011 and $109.7 billion, or 3.9% of our single-family conventional guaranty book of business, as of December 31, 2010. The standard conforming loan limit for a one-unit property was $417,000 in 2011 and 2010. Our loan limits


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were higher in specified high-cost areas, reaching as high as $729,750 for one-unit properties; however, our loan limits for loans originated after September 30, 2011 decreased in specified high-cost areas to an amount not to exceed $625,500 for one-unit properties. Unlike FHA, which is not subject to current loan limits for refinancing its existing loans above current limits, our current loan limits apply to all new acquisitions. Therefore, we expect refinances of our existing loans above current limits to be significantly reduced. See “Business—Our Charter and Regulation of Our Activities—Charter Act—Loan Standards” in our 2010 Form 10-K for additional information on our loan limits.
 
Reverse Mortgages
 
The outstanding unpaid principal balance of reverse mortgage whole loans and Fannie Mae MBS backed by reverse mortgage loans in our guaranty book of business was $50.9 billion as of September 30, 2011 and $50.8 billion as of December 31, 2010. The balance of our reverse mortgage loans could increase over time, as each month the scheduled and unscheduled payments, interest, mortgage insurance premium, servicing fee, and default-related costs accrue to increase the unpaid principal balance. The majority of these loans are home equity conversion mortgages insured by the federal government through the FHA. Because home equity conversion mortgages are insured by the federal government, we believe that we have limited exposure to losses on these loans. In December 2010, we communicated to our lenders that we are exiting the reverse mortgage business and will no longer acquire newly originated home equity conversion mortgages.
 
Problem Loan Management
 
Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would otherwise occur and pursuing foreclosure alternatives to attempt to minimize the severity of the losses we incur. If a borrower does not make required payments, or is in jeopardy of not making 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 workouts reflect our various types of home retention strategies, including loan modifications, repayment plans and forbearances, and foreclosure alternatives, including preforeclosure sales and deeds-in-lieu of foreclosure. When appropriate, we seek to move to foreclosure expeditiously. For additional discussion on our efforts to reduce defaults and credit losses, see “Executive Summary—Reducing Credit Losses on Our Legacy Book of Business.”
 
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 single-family conventional loans that we own and that back Fannie Mae MBS in the calculation of the single-family delinquency rate. Percentage of book outstanding 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.


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Problem Loan Statistics
 
The following table displays the delinquency status of loans in our single-family conventional guaranty book of business (based on number of loans) as of the dates indicated.
 
Table 37:  Delinquency Status of Single-Family Conventional Loans
 
                         
    As of  
    September 30,
    December 31,
    September 30,
 
    2011     2010     2010  
 
As of period end:
                       
Delinquency status:
                       
30 to 59 days delinquent
    2.16 %     2.32 %     2.40 %
60 to 89 days delinquent
    0.75       0.87       0.91  
Seriously delinquent
    4.00       4.48       4.56  
Percentage of seriously delinquent loans that have been delinquent for more than 180 days
    71 %     67 %     66 %
 
The number of loans at risk of becoming seriously delinquent has diminished in 2011 as early stage delinquencies have decreased. As of September 30, 2011, the percentage and number of our single-family conventional loans that were seriously delinquent decreased, as compared with December 31, 2010, and has decreased every quarter since the first quarter of 2010. The decrease in our serious delinquency rate in 2010 and the first nine months of 2011 was primarily the result of home retention solutions, as well as foreclosure alternatives and completed foreclosures. The decrease is also attributable to our acquisition of loans with stronger credit profiles since the beginning of 2009, as these loans have become an increasingly larger portion of our single-family guaranty book of business, resulting in a smaller percentage of our loans becoming seriously delinquent.
 
Although our single-family serious delinquency rate has decreased since the first quarter of 2010, our serious delinquency rate and the period of time that loans remain seriously delinquent have been negatively affected in recent periods by the increase in the average number of days it is taking to complete a foreclosure. Continuing issues in the servicer foreclosure process, changes in state foreclosure laws, and new court rules and proceedings have lengthened the time it takes to foreclose on a mortgage loan in many states. In addition, servicers and states are dealing with the backlog of foreclosures resulting from these delays and from the elevated level of foreclosures resulting from the housing market downturn. For more information on the delays in the foreclosure process, see “Executive Summary—Reducing Credit Losses on Our Legacy Book of Business.” We expect serious delinquency rates will continue to be affected in the future by home price changes, changes in other macroeconomic conditions, the length of the foreclosure process, and the extent to which borrowers with modified loans continue to make timely payments.
 
Table 38 provides a comparison, by geographic region and by loans with and without credit enhancement, of the serious delinquency rates as of the dates indicated for single-family conventional loans in our single-family guaranty book of business.


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Table 38:  Single-Family Serious Delinquency Rates
 
                                                 
    As of  
    September 30, 2011     December 31, 2010     September 30, 2010  
    Percentage of
    Serious
    Percentage of
    Serious
    Percentage of
    Serious
 
    Book
    Delinquency
    Book
    Delinquency
    Book
    Delinquency
 
    Outstanding     Rate     Outstanding     Rate     Outstanding     Rate  
 
Single-family conventional delinquency rates by geographic region:(1)
                                               
Midwest
    15 %     3.89 %     15 %     4.16 %     16 %     4.16 %
Northeast
    19       4.36       19       4.38       19       4.27  
Southeast
    24       5.78       24       6.15       24       6.19  
Southwest
    15       2.34       15       3.05       15       3.19  
West
    27       3.04       27       4.06       26       4.35  
                                                 
Total single-family conventional loans
    100 %     4.00 %     100 %     4.48 %     100 %     4.56 %
                                                 
Single-family conventional loans:
                                               
Credit enhanced
    14 %     9.43 %     15 %     10.60 %     15 %     10.66 %
Non-credit enhanced
    86       3.10       85       3.40       85       3.45  
                                                 
Total single-family conventional loans
    100 %     4.00 %     100 %     4.48 %     100 %     4.56 %
                                                 
 
 
(1) See footnote 9 to “Table 36: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” for states included in each geographic region.
 
While loans across our single-family guaranty book of business have been affected by the weak market conditions, loans in certain states, certain higher-risk loan categories, such as Alt-A loans, subprime loans and loans with higher mark-to-market LTVs, and our 2006 and 2007 loan vintages continue to exhibit higher than average delinquency rates and/or account for a disproportionate share of our credit losses. Some 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 unemployment rates that remain high.
 
Table 39 presents the serious delinquency rates and other financial information for our single-family conventional loans with some of these higher-risk characteristics as of the periods indicated. The reported categories are not mutually exclusive.


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Table 39:  Single-Family Conventional Serious Delinquency Rate Concentration Analysis
 
                                                                                                 
    As of  
    September 30, 2011     December 31, 2010     September 30, 2010  
                      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)  
    (Dollars in millions)  
 
States:
                                                                                               
Arizona
  $ 67,562       2 %     3.78 %     110 %   $ 71,052       2 %     6.23 %     105 %   $ 71,636       2 %     6.39 %     104 %
California
    510,199       19       2.70       79       507,598       18       3.89       76       498,462       18       4.28       75  
Florida
    178,036       6       11.90       107       184,101       7       12.31       107       186,010       7       12.10       104  
Nevada
    29,200       1       7.53       135       31,661       1       10.66       128       32,195       1       11.24       127  
Select Midwest
states(2)
    286,389       10       4.55       82       292,734       11       4.80       80       294,174       11       4.78       78  
All other states
    1,691,570       62       3.20       71       1,695,615       61       3.46       71       1,684,827       61       3.51       69  
Product type:
                                                                                               
Alt-A
    188,385       7       12.71       99       211,770       8       13.87       96       219,968       8       13.79       93  
Subprime
    5,968       *       23.91       108       6,499       *       28.20       103       6,665       *       28.50       100  
Vintages:
                                                                                               
2006
    196,843       7       11.81       108       232,009       8       12.19       104       246,502       9       11.84       101  
2007
    283,866       10       12.63       109       334,110       12       13.24       104       356,063       13       13.04       100  
All other vintages
    2,282,247       83       2.41       71       2,216,642       80       2.62       70       2,164,739       78       2.64       68  
Estimated mark-to-market
                                                                                               
LTV ratio:
                                                                                               
Greater than 100%(1)
    463,241       16       14.53       131       435,991       16       17.70       130       400,998       15       18.57       130  
Select combined risk characteristics:
                                                                                               
Original LTV ratio > 90% and FICO score < 620
    19,587       1       18.99       112       21,205       1       21.41       109       21,806       1       21.80       107  
 
 
* Percentage is less than 0.5%.
 
(1) Second lien mortgage 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.
 
Loan Workout Metrics
 
The efforts of our mortgage servicers are critical in keeping people in their homes, preventing foreclosures and providing homeowner assistance. We continue to work with our servicers to implement our foreclosure prevention initiatives effectively and to find ways to enhance our workout protocols and their workflow processes. Partnering with our servicers, civic and community leaders and housing industry partners, we have launched a series of Mortgage Help Centers nationwide to accelerate the response time for struggling borrowers with loans owned by us. As of September 30, 2011, we have established 11 Mortgage Help Centers which completed nearly 4,100 home retention solutions in the first nine months of 2011. Additionally, we currently offer up to twelve months forbearance for those homeowners who are unemployed as an additional tool to help homeowners avoid foreclosure.
 
Our approach to workouts continues to focus on the large number of borrowers facing financial hardships. Accordingly, the vast majority of loan modifications we completed during the first nine months of 2011 were, as in recent periods, concentrated on deferring or lowering the borrowers’ monthly mortgage payments to allow borrowers to work through their hardships.


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In addition, we continue to focus on alternatives to foreclosure for borrowers who are unable to retain their homes. Our servicers work with a borrower to sell their home prior to foreclosure in a preforeclosure sale or accept a 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 having to go through a foreclosure. Further, in cooperation with several Multiple Listing Services across the nation, we developed the Short Sale Assistance Desk to assist real estate professionals in handling post-offer short sale issues that may relate to servicer responsiveness, the existence of a second lien, or issues involving mortgage insurance.
 
Table 40 provides statistics on our single-family loan workouts that were completed, by type, for the periods indicated. These statistics include loan modifications but do not include trial modifications or repayment and forbearance plans that have been initiated but not completed.
 
Table 40:  Statistics on Single-Family Loan Workouts
 
                                                 
    For the
    For the
    For the
 
    Nine Months Ended
    Year Ended
    Nine Months Ended
 
    September 30, 2011     December 31, 2010     September 30, 2010  
    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
  $ 32,658       161,404     $ 82,826       403,506     $ 66,206       321,814  
Repayment plans and forbearances completed
    3,769       26,801       4,385       31,579       3,258       23,606  
HomeSaver Advance first-lien loans
                688       5,191       661       5,165  
                                                 
      36,427       188,205       87,899       440,276       70,125       350,585  
                                                 
Foreclosure alternatives:
                                               
Preforeclosure sales
    11,231       50,966       15,899       69,634       12,775       55,788  
Deeds-in-lieu of foreclosure
    1,179       6,636       1,053       5,757       732       3,971  
                                                 
      12,410       57,602       16,952       75,391       13,507       59,759  
                                                 
Total loan workouts
  $ 48,837       245,807     $ 104,851       515,667     $ 83,632       410,344  
                                                 
Loan workouts as a percentage of single-family guaranty book of business(1)
    2.29 %     1.84 %     3.66 %     2.87 %     3.91 %     3.05 %
                                                 
 
 
(1) Calculated based on annualized loan workouts during the period as a percentage of our single-family guaranty book of business as of the end of the period.
 
The volume of workouts completed in the first nine months of 2011 decreased compared with the first nine months of 2010, primarily because we began to require that non-HAMP modifications go through a trial period, which initially lowers the number of modifications that can become permanent in any particular period. The number of foreclosure alternatives we agreed to during the first nine months of 2011 remains high as these are favorable solutions for a large number of borrowers. We expect the volume of our foreclosure alternatives to remain high throughout the remainder of 2011.
 
During the first nine months of 2011, we initiated approximately 165,000 trial modifications, including HAMP and non-HAMP, compared with approximately 135,000 trial modifications during the first nine months of 2010. We also initiated other types of workouts, such as repayment plans and forbearances. It is difficult to predict how many of these trial modifications and initiated plans will be completed.
 
Table 41 displays the profile of loan modifications (HAMP and non-HAMP) provided to borrowers for the periods indicated.


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Table 41:  Single-Family Loan Modification Profile
 
                                         
    2011   Full Year
    YTD   Q3   Q2   Q1   2010
 
Term extension, interest rate reduction, or combination of both(1)
    98 %     100 %     99 %     96 %     93 %
Initial reduction in monthly payment(2)
    96       97       97       94       91  
Estimated mark-to-market LTV ratio > 100%
    62       61       62       64       53  
Troubled debt restructurings(3)
    100       100       98       97       94  
 
 
(1) Reported statistics for term extension, interest rate reduction or the combination 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.
 
(3) Percentage for the nine months ended September 30, 2011 reflects the impact of the new TDR accounting standard which was retrospectively adopted beginning January 1, 2011. Prior periods have not been revised.
 
The majority of our modifications in 2010 and the first nine months of 2011 were made to loans with a mark-to-market LTV ratio greater than 100% because these borrowers are typically unable to refinance their mortgages or sell their homes for a price that allows them to pay off their mortgage obligation as their mortgages are greater than the value of their homes. Additionally, the serious delinquency rate for these loans tends to be significantly higher than the overall average serious delinquency rate. As of September 30, 2011, the serious delinquency rate for loans with a mark-to-market LTV ratio greater than 100% was 15%, compared with our overall average single-family serious delinquency rate of 4.00%.
 
Approximately 69% of loans modified during the first nine months of 2010 were current or had paid off as of one year following the loan modification date. In comparison, 44% of loans modified during the first nine months of 2009 were current or had paid off as of one year following the loan modification date. There is significant uncertainty regarding the ultimate long term success of our current modification efforts and we believe the performance of our workouts will be highly dependent on economic factors, such as unemployment rates, household wealth and income, and home prices. Modifications, even those with reduced monthly payments, may also not be sufficient to help borrowers with second liens and other significant non-mortgage debt obligations. 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. See “Risk Factors” for a discussion of efforts we may be required or asked to undertake and their potential affect on us.
 
REO Management
 
Foreclosure and REO activity affect the level of credit losses. Table 42 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.


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Table 42:  Single-Family Foreclosed Properties
 
                 
    For the Nine Months
 
    Ended September 30,  
    2011     2010  
 
Single-family foreclosed properties (number of properties):
               
Beginning of period inventory of single-family foreclosed properties (REO)(1)
    162,489       86,155  
Acquisitions by geographic area:(2)
               
Midwest
    32,074       48,930  
Northeast
    7,091       12,022  
Southeast
    36,433       66,313  
Southwest
    36,324       44,378  
West
    40,518       44,473  
                 
Total properties acquired through foreclosure(1)
    152,440       216,116  
Dispositions of REO
    (192,313 )     (135,484 )
                 
End of period inventory of single-family foreclosed properties (REO)(1)
    122,616       166,787  
                 
Carrying value of single-family foreclosed properties (dollars in millions)(3)
  $ 11,039     $ 16,394  
                 
Single-family foreclosure rate(4)
    1.15 %     1.61 %
                 
 
 
(1) Includes acquisitions through deeds-in-lieu of foreclosure.
 
(2) See footnote 9 to “Table 36: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” for states included in each geographic region.
 
(3) Excludes foreclosed property claims receivables, which are reported in our condensed consolidated balance sheets as a component of “Acquired property, net.”
 
(4) Estimated based on the annualized total number of properties acquired through foreclosure or deeds-in-lieu of foreclosure as a percentage of the total number of loans in our single-family conventional guaranty book of business as of the end of each respective period.
 
The continued weak economy, as well as high unemployment rates, continues to result in a high level of mortgage loans that transition from delinquent to REO status, either through foreclosure or deed-in-lieu of foreclosure. Our foreclosure rates remain high; however, foreclosure levels were lower than what they otherwise would have been during the first nine months of 2011 due to delays in the processing of foreclosures caused by continuing foreclosure process issues encountered by our servicers, changes in state foreclosure laws, and new court rules and proceedings. Additionally, foreclosure levels were affected by our directive to servicers to delay foreclosure sales until the loan servicer verifies that the borrower is ineligible for a HAMP modification and that all other home retention and foreclosure prevention alternatives have been exhausted. The delay in potential foreclosures, as well as an increase in the number of dispositions of REO properties, has resulted in a decrease in the ending inventory of foreclosed properties since December 31, 2010.
 
The percentage of our single-family foreclosed properties that we determined were unable to market for sale was 46% as of September 30, 2011 compared with 41% as of December 31, 2010. The two largest concentrations of the unable to market for sale inventory are: (1) properties that are still occupied by the person or personal property, and the eviction process is not yet complete (“occupied status”); and (2) properties that are within the period during which state law allows the former mortgagor and second lien holders to redeem the property (“redemption status”). Being in occupied status lengthens the time a property remains in our REO inventory by an average of one to three months, and occupied status properties represented approximately 32% of our unable to market for sale inventory as of September 30, 2011 compared with approximately 40% as of December 31, 2010. Being in redemption status lengthens the time a property remains in our REO inventory by an average of two to six months, and redemption status properties represented approximately 26% of our unable to market for sale inventory as of September 30, 2011 compared with approximately 27% as of December 31, 2010. As we are unable to market a higher portion of our


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inventory, it slows the pace at which we can dispose of our properties and increases our foreclosed property expense related to costs associated with ensuring that the property is vacant and maintaining the property.
 
As shown in Table 43 we have experienced a disproportionate share of foreclosures in certain states as compared with their share of our guaranty book of business. This is primarily because these states have had significant home price depreciation or weak economies and, in the case of California and Florida specifically, a significant number of Alt-A loans.
 
Table 43:  Single-Family Acquired Property Concentration Analysis
 
                                 
            For the Nine Months Ended
    As of   September 30, 2011   September 30, 2010
    September 30, 2011   December 31, 2010   Percentage of
  Percentage of
    Percentage of
  Percentage of
  Properties
  Properties
    Book
  Book
  Acquired
  Acquired
    Outstanding(1)   Outstanding(1)   by Foreclosure(2)   by Foreclosure(2)
 
States:
                               
Arizona, California, Florida, and Nevada
    28 %     28 %     35 %     36 %
Illinois, Indiana, Michigan, and Ohio
    10       11       16       18  
 
 
(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) Calculated based on the number of properties acquired through foreclosure during the period divided by the total number of properties acquired through foreclosure.
 
Multifamily Mortgage Credit Risk Management
 
The credit risk profile of our multifamily mortgage credit book of business is influenced by: 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 Operations—Credit-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.
 
Multifamily Acquisition Policy and Underwriting Standards
 
Our Multifamily 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). 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 financial institutions to smaller independent multifamily lenders. 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, depending on the product type and/or loan size. Loans delivered to us by DUS lenders and their affiliates represented 85% of our multifamily guaranty book of business as of September 30, 2011 compared with 84% as of December 31, 2010.
 
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.


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Lenders in the DUS program typically share in loan-level credit losses in one of two ways: (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 share up to one-third of the credit losses on an equal basis with us. Other non-DUS lenders typically share or absorb credit losses based on a negotiated percentage of the loan or the pool balance.
 
For our purchase or guarantee of multifamily mortgage loans, we and our lender partners rely significantly on sound underwriting standards, which often include third party appraisals and actual cash flow analysis. Our standards for multifamily loans specify maximum original LTV ratio and minimum debt service coverage ratio (“DSCR”) that vary based on the loan characteristics. Original LTV reflects the borrower equity in the transaction. Similarly, original DSCR reflects the anticipated cash flow on the transaction at underwriting, with additional measures taken to address higher risk loans. Original LTV and DSCR values have proven to be reliable indicators of future credit performance.
 
Multifamily Portfolio Diversification and Monitoring
 
Diversification within our multifamily mortgage credit book of business by geographic concentration, term-to-maturity, interest rate structure, borrower concentration and credit enhancement arrangement 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 guaranty book of business was 66% as of September 30, 2011 and 67% as of December 31, 2010. The percentage of our multifamily guaranty book of business with an original LTV ratio greater than 80% was 5% as of both September 30, 2011 and December 31, 2010. We present the current risk profile of our multifamily guaranty book of business in “Note 6, Financial Guarantees.”
 
We and our lender partners monitor the performance and risk concentrations of our multifamily loans and the underlying properties on an ongoing basis throughout the life of the investment at the loan, property and portfolio level. We track the physical condition of the 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 that merit closer attention or loss mitigation actions, in addition to capitalization rates. We are managing our exposure to refinancing risk for multifamily loans maturing in the next several years. We have a team that proactively manages upcoming loan maturities to minimize losses on maturing loans. This team assists lenders and borrowers with timely and appropriate refinancing of maturing loans with the goal of reducing defaults and foreclosures related to loans maturing in the near term. For our investments in multifamily loans, the primary asset management responsibilities are performed by our DUS and other multifamily lenders. We periodically evaluate these lenders’ and our other third party service providers’ performance for compliance with our asset management criteria.
 
As a part of our ongoing credit risk management process, we have worked with our lender partners over the last two years to collect limited quarterly property operating measures from borrowers, in addition to more complete annual financial updates, for those loans where we are entitled contractually to receive such information. As part of our asset management process, we focus on loans with an estimated current DSCR below 1.0, as that is an indicator of heightened default risk. The percentage of loans in our multifamily guaranty book of business with a current debt service coverage ratio less than 1.0 was approximately 8% as of September 30, 2011 and approximately 10% as of December 31, 2010. Our estimates of current DSCRs are based on the latest available income information for these properties and our assessments of market conditions. Although we use the most recently available results of our multifamily borrowers, there is a significant lag in reporting as they prepare their results in the normal course of business.
 
Problem Loan Management and Foreclosure Prevention
 
The number of multifamily loans at risk of becoming seriously delinquent has decreased in 2011, as early-stage delinquencies have decreased. Since delinquency rates are a lagging indicator, we expect to continue to incur additional credit losses. We periodically refine our underwriting standards in response to market


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conditions and enact proactive portfolio management and monitoring which are each designed to keep credit losses to a low level relative to our multifamily guaranty book of business.
 
Problem Loan Statistics
 
Table 44 provides a comparison of our multifamily serious delinquency rates for loans with and without credit enhancement in our multifamily guaranty book of business. We classify multifamily loans as seriously delinquent when payment is 60 days or more past due. We include the unpaid principal balance of 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.
 
Table 44:  Multifamily Serious Delinquency Rates
 
                                                 
    As of  
    September 30, 2011     December 31, 2010     September 30, 2010  
    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
    90 %     0.54 %     89 %     0.67 %     89 %     0.60 %
Non-credit enhanced
    10       0.86       11       1.01       11       1.06  
                                                 
Total multifamily loans
    100 %     0.57 %     100 %     0.71 %     100 %     0.65 %
                                                 
 
The multifamily serious delinquency rate decreased as of September 30, 2011 compared with both December 31, 2010 and September 30, 2010 as national multifamily market fundamentals continued to improve. Table 45 provides a comparison of our multifamily serious delinquency rates for loans acquired through DUS lenders and loans acquired through non-DUS lenders.
 
Table 45:  Multifamily Concentration Analysis
 
                                                                 
        Percentage
        of
        Multifamily
        Credit
        Losses
    As of   For the Nine
    September 30, 2011   December 31, 2010   September 30, 2010   Months
    Percentage
  Serious
  Percentage
  Serious
  Percentage
  Serious
  Ended
    of Book
  Delinquency
  of Book
  Delinquency
  of Book
  Delinquency
  September 30,
    Outstanding   Rate   Outstanding   Rate   Outstanding   Rate   2011   2010
 
DUS small balance loans(1)
    8 %     0.64 %     8 %     0.55 %     8 %     0.57 %     7 %     7 %
DUS non small balance loans(2)
    72       0.46       70       0.56       69       0.46       72       63  
Non-DUS small balance loans(1)
    9       1.27       10       1.47       11       1.58       14       6  
Non-DUS non small balance loans(2)
    11       0.67       12       0.97       12       0.95       7       24  
 
 
(1) Loans with original unpaid principal balances less than or equal to $3 million as well as loans in high cost markets with original unpaid principal balances less than or equal to $5 million.
 
(2) Loans with original unpaid principal balances greater than $3 million as well as loans in high cost markets with original unpaid principal balances greater than $5 million.
 
The DUS loans in our guaranty book of business have lower delinquency rates when compared with the non-DUS loans in our guaranty book primarily due to the DUS model, which has several features that align our interest with those of the borrowers and lenders. Smaller balance non-DUS loans continue to represent a disproportionate share of delinquencies but they are generally covered by loss sharing arrangements, which limit the credit losses incurred by us.
 
In addition, Florida, Michigan, Nevada and Ohio have a disproportionate share of seriously delinquent loans compared with their share of the multifamily guaranty book of business as a result of slow economic recovery


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in certain areas of these states. These states accounted for 45% of multifamily serious delinquencies but only 9% of the multifamily guaranty book of business as of September 30, 2011.
 
REO Management
 
Foreclosure and REO activity affect the level of credit losses. Table 46 compares our held for sale multifamily REO balances for the periods indicated.
 
Table 46:  Multifamily Foreclosed Properties
 
                 
    For the Nine
 
    Months Ended
 
    September 30,  
    2011     2010  
 
Multifamily foreclosed properties (number of properties):
               
Beginning of period inventory of multifamily foreclosed properties (REO)
    222       73  
Total properties acquired through foreclosure
    190       160  
Disposition of REO
    (138 )     (49 )
                 
End of period inventory of multifamily foreclosed properties (REO)
    274       184  
                 
Carrying value of multifamily foreclosed properties (dollars in millions)
  $ 561     $ 523  
                 
 
The increase in our multifamily foreclosed property inventory reflects the continuing stress on our multifamily guaranty book of business as certain local markets and properties continue to exhibit weak fundamentals, though national multifamily market fundamentals have continued to improve in 2011.
 
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 credit risk is the risk that these institutional counterparties may fail to fulfill their contractual obligations to us, including seller/servicers who are obligated to repurchase loans from us or reimburse us for losses in certain circumstances. Defaults by a counterparty with significant obligations to us could result in significant financial losses to us.
 
See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” in our 2010 Form 10-K for additional information about our institutional counterparties, including counterparty risk we face from mortgage originators and investors, from debt security and mortgage dealers and from document custodians.
 
Mortgage Seller/Servicers
 
Our business with our mortgage seller/servicers is concentrated. Our ten largest single-family mortgage servicers, including their affiliates, serviced 75% of our single-family guaranty book of business as of September 30, 2011, compared to 77% as of December 31, 2010. Our largest mortgage servicer is Bank of America, N.A. which, together with its affiliates, serviced approximately 24% of our single-family guaranty book of business as of September 30, 2011, compared with 26% as of December 31, 2010. In addition, we had two other mortgage servicers, JPMorgan Chase & Co. and Wells Fargo Bank, N.A., that, with their affiliates, each serviced over 10% of our single-family guaranty book of business as of September 30, 2011. In addition, Wells Fargo Bank serviced over 10% of our multifamily guaranty book of business as of both September 30, 2011 and December 31, 2010. Because we delegate the servicing of our mortgage loans to mortgage servicers and do not have our own servicing function, servicers’ lack of appropriate process controls or the loss of business from a significant mortgage servicer counterparty could pose significant risks to our ability to conduct our business effectively. During the first nine months of 2011, our primary mortgage servicers have generally continued to meet their financial obligations to us. However, many of our largest servicer counterparties continue to reevaluate the effectiveness of their process controls. Many servicers are


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subject to consent orders by their regulators that require the servicers to correct foreclosure process deficiencies and improve their servicing and foreclosure practices. This has resulted in extended foreclosure timelines and therefore, additional holding costs for us, such as property taxes and insurance, repairs and maintenance, and valuation adjustments due to home price changes.
 
Our mortgage seller/servicers are obligated to repurchase loans or foreclosed properties, or reimburse us for losses if the foreclosed property has been sold, under certain circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements, if loan representations and warranties are violated or if mortgage insurers rescind coverage. We refer to our demands that seller/servicers meet these obligations collectively as “repurchase requests.” The number of our repurchase requests remained high during the first nine months of 2011. The aggregate unpaid principal balance of loans repurchased by our seller/servicers pursuant to their contractual obligations was approximately $8.8 billion in the first nine months of 2011, compared with $4.7 billion during the first nine months of 2010. In addition, as of September 30, 2011, we had $9.5 billion in outstanding repurchase requests related to loans that had been reviewed for potential breaches of contractual obligations, compared with $5.0 billion as of December 31, 2010. As of September 30, 2011, approximately 45% of our total outstanding repurchase requests had been made to one of our seller/servicers, compared with 41% as of December 31, 2010. As of September 30, 2011, 25% of our outstanding repurchase requests had been outstanding for more than 120 days from either the original repurchase request date or, for lenders remitting after the REO is disposed, the date of our final loss determination, compared with 30% as of December 31, 2010. As of September 30, 2011, approximately 48% of our repurchase requests outstanding for more than 120 days had been made to one of our seller/servicers, compared with 37% as of December 31, 2010.
 
The amount of our outstanding repurchase requests provided above is based on the unpaid principal balance of the loans underlying the repurchase request issued, not the actual amount we have requested from the lenders. In some cases, we allow lenders to remit payment equal to our loss, including imputed interest, on the loan after we have disposed of the REO, which is less than the unpaid principal balance of the loan. As a result, we expect our actual cash receipts relating to these outstanding repurchase requests to be significantly lower than the unpaid principal balance of the loan. In addition, amounts relating to repurchase requests originating from missing documentation or loan files are excluded from the total requests outstanding until the completion of a full underwriting review, once the documents and loan files are received.
 
In June 2011, we issued an announcement that (1) reminded lenders of their existing obligations with respect to mortgage insurance; (2) required lenders to report to us mortgage insurance rescissions, mortgage insurer-initiated cancellations, and claim denials; (3) confirmed our repurchase policies with respect to these actions; (4) temporarily extended from 30 to 90 days our timeframe within which lenders must repurchase loans and provided an appeal process; (5) required that all outstanding mortgage insurance-related repurchase demands as of April 30, 2011 be satisfactorily resolved by September 30, 2011; (6) reiterated our process for the redelivery of certain repurchased loans; and (7) reiterated our remedies if a lender fails to meet our repurchase requirements.
 
Not all outstanding mortgage insurance related repurchase demands as of April 30, 2011 were resolved by September 30, 2011. We entered into “tolling agreements” with three of our major lenders that required these lenders to post collateral based on their maximum exposure in exchange for an extension until June 2012 to resolve their outstanding mortgage insurance related repurchase demands. In addition, we provided some of our lenders that did not have a substantial amount of unresolved mortgage insurance related demands, an extension until December 2011. One of our mortgage seller/servicers has disputed these demands and accounts for nearly half of these unresolved mortgage insurance related requests.
 
We continue to aggressively pursue our contractual rights associated with these repurchase requests. If we are unable to resolve these matters to our satisfaction, we may seek additional remedies. Failure by a seller/servicer to repurchase a loan or to otherwise make us whole for our losses, may result in the imposition of certain sanctions including, but not limited to:
 
  •  requiring the posting of collateral,
 
  •  denying transfer of servicing requests or denying pledged servicing requests,
 
  •  imposing limits on trading desk transactions,


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  •  imposing compensatory fees,
 
  •  modifying or suspending any contract or agreement with a lender, or
 
  •  suspending or terminating a lender or imposing some other formal sanction on a lender.
 
If we are unable to resolve our repurchase requests, either through collection or additional remedies, we will not recover the losses we have recognized from the associated loans.
 
We continue to work with our mortgage seller/servicers to fulfill outstanding repurchase requests; however, as the volume of repurchase requests increases, the risk increases that affected seller/servicers will not be willing or able to meet the terms of their repurchase obligations and we may be unable to recover on all outstanding loan repurchase obligations resulting from seller/servicers’ breaches of contractual obligations. We expect that the amount of our outstanding repurchase requests will remain high.
 
If a significant seller/servicer counterparty, or a number of seller/servicers, fails to fulfill its repurchase obligations to us, it could result in a significant increase in our credit losses and have a material adverse effect on our results of operations and financial condition. We estimate our allowance for loan losses assuming the benefit of repurchase demands only from those counterparties we determine have the financial capacity to fulfill this obligation. Accordingly, as of September 30, 2011, we do not believe that we have any exposure to seller/servicers that lacked the financial capacity to honor their contractual obligations as we assumed no benefit from repurchase demands due to us from these counterparties in estimating our allowance for loan loss.
 
We are exposed to the risk that a mortgage seller/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” in our 2010 Form 10-K for additional discussion on risks of mortgage fraud to which we are exposed.
 
Mortgage Insurers
 
Table 47 presents our maximum potential loss recovery for the primary and pool mortgage insurance coverage on single-family loans in our guaranty book of business and our unpaid principal balance covered by insurance for our mortgage insurer counterparties as of September 30, 2011 and December 31, 2010. The table includes our top eight mortgage insurer counterparties, which provided over 99% of our total mortgage insurance coverage on single-family loans in our guaranty book of business as of both September 30, 2011 and December 31, 2010.


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Table 47:  Mortgage Insurance Coverage
 
                                                 
                Unpaid Principal Balance
 
    Maximum Coverage(1)     Covered By Insurance(2)  
    As of September 30,
    As of
    As of
    As of
 
    2011     December 31,
    September 30,
    December 31,
 
Counterparty:(3)
  Primary     Pool     Total     2010     2011     2010  
    (Dollars in millions)  
 
Mortgage Guaranty Insurance Corporation
  $ 20,322     $ 1,681     $ 22,003     $ 23,277     $ 94,620     $ 101,823  
Radian Guaranty, Inc. 
    14,683       449       15,132       15,370       62,060       64,042  
United Guaranty Residential Insurance Company
    13,913       202       14,115       14,044       58,345       58,416  
Genworth Mortgage Insurance Corporation
    13,655       66       13,721       14,331       55,161       57,845  
PMI Mortgage Insurance Co. 
    11,387       265       11,652       12,359       50,132       53,768  
Republic Mortgage Insurance Company
    8,736       925       9,661       10,566       41,218       46,660  
Triad Guaranty Insurance Corporation
    2,612       892       3,504       3,809       14,620       16,974  
CMG Mortgage Insurance Company(4)
    1,936             1,936       1,938       8,166       8,174  
Others
    434             434       209       2,143       1,140  
                                                 
Total
  $ 87,678     $ 4,480     $ 92,158     $ 95,903     $ 386,465     $ 408,842  
                                                 
Total as a percentage of single-family guaranty book of business
                    3 %     3 %     14 %     14 %
                                                 
 
 
(1) 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.
 
(2) Represents the unpaid principal balance of single-family loans in our guaranty book of business covered under the applicable mortgage insurance policies (i.e., “insurance in force”).
 
(3) Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates and subsidiaries of the counterparty.
 
(4) CMG Mortgage Insurance Company is a joint venture owned by PMI Mortgage Insurance Co. and CUNA Mutual Insurance Society.
 
See “Risk Management—Credit Risk Management—Institutional Counterparty Risk Management—Mortgage Insurers” in our 2010 Form 10-K for a discussion on the credit ratings of our mortgage insurers.
 
We evaluate our mortgage insurer counterparties individually to determine whether or under what conditions they will remain eligible to insure new mortgages sold to us. Following issuance by the Arizona Department of Insurance of a supervisory order directing PMI Mortgage Insurance Co. (“PMI”) and its subsidiary PMI Insurance Co. (“PIC”) to cease offering new commitments for insurance after August 19, 2011 and to cease issuing certificates after September 16, 2011, we notified PMI on August 22, 2011 that, effective immediately, PMI and its subsidiaries, PIC and PMI Mortgage Assurance Co. (“PMAC”), were suspended nationwide as approved mortgage insurers. We simultaneously notified our mortgage sellers and servicers that we would not accept any mortgage loan insured by PMI, PIC or PMAC that is delivered after December 30, 2011, except for refinanced Fannie Mae loans where continuation of the coverage is effected through modification of an existing mortgage insurance certificate.
 
As reported by PMI, on October 20, 2011, PMI received from its regulator an order under which the regulator now has full possession, management and control of PMI. The regulator is also seeking to place PMI into receivership. Pursuant to the order, effective October 24, 2011, the regulator instituted a partial claim payment plan whereby all valid claims under PMI mortgage guaranty insurance policies will be paid 50% in cash and 50% deferred as a policyholder claim. It is uncertain when, and if, PMI’s regulator will allow PMI to begin paying its deferred policyholder claims and/or increase the amount of cash PMI pays on claims.
 
On July 29, 2011, we notified Republic Mortgage Insurance Company (“RMIC”) that, effective immediately, both RMIC and its affiliate, Republic Mortgage Insurance Company of North Carolina (“RMIC-NC”), were suspended nationwide as approved mortgage insurers. We also notified our mortgage sellers and servicers that


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we would not accept any mortgage loan insured by RMIC or RMIC-NC that is delivered after November 30, 2011, except for refinanced Fannie Mae loans where continuation of the coverage is effected through modification of an existing mortgage insurance certificate. On October 12, 2011, RMIC and RMIC-NC each voluntarily entered into an agreement with their regulator to discontinue writing or assuming any new mortgage guaranty insurance business in all states. RMIC’s parent company has indicated that it is more likely than not that the capital contributed to RMIC by its parent company will “continue on a path toward full depletion in relatively short order.”
 
The already weak financial condition of many of our mortgage insurer counterparties deteriorated at an accelerated pace during the third quarter of 2011, which increased the significant risk that these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. In addition to PMI and its subsidiaries, the claims obligations of Triad Guaranty Insurance Corporation (“Triad”) have been partially deferred since June 2009 pursuant to an order from its regulator. The state regulator for RMIC and RMIC-NC could take additional corrective action following their orders to cease writing new business, which may include issuing an order to defer partial payment of claims and/or placing the entities into receivership. While our remaining mortgage insurers have continued to pay claims owed to us, there can be no assurance that they will continue do so given their current financial condition.
 
As of November 7, 2011, four of our mortgage insurers (Triad, RMIC, PMI and Genworth Mortgage Insurance Corporation) have publicly disclosed that they are either in run-off or, absent a waiver, estimate they would not meet state regulatory capital requirements for their main writing entity as of September 30, 2011. An additional two of our mortgage insurers (Mortgage Guaranty Insurance Corporation and Radian Guaranty, Inc.) have disclosed that, in the absence of additional capital contributions to their writing entity, their capital might fall below state regulatory capital requirements in the future. These six mortgage insurers provided a combined $75.7 billion, or 82%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of September 30, 2011. If mortgage insurers are not able to raise capital and they exceed their risk-to-capital limits, they will likely be forced into run-off or receivership unless they can secure and maintain a waiver from their state regulator. In 2010, the parent companies of several of our largest mortgage insurer counterparties raised capital or made contributions in various forms to their respective mortgage insurance subsidiaries. While these actions improved the insurers’ ability to meet state-imposed risk-to-capital limits and their ability to continue paying our claims in full as they came due to the extent of the capital raised or contributions made by the parent companies, our mortgage insurer counterparties’ current financial condition is weak. We are unable to determine how long certain of our mortgage insurer counterparties will remain below their state-imposed risk-to-capital limits.
 
Our mortgage insurer counterparties have increased the number of mortgage loans for which they have rescinded coverage. In those cases where the mortgage insurer has rescinded coverage, we generally require the seller/servicer to repurchase the loan or indemnify us against loss. In 2010, some mortgage insurers disclosed that they entered into agreements with lenders whereby they agreed to waive certain rights to investigate claims for some of the lenders’ insured loans in return for some compensation against loss. Although these agreements do not affect our rights to demand repurchase in the event of violations of lender representations and warranties, these agreements are likely to result in fewer mortgage insurance rescissions for certain groups of loans.
 
As a result, in April 2011, we issued an announcement which prohibited servicers from entering into any agreement that modifies the terms of an approved mortgage insurance master policy on loans delivered to us. We also required servicers to disclose any such agreements with mortgage insurers to us. With respect to our mortgage insurance counterparties, changes to the substance of their master policies have required our prior approval since 2005. In October 2010, we required our top mortgage insurers to notify us promptly of any agreement that affects their investigative or rescission rights. In April 2011, we further clarified and amended our mortgage insurer requirements to prohibit any agreement that has the effect of modifying a master policy, including any investigative or rescission rights, absent our approval. By taking these steps, we expect to mitigate the risk of loss for loans that would have resulted in mortgage insurance rescission, and—as a result—a lender repurchase, for loan defects that we may not have otherwise uncovered in our independent review process.


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We evaluate the financial condition of our mortgage insurer counterparties to assess whether we have incurred probable losses in connection with our coverage. As of September 30, 2011, our allowance for loan losses of $71.4 billion, allowance for accrued interest receivable of $2.2 billion and reserve for guaranty losses of $916 million incorporated an estimated recovery amount of approximately $12.7 billion from mortgage insurance related both to loans that are individually measured for impairment and those that are collectively reserved. This amount is comprised of the contractual recovery of approximately $15.1 billion as of September 30, 2011 and an adjustment of approximately $2.4 billion which reduces the contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully pay those claims. As of December 31, 2010, our allowance for loan losses of $61.6 billion, allowance for accrued interest receivable of $3.4 billion and reserve for guaranty losses of $323 million incorporated an estimated recovery amount of approximately $16.4 billion from mortgage insurance related both to loans that are individually measured for impairment and those that are collectively reserved. This amount is comprised of the contractual recovery of approximately $17.5 billion as of December 31, 2010 and an adjustment of approximately $1.2 billion, which reduces the contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully pay those claims. Our valuation allowance for these receivables increased significantly from December 31, 2010 to September 30, 2011 as a result of our determination that our mortgage insurer counterparties’ financial condition has deteriorated.
 
When an insured loan held in our mortgage portfolio subsequently goes into foreclosure, we charge off the loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds insurance coverage, the initial receivable becomes due from the mortgage seller/servicer. We had outstanding receivables of $3.7 billion as of September 30, 2011 and $4.4 billion as of December 31, 2010 related to amounts claimed on insured, defaulted loans that we have not yet received, of which $494 million as of September 30, 2011 and $648 million as of December 31, 2010 was due from our mortgage seller/servicers. We assessed the total outstanding receivables for collectibility, and they were recorded net of a valuation allowance of $589 million as of September 30, 2011 and $317 million as of December 31, 2010 in “Other assets.” These mortgage insurance receivables are short-term in nature, having an average duration of approximately six months, and the valuation allowance reduces our claim receivable to the amount that we consider probable of collection. We received proceeds under our primary and pool mortgage insurance policies for single-family loans of $1.4 billion for the third quarter of 2011, $4.6 billion for the first nine months of 2011 and $6.4 billion for the year ended December 31, 2010.
 
Financial Guarantors
 
We are the beneficiary of financial guarantees on non-agency securities held in our investment portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. Table 48 displays the total unpaid principal balance of guaranteed non-agency securities in our portfolio as of September 30, 2011, and December 31, 2010.
 
Table 48:  Unpaid Principal Balance of Financial Guarantees
 
                 
    As of  
    September 30, 2011     December 31, 2010  
    (Dollars in millions)  
 
Alt-A private-label securities
  $ 1,356     $ 1,544  
Subprime private-label securities
    1,425       1,487  
Mortgage revenue bonds
    5,003       5,264  
Other mortgage-related securities
    324       347  
Non mortgage-related securities
    58       172  
                 
Total
  $ 8,166     $ 8,814  
                 
 
With the exception of Ambac Assurance Corporation (“Ambac”), none of our financial guarantor counterparties has failed to repay us for claims under guaranty contracts. Ambac provided coverage on


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$3.4 billion, or 41%, of our total guarantees, as of September 30, 2011. Based on the stressed financial condition of our financial guarantor counterparties, we believe that all but one of our other financial guarantor counterparties may not be able to fully meet their obligations to us in the future. We model our securities without assuming the benefit of financial guarantees. We then adjust results for those external financial guarantees from guarantors that we determine are creditworthy, although we continue to seek collection of any amounts due to us from all counterparties. As of September 30, 2011, when modeling our securities for impairments we did not assume the benefit of external financial guarantees from any counterparty.
 
We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that totaled $32.6 billion as of September 30, 2011 and $25.7 billion as of December 31, 2010.
 
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 $13.3 billion as of September 30, 2011 and $15.6 billion as of December 31, 2010. As of September 30, 2011, 58% of our maximum potential loss recovery on single-family loans was from three lenders and as of December 31, 2010, 56% of our maximum potential loss recovery on single-family loans was from three lenders. Our maximum potential loss recovery from lenders under these risk sharing agreements on DUS and non-DUS multifamily loans was $31.6 billion as of September 30, 2011 and $30.3 billion as of December 31, 2010. As of September 30, 2011, 40% of our maximum potential loss recovery on multifamily loans was from three DUS lenders. As of December 31, 2010, 41% of our maximum potential loss recovery on multifamily loans was from three DUS lenders.
 
Unfavorable market conditions have adversely affected, and 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 S&P, Moody’s and Fitch ratings) was 47% as of September 30, 2011 and 46% as of December 31, 2010. The percentage of these recourse obligations to lender counterparties rated below investment grade was 24% as of September 30, 2011 and 23% as of December 31, 2010. The remaining percentage of these recourse obligations were to lender counterparties that were not rated by rating agencies, which was 29% as of September 30, 2011 and 31% as of December 31, 2010. Given the stressed financial condition of some of our lenders, we expect in some cases we will recover less, perhaps significantly less, than the amount the lender is obligated to provide us under our risk sharing arrangement with them. Depending on the financial strength of the counterparty, we may require a lender to pledge collateral to secure its recourse obligations.
 
As noted above in “Multifamily Credit Risk Management,” our primary multifamily delivery channel is our DUS program, which is comprised of lenders that span the spectrum from large depositories to independent non-bank financial institutions. As of September 30, 2011, approximately 53% of the unpaid principal balance of loans in our multifamily guaranty book of business serviced by our DUS lenders were from institutions with an external investment grade credit rating or a guarantee from an affiliate with an external investment grade credit rating. Given the recourse nature of the DUS program, the lenders are bound by eligibility standards that dictate, among other items, minimum capital and liquidity levels, and the posting of collateral at a highly rated custodian to secure a portion of the lenders’ future obligations. We actively monitor the financial condition of these lenders to help ensure the level of risk remains within our standards.
 
Custodial Depository Institutions
 
A total of $52.1 billion in deposits for single-family payments were received and held by 286 institutions in the month of September 2011 and a total of $75.4 billion in deposits for single-family payments were received and held by 289 institutions in the month of December 2010. Of these total deposits, 93% as of September 30, 2011 and 92% as of December 31, 2010 were held by institutions rated as investment grade by S&P, Moody’s and Fitch. Our ten largest custodial depository institutions held 93% of these deposits as of both September 30, 2011 and December 31, 2010.


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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 certificate holders. Accordingly, the insolvency of one of our principal custodial depository counterparties could result in significant financial losses to us. In the month of September 2011, approximately $3.6 billion or 7% of our total deposits for single-family payments received and held by these institutions was in excess of the deposit insurance protection limit compared with approximately $6.2 billion or 8% in the month of December 2010. These amounts can vary as they are calculated based on individual payments of mortgage borrowers and we must estimate which borrowers are paying their regular principal and interest payments and other types of payments, such as prepayments from refinancing or sales.
 
Issuers of Investments Held in our Cash and Other Investments Portfolio
 
Our cash and other investments portfolio primarily consists of cash and cash equivalents, federal funds sold and securities purchased under agreements to resell or similar arrangements, U.S. Treasury securities and asset-backed securities. Our cash and other investment counterparties are primarily financial institutions and the Federal Reserve Bank. See “Liquidity and Capital Management—Liquidity Management—Cash and Other Investments Portfolio” for more detailed information on our cash and other investments portfolio.
 
Our cash and other investments portfolio, which totaled $103.5 billion as of September 30, 2011, included $41.9 billion of U.S. Treasury securities and $5.0 billion of unsecured positions. As of December 31, 2010, our cash and other investments portfolio totaled $61.8 billion and included $31.5 billion of U.S. Treasury securities and $10.3 billion of unsecured positions. As of both September 30, 2011 and December 31, 2010, all of our unsecured positions were short-term deposits with financial institutions which had short-term credit ratings of A-1, P-1, F1 (or equivalent) or higher from Standard & Poor’s, Moody’s and Fitch ratings, respectively.
 
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. The fair value of derivatives in a gain position is included in our condensed consolidated balance sheets in “Other assets.” Typically, we seek to manage credit exposure by contracting with experienced counterparties that are rated A- (or its equivalent) or better by the major ratings organizations. We also manage our exposure by requiring counterparties to post collateral. The collateral includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.
 
Our net credit exposure on derivatives contracts increased to $164 million as of September 30, 2011, from $152 million as of December 31, 2010. We had outstanding interest rate and foreign currency derivative transactions with 15 counterparties as of both September 30, 2011 and December 31, 2010. Derivatives transactions with nine of our counterparties accounted for approximately 90% of our total outstanding notional amount as of September 30, 2011, with each of these counterparties accounting for between approximately 6% and 16% of the total outstanding notional amount. In addition to the 15 counterparties with whom we had outstanding notional amounts and master netting agreements as of September 30, 2011, we had a master netting agreement with one more counterparty with whom we may enter into interest rate derivative or foreign currency derivative transactions in the future.
 
We expect that, under the Dodd-Frank Act, we will be required in the future to submit certain interest rate swaps for clearing to a derivatives clearing organization. In anticipation of those requirements, we have cleared a small number of new interest rate swap transactions with the Chicago Mercantile Exchange, Inc.


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(“CME”), a derivatives clearing organization. As a result, we are exposed to the institutional credit risk of CME and its members that execute and submit our transactions for clearing. Our institutional credit risk exposure to the CME or other comparable exchanges or trading facilities, as well as their members, is likely to increase in the future.
 
See “Note 9, Derivative Instruments” for information on the outstanding notional amount and additional information on our risk management derivative contracts as of September 30, 2011 and December 31, 2010, as well as a discussion of our collateral requirements under our derivatives contracts. See “Risk Factors” for a discussion of the impact of decreases in our credit ratings on our collateral obligations under our derivatives contracts. Also see “Risk Factors” in our 2010 Form 10-K for a discussion of the risks to our business posed by interest rate risk and a discussion of the risks to our business as a result of the concentration of our institutional counterparties.
 
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. We describe our sources of interest rate risk exposure and our strategy for managing interest rate risk and spread risk in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” in our 2010 Form 10-K.
 
Measurement of Interest Rate Risk
 
Below we present two quantitative metrics that provide 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. The metrics presented 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. On a continuous basis, management makes judgments about the appropriateness of the risk assessments and will make adjustments as necessary to properly assess our interest rate exposure and manage our interest rate risk. The methodologies used to calculate risk estimates are periodically changed on a prospective basis to reflect improvements in the underlying estimation process.
 
Interest Rate 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.
 
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 of 16.7 basis points for the 1-year rate and 8.3 basis points for the 30-year rate. We believe the aforementioned interest rate shocks for our monthly disclosures represent moderate movements in interest rates over a one-month period.


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Duration Gap
 
Duration gap 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 gap indicates that the duration of our assets exceeds the duration of our liabilities. We disclose duration gap on a monthly basis under the caption “Interest Rate Risk Disclosures” in our Monthly Summaries, which are available on our website and announced in a press release.
 
The sensitivity measures presented in Table 49, 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 market 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; and (3) the monthly disclosure shows the most adverse pre-tax impact on the market 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.
 
In addition, Table 49 also provides the average, minimum, maximum and standard deviation for duration gap and for the most adverse market value impact on the net portfolio for non-parallel and parallel interest rate shocks for the three months ended September 30, 2011 and 2010.
 
Table 49:  Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve(1)
 
                 
    As of
    September 30, 2011   December 31, 2010
    (Dollars in billions)
 
Rate level shock:
               
-100 basis points
  $ 0.1     $ (0.8 )
-50 basis points
          (0.2 )
+50 basis points
          (0.2 )
+100 basis points
          (0.5 )
Rate slope shock:
               
-25 basis points (flattening)
          (0.1 )
+25 basis points (steepening)
          0.1  
 
                         
    For the Three Months Ended September 30, 2011  
    Duration
    Rate Slope Shock
    Rate Level Shock
 
    Gap     25 Bps     50 Bps  
          Exposure  
          (Dollars in billions)  
    (In months)        
 
Average
    0.1     $ 0.1     $ 0.2  
Minimum
    (0.7 )            
Maximum
    0.8       0.2       0.3  
Standard deviation
    0.3       0.1       0.1  
 


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    For the Three Months Ended September 30, 2010  
    Duration
    Rate Slope Shock
    Rate Level Shock
 
    Gap     25 Bps     50 Bps  
          Exposure  
          (Dollars in billions)  
    (In months)        
 
Average
    0.2     $     $ 0.2  
Minimum
    (0.6 )            
Maximum
    0.7       0.1       0.4  
Standard deviation
    0.3             0.1  
 
 
(1) Computed based on changes in LIBOR swap rates.
 
A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with our debt issuance, which includes callable debt. We use derivatives to help manage the residual interest rate risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk exposure at consistently low levels in a wide range of interest-rate environments. Table 50 shows an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.
 
Table 50:  Derivative Impact on Interest Rate Risk (50 Basis Points)
 
                         
    Before
  After
  Effect of
    Derivatives   Derivatives   Derivatives
    (Dollars in billions)
 
As of September 30, 2011
  $ (1.4 )   $     $ 1.4  
As of December 31, 2010
  $ (0.9 )   $ (0.2 )   $ 0.7  
 
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. 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.
 
In “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management—Measurement of Interest Rate Risk—Other Interest Rate Risk Information” in our 2010 Form 10-K, we provided additional interest rate sensitivities including separate disclosure of the potential impact on the fair value of our trading assets and other financial instruments. As of September 30, 2011, these sensitivities were relatively unchanged as compared with December 31, 2010. The fair value of our trading financial instruments and our other financial instruments as of September 30, 2011 and December 31, 2010 can be found in “Note 13, Fair Value.”
 
Liquidity Risk Management
 
See “Liquidity and Capital Management—Liquidity Management” for a discussion on how we manage liquidity risk.

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IMPACT OF FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
 
We identify and discuss the expected impact on our condensed consolidated financial statements of recently issued accounting pronouncements in “Note 1, Summary of Significant Accounting Policies.”
 
 
FORWARD-LOOKING STATEMENTS
 
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). In addition, our senior management may from time to time make forward-looking statements orally to analysts, investors, the news media and others. Forward-looking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” or similar words.
 
Among the forward-looking statements in this report are statements relating to:
 
  •  Our expectation that loans in our new single-family book of business will be profitable over their lifetime;
 
  •  Our belief that credit losses on loans we have acquired since 2009 would exceed guaranty fee revenue if home prices declined nationally by approximately 10% from their September 2011 levels over the next five years, based on our home price index;
 
  •  Our expectations regarding whether loans we acquired in specific years will be profitable or unprofitable;
 
  •  Our expectations regarding the performance and profitability of loans we acquired in 2004 and the factors that will impact the performance and profitability of these loans;
 
  •  Our expectation that our 2005 through 2008 vintages will be significantly more unprofitable than our 2004 vintage;
 
  •  Our expectation that our acquisitions of loans with high LTV ratios will increase in 2012 as a result of recently announced changes to HARP;
 
  •  Our expectations regarding the credit profile of loans we acquire in the future, and the factors that will influence their credit profile;
 
  •  Our estimate that, while single-family loans that we acquired from 2005 through 2008 will give rise to additional credit losses that we will realize when the loans are charged off (upon foreclosure or our acceptance of a short sale or deed-in-lieu of foreclosure), we have reserved for the substantial majority of the remaining losses on these loans;
 
  •  Our expectation that future defaults on loans in our legacy book of business and the resulting charge-offs will occur over a period of years;
 
  •  Our expectation that it will take years before our REO inventory is reduced to pre-2008 levels;
 
  •  Our expectation that we will realize as credit losses an estimated two-thirds of the fair value losses on loans purchased out of MBS trusts that are reflected in our condensed consolidated balance sheets, and eventually recover the remaining one-third, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan;
 
  •  Our belief that successful modifications will ultimately reduce our credit losses over the long term from what they otherwise would have been if we had taken the loans to foreclosure;
 
  •  Our expectation that serious delinquency rates will continue to be affected in the future by home price changes, changes in other macroeconomic conditions, the length of the foreclosure process, the volume of loan modifications and the extent to which borrowers with modified loans continue to make timely payments;


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  •  Our belief that foreclosure delays resulting from changes in the foreclosure environment will continue to negatively impact our foreclosure timelines, credit-related expenses and single-family serious delinquency rates, and will delay the recovery of the housing market;
 
  •  Our expectation that employment will likely need to post sustained improvement for an extended period to have a positive impact on housing;
 
  •  Our expectation that weakness in the housing and mortgage markets will continue in the fourth quarter of 2011;
 
  •  Our expectation that home sales are unlikely to increase until the unemployment rate improves further;
 
  •  Our estimate that the likelihood of a recession by the end of next year is close to 50%;
 
  •  Our expectation that single-family default and severity rates, as well as the level of single-family foreclosures, will remain high in 2011;
 
  •  Our expectation that multifamily charge-offs in 2011 will remain generally commensurate with 2010 levels as certain local markets and properties continue to exhibit weak fundamentals;
 
  •  Our expectations that the recently announced changes to HARP will result in our acquiring more refinancings in 2012 than we would have acquired in the absence of the changes, but that we will acquire fewer refinancings overall in each of 2011 and 2012 than in 2010 as a result of the high number of mortgages that have already refinanced to low rates in recent years;
 
  •  Our expectation that the pace of our loan acquisitions overall for each of 2011 and 2012 will be lower than in 2010;
 
  •  Our belief that our loan acquisitions could be negatively affected by the decrease in our maximum loan limit in the fourth quarter of 2011;
 
  •  Our expectation that if FHA continues to be the lower-cost option for some consumers, and in some cases the only option, for loans with higher LTV ratios, our market share could be adversely impacted;
 
  •  Our expectation that our future revenues will be negatively impacted to the extent our acquisitions decline;
 
  •  Our estimation that total originations in the U.S. single-family mortgage market in 2011 will decrease from 2010 levels by approximately 23%, from an estimated $1.7 trillion to an estimated $1.3 trillion, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decline from approximately $1.1 trillion to approximately $905 billion;
 
  •  Our expectation that home prices on a national basis will decline further, with greater declines in some geographic areas than others, before stabilizing in 2012;
 
  •  Our expectations regarding regional variations in home price declines and stabilization;
 
  •  Our expectation of a peak-to-trough home price decline on a national basis ranging from 22% to 28%, and our expectation that it would take the occurrence of an additional adverse economic event to reach the high end of the range;
 
  •  Our expectation that our credit losses will be lower in 2011 than in 2010;
 
  •  Our expectation that we will not earn profits in excess of our annual dividend obligation to Treasury for the indefinite future;
 
  •  Our expectation that the Acting Director of FHFA will submit a request to Treasury on our behalf for $7.8 billion to eliminate our net worth deficit as of September 30, 2011;


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  •  Our expectation that we will request additional draws under the senior preferred stock purchase agreement in future periods, which will further increase the dividends we owe to Treasury on the senior preferred stock;
 
  •  Our expectation that over time our dividend obligation to Treasury will constitute an increasing portion of our future draws under the senior preferred stock purchase agreement;
 
  •  Our expectation that uncertainty regarding the future of our company will continue;
 
  •  Our expectation that Congress will continue to hold hearings and consider legislation in the remainder of 2011 and in 2012 on the future status of Fannie Mae and Freddie Mac;
 
  •  Our belief that, as drafted, bills introduced in Congress that would require FHFA to make a determination within two years of enactment whether the GSEs were financially viable and, if the GSEs were determined to be not financially viable, to place them into receivership may upon enactment impair our ability to issue securities in the capital markets and therefore our ability to conduct our business, absent the federal government providing an explicit guarantee of our existing and ongoing liabilities;
 
  •  Our expectations regarding when fees for loans refinanced under HARP’s revised terms will be announced;
 
  •  Our expectation that our single-family guaranty fees will increase in the coming years;
 
  •  Our expectations regarding a transitional period as we phase out the practice of requiring mortgage servicers to use our network of retained attorneys to perform default- and foreclosure-related legal services for our loans;
 
  •  Our expectation that we will continue to purchase loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity, and other factors, including the limit on mortgage assets that we may own pursuant to the senior preferred stock purchase agreement;
 
  •  Our expectation that our mortgage portfolio will continue to decrease due to the restrictions on the amount of mortgage assets we may own under the terms of our senior preferred stock purchase agreement with Treasury;
 
  •  Our expectation that the current market premium portion of our current estimate of fair value will not impact future Treasury draws, which is based on our intention not to have another party assume the credit risk inherent in our book of business;
 
  •  Our expectation that our debt funding needs will decline in future periods as we reduce the size of our mortgage portfolio in compliance with the requirement of the senior preferred stock purchase agreement;
 
  •  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;
 
  •  Our intention 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;
 
  •  Our expectations regarding our credit ratings and their impact on us;
 
  •  Our expectation that our acquisitions of Alt-A mortgage loans will continue to be minimal in future periods and the percentage of the book of business attributable to Alt-A will continue to decrease over time;
 
  •  Our expectation that the volume of our foreclosure alternatives will remain high throughout the remainder of 2011;
 
  •  Our belief that the performance of our workouts will be highly dependent on economic factors, such as unemployment rates, household wealth and income, and home prices;


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  •  Our expectation that the amount of our outstanding repurchase requests to seller/servicers will remain high, and that we may be unable to recover on all outstanding loan repurchase obligations resulting from seller/servicers’ breaches of contractual obligations;
 
  •  Our expectations regarding recoveries from our lenders under risk sharing arrangements, and the possibility that we may require a lender to pledge collateral to secure its recourse obligations;
 
  •  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;
 
  •  Our expectation that we will be required to submit certain interest rate swaps for clearing to a derivatives clearing organization in the future and that our institutional credit risk exposure to the Chicago Mercantile Exchange or other comparable exchanges or trading facilities and their members is likely to increase in the future;
 
  •  Our expectation that we will continue to need funding from Treasury to avoid triggering FHFA’s obligation to place us into receivership; and
 
  •  Our belief 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.
 
Forward-looking statements reflect our management’s expectations, forecasts or predictions of future conditions, events or results based on various assumptions and management’s estimates of trends and economic factors in the markets in which we are active, as well as our business plans. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. Our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. There are a number of factors that could cause actual conditions, events or results to differ materially from those described in the forward-looking statements contained in this report, including, but not limited to the following: the uncertainty of our future; legislative and regulatory changes affecting us; challenges we face in retaining and hiring qualified employees; the deteriorated credit performance of many loans in our guaranty book of business; the conservatorship and its effect on our business; the investment by Treasury and its effect on our business; adverse effects from activities we undertake to support the mortgage market and help borrowers; a decrease in our credit ratings; limitations on our ability to access the debt capital markets; further disruptions in the housing and credit markets; defaults by one or more institutional counterparties; our reliance on mortgage servicers; deficiencies in servicer foreclosure processes and the consequences of those deficiencies; guidance by the FASB; operational control weaknesses; our reliance on models; the level and volatility of interest rates and credit spreads; changes in the structure and regulation of the financial services industry; and those factors described in “Risk Factors” in this report and in our 2010 Form 10-K, as well as the factors described in “Executive Summary—Our Strong New Book of Business and Expected Losses on our Legacy Book of Business—Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations” in this report.
 
Readers are cautioned to place forward-looking statements in this report or that we make from time to time into proper context by carefully considering the factors discussed in “Risk Factors” in our 2010 Form 10-K and in this report. Our forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement because of new information, future events or otherwise, except as required under the federal securities laws.


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Item 1.   Financial Statements
 
FANNIE MAE
(In conservatorship)

Condensed Consolidated Balance Sheets— (Unaudited)
(Dollars in millions, except share amounts)
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
 
ASSETS
Cash and cash equivalents (includes $3 and $348, respectively, related to consolidated trusts)
  $ 24,307     $ 17,297  
Restricted cash (includes $51,774 and $59,619, respectively, related to consolidated trusts)
    55,961       63,678  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    35,950       11,751  
Investments in securities:
               
Trading, at fair value (includes $20 and $21, respectively, related to consolidated trusts)
    68,149       56,856  
Available-for-sale, at fair value (includes $1,429 and $1,055, respectively, related to consolidated trusts)
    82,710       94,392  
                 
Total investments in securities
    150,859       151,248  
                 
Mortgage loans:
               
Loans held for sale, at lower of cost or fair value (includes $53 and $661, respectively, related to consolidated trusts)
    309       915  
Loans held for investment, at amortized cost:
               
Of Fannie Mae
    385,247       407,228  
Of consolidated trusts (includes $3,361 and $2,962, respectively, at fair value and loans pledged as collateral that may be sold or repledged of $6,993 and $2,522, respectively)
    2,583,699       2,577,133  
                 
Total loans held for investment
    2,968,946       2,984,361  
Allowance for loan losses
    (71,435 )     (61,556 )
                 
Total loans held for investment, net of allowance
    2,897,511       2,922,805  
                 
Total mortgage loans
    2,897,820       2,923,720  
Accrued interest receivable, net (includes $8,451 and $8,910, respectively, related to consolidated trusts)
    10,862       11,279  
Acquired property, net
    12,195       16,173  
Other assets
    25,923       26,826  
                 
Total assets
  $ 3,213,877     $ 3,221,972  
                 
 
LIABILITIES AND DEFICIT
Liabilities:
               
Accrued interest payable (includes $9,449 and $9,712, respectively, related to consolidated trusts)
  $ 12,928     $ 13,764  
Federal funds purchased and securities sold under agreements to repurchase
          52  
Debt:
               
Of Fannie Mae (includes $845 and $893, respectively, at fair value)
    744,803       780,044  
Of consolidated trusts (includes $3,840 and $2,271, respectively, at fair value)
    2,446,973       2,416,956  
Other liabilities (includes $674 and $893, respectively, related to consolidated trusts)
    16,964       13,673  
                 
Total liabilities
    3,221,668       3,224,489  
                 
Commitments and contingencies (Note 14)
           
Fannie Mae stockholders’ equity (deficit):
               
Senior preferred stock, 1,000,000 shares issued and outstanding
    104,787       88,600  
Preferred stock, 700,000,000 shares are authorized—555,374,922 and 576,868,139 shares issued and outstanding, respectively
    19,130       20,204  
Common stock, no par value, no maximum authorization—1,308,762,703 and 1,270,092,708 shares issued, respectively; 1,157,757,042 and 1,118,504,194 shares outstanding, respectively
    687       667  
Accumulated deficit
    (123,359 )     (102,986 )
Accumulated other comprehensive loss
    (1,696 )     (1,682 )
Treasury stock, at cost, 151,005,661 and 151,588,514 shares, respectively
    (7,402 )     (7,402 )
                 
Total Fannie Mae stockholders’ deficit
    (7,853 )     (2,599 )
                 
Noncontrolling interest
    62       82  
                 
Total deficit
    (7,791 )     (2,517 )
                 
Total liabilities and deficit
  $ 3,213,877     $ 3,221,972  
                 
 
See Notes to Condensed Consolidated Financial Statements


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FANNIE MAE
(In conservatorship)

Condensed Consolidated Statements of Operations and Comprehensive Loss— (Unaudited)
(Dollars and shares in millions, except per share amounts)
 
                                 
    For the Three
    For the Nine
 
    Months Ended
    Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
 
Interest income:
                               
Trading securities
  $ 274     $ 310     $ 822     $ 955  
Available-for-sale securities
    1,160       1,313       3,525       4,175  
Mortgage loans (includes $30,633 and $32,807, respectively, for the three months ended and $94,111 and $100,810, respectively, for the nine months ended related to consolidated trusts)
    34,334       36,666       105,257       111,917  
Other
    26       31       79       111  
                                 
Total interest income
    35,794       38,320       109,683       117,158  
                                 
Interest expense:
                               
Short-term debt (includes $3 and $4, respectively, for the three months ended and $8 and $9, respectively, for the nine months ended related to consolidated trusts)
    66       194       254       479  
Long-term debt (includes $27,157 and $28,878, respectively, for the three months ended and $82,928 and $90,379, respectively, for the nine months ended related to consolidated trusts)
    30,542       33,350       94,311       104,907  
                                 
Total interest expense
    30,608       33,544       94,565       105,386  
                                 
Net interest income
    5,186       4,776       15,118       11,772  
Provision for loan losses
    (4,159 )     (4,696 )     (20,548 )     (20,930 )
                                 
Net interest income (loss) after provision for loan losses
    1,027       80       (5,430 )     (9,158 )
                                 
Investment gains, net
    73       82       319       271  
Other-than-temporary impairments
    (232 )     (366 )     (317 )     (600 )
Noncredit portion of other-than-temporary impairments recognized in other comprehensive income
    (30 )     40       (45 )     (99 )
                                 
Net other-than-temporary impairments
    (262 )     (326 )     (362 )     (699 )
Fair value (losses) gains, net
    (4,525 )     525       (5,870 )     (877 )
Debt extinguishment losses, net
    (119 )     (214 )     (149 )     (497 )
Fee and other income
    291       304       793       831  
                                 
Non-interest (loss) income
    (4,542 )     371       (5,269 )     (971 )
                                 
Administrative expenses:
                               
Salaries and employee benefits
    323       325       953       973  
Professional services
    173       305       531       759  
Occupancy expenses
    46       43       131       124  
Other administrative expenses
    49       57       150       149  
                                 
Total administrative expenses
    591       730       1,765       2,005  
(Benefit) provision for guaranty losses
    (8 )     78       694       111  
Foreclosed property expense
    733       787       743       1,255  
Other expenses
    254       196       638       650  
                                 
Total expenses
    1,570       1,791       3,840       4,021  
                                 
Loss before federal income taxes
    (5,085 )     (1,340 )     (14,539 )     (14,150 )
Benefit for federal income taxes
          9       91       67  
                                 
Net loss
    (5,085 )     (1,331 )     (14,448 )     (14,083 )
Other comprehensive (loss) income:
                               
Changes in unrealized losses on available-for-sale securities, net of reclassification adjustments and taxes
    (198 )     901       (20 )     3,938  
Other
    1       1       6       6  
                                 
Total other comprehensive (loss) income
    (197 )     902       (14 )     3,944  
                                 
Total comprehensive loss
    (5,282 )     (429 )     (14,462 )     (10,139 )
Less: Comprehensive income attributable to the noncontrolling interest
          (8 )     (1 )     (4 )
                                 
Total comprehensive loss attributable to Fannie Mae
  $ (5,282 )   $ (437 )   $ (14,463 )   $ (10,143 )
                                 
Net loss
  $ (5,085 )   $ (1,331 )   $ (14,448 )   $ (14,083 )
Less: Net income attributable to the noncontrolling interest
          (8 )     (1 )     (4 )
                                 
Net loss attributable to Fannie Mae
    (5,085 )     (1,339 )     (14,449 )     (14,087 )
Preferred stock dividends
    (2,494 )     (2,116 )     (6,992 )     (5,550 )
                                 
Net loss attributable to common stockholders
  $ (7,579 )   $ (3,455 )   $ (21,441 )   $ (19,637 )
                                 
Loss per share—Basic and Diluted
  $ (1.32 )   $ (0.61 )   $ (3.74 )   $ (3.45 )
Weighted-average common shares outstanding—Basic and Diluted
    5,760       5,695       5,730       5,694  
 
See Notes to Condensed Consolidated Financial Statements


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FANNIE MAE
(In conservatorship)

Condensed Consolidated Statements of Cash Flows— (Unaudited)
(Dollars in millions)
 
                 
    For the Nine Months
 
    Ended September 30,  
    2011     2010  
 
Net cash used in operating activities
  $ (6,714 )   $ (42,447 )
Cash flows provided by investing activities:
               
Purchases of trading securities held for investment
    (2,483 )     (7,984 )
Proceeds from maturities and paydowns of trading securities held for investment
    1,672       1,997  
Proceeds from sales of trading securities held for investment
    837       21,488  
Purchases of available-for-sale securities
    (44 )     (262 )
Proceeds from maturities and paydowns of available-for-sale securities
    9,995       12,927  
Proceeds from sales of available-for-sale securities
    2,590       7,096  
Purchases of loans held for investment
    (44,276 )     (52,048 )
Proceeds from repayments of loans held for investment of Fannie Mae
    18,467       14,749  
Proceeds from repayments of loans held for investment of consolidated trusts
    364,500       378,662  
Net change in restricted cash
    7,717       (11,111 )
Advances to lenders
    (43,363 )     (44,951 )
Proceeds from disposition of acquired property and preforeclosure sales
    36,280       28,079  
Net change in federal funds sold and securities purchased under agreements to resell or similar agreements
    (24,199 )     33,219  
Other, net
    137       (476 )
                 
Net cash provided by investing activities
    327,830       381,385  
Cash flows used in financing activities:
               
Proceeds from issuance of debt of Fannie Mae
    572,828       890,570  
Payments to redeem debt of Fannie Mae
    (609,399 )     (848,438 )
Proceeds from issuance of debt of consolidated trusts
    157,280       191,665  
Payments to redeem debt of consolidated trusts
    (444,160 )     (587,963 )
Payments of cash dividends on senior preferred stock to Treasury
    (6,992 )     (5,554 )
Proceeds from senior preferred stock purchase agreement with Treasury
    16,187       25,200  
Net change in federal funds purchased and securities sold under agreements to repurchase
          185  
Other, net
    150       (33 )
                 
Net cash used in financing activities
    (314,106 )     (334,368 )
Net increase in cash and cash equivalents
    7,010       4,570  
Cash and cash equivalents at beginning of period
    17,297       6,812  
                 
Cash and cash equivalents at end of period
  $ 24,307     $ 11,382  
                 
Cash paid during the period for interest
  $ 97,592     $ 107,537  
 
See Notes to Condensed Consolidated Financial Statements


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
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 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”). The U.S. government does not guarantee our securities or other obligations.
 
Conservatorship
 
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) Treasury’s 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.
 
Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Federal Housing Finance Regulatory Reform Act of 2008, (together, the “GSE Act”), the conservator immediately succeeded to (1) 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 (2) 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 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.
 
We were directed by FHFA to voluntarily delist our common stock and each listed series of our preferred stock from the New York Stock Exchange and the Chicago Stock Exchange. The last trading day for the listed securities on the New York Stock Exchange and the Chicago Stock Exchange was July 7, 2010, and since July 8, 2010, the securities have been traded on the over-the-counter market.
 
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 mortgage-backed securities (“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 November 8, 2011, FHFA has not exercised this power.
 
Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform under our mortgage guaranty obligations.
 
On June 20, 2011, FHFA issued a final rule establishing a framework for conservatorship and receivership operations for the GSEs. The final rule, which became effective on July 20, 2011, establishes procedures for conservatorship and receivership, and priorities of claims for contract parties and other claimants. The final rule is part of FHFA’s implementation of the powers provided by the Federal Housing Finance Regulatory Reform Act of 2008, and does not seek to anticipate or predict future conservatorships or receiverships.
 
The conservatorship has no specified termination date and there continues to be uncertainty regarding the future of our company, including how long we will continue to be in existence, the extent of our role in the market, what form we will have, and what ownership interest, if any, our current common and preferred


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
stockholders will hold in us after the conservatorship is terminated. 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 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 former 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. We are not aware of any plans of FHFA to significantly change our business model or capital structure in the near-term.
 
Impact of U.S. Government Support
 
We are dependent upon the continued support of 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.
 
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. We have received a total of $103.8 billion as of September 30, 2011 under Treasury’s funding commitment and the Acting Director of FHFA will submit a request for an additional $7.8 billion from Treasury to eliminate our net worth deficit as of September 30, 2011. The aggregate liquidation preference of the senior preferred stock was $104.8 billion as of September 30, 2011 and will increase to $112.6 billion as a result of FHFA’s request on our behalf for funds to eliminate our net worth deficit as of September 30, 2011.
 
The amended senior preferred stock purchase agreement provides that the $200 billion maximum amount of the commitment from Treasury will increase as necessary to accommodate any net worth deficiencies attributable to periods during 2010, 2011, and 2012. If we do not have a positive net worth as of December 31, 2012, then the amount of funding available under the amended senior preferred stock purchase agreement after 2012 will be $124.8 billion ($200 billion less $75.2 billion in cumulative draws for net worth deficiencies through December 31, 2009).
 
In the event we have a positive net worth as of December 31, 2012, then the amount of funding available after 2012 under the amended senior preferred stock purchase agreement will depend on the size of that positive net worth relative to the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011, and 2012, as follows:
 
  •  If our positive net worth as of December 31, 2012 is less than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding will be $124.8 billion less our positive net worth as of December 31, 2012.
 
  •  If our positive net worth as of December 31, 2012 is greater than the cumulative draws for net worth deficiencies attributable to periods during 2010, 2011, and 2012, then the amount of available funding will be $124.8 billion less the cumulative draws attributable to periods during 2010, 2011, and 2012.
 
As of November 7, 2011, the amount of the quarterly commitment fee payable by us to Treasury under the senior preferred stock purchase agreement had not been established; however, Treasury has waived the quarterly commitment fee under the senior preferred stock purchase agreement for each quarter of 2011 due to the continued fragility of the U.S. mortgage market and Treasury’s belief that imposing the commitment fee


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
would not generate increased compensation for taxpayers. Treasury stated that it will reevaluate the situation during the next calendar quarter to determine whether to set the quarterly commitment fee for the first quarter of 2012.
 
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 ability to issue long-term debt has been strong primarily due to actions taken by the federal government to support us and the financial markets.
 
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 government’s support could 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, due to our reliance on the U.S. government’s support, our access to debt funding or the cost of debt funding also could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government. A downgrade in our credit ratings could reduce demand for our debt securities and increase our borrowing costs. Standard & Poor’s Ratings Services’ (“S&P”) downgrade of our credit rating on August 8, 2011, which was a result of a similar action on the U.S. government’s sovereign credit rating, has not adversely affected our access to debt funding or the cost of our debt funding. 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.
 
On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both institutions. The report emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. We expect that Congress will continue to hold hearings and consider legislation in 2011 on the future status of Fannie Mae and Freddie Mac, including proposals that would result in a substantial change to our business structure, or our operations, or that involve Fannie Mae’s liquidation or dissolution. We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding the future status of the GSEs.
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Intercompany accounts and transactions have been eliminated. Results for the three and nine months ended September 30, 2011 may not necessarily be indicative of the results for the year ending December 31, 2011. The unaudited interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2011 should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”), filed with the SEC on February 24, 2011.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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. As of September 30, 2011, Treasury held an investment in our senior preferred stock with an aggregate liquidation preference of $104.8 billion. Our administrative expenses were reduced by $30 million and $90 million for the three and nine months ended September 30, 2011, respectively, due to reimbursements from Treasury and Freddie Mac for expenses incurred as program administrator for the Home Affordable Modification Program (“HAMP”) and other initiatives under the Making Home Affordable Program.
 
During the nine months ended September 30, 2011, we received a refund of $1.1 billion from the Internal Revenue Service (“IRS”), a bureau of Treasury, related to the carryback of our 2009 operating loss to the 2008 and 2007 tax years. In addition, in June 2011, we effectively settled our 2007 and 2008 tax years with the IRS and as a result, we have recognized an income tax benefit of $90 million in our condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2011.
 
Under a temporary credit and liquidity facilities (“TCLF”) program, we had $3.3 billion and $3.7 billion outstanding, which include principal and interest, of three-year standby credit and liquidity support as of September 30, 2011 and December 31, 2010, respectively. Treasury has purchased participating interests in these temporary credit and liquidity facilities. Under a new issue bond (“NIB”) program, we had $7.5 billion and $7.6 billion outstanding of pass-through securities backed by single-family and multifamily housing bonds issued by housing finance agencies (“HFAs”) as of September 30, 2011 and December 31, 2010, respectively. Treasury bears the initial loss of principal under the TCLF program and the NIB program up to 35% of the total principal on a combined program-wide basis.
 
FHFA’s 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 September 30, 2011 and December 31, 2010, we held Freddie Mac mortgage-related securities with a fair value of $16.6 billion and $18.3 billion, respectively, and accrued interest receivable of $76 million and $93 million, respectively. We recognized interest income on Freddie Mac mortgage-related securities held by us of $174 million and $239 million for the three months ended September 30, 2011 and 2010, respectively, and $534 million and $851 million for the nine months ended September 30, 2011 and 2010, 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 condensed 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 dates of our condensed consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting periods. Management has made significant estimates in a variety of areas including, but not limited to, valuation of certain financial instruments, and other assets and liabilities, the allowance for loan losses and reserve for guaranty losses, and other-than-temporary impairment of investment securities. Actual results could be different from these estimates.
 
In the three months ended September 30, 2011, we updated our allowance for loan loss models for individually impaired loans to incorporate more home price data at the regional level rather than at the national level. We believe this approach is a better estimation of possible home price paths and related default


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
expectations; it has resulted in a decrease to our allowance for loan losses and a reduction in our provision for loan losses of approximately $800 million.
 
In the three months ended June 30, 2011, we updated our loan loss models to incorporate more recent data on prepayments of modified loans which contributed to an increase to our allowance of loan losses of approximately $1.5 billion. The change resulted in slower expected prepayment speeds, which extended the expected lives of modified loans and lowered the present value of cash flows on those loans. Also in the three months ended June 30, 2011, we updated our estimate of the reserve for guaranty losses related to private-label mortgage-related securities that we have guaranteed to increase our focus on earlier stage delinquency, rather than foreclosure trends, as the primary driver in estimating incurred losses. We believe delinquencies are a better indicator of incurred losses compared to foreclosure trends because the recent delays in the foreclosure process have interrupted the normal flow of delinquent mortgages into foreclosure. This update resulted in an increase to our reserve for guaranty losses included within “Other liabilities” of approximately $700 million.
 
In addition, in the three months ended June 30, 2011, we revised our estimate for amounts due to us related to outstanding repurchase requests to incorporate additional loan-level attributes which resulted in a decrease in our provision for loan losses and foreclosed property expense of $1.5 billion.
 
Principles of Consolidation
 
Our condensed consolidated financial statements include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated. The typical condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. A controlling financial interest may also exist in entities through arrangements that do not involve voting interests, such as a variable interest entity (“VIE”).
 
Cash and Cash Equivalents and Statements of Cash Flows
 
During 2010, we identified certain servicer and consolidation related transactions that were not appropriately reflected in our condensed consolidated statements of cash flows for the nine months ended September 30, 2010. We evaluated the effects of these misstatements, both quantitatively and qualitatively, on our previously reported condensed consolidated statements of cash flows for the nine months ended September 30, 2010 and concluded that this previously reported prior period was not materially misstated. We also reclassified amounts in our condensed consolidated statements of cash flows for the nine months ended September 30, 2010. The following table displays the line item adjustments and reclassifications in our condensed consolidated statement of cash flows for the nine months ended September 30, 2010. As a result of the adjustments, our condensed consolidated statement of cash flows for the nine months ended September 30, 2010 includes a $6.6 billion adjustment to increase net cash used in operating activities, a $7.0 billion adjustment to increase


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
net cash provided by investing activities, and a $357 million adjustment to increase net cash used in financing activities.
 
                                 
    For the Nine Months Ended September 30, 2010
    As Previously
           
    Reported   Adjustments   Reclassifications   As Adjusted
    (Dollars in millions)
 
Reclassified and adjusted line items:
                               
Cash flows used in operating activities:
                               
Other, net
  $ (6,222 )   $ (6,601 )   $     $ (12,823 )
Cash flows provided by investing activities:
                               
Proceeds from sales of available-for-sale securities
    6,680       416             7,096  
Purchases of loans held for investment
    (59,145 )     7,097             (52,048 )
Proceeds from repayments of loans held for investment of Fannie Mae
    15,025       (276 )           14,749  
Proceeds from repayments of loans held for investment of consolidated trusts
    378,941       (279 )           378,662  
Cash flows used in financing activities:
                               
Proceeds from issuance of short-term debt of Fannie Mae
    555,422             (555,422 )      
Proceeds from issuance of long-term debt of Fannie Mae
    335,115             (335,148 )      
Proceeds from issuance of debt of Fannie Mae
                890,570       890,570  
Payments to redeem short-term debt of Fannie Mae
    (537,181 )           537,181        
Payments to redeem long-term debt of Fannie Mae
    (311,257 )           311,257        
Payments to redeem debt of Fannie Mae
                (848,438 )     (848,438 )
Proceeds from issuance of short-term debt of consolidated trusts
    10,067             (10,067 )      
Proceeds from issuance of long-term debt of consolidated trusts
    182,014       (416 )     (181,598 )      
Proceeds from issuance of debt of consolidated trusts
                191,665       191,665  
Payments to redeem short-term debt of consolidated trusts
    (27,852 )           27,852        
Payments to redeem long-term debt of consolidated trusts
    (560,170 )     59       560,111        
Payments to redeem debt of consolidated trusts
                (587,963 )     (587,963 )
Other, net
                (33 )     (33 )


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Collateral
 
Cash Collateral
 
The following table displays cash collateral accepted and pledged as of September 30, 2011 and December 31, 2010.
 
                 
    As of  
    September 30, 2011     December 31, 2010  
    (Dollars in millions)  
 
Cash collateral accepted(1)
  $ 3,360     $ 3,101  
                 
Cash collateral pledged
  $ 6,199     $ 5,884  
Cash collateral pledged related to derivatives activities
    3,486       3,453  
                 
Total cash collateral pledged
  $ 9,685     $ 9,337  
                 
 
 
(1) Includes restricted cash of $2.7 billion and $2.5 billion as of September 30, 2011 and December 31, 2010, respectively.
 
Non-Cash Collateral
 
The following table displays non-cash collateral pledged and accepted as of September 30, 2011 and December 31, 2010.
 
                         
    As of    
    September 30, 2011   December 31, 2010    
    (Dollars in millions)    
 
Non-cash collateral pledged where the secured party has the right to sell or repledge:
                       
Held-for-investment loans of consolidated trusts
  $ 6,993     $ 2,522          
Non-cash collateral accepted with the right to sell or repledge(1)
  $ 20,050     $ 7,500          
Non-cash collateral accepted without the right to sell or repledge
  $ 28,256     $ 6,744          
 
 
(1) None of this collateral was sold or repledged as of September 30, 2011 and December 31, 2010.
 
Additionally, we provide early funding to lenders on a collateralized basis and account for the advances as secured lending arrangements in “Other assets” in our condensed consolidated balance sheets. These amounts totaled $5.1 billion as of September 30, 2011 and $7.2 billion at December 31, 2010.
 
Our liability to third-party holders of Fannie Mae MBS that arises as the result of a consolidation of a securitization trust is 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 condensed consolidated balance sheets. We had no repurchase agreements outstanding as of September 30, 2011 and $49 million in repurchase agreements outstanding as of December 31, 2010.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Mortgage Loans
 
Nonaccrual Loans
 
We discontinue accruing interest on loans when we believe collectability of principal or interest is not reasonably assured, which for single-family loans we have determined, based on our historical experience, to be when the loan becomes two months or more past due according to its contractual terms. We place multifamily loans on nonaccrual status when the loan is deemed to be individually impaired, unless the loan is well secured such that collectability of principal and accrued interest is reasonably assured.
 
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. For single-family loans, we recognize interest income for loans on non-accrual status when cash is received. For multifamily loans that are individually impaired, we apply any payment received on a cost recovery basis to reduce principal on the mortgage loan unless the loan is determined to be well secured.
 
We return a single-family loan to accrual status at the point that the borrower has made sufficient payments to reduce their delinquency below our nonaccrual threshold. For modified single-family loans, the loan is not returned to accrual status until the borrower successfully makes all required payments during the trial period (generally three to four months) and the modification is made permanent. We return a multifamily loan to accrual status when the borrower cures the delinquency of the loan or we otherwise determine that the loan is well secured such that collectability 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”). Our loss mitigation programs primarily include modifications that result in the capitalization of past due amounts in combination with interest rate reductions below market and/or the extension of the loan’s maturity date. Such restructurings are granted to borrowers in financial difficulty on either a permanent or contingent basis, as in the case of modifications with a trial period. We consider these types of loan restructurings to be TDRs.
 
We do not currently include principal or past due interest forgiveness as part of our loss mitigation programs, and as a result, we do not charge off any outstanding principal or accrued interest amounts at the time of loan modification. We believe that the loan underwriting activities we perform as a part of our loan modification process coupled with the borrower’s successful performance during any required trial period provide us reasonable assurance regarding the collectability of the principal and interest due in accordance with the loan’s modified terms, which include any past due interest amounts that are capitalized at the time of modification. As such, the loan is returned to accrual status when the loan modification is completed (i.e., at the end of the trial period), and we accrue interest thereafter in accordance with our interest accrual policy. If the loan was on nonaccrual status prior to entering the trial period, it remains on nonaccrual status until the borrower demonstrates performance via the trial period and the modification is finalized.
 
In addition to these loan modifications, we also engage in other loss mitigation activities with troubled borrowers, which include repayment plans, forbearance arrangements, and the capitalization only of past due amounts. Repayment plans and forbearance arrangements are informal agreements with the borrower that do not result in the legal modification of the loan. For all of these activities, we consider the deferral or capitalization of three or fewer missed payments to represent only an insignificant delay, and thus not a TDR. If we defer or capitalize more than three missed payments, the delay is no longer considered insignificant, and the restructuring is accounted for as a TDR.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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 loan’s original effective interest rate. Costs incurred to complete a TDR are expensed as incurred.
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued a new standard effective for the three months ended September 30, 2011 that applies retrospectively to the beginning of the annual period of adoption. The new guidance clarifies how to determine when a borrower is experiencing financial difficulty, when a concession is granted by a creditor, and when a delay in payment is considered insignificant. The primary impact to us of adopting this new guidance was the refinement of how we define an insignificant delay. As a result, we lowered our threshold for an insignificant delay from approximately nine missed payments to three missed payments and thus this type of additional loss mitigation activity that had previously been excluded is now considered a TDR. This refinement was necessary in order to conform our policy to the new guidance on insignificant delay provided by the FASB.
 
As a result of adopting the new TDR accounting standard, we identified approximately 22,000 loan restructurings for the nine months ended September 30, 2011 that had not defaulted as of September 30, 2011 and were not previously considered TDRs. The impact of this was an increase in our provision for loan losses of $514 million in our condensed consolidated statements of operations and comprehensive loss for the three months ended September 30, 2011. This amount includes the net increase in our allowance for loan losses due to identifying these restructurings as TDRs and measuring their impairment on an individual basis offset by the elimination of our allowance for loan loss measured on a collective basis related to these loans.
 
Fair Value (Losses) Gains, Net
 
The following table displays the composition of “Fair value (losses) gains, net” for the three and nine months ended September 30, 2011 and 2010.
 
                                 
    For the Three
    For the Nine
 
    Months Ended
    Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Derivatives fair value losses, net
  $ (4,255 )   $ (124 )   $ (5,793 )   $ (3,283 )
Trading securities (losses) gains, net
    (214 )     889       146       2,587  
Other, net
    (56 )     (240 )     (223 )     (181 )
                                 
Fair value (losses) gains, net
  $ (4,525 )   $ 525     $ (5,870 )   $ (877 )
                                 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Reclassifications
 
To conform to our current period presentation, we have reclassified and condensed certain amounts reported in our condensed consolidated financial statements. The following table displays the line items that were reclassified and condensed in our condensed consolidated balance sheet as of December 31, 2010.
 
                 
    As of December 31, 2010
    Before
  After
    Reclassification   Reclassification
    (Dollars in millions)
 
Reclassified lines to:
               
Assets:
               
Servicer and MBS trust receivable
  $ 951     $    
Other assets
    25,875       26,826  
Liabilities:
               
Short-term debt:
               
Of Fannie Mae
    151,884          
Of consolidated trusts
    5,359          
Long-term debt:
               
Of Fannie Mae
    628,160          
Of consolidated trusts
    2,411,597          
Debt:
               
Of Fannie Mae
            780,044  
Of consolidated trusts
            2,416,956  
Reserve for guaranty losses
    323          
Servicer and MBS trust payable
    2,950          
Other liabilities
    10,400       13,673  


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
The following table represents the line items that we reclassified and condensed in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2010.
 
                                 
    For the Three Months Ended
  For the Nine Months Ended
    September 30, 2010   September 30, 2010
    Before
  After
  Before
  After
    Reclassification   Reclassification   Reclassification   Reclassification
        (Dollars in millions)    
 
Reclassified lines to:
                               
Interest income:
                               
Mortgage loans:
                               
Of Fannie Mae
  $ 3,859     $       $ 11,107     $    
Of consolidated trusts
    32,807               100,810          
Mortgage loans (includes $32,807 and $100,810, respectively, related to consolidated trusts)
            36,666               111,917  
Interest expense:
                               
Short-term debt:
                               
Of Fannie Mae
    190               470          
Of consolidated trusts
    4               9          
Long-term debt:
                               
Of Fannie Mae
    4,472               14,528          
Of consolidated trusts
    28,878               90,379          
Short-term debt (includes $4 and $9, respectively, related to consolidated trusts)
            194               479  
Long-term debt (includes $28,878 and $90,379, respectively, related to consolidated trusts)
            33,350               104,907  
Guaranty fee income
    51               157          
Fee and other income
    253       304       674       831  
Income (losses) from partnership investments
    47               (37 )        
Other expenses
    243       196       613       650  
 
New Accounting Pronouncements
 
In May 2011, the FASB issued amendments to the guidance pertaining to fair value measurement and disclosure. The amendments create a common definition of fair value for GAAP and International Financial Reporting Standards (“IFRS”) and align the measurement and disclosure requirements. These amendments provide further guidance on some of the principles for measuring fair value and expand the disclosure requirements specifically for Level 3 fair value measurements. The new requirements are effective for us on January 1, 2012 and will be applied prospectively. We do not expect that the adoption of these amendments will have a material impact on our consolidated financial statements.


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Table of Contents

FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
2.   Consolidations and Transfers of Financial Assets
 
We have interests in various entities that are considered to be VIEs. The primary types of entities are securitization trusts guaranteed by us via lender swap and portfolio securitization transactions, mortgage and asset-backed trusts that were not created by us, as well as housing partnerships that are established to finance the acquisition, construction, development or rehabilitation of affordable multifamily and single-family housing. These interests include investments in securities issued by VIEs, such as Fannie Mae MBS created pursuant to our securitization transactions and our guaranty to the entity. We consolidate the substantial majority of our single-class securitization trusts.
 
As of September 30, 2011, we consolidated certain Fannie Mae securities that were not consolidated as of December 31, 2010 because we now hold in our portfolio a substantial portion of the certificates. As a result of consolidating these securities, which had combined total assets of $2.9 billion in unpaid principal balance as of September 30, 2011, we derecognized our investment in these trusts and recognized the assets and liabilities of the consolidated trusts at their fair value.
 
As of September 30, 2011, we deconsolidated VIEs that were consolidated as of December 31, 2010. These VIEs were Fannie Mae securitization trusts and were deconsolidated because we no longer hold in our portfolio a substantial portion of the certificates. As a result of deconsolidating these trusts, which had combined total assets of $446 million in unpaid principal balance as of December 31, 2010, we derecognized the assets and liabilities of the trusts and recognized at fair value our retained interests as securities in our condensed consolidated balance sheet.
 
Unconsolidated VIEs
 
We also have interests in VIEs that we do not consolidate because we are not deemed to be the primary beneficiary. These unconsolidated VIEs include securitization trusts, as well as other investment entities. The following table displays the carrying amount and classification of our assets and liabilities that relate to our involvement with unconsolidated VIEs as of September 30, 2011 and December 31, 2010, as well as our maximum exposure to loss and the total assets of those unconsolidated VIEs.
 
                         
    As of September 30, 2011  
                Limited
 
    Mortgage-Backed
    Asset-Backed
    Partnership
 
    Trusts     Trusts     Investments  
    (Dollars in millions)  
 
Assets and liabilities recorded in our condensed consolidated balance sheets:
                       
Assets:
                       
Available-for-sale securities(1)
  $ 73,814     $     $  
Trading securities(1)
    24,862       2,465        
Other assets
    270             131  
Other liabilities
    1,257             150  
                         
Net carrying amount
  $ 97,689     $ 2,465     $ (19 )
                         
Maximum exposure to loss(1)
  $ 104,477     $ 2,465     $ 117  
Total assets of unconsolidated VIEs(1)
  $ 674,599     $ 323,035     $ 13,119  
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                         
    As of December 31, 2010(2)  
                Limited
 
    Mortgage-Backed
    Asset-Backed
    Partnership
 
    Trusts     Trusts     Investments  
    (Dollars in millions)  
 
Assets and liabilities recorded in our condensed consolidated balance sheets:
                       
Assets:
                       
Available-for-sale securities(1)
  $ 84,770     $     $  
Trading securities(1)
    24,021       5,321        
Other assets
    257             94  
Other liabilities
    773             170  
                         
Net carrying amount
  $ 108,275     $ 5,321     $ (76 )
                         
Maximum exposure to loss(1)
  $ 111,004     $ 5,321     $ 319  
Total assets of unconsolidated VIEs(1)
  $ 740,387     $ 363,721     $ 13,102  
 
 
(1) Contains securities exposed through consolidation which may also represent an interest in other unconsolidated VIEs.
 
(2) Certain prior period amounts have been reclassified to conform to the current period presentation.
 
Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the unpaid principal balance of the assets covered by our guaranty. However, our securities issued by Fannie Mae multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss as we already consolidate the underlying collateral.
 
Transfers of Financial Assets
 
We issue Fannie Mae MBS through portfolio 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 transaction. For the three months ended September 30, 2011 and 2010, the unpaid principal balance of portfolio securitizations was $22.0 billion and $35.1 billion, respectively. For the nine months ended September 30, 2011 and 2010, the unpaid principal balance of portfolio securitizations was $78.7 billion and $68.0 billion, respectively.
 
The following table displays some key characteristics of the securities retained in unconsolidated portfolio securitization trusts.
 
                 
    Fannie Mae
   
    Single-class
   
    MBS & Fannie
  REMICS &
    Mae Megas   SMBS
    (Dollars in millions)
 
As of September 30, 2011
               
Unpaid principal balance
  $ 618     $ 14,008  
Fair value
    683       15,320  
Weighted-average coupon
    6.21 %     5.96 %
Weighted-average loan age
    5.1 years       4.5 years  
Weighted-average maturity
    23.8 years       19.5 years  
As of December 31, 2010
               
Unpaid principal balance
  $ 63     $ 15,771  
Fair value
    68       16,745  
Weighted-average coupon
    6.58 %     6.28 %
Weighted-average loan age
    4.2 years       4.4 years  
Weighted-average maturity
    25.6 years       22.0 years  

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
For the three months ended September 30, 2011 and 2010, the principal and interest received on retained interests was $777 million and $855 million, respectively. For the nine months ended September 30, 2011 and 2010, the principal and interest received on retained interests was $2.2 billion and $2.6 billion, respectively.
 
Managed Loans
 
We define “managed loans” as on-balance sheet mortgage loans as well as mortgage loans that we have securitized in unconsolidated portfolio securitization trusts. The following table displays the unpaid principal balances of managed loans, including those managed loans that are delinquent as of September 30, 2011 and December 31, 2010.
 
                                 
    As of  
    September 30, 2011     December 31, 2010  
    Unpaid Principal
    Principal Amount of
    Unpaid Principal
    Principal Amount of
 
    Balance     Delinquent Loans(1)     Balance     Delinquent Loans(1)  
    (Dollars in millions)  
 
Loans held for investment
                               
Of Fannie Mae
  $ 401,610     $ 124,595     $ 423,686     $ 141,342  
Of consolidated trusts
    2,567,502       25,808       2,565,347       34,080  
Loans held for sale
    335       60       964       127  
Securitized loans
    2,219       66       2,147       78  
                                 
Total loans managed
  $ 2,971,666     $ 150,529     $ 2,992,144     $ 175,627  
                                 
 
 
(1) Represents the unpaid principal balance of loans held for investment, loans held for sale and securitized loans for which we are no longer accruing interest and loans 90 days or more delinquent which are continuing to accrue interest.
 
Qualifying Sales of Portfolio Securitizations
 
The majority of our portfolio securitization transactions do not qualify for sale treatment. We report the assets and liabilities of consolidated trusts created via portfolio securitization transactions that do not qualify as sales in our condensed consolidated balance sheets. Our continuing involvement in the form of guaranty assets and guaranty liabilities with assets that were transferred into unconsolidated trusts is not material.
 
We recognize assets obtained and liabilities incurred in a portfolio securitization at fair value. Proceeds from the initial sale of securities from portfolio securitizations were $143 million and $169 million for the three months ended September 30, 2011 and 2010, respectively. Proceeds from the initial sale of securities from portfolio securitizations were $764 million and $544 million for the nine months ended September 30, 2011 and 2010, respectively.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
3.   Mortgage Loans
 
The following table displays our mortgage loans as of September 30, 2011 and December 31, 2010.
 
                                                 
    As of  
    September 30, 2011     December 31, 2010  
    Of
    Of
          Of
    Of
       
    Fannie
    Consolidated
          Fannie
    Consolidated
       
    Mae     Trusts     Total     Mae     Trusts     Total  
    (Dollars in millions)  
 
Single-family
  $ 319,756     $ 2,474,912     $ 2,794,668     $ 328,824     $ 2,490,623     $ 2,819,447  
Multifamily
    82,136       92,643       174,779       95,157       75,393       170,550  
                                                 
Total unpaid principal balance of mortgage loans
    401,892       2,567,555       2,969,447       423,981       2,566,016       2,989,997  
Cost basis and fair value adjustments, net
    (16,389 )     16,197       (192 )     (16,498 )     11,777       (4,721 )
Allowance for loan losses for
                                               
loans held for investment
    (55,398 )     (16,037 )     (71,435 )     (48,530 )     (13,026 )     (61,556 )
                                                 
Total mortgage loans
  $ 330,105     $ 2,567,715     $ 2,897,820     $ 358,953     $ 2,564,767     $ 2,923,720  
                                                 
 
During the three months ended September 30, 2011, we did not redesignate any loans from held for investment (“HFI”) to held for sale (“HFS”). During the nine months ended September 30, 2011, we redesignated loans with a carrying value of $561 million from HFI to HFS.
 
The following tables display an aging analysis of the total recorded investment in our HFI mortgage loans, excluding loans for which we have elected the fair value option, by portfolio segment and class as of September 30, 2011 and December 31, 2010.
 
                                                                 
    As of September 30, 2011(1)  
                                        Recorded
       
                                        Investment in
       
                                        Loans Over
       
                                        90 Days
    Recorded
 
                                        Delinquent
    Investment
 
                                        and
    in
 
    30 - 59 Days
    60 - 89 Days
    Seriously
    Total
                Accruing
    Nonaccrual
 
    Delinquent     Delinquent     Delinquent(2)     Delinquent     Current     Total     Interest     Loans  
    (Dollars in millions)  
 
Single-family:
                                                               
Primary(3)
  $ 43,721     $ 15,523     $ 82,808     $ 142,052     $ 2,330,328     $ 2,472,380     $ 122     $ 98,154  
Government(4)
    105       46       312       463       51,458       51,921       312        
Alt-A
    7,445       3,261       30,126       40,832       143,126       183,958       15       33,366  
Other(5)
    3,586       1,556       11,940       17,082       75,753       92,835       101       13,305  
                                                                 
Total single-family
    54,857       20,386       125,186       200,429       2,600,665       2,801,094       550       144,825  
Multifamily(6)
    519       NA       753       1,272       175,761       177,033             698  
                                                                 
Total
  $ 55,376     $ 20,386     $ 125,939     $ 201,701     $ 2,776,426     $ 2,978,127     $ 550     $ 145,523  
                                                                 
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                                 
    As of December 31, 2010(1)  
                                        Recorded
       
                                        Investment in
       
                                        Loans Over
       
                                        90 Days
    Recorded
 
                                        Delinquent
    Investment
 
                                        and
    in
 
    30 - 59 Days
    60 - 89 Days
    Seriously
    Total
                Accruing
    Nonaccrual
 
    Delinquent     Delinquent     Delinquent(2)     Delinquent     Current     Total     Interest     Loans  
    (Dollars in millions)  
 
Single-family:
                                                               
Primary(3)
  $ 47,048     $ 18,055     $ 93,302     $ 158,405     $ 2,299,080     $ 2,457,485     $ 139     $ 110,758  
Government(4)
    125       58       371       554       51,930       52,484       354        
Alt-A
    8,547       4,097       37,557       50,201       156,951       207,152       21       41,566  
Other(5)
    3,785       1,831       15,290       20,906       84,473       105,379       80       17,022  
                                                                 
Total single-family
    59,505       24,041       146,520       230,066       2,592,434       2,822,500       594       169,346  
Multifamily (6)
    382       NA       1,132       1,514       171,000       172,514             1,012  
                                                                 
Total
  $ 59,887     $ 24,041     $ 147,652     $ 231,580     $ 2,763,434     $ 2,995,014     $ 594     $ 170,358  
                                                                 
 
 
(1) Recorded investment consists of (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable.
 
(2) Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Multifamily seriously delinquent loans are loans that are 60 days or more past due.
 
(3) Consists of mortgage loans that are not included in other loan classes.
 
(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A. Primarily consists of reverse mortgages which due to their nature are not aged and are included in the current column.
 
(5) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A.
 
(6) Multifamily loans 60-89 days delinquent are included in the seriously delinquent column.
 
The following table displays the total recorded investment in our single-family HFI loans, excluding loans for which we have elected the fair value option, by class and credit quality indicator as of September 30, 2011 and December 31, 2010. The single-family credit quality indicator is updated quarterly.
 
                                                 
    As of  
    September 30, 2011(1)(2)     December 31, 2010(1)(2)  
    Primary(3)     Alt-A     Other(4)     Primary(3)     Alt-A     Other(4)  
                (Dollars in millions)              
 
Estimated mark-to-market LTV ratio:(5)
                                               
Less than or equal to 80%
  $ 1,543,118     $ 68,340     $ 26,170     $ 1,561,202     $ 79,305     $ 29,854  
80.01% to 90%
    377,448       23,146       10,371       376,414       27,472       13,394  
90.01% to 100%
    223,477       20,355       10,111       217,193       24,392       12,935  
100.01% to 110%
    117,339       16,051       9,275       112,376       18,022       11,400  
110.01% to 120%
    66,747       11,974       7,980       62,283       12,718       8,967  
120.01% to 125%
    23,692       4,878       3,368       21,729       5,083       3,733  
Greater than 125%
    120,559       39,214       25,560       106,288       40,160       25,096  
                                                 
Total
  $ 2,472,380     $ 183,958     $ 92,835     $ 2,457,485     $ 207,152     $ 105,379  
                                                 
 
 
(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable.
 
(2) Excludes $51.9 billion and $52.5 billion as of September 30, 2011 and December 31, 2010, respectively, of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
loans. The segment class is primarily reverse mortgages for which we do not calculate an estimated mark-to-market LTV.
 
(3) Consists of mortgage loans that are not included in other loan classes.
 
(4) Includes loans with higher-risk loan characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A.
 
(5) 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.
 
The following table displays the total recorded investment in our multifamily HFI loans, excluding loans for which we have elected the fair value option, by credit quality indicator as of September 30, 2011 and December 31, 2010. We stratify multifamily loans into different internal risk rating categories based on the credit risk inherent in each individual loan. We categorize loan credit risk based on relevant observable data about a borrower’s ability to pay, including multifamily market economic fundamentals, review of available current borrower financial information (e.g. current debt service coverage ratios), operating statements on the underlying collateral, historical payment experience, estimates of the current collateral values and other related credit documentation. As a result of this analysis, multifamily loans are categorized based on management’s judgment into the following categories: (1) Green (loan with acceptable risk); (2) Yellow (loan with signs of potential weakness); (3) Orange (loan with a well defined weakness that may jeopardize the timely full repayment); and (4) Red (loan with a weakness that makes timely collection or liquidation in full highly questionable based on existing conditions and values). We evaluate loans in the orange and red risk rating categories to determine which ones are individually impaired. The multifamily credit quality indicator is updated quarterly.
 
                 
    As of  
    September 30, 2011(1)     December 31, 2010(1)  
    (Dollars in millions)  
 
Credit risk profile by internally assigned grade:
               
Green
  $ 127,551     $ 117,388  
Yellow(2)
    29,567       34,651  
Orange
    17,924       18,075  
Red
    1,991       2,400  
                 
Total
  $ 177,033     $ 172,514  
                 
 
 
(1) Recorded investment consists of the following:  (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable.
 
(2) Includes approximately $9.1 billion and $9.7 billion of unpaid principal balance as of September 30, 2011 and December 31, 2010, respectively, classified solely due to past due financial information.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Individually Impaired Loans
 
Individually impaired loans include TDRs, acquired credit-impaired loans, and other multifamily loans regardless of whether we are currently accruing interest. The following tables display the total recorded investment, unpaid principal balance, and related allowance as of September 30, 2011 and December 31, 2010 and interest income recognized and average recorded investment for the three and nine months ended September 30, 2011 for individually impaired loans.
 
                                                                                 
    As of September 30, 2011     For the Three Months Ended September 30, 2011     For the Nine Months Ended September 30, 2011  
                      Related
                                     
                      Allowance for
                Interest
                   
    Unpaid
    Total
    Related
    Accrued
    Average
    Total Interest
    Income
    Average
    Total Interest
    Interest Income
 
    Principal
    Recorded
    Allowance for
    Interest
    Recorded
    Income
    Recognized on
    Recorded
    Income
    Recognized on a
 
    Balance     Investment(1)     Loan Losses     Receivable     Investment     Recognized(2)     a Cash Basis     Investment     Recognized (2)     Cash Basis  
    (Dollars in millions)  
 
                                                                                 
Individually impaired loans:
                                                                               
                                                                                 
With related allowance recorded:
                                                                               
                                                                                 
Single-family:
                                                                               
                                                                                 
Primary(3)
  $ 115,961     $ 108,489     $ 28,709     $ 639     $ 102,555     $ 949     $ 183     $ 99,495     $ 2,764     $ 550  
                                                                                 
Government(4)
    247       247       58       7       280       3             270       9        
                                                                                 
Alt-A
    34,034       31,159       10,865       277       29,755       247       45       29,459       728       143  
                                                                                 
Other(5)
    16,088       15,237       5,175       101       14,630       111       22       14,295       323       69  
                                                                                 
                                                                                 
Total single-family
    166,330       155,132       44,807       1,024       147,220       1,310       250       143,519       3,824       762  
                                                                                 
Multifamily
    2,877       2,896       704       27       2,485       26       2       2,324       74       5  
                                                                                 
                                                                                 
Total individually impaired loans with related allowance recorded
    169,207       158,028       45,511       1,051       149,705       1,336       252       145,843       3,898       767  
                                                                                 
                                                                                 
With no related allowance recorded:(6)
                                                                               
                                                                                 
Single-family:
                                                                               
                                                                                 
Primary(3)
    8,284       5,624                   7,118       175       58       6,019       427       146  
                                                                                 
Government(4)
    19       12                   21       2             14       6        
                                                                                 
Alt-A
    2,962       1,467                   1,832       68       21       1,443       154       47  
                                                                                 
Other(5)
    638       342                   483       18       6       403       39       13  
                                                                                 
                                                                                 
Total single-family
    11,903       7,445                   9,454       263       85       7,879       626       206  
                                                                                 
Multifamily
    908       914                   836       12       2       799       37       7  
                                                                                 
                                                                                 
Total individually impaired loans with no related allowance recorded
    12,811       8,359                   10,290       275       87       8,678       663       213  
                                                                                 
                                                                                 
Total individually impaired loans(7)
  $ 182,018     $ 166,387     $ 45,511     $ 1,051     $ 159,995     $ 1,611     $ 339     $ 154,521     $ 4,561     $ 980  
                                                                                 
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                         
          For the Year
 
          Ended
 
    As of December 31, 2010     December 31, 2010  
                      Related
       
    Unpaid
          Related
    Allowance for
    Average
 
    Principal
    Total Recorded
    Allowance for
    Accrued
    Recorded
 
    Balance     Investment(1)     Loan Losses     Interest Receivable     Investment  
    (Dollars in millions)  
 
Individually impaired loans:
                                       
With related allowance recorded:
                                       
Single-family:
                                       
Primary(3)
  $ 99,838     $ 93,024     $ 23,565     $ 772     $ 81,258  
Government(4)
    240       248       38       7       141  
Alt-A
    30,932       28,253       9,592       368       25,361  
Other(5)
    14,429       13,689       4,479       137       12,094  
                                         
Total single-family
    145,439       135,214       37,674       1,284       118,854  
Multifamily
    2,372       2,371       556       23       1,496  
                                         
Total individually impaired loans with related allowance recorded
    147,811       137,585       38,230       1,307       120,350  
                                         
With no related allowance recorded:(6)
                                       
Single-family:
                                       
Primary(3)
    10,586       7,237                   7,860  
Government(4)
    19       13                   11  
Alt-A
    3,600       1,884                   2,091  
Other(5)
    879       512                   589  
                                         
Total single-family
    15,084       9,646                   10,551  
Multifamily
    789       811                   642  
                                         
Total individually impaired loans with no related allowance recorded
    15,873       10,457                   11,193  
                                         
Total individually impaired loans(7)
  $ 163,684     $ 148,042     $ 38,230     $ 1,307     $ 131,543  
                                         
 
 
(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable.
 
(2) Total single-family interest income recognized of $1.6 billion for the three months ended September 30, 2011 consists of $1.1 billion of contractual interest and $427 million of effective yield adjustments. Total single-family interest income recognized of $4.5 billion for the nine months ended September 30, 2011 consists of $3.3 billion of contractual interest and $1.2 billion of effective yield adjustments.
 
(3) Consists of mortgage loans that are not included in other loan classes.
 
(4) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A.
 
(5) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A.
 
(6) The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no valuation allowance is required.

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
(7) Includes single-family loans restructured in a TDR with a recorded investment of $159.0 billion and $140.1 billion as of September 30, 2011 and December 31, 2010, respectively. Includes multifamily loans restructured in a TDR with a recorded investment of $1.0 billion and $939 million as of September 30, 2011 and December 31, 2010, respectively.
 
Interest income recognized on impaired loans was $1.4 billion for the three months ended September 30, 2010 and $4.1 billion for the nine months ended September 30, 2010. Interest income recognized on a cash basis on impaired loans was $511 million for the three months ended September 30, 2010 and $1.4 billion for the nine months ended September 30, 2010.
 
Troubled Debt Restructurings
 
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a TDR. In addition to formal loan modifications, we also engage in other loss mitigation activities with troubled borrowers, which include repayment plans and forbearance arrangements, both of which represent informal agreements with the borrower that do not result in the legal modification of the loan’s contractual terms. As described in our “Summary of Significant Accounting Policies,” we account for these informal restructurings as a TDR if we defer more than three missed payments. The substantial majority of the loan modifications we complete result in term extensions, interest rate reductions or a combination of both. During the three and nine months ended September 30, 2011, the average term extension of a modified loan was 103 and 82 months, respectively, and the average interest rate reduction of a modified loan was 2.63 and 3.14 percentage points, respectively.
 
Upon adoption of the new TDR standard, we reassessed all modifications, forbearance arrangements, and repayment plans that occurred on or after January 1, 2011 through June 30, 2011 that were not previously considered TDRs and for which the allowance for loan losses was measured on a collective basis (“the transition population”). As of September 30, 2011, the recorded investment related to restructurings in the transition population that were not previously considered TDRs was $2.3 billion and the individually impaired allowance for loan losses on this population was $605 million.
 
The following table displays the number of loans and recorded investment in our loans restructured in a TDR during the three and nine months ended September 30, 2011.
 
                                 
    For the Three
    For the Nine
 
    Months Ended
    Months Ended
 
    September 30, 2011(5)     September 30, 2011  
    Number of
    Recorded
    Number of
    Recorded
 
    Loans     Investment(1)     Loans     Investment(1)  
    (Dollars in millions)  
 
Single-family
                               
Primary(2)
    60,725     $ 10,594       132,682     $ 23,783  
Government(3)
    201       24       497       86  
Alt-A
    12,932       2,691       27,722       5,958  
Other(4)
    5,429       1,324       12,424       3,095  
                                 
Total Single-family
    79,287       14,633       173,325       32,922  
Multifamily
    13       39       42       214  
                                 
Total troubled debt restructurings
    79,300     $ 14,672       173,367     $ 33,136  
                                 
 
 
(1) Consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments and fair value adjustments; and (c) accrued interest receivable on HFI loans. Based on the nature of our modification programs, which do not include principal or interest forgiveness, there is not a material difference


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
between the recorded investment in our loans pre- and post- modification, therefore amounts represent recorded investment post-modification.
 
(2) Consists of mortgage loans that are not included in other loan classes.
 
(3) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A.
 
(4) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A.
 
(5) Includes recorded investment related to transition population.
 
The following table displays the number of loans and recorded investment of TDRs that had a payment default during the three and nine months ended September 30, 2011 and were modified in a TDR in the twelve months prior to the payment default. For purposes of this disclosure, we define loans that had a payment default as single-family and multifamily loans with completed TDRs that liquidated during the period, either through foreclosure, deed-in-lieu of foreclosure or a preforeclosure sale, single-family loans with completed modifications that are two or more months delinquent during the period or multifamily loans with completed modifications that are one or more months delinquent during the period.
 
                                 
    For the Three Months Ended September 30, 2011     For the Nine Months Ended September 30, 2011  
    Number of
    Recorded
    Number of
    Recorded
 
    Loans     Investment(1)     Loans     Investment(1)  
    (Dollars in millions)  
 
Single-family
                               
Primary(2)
    14,545     $ 2,531       52,532     $ 9,227  
Government(3)
    70       17       252       68  
Alt-A
    2,929       620       11,625       2,499  
Other(4)
    1,519       378       5,384       1,315  
                                 
Total single-family
    19,063       3,546       69,793       13,109  
Multifamily
                8       49  
                                 
Total TDRs that subsequently defaulted
    19,063     $ 3,546       69,801     $ 13,158  
                                 
 
 
(1) Consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) fair value adjustments and accrued interest receivable on HFI loans. Represents our recorded investment in the loan at time of payment default.
 
(2) Consists of mortgage loans that are not included in other loan classes.
 
(3) Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies that are not Alt-A.
 
(4) Includes loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans that are neither government nor Alt-A.
 
Loans Acquired in a Transfer
 
We acquired delinquent loans from unconsolidated trusts and long-term standby commitments with an unpaid principal balance plus accrued interest of $48 million and $67 million for the three months ended September 30, 2011 and 2010, respectively, and $144 million and $227 million for the nine months ended September 30, 2011 and 2010, respectively. The following table displays the outstanding unpaid principal balance and accrued interest receivable, carrying amount by accrual status and accretable yield of acquired


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
credit-impaired loans as of September 30, 2011 and December 31, 2010, excluding loans that were modified as TDRs subsequent to their acquisition from MBS trusts.
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Outstanding contractual balance
  $ 5,563     $ 8,519  
                 
Carrying amount:
               
Loans on accrual status
  $ 1,758     $ 2,029  
Loans on nonaccrual status
    1,392       2,449  
                 
Total carrying amount of loans
  $ 3,150     $ 4,478  
                 
Accretable yield
  $ 1,584     $ 2,412  
 
The following table displays interest income recognized and the impact to the “Provision for loan losses” related to loans that are still being accounted for as acquired credit-impaired loans, as well as loans that have been subsequently modified as a TDR, for the three and nine months ended September 30, 2011 and 2010.
 
                                 
    For the Three
       
    Months Ended
    For the Nine
 
    September 30,     Months Ended September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Accretion of fair value discount(1)
  $ 288     $ 231     $ 769     $ 785  
Interest income on loans returned to accrual status or subsequently modified as TDRs
    257       235       777       854  
                                 
Total interest income recognized on acquired credit-impaired loans
  $ 545     $ 466     $ 1,546     $ 1,639  
                                 
(Decrease) increase in “Provision for loan losses” subsequent to the acquisition of credit-impaired loans
  $ (275 )   $ (125 )   $ 684     $ 319  
 
 
(1) Represents accretion of the fair value discount that was recorded on acquired credit-impaired loans.
 
4.   Allowance for Loan Losses
 
We maintain an allowance for loan losses for HFI loans in our mortgage portfolio and loans backing Fannie Mae MBS issued from consolidated trusts. When calculating our allowance for loan losses, we consider only our net recorded investment in the loan at the balance sheet date, which includes interest income only while the loan was on accrual status. The allowance for loan losses is calculated based on our estimate of incurred losses as of the balance sheet date. Determining the adequacy of our allowance for loan losses is complex and requires judgment about the effect of matters that are inherently uncertain.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Allowance for Loan Losses
 
The following table displays changes in both single-family and multifamily allowance for loan losses for the three and nine months ended September 30, 2011 and total allowance for loan losses for the three and nine months ended September 30, 2011 and 2010.
 
                                                         
    For the Three Months Ended September 30,        
    2011     2010        
    Of
    Of
          Of
    Of
             
    Fannie
    Consolidated
          Fannie
    Consolidated
             
    Mae     Trusts     Total     Mae     Trusts     Total        
    (Dollars in millions)  
 
Single-family allowance for loan losses:
                                                       
Beginning balance
  $ 54,949     $ 13,078     $ 68,027                                  
Provision for loan losses
    (235 )     4,318       4,083                                  
Charge-offs(1)(6)
    (3,802 )     (260 )     (4,062 )                                
Recoveries
    848       35       883                                  
Transfers(2)
    1,764       (1,764 )                                      
Other(3)
    860       137       997                                  
                                                         
Ending balance
  $ 54,384     $ 15,544     $ 69,928                                  
                                                         
Multifamily allowance for loan losses:
                                                       
Beginning balance
  $ 1,017     $ 462     $ 1,479                                  
Provision for loan losses
    39       37       76                                  
Charge-offs(1)
    (51 )           (51 )                                
Transfers(2)
    6       (6 )                                      
Other(3)
    3             3                                  
                                                         
Ending balance
  $ 1,014     $ 493     $ 1,507                                  
                                                         
Total allowance for loan losses:
                                                       
Beginning balance
  $ 55,966     $ 13,540     $ 69,506     $ 42,844     $ 17,738     $ 60,582          
Total provision for loan losses
    (196 )     4,355       4,159       2,144       2,552       4,696          
Charge-offs(1)(6)
    (3,853 )     (260 )     (4,113 )     (5,946 )     (1,243 )     (7,189 )        
Recoveries
    848       35       883       205       304       509          
Transfers(2)
    1,770       (1,770 )           5,131       (5,131 )              
Other(3)
    863       137       1,000       895       247       1,142          
                                                         
Ending balance(4)(5)
  $ 55,398     $ 16,037     $ 71,435     $ 45,273     $ 14,467     $ 59,740          
                                                         
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                 
    For the Nine Months Ended September 30,  
    2011     2010  
    Of
    Of
          Of
    Of
       
    Fannie
    Consolidated
          Fannie
    Consolidated
       
    Mae     Trusts     Total     Mae     Trusts     Total  
    (Dollars in millions)  
 
Single-family allowance for loan losses:
                                               
Beginning balance
  $ 47,377     $ 12,603     $ 59,980                          
Provision for loan losses
    9,962       10,410       20,372                          
Charge-offs(1)(6)
    (14,766 )     (1,466 )     (16,232 )                        
Recoveries
    3,197       1,537       4,734                          
Transfers(2)
    7,676       (7,676 )                              
Other(3)
    938       136       1,074                          
                                                 
Ending balance
  $ 54,384     $ 15,544     $ 69,928                          
                                                 
Multifamily allowance for loan losses:
                                               
Beginning balance
  $ 1,153     $ 423     $ 1,576                          
Provision for loan losses
    41       135       176                          
Charge-offs(1)
    (252 )           (252 )                        
Transfers(2)
    63       (63 )                              
Other(3)
    9       (2 )     7                          
                                                 
Ending balance
  $ 1,014     $ 493     $ 1,507                          
                                                 
Total allowance for loan losses:
                                               
Beginning balance
  $ 48,530     $ 13,026     $ 61,556     $ 8,078     $ 1,847     $ 9,925  
Adoption of new accounting standards
                            43,576       43,576  
Total provision for loan losses
    10,003       10,545       20,548       11,008       9,922       20,930  
Charge-offs(1)(6)
    (15,018 )     (1,466 )     (16,484 )     (12,097 )     (6,645 )     (18,742 )
Recoveries
    3,197       1,537       4,734       367       872       1,239  
Transfers(2)
    7,739       (7,739 )           41,606       (41,606 )      
Other(3)
    947       134       1,081       (3,689 )     6,501       2,812  
                                                 
Ending balance(4)(5)
  $ 55,398     $ 16,037     $ 71,435     $ 45,273     $ 14,467     $ 59,740  
                                                 
 
 
(1) Total charge-offs include accrued interest of $289 million and $811 million for the three months ended September 30, 2011 and 2010, respectively and $1.1 billion and $2.0 billion for the nine months ended September 30, 2011 and 2010, respectively. Single-family charge-offs include accrued interest of $279 million and $1.1 billion for the three and nine months ended September 30, 2011, respectively. Multifamily charge-offs include accrued interest of $10 million and $34 million for the three and nine months ended September 30, 2011, respectively.
 
(2) Includes transfers from trusts for delinquent loan purchases.
 
(3) Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and transfer activity included in this table reflects all changes for both the allowance for loan losses and the valuation allowances for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans.

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
(4) Includes $334 million and $397 million as of September 30, 2011 and 2010, respectively, for acquired credit-impaired loans.
 
(5) Total single-family allowance for loan losses was $58.3 billion as of September 30, 2010. Total multifamily allowance for loan losses was $1.4 billion as of September 30, 2010.
 
(6) While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default.
 
As of September 30, 2011, the allowance for accrued interest receivable for loans of Fannie Mae was $1.9 billion and for loans of consolidated trusts was $304 million. As of December 31, 2010, the allowance for accrued interest receivable for loans of Fannie Mae was $3.0 billion and for loans of consolidated trusts was $439 million.
 
In the three month period ended June 30, 2010, we identified that for a portion of our delinquent loans we had not estimated and recorded our obligation to reimburse servicers for advances they made on our behalf for preforeclosure property taxes and insurance. We previously recognized these expenses when we reimbursed servicers. We also did not record a receivable from borrowers for these payments or assess the collectibility of the receivable. The nine month period ended September 30, 2010 includes an out-of-period adjustment of $1.1 billion to our condensed consolidated statements of operations reflecting our assessment of the collectibility of the receivable from borrowers.
 
The following table displays the allowance for loan losses and total recorded investment in our HFI loans, excluding loans for which we have elected the fair value option, by impairment or reserve methodology and portfolio segment as of September 30, 2011 and December 31, 2010.
 
                                                 
    As of  
    September 30, 2011     December 31, 2010  
    Single-
                Single-
             
    Family     Multifamily     Total     Family     Multifamily     Total  
    (Dollars in millions)  
 
Allowance for loan losses by segment:
                                               
Individually impaired loans
  $ 44,475     $ 702     $ 45,177     $ 37,296     $ 549     $ 37,845  
Collectively reserved loans
    25,121       803       25,924       22,306       1,020       23,326  
Acquired credit-impaired loans
    332       2       334       378       7       385  
                                                 
Total allowance for loan losses
  $ 69,928     $ 1,507     $ 71,435     $ 59,980     $ 1,576     $ 61,556  
                                                 
Recorded investment in loans by segment:(1)
                                               
Individually impaired loans
  $ 159,031     $ 3,760     $ 162,791     $ 140,062     $ 3,074     $ 143,136  
Collectively reserved loans
    2,638,517       173,223       2,811,740       2,677,640       169,332       2,846,972  
Acquired credit-impaired loans
    3,546       50       3,596       4,798       108       4,906  
                                                 
Total recorded investment in loans
  $ 2,801,094     $ 177,033     $ 2,978,127     $ 2,822,500     $ 172,514     $ 2,995,014  
                                                 
 
 
(1) Recorded investment consists of the following: (a) unpaid principal balance; (b) unamortized premiums, discounts and other cost basis adjustments; and (c) accrued interest receivable.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
5.   Investments in Securities
 
Trading Securities
 
Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value (losses) gains, net” in our condensed consolidated statements of operations and comprehensive loss. The following table displays our investments in trading securities and the cumulative amount of net losses recognized from holding these securities as of September 30, 2011 and December 31, 2010.
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Mortgage-related securities:
               
Fannie Mae
  $ 7,529     $ 7,398  
Freddie Mac
    2,866       1,326  
Ginnie Mae
    297       590  
Alt-A private-label securities
    1,454       1,683  
Subprime private-label securities
    1,318       1,581  
CMBS
    10,600       10,764  
Mortgage revenue bonds
    718       609  
Other mortgage-related securities
    147       152  
                 
Total
    24,929       24,103  
                 
Non-mortgage-related securities:
               
U.S. Treasury securities
    40,755       27,432  
Asset-backed securities
    2,465       5,321  
                 
Total
    43,220       32,753  
                 
Total trading securities
  $ 68,149     $ 56,856  
                 
Losses in trading securities held in our portfolio, net
  $ 1,986     $ 2,149  
 
The following table displays information about our net trading gains and losses for the three and nine months ended September 30, 2011 and 2010.
 
                                 
    For the Three
    For the Nine
 
    Months Ended
    Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Net trading (losses) gains:
                               
Mortgage-related securities
  $ (209 )   $ 879     $ 151     $ 2,497  
Non-mortgage-related securities
    (5 )     10       (5 )     90  
                                 
Total
  $ (214 )   $ 889     $ 146     $ 2,587  
                                 
Net trading (losses) gains recorded in the period related to
                               
securities still held at period end:
                               
Mortgage-related securities
  $ (206 )   $ 872     $ 145     $ 2,368  
Non-mortgage-related securities
          7       2       71  
                                 
Total
  $ (206 )   $ 879     $ 147     $ 2,439  
                                 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Available-for-Sale Securities
 
We measure AFS securities at fair value with unrealized gains and losses recorded as a component of “Other comprehensive (loss) income,” net of tax, and we record realized gains and losses from the sale of AFS securities in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive loss.
 
The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the three and nine months ended September 30, 2011 and 2010.
 
                                 
    For the Three
  For the Nine
    Months Ended
  Months Ended
    September 30,   September 30,
    2011   2010   2011   2010
    (Dollars in millions)
 
Gross realized gains
  $ 15     $ 170     $ 148     $ 515  
Gross realized losses
    22       101       75       280  
Total proceeds(1)
    597       978       1,826       6,552  
 
 
(1) Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 2, Consolidations and Transfers of Financial Assets.” For the nine months ended September 30, 2010, proceeds were increased by $416 million, from what was previously disclosed, related to deconsolidated REMICs that were previously presented as proceeds from issuance of long-term debt of consolidated trusts.
 
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 September 30, 2011 and December 31, 2010.
 
                                         
    As of September 30, 2011  
                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
  $ 17,698     $ 1,559     $ (4 )   $ (15 )   $ 19,238  
Freddie Mac
    12,781       968                   13,749  
Ginnie Mae
    807       132                   939  
Alt-A private-label securities
    14,299       215       (1,989 )     (238 )     12,287  
Subprime private-label securities
    10,367       3       (2,040 )     (443 )     7,887  
CMBS(4)
    14,598       62             (270 )     14,390  
Mortgage revenue bonds
    10,635       180       (25 )     (183 )     10,607  
Other mortgage-related securities
    3,771       144       (21 )     (281 )     3,613  
                                         
Total
  $ 84,956     $ 3,263     $ (4,079 )   $ (1,430 )   $ 82,710  
                                         
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                         
    As of December 31, 2010  
                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
  $ 21,428     $ 1,453     $ (9 )   $ (44 )   $ 22,828  
Freddie Mac
    15,986       1,010                   16,996  
Ginnie Mae
    909       130                   1,039  
Alt-A private-label securities
    15,789       177       (1,791 )     (285 )     13,890  
Subprime private-label securities
    11,323       54       (997 )     (448 )     9,932  
CMBS(4)
    15,273       25             (454 )     14,844  
Mortgage revenue bonds
    11,792       47       (64 )     (734 )     11,041  
Other mortgage-related securities
    4,098       106       (44 )     (338 )     3,822  
                                         
Total
  $ 96,598     $ 3,002     $ (2,905 )   $ (2,303 )   $ 94,392  
                                         
 
 
(1) Amortized cost includes unamortized premiums, discounts and other cost basis adjustments as well as the credit component of other-than-temporary impairments (OTTI) recognized in our condensed consolidated statements of operations and comprehensive loss.
 
(2) Represents the noncredit component of other-than-temporary impairment losses recorded in “Accumulated other comprehensive loss” as well as cumulative changes in fair value for securities for which we previously recognized the credit component of an other-than-temporary impairment.
 
(3) Represents the gross unrealized losses on securities for which we have not recognized an other-than-temporary impairment.
 
(4) Amortized cost includes $725 million and $848 million as of September 30, 2011 and December 31, 2010, respectively, of increase to the carrying amount from previous fair value hedge accounting.
 
The following tables display additional information regarding gross unrealized losses and fair value by major security type for AFS securities in an unrealized loss position that we held as of September 30, 2011 and December 31, 2010.
 
                                 
    As of September 30, 2011  
    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
  $ (6 )   $ 758     $ (13 )   $ 186  
Alt-A private-label securities
    (157 )     1,544       (2,070 )     7,072  
Subprime private-label securities
    (206 )     992       (2,277 )     6,843  
CMBS
    (110 )     7,572       (160 )     2,982  
Mortgage revenue bonds
    (9 )     311       (199 )     2,718  
Other mortgage-related securities
    (12 )     264       (290 )     1,508  
                                 
Total
  $ (500 )   $ 11,441     $ (5,009 )   $ 21,309  
                                 
 

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                 
    As of December 31, 2010  
    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
  $ (35 )   $ 1,461     $ (18 )   $ 211  
Alt-A private-label securities
    (104 )     1,915       (1,972 )     9,388  
Subprime private-label securities
    (47 )     627       (1,398 )     8,493  
CMBS
    (15 )     1,774       (439 )     10,396  
Mortgage revenue bonds
    (206 )     5,009       (592 )     3,129  
Other mortgage-related securities
    (2 )     262       (380 )     2,014  
                                 
Total
  $ (409 )   $ 11,048     $ (4,799 )   $ 33,631  
                                 
 
Other-Than-Temporary Impairments
 
We recognize the credit component of other-than-temporary impairments of our debt securities in our condensed consolidated statements of operations and comprehensive loss and the noncredit component in “Other comprehensive (loss) income” 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, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. $5.0 billion of the $5.5 billion of gross unrealized losses on AFS securities as of September 30, 2011 have existed for a period of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of September 30, 2011 include unrealized losses on securities with other-than-temporary impairment in which a portion of the impairment remains in “Accumulated other comprehensive loss.” The securities with unrealized losses for 12 consecutive months or longer, on average, had a fair value as of September 30, 2011 that was 81% of their amortized cost basis. Based on our review for impairments of AFS securities, which includes an evaluation of the collectibility 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 that we will be required to sell the securities. Additionally, our projections of cash flows indicate that we will recover a portion or the majority of these unrealized losses over the lives of the securities.
 
The following table displays our net other-than-temporary impairments by major security type recognized in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2011 and 2010.
 
                                 
    For the Three
    For the Nine
 
    Months Ended
    Months Ended
 
    September 30,     September 30,  
    2011     2010(1)     2011     2010(1)  
    (Dollars in millions)  
 
Alt-A private-label securities
  $ 238     $ 153     $ 329     $ 310  
Subprime private-label securities
    2       171       2       365  
Other
    22       2       31       24  
                                 
Net other-than-temporary impairments
  $ 262     $ 326     $ 362     $ 699  
                                 
 
 
(1) Certain prior period amounts have been reclassified to conform to the current period presentation.

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
For the three and nine months ended September 30, 2011, we recorded net other-than-temporary impairment of $262 million and $362 million, respectively. The net other-than-temporary impairment charges recorded in the three month period ended September 30, 2011 were primarily driven by an increase in collateral losses on certain Alt-A private-label securities, which resulted in a decrease in the present value of our cash flow projections on these Alt-A private-label securities.
 
The following table displays activity related to the unrealized credit component on debt securities held by us and recognized in earnings for the three and nine months ended September 30, 2011 and 2010. A related unrealized non-credit component has been recognized in “Accumulated other comprehensive loss.”
 
                                 
    For the Three
    For the Nine
 
    Months Ended September 30,     Months Ended September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Balance, beginning of period
  $ 7,876     $ 8,181     $ 8,215     $ 8,191  
Additions for the credit component on debt securities for which OTTI
                               
was not previously recognized
          6       8       21  
Additions for credit losses on debt securities for which OTTI was
                               
previously recognized
    262       320       354       678  
Reductions for securities no longer in portfolio at period end
    (5 )     (102 )     (5 )     (154 )
Reductions for amortization resulting from increases in cash flows
                               
expected to be collected over the remaining life of the securities
    (253 )     (137 )     (692 )     (468 )
                                 
Balance, end of period
  $ 7,880     $ 8,268     $ 7,880     $ 8,268  
                                 
 
As of September 30, 2011, those debt securities with other-than-temporary impairment for which we recognized in our condensed consolidated statements of operations and comprehensive loss only the amount of loss related to credit consisted predominantly of Alt-A and subprime securities. We evaluate Alt-A (including option adjustable rate mortgage (“ARM”)) and subprime private-label securities for other-than-temporary impairment by discounting the projected cash flows from econometric models to estimate the portion of loss in value attributable to credit. Separate components of a third-party model project regional home prices, unemployment and interest rates. The model combines these factors with available current information regarding attributes of loans in pools backing the private-label mortgage-related securities to project prepayment speeds, conditional default rates, loss severities and delinquency rates. It incorporates detailed information on security-level subordination levels and cash flow priority of payments to project security level cash flows. We model securities assuming the benefit of those external financial guarantees that we determined are creditworthy. We have recorded other-than-temporary impairments for the three and nine months ended September 30, 2011 based on this analysis, with amounts related to credit loss recognized in our condensed consolidated statements of operations and comprehensive loss. For securities we determined were not other-than-temporarily impaired, we concluded that either the bond had no projected credit loss or if we projected a loss, that the present value of expected cash flows was greater than the security’s cost basis.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
The following table displays the modeled attributes, including default rates and severities, which are used to determine whether our senior interests in certain non-agency mortgage-related securities will experience a cash shortfall. Assumption of voluntary prepayment rates is also an input to the present value of expected losses.
 
                                         
    As of September 30, 2011  
          Alt-A  
    Subprime     Option ARM     Fixed Rate     Variable Rate     Hybrid Rate  
    (Dollars in millions)  
 
Vintage Year
                                       
2004 & Prior:
                                       
Unpaid principal balance
  $ 1,699     $ 487     $ 3,497     $ 501     $ 2,311  
Weighted average collateral default(1)
    36.6 %     36.6 %     10.5 %     31.4 %     16.0 %
Weighted average collateral severities(2)
    59.8       51.9       47.0       41.1       38.6  
Weighted average voluntary prepayment rates(3)
    6.9       11.6       12.7       9.2       12.5  
Average credit enhancement(4)
    51.1       16.3       12.1       22.3       10.5  
2005
                                       
Unpaid principal balance
  $ 179     $ 1,324     $ 1,202     $ 540     $ 2,389  
Weighted average collateral default(1)
    71.2 %     56.3 %     38.3 %     53.5 %     37.8 %
Weighted average collateral severities(2)
    72.1       59.8       62.1       57.0       46.8  
Weighted average voluntary prepayment rates(3)
    2.5       6.4       9.3       7.4       9.1  
Average credit enhancement(4)
    65.3       24.8       1.4       17.9       5.1  
2006
                                       
Unpaid principal balance
  $ 11,792     $ 1,241     $ 533     $ 1,619     $ 1,716  
Weighted average collateral default(1)
    76.3 %     70.9 %     38.6 %     58.3 %     31.0 %
Weighted average collateral severities(2)
    72.2       62.6       64.6       57.8       49.8  
Weighted average voluntary prepayment rates(3)
    2.5       3.4       8.4       6.5       9.8  
Average credit enhancement(4)
    17.5       17.0       2.3       0.2       0.6  
2007 & After:
                                       
Unpaid principal balance
  $ 609     $     $     $     $ 120  
Weighted average collateral default(1)
    78.8 %     N/A       N/A       N/A       40.9 %
Weighted average collateral severities(2)
    68.7       N/A       N/A       N/A       57.7  
Weighted average voluntary prepayment rates(3)
    2.0       N/A       N/A       N/A       9.0  
Average credit enhancement(4)
    33.7       N/A       N/A       N/A       26.1  
Total
                                       
Unpaid principal balance
  $ 14,279     $ 3,052     $ 5,232     $ 2,660     $ 6,536  
Weighted average collateral default(1)
    71.6 %     59.1 %     19.7 %     52.2 %     28.4 %
Weighted average collateral severities(2)
    70.6       59.7       52.3       54.5       44.9  
Weighted average voluntary prepayment rates(3)
    3.0       6.0       11.5       7.2       10.5  
Average credit enhancement(4)
    22.8       20.3       8.6       7.9       6.2  
 
 
(1) The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the current collateral unpaid principal balance, weighted by security unpaid principal balance.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
(2) The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.
 
(3) The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.
 
(4) The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest projections and monoline bond insurance.
 
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 September 30, 2011. 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 September 30, 2011  
                            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
  $ 17,698     $ 19,238     $     $     $ 6     $ 6     $ 2,645     $ 2,832     $ 15,047     $ 16,400  
Freddie Mac
    12,781       13,749       1       1       46       48       1,331       1,439       11,403       12,261  
Ginnie Mae
    807       939                               5       6       802       933  
Alt-A private-label securities
    14,299       12,287                   1       1       249       252       14,049       12,034  
Subprime private-label securities
    10,367       7,887                                           10,367       7,887  
CMBS
    14,598       14,390       62       63       5,255       5,244       8,678       8,500       603       583  
Mortgage revenue bonds
    10,635       10,607       59       59       366       377       743       756       9,467       9,415  
Other mortgage-related securities
    3,771       3,613                                     14       3,771       3,599  
                                                                                 
Total
  $ 84,956     $ 82,710     $ 122     $ 123     $ 5,674     $ 5,676     $ 13,651     $ 13,799     $ 65,509     $ 63,112  
                                                                                 
 
Accumulated Other Comprehensive Loss
 
The following table displays our accumulated other comprehensive loss by major categories as of September 30, 2011 and December 31, 2010.
 
                 
    As of  
    September 30,
    December 31,
 
    2011     2010  
    (Dollars in millions)  
 
Net unrealized gains on available-for-sale securities for which we have not recorded other-than-temporary impairment, net of tax
  $ 1,049     $ 304  
Net unrealized losses on available-for-sale securities for which we have recorded other-than-temporary impairment, net of tax
    (2,509 )     (1,736 )
Other losses
    (236 )     (250 )
                 
Accumulated other comprehensive loss
  $ (1,696 )   $ (1,682 )
                 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
The following table displays the activity in other comprehensive (loss) income, net of tax, by major categories for the three and nine months ended September 30, 2011 and 2010.
 
                                 
    For the Three
    For the Nine
 
    Months Ended
    Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Comprehensive loss:
                               
Net loss
  $ (5,085 )   $ (1,331 )   $ (14,448 )   $ (14,083 )
Other comprehensive (loss) income, net of tax:
                               
Changes in net unrealized losses on available-for-sale securities (net of tax benefit of $210 and tax of $380, respectively, for the three months ended and net of tax benefit of $142 and tax of $1,889, respectively, for the nine months ended)
    (391 )     705       (264 )     3,507  
Reclassification adjustment for other-than-temporary impairments recognized in net loss (net of tax of $92 and $113, respectively, for the three months ended and net of tax of $120 and $239, respectively, for the nine months ended)
    170       213       242       460  
Reclassification adjustment for losses (gains) included in net loss (net of tax benefit of $10 and tax of $10, respectively, for the three months ended and net of tax of $1 and $16, respectively, for the nine months ended)
    23       (17 )     2       (29 )
Other
    1       1       6       6  
                                 
Other comprehensive (loss) income
    (197 )     902       (14 )     3,944  
                                 
Total comprehensive loss
  $ (5,282 )   $ (429 )   $ (14,462 )   $ (10,139 )
                                 
 
6.   Financial Guarantees
 
For our guarantees to unconsolidated trusts and other guaranty arrangements, we recognize a guaranty obligation for our obligation to stand ready to perform on these guarantees. For those guarantees recognized in our condensed 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 $56.5 billion and $52.4 billion as of September 30, 2011 and December 31, 2010, respectively. The maximum amount we could recover through available credit enhancements and recourse with third parties on guarantees recognized in our condensed consolidated balance sheets was $14.0 billion and $12.6 billion as of September 30, 2011 and December 31, 2010, respectively. In addition, we had exposure of $9.5 billion and $10.3 billion for other guarantees not recognized in our condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, respectively. The maximum amount we could recover through available credit enhancements and recourse with third parties on guarantees not recognized in our condensed consolidated balance sheets was $4.1 billion and $3.9 billion as of September 30, 2011 and December 31, 2010, respectively. Recoverability of such credit enhancements and recourse is subject to, among other factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us.
 
The fair value of our guaranty obligations associated with the Fannie Mae MBS included in “Investments in securities” was $2.2 billion and $2.0 billion as of September 30, 2011 and December 31, 2010, respectively.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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 mortgage loans underlying the related securities. Management also monitors the serious delinquency rate, which is the percentage of single-family loans three or more months past due or in the foreclosure process, and the percentage of multifamily loans 60 days or more past due, of loans that also have higher risk characteristics, such as high mark-to-market loan-to-value ratios on single-family loans and low original debt service coverage ratios on multifamily loans. We use this information, in conjunction with housing market and economic conditions, to structure our pricing and our eligibility and underwriting criteria to reflect the current risk of loans with these higher-risk characteristics, and in some cases we decide to significantly reduce our participation in riskier loan product categories. Management also uses this data together with other credit risk measures to identify key trends that guide the development of our loss mitigation strategies.
 
The following tables display the current delinquency status and certain higher risk characteristics of our single-family conventional and total multifamily guaranty book of business as of September 30, 2011 and December 31, 2010.
 
                                                 
    As of September 30, 2011(1)     As of December 31, 2010(1)  
    30 Days
    60 Days
    Seriously
    30 Days
    60 Days
    Seriously
 
    Delinquent     Delinquent     Delinquent(2)     Delinquent     Delinquent     Delinquent(2)  
 
Percentage of single-family conventional guaranty book of business(3)
    2.00 %     0.75 %     4.64 %     2.19 %     0.89 %     5.37 %
Percentage of single-family conventional loans(4)
    2.16       0.75       4.00       2.32       0.87       4.48  
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                 
    As of September 30, 2011(1)   As of December 31, 2010(1)
    Percentage of
      Percentage of
   
    Single-Family
      Single-Family
   
    Conventional
  Percentage
  Conventional
  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:
                               
Less than 100%
    84 %     2.35 %     84 %     2.62 %
100.01% to 110%
    5       9.50       5       11.60  
110.01% to 120%
    3       12.16       3       14.74  
120.01% to 125%
    1       13.64       1       16.86  
Greater than 125%
    7       19.83       7       24.71  
Geographical distribution:
                               
Arizona
    2       3.78       2       6.23  
California
    19       2.70       18       3.89  
Florida
    6       11.90       7       12.31  
Nevada
    1       7.53       1       10.66  
Select Midwest states(5)
    10       4.55       11       4.80  
All other states
    62       3.20       61       3.46  
Product distribution (not mutually exclusive): (6)
                               
Alt-A
    7       12.71       8       13.87  
Subprime
    *       23.91       *       28.20  
Negatively amortizing adjustable rate
    *       7.79       *       9.02  
Interest only
    5       15.70       6       17.85  
Investor property
    6       4.34       6       4.79  
Condo/Coop
    9       4.74       9       5.37  
Original loan-to-value ratio >90%(7)
    10       8.42       10       10.04  
FICO credit score <620(7)
    3       13.56       4       14.63  
Original loan-to-value ratio >90% and FICO credit score <620(7)
    1       18.99       1       21.41  
Vintages:
                               
2005
    7       7.13       9       7.20  
2006
    7       11.81       8       12.19  
2007
    10       12.63       12       13.24  
2008
    8       5.34       9       4.88  
All other vintages
    68       1.60       62       1.73  
 
 
 * Represents less than 0.5% of the single-family conventional guaranty book of business.
 
(1) Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total single-family conventional guaranty book of business as of both September 30, 2011 and December 31, 2010.
 
(2) Consists of single-family conventional loans that were three months or more past due or in the foreclosure process, as of the periods indicated.

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
(3) Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business.
 
(4) Calculated based on the number of single-family conventional loans that were delinquent divided by the total number of loans in our single-family conventional 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®.
 
                                 
    As of September 30, 2011(1)(2)   As of December 31, 2010(1)(2)
    30 Days
  Seriously
  30 Days
  Seriously
    Delinquent   Delinquent(3)   Delinquent   Delinquent(3)
 
Percentage of multifamily guaranty book of business
    0.20 %     0.57 %     0.21 %     0.71 %
 
                                 
    As of September 30, 2011(1)(2)   As of December 31, 2010(1)(2)
    Percentage of
      Percentage of
   
    Multifamily
  Percentage
  Multifamily
  Percentage
    Guaranty
  Seriously
  Guaranty
  Seriously
    Book of Business   Delinquent(3)   Book of Business   Delinquent(3)
 
Original loan-to-value ratio:
                               
Greater than 80%
    5 %     1.52 %     5 %     0.59 %
Less than or equal to 80%
    95       0.53       95       0.71  
Original debt service coverage ratio:
                               
Less than or equal to 1.10
    8       0.17       9       0.27  
Greater than 1.10
    92       0.61       91       0.75  
Acquisition loan size distribution:
                               
Less than or equal to $750,000
    2       1.37       2       1.61  
Greater than $750,000 and less than or equal to $3 million
    11       1.11       12       1.17  
Greater than $3 million and less than or equal to $5 million
    9       0.80       9       0.88  
Greater than $5 million and less than or equal to $25 million
    42       0.63       42       0.88  
Greater than $25 million
    36       0.23       35       0.24  
Maturing dates:
                               
Maturing in 2011
    1       3.68       3       0.68  
Maturing in 2012
    6       0.41       7       0.42  
Maturing in 2013
    10       0.45       11       0.54  
Maturing in 2014
    8       0.56       8       0.67  
Maturing in 2015
    9       0.45       9       0.57  
 
 
(1) Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted 99% of our total multifamily guaranty book of business as of both September 30, 2011 and December 31, 2010 excluding loans that have been defeased. Defeasance is a pre-payment of a loan through substitution of collateral.
 
(2) Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the aggregate unpaid principal balance of loans in our multifamily guaranty book of business.
 
(3) Consists of multifamily loans that were 60 days or more past due as of the periods indicated.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
7.   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 displays the activity in acquired property and the related valuation allowance for the three and nine months ended September 30, 2011 and 2010.
 
                                                 
    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2011     September 30, 2011  
    Acquired
    Valuation
    Acquired
    Acquired
    Valuation
    Acquired
 
    Property     Allowance(1)     Property, Net     Property     Allowance(1)     Property, Net  
    (Dollars in millions)  
 
Balance as of beginning of period
  $ 14,915     $ (1,323 )   $ 13,592     $ 18,054     $ (1,881 )   $ 16,173  
Additions
    4,066       (144 )     3,922       13,953       (422 )     13,531  
Disposals
    (5,606 )     601       (5,005 )     (18,632 )     2,119       (16,513 )
Write-downs, net of recoveries
          (314 )     (314 )           (996 )     (996 )
                                                 
Balance as of end of period
  $ 13,375     $ (1,180 )   $ 12,195     $ 13,375     $ (1,180 )   $ 12,195  
                                                 
 
                                                 
    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2010     September 30, 2010  
    Acquired
    Valuation
    Acquired
    Acquired
    Valuation
    Acquired
 
    Property     Allowance(1)     Property, Net     Property     Allowance(1)     Property, Net  
    (Dollars in millions)  
 
Balance as of beginning of period
  $ 15,141     $ (1,120 )   $ 14,021     $ 9,716     $ (574 )   $ 9,142  
Additions
    8,586       (339 )     8,247       22,176       (629 )     21,547  
Disposals
    (4,618 )     390       (4,228 )     (12,783 )     915       (11,868 )
Write-downs, net of recoveries
          (450 )     (450 )           (1,231 )     (1,231 )
                                                 
Balance as of end of period
  $ 19,109     $ (1,519 )   $ 17,590     $ 19,109     $ (1,519 )   $ 17,590  
                                                 
 
 
(1) Reflects activities in the valuation allowance for acquired properties held primarily by our Single-Family segment.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
8.   Short-Term Borrowings and Long-Term Debt
 
Short-Term Borrowings
 
The following table displays our outstanding short-term borrowings (borrowing with an original contractual maturity of one year or less) and weighted-average interest rates of these borrowings as of September 30, 2011 and December 31, 2010.
 
                                 
    As of  
    September 30, 2011     December 31, 2010  
          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
  $       %   $ 52       2.20 %
                                 
Fixed-rate short-term debt:
                               
Discount notes
  $ 193,385       0.13 %   $ 151,500       0.32 %
Foreign exchange discount notes
    333       2.01       384       2.43  
                                 
Total short-term debt of Fannie Mae
    193,718       0.14       151,884       0.32  
Debt of consolidated trusts
    5,004       0.19       5,359       0.23  
                                 
Total short-term debt
  $ 198,722       0.14 %   $ 157,243       0.32 %
                                 
 
 
(1) Includes the effects of discounts, premiums, and other cost basis adjustments.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
Long-Term Debt
 
Long-term debt represents borrowings with an original contractual maturity of greater than one year. The following table displays our outstanding long-term debt as of September 30, 2011 and December 31, 2010.
 
                                         
    As of  
    September 30, 2011     December 31, 2010  
              Weighted-
              Weighted-
 
              Average
              Average
 
              Interest
              Interest
 
    Maturities   Outstanding     Rate(1)     Maturities   Outstanding     Rate(1)  
    (Dollars in millions)  
 
Senior fixed:
                                       
Benchmark notes and bonds
  2011-2030   $ 281,876       2.90 %   2011-2030   $ 300,344       3.20 %
Medium-term notes
  2011-2021     153,166       1.81     2011-2020     199,266       2.13  
Foreign exchange notes and bonds
  2021-2028     667       5.22     2017-2028     1,177       6.21  
Other(2)
  2011-2040     44,241       5.59     2011-2040     44,893       5.64  
                                         
Total senior fixed
        479,950       2.80           545,680       3.02  
Senior floating:
                                       
Medium-term notes
  2011-2016     62,970       0.30     2011-2015     72,039       0.31  
Other(2)
  2020-2037     421       6.61     2020-2037     386       4.92  
                                         
Total senior floating
        63,391       0.33           72,425       0.34  
Subordinated fixed:
                                       
Qualifying subordinated(3)
  2012-2014     4,893       5.08     2011-2014     7,392       5.47  
Subordinated debentures
  2019     2,851       9.91     2019     2,663       9.91  
                                         
Total subordinated fixed
        7,744       6.86           10,055       6.65  
                                         
Total long-term debt of Fannie Mae(4)
        551,085       2.58           628,160       2.77  
Debt of consolidated trusts(2)
  2011-2051     2,441,969       4.40     2011-2051     2,411,597       4.59  
                                         
Total long-term debt
      $ 2,993,054       4.06 %       $ 3,039,757       4.22 %
                                         
 
 
(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.
 
(3) Consists of subordinated debt issued with an interest deferral feature.
 
(4) Reported amounts include a net discount and other cost basis adjustments of $9.5 billion and $12.4 billion as of September 30, 2011 and December 31, 2010, respectively.
 
Intraday Lines of Credit
 
We periodically use secured and unsecured intraday funding lines of credit provided by several large financial institutions. We post collateral which, in some circumstances, the secured party has the right to repledge to third parties. As these lines of credit are uncommitted intraday loan facilities, we may be unable to draw on them if and when needed. We had secured uncommitted lines of credit of $25.0 billion and unsecured uncommitted lines of credit of $500 million as of September 30, 2011 and December 31, 2010. We had no borrowings outstanding from these lines of credit as of September 30, 2011 and December 31, 2010.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
9.   Derivative Instruments
 
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 derivatives, or they may be listed and traded on an exchange. 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 interest rate swaps, interest rate options, foreign currency swaps and futures.
 
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 recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their fair value on a trade date basis. Fair value amounts, which are netted to the extent a legal right of offset exists and is enforceable by law at the counterparty level and are inclusive of the right or obligation associated with the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our condensed consolidated balance sheets. We record all derivative gains and losses, including accrued interest, in “Fair value (losses) gains, net” in our condensed consolidated statements of operations and comprehensive loss.
 
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 as of September 30, 2011 and December 31, 2010.
 
                                                                 
    As of September 30, 2011     As of December 31, 2010  
    Asset Derivatives     Liability Derivatives     Asset Derivatives     Liability Derivatives  
    Notional
    Estimated
    Notional
    Estimated
    Notional
    Estimated
    Notional
    Estimated
 
    Amount     Fair Value     Amount     Fair Value     Amount     Fair Value     Amount     Fair Value  
    (Dollars in millions)  
 
Risk management derivatives:
                                                               
Swaps:
                                                               
Pay-fixed
  $ 36,990     $ 46     $ 156,892     $ (17,154 )   $ 49,085     $ 1,812     $ 228,142     $ (14,115 )
Receive-fixed
    144,603       7,740       35,205       (63 )     172,174       6,493       52,003       (578 )
Basis
    332       122       6,665       (18 )     435       29       50        
Foreign currency
    457       135       542       (82 )     1,274       164       286       (51 )
Swaptions:
                                                               
Pay-fixed
    64,150       191       48,500       (275 )     66,200       482       30,950       (1,773 )
Receive-fixed
    38,845       6,707       48,500       (3,036 )     48,340       4,992       30,275       (673 )
Interest rate caps
    7,000       2                   7,000       24              
Other(1)
    639       52       150       (4 )     909       75       25       (1 )
                                                                 
Total gross risk management derivatives
    293,016       14,995       296,454       (20,632 )     345,417       14,071       341,731       (17,191 )
Accrued interest receivable (payable)
          770             (1,319 )           1,288             (1,805 )
Netting adjustment(2)
          (15,539 )           18,372             (15,175 )           18,023  
                                                                 
Total net risk management derivatives
  $ 293,016     $ 226     $ 296,454     $ (3,579 )   $ 345,417     $ 184     $ 341,731     $ (973 )
                                                                 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                                 
    As of September 30, 2011     As of December 31, 2010  
    Asset Derivatives     Liability Derivatives     Asset Derivatives     Liability Derivatives  
    Notional
    Estimated
    Notional
    Estimated
    Notional
    Estimated
    Notional
    Estimated
 
    Amount     Fair Value     Amount     Fair Value     Amount     Fair Value     Amount     Fair Value  
    (Dollars in millions)  
 
Mortgage commitment derivatives:
                                                               
Mortgage commitments to purchase whole loans
  $ 9,434     $ 84     $ 2,991     $ (12 )   $ 2,880     $ 19     $ 4,435     $ (105 )
Forward contracts to purchase mortgage-related securities
    30,447       365       18,370       (86 )     19,535       123       27,697       (468 )
Forward contracts to sell mortgage-related securities
    15,077       48       50,896       (596 )     40,761       811       24,562       (169 )
                                                                 
Total mortgage commitment derivatives
  $ 54,958     $ 497     $ 72,257     $ (694 )   $ 63,176     $ 953     $ 56,694     $ (742 )
                                                                 
Derivatives at fair value
  $ 347,974     $ 723     $ 368,711     $ (4,273 )   $ 408,593     $ 1,137     $ 398,425     $ (1,715 )
                                                                 
 
 
(1) Includes futures, 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) 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 receivable and payable. Cash collateral receivable was $3.5 billion as of September 30, 2011 and December 31, 2010. Cash collateral payable was $653 million and $604 million as of September 30, 2011 and December 31, 2010, respectively.
 
A majority of our derivative instruments contain provisions that require our senior unsecured debt to maintain a minimum credit rating from S&P, Moody’s or Fitch. 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 were in a net liability position as of September 30, 2011 was $7.0 billion, for which we posted collateral of $6.9 billion in the normal course of business. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $182 million of collateral would have been required to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position at September 30, 2011.
 
The aggregate fair value of all derivatives with credit risk-related contingent features that were in a net liability position as of December 31, 2010 was $4.4 billion, for which we posted collateral of $3.5 billion in the normal course of business. Had all of the credit risk-related contingency features underlying these agreements been triggered, an additional $891 million would have been required to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position at December 31, 2010.

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives for the three and nine months ended September 30, 2011 and 2010.
 
                                 
    For the
    For the
 
    Three Months
    Nine Months
 
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (Dollars in millions)  
 
Risk management derivatives:
                               
Swaps:
                               
Pay-fixed
  $ (11,334 )   $ (8,034 )   $ (16,206 )   $ (24,811 )
Receive-fixed
    4,577       6,126       7,105       18,642  
Basis
    75       43       104       73  
Foreign currency
    31       149       114       138  
Swaptions:
                               
Pay-fixed
    533       17       805       (1,342 )
Receive-fixed
    2,091       1,778       2,591       5,460  
Interest rate caps
    (4 )     (16 )     (22 )     (115 )
Other(1)
    (36 )     (4 )     (58 )     33  
                                 
Total risk management derivatives fair value (losses) gains, net
    (4,067 )     59       (5,567 )     (1,922 )
Mortgage commitment derivatives fair value losses, net
    (188 )     (183 )     (226 )     (1,361 )
                                 
Total derivatives fair value losses, net
  $ (4,255 )   $ (124 )   $ (5,793 )   $ (3,283 )
                                 
 
 
(1) Includes futures, swap credit enhancements and mortgage insurance contracts.
 
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 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 by S&P, Moody’s or Fitch. We also manage our exposure by requiring counterparties to post collateral. The collateral includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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 September 30, 2011 and December 31, 2010.
 
                                         
    As of September 30, 2011  
    Credit Rating(1)                    
    AA+/AA/AA-     A+/A     Subtotal(2)     Other(3)     Total  
    (Dollars in millions)  
 
Credit loss exposure(4)
  $ 587     $ 232     $ 819     $ 49     $ 868  
Less: Collateral held(5)
    515       189       704             704  
                                         
Exposure net of collateral
  $ 72     $ 43     $ 115     $ 49     $ 164  
                                         
Additional information:
                                       
Notional amount
  $ 152,829     $ 434,712     $ 587,541     $ 1,929     $ 589,470  
Number of counterparties
    7       8       15                  
 
                                         
    As of December 31, 2010  
    Credit Rating(1)                    
    AA+/AA/AA-     A+/A     Subtotal(2)     Other(3)     Total  
    (Dollars in millions)  
 
Credit loss exposure(4)
  $ 350     $ 325     $ 675     $ 75     $ 750  
Less: Collateral held(5)
    273       325       598             598  
                                         
Exposure net of collateral
  $ 77     $     $ 77     $ 75     $ 152  
                                         
Additional information:
                                       
Notional amount
  $ 208,898     $ 476,766     $ 685,664     $ 1,484     $ 687,148  
Number of counterparties
    7       8       15                  
 
 
(1) We manage collateral requirements based on the lower credit rating of the legal entity, as issued by S&P and Moody’s. The credit rating reflects the equivalent S&P’s rating for any ratings based on Moody’s scale.
 
(2) We had exposure to 4 and 3 interest rate and foreign currency derivative counterparties in a net gain position as of September 30, 2011 and December 31, 2010, respectively. Those interest rate and foreign currency derivatives had notional balances of $135.1 billion and $106.5 billion as of September 30, 2011 and December 31, 2010, respectively.
 
(3) Includes defined benefit mortgage insurance contracts and swap credit enhancements accounted for as derivatives where the right of legal offset does not exist. Also includes exchange-traded derivatives, such as futures and interest rate swaps, which are settled daily through a clearinghouse.
 
(4) 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.
 
(5) Represents both cash and non-cash collateral posted by our counterparties to us. Does not include collateral held in excess of exposure. 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.
 
10.   Segment Reporting
 
Our three reportable segments are: Single-Family, Multifamily, 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. We are working on reorganizing our company by function rather than by business in order to improve our operational efficiencies and effectiveness. In future periods, we may change some of our management reporting and how we report our business segment results.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Under our segment reporting, the sum of the results for our three business segments does not equal our condensed consolidated statements of operations and comprehensive loss, as we separate the activity related to our consolidated trusts from the results generated by our three segments. 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) a provision or benefit for federal income taxes. In addition, we allocate intracompany guaranty fee income as a charge from the Single-Family and Multifamily segments to Capital Markets for managing the credit risk on mortgage loans held by the Capital Markets group. We also include an eliminations/adjustments category to reconcile our business segment results and the activity related to our consolidated trusts to net loss in our condensed consolidated statements of operations and comprehensive loss.
 
The following tables display our segment results for the three and nine months ended September 30, 2011 and 2010.
 
                                                 
    For the Three Months Ended September 30, 2011  
          Other Activity/
       
    Business Segments     Reconciling Items        
    Single-
          Capital
    Consolidated
    Eliminations/
    Total
 
    Family     Multifamily     Markets     Trusts(1)     Adjustments(2)     Results  
    (Dollars in millions)  
 
Net interest (loss) income
  $ (374 )   $ (7 )   $ 3,904     $ 1,210     $ 453 (3)   $ 5,186  
Provision for loan losses
    (4,083 )     (76 )                       (4,159 )
                                                 
Net interest (loss) income after provision for loan losses
    (4,457 )     (83 )     3,904       1,210       453       1,027  
Guaranty fee income (expense)
    1,867       226       (369 )     (1,124 )(4)     (551 )(4)     49 (4)
Investment gains (losses), net
    3       5       801       (89 )     (647 )(5)     73  
Net other-than-temporary impairments
                (262 )                 (262 )
Fair value losses, net
    (2 )           (4,670 )     (17 )     164 (6)     (4,525 )
Debt extinguishment losses, net
                (107 )     (12 )           (119 )
Losses from partnership investments
          (30 )                       (30 )(7)
Fee and other income (expenses)
    136       51       125       (67 )     (3 )     242  
Administrative expenses
    (409 )     (62 )     (120 )                 (591 )
Benefit (provision) for guaranty losses
    11       (3 )                       8  
Foreclosed property expense
    (710 )     (23 )                       (733 )
Other expenses
    (184 )     (9 )     (14 )           (17 )     (224 )
                                                 
(Loss) income before federal income taxes
    (3,745 )     72       (712 )     (99 )     (601 )     (5,085 )
(Provision) benefit for federal income taxes
    (1 )           1                    
                                                 
Net (loss) income attributable to Fannie Mae
  $ (3,746 )   $ 72     $ (711 )   $ (99 )   $ (601 )   $ (5,085 )
                                                 
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                 
    For the Nine Months Ended September 30, 2011  
          Other Activity/
       
    Business Segments     Reconciling Items        
    Single-
          Capital
    Consolidated
    Eliminations/
    Total
 
    Family     Multifamily     Markets     Trusts(1)     Adjustments(2)     Results  
    (Dollars in millions)  
 
Net interest (loss) income
  $ (1,952 )   $ (27 )   $ 11,481     $ 4,098     $ 1,518 (3)   $ 15,118  
Provision for loan losses
    (20,372 )     (176 )                       (20,548 )
                                                 
Net interest (loss) income after provision for loan losses
    (22,324 )     (203 )     11,481       4,098       1,518       (5,430 )
Guaranty fee income (expense)
    5,618       651       (1,159 )     (3,350 )(4)     (1,611 )(4)     149 (4)
Investment (losses) gains, net
    (2 )     10       2,589       (258 )     (2,020 )(5)     319  
Net other-than-temporary impairments
                (361 )     (1 )           (362 )
Fair value losses, net
    (5 )           (5,959 )     (122 )     216 (6)     (5,870 )
Debt extinguishment (losses) gains, net
                (186 )     37             (149 )
Losses from partnership investments
          (8 )                 1       (7 )(7)
Fee and other income (expense)
    397       166       309       (222 )     (6 )     644  
Administrative expenses
    (1,225 )     (194 )     (346 )                 (1,765 )
(Provision) benefit for guaranty losses
    (732 )     38                         (694 )
Foreclosed property expense
    (717 )     (26 )                       (743 )
Other (expenses) income
    (579 )     33       (32 )           (53 )     (631 )
                                                 
(Loss) income before federal income taxes
    (19,569 )     467       6,336       182       (1,955 )     (14,539 )
Benefit (provision) for federal income taxes
    106       (61 )     46                   91  
                                                 
Net (loss) income
    (19,463 )     406       6,382       182       (1,955 )     (14,448 )
                                                 
Less: Net income attributable to noncontrolling interest
                            (1 )(8)     (1 )
                                                 
Net (loss) income attributable to Fannie Mae
  $ (19,463 )   $ 406     $ 6,382     $ 182     $ (1,956 )   $ (14,449 )
                                                 
 

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                 
    For the Three Months Ended September 30, 2010  
          Other Activity/
       
    Business Segments     Reconciling Items        
    Single-
          Capital
    Consolidated
    Eliminations/
    Total
 
    Family     Multifamily     Markets     Trusts(1)     Adjustments(2)     Results  
          (Dollars in millions)  
 
Net interest (loss) income
  $ (1,108 )   $     $ 4,065     $ 1,246     $ 573 (3)   $ 4,776  
(Provision) benefit for loan losses
    (4,702 )     6                         (4,696 )
                                                 
Net interest (loss) income after provision for loan losses
    (5,810 )     6       4,065       1,246       573       80  
Guaranty fee income (expense)
    1,804       205       (402 )     (1,095 )(4)     (461 )(4)     51 (4)
Investment gains (losses), net
    3       4       1,270       (165 )     (1,030 )(5)     82  
Net other-than-temporary impairments
                (323 )     (3 )           (326 )
Fair value gains (losses), net
                436       (89 )     178 (6)     525  
Debt extinguishment losses, net
                (185 )     (29 )           (214 )
Gains from partnership investments
          39                   8       47 (7)
Fee and other income (expense)
    93       35       130       (4 )     (1 )     253  
Administrative expenses
    (471 )     (94 )     (165 )                 (730 )
(Provision) benefit for guaranty losses
    (79 )     1                         (78 )
Foreclosed property expense
    (778 )     (9 )                       (787 )
Other expense
    (217 )     (7 )     (3 )           (16 )     (243 )
                                                 
(Loss) income before federal income taxes
    (5,455 )     180       4,823       (139 )     (749 )     (1,340 )
Benefit for federal income taxes
    1       1       7                   9  
                                                 
Net (loss) income
    (5,454 )     181       4,830       (139 )     (749 )     (1,331 )
Less: Net income attributable to noncontrolling interests
                            (8 )(8)     (8 )
                                                 
Net (loss) income attributable to Fannie Mae
  $ (5,454 )   $ 181     $ 4,830     $ (139 )   $ (757 )   $ (1,339 )
                                                 
 

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                 
    For the Nine Months Ended September 30, 2010  
          Other Activity/
       
    Business Segments     Reconciling Items        
    Single-
          Capital
    Consolidated
    Eliminations/
    Total
 
    Family     Multifamily     Markets     Trusts(1)     Adjustments(2)     Results  
    (Dollars in millions)  
 
Net interest (loss) income
  $ (4,438 )   $ 9     $ 10,671     $ 3,767     $ 1,763 (3)   $ 11,772  
(Provision) benefit for loan losses
    (20,966 )     36                         (20,930 )
                                                 
Net interest (loss) income after provision for loan losses
    (25,404 )     45       10,671       3,767       1,763       (9,158 )
Guaranty fee income (expense)
    5,367       594       (1,041 )     (3,422 )(4)     (1,341 )(4)     157 (4)
Investment gains (losses), net
    7       3       2,841       (348 )     (2,232 )(5)     271  
Net other-than-temporary impairments
                (696 )     (3 )           (699 )
Fair value losses, net
                (119 )     (113 )     (645 )(6)     (877 )
Debt extinguishment losses, net
                (368 )     (129 )           (497 )
Losses from partnership investments
          (41 )                 4       (37 )(7)
Fee and other income (expense)
    225       98       370       (18 )     (1 )     674  
Administrative expenses
    (1,297 )     (286 )     (422 )                 (2,005 )
(Provision) benefit for guaranty losses
    (163 )     52                         (111 )
Foreclosed property expense
    (1,227 )     (28 )                       (1,255 )
Other (expenses) income
    (648 )     (24 )     115             (56 )     (613 )
                                                 
(Loss) income before federal income taxes
    (23,140 )     413       11,351       (266 )     (2,508 )     (14,150 )
Benefit (provision) for federal income taxes
    53       (14 )     28                   67  
                                                 
Net (loss) income
    (23,087 )     399       11,379       (266 )     (2,508 )     (14,083 )
Less: Net income attributable to noncontrolling interests
                            (4 )(8)     (4 )
                                                 
Net (loss) income attributable to Fannie Mae
  $ (23,087 )   $ 399     $ 11,379     $ (266 )   $ (2,512 )   $ (14,087 )
                                                 
 
 
(1) Represents activity related to the assets and liabilities of consolidated trusts in our condensed consolidated balance sheets.
 
(2) Represents the elimination of intercompany transactions occurring between the three business segments and our consolidated trusts, as well as other adjustments to reconcile to our condensed consolidated results.
 
(3) Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a GAAP basis are eliminated.
 
(4) Represents the guaranty fees paid from consolidated trusts to the Single-Family and Multifamily segments. The adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the amortization of deferred cash fees related to consolidated trusts that were re-established for segment reporting. Total guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive loss.
 
(5) Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as available-for-sale securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The adjustment also includes the removal of securitization gains (losses) recognized in the Capital Markets segment relating to portfolio securitization transactions that do not qualify for sale accounting under GAAP.
 
(6) Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are retained in the Capital Markets portfolio.
 
(7) Gains (losses) from partnership investments are included in other expenses in our condensed consolidated statements of operations and comprehensive loss.

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
(8) Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that are consolidated in our condensed consolidated balance sheets.
 
11.   Regulatory Capital Requirements
 
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 submit capital reports to FHFA during the conservatorship and FHFA monitors our capital levels.
 
The following table displays our regulatory capital classification measures as of September 30, 2011 and December 31, 2010.
 
                 
    As of  
    September 30,
    December 31,
 
    2011(1)     2010(1)  
    (Dollars in millions)  
 
Core capital(2)
  $ (110,943 )   $ (89,516 )
Statutory minimum capital requirement(3)
    32,697       33,676  
                 
Deficit of core capital over statutory minimum capital requirement
  $ (143,640 )   $ (123,192 )
                 
 
 
(1) Amounts as of September 30, 2011 and December 31, 2010 represent estimates that we have submitted to FHFA.
 
(2) The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated value of our outstanding non-cumulative perpetual preferred stock; (c) our paid-in capital; and (d) our retained earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income (loss) or (b) senior preferred stock.
 
(3) Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (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).
 
12.   Concentration of Credit Risk
 
Mortgage Seller/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 75% of our single-family guaranty book of business as of September 30, 2011, compared with 77% as of December 31, 2010. Our ten largest multifamily mortgage servicers, including their affiliates, serviced 68% of our multifamily guaranty book of business as of September 30, 2011, compared with 70% as of December 31, 2010.
 
If one of our principal mortgage seller/servicers fails to meet its obligations to us, it could increase our credit-related expenses and credit losses, result in financial losses to us and have a material adverse effect on our earnings, liquidity, financial condition and net worth.
 
Mortgage Insurers.  Mortgage insurance “risk in force” represents our maximum potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of $92.2 billion on the single-family mortgage loans in our guaranty book of business as of September 30, 2011, which represented approximately 3% 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 represented $87.7 billion and $4.5 billion, respectively, as of September 30, 2011, compared with $91.2 billion


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
and $4.7 billion, respectively, as of December 31, 2010. Eight mortgage insurance companies provided over 99% of our mortgage insurance as of both September 30, 2011 and December 31, 2010.
 
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. During the three month period ending September 30, 2011, we notified PMI Mortgage Insurance Co. (“PMI”) and Republic Mortgage Insurance Company (“RMIC”), two of our mortgage insurer counterparties, that they were suspended nationwide as approved mortgage insurers.
 
As reported by PMI, on October 20, 2011, PMI received from its regulator an order under which the regulator now has full possession, management and control. The regulator is also seeking to place PMI into receivership. Pursuant to the order, effective October 24, 2011, the regulator instituted a partial claim payment plan whereby all valid claims under PMI mortgage guaranty insurance policies will be paid 50% in cash and 50% deferred as a policyholder claim. It is uncertain when, and if, PMI’s regulator will allow PMI to begin paying its deferred policyholder claims and/or increase the amount of cash PMI pays on claims. On October 12, 2011, RMIC voluntarily entered into an agreement with its regulator to discontinue writing or assuming any new mortgage guaranty insurance business in all states.
 
As of November 7, 2011, four of our mortgage insurers (Triad, RMIC, PMI and Genworth Mortgage Insurance Corporation) have publicly disclosed that they are either in run-off or, absent a waiver, estimate they would not meet state regulatory capital requirements for their main writing entity as of September 30, 2011. An additional two of our mortgage insurers (Mortgage Guaranty Insurance Corporation and Radian Guaranty, Inc.) have disclosed that, in the absence of additional capital contributions to their writing entity, their capital might fall below state regulatory capital requirements in the future. These six mortgage insurers provided a combined $75.7 billion, or 82%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of September 30, 2011.
 
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 September 30, 2011, our allowance for loan losses of $71.4 billion, allowance for accrued interest receivable of $2.2 billion and reserve for guaranty losses of $916 million incorporated an estimated recovery amount of approximately $12.7 billion from mortgage insurance related both to loans that are individually measured for impairment and those that are collectively reserved. This amount is comprised of the contractual recovery of approximately $15.1 billion as of September 30, 2011 and an adjustment of approximately $2.4 billion which reduces the contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully pay those claims. As of December 31, 2010, our allowance for loan losses of $61.6 billion, allowance for accrued interest receivable of $3.4 billion and reserve for guaranty losses of $323 million incorporated an estimated recovery amount of approximately $16.4 billion from mortgage insurance related both to loans that are individually measured for impairment and those that are collectively reserved. This amount is comprised of the contractual recovery of approximately $17.5 billion as of December 31, 2010 and an adjustment of approximately $1.2 billion, which reduces the contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully pay those claims.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
We had outstanding receivables of $3.7 billion recorded in “Other assets” in our condensed consolidated balance sheets as of September 30, 2011 and $4.4 billion as of December 31, 2010 related to amounts claimed on insured, defaulted loans that we have not yet received, of which $494 million as of September 30, 2011 and $648 million as of December 31, 2010 was due from our mortgage seller/servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $589 million as of September 30, 2011 and $317 million as of December 31, 2010. These mortgage insurance receivables are short-term in nature, having an average duration of approximately six months, and the valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of September 30, 2011 and December 31, 2010.
 
We received proceeds under our primary and pool mortgage insurance policies for single-family loans of $1.4 billion and $4.6 billion for the three and nine months ended September 30, 2011, respectively, and $6.4 billion for the year ended December 31, 2010. We negotiated the cancellation and restructurings of some of our mortgage insurance coverage in exchange for a fee. The cash fees received of $796 million for the year ended December 31, 2010 are included in our total insurance proceeds amount; there were no such cash fees received in the nine months ended September 30, 2011. These fees represented an acceleration of, and discount on, claims to be paid pursuant to the coverage in order to reduce future exposure to our mortgage insurers and were recorded as a reduction to our “Foreclosed property expense” in our condensed consolidated statements of operations and comprehensive loss.
 
Financial Guarantors.  We are the beneficiary of financial guarantees on non-agency securities held in our investment portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The following table displays the total unpaid principal balance of guaranteed non-agency securities in our portfolio as of September 30, 2011, and December 31, 2010.
 
                 
    As of  
    September 30, 2011     December 31, 2010  
    (Dollars in millions)  
 
Alt-A private-label securities
  $ 1,356     $ 1,544  
Subprime private-label securities
    1,425       1,487  
Mortgage revenue bonds
    5,003       5,264  
Other mortgage-related securities
    324       347  
Non mortgage-related securities
    58       172  
                 
Total
  $ 8,166     $ 8,814  
                 
 
With the exception of Ambac Assurance Corporation (“Ambac”), none of our financial guarantor counterparties has failed to repay us for claims under guaranty contracts. Ambac provided coverage on $3.4 billion, or 41%, of our total guarantees, as of September 30, 2011. We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that totaled $32.6 billion as of September 30, 2011 and $25.7 billion as of December 31, 2010. 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.
 
We model our securities without assuming the benefit of financial guarantees. We then adjust results for those external financial guarantees from guarantors that we determine are creditworthy, although we continue to seek collection of any amounts due to us from all counterparties. As of September 30, 2011, when modeling our securities for impairments we did not assume the benefit of external financial guarantees from any counterparty.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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 $13.3 billion as of September 30, 2011 and $15.6 billion as of December 31, 2010. As of September 30, 2011, 58% of our maximum potential loss recovery on single-family loans was from three lenders. As of December 31, 2010, 56% of our maximum potential loss recovery on single-family loans was from three lenders. Our maximum potential loss recovery from lenders under these risk sharing agreements on both DUS and non-DUS multifamily loans was $31.6 billion as of September 30, 2011 and $30.3 billion as of December 31, 2010. As of September 30, 2011 and December 31, 2010, 40% and 41%, respectively, of our maximum potential loss recovery on multifamily loans was from three DUS lenders.
 
Custodial Depository Institutions.  A total of $52.1 billion in deposits for single-family payments were received and held by 286 institutions in the month of September 2011 and a total of $75.4 billion in deposits for single-family payments were received and held by 289 institutions in the month of December 2010. Of these total deposits, 93% as of September 30, 2011 and 92% as of December 31, 2010 were held by institutions rated as investment grade by S&P, Moody’s and Fitch. Our ten largest custodial depository institutions held 93% of these deposits as of both September 30, 2011 and December 31, 2010. In the month of September 2011, approximately $3.6 billion or 7% of our total deposits for single-family payments received and held by these institutions was in excess of the deposit insurance protection limit compared with approximately $6.2 billion or 8% in the month of December 2010. These amounts can vary as they are calculated based on individual payments of mortgage borrowers and we must estimate which borrowers are paying their regular principal and interest payments and other types of payments, such as prepayments from refinancing or sales.
 
13.   Fair Value
 
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.
 
Fair Value Measurement
 
Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and expands disclosures around fair value measurements. This guidance applies whenever other accounting standards 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. The next highest priority, Level 2, is given to measurements of assets and liabilities based on limited observable inputs or observable inputs for similar assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Recurring Changes in Fair Value
 
The following tables display our assets and liabilities measured in our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments for which we have elected the fair value option as of September 30, 2011 and December 31, 2010. Specifically, total assets measured at fair value on a recurring basis and classified as Level 3 were $36.2 billion, or 1% of “Total assets,” and $39.0 billion, or 1% of “Total assets,” in our condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, respectively.
 
                                         
    Fair Value Measurements as of September 30, 2011  
    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:
                                       
Cash equivalents(2)
  $ 1,150     $ 5,000     $     $     $ 6,150  
Trading securities:
                                       
Mortgage-related securities:
                                       
Fannie Mae
          5,668       1,861             7,529  
Freddie Mac
          2,866                   2,866  
Ginnie Mae
          261       36             297  
Alt-A private-label securities
          1,242       212             1,454  
Subprime private-label securities
                1,318             1,318  
CMBS
          10,600                   10,600  
Mortgage revenue bonds
                718             718  
Other
          147                   147  
Non-mortgage-related securities:
                                       
U.S. Treasury securities
    40,755                         40,755  
Asset-backed securities
          2,465                   2,465  
                                         
Total trading securities
    40,755       23,249       4,145             68,149  
Available-for-sale securities:
                                       
Mortgage-related securities:
                                       
Fannie Mae
          18,441       797             19,238  
Freddie Mac
          13,737       12             13,749  
Ginnie Mae
          939                   939  
Alt-A private-label securities
          5,662       6,625             12,287  
Subprime private-label securities
                7,887             7,887  
CMBS
          14,390                   14,390  
Mortgage revenue bonds
          8       10,599             10,607  
Other
          14       3,599             3,613  
                                         
Total available-for-sale securities
          53,191       29,519             82,710  
Mortgage loans of consolidated trusts
          1,077       2,284             3,361  
Other assets:
                                       
Risk management derivatives:
                                       
Swaps
          8,657       156             8,813  
Swaptions
          6,898                   6,898  
Interest rate caps
          2                   2  
Other
    2             50             52  
Netting adjustment
                      (15,539 )     (15,539 )
Mortgage commitment derivatives
          476       21             497  
                                         
Total other assets
    2       16,033       227       (15,539 )     723  
                                         
Total assets at fair value
  $ 41,907     $ 98,550     $ 36,175     $ (15,539 )   $ 161,093  
                                         


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                         
    Fair Value Measurements as of September 30, 2011  
    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)  
 
Liabilities:
                                       
Long-term debt:
                                       
Of Fannie Mae:
                                       
Senior fixed
  $     $ 439     $     $     $ 439  
Senior floating
                406             406  
                                         
Total of Fannie Mae
          439       406             845  
Of consolidated trusts
          3,112       728             3,840  
                                         
Total long-term debt
          3,551       1,134             4,685  
Other liabilities:
                                       
Risk management derivatives:
                                       
Swaps
          18,476       160             18,636  
Swaptions
          3,311                   3,311  
Other
    4                         4  
Netting adjustment
                      (18,372 )     (18,372 )
Mortgage commitment derivatives
          681       13             694  
                                         
Total other liabilities
    4       22,468       173       (18,372 )     4,273  
                                         
Total liabilities at fair value
  $ 4     $ 26,019     $ 1,307     $ (18,372 )   $ 8,958  
                                         
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                         
    Fair Value Measurements as of December 31, 2010  
    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:
                                       
Cash equivalents(2)
  $ 4,049     $ 2,300     $     $     $ 6,349  
Trading securities:
                                       
Mortgage-related securities:
                                       
Fannie Mae
          5,196       2,202             7,398  
Freddie Mac
          1,326                   1,326  
Ginnie Mae
          590                   590  
Alt-A private-label securities
          1,663       20             1,683  
Subprime private-label securities
                1,581             1,581  
CMBS
          10,764                   10,764  
Mortgage revenue bonds
                609             609  
Other
                152             152  
Non-mortgage-related securities:
                                       
U.S. Treasury securities
    27,432                         27,432  
Asset-backed securities
          5,309       12             5,321  
                                         
Total trading securities
    27,432       24,848       4,576             56,856  
Available-for-sale securities:
                                       
Mortgage-related securities:
                                       
Fannie Mae
          22,714       114             22,828  
Freddie Mac
          16,993       3             16,996  
Ginnie Mae
          1,039                   1,039  
Alt-A private-label securities
          6,841       7,049             13,890  
Subprime private-label securities
                9,932             9,932  
CMBS
          14,844                   14,844  
Mortgage revenue bonds
          11       11,030             11,041  
Other
          16       3,806             3,822  
                                         
Total available-for-sale securities
          62,458       31,934             94,392  
Mortgage loans of consolidated trusts
          755       2,207             2,962  
Other assets:
                                       
Risk management derivatives:
                                       
Swaps
          9,623       163             9,786  
Swaptions
          5,474                   5,474  
Interest rate caps
          24                   24  
Other
    3             72             75  
Netting adjustment
                      (15,175 )     (15,175 )
Mortgage commitment derivatives
          941       12             953  
                                         
Total other assets
    3       16,062       247       (15,175 )     1,137  
                                         
Total assets at fair value
  $ 31,484     $ 106,423     $ 38,964     $ (15,175 )   $ 161,696  
                                         
 

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                         
    Fair Value Measurements as of December 31, 2010  
    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)  
 
Liabilities:
                                       
Long-term debt:
                                       
Of Fannie Mae:
                                       
Senior fixed
  $     $ 472     $     $     $ 472  
Senior floating
                421             421  
                                         
Total of Fannie Mae
          472       421             893  
Of consolidated trusts
          1,644       627             2,271  
                                         
Total long-term debt
          2,116       1,048             3,164  
Other liabilities:
                                       
Risk management derivatives:
                                       
Swaps
          16,436       113             16,549  
Swaptions
          2,446                   2,446  
Other
    1                         1  
Netting adjustment
                      (18,023 )     (18,023 )
Mortgage commitment derivatives
          712       30             742  
                                         
Total other liabilities
    1       19,594       143       (18,023 )     1,715  
                                         
Total liabilities at fair value
  $ 1     $ 21,710     $ 1,191     $ (18,023 )   $ 4,879  
                                         
 
 
(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) Cash equivalents is comprised of U.S. Treasuries that are classified as Level 1 as well as money market funds and certificate of deposits that are classified as Level 2.

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
 
The following tables display a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010. The tables also display gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our condensed consolidated statements of operations and comprehensive loss for Level 3 assets and liabilities for the three and nine months ended September 30, 2011 and 2010. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.
 
                                                                                         
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
    For the Three Months Ended September 30, 2011  
                                                                Net Unrealized
 
                                                                Gains (Losses)
 
                                                                Included
 
                                                                in Net Loss
 
                                                                Related to
 
          Total Gains or (Losses) (Realized/Unrealized)                                               Assets and
 
                Included in
                                              Liabilities Still
 
    Balance,
    Included
    Other
                            Transfers
    Transfers
    Balance,
    Held as of
 
    July 1,
    in Net
    Comprehensive
                            out of
    into
    September 30,
    September 30,
 
    2011     Loss     (Loss) Income     Purchases(1)     Sales(1)     Issuances(2)     Settlements(2)     Level 3(3)     Level 3(3)     2011     2011(4)  
    (Dollars in millions)  
 
                                                                                         
Trading securities:
                                                                                       
                                                                                         
Mortgage-related:
                                                                                       
                                                                                         
Fannie Mae
  $ 1,679     $ 19     $     $ 322     $ (3 )   $     $ (115 )   $ (41 )   $     $ 1,861     $ 41  
                                                                                         
Ginnie Mae
                                                    36       36        
                                                                                         
Alt-A private-label securities
    126       7                               (13 )     (73 )     165       212       10  
                                                                                         
Subprime private-label securities
    1,459       (96 )                             (45 )                 1,318       (95 )
                                                                                         
Mortgage revenue bonds
    616       105                               (3 )                 718       106  
                                                                                         
Other
    154       (4 )                             (3 )     (147 )                  
                                                                                         
                                                                                         
Total trading securities
  $ 4,034     $ 31     $     $ 322     $ (3 )   $     $ (179 )   $ (261 )   $ 201     $ 4,145     $ 62  
                                                                                         
                                                                                         
Available-for-sale securities:
                                                                                       
                                                                                         
Mortgage-related:
                                                                                       
                                                                                         
Fannie Mae
  $ 635     $ (1 )   $ 16     $ 853     $ (344 )   $     $ (9 )   $ (374 )   $ 21     $ 797     $  
                                                                                         
Freddie Mac
    12                                     (1 )           1       12        
                                                                                         
Alt-A private-label securities
    6,652       (20 )     (15 )                       (250 )     (431 )     689       6,625        
                                                                                         
Subprime private-label securities
    8,909       148       (484 )           (363 )           (323 )                 7,887        
                                                                                         
Mortgage revenue bonds
    10,464       (5 )     429             (1 )           (288 )                 10,599        
                                                                                         
Other
    3,707       (10 )     9                         (107 )                 3,599        
                                                                                         
                                                                                         
Total available-for-sale securities
  $ 30,379     $ 112     $ (45 )   $ 853     $ (708 )   $     $ (978 )   $ (805 )   $ 711     $ 29,519     $  
                                                                                         
                                                                                         
Mortgage loans of consolidated trusts
  $ 2,365     $ 8     $     $ 45     $     $     $ (101 )   $ (56 )   $ 23     $ 2,284     $ 6  
                                                                                         
Net derivatives
    79       118                         (1 )     (72 )     (70 )           54       33  
                                                                                         
Long-term debt:
                                                                                       
                                                                                         
Of Fannie Mae:
                                                                                       
                                                                                         
Senior floating
  $ (402 )   $ (74 )   $     $     $     $     $ 70     $     $     $ (406 )   $ (74 )
                                                                                         
Of consolidated trusts
    (646 )     1                   4       (4 )     18       35       (136 )     (728 )     6  
                                                                                         
                                                                                         
                                                                                         
                                                                                         
Total long-term debt
  $ (1,048 )   $ (73 )   $     $     $ 4     $ (4 )   $ 88     $ 35     $ (136 )   $ (1,134 )   $ (68 )
                                                                                         
 


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Table of Contents

FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                                                         
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
    For the Nine Months Ended September 30, 2011  
                                                                Net Unrealized
 
                                                                Gains (Losses)
 
                                                                Included in Net
 
          Total Gains or (Losses)
                                              Loss Related to
 
          (Realized/Unrealized)                                               Assets and
 
                Included in
                                              Liabilities Still
 
    Balance,
    Included
    Other
                            Transfers
    Transfers
    Balance,
    Held as of
 
    December 31,
    in Net
    Comprehensive
                            out of
    into
    September 30,
    September 30,
 
    2010     Loss     (Loss) Income     Purchases(1)     Sales(1)     Issuances(2)     Settlements(2)     Level 3(3)     Level 3(3)     2011     2011(4)  
    (Dollars in millions)  
 
Trading securities:
                                                                                       
Mortgage-related:
                                                                                       
Fannie Mae
  $ 2,202     $ 7     $     $ 446     $ (18 )   $     $ (344 )   $ (432 )   $     $ 1,861     $ 32  
Ginnie Mae
                                                    36       36        
Alt-A private-label securities
    20       8                               (14 )     (73 )     271       212       12  
Subprime private-label securities
    1,581       (126 )                             (137 )                 1,318       (126 )
Mortgage revenue bonds
    609       126                               (17 )                 718       129  
Other
    152       1                               (6 )     (147 )                  
Non-mortgage-related:
                                                                                       
Asset-backed securities
    12                                     (5 )     (9 )     2              
                                                                                         
Total trading securities
  $ 4,576     $ 16     $     $ 446     $ (18 )   $     $ (523 )   $ (661 )   $ 309     $ 4,145     $ 47  
                                                                                         
Available-for-sale securities:
                                                                                       
Mortgage-related:
                                                                                       
Fannie Mae
  $ 114     $ (1 )   $ 28     $ 1,742     $ (383 )   $     $ (11 )   $ (843 )   $ 151     $ 797     $  
Freddie Mac
    3                                     (1 )           10       12        
Alt-A private-label securities
    7,049       (19 )     63                         (725 )     (1,495 )     1,752       6,625        
Subprime private-label securities
    9,932       408       (1,089 )           (363 )           (1,001 )                 7,887        
Mortgage revenue bonds
    11,030       (8 )     723             (107 )           (1,039 )                 10,599        
Other
    3,806       (7 )     120                         (320 )                 3,599        
                                                                                         
Total available-for-sale securities
  $ 31,934     $ 373     $ (155 )   $ 1,742     $ (853 )   $     $ (3,097 )   $ (2,338 )   $ 1,913     $ 29,519     $  
                                                                                         
Mortgage loans of consolidated trusts
  $ 2,207     $ 38     $     $ 102     $     $     $ (251 )   $ (93 )   $ 281     $ 2,284     $ 28  
Net derivatives
    104       123                         (2 )     (101 )     (70 )           54       49  
Long-term debt:
                                                                                       
Of Fannie Mae:
                                                                                       
Senior floating
  $ (421 )   $ (88 )   $     $     $     $     $ 103     $     $     $ (406 )   $ (89 )
Of consolidated trusts
    (627 )     (28 )                 4       (44 )     66       112       (211 )     (728 )     (11 )
                                                                                         
Total long-term debt
  $ (1,048 )   $ (116 )   $     $     $ 4     $ (44 )   $ 169     $ 112     $ (211 )   $ (1,134 )   $ (100 )
                                                                                         
 

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
    For the Three Months Ended September 30, 2010  
                                              Net Unrealized
 
                                              Gains (Losses)
 
                                              Included
 
                                              in Net Loss
 
          Total Gains or (Losses)
                            Related to
 
          (Realized/Unrealized)                             Assets and
 
                Included
    Purchases,
                      Liabilities Still
 
    Balance,
    Included
    in Other
    Sales,
    Transfers
    Transfers
    Balance,
    Held as of
 
    July 1,
    in Net
    Comprehensive
    Issuances, and
    out of
    into
    September 30,
    September 30,
 
    2010     Loss     (Loss) Income     Settlements, Net     Level 3(3)     Level 3(3)     2010     2010(4)  
    (Dollars in millions)  
 
Trading securities:
                                                               
Mortgage-related:
                                                               
Fannie Mae
  $ 58     $ (7 )   $     $ 80     $ (12 )   $ 1,925     $ 2,044     $ (1 )
Freddie Mac
    4                                     4        
Ginnie Mae
                      1                   1        
Alt-A private-label securities
    119       174             (11 )     (24 )     216       474       176  
Subprime private-label securities
    1,645       (1 )           (53 )                 1,591       (1 )
Mortgage revenue bonds
    650       28                               678       30  
Other
    160       (2 )           (3 )                 155       (2 )
Non-mortgage-related:
                                                               
Asset-backed securities
    24       1             (10 )                 15        
                                                                 
Total trading securities
  $ 2,660     $ 193     $     $ 4     $ (36 )   $ 2,141     $ 4,962     $ 202  
                                                                 
Available-for-sale securities:
                                                               
Mortgage-related:
                                                               
Fannie Mae
  $ 53     $     $     $ 65     $ (51 )   $ 11     $ 78     $  
Freddie Mac
    21                   (14 )                 7        
Ginnie Mae
    125             (1 )                       124        
Alt-A private-label securities
    7,777       (59 )     264       (259 )     (490 )     1,878       9,111        
Subprime private-label securities
    10,255       (96 )     183       (402 )                 9,940        
Mortgage revenue bonds
    12,428       3       172       (369 )     (2 )           12,232        
Other
    3,890       2       103       (119 )                 3,876        
                                                                 
Total available-for-sale securities
  $ 34,549     $ (150 )   $ 721     $ (1,098 )   $ (543 )   $ 1,889     $ 35,368     $  
                                                                 
Mortgage loans of consolidated trusts
  $     $ (9 )   $     $ 62     $     $     $ 53     $ (9 )
Net derivatives
    226       65             (69 )                 222       21  
Guaranty assets and buy-ups
    15       (1 )           3                   17       (2 )
Long-term debt:
                                                               
Of Fannie Mae:
                                                               
Senior floating
  $ (585 )   $ (37 )   $     $ 155     $     $     $ (467 )   $ (38 )
Of consolidated trusts
    (105 )     8             2       48       (22 )     (69 )     4  
                                                                 
Total long-term debt
  $ (690 )   $ (29 )   $     $ 157     $ 48     $ (22 )   $ (536 )   $ (34 )
                                                                 
 

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Table of Contents

FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                                         
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
    For the Nine Months Ended September 30, 2010  
                                                    Net Unrealized
 
                                                    Gains (Losses)
 
                                                    Included in Net
 
                Total Gains or (Losses)
    Purchases,
                      Loss Related to
 
                (Realized/Unrealized)     Sales,
                      Assets and
 
          Impact of
          Included
    Issuances,
                      Liabilities Still
 
    Balance,
    New
    Included
    in Other
    and
    Transfers
    Transfers
    Balance,
    Held as of
 
    December 31,
    Accounting
    in Net
    Comprehensive
    Settlements,
    out of
    into
    September 30,
    September 30,
 
    2009     Standards     Loss     (Loss) Income     Net     Level 3(3)     Level 3(3)     2010     2010(4)  
    (Dollars in millions)  
 
Trading securities:
                                                                       
Mortgage-related:
                                                                       
Fannie Mae
  $ 5,656     $ (2 )   $ (3 )   $     $ (162 )   $ (5,375 )   $ 1,930     $ 2,044     $ (3 )
Freddie Mac
                                        4       4        
Ginnie Mae
                            1                   1        
Alt-A private-label securities
    564       62       206             (59 )     (613 )     314       474       186  
Subprime private-label securities
    1,780             (1 )           (188 )                 1,591       (1 )
Mortgage revenue bonds
    600             127             (49 )                 678       126  
Other
    154             6             (5 )                 155       6  
Non-mortgage-related:
                                                                       
Asset-backed securities
    107             1             (59 )     (47 )     13       15       2  
                                                                         
Total trading securities
  $ 8,861     $ 60     $ 336     $     $ (521 )   $ (6,035 )   $ 2,261     $ 4,962     $ 316  
                                                                         
Available-for-sale securities:
                                                                       
Mortgage-related:
                                                                       
Fannie Mae
  $ 596     $ (203 )   $ (1 )   $ 4     $ 147     $ (514 )   $ 49     $ 78     $  
Freddie Mac
    27                   (1 )     (25 )           6       7        
Ginnie Mae
    123                   2       (1 )                 124        
Alt-A private-label securities
    8,312       471       (40 )     998       (934 )     (2,746 )     3,050       9,111        
Subprime private-label securities
    10,746       (118 )     (106 )     768       (1,350 )                 9,940        
Mortgage revenue bonds
    12,820       21       2       675       (1,284 )     (2 )           12,232        
Other
    3,530       366       (4 )     357       (373 )                 3,876        
                                                                         
Total available-for-sale securities
  $ 36,154     $ 537     $ (149 )   $ 2,803     $ (3,820 )   $ (3,262 )   $ 3,105     $ 35,368     $  
                                                                         
Mortgage loans of consolidated trusts
  $     $     $ (9 )   $     $ 62     $     $     $ 53     $ (9 )
Net derivatives
    123             232             (128 )           (5 )     222       85  
Guaranty assets and buy-ups
    2,577       (2,568 )     2       1       5                   17       2  
Long-term debt:
                                                                       
Of Fannie Mae:
                                                                       
Senior floating
  $ (601 )   $     $ (26 )   $     $ 160     $     $     $ (467 )   $ (21 )
Of consolidated trusts
          (77 )     15             (36 )     59       (30 )     (69 )     11  
                                                                         
Total long-term debt
  $ (601 )   $ (77 )   $ (11 )   $     $ 124     $ 59     $ (30 )   $ (536 )   $ (10 )
                                                                         
 
 
(1) Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts.
 
(2) Issuances and settlements include activity related to the consolidation and deconsolidation of liabilities of securitization trusts.
 
(3) Transfers out of Level 3 consisted primarily of Fannie Mae guaranteed mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these securities were obtained from multiple third-party vendors supported by market observable inputs. Transfers into Level 3 consisted primarily of Fannie Mae guaranteed

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
mortgage-related securities and private-label mortgage-related securities backed by Alt-A loans. Prices for these securities are based on inputs from a single source or inputs that were not readily observable.
 
(4) 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.
 
The following tables display realized and unrealized gains and losses included in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2011 and 2010, for our Level 3 assets and liabilities measured in our condensed consolidated balance sheets at fair value on a recurring basis.
 
                                         
    For the Three Months Ended September 30, 2011  
                Net
             
          Fair Value
    Other-than-
             
    Interest
    (Losses)
    Temporary
             
    Income     Gains, net     Impairments     Other     Total  
    (Dollars in millions)  
 
Total realized and unrealized gains (losses) included in net loss
  $ 158     $ 98     $ (62 )   $ 2     $ 196  
Net unrealized (losses) gains related to Level 3 assets and liabilities still held as of September 30, 2011
  $ (1 )   $ 34     $     $     $ 33  
                                         
 
                                         
    For the Nine Months Ended September 30, 2011  
                Net
             
          Fair Value
    Other-than-
             
    Interest
    (Losses)
    Temporary
             
    Income     Gains, net     Impairments     Other     Total  
    (Dollars in millions)  
 
Total realized and unrealized gains (losses) included in net loss
  $ 428     $ 82     $ (85 )   $ 9     $ 434  
Net unrealized (losses) gains related to Level 3 assets and liabilities still held as of September 30, 2011
  $ (2 )   $ 26     $     $     $ 24  
 
                                         
    For the Three Months Ended September 30, 2010  
                Net
             
          Fair Value
    Other-than-
             
    Interest
    (Losses)
    Temporary-
             
    Income     Gains, net     Impairments     Other     Total  
    (Dollars in millions)  
 
Total realized and unrealized gains (losses) included in net loss
  $ 70     $ 222     $ (235 )   $ 12     $ 69  
Net unrealized gains (losses) related to Level 3 assets and liabilities still held as of September 30, 2010
  $     $ 180     $     $ (2 )   $ 178  
                                         
 
                                         
    For the Nine Months Ended September 30, 2010  
                Net
             
          Fair Value
    Other-than-
             
    Interest
    (Losses)
    Temporary-
             
    Income     Gains, net     Impairments     Other     Total  
    (Dollars in millions)  
 
Total realized and unrealized gains (losses) included in net loss
  $ 282     $ 547     $ (454 )   $ 26     $ 401  
Net unrealized gains related to Level 3 assets and liabilities still held as of September 30, 2010
  $     $ 382     $     $ 2     $ 384  


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Table of Contents

FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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 valuation techniques we use for assets and liabilities measured at fair value on a recurring basis, as well as our basis for classifying these assets and liabilities as Level 1, Level 2 or Level 3. These valuation techniques are also used to estimate the fair value of financial instruments not carried at fair value but disclosed as part of the fair value of financial instruments.
 
Cash Equivalents, Trading Securities and Available-for-Sale Securities—These securities are recorded in our condensed 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 prices provided by up to four third-party pricing services that are calibrated to the quoted market prices in active markets for similar securities, and assets valued in this manner are classified as Level 2. In the absence of prices provided by third-party pricing services supported by observable market data, fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flow models that use inputs such as spread, prepayment speed, yield, and loss severity based on market assumptions where available. Such instruments are generally classified as Level 2. Where there is limited activity or less transparency around inputs to the valuation, securities are classified as Level 3.
 
Mortgage Loans Held for Investment—The majority of HFI performing loans and nonperforming loans that are not individually impaired are reported in our condensed consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments and an allowance for loan losses. We elected the fair value option for certain loans containing embedded derivatives that would otherwise require bifurcation and consolidated loans of senior-subordinate trust structures, which are recorded in our condensed consolidated balance sheets at fair value on a recurring basis.
 
Fair value of performing loans represents an estimate of the prices we would receive if we were to securitize those loans and is determined based on comparisons to Fannie Mae MBS with similar characteristics, either on a pool or loan level. We use the observable market values of our Fannie Mae MBS determined from third-party pricing services and other observable market data as a base value, from which we add or subtract the fair value of the associated guaranty asset, guaranty obligation and master servicing arrangement. We classify these valuations primarily within Level 2 of the valuation hierarchy given that the market values of our Fannie Mae MBS are calibrated to the quoted market prices in active markets for similar securities. To the extent that significant inputs are not observable or determined by extrapolation of observable points, the loans are classified within Level 3. Certain loans that do not qualify for Fannie Mae MBS securitization are valued using market-based data including, for example, credit spreads, severities and prepayment speeds for similar loans, through third-party pricing services or through a model approach incorporating both interest rate and credit risk simulating a loan sale via a synthetic structure.
 
Fair value of single-family nonperforming loans represents an estimate of the prices we would receive if we were to sell these loans in the nonperforming whole-loan market. We calculate the fair value of nonperforming loans based on assumptions about key factors, including loan performance, collateral value, foreclosure related expenses, disposition timeline, and mortgage insurance repayment. Using these assumptions, along with indicative bids for a representative sample of nonperforming loans, we compute a market calibrated fair value. The bids on sample loans are obtained from multiple active market participants. Fair value for loans that are four or more months delinquent, in an open modification period, or in a closed modification and that have performed for nine or fewer months, is estimated directly from a model calibrated to these indicative bids. Fair value for loans that are one to three months delinquent is estimated by an interpolation method using three


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
inputs: (1) the fair value estimate as a performing loan; (2) the fair value estimate as a nonperforming loan; and (3) the delinquency transition rate corresponding to the loan’s current delinquency status.
 
Fair value of a portion of our single-family nonperforming loans is measured using the value of the underlying collateral. These valuations leverage our proprietary distressed home price model. The model assigns a value using comparable transaction data. In determining what comparables to use in the calculations, the model measures three key characteristics relative to the target property: (1) distance from target property, (2) time of the transaction and (3) comparability of the nondistressed value. A portion of the nonperforming loans that are impaired is measured at fair value in our condensed consolidated balance sheets on a nonrecurring basis. These loans are classified within Level 3 of the valuation hierarchy because significant inputs are unobservable.
 
Fair value of multifamily nonperforming loans is determined by external third-party valuations when available. If third-party valuations are unavailable, we determine the value of the collateral based on a derived property value estimation method using current net operating income of the property and capitalization rates.
 
Derivatives Assets and Liabilities (collectively “derivatives”)—Derivatives are recorded in our condensed consolidated balance sheets at fair value on a recurring basis. The valuation process for the majority of our risk management derivatives uses observable market data provided by third-party sources, resulting in Level 2 classification. Interest rate swaps are valued by referencing yield curves derived from observable interest rates and spreads to project and discount swap cash flows to present value. Option-based derivatives use a model that projects the probability of various levels of interest rates by referencing swaption and caplet volatilities provided by market makers/dealers. The projected cash flows of the underlying swaps of these option-based derivatives are discounted to present value using yield curves derived from observable interest rates and spreads. Exchange-traded futures are valued using market quoted prices, resulting in Level 1 classification. Certain highly complex structured derivatives use only a single external source of price information due to lack of transparency in the market and may be modeled using observable interest rates and volatility levels as well as significant assumptions, resulting in Level 3 classification. Mortgage commitment derivatives use observable market data, quotes and actual transaction price 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-ups—Guaranty assets related to our portfolio securitizations are recorded in our condensed 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 condensed consolidated balance sheets at the lower of cost or fair value. These assets, which are measured at fair value on a nonrecurring 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 management’s 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. This discount is based on market quotes from dealers.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
The fair value of the guaranty assets includes the fair value of any associated buy-ups, which is estimated in the same manner as guaranty assets but is recorded separately as a component of “Other assets” in our condensed consolidated balance sheets. While the fair value of the guaranty assets reflects all guaranty arrangements, the carrying value primarily reflects only those arrangements entered into subsequent to our adoption of the accounting standard on guarantor’s accounting and disclosure requirements for guarantees.
 
Debt—The majority of debt of Fannie Mae is recorded in our condensed consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments. We elected the fair value option for certain structured debt instruments, which are recorded in our condensed consolidated balance sheets at fair value on a recurring basis.
 
We use third-party pricing services that reference observable market data such as interest rates and spreads to measure the fair value of debt, and thus classify that debt as Level 2. When third-party pricing is not available, we use a discounted cash flow approach based on a yield curve derived from market prices observed for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of the market.
 
For structured debt instruments that are not valued by third-party pricing services, cash flows are evaluated taking into consideration any structured derivatives through which we have swapped out of the structured features of the notes. The resulting cash flows are discounted to present value using a yield curve derived from market prices observed for Fannie Mae Benchmark Notes and adjusted to reflect fair values at the offer side of the market. Market swaption volatilities are also referenced for the valuation of callable structured debt instruments. Given that the derivatives considered in the valuations of these structured debt instruments are classified as Level 3, the valuations of the structured debt instruments result in a Level 3 classification.
 
Consolidated MBS debt is traded in the market as MBS assets. Accordingly, we estimate the fair value of our consolidated MBS debt using quoted market prices in active markets for similar liabilities when traded as assets. The valuation methodology and inputs used in estimating the fair value of MBS assets are described under “Cash Equivalents, Trading Securities and Available-for-Sale Securities.” Certain consolidated MBS debt with embedded derivatives is recorded in our condensed consolidated balance sheets at fair value on a recurring basis.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Nonrecurring Changes in Fair Value
 
The following tables display assets and liabilities measured in our condensed consolidated balance sheets at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when we evaluate for impairment), and the gains or losses recognized for these assets and liabilities for the three and nine months ended September 30, 2011 and 2010 as a result of fair value measurements.
 
                                                 
                            For the
    For the
 
                            Three Months
    Nine Months
 
    Fair Value Measurements
    Ended
    Ended
 
    For the Nine Months Ended September 30, 2011     September 30, 2011     September 30, 2011  
    Quoted
                               
    Prices in
                               
    Active
    Significant
                         
    Markets for
    Other
    Significant
                   
    Identical
    Observable
    Unobservable
    Estimated
             
    Assets
    Inputs
    Inputs
    Fair
    Total
    Total
 
    (Level 1)     (Level 2)     (Level 3)     Value     Losses     Losses  
    (Dollars in millions)  
 
Assets:
                                               
Mortgage loans held for sale, at lower of cost or fair value
  $     $ 2     $ 204     $ 206 (1)   $ (3 )   $ (16 )
Single-family mortgage loans held for investment, at amortized cost:
                                               
Of Fannie Mae
                40,280       40,280 (2)     (1,045 )     (2,125 )
Of consolidated trusts
                885       885 (2)     (33 )     (131 )
Multifamily mortgage loans held for investment, at amortized cost:
                                               
Of Fannie Mae
                1,708       1,708 (2)     (183 )     (291 )
Acquired property, net:
                                               
Single-family
                17,642       17,642 (3)     (635 )     (2,147 )
Multifamily
                315       315 (3)     (32 )     (81 )
Other assets
                1,138       1,138 (4)     (29 )     (94 )
                                                 
Total assets at fair value
  $     $ 2     $ 62,172     $ 62,174     $ (1,960 )   $ (4,885 )
                                                 
 


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
                                                 
                            For the
    For the
 
                            Three Months
    Nine Months
 
    Fair Value Measurements
    Ended
    Ended
 
    For the Nine Months Ended September 30, 2010     September 30, 2010     September 30, 2010  
    Quoted
                               
    Prices in
                               
    Active
    Significant
                         
    Markets for
    Other
    Significant
                   
    Identical
    Observable
    Unobservable
    Estimated
             
    Assets
    Inputs
    Inputs
    Fair
    Total (Losses)
    Total
 
    (Level 1)     (Level 2)     (Level 3)     Value     Gains     Losses  
    (Dollars in millions)  
 
Assets:
                                               
Mortgage loans held for sale, at lower of cost or fair value
  $     $ 6,884     $ 550     $ 7,434 (1)(5)   $ (1 )   $ (91 )(5)
Single-family mortgage loans held for investment, at amortized cost:
                                               
Of Fannie Mae
                27,329       27,329 (2)     (408 )     (1,216 )
Of consolidated trusts
                1,039       1,039 (2)     (79 )     (182 )
Multifamily mortgage loans held for investment, at amortized cost:
                                               
Of Fannie Mae
                1,132       1,132 (2)     95       (142 )
Acquired property, net:
                                               
Single-family
                15,546       15,546 (3)     (768 )     (1,772 )
Multifamily
                196       196 (3)     (5 )     (37 )
Other Assets:
                                               
Guaranty assets
                28       28       (2 )     (6 )
Partnership investments
                109       109       (15 )     (104 )
Other assets
                51       51 (4)     (8 )     (8 )
                                                 
Total assets at fair value
  $     $ 6,884     $ 45,980     $ 52,864     $ (1,191 )   $ (3,558 )
                                                 
 
 
(1) Includes $72 million and $7.1 billion of mortgage loans held for sale that were sold, deconsolidated, retained as a mortgage-related security or redesignated to mortgage loans held for investment as of September 30, 2011 and 2010, respectively.
 
(2) Includes $5.7 billion and $1.6 billion of mortgage loans held for investment that were liquidated or transferred to foreclosed properties as of September 30, 2011 and 2010, respectively.
 
(3) Includes $11.8 billion and $7.2 billion of acquired properties that were sold or transferred as of September 30, 2011 and 2010, respectively.
 
(4) Includes $285 million and $4 million of other assets that were sold or transferred as of September 30, 2011 and 2010, respectively.
 
(5) Includes $7.1 billion of estimated fair value and $68 million in losses due to the adoption of the new accounting standards.
 
The following is a description of the fair valuation techniques we use for assets and liabilities measured at fair value on a nonrecurring basis under the accounting standard for fair value measurements as well as our basis for classifying these assets and liabilities as Level 1, Level 2 or Level 3. We also use these valuation techniques to estimate the fair value of financial instruments not carried at fair value but disclosed as part of the fair value of financial instruments.
 
Mortgage Loans Held for Sale—Loans are reported at the lower of cost or fair value in our condensed consolidated balance sheets. The valuation methodology and inputs used in estimating the fair value of HFS loans are described under “Mortgage Loans Held for Investment” and these loans are classified as Level 2 to

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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
the extent that significant inputs are observable. To the extent that significant inputs are unobservable or determined by extrapolation of observable points, the loans are classified within Level 3.
 
Acquired Property, Net and Other Assets—Acquired property, net mainly represents foreclosed property received in full satisfaction of a loan net of a valuation allowance. Acquired property is initially recorded in our condensed consolidated balance sheets at its fair value less its estimated cost to sell. The initial fair value of foreclosed properties is determined using a hierarchy based on the reliability of available information. The fair value estimate is based on the best information available at the time of valuation. The hierarchy includes offers accepted, third-party interior appraisals, independent broker opinions, proprietary home price model values and exterior broker price opinions. Estimated cost to sell is based upon historical sales cost at a geographic level.
 
Subsequent to initial measurement, the foreclosed properties that we intend to sell are reported at the lower of the carrying amount or fair value less estimated costs to sell. Foreclosed properties classified as held for use, included in other assets, are depreciated and are impaired when circumstances indicate that the carrying amount of the property is no longer recoverable. The fair value of our single-family foreclosed properties on an ongoing basis is determined using the same information hierarchy used at the point of initial fair value. The fair value of our multifamily properties is derived using third-party valuations. When third-party valuations are not available, we estimate the fair value using current net operating income of the property and capitalization rates.
 
Acquired property is classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
 
Fair Value of Financial Instruments
 
The following table displays the carrying value and estimated fair value of our financial instruments as of September 30, 2011 and December 31, 2010. The fair value of financial instruments we disclose, includes commitments to purchase multifamily and single-family mortgage loans, which are off-balance sheet financial instruments that we do not record in our condensed consolidated balance sheets. The fair values of these commitments are included as “Mortgage loans held for investment, net of allowance for loan losses.” The disclosure excludes certain financial instruments, such as plan obligations for pension and postretirement health care benefits, employee stock option and stock purchase plans, and also excludes all non-financial


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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  
    September 30, 2011     December 31, 2010  
    Carrying
    Estimated
    Carrying
    Estimated
 
    Value     Fair Value     Value     Fair Value  
    (Dollars in millions)  
 
Financial assets:
                               
Cash and cash equivalents(1)
  $ 80,268     $ 80,268     $ 80,975     $ 80,975  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    35,950       35,950       11,751       11,751  
Trading securities
    68,149       68,149       56,856       56,856  
Available-for-sale securities
    82,710       82,710       94,392       94,392  
Mortgage loans held for sale
    309       309       915       915  
Mortgage loans held for investment, net of allowance for loan losses:
                               
Of Fannie Mae
    329,848       303,953       358,698       319,367  
Of consolidated trusts
    2,567,663       2,663,443       2,564,107       2,610,145  
                                 
Mortgage loans held for investment
    2,897,511       2,967,396       2,922,805       2,929,512  
Advances to lenders
    5,145       5,029       7,215       6,990  
Derivative assets at fair value
    723       723       1,137       1,137  
Guaranty assets and buy-ups
    480       858       458       814  
                                 
Total financial assets
  $ 3,171,245     $ 3,241,392     $ 3,176,504     $ 3,183,342  
                                 
Financial liabilities:
                               
Federal funds purchased and securities sold under agreements to repurchase
  $     $     $ 52     $ 51  
Short-term debt:
                               
Of Fannie Mae
    193,718       193,759       151,884       151,974  
Of consolidated trusts
    5,004       5,004       5,359       5,359  
Long-term debt:
                               
Of Fannie Mae
    551,085       580,238       628,160       649,684  
Of consolidated trusts
    2,441,969       2,588,550       2,411,597       2,514,929  
Derivative liabilities at fair value
    4,273       4,273       1,715       1,715  
Guaranty obligations
    765       3,920       769       3,854  
                                 
Total financial liabilities
  $ 3,196,814     $ 3,375,744     $ 3,199,536     $ 3,327,566  
                                 
 
 
(1) Includes restricted cash of $56.0 billion and $63.7 billion as of September 30, 2011 and December 31, 2010, 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 because they are only measured at fair value at inception.
 
Financial Instruments for which fair value approximates carrying value—We hold certain financial instruments that are not carried at fair value but for which 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 our advances to lenders approximates the fair value due to the short-term nature of the specific instruments. Other instruments include loans for which the


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
carrying value does not approximate fair value. These loans are valued using collateral values of similar loans as a proxy.
 
Guaranty Obligations—The fair value of all guaranty obligations (“GO”), measured subsequent to their initial recognition, is our estimate of a hypothetical transaction price we would receive if we were to issue our guaranty to an unrelated party in a standalone arm’s-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 management’s best estimate of certain key assumptions such as current mark-to-market LTV ratios, future house prices, 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 accounting standard on guarantor’s accounting and disclosure requirements for guarantees.
 
Fair Value Option
 
We elected the fair value option for certain consolidated loans and debt instruments recorded in our condensed consolidated balance sheets as a result of consolidating VIEs. These instruments contain embedded derivatives that would otherwise require bifurcation. Under the fair value option, we elected to carry these instruments at fair value instead of bifurcating the embedded derivative from the respective loan or debt instrument.
 
We elected the fair value option for all 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 recording these structured debt instruments at cost while recording the related derivatives at fair value.
 
We elected the fair value option for the financial assets and liabilities of the consolidated senior-subordinate trust structures. 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 different accounting treatment between loans at cost and debt at cost.
 
Interest income for the mortgage loans is recorded in “Mortgage loans interest income” and interest expense for the debt instruments is recorded in “Long-term debt interest expense” in our condensed consolidated statements of operations and comprehensive loss.
 
The following table displays the fair value and unpaid principal balance of the financial instruments for which we have made fair value elections as September 30, 2011 and December 31, 2010.
 
                                                 
    As of  
    September 30, 2011     December 31, 2010  
                Long-Term
                Long-Term
 
    Loans of
    Long-Term
    Debt of
    Loans of
    Long-Term
    Debt of
 
    Consolidated
    Debt of
    Consolidated
    Consolidated
    Debt of
    Consolidated
 
    Trusts(1)     Fannie Mae     Trusts(2)     Trusts(1)     Fannie Mae     Trusts(2)  
    (Dollars in millions)  
 
Fair value
  $ 3,361     $ 845     $ 3,840     $ 2,962     $ 893     $ 2,271  
Unpaid principal balance
    3,853       712       3,952       3,456       829       2,572  
 
 
(1) Includes nonaccrual loans with a fair value of $211 million and $219 million as of September 30, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of September 30, 2011 is $227 million. Includes loans that are 90 days past due with a fair value


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
of $367 million and $369 million as of September 30, 2011 and December 31, 2010, respectively. The difference between unpaid principal balance and the fair value of these 90 or more days past due loans as of September 30, 2011 is $256 million.
 
(2) Includes interest-only debt instruments with no unpaid principal balance and a fair value of $123 million and $151 million as of September 30, 2011 and December 31, 2010, respectively.
 
Changes in Fair Value under the Fair Value Option Election
 
The following table displays fair value gains and losses, net, including changes attributable to instrument-specific credit risk, for loans and debt for which the fair value election was made. Amounts are recorded as a component of “Fair value (losses) gains, net” in our condensed consolidated statements of operations and comprehensive loss for the periods ended September 30, 2011 and 2010.
 
                                 
    For the Three Months Ended September 30,  
    2011     2010  
          Long-Term
    Total Gains
    Long-Term
 
    Loans     Debt     (Losses)     Debt  
    (Dollars in millions)  
 
Changes in instrument-specific credit risk
  $ 27     $ 8     $ 35     $ (3 )
Other changes in fair value
    (30 )     (79 )     (109 )     (44 )
                                 
Fair value losses, net
  $ (3 )   $ (71 )   $ (74 )   $ (47 )
                                 
                                 
    For the Nine Months Ended September 30,  
    2011     2010  
          Long-Term
    Total Gains
    Long-Term
 
    Loans     Debt     (Losses)     Debt  
    (Dollars in millions)  
 
Changes in instrument-specific credit risk
  $ (184 )   $ 12     $ (172 )   $ 5  
Other changes in fair value
    111       (72 )     39       (70 )
                                 
Fair value losses, net
  $ (73 )   $ (60 )   $ (133 )   $ (65 )
                                 
 
In determining the changes in the instrument-specific credit risk for loans, the changes in the associated credit-related components of these loans, primarily the guaranty obligation, were taken into consideration with the overall change in the fair value of the loans for which we elected the fair value option for financial instruments. In determining the changes in the instrument-specific credit risk for debt, 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.
 
14.   Commitments and Contingencies
 
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 information gathering requests. In some of the matters, indeterminate amounts are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. This variability in pleadings, together with our and our counsel’s actual experience in litigating or settling claims, leads us to


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(In conservatorship)

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(UNAUDITED)
 
conclude that the monetary relief that may be sought by plaintiffs bears little relevance to its merits or disposition value.
 
On a quarterly and annual basis, we review relevant information about all pending legal actions and proceedings for the purpose of evaluating and revising our contingencies, reserves and disclosures.
 
Legal actions and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Accordingly, the outcome of any given matter and the amount or range of potential loss at particular points in time is frequently difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel view the evidence and applicable law. Further, FHFA adopted a regulation on June 20, 2011, which provides, in part, that while we are in conservatorship, FHFA will not pay claims by our current or former shareholders, unless the Director of FHFA determines it is in the interest of the conservatorship. The presence of this regulation and the Director of FHFA’s assertion that it will not pay claims asserted in certain cases discussed below while we are in conservatorship creates additional uncertainty in those cases.
 
We have established a reserve for those matters where a loss is probable and where we can reasonably estimate the amount of such loss. Reserves have been established for certain of the matters noted below. These reserves did not have a material adverse effect on our financial statements. We note, however, that in light of the uncertainties involved in such actions and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves we have currently accrued.
 
For the remaining legal actions or proceedings, including those where there is only a reasonable possibility that a loss may be incurred, we are not currently able to estimate the reasonably possible losses or ranges of losses and we have not established a reserve with respect to those actions or proceedings. We are often unable to estimate the possible loss or range of loss, particularly for proceedings that are in their early stages of development, where plaintiffs seek substantial or indeterminate damages, or where there may be novel or unsettled legal questions relevant to the proceedings or settlement negotiations have not occurred or progressed. Further, as noted above, FHFA’s regulation and the Director of FHFA’s assertion creates additional uncertainty with respect to certain cases.
 
Given the uncertainties involved in any action or proceeding, regardless of whether we have established a reserve, the ultimate resolution of certain of these matters may be material to our operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our net income or loss for that period. Based on our current knowledge with respect to the matters described below, we believe we have valid defenses to the claims in these proceedings and intend to defend these matters 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 or financial condition. We have advanced fees and expenses of certain current and former officers and directors in connection with various legal proceedings pursuant to indemnification agreements.
 
In re Fannie Mae Securities Litigation
 
Fannie Mae is a defendant in a consolidated class action lawsuit initially filed in 2004 and currently pending in the U.S. District Court for the District of Columbia. In the consolidated complaint filed on March 4, 2005, lead plaintiffs Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio


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(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
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. Plaintiffs contend that Fannie Mae’s accounting statements were inconsistent with GAAP requirements relating to hedge accounting and the amortization of premiums and discounts, 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 October 17, 2008, FHFA, as conservator for Fannie Mae, intervened in this case. On August 18, 2011, the parties filed various motions for summary judgment.
 
On October 7, 2011, FHFA, as conservator, filed a motion to stay this case for the duration of our conservatorship based on a regulation FHFA adopted on June 20, 2011, which provides in part that while we are in conservatorship, FHFA will not pay claims by our current or former shareholders, unless the Director of FHFA determines it is in the interest of the conservatorship. The Acting Director of FHFA has determined it will not pay the claims asserted in this case while we are in conservatorship. FHFA maintains, therefore, that continuing litigation of this matter would be a waste of resources. Alternatively, FHFA has stated it will seek a stay of this case, while a separate lawsuit challenging the regulation is decided.
 
In September and December, 2010, plaintiffs served expert reports claiming damages to plaintiffs under various scenarios ranging cumulatively from $2.2 billion to $8.6 billion. Given the substantial and novel legal questions that remain, including those raised by FHFA’s regulation and the Director of FHFA’s determination, we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.
 
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 York—In 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. Given the early status of these matters, the absence of a specified demand or claim by the plaintiffs and the substantial and novel legal questions that remain, we are currently unable to estimate the reasonably possible loss or range of loss arising from these lawsuits.
 
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 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 seek various forms of relief, including rescission, damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive relief. On October 13, 2009, the Court entered an order allowing FHFA to intervene.
 
On November 24, 2009, the Court granted the defendants’ motion to dismiss the Securities Act claims as to all defendants. On September 30, 2010, the Court granted in part and denied in part the defendants’ motions to dismiss the Securities Exchange Act claims. As a result of the partial denial, some of the Securities Exchange Act claims remain pending against us and certain of our former officers. On October 14, 2010, we and certain other defendants filed motions for reconsideration of those portions of the Court’s September 30, 2010 order denying in part the defendants’ motions to dismiss. Fannie Mae filed its answer to the consolidated


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(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
complaint on December 31, 2010. Defendants’ motions for reconsideration were denied on April 11, 2011. On July 28, 2011 lead plaintiffs filed motions to certify 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.
 
On October 12, 2011, FHFA, as conservator, filed a letter with the court requesting a pre-motion conference to discuss FHFA’s intention to file a motion to stay this case for the duration of our conservatorship based on a regulation FHFA adopted on June 20, 2011, which provides in part that while we are in conservatorship, FHFA will not pay claims by our current or former shareholders, unless the Director of FHFA determines it is in the interest of the conservatorship. The Acting Director of FHFA has determined it will not pay the claims asserted in this case while we are in conservatorship. FHFA maintains, therefore, that continuing litigation of this matter is a waste of resources. Alternatively, FHFA will seek a stay of this case while a separate lawsuit challenging the regulation is decided.
 
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 Mae’s Benefit Plans Committee and the Compensation Committee of Fannie Mae’s Board of Directors, as fiduciaries of Fannie Mae’s Employee Stock Ownership Plan (“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 and remain pending. On November 2, 2011, we filed a letter notifying the court of two recent decisions by the U.S. Court of Appeals for the Second Circuit that are relevant to the defendants’ motions to dismiss.
 
Comprehensive Investment Services v. Mudd, et al.
 
This individual securities action was originally filed on May 13, 2009, by plaintiff Comprehensive Investment Services, Inc. against certain of our former officers and directors, and certain of our underwriters in the Southern District of Texas. On July 7, 2009, this case was transferred to the Southern District of New York for coordination with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation. Plaintiff filed an amended complaint on May 11, 2011 against us, certain of our former officers, and certain of our underwriters. The amended complaint alleges violations of §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violations 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 Mae’s May 2008 $2.0 billion offering of 8.25% non-cumulative preferred Series T stock. Plaintiff seeks relief in the form of rescission, actual damages, punitive damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive relief. On July 11, 2011, defendants filed motions to dismiss the amended complaint, which are now fully briefed and remain pending. Given the preliminary stage of this lawsuit, the absence of a specified demand or claim by the plaintiff and the substantial and novel legal questions that remain, we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.


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FANNIE MAE
(In conservatorship)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)
 
Smith v. Fannie Mae, et al.
 
This individual securities action was originally filed on February 25, 2010, by plaintiff Edward Smith against Fannie Mae and certain of its former officers as well as several underwriters in the Central District of California. On April 12, 2010, this case was transferred to the Southern District of New York for coordination with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation. Plaintiff filed an amended complaint on April 19, 2011, which alleges violations of §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violations of §20(a) of the Securities Exchange Act of 1934; common law fraud and negligence claims; and California state law claims for misrepresentation in connection with Fannie Mae’s December 2007 $7.0 billion offering of 7.75% fixed-to-floating rate non-cumulative preferred Series S stock. Plaintiff seeks relief in the form of rescission, actual damages (including interest), and exemplary and punitive damages. On July 11, 2011, defendants filed motions to dismiss the amended complaint, which are now fully briefed and remain pending. Given the preliminary stage of this lawsuit, the absence of a specified demand or claim by the plaintiff and the substantial and novel legal questions that remain, we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.
 
Alenick v. Merrill Lynch, et al.
 
On May 12, 2011, Zeke Alenick filed an individual securities action against one of our former officers, certain of our underwriters, and an employee of one of our underwriters in New York State Court. Plaintiff alleges common law fraud, recklessness, negligence, and violations of §349 of the New York General Business Law in connection with Fannie Mae’s May 2008 $2.0 billion offering of 8.25% non-cumulative preferred Series T stock. The complaint seeks various forms of relief, including damages, punitive damages, and rescission. On June 13, 2011, the case was removed to the United States District Court for the Southern District of New York and accepted as related to In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation. On July 18 and 25, 2011, Alenick filed motions to dismiss voluntarily all defendants. The court granted those motions on July 25 and 28, 2011, and closed the case.
 
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 were informed that the Department of Justice was continuing an investigation and on March 15, 2010, we received another Grand Jury subpoena for documents. We are cooperating with this investigation.


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Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management.”
 
Item 4.   Controls and Procedures
 
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 Securities and Exchange Commission (“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 September 30, 2011, the end of the period covered by this report. As a result of management’s 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 September 30, 2011 or as of the date of filing this report.
 
Our disclosure controls and procedures were not effective as of September 30, 2011 or as of the date of filing this report because they 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. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of September 30, 2011 or as of the date of this filing, and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below under “Description of Material Weakness.” 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 this material weakness while we are under conservatorship.
 
Description of Material Weakness
 
The Public Company Accounting Oversight Board’s 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 company’s annual or interim financial statements will not be prevented or detected on a timely basis.


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Management has determined that we continued to have the following material weakness as of September 30, 2011 and as of the date of filing this report:
 
  •  Disclosure Controls and Procedures.  We have been under the conservatorship of FHFA since September 6, 2008. Under the 2008 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 2008 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 2008 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.
 
Due to these circumstances, we have not been able to update our disclosure controls and procedures in a manner that adequately ensures the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including disclosures affecting our condensed 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 September 30, 2011 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.
 
Mitigating Actions Relating to Material Weakness
 
As described above under “Description of Material Weakness,” 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:
 
  •  FHFA has established the Office of Conservatorship Operations, which is intended to facilitate operation of the company with the oversight of the conservator.
 
  •  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.
 
  •  FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this quarterly report on Form 10-Q for the quarter ended September 30, 2011 (“Third Quarter 2011 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our Third Quarter 2011 Form 10-Q, FHFA provided Fannie Mae management with a written acknowledgement that it had reviewed the Third Quarter 2011 Form 10-Q, and it was not aware of any material misstatements or omissions in the Third Quarter 2011 Form 10-Q and had no objection to our filing the Third Quarter 2011 Form 10-Q.
 
  •  The Acting Director of FHFA and our Chief Executive Officer have been in frequent communication, typically meeting on at least a bi-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.
 
  •  Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance executives regarding our accounting policies, practices and procedures.
 
Changes in Internal Control over Financial Reporting
 
Overview
 
Management is required to evaluate, 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 June 30, 2011 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Changes in Management
 
During the third quarter of 2011, Susan R. McFarland became our new Chief Financial Officer, succeeding David C. Hisey as our principal financial officer. Mr. Hisey continued to serve as our principal accounting officer until the fourth quarter of 2011, when Gregory A. Fink, Senior Vice President and Controller of Fannie Mae, was appointed as our principal accounting officer. Mr. Hisey continues to serve as our Executive Vice President and Deputy Chief Financial Officer.
 
In addition, John Nichols, who had previously been our interim Chief Risk Officer, was appointed our Chief Risk Officer in the third quarter of 2011.


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PART II—OTHER INFORMATION
 
Item 1.   Legal Proceedings
 
The information in this item supplements information regarding certain legal proceedings set forth in “Legal Proceedings” in our 2010 Form 10-K and First Quarter 2011 Form 10-Q and Second Quarter Form 10-Q. We also provide information regarding material legal proceedings in “Note 14, Commitments and Contingencies,” 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 condensed 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 in this item or in our 2010 Form 10-K, First Quarter 2011 Form 10-Q or Second Quarter 2011 Form 10-Q. 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.
 
FHFA Private-Label Mortgage-Related Securities Litigation
 
In the third quarter of 2011, FHFA, as conservator for us and for Freddie Mac, filed 16 lawsuits on behalf of us and Freddie Mac against various financial institutions, their officers and unaffiliated underwriters who were responsible for marketing and selling private-label mortgage-related securities to us. The lawsuits seek to recover losses we and Freddie Mac incurred on the securities. FHFA filed 13 of these lawsuits in the U.S. District Court for the Southern District of New York—against Bank of America Corp.; Barclays Bank PLC; Citigroup, Inc.; Credit Suisse Holdings (USA), Inc.; Deutsche Bank AG; First Horizon National Corporation; Goldman, Sachs & Co.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Merrill Lynch & Co.; Nomura Holding America Inc.; SG Americas, Inc.; and UBS Americas Inc. and against certain related entities and individuals. Two lawsuits—against Countrywide Financial Corporation and Morgan Stanley—were filed in the Supreme Court of the State of New York for the County of New York, and one—against The Royal Bank of Scotland Group PLC—was filed in the U.S. District Court for the District of Connecticut. The lawsuit against UBS was filed on July 27, 2011, and all the others were filed on September 2, 2011. The lawsuits allege that the defendants violated federal securities laws and state common law by making material misstatements and omissions in the offering documents for the securities that were sold to Fannie Mae and Freddie Mac regarding the characteristics of the loans underlying the securities. Some of the complaints also allege state securities law violations and common law fraud. The complaints seek, among other things, rescission and recovery of consideration paid for the securities at issue in the lawsuits, monetary damages and, in certain cases, punitive damages for common law fraud.
 
Investigation by Office of the Inspector General of FHFA and U.S. Attorney for the Eastern District of Virginia
 
On October 27, 2011, we received notice of an ongoing investigation by the Office of the Inspector General of FHFA (“FHFA OIG”) and the U.S. Attorney for the Eastern District of Virginia with regard to a multifamily agreement with The Related Companies, L.P. The financial impact of the agreement was not material to our financial statements. In connection with the investigation, we received a subpoena for documents from the FHA OIG. We are cooperating with this investigation.


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Item 1A.   Risk Factors
 
In addition to the information in this report, you should carefully consider the risks relating to our business that we identify in “Risk Factors” in our 2010 Form 10-K. This section supplements and updates that discussion and, for a complete understanding of the subject, you should read both together. Please also refer to “MD&A—Risk Management” in this report and in our 2010 Form 10-K for more detailed descriptions of the primary risks to our business and how we seek to manage those risks.
 
The risks we face 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 past results or the results contemplated by forward-looking statements contained in this report. However, these are not the only risks we face. In addition to the risks we discuss below, we face risks and uncertainties not currently known to us or that we currently believe are immaterial.
 
The future of our company is uncertain.
 
There is significant uncertainty regarding the future of our company, including how long we will continue to be in existence, the extent of our role in the market, what form we will have, and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated.
 
On February 11, 2011, Treasury and HUD released a report to Congress on ending the conservatorships of the GSEs and reforming America’s housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both institutions. The report also addresses three options for a reformed housing finance system. The report does not state whether or how the existing infrastructure or human capital of Fannie Mae may be used in the establishment of such a reformed system. The report emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period.
 
The Subcommittee on Capital Markets and Government Sponsored Enterprises of the Financial Services Committee has approved numerous bills that could constrain the current operations of the GSEs or alter the existing authority that FHFA or Treasury have over the enterprises. In addition, several bills have been introduced in the Senate and House of Representatives that would place the GSEs into receivership after a period of time and either grant federal charters to new entities to engage in activities similar to those currently engaged in by the GSEs or leave secondary mortgage market activities to entities in the private sector. We expect that Congress will continue to hold hearings and consider legislation in the remainder of 2011 and in 2012 on the future status of Fannie Mae and Freddie Mac, including proposals that would result in a substantial change to our business structure, our operations, or that involve Fannie Mae’s liquidation or dissolution. We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding the future status of the GSEs. See “MD&A—Legislative and Regulatory Developments—GSE Reform” for more information about the Treasury report and Congressional proposals regarding reform of the GSEs.
 
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 will likely be insufficient to repay the liquidation preference of any series of our preferred stock or to provide any proceeds to common shareholders.
 
FHFA has an obligation to place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations for a period of 60 days after the filing deadline for our Form 10-K or Form 10-Q with the SEC. Because of the credit-related expenses we expect to incur on our legacy book of business and our dividend obligation to Treasury, we will continue to need funding from Treasury to avoid triggering FHFA’s obligation. Although Treasury committed to providing us funds in accordance with the


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terms of the senior preferred stock purchase agreement, Treasury may not provide these funds to us within the required 60 days if it has exhausted its borrowing authority or if there is a government shutdown. 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 former Director of FHFA placed us into conservatorship.
 
A receivership would terminate the conservatorship. In addition to the powers FHFA has as our 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 from 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.
 
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.
 
In the event of a liquidation of our assets, only after payment of the administrative expenses of the receiver and the immediately preceding conservator, the secured and unsecured claims against the company (including repaying all outstanding debt obligations), 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 unlikely 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.
 
Efforts that we undertake, including those we are required or asked to undertake 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. Our conservator has directed us to focus primarily on 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. For example, while we do not at this time know the ultimate impact on us of the changes to HARP described in “MD&A—Legislative and Regulatory Developments,” we expect we may incur additional credit-related expenses as a result of acquiring refinancings made under HARP’s revised terms. The amount of any additional credit-related expenses we incur depends on a number of factors, including the terms, credit profile and volume of our acquisitions under the revised program. At this time, we do not know how many of these refinancings we will acquire. We have also incurred substantial costs in connection with HAMP, as we discuss in “MD&A—Consolidated Results of Operations—Financial Impact of the Making Home Affordable Program on Fannie Mae” in our 2010 Form 10-K. 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.


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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, the future of our business (including future profitability, future structure, regulatory actions and GSE status) and the creditworthiness of the U.S. government could cause a severe negative effect on our access to the unsecured debt markets, particularly for long-term debt. We believe that our ability in 2010 and the first nine months of 2011 to issue debt of varying maturities at attractive pricing resulted from federal government support of us and the financial markets, including the Federal Reserve’s purchases of our debt and MBS. As a result, we believe that our status as a GSE and continued federal government support is essential to maintaining our access to debt funding. Changes or perceived changes in the government’s support of us or the markets could have a material adverse effect on our ability to fund our operations. As recently as September 2011, the Federal Reserve announced that, to help support conditions in mortgage markets, it will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. However, there can be no assurance that the government will continue to support us or the markets, or that our current level of access to debt funding will continue. In addition, due to our reliance on the U.S. government’s support, our access to debt funding also could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government.
 
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 plans may be difficult or impossible to execute during a liquidity crisis.
 
We believe that our liquidity contingency plans may be difficult or impossible to execute during a liquidity crisis. If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our operations could be significantly impaired. In this event, our alternative sources of liquidity—consisting of our cash and other investments portfolio and the unencumbered mortgage assets in our mortgage portfolio—may not be sufficient to meet our liquidity needs.
 
We believe that the amount of mortgage-related assets that we could successfully borrow against or sell in the event of a liquidity crisis or significant market disruption is substantially lower than the amount of mortgage-related assets we hold. Due to the large size of our portfolio of mortgage assets, current market conditions and the significant amount of distressed assets in our mortgage portfolio, there likely would be insufficient market demand for large amounts of these assets over a prolonged period of time, which would limit our ability to borrow against or sell these assets.
 
To the extent that we are able to obtain funding by pledging or selling mortgage-related securities as collateral, we anticipate that a discount would be applied that would reduce the value assigned to those securities. Depending on market conditions at the time, this discount could result in proceeds significantly lower than the current market value of these securities and could thereby reduce the amount of financing we obtain. In addition, our primary source of collateral is Fannie Mae MBS that we own. 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 sell or borrow against these securities in sufficient amounts to meet our liquidity needs.


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A decrease in the credit ratings on our senior unsecured debt could have an adverse effect on our ability to issue debt on reasonable terms and trigger additional collateral requirements, and would likely do so if such a decrease were not based on a similar action on the credit ratings of the U.S. government.
 
Credit ratings on our senior unsecured debt, as well as the credit ratings of the U.S. government, are primary factors that could affect our borrowing costs and our access to the debt capital markets. Credit ratings on our debt are subject to revision or withdrawal at any time by the rating agencies. Actions by governmental entities impacting the support we receive from Treasury could adversely affect the credit ratings on our senior unsecured debt.
 
On August 5, 2011, S&P lowered the long-term sovereign credit rating on the U.S. to “AA+.” As a result of this action, and because we directly rely on the U.S. government for capital support, on August 8, 2011, S&P lowered our long-term senior debt rating to “AA+” with a negative outlook. Previously, our long-term senior debt had been rated by S&P as “AAA” and had been on CreditWatch Negative. S&P affirmed our short-term senior debt rating of “A-1+” and removed it from CreditWatch Negative. In assigning a negative outlook on the U.S. government’s long-term debt rating, S&P noted that it may lower the U.S. government’s long-term debt rating to “AA” within the next two years if it sees less reduction in spending than agreed to or higher interest rates, or if new fiscal pressures during the period result in a higher general government debt trajectory than S&P currently assumes. If S&P further lowers the U.S. government’s long-term debt rating, we expect that S&P would lower our long-term debt rating correspondingly.
 
After the U.S. government’s statutory debt limit was raised on August 2, 2011, Fitch affirmed its rating and stable outlook of our long-term debt, and Moody’s confirmed the U.S. government’s rating and our long-term debt ratings. Moody’s also removed the designation that these ratings were under review for possible downgrade. Moody’s revised the outlook for both the U.S. government’s rating and our long-term debt ratings to negative. In assigning the negative outlook to the U.S. government’s rating, Moody’s indicated there would be a risk of a downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the U.S. government’s funding costs over and above what is currently expected. As of November 3, 2011, our long-term debt continued to be rated “Aaa” by Moody’s and “AAA” by Fitch.
 
S&P, Moody’s and Fitch have all indicated that they would likely lower their ratings on the debt of Fannie Mae and certain other government-related entities if they were to lower their ratings on the U.S. government.
 
We currently cannot predict whether one or more of these rating agencies will downgrade our debt ratings in the future, nor can we predict the potential impact. Although S&P’s downgrade of our credit rating has not increased our borrowing costs or limited our access to the debt capital markets to date, an additional reduction in our credit ratings could have a material adverse impact on our access to debt funding or on the cost of our debt funding, and would likely do so if it were not based on a similar action on the credit ratings of the U.S. government. An additional reduction in our credit ratings may also trigger additional collateral requirements under our derivatives contracts and other borrowing arrangements, 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&A—Liquidity and Capital Management—Liquidity Management—Credit Ratings.”
 
Further 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 disruptions and increased concentration risk.
 
We rely heavily on mortgage insurers to provide insurance against borrower defaults on single-family conventional mortgage loans with LTV ratios over 80% at the time of acquisition. The already weak financial condition of many of our mortgage insurer counterparties deteriorated at an accelerated pace during the third


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quarter of 2011, which increases the significant 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 multiple times to reflect their weakened financial condition. In 2008, one of our top eight mortgage insurer counterparties, Triad Guaranty Insurance Corporation (“Triad”), ceased issuing commitments for new mortgage insurance, 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. Since June 30, 2011, two more of our top eight insurer counterparties, PMI Mortgage Insurance Co. (“PMI”) and Republic Mortgage Insurance Company (“RMIC”) were ordered to or agreed with their regulators to cease issuing commitments for new mortgage insurance. RMIC’s parent company has announced that RMIC is in run-off operating mode. RMIC’s parent company has also indicated that it is more likely than not that the capital contributed to RMIC by its parent company will “continue on a path toward full depletion in relatively short order.” PMI has received an order from its regulator under which the regulator now has full possession, management and control of PMI. The regulator is also seeking to place PMI into receivership. The regulator instituted a partial claim payment plan whereby all valid claims under PMI’s mortgage guaranty insurance policies will be paid 50% in cash and 50% deferred as a policyholder claim. RMIC’s state regulators could take additional corrective action, which may include the issuance of an order to defer payment of claims and/or placement of the mortgage insurance writing entity into receivership. It is uncertain when, and if, Triad’s or PMI’s regulator will allow deferred policyholder claims to be paid and/or increase the amount of cash paid on claims.
 
As of November 7, 2011, four of our mortgage insurers (Triad, RMIC, PMI and Genworth Mortgage Insurance Corporation) have publicly disclosed that they are either in run-off or, absent a waiver, estimate they would not meet state regulatory capital requirements for their main writing entity as of September 30, 2011. An additional two of our mortgage insurers (Mortgage Guaranty Insurance Corporation and Radian Guaranty, Inc.) have disclosed that, in the absence of additional capital contributions to their writing entity, their capital might fall below state regulatory capital requirements in the future. These six mortgage insurers provided a combined $75.7 billion, or 82%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of September 30, 2011. If mortgage insurers are not able to raise capital and they exceed their risk-to-capital limits, they will likely be forced into run-off or receivership unless they can secure and maintain 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. We are unable to determine how long certain of our mortgage insurer counterparties will remain below their state-imposed risk-to-capital limits.
 
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.
 
If our assessment of one or more of our mortgage insurer counterparty’s 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 increase our credit losses.
 
Many mortgage insurers 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 single-family conventional 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 loans 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.


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Changes in the foreclosure environment and our reliance on servicers and their counsel and other service providers to complete foreclosures could continue to have a material adverse effect on our business, results of operations, financial condition and net worth.
 
Circumstances in the foreclosure environment over the last few years have resulted in foreclosures proceeding at a slow pace. As a result of the housing market downturn that began in 2006 and significantly worsened in 2008, the volume of foreclosures to be processed by servicers and states significantly increased in 2009 and the first nine months of 2010. In October 2010, a number of single-family mortgage servicers temporarily halted some or all of the foreclosures they were processing after discovering deficiencies in their and their service providers’ foreclosure processes. Although servicers have generally ended their outright foreclosure halts, the processing of foreclosures continues to be slow in many states due to continuing issues in the servicer foreclosure process, including efforts by servicers to comply with regulatory consent orders, recent changes in state foreclosure laws, court rules and proceedings, and the pipeline of foreclosures resulting from these delays and the elevated level of foreclosures caused by the housing market downturn. In addition, court budget cuts in Florida and other states could further delay the processing of foreclosures.
 
These changes in the foreclosure environment have negatively affected our foreclosure timelines, credit-related expenses and single-family serious delinquency rates, and we expect they will continue to do so. We believe these changes also will delay the recovery of the housing market. These changes could also negatively affect the value of the private-label securities we hold and result in additional impairments on these securities. In addition, the failure of our servicers or their service providers to apply prudent and effective process controls and to comply with legal and other requirements in the foreclosure process poses operational, reputational and legal risks for us. The servicer foreclosure process deficiencies have generated significant concern and are currently being reviewed by various government agencies and the various state attorneys general, which could lead to additional new laws, regulation, rules or agreements that negatively affect our ability to foreclose expeditiously or increase our costs.
 
In addition, FHFA directed us in October 2011 to phase out the practice of requiring mortgage servicers to use our network of retained attorneys to perform default- and foreclosure-related legal services for our loans. Phasing out the requirement that servicers use our retained attorney network may negatively impact the performance of default- and foreclosure-related legal services for our loans, which may adversely impact our efforts to reduce our credit losses.
 
Challenges to the MERS® company, system and processes could pose operational, reputational and legal risks for us.
 
MERSCORP, Inc. (“MERSCORP”) is a privately held company that maintains an electronic registry (the “MERS System”) that tracks servicing rights and ownership of loans in the United States. Mortgage Electronic Registration Systems, Inc. (“MERS”), a wholly owned subsidiary of MERSCORP, Inc., can serve as a nominee for the owner of a mortgage loan and, in that role, become the mortgagee of record for the loan in local land records. Fannie Mae seller/servicers may choose to use MERS as a nominee; however, we have prohibited servicers from initiating foreclosures on Fannie Mae loans in MERS’s name. Approximately half of the loans we own or guarantee are registered in MERS’s name and the related servicing rights are tracked in the MERS System. The MERS System is widely used by participants in the mortgage finance industry. Along with a number of other organizations in the mortgage finance industry, we are a shareholder of MERSCORP.
 
Several legal challenges have been made disputing MERS ’s ability to initiate foreclosures, act as nominee in local land records, and/or assign mortgages or take other action on behalf of the loan owner. These challenges seek judicial relief ranging from money damages to injunctive/declaratory relief seeking the prevention of mortgage assignments by MERS and/or the voiding of completed foreclosures in which MERS appeared in the chain of title. These challenges have focused public attention on MERS and on how loans are recorded in local land records. As a result, these challenges could negatively affect MERS’s ability to serve as the mortgagee of record in some jurisdictions, which could cause additional costs and time in the recordation


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process. These challenges also could result in court decisions that substantially delay new or pending foreclosures, or void completed foreclosures in certain jurisdictions, which would require that we re-foreclose on the affected properties, thereby increasing our costs and lengthening the time it takes for us to foreclose on and dispose of the properties.
 
In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and other legal documents in connection with foreclosure proceedings. As a result, investigations by governmental authorities and others into the servicer foreclosure process deficiencies discussed above may impact MERS. On April 13, 2011, federal banking regulators and FHFA announced that they were taking enforcement action against MERS and MERSCORP to address significant weaknesses in, among other things, oversight, management supervision and corporate governance at MERS and MERSCORP that were uncovered as part of the regulators’ review of mortgage servicers’ foreclosure processing. Failures by MERS or MERSCORP to apply prudent and effective process controls and to comply with legal and other requirements could pose counterparty, operational, reputational and legal risks for us. If investigations or new regulation or legislation restricts servicers’ use of MERS, our counterparties may be required to record all mortgage transfers in land records, incurring additional costs and time in the recordation process. At this time, we cannot predict the ultimate outcome of these legal challenges to, or the enforcement action against, MERS and MERSCORP or the impact on our business, results of operations and financial condition.
 
A failure in our operational systems or infrastructure, or those of third parties, could materially adversely affect our business, impair our liquidity, 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, financial losses and damage to our reputation. For example, our business is highly dependent on our ability to manage and process, on a daily basis, an extremely large number of transactions, many of which are highly complex, 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, accounting and regulatory standards. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled, adversely affecting our ability to process these transactions. In addition, we rely on information provided by third parties in processing many of our transactions, and that information may be incorrect or we may fail to properly manage or analyze it.
 
We rely upon business processes that are highly dependent on people, legacy 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. This reliance increases the risk that we may be exposed to financial, reputational or other losses as a result of inadequately designed internal processes or systems, or failed execution of our systems. While we continue to enhance our technology, operational controls and organizational structure in order to reduce our operational risk, these actions may not be effective to manage these risks and may create additional operational risk as we execute these enhancements. In addition, as our use of third-party service providers for some of our business functions increases, we increasingly face the risk of an operational failure with respect to these third parties.
 
We also face the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearinghouses or other financial intermediaries we use to facilitate our securities and derivatives transactions. Any such failure, termination or constraint could adversely affect our ability to effect transactions or manage our exposure to risk, and could have a significant adverse impact on our business, liquidity, financial condition, net worth and results of operations.
 
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could


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have a security impact. If one or more of such events occur, this potentially could jeopardize our or our customers’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our customers’, our counterparties’ or third parties’ operations, which could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures arising from operational and security risks.
 
In addition, we have experienced, and expect we may continue to experience, 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, our systems could fail to operate properly, which could lead to financial losses, business disruptions, legal and regulatory sanctions and reputational damage.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
Recent Sales of Unregistered Securities
 
Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from selling or issuing our equity interests, other than as required by (and pursuant to) the terms of a binding agreement in effect on September 7, 2008, without the prior written consent of Treasury.
 
We previously provided stock compensation to employees and members of the Board of Directors under the Fannie Mae Stock Compensation Plan of 1993 and the Fannie Mae Stock Compensation Plan of 2003 (the “Plans”). During the quarter ended September 30, 2011, 583 restricted stock units vested, as a result of which 403 shares of common stock were issued, and 180 shares of common stock that otherwise would have been issued were withheld by us in lieu of requiring the recipients to pay us the withholding taxes due upon vesting. All of these restricted stock units were granted prior to our entering into conservatorship. Restricted stock units granted under the Plans typically vest in equal annual installments over three or four years beginning on the first anniversary of the date of grant. Each restricted stock unit represents the right to receive a share of common stock at the time of vesting. As a result, restricted stock units are generally similar to restricted stock, except that restricted stock units do not confer voting rights on their holders. All restricted stock units were granted to persons who were employees or members of the Board of Directors of Fannie Mae.
 
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 of 1933 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.


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To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report our incurrence of these types of obligations either in offering circulars or prospectuses (or supplements thereto) that we post on our Web site or in a current report on Form 8-K, in accordance with a “no-action” letter we received from the SEC staff in 2004. In cases where the information is disclosed in a prospectus or offering circular posted on our Web site, the document will be posted on our Web site within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
 
The Web site address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this address, investors can access the offering circular and related supplements for debt securities offerings under Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.
 
Disclosure about our obligations pursuant to some of the MBS we issue, some of which may be off-balance sheet obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access information and documents about our MBS, including prospectuses and related prospectus supplements.
 
We are providing our Web site address solely for your information. Information appearing on our Web site is not incorporated into this report.
 
Our Purchases of Equity Securities
 
The following table shows shares of our common stock we repurchased during the third quarter of 2011.
 
                                 
            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
Period
  Purchased(1)   per Share   Program(2)   the Program (2)
    (Shares in thousands)
 
2011
                               
July 1-31
    2     $ 0.34              
August 1-31
          0.27              
September 1-30
          0.27              
                                 
Total
    2                          
                                 
 
 
(1) Consists of shares of common stock reacquired from employees to pay an aggregate of $576 in withholding taxes due upon the vesting of previously issued restricted stock.
 
(2) We do not have any publicly announced share repurchase programs under which we could purchase our common stock.
 
Dividend Restrictions
 
Our payment of dividends is subject to the following restrictions:
 
Restrictions Relating to Conservatorship.  Our conservator announced on September 7, 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock. In addition, FHFA’s regulations relating to conservatorship and receivership operations, which became effective July 20, 2011, prohibit us from paying any dividends while in conservatorship unless authorized by the Director of FHFA. The Acting Director of FHFA directs us to make dividend payments on the senior preferred stock on a quarterly basis.
 
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 (other than the senior preferred stock) without the prior written consent of Treasury.


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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 Qualifying 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.
 
Item 3.   Defaults Upon Senior Securities
 
None.
 
Item 4.   [Removed and reserved]
 
Item 5.   Other Information
 
On November 4, 2011, Gregory A. Fink, Senior Vice President and Controller of Fannie Mae, was appointed as the company’s principal accounting officer, effective on that date. As of that date, David C. Hisey no longer serves as the company’s principal accounting officer. Mr. Hisey continues to serve as the company’s Executive Vice President and Deputy Chief Financial Officer.
 
Gregory A. Fink, 44, has been Senior Vice President—Finance of Fannie Mae since April 2009, as well as the company’s Controller since September 2010. Mr. Fink previously served as Vice President—Financial Reporting from October 2006 to April 2009. Mr. Fink joined Fannie Mae in March 2006 as Vice President—Accounting Policy.
 
Item 6.   Exhibits
 
An index to exhibits has been filed as part of this report beginning on page E-1 and is incorporated herein by reference.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Federal National Mortgage Association
 
  By: 
/s/  Michael J. Williams
Michael J. Williams
President and Chief Executive Officer
 
Date: November 8, 2011
 
  By: 
/s/  Susan R. McFarland
Susan R. McFarland
Executive Vice President and
Chief Financial Officer
 
Date: November 8, 2011


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INDEX TO EXHIBITS
 
         
Item
 
Description
 
  3 .1   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 Mae’s Annual Report on Form 10-K, filed February 24, 2011.)
  3 .2   Fannie Mae Bylaws, as amended through January 30, 2009 (Incorporated by reference to Exhibit 3.2 to Fannie Mae’s Annual Report on Form 10-K for the year ended December 31, 2008, filed February 26, 2009.)
  31 .1   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
  31 .2   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)
  32 .1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
  32 .2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
  101 . INS   XBRL Instance Document*
  101 . SCH   XBRL Taxonomy Extension Schema*
  101 . CAL   XBRL Taxonomy Extension Calculation*
  101 . LAB   XBRL Taxonomy Extension Labels*
  101 . PRE   XBRL Taxonomy Extension Presentation*
  101 . DEF   XBRL Taxonomy Extension Definition*
 
 
* The financial information contained in these XBRL documents is unaudited. The information in these exhibits shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of Section 18, nor shall they be deemed incorporated by reference into any disclosure document relating to Fannie Mae, except to the extent, if any, expressly set forth by specific reference in such filing.


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(FANNIEMAE LOGO)
 
FR008