Fannie Mae 2008 Annual Report Download

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, without par value New York Stock Exchange
Chicago Stock Exchange
8.25% Non-Cumulative Preferred Stock,
Series T, stated value $25 per share
New York Stock Exchange
8.75% Non-Cumulative Mandatory Convertible
Preferred Stock, Series 2008-1,
stated value $50 per share
New York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative
Preferred Stock, Series S,
stated value $25 per share
New York Stock Exchange
7.625% Non-Cumulative Preferred Stock,
Series R, stated value $25 per share
New York Stock Exchange
6.75% Non-Cumulative Preferred Stock,
Series Q, stated value $25 per share
New York Stock Exchange
Variable Rate Non-Cumulative Preferred Stock,
Series P, stated value $25 per share
New York Stock Exchange
5.50% Non-Cumulative Preferred Stock,
Series N, stated value $50 per share
New York Stock Exchange
4.75% Non-Cumulative Preferred Stock,
Series M, stated value $50 per share
New York Stock Exchange
5.125% Non-Cumulative Preferred Stock,
Series L, stated value $50 per share
New York Stock Exchange
5.375% Non-Cumulative Preferred Stock,
Series I, stated value $50 per share
New York Stock Exchange
5.81% Non-Cumulative Preferred Stock,
Series H, stated value $50 per share
New York Stock Exchange
Variable Rate Non-Cumulative Preferred Stock,
Series G, stated value $50 per share
New York Stock Exchange
Variable Rate Non-Cumulative Preferred Stock,
Series F, stated value $50 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Variable Rate Non-Cumulative Preferred Stock, Series O, stated value $50 per share
(Title of class)
5.375% Non-Cumulative Convertible Series 2004-1 Preferred Stock, stated value $100,000 per share
(Title of class)
5.10% Non-Cumulative Preferred Stock, Series E, stated value $50 per share
(Title of class)
5.25% Non-Cumulative Preferred Stock, Series D, stated value $50 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes nNo ¥
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes nNo ¥
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¥No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥
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 ¥Accelerated filer nNon-accelerated filer nSmaller reporting company n
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes nNo ¥
The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold on June 30,
2008 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $20,932 million.
As of January 31, 2009, there were 1,091,230,272 shares of common stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.

Table of contents

  • Page 1
    ...10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 Commission File No.: 0-50231 Federal National Mortgage Association (Exact name of registrant as specified in its charter) Fannie Mae Federally chartered corporation...

  • Page 2
    ... Operations ...83 Critical Accounting Policies And Estimates ...83 Consolidated Results Of Operations ...96 Business Segment Results...116 Consolidated Balance Sheet Analysis ...121 Supplemental Non-GAAP Information-Fair Value Balance Sheets ...140 Liquidity And Capital Management ...145 Off-Balance...

  • Page 3
    ... ...224 Directors ...224 Corporate Governance ...225 Executive Officers ...229 Item 11. Executive Compensation...230 Compensation Discussion And Analysis ...230 Report Of The Compensation Committee Of The Board Of Directors ...238 Item 12. Item 13. Compensation Tables ...238 Security Ownership of...

  • Page 4
    ..., Single-Family Guaranty Book of Business...Level 3 Recurring Financial Assets at Fair Value ...Condensed Consolidated Results of Operations and Selected Market Data ...Analysis of Net Interest Income and Yield ...Rate/Volume Analysis of Net Interest Income ...Analysis of Guaranty Fee Income and...

  • Page 5
    ...Loans ...Single-Family and Multifamily Foreclosed Properties ...Mortgage Insurance Coverage...Credit Loss Exposure of Risk Management Derivative Instruments ...Activity and Maturity Data for Risk Management Derivatives ...Fair Value Sensitivity of Net Portfolio to Changes in Level and Scope of Yield...

  • Page 6
    ... process under "Business Segments-Single-Family Credit Guaranty Business-Mortgage Securitizations" below. We also participate in the secondary mortgage market by purchasing mortgage loans (often referred to as "whole loans") and mortgage-related securities, including our own Fannie Mae MBS...

  • Page 7
    ... includes mortgage assets we hold in our investment portfolio, our Fannie Mae MBS held by third parties and credit enhancements that we provide on mortgage assets, was $3.1 trillion as of September 30, 2008, or approximately 26% of total U.S. residential mortgage debt outstanding. With weak housing...

  • Page 8
    ... National Mortgage Association ("Ginnie Mae"). The Federal Reserve began purchasing our debt and MBS under this program in January 2009. • On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 ("2009 Stimulus Act"), a $787 billion economic...

  • Page 9
    ... of funds Treasury must invest in us pursuant to the senior preferred stock purchase agreement in order to eliminate a net worth deficit could require us to constrain some of our business activities, including activities that provide liquidity, stability and affordability to the mortgage market...

  • Page 10
    ... that service loans held in Fannie Mae MBS trusts or in our portfolio will be incented to reduce at-risk borrowers' monthly mortgage payments to as little as 31% of monthly income, which may be achieved through a variety of methods, including interest rate reductions, principal forbearance and term...

  • Page 11
    ... the home in order to avoid potential adverse impact of further declines in home value and terminate further mortgage costs The principal purposes of these initiatives are: to help stabilize the mortgage market; to limit foreclosures and keep people in their homes; and to help stabilize communities...

  • Page 12
    ... book of business is made up of single-family conventional mortgage loans that we own or that are in guaranteed Fannie Mae MBS and because the number of seriously delinquent loans is significantly higher for our single-family mortgage credit guaranty book, we have focused our credit loss reduction...

  • Page 13
    ... to be held with mortgage servicers, requiring more frequent remittances of funds and moving funds held with our largest counterparties from custodial accounts to trust accounts. Summary of Our Financial Results for 2008 We recorded a net loss of $58.7 billion and a diluted loss per share of $24.04...

  • Page 14
    ... guaranty book of business in 2007, and on a quarterly basis in 2008. Table 1: Credit Statistics, Single-Family Guaranty Book of Business(1) Q4 Q3 2008 Q2 Q1 (Dollars in millions) Total 2007 Total As of the end of each period: Serious delinquency rate(2) ...On-balance sheet nonperforming loans...

  • Page 15
    ... to our worsening credit statistics. At this time, however, we are observing higher delinquency rates across our broader guaranty book of business as well. Net Worth and Fair Value Deficit Net Worth and Fair Value Deficit Amounts Under our senior preferred stock purchase agreement with Treasury...

  • Page 16
    ... guaranty book of business. Rather, our combined loss reserves reflect only probable losses that we believe we have already incurred as of the balance sheet date, while the fair value of our guaranty obligation is based not only on future expected credit losses over the life of the loans underlying...

  • Page 17
    ... unsecured debt markets. On February 25, 2009, the Director of FHFA submitted a request to Treasury on our behalf for $15.2 billion in funding under the terms of the senior preferred stock purchase agreement in order to eliminate our net worth deficit as of December 31, 2008. There are limitations...

  • Page 18
    ... credit loss ratio in 2008. We also expect a significant increase in our SOP 03-3 fair value losses as we increase the number of loans we repurchase from MBS trusts in order to modify them. In addition, we expect significant continued increases in our combined loss reserves through 2009. Liquidity...

  • Page 19
    ...: Single-Family Credit Guaranty, Housing and Community Development, and Capital Markets. The table below displays net revenues, net income (loss) and total assets for each of our business segments for the years ended December 31, 2008, 2007 and 2006. Business Segment Summary Financial Information...

  • Page 20
    ... mortgage market generally deliver pools of mortgage loans to us in exchange for Fannie Mae MBS backed by these loans. After receiving the loans in a lender swap transaction, we place them in a trust that is established for the sole purpose of holding the loans separate and apart from our assets...

  • Page 21
    ... HomeSaver Advance Fair Value Losses" for a description of our accounting for delinquent loans purchased from MBS trusts and the effect of these purchases on our 2008 financial results. Mortgage Acquisitions We acquire single-family mortgage loans for securitization or for our investment portfolio...

  • Page 22
    ...our Single-Family business creates single-family Fannie Mae MBS. See "Single-Family Credit Guaranty Business-Mortgage Securitizations" for a description of a typical lender swap securitization transaction. MBS Trusts Each of our multifamily MBS trusts operates in accordance with a trust agreement or...

  • Page 23
    ... we earn on our mortgage assets and the interest we pay on the debt we issue to fund these assets. We refer to this spread as our net interest yield. Changes in the fair value of the derivative instruments and trading securities we hold impact the net income or loss reported by the Capital Markets...

  • Page 24
    ... in exchange for a transaction fee. Our Capital Markets group creates Fannie Mae MBS using mortgage loans and mortgage-related securities that we hold in our investment portfolio, referred to as "portfolio securitizations." We currently securitize a majority of the single-family mortgage loans we...

  • Page 25
    ... and enhance liquidity in the secondary mortgage market. CONSERVATORSHIP, TREASURY AGREEMENTS, OUR CHARTER AND REGULATION OF OUR ACTIVITIES Conservatorship On September 6, 2008, at the request of the Secretary of the Treasury, the Chairman of the Federal Reserve Board and the Director of FHFA...

  • Page 26
    ... management authority, including the authority to withdraw its delegations to management at any time • Shareholders have no voting rights Structure of Board of Directors • 13 directors: 12 independent plus President and Chief Executive Officer; independent, non-executive Chairman of the Board...

  • Page 27
    ... is required to maintain a full accounting of the conservatorship and make its reports available upon request to shareholders and members of the public. We remain liable for all of our obligations relating to our outstanding debt securities and Fannie Mae MBS. In a Fact Sheet dated September 7, 2008...

  • Page 28
    ...defraud Fannie Mae, FHFA, the conservator or, in the case of a transfer in connection with a qualified financial contract, our creditors. To the extent a transfer is avoided, the conservator may recover, for our benefit, the property or, by court order, the value of that property from the initial or...

  • Page 29
    ..."will no longer be managed with a strategy to maximize common shareholder returns." Treasury Agreements The Regulatory Reform Act granted Treasury temporary authority (through December 31, 2009) to purchase any obligations and other securities issued by Fannie Mae on such terms and conditions and in...

  • Page 30
    ... 31, 2008, our total liabilities exceeded our total assets, as reflected on our consolidated balance sheet, by $15.2 billion. The Director of FHFA submitted a request on February 25, 2009 for funds from Treasury on our behalf under the terms of the senior preferred stock purchase agreement to...

  • Page 31
    ... failure, the holders of our debt securities or Fannie Mae MBS may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us the lesser of (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS and (2) the lesser of (a) the...

  • Page 32
    ...if declared by our Board of Directors, out of legally available funds, cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current liquidation preference of the senior preferred stock. As conservator and under our charter, FHFA also has authority to declare and approve...

  • Page 33
    ... loans made to us by Treasury pursuant to the credit facility must be collateralized by Fannie Mae MBS or Freddie Mac mortgage-backed securities. Refer to "Part II-Item 7-MD&A-Liquidity and Capital Management-Liquidity Management-Liquidity Contingency Plan-Treasury Credit Facility" for a discussion...

  • Page 34
    ... executive officer (as defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury. We are required under the senior preferred stock purchase agreement to provide annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports...

  • Page 35
    ...stock, including setting a record date for a dividend payment, granting subscription or purchase rights, authorizing a recapitalization, reclassification, merger or similar transaction, commencing a liquidation of the company or any other action that would trigger an adjustment in the exercise price...

  • Page 36
    ... equal to up to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis on the date of exercise for a nominal price, thereby substantially diluting the ownership in Fannie Mae of our common shareholders at the time of exercise. Until Treasury exercises its rights...

  • Page 37
    ...Stimulus Act of 2008 (except in a limited number of areas where the limits established by HERA were greater). • Loan-to-Value and Credit Enhancement Requirements. The Charter Act generally requires credit enhancement on any conventional single-family mortgage loan that we purchase or securitize if...

  • Page 38
    ... of federal corporate income taxes. • Other Limitations and Requirements. Under the Charter Act, we may not originate mortgage loans or advance funds to a mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale of the mortgages in the secondary market. In addition...

  • Page 39
    ... from time to time. The interim final rule is effective for as long as we remain subject to the terms and obligations of the senior preferred stock purchase agreement. Prompt Corrective Action. FHFA has prompt corrective action authority, including the discretionary authority to change our capital...

  • Page 40
    .... The legislation requires us to make annual allocations to fund government affordable housing programs, based on the dollar amount of our total new business purchases, at the rate of 4.2 basis points per dollar. FHFA must issue regulations prohibiting us from redirecting the cost of our allocations...

  • Page 41
    ... we purchase that finance the purchase of single-family, owner-occupied properties located in metropolitan areas. Since 1995, we have also been required to meet a subgoal for multifamily special affordable housing that is expressed as a dollar amount. The Regulatory Reform Act changed the structure...

  • Page 42
    ... up to 30 days, FHFA may make appropriate adjustments to the 2009 goals consistent with such market conditions. See "Item 1A-Risk Factors" for a description of how changes we have made to our business strategies in order to meet our housing goals and subgoals have increased our credit losses and may...

  • Page 43
    ...-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances. For information on the amounts of our core capital and our statutory minimum capital requirement as of December 31, 2008 and 2007, see "Part II-Item 7-MD&A-Liquidity and Capital Management-Capital...

  • Page 44
    ... institutions, securities dealers, insurance companies, pension funds, investment funds and other investors. During 2008, almost all of our competitors, other than Freddie Mae, Ginnie Mae and the FHLBs, have ceased their activities in the residential mortgage finance business. We compete to purchase...

  • Page 45
    ...37.8% for the fourth quarter of 2006, 2007 and 2008, respectively. Our estimates of market share are based on publicly available data and exclude previously securitized mortgages. We also compete for low-cost debt funding with institutions that hold mortgage portfolios, including Freddie Mac and the...

  • Page 46
    ...to support the mortgage market and help borrowers may contribute to further deterioration in our results of operations and financial condition; • Our expectation that the Federal Reserve will continue to purchase our long-term debt and MBS in the secondary market; • Our expectations with respect...

  • Page 47
    ...have taken in 2008 and 2009 will significantly improve the credit profile of our single-family acquisitions; • Our belief that our problem loan management strategies may help in reducing our long-term credit losses; • Our expectation that our acquisitions of Alt-A mortgage loans will continue to...

  • Page 48
    ... an economic recovery; our ability to access the debt capital markets; the conservatorship and its effect on our business (including our business strategies and practices); further disruptions in the housing, credit and stock markets; the level and volatility of interest rates and credit spreads...

  • Page 49
    ...31, 2008, our total liabilities exceeded our total assets by $15.2 billion, as reflected on our consolidated balance sheet. As a result, we will have to draw on Treasury's commitment under the senior preferred stock purchase agreement. We expect the market conditions that contributed to our net loss...

  • Page 50
    .... Because of the housing and economic crisis, there is significant uncertainty regarding the full extent of our future credit losses. The credit losses we experience in future periods will adversely affect our business, results of operations, financial condition, liquidity and net worth. We are...

  • Page 51
    ... lower rate without obtaining new mortgage insurance in excess of what was already in place. To the extent that borrowers and our servicers participate in these programs in large numbers, it is likely that the costs we incur associated with the modifications of loans in our guaranty book of business...

  • Page 52
    ... is authorized or required to place us into receivership under specified conditions, which would result in the liquidation of our assets and could have a material adverse effect on holders of our common stock, preferred stock, debt securities and Fannie Mae MBS. Under the Regulatory Reform Act, FHFA...

  • Page 53
    ..., purchase or redeem Fannie Mae equity securities; sell, transfer, lease or otherwise dispose of assets other than for fair market value in specified situations; engage in transactions with affiliates other than on arm's-length terms or in the ordinary course of business; issue subordinated debt...

  • Page 54
    ... of a liquidity crisis. Treasury is not obligated by the terms of the Treasury credit facility to make any loans to us. In addition, we must provide collateral securing any loan that Treasury makes to us under the Treasury credit facility in the form of Fannie Mae MBS or Freddie Mac mortgage-backed...

  • Page 55
    ...the debt capital markets, particularly the long-term or callable debt markets, was limited. Similar limitations in future periods could have a material adverse effect on our ability to fund our operations and on our costs, liquidity, business, results of operations, financial condition and net worth...

  • Page 56
    ... net interest income we earn from the difference, or spread, between the return that we receive on our mortgage assets and our borrowing costs. The issuance of short-term and longterm debt securities in the domestic and international capital markets is our primary source of funding for our purchases...

  • Page 57
    ... limiting our ability to issue additional debt. 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 would have a continuing material adverse effect on our liquidity, earnings, financial...

  • Page 58
    ...earnings and materially adversely affect our ability to conduct our normal business operations and our liquidity, financial condition and results of operations. Our borrowing costs and our access to the debt capital markets depend in large part on the high credit ratings on our senior unsecured debt...

  • Page 59
    ... and Capital Management- Liquidity Management-Credit Ratings." We have experienced significant management changes and we may lose a significant number of valuable employees, which could have a material adverse effect on our ability to do business and our results of operations. Since late August 2008...

  • Page 60
    ... loans. We also incurred significant losses during the second half of 2008 relating to the non-mortgage investment securities in our cash and other investments portfolio, primarily as a result of a substantial decline in the market value of these assets due to the financial market crisis. The fair...

  • Page 61
    ... of the current financial market crisis. Our primary exposures to institutional counterparty risk are with: mortgage servicers that service the loans we hold in our mortgage portfolio or that back our Fannie Mae MBS; third-party providers of credit enhancement on the mortgage assets that we hold in...

  • Page 62
    ... in our loss reserves and the fair value of our guaranty obligations if we determine it is probable that we would not collect all of our claims from the affected mortgage insurer, which could adversely affect our business, results of operations, financial condition, liquidity and net worth. In...

  • Page 63
    ... half of 2008. The mortgage industry has been consolidating and a decreasing number of large lenders originate most singlefamily mortgages. The loss of business from any one of our major lender customers could adversely affect our market share, our revenues and the liquidity of Fannie Mae MBS, which...

  • Page 64
    ... or business decisions, including decisions affecting loan purchases, management of credit losses and risk, guaranty fee pricing, asset and liability management and the management of our net worth, and any of those decisions could adversely affect our earnings, liquidity, net worth and financial...

  • Page 65
    ... created a number of challenges for us in managing our market-related risks. As a result of our extremely limited ability to issue callable debt or long-term debt in October and November 2008, we relied primarily on a combination of short-term debt, interest rate swaps and swaptions to fund mortgage...

  • Page 66
    ... not purchase single-family loans in excess of the conforming loan limits. In addition, under the Charter Act, our business is limited to the U.S. housing finance sector. As a result of these limitations on our ability to diversify our operations, our financial condition and earnings depend almost...

  • Page 67
    ... activity in the housing market and declines in home prices, and we expect mortgage debt outstanding to decrease by 0.2% in 2009. A decline in the rate of growth in mortgage debt outstanding reduces the unpaid principal balance of mortgage loans available for us to purchase or securitize, which in...

  • Page 68
    ... capital markets, including sudden changes in short-term or longterm interest rates, could decrease the fair value of our mortgage assets, derivatives positions and other investments, negatively affect our ability to issue debt at reasonable rates, and reduce our net interest income. Our business...

  • Page 69
    ...to limits on executive compensation, impact the retention and recruitment of management. In addition, the actions of Treasury, the FDIC, the Federal Reserve and international central banking authorities directly impact financial institutions' cost of funds for lending, capital raising and investment...

  • Page 70
    ...in our consolidated financial statements the potential liability that may result from these matters. If one or more of these matters is determined against us, it could have a material adverse effect on our earnings, liquidity and financial condition. Securities Class Action Lawsuits In re Fannie Mae...

  • Page 71
    ...2008, a series of shareholder lawsuits were filed under the Securities Act against underwriters of issuances of certain Fannie Mae common and preferred stock. Two of these lawsuits were also filed against us and one of those two was also filed against certain former Fannie Mae officers and directors...

  • Page 72
    ... District of New York. Securities Class Action Lawsuits Pursuant to the Securities Exchange Act of 1934 On September 8, 2008, the first of several shareholder lawsuits was filed under the Exchange Act against certain current and former Fannie Mae officers and directors, underwriters of issuances of...

  • Page 73
    ..., 2008, Fogel Capital Management, Inc. filed a securities class action complaint in the U.S. District Court for the Southern District of New York against Fannie Mae and certain current and former officers and directors. The complaint's factual allegations and claims for relief are based on purchases...

  • Page 74
    ... a securities class action complaint in the U.S. District Court for the Southern District of New York against certain current and former officers and directors. Fannie Mae was not named as a defendant. The complaint was filed on behalf of purchasers of Fannie Mae's Series S Preferred Stock, from...

  • Page 75
    ...Consolidated Retirement System as lead plaintiff on behalf of purchasers of preferred stock, and appointing the Massachusetts Pension Reserves Investment Management Board and the Boston Retirement Board as lead plaintiffs on behalf of common stockholders. Shareholder Derivative Lawsuits In re Fannie...

  • Page 76
    ... certain of our current and former directors and officers, Fannie Mae as a nominal defendant, Washington Mutual, Inc., Kerry K. Killinger; Countrywide Financial Corporation and its subsidiaries and/or affiliates, Countrywide Home Loans, Inc., Countrywide Home Equity Loan Trust, and Countrywide Bank...

  • Page 77
    ... 23, 2008, Mary P. Moore filed a proposed class action complaint in the U.S. District Court for the District of Columbia against our Board of Directors' Compensation Committee, our Benefits Plans Committee, and certain current and former Fannie Mae officers and directors. This case is based on ERISA...

  • Page 78
    ... 25, 2008, David Gwyer filed a proposed class action complaint in the U.S. District Court for the District of Columbia against our Board of Directors' Compensation Committee, our Benefits Plans Committee, and certain current and former Fannie Mae officers and directors. This case is based on ERISA...

  • Page 79
    ...multifamily borrowers whose mortgages are insured under Sections 221(d)(3), 236 and other sections of the National Housing Act and are held or serviced by us. The complaint identified as a proposed class low- and moderate-income apartment building developers who maintained uninvested escrow accounts...

  • Page 80
    ... On July 8, 2008, our former Chief Financial Officer and Vice Chairman, J. Timothy Howard, initiated an arbitration proceeding against Fannie Mae before a Federal Arbitration, Inc. panelist. Mr. Howard claimed that he was entitled to salary continuation under his employment agreement because, in...

  • Page 81
    ... 02940. Common Stock Data The following table shows, for the periods indicated, the high and low sales prices per share of our common stock in the consolidated transaction reporting system as reported in the Bloomberg Financial Markets service, as well as the dividends per share declared in each...

  • Page 82
    ... report on Form 10-Q for the quarter ended September 30, 2008, filed with the SEC on November 10, 2008. Fourth Quarter 2008 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...

  • Page 83
    ... this annual report on Form 10-K. Purchases of Equity Securities by the Issuer The following table shows shares of our common stock we repurchased during the fourth quarter of 2008. Total Number of Shares Purchased(1) Total Number of Shares Purchased as Part of Publicly Average Announced Price Paid...

  • Page 84
    ... or expected to be issued under our employee benefit plans. No shares were repurchased during the fourth quarter of 2008 pursuant to the General Repurchase Authority. The General Repurchase Authority has no specified expiration date. Under the terms of the senior preferred stock purchase agreement...

  • Page 85
    ...this annual report on Form 10-K. 2008 For the Year Ended December 31, 2007 2006 2005 2004 (Dollars in millions, except per share amounts) Statement of operations data:(1) Net interest income ...Guaranty fee income ...Losses on certain guaranty contracts ...Investment losses, net ...Trust management...

  • Page 86
    ... book of business...Combined loss reserves as a percentage of total nonperforming loans ... For the Year Ended December 31, 2007 2006 2005 Performance ratios: Net interest yield(16) ...Average effective guaranty fee rate (in basis points)(17) ...Credit loss ratio (in basis points)(18) ...Return...

  • Page 87
    ... net income available to common stockholders for the reporting period, expressed as a percentage. Note: * Average balances for purposes of ratio calculations are based on balances at the beginning of the year and at the end of each respective quarter for 2008 and 2007. Average balances for purposes...

  • Page 88
    ...: • Fair Value of Financial Instruments • Other-than-temporary Impairment of Investment Securities • Allowance for Loan Losses and Reserve for Guaranty Losses • Deferred Tax Assets We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and...

  • Page 89
    ... the types of financial assets we hold within each balance sheet category that are based on level 3 inputs and the valuation techniques we use to determine their fair values, including key inputs and assumptions. • Trading and Available-for-Sale Investment Securities. Our financial instruments...

  • Page 90
    ...-for-sale mortgage loans, are referred to non-recurring fair value measurements. Table 2 presents a comparison, by balance sheet category, of the amount of financial assets carried in our consolidated balance sheets at fair value on a recurring basis and classified as level 3 as of December 31, 2008...

  • Page 91
    ...31, 2008. Our LIHTC investments trade in a market with limited observable transactions. We determine the fair value of our LIHTC investments using internal models that estimate the present value of the expected future tax benefits (tax credits and tax deductions for net operating losses) expected to...

  • Page 92
    ... our fair value measurement process and accounting. Fair Value of Guaranty Obligations When we issue Fannie Mae MBS, we record in our consolidated balance sheets a guaranty asset that represents the present value of cash flows expected to be received as compensation over the life of the guaranty. As...

  • Page 93
    ...and expected life of the fixed-rate loans underlying the MBS totals $100. Based on market expectations, we estimate that a market participant would require $120 to assume the risk associated with our guaranty of the principal and interest due to investors in the MBS trust. To simplify the accounting...

  • Page 94
    ... of economic scenarios. Key inputs and assumptions used in these models that affected the fair value of our guaranty obligations were home price growth rates and an estimated market rate of return. Effect on Credit-Related Expenses As described in "Notes to Consolidated Financial Statements-Note...

  • Page 95
    ... months and is still in the MBS trust at that time. As long as the loan or REO property remains in the MBS trust, we continue to pay principal and interest to the MBS trust under the terms of our guaranty arrangement. As described in "Notes to Consolidated Financial Statements-Note 2, Summary...

  • Page 96
    ... Consolidated Balance Sheet: Assets: Mortgage loans ...Acquired property, net ...Liabilities: Reserve for guaranty losses-beginning balance(1) ...Plus: Provision for credit losses attributable to SOP 03-3 fair value losses ...Less: Charge-offs related to initial purchase discount on SOP 03-3 loans...

  • Page 97
    ... the initial fair value of delinquent loans purchased from MBS trusts. These prices, which reflect the significant decline in the value of mortgage assets due to the deterioration in the housing and credit markets, have resulted in a substantial increase in the SOP 03-3 fair value loss we record...

  • Page 98
    ... are the same. To calculate the loss reserves for our single-family guaranty book of business, we aggregate homogeneous loans into pools based on common underlying risk characteristics, such as origination year and seasoning, original loan-to-value ("LTV") ratio and loan product type. Based on the...

  • Page 99
    ... adjustments to our loss reserves on our consolidated financial statements in "Consolidated Results of Operations-Credit-Related Expenses" and "Notes to Consolidated Financial Statements-Note 5, Allowance for Loan Losses and Reserve for Guaranty Losses." Deferred Tax Assets We recognize deferred tax...

  • Page 100
    ... our deferred tax assets in the future. Our cumulative book taxable loss position was caused by the negative impact on our results from the weak housing and credit market conditions over the past year. These conditions deteriorated dramatically during the third quarter of 2008, causing a significant...

  • Page 101
    ... Table 3: Condensed Consolidated Results of Operations and Selected Market Data(1) Variance For the Year Ended December 31, 2008 vs. 2007 2007 vs. 2006 2008 2007 2006 $ % $ % (Dollars in millions, except per share amounts) Net interest income ...Guaranty fee income ...Trust management income(2) Fee...

  • Page 102
    ...interest rate swaps, is not reflected in net interest income. See "Fair Value Gains (Losses), Net" for additional information. Table 4 presents an analysis of our net interest income and net interest yield for 2008, 2007 and 2006. Table 4: Analysis of Net Interest Income and Yield For the Year Ended...

  • Page 103
    ... million for 2008, 2007 and 2006 relating to a portion of the fair value losses recorded upon the purchase of SOP 03-3 loans. Includes cash equivalents. We compute net interest yield by dividing net interest income for the period by the average balance of our total interest-earning assets during the...

  • Page 104
    ...our future net interest income. For additional information on our portfolio investment and funding activity, see "Consolidated Balance Sheet Analysis-Mortgage Investments" and "Liquidity and Capital Management-Liquidity Management-Debt Funding." For a description of the Treasury agreements and terms...

  • Page 105
    ... credit risk, we may require that the lender pay an upfront fee to compensate us for assuming the additional credit risk. We refer to this payment as a risk-based pricing adjustment. We also may adjust the monthly contractual guaranty fee rate so that the pass-through coupon rates on Fannie Mae MBS...

  • Page 106
    ...-Fair Value of Financial Instruments" for information on our accounting for these losses and the impact on our financial statements. Our average effective guaranty fee rate for 2008 also was affected by guaranty fee pricing changes we implemented to address the current risks in the housing market...

  • Page 107
    ... made operational changes to segregate these funds from our corporate assets and began separately reporting this compensation as "Trust management income" in our consolidated statements of operations. Trust management income totaled $261 million, $588 million and $111 million for 2008, 2007 and 2006...

  • Page 108
    Table 7: Investment Gains (Losses), Net For the Year Ended December 31, 2008 2007 2006 (Dollars in millions) Other-than-temporary impairment on available-for-sale securities(1) . Lower of cost or fair value adjustments on held for sale loans ...Gains (losses) on Fannie Mae portfolio securitizations...

  • Page 109
    ... discussion of our use of derivatives in "Risk Management-Interest Rate Risk Management and Other Market Risks-Interest Rate Risk Management Strategies-Derivative Instruments." Table 9 presents, by type of derivative instrument, the fair value gains and losses on our derivatives for 2008, 2007...

  • Page 110
    ...change in the fair value of outstanding derivative contracts. The 5-year swap interest rate, which is shown below in Table 9, is a key reference interest rate that affects the fair value of our derivatives. Table 9: Derivatives Fair Value Gains (Losses), Net For the Year Ended December 31, 2008 2007...

  • Page 111
    ... and Other Market Risks-Interest Rate Risk Management Strategies." See "Consolidated Balance Sheet Analysis-Derivative Instruments" for a discussion of the effect of derivatives on our consolidated balance sheets. Trading Securities Gains (Losses), Net We recorded net losses on trading securities of...

  • Page 112
    ...sensitivity of changes in the fair value of our trading securities to changes in interest rates in "Risk Management-Interest Rate Risk Management and Other Market Risks-Interest Rate Risk Metrics." Hedged Mortgage Assets Gains (Losses), Net Our hedge accounting relationships during 2008 consisted of...

  • Page 113
    ... for our principal employee retirement benefit plans in "Notes to Consolidated Financial Statements-Note 15, Employee Retirement Benefits." We made contributions of $12 million to fund our nonqualified pension plans and other postretirement benefit plans during 2008. The funding status of our...

  • Page 114
    Table 10: Credit-Related Expenses For the Year Ended December 31, 2008 2007 2006 (Dollars in millions) Provision for credit losses attributable to guaranty book of business ...$25,522 Provision for credit losses attributable to SOP 03-3 and HomeSaver Advance fair value losses ...2,429 Total ...

  • Page 115
    ...2005, we record seriously delinquent loans purchased from Fannie Mae MBS trusts at the lower of acquisition cost or fair value at the date of purchase. We no longer record an increase in the allowance for loan losses and reduction in the reserve for guaranty losses when we purchase these loans. 110

  • Page 116
    ... fair value of the acquired loan. Excludes delinquent loans totaling $56 million that are subject to SOP 03-3 but are held in MBS trusts consolidated on our balance sheets. Represents loss reserves amount attributable to each loan type as a percentage of the guaranty book of business for each loan...

  • Page 117
    ... loans purchased from MBS trusts, we experienced an increase in SOP 03-3 fair value losses due to the significant decline in the price of mortgage assets during 2008 as a result of the ongoing deterioration in the housing and credit markets and widespread illiquidity in the financial markets...

  • Page 118
    ... Loan Discount Losses (Dollars in millions) Net Investment Balance as of December 31, 2006 ...Purchases of delinquent loans ...Provision for credit losses ...Principal repayments ...Modifications and troubled debt restructurings . Foreclosures, transferred to REO ...Balance as of December 31, 2007...

  • Page 119
    ... by the average guaranty book of business during the period. We previously calculated our credit loss ratio based on annualized credit losses as a percentage of our mortgage credit book of business, which includes non-Fannie Mae mortgage-related securities held in our mortgage investment portfolio...

  • Page 120
    ... losses and forgone interest. Calculations are based on approximately 97% of our total single-family guaranty book of business as of both December 31, 2008 and 2007. The mortgage loans and mortgage-related securities that are included in these estimates consist of: (i) single-family Fannie Mae MBS...

  • Page 121
    ...inception of guaranty contracts, costs associated with the purchase of additional mortgage insurance to protect against credit losses, net gains and losses on the extinguishment of debt, the amortization of master servicing assets and other miscellaneous expenses. Other non-interest expenses totaled...

  • Page 122
    ...: Single-Family Business Results Variance For the Year Ended December 31, 2008 vs. 2007 2007 vs. 2006 2008 2007 2006 $ % $ % (Dollars in millions) Statement of operations data:(1) Guaranty fee income ...Trust management income(2) ...Other income(3) ...Losses on certain guaranty contracts ...Credit...

  • Page 123
    ... in market-based valuation adjustments on delinquent loans purchased from MBS trusts, which are presented as part of our provision for credit losses. • A relatively stable effective tax rate of 35.0% for 2007, compared with 34.8% for 2006. HCD Business Our HCD business recorded a net loss of...

  • Page 124
    ... by these investments. Table 17: HCD Business Results Variance For the Year Ended December 31, 2008 vs. 2007 2007 vs. 2006 2008 2007 2006 $ % $ % (Dollars in millions) Statement of operations data: Guaranty fee income ...Other income(1)(2) ...Losses on partnership investments . Credit-related...

  • Page 125
    ... on the financial performance of our Capital Markets group. Table 18: Capital Markets Group Business Results Variance For the Year Ended December 31, 2008 vs. 2007 2007 vs. 2006 2008 2007 2006 $ % $ % (Dollars in millions) Statement of operations data: Net interest income ...Investment losses, net...

  • Page 126
    ...by a reduction in the average cost of our debt that more than offset a decline in the average yield on our interest-earning assets. The decrease in the average cost of our debt was due to the decline in short-term interest rates during 2008 and a shift in our funding mix to more short-term debt. The...

  • Page 127
    ... tax asset valuation allowance, and a significant increase in unrealized losses on available-for-sale securities. Following is a discussion of material changes in the major components of our assets and liabilities since December 31, 2007. See "Liquidity and Capital Management-Capital Management...

  • Page 128
    ...(1) 2008 Purchases(2) 2007 2006 Sales 2008 2007 2006 (Dollars in millions) 2008 Liquidations(3) 2007 2006 Mortgage loans: Fixed-rate: Long-term ...$ 72,956 $ 62,738 $ 65,680 $ 30,004 32,080 16,044 Intermediate-term (4) ...Total fixed-rate loans ...Adjustable-rate loans ...Total mortgage loans...

  • Page 129
    ... (discounts) and other cost basis adjustments, net ...Lower of cost or fair value adjustments on loans held for sale ...Allowance for loan losses for loans held for investment . . Total mortgage loans, net ...Mortgage-related securities: Fannie Mae single-class MBS ...Fannie Mae structured MBS...

  • Page 130
    ...-for-Sale Investment Securities Our mortgage investment securities are classified in our consolidated balance sheets as either trading or available for sale and reported at fair value. In conjunction with our January 1, 2008 adoption of SFAS No. 159, The Fair Value Option for Financial Assets and...

  • Page 131
    ... repay these obligations at any time. Yields are determined by dividing interest income (including the amortization and accretion of premiums, discounts and other cost basis adjustments) by amortized cost balances as of year-end. Table 22 shows the composition of our trading and available-for-sale...

  • Page 132
    ... Gross Total Unrealized Fair Value Losses Amortized Cost(1) Gross Unrealized Gains Trading: Fannie Mae single-class MBS Fannie Mae structured MBS . Non-Fannie Mae single-class mortgage-related securities Non-Fannie Mae structured mortgage-related securities Mortgage revenue bonds ...Asset-backed...

  • Page 133
    ... subordination and financial guarantees. Reflects the ratio of the current amount of the securities that will incur losses in a securitization structure before any losses are allocated to securities that we own. Percentage calculated based on the quotient of the total unpaid principal balance of all...

  • Page 134
    ...-Label Mortgage-Related Securities As indicated in Table 23, the unpaid principal balance of our investments in private-label mortgage-related securities backed by Alt-A and subprime loans totaled $52.4 billion as of December 31, 2008. We recognized net fair value losses of $2.7 billion in 2008 on...

  • Page 135
    ... investments as of December 31, 2008. Table 25: Other-than-temporary Impairment Losses on Alt-A and Subprime Private-Label Securities For the Year Ended As of December 31, December 31, 2008 2008 2007 Cumulative (Dollars in millions) Q4 2008 Other-than-temporary impairment on private-label mortgage...

  • Page 136
    ... totaled $233 million in 2008. We will continue to monitor and analyze the performance of these securities to assess the collectability of principal and interest as of each balance sheet date. If there is further deterioration in the housing and mortgage markets and the decline in home prices...

  • Page 137
    Table 26: Investments in Alt-A Private-Label Mortgage-Related Securities, Excluding Wraps* Unpaid Principal Balance Availablefor-Sale Trading Average Securities(2) Securities(3) Price As of December 31, 2008 Credit Enhancement Statistics Monoline Financial Average Minimum Guaranteed Current(4) ...

  • Page 138
    ... Unpaid Principal Balance Availablefor-Sale Trading Average Securities(2) Securities(3) Price Fair Value As of December 31, 2008 Credit Enhancement Statistics Monoline Hypothetical Scenarios(6) Financial Guaranteed Average Minimum 40d/40s 50d/50s 50d/60s 70d/60s Current(4) Original(4) Current...

  • Page 139
    ... 2007-1(1) 2007-1(2) 2007-1(3) 2007-1(4) 2007-2(1) 2007-2(2) 2007-2(3) 2007-2(4) 2008-1 2008-1(2) 2008-1(3) 2008-1(4) (1) Trading Securities(2) Availablefor-Sale Average Securities(3) Price Fair Value Average Current(4) Original(4) Monoline Hypothetical Scenarios(6) Financial Minimum Guaranteed...

  • Page 140
    ... will incur losses in the securitization structure before any losses are allocated to securities that we own, taking into consideration subordination and financial guarantees. Percentage calculated based on the quotient of the total unpaid principal balance of all credit enhancement in the form of...

  • Page 141
    ... ... 2007-1 subtotal ... 2008-1 subtotal ...Total Alt-A wraps ... As of December 31, 2008 Credit Enhancement Statistics Monoline Hypothetical Scenarios(5) Unpaid Financial Principal Average Minimum Guaranteed 50d/60s 60d/50s 60d/60s 70d/70s NPV NPV NPV NPV Balance(2) Current(3) Original(3) Current...

  • Page 142
    ... of the mix between our outstanding short-term and long-term debt as of December 31, 2008 and 2007 in "Liquidity and Capital Management-Liquidity Management-Debt Funding-Debt Funding Activity." Also see "Notes to Consolidated Financial Statements-Note 10, ShortTerm Borrowings and Long-Term Debt" for...

  • Page 143
    .... Table 30 provides an analysis of the change in the estimated fair value of our net derivative liability, excluding mortgage commitments, recorded in our consolidated balance sheets between December 31, 2007 and December 31, 2008. As indicated in Table 30, the net fair value of our risk management...

  • Page 144
    ... operations, excluding mortgage commitments. For additional information on our derivative instruments, see "Consolidated Results of Operations-Fair Value Gains (Losses), Net" "Risk Management-Interest Rate Risk Management and Other Market Risks" and "Notes to Consolidated Financial Statements-Note...

  • Page 145
    ....3 billion reported in our GAAP consolidated balance sheets as of December 31, 2008. The substantial decline in the fair value of our net assets during 2008 reflected the adverse impact on our net guaranty assets and net portfolio from the ongoing deterioration in the housing and credit markets and...

  • Page 146
    ... driving the decline in the fair value of net assets in 2008; and (3) the limitations of our non-GAAP fair value balance sheet and related measures. Fair Value Measurement As discussed more fully in "Critical Accounting Policies and Estimates-Fair Value of Financial Instruments," we use various...

  • Page 147
    ...in "Consolidated Balance Sheet Analysis-Mortgage Investments." Cautionary Language Relating to Supplemental Non-GAAP Financial Measures In reviewing our non-GAAP fair value balance sheets, there are a number of important factors and limitations to consider. The estimated fair value of our net assets...

  • Page 148
    ... Total financial assets ...Master servicing assets and credit enhancements ...Other assets ...Liabilities: Federal funds purchased and securities sold under agreements to repurchase ...Short-term debt ...Long-term debt...Derivative liabilities at fair value ...Guaranty obligations ... Total assets...

  • Page 149
    ... fair value amounts of total mortgage loans in Note 20. In our GAAP consolidated balance sheets, we report the guaranty assets associated with our outstanding Fannie Mae MBS and other guarantees as a separate line item and include buy-ups, master servicing assets and credit enhancements associated...

  • Page 150
    ... value of net assets (net of tax effect) presented in Table 32: Supplemental NonGAAP Consolidated Fair Value Balance Sheets. LIQUIDITY AND CAPITAL MANAGEMENT Our business activities require that we maintain adequate liquidity to fund our operations. We have a liquidity and capital risk management...

  • Page 151
    ... and non-mortgage assets; • borrowings against mortgage-related securities and other investment securities we hold pursuant to repurchase agreements and loan agreements; • guaranty fees received on Fannie Mae MBS; • payments received from mortgage insurance counterparties; and • net receipts...

  • Page 152
    ...2008, to set aside an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases for an affordable housing trust fund. The Director of FHFA has the authority to temporarily suspend this requirement if payment would contribute to our financial...

  • Page 153
    ... fixed-rate issues of Benchmark Notes each month through dealer syndicates. • Discount Notes. We issue short-term debt securities called Discount Notes with maturities ranging from overnight to 360 days from the date of issuance. Investors purchase these notes at a discount to the principal amount...

  • Page 154
    ... a summary of our debt activity for 2008, 2007 and 2006. Table 34: Debt Activity For the Year Ended December 31, 2008 2007 2006 (Dollars in millions) Issued during the year:(1) Short-term:(2) Amount(3) ...Weighted average interest rate Long-term:(4) Amount(3) ...Weighted average interest rate Total...

  • Page 155
    ... our debt securities with maturities greater than one year and our callable debt was low between July and November 2008, we were forced to rely increasingly on short-term debt to fund our purchases of mortgage loans, which are by nature long-term assets. As a result, we will be required to refinance...

  • Page 156
    ...this debt limit is $892.0 billion. Our calculation of aggregate indebtedness reflects the unpaid principal balance of our debt outstanding as of June 30, 2008, or in the case of long-term zero coupon bonds, the unpaid principal balance at maturity. Our calculation excludes basis adjustments and debt...

  • Page 157
    ..., 2007 Weighted Average Interest Rate Maturities Outstanding Outstanding Federal funds purchased and securities sold under agreements to repurchase. . Short-term debt: Fixed rate short-term debt: Discount notes ...Foreign exchange discount notes...Other short-term debt ...Total fixed rate short...

  • Page 158
    ... Outstanding Rate 2008 Average During the Year Weighted Average Interest (2) Outstanding Rate (Dollars in millions) Maximum Outstanding(3) Federal funds purchased and securities sold under agreements to repurchase ...Fixed-rate short-term debt: Discount notes ...Foreign exchange discount notes...

  • Page 159
    ... of Outstanding Debt Table 37 presents the maturity profile, on a monthly basis, of our outstanding short-term debt as of December 31, 2008 based on the contractual maturity dates of our short-term debt securities. The current portion of our long-term debt (that is, the total amount of our long-term...

  • Page 160
    ... net discount and other cost basis adjustments of approximately $15.5 billion. Excludes contractual interest on long-term debt from consolidations. Includes certain premises and equipment leases. Includes on- and off-balance sheet commitments to purchase loans and mortgage-related securities...

  • Page 161
    ... or short-term unsecured debt securities; • daily forecasting and statistical analysis of our daily cash needs over a 21 business day period; • routine operational testing of our ability to rely upon identified sources of liquidity, such as mortgage repurchase agreements; • periodic reporting...

  • Page 162
    ... $63,493 Total ...$92,991 As described in "Consolidated Results of Operations-Fair Value Gains (Losses), Net," we incurred net trading losses of $2.7 billion in 2008 on the non-mortgage-related securities in our cash and other investments portfolio due to the substantial decline in market value of...

  • Page 163
    ... a liquidity crisis in which we cannot adequately access the unsecured debt markets. As of December 31, 2008, we had approximately $208.6 billion in unpaid principal balance of Fannie Mae MBS and Freddie Mac mortgage-backed securities available as collateral to secure loans under the Treasury credit...

  • Page 164
    ... under the senior preferred stock purchase agreement in order to eliminate our net worth deficit as of December 31, 2008. Credit Ratings Our ability to access the capital markets and other sources of funding, as well as our cost of funds, is highly dependent on our credit ratings from the major...

  • Page 165
    amount of long-term debt as interest rates fell during the period. Net cash used in investing activities was $72.5 billion, attributable to our purchases of available-for-sale securities, loans held for investment and advances to lenders. Year Ended December 31, 2007. Our cash and cash equivalents ...

  • Page 166
    ... common stock dividend; • electing to purchase fewer mortgage assets; • slowing the growth of our guaranty business; • increasing our guaranty fee pricing on new acquisitions; • reducing our administrative costs; and • applying other changes to our business practices to reduce our losses...

  • Page 167
    Our ability to manage our net worth is very limited. We are effectively unable to raise equity capital from private sources at this time. On February 25, 2009, the Director of FHFA submitted a request for Treasury to provide us with funding under the senior preferred stock purchase agreement as ...

  • Page 168
    ...replacement of FASB Statement No. 125) ("SFAS 140"). Fannie Mae MBS Transactions and Other Financial Guarantees While we hold some Fannie Mae MBS in our mortgage portfolio, most outstanding Fannie Mae MBS are held by third parties and therefore not reflected in our consolidated balance sheets. Table...

  • Page 169
    ... Financial Statements- Note 19, Concentrations of Credit Risk." For information on the revenues and expenses associated with our Single-Family and HCD businesses, see "Business Segment Results." For information regarding the mortgage loans underlying both our on- and off-balance sheet Fannie Mae MBS...

  • Page 170
    ... yield method of accounting, as appropriate. In each case, we record in the consolidated financial statements our share of the income and losses of the LIHTC partnerships, as well as our share of the tax credits and tax benefits of the partnerships. Our share of the operating losses generated...

  • Page 171
    ... result in adverse changes in the fair value of our net assets or our long-term earnings. We actively manage the market risk associated with changes in interest rates. • Operational Risk. Operational risk relates to the risk of loss resulting from inadequate or failed internal processes, people or...

  • Page 172
    ... risk on loans in our single-family mortgage credit book of business include the borrower's financial strength and credit profile; the type of mortgage; the value and characteristics of the property securing the mortgage; and economic conditions, such as changes in unemployment rates and home prices...

  • Page 173
    ... help borrowers and loan servicers address potential mortgage problems and prevent unnecessary home foreclosures among the more than 18 million single-family loans owned or guaranteed by Fannie Mae. These initiatives include the following: • HomeSaver Advance, an unsecured, personal loan designed...

  • Page 174
    ... foreclosures. Under the program, servicers that service loans held in Fannie Mae MBS trusts or in our portfolio will be incented to reduce at-risk borrowers' monthly mortgage payments to as little as 31% of monthly income, which may be achieved through a variety of methods, including interest rate...

  • Page 175
    ...,478 $60,355 Total mortgage portfolio ...Fannie Mae MBS held by third parties(9) ...Other credit guarantees(10) . . Mortgage credit book of business ...Guaranty book of business... As of December 31, 2007 Single-Family(1) Multifamily(2) Total Conventional(3) Government(4) Conventional(3) Government...

  • Page 176
    ...on single-family mortgage assets. See "Consolidated Balance Sheet Analysis-Trading and Available-For-Sale Investment Securities- Investments in Private-Label Mortgage-Related Securities" for additional information on our private-label mortgage securities. The amounts reported above reflect our total...

  • Page 177
    ... Risk Office, is responsible for pricing and managing credit risk relating to the portion of our single-family mortgage credit book of business consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans (whether held in our portfolio or held by third parties...

  • Page 178
    ...Management-Mortgage Insurers." • Housing and Community Development 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...

  • Page 179
    ...expected. A higher credit score typically indicates a lower degree of credit risk. - Loan purpose. Loan purpose indicates how the borrower intends to use the funds from a mortgage loan. Cash-out refinancings have a higher risk of default than either mortgage loans used for the purchase of a property...

  • Page 180
    ... Single-Family Business Volume and Mortgage Credit Book of Business(1) Percent of Conventional Single-Family Business Volume(2) For the Year Ended December 31, 2008 2007 2006 Percent of Conventional Single-Family Book of Business(3) As of December 31, 2008 2007 2006 Original loan-to-value ratio...

  • Page 181
    ... of Conventional Single-Family Business Volume(2) For the Year Ended December 31, 2008 2007 2006 Percent of Conventional Single-Family Book of Business(3) As of December 31, 2008 2007 2006 Occupancy type: Primary residence ...Second/vacation home ...Investor ...Total ...FICO credit score: Ͻ 620...

  • Page 182
    ... business volume refers to both single-family mortgage loans we purchase for our mortgage portfolio and single-family mortgage loans we securitize into Fannie Mae MBS. Percentages calculated based on unpaid principal balance of loans as of the end of each period. The original loan-to-value ratio...

  • Page 183
    ... backing Fannie Mae MBS, excluding resecuritized private-label mortgage-related securities backed by subprime mortgage loans, represented approximately 0.3% of our total single-family mortgage credit book of business as of both December 31, 2008 and 2007. We currently are not purchasing mortgages...

  • Page 184
    ... in home prices, by the lesser of the appraised value or the HUD loan limit. Once a borrower reaches the principal limit, no additional cash can be advanced. • Housing and Community Development Diversification within our multifamily mortgage credit book of business and equity investments business...

  • Page 185
    ...the number of loans at imminent risk of payment default. The percentage of loans in our single-family guaranty book of business that were 30 days and 60 days delinquent was 2.52% and 1.00%, respectively, as of the December 31, 2008, compared with 2.11% and 0.58%, respectively as of December 31, 2007...

  • Page 186
    ... economic conditions, relative to the loans we acquired in 2006, 2007 and early 2008. • The conventional single-family serious delinquency rates for California and Florida, which represent the two largest states in our conventional single-family mortgage credit book of business in terms...

  • Page 187
    ... of condominiums to rental properties. • Nonperforming Loans We classify conventional single-family and multifamily loans held in our mortgage portfolio, including delinquent single-family loans purchased from MBS trusts, as nonperforming and place them on nonaccrual status when we believe...

  • Page 188
    ... on-balance sheet loans classified as nonperforming as of the end of each period. Management of Problem Loans In our experience, early intervention for a potential or existing problem is critical to helping borrowers avoid foreclosure. If a borrower does not make the required payments, we work in...

  • Page 189
    ... product type, interest rate, amortization term, maturity date, and/or unpaid principal balance; and • forbearances, whereby the lender agrees to suspend or reduce borrower payments for a period of time. Foreclosure Alternatives: • preforeclosure sales in which borrowers, working with servicers...

  • Page 190
    ... Reflects unpaid principal balance and the number of first-lien loans associated with unsecured HomeSaver Advance loans. Represents total problem loan workouts during the period as a percent of our conventional single-family guaranty book of business as of the end of each year. As shown in Table 49...

  • Page 191
    ... loan modifications made during the period 2004 to 2008. Table 50: Re-performance Rates of Modified Conventional Single-Family Loans(1) Status as of December 31, 2008 2008 2007 2006 2005 2004 Current to Ͻ 60 days delinquent . 61 to Ͻ 90 days delinquent ...90 days or more delinquent ...Foreclosure...

  • Page 192
    ... are reported in our consolidated balance sheets as a component of "Acquired property, net." Estimated based on the total number of properties acquired through foreclosure as a percentage of the total number of loans in our conventional single-family mortgage credit book of business as of the end of...

  • Page 193
    ... or backing Fannie Mae MBS, excluding resecuritized privatelabel mortgage-related securities backed by Alt-A mortgage loans, represented approximately 10% of our total single-family mortgage credit book of business as of December 31, 2008, but accounted for 31% of single-family properties acquired...

  • Page 194
    ...' outstanding mortgage loan reimbursement obligations to us that we do not expect to recover. We also incurred trading losses of approximately $114 million during 2008 relating to our investment in corporate debt securities issued by AIG. In addition, we have previously obtained insurance from...

  • Page 195
    ... an agreement with JPMorgan Chase in which we consented to the transfer of Washington Mutual Bank's selling and servicing contracts to JPMorgan Chase Bank, National Association. The loans covered by these contracts represented approximately 5% of our single-family mortgage credit book of business as...

  • Page 196
    .... In September 2008, to mitigate our counterparty exposure to mortgage servicers, we announced several important changes to the standards single-family lenders must meet to become or remain an eligible Fannie Mae lender. These changes include: • an increase in the minimum net worth requirement for...

  • Page 197
    ...and pool mortgage insurance coverage on single-family loans in our guaranty book of business by mortgage insurer for our top eight mortgage insurer counterparties as of December 31, 2008, as well as the insurer financial strength ratings of each of these counterparties as of February 19, 2009. Table...

  • Page 198
    ... in our loss reserves and a substantial increase in the fair value of our guaranty obligations, which could adversely affect our business, results of operations, liquidity, financial condition and net worth. In addition, if a mortgage insurer implements a run-off plan in which the insurer no longer...

  • Page 199
    ...potential loss recovery from lenders under these risk sharing agreements on multifamily loans was $27.2 billion and $25.0 billion as of December 31, 2008 and 2007, respectively. The current financial market crisis has adversely affected, and is expected to continue to adversely affect, the liquidity...

  • Page 200
    reduction in the fair value of the securities they guarantee, which could adversely affect our results of operations, liquidity, financial condition and net worth. See "Consolidated Balance Sheet Analysis-Trading and Available-for-Sale Investment Securities- Investments in Private-Label Mortgage-...

  • Page 201
    ... in a gain position are reported in the consolidated balance sheets as "Derivative assets at fair value." Table 53 presents our assessment of our credit loss exposure by counterparty credit rating on outstanding risk management derivative contracts as of December 31, 2008 and 2007. We present...

  • Page 202
    ...us as of December 31, 2008. Represents both cash and non-cash collateral posted by our counterparties to us. This amount is adjusted for the collateral transferred subsequent to month-end based on credit loss exposure limits on derivative instruments as of December 31, 2007. Settlement dates vary by...

  • Page 203
    ... 19 as of December 31, 2008 from 21 as of December 31, 2007. As a result of the current financial market crisis, we may experience further losses relating to our derivative contracts that could adversely affect our results of operations, liquidity, financial condition and net worth. In addition, if...

  • Page 204
    ... to replace the mortgage pools at higher cost to meet a forward commitment to sell the MBS. We manage these risks by establishing approval standards and limits on exposure and monitoring both our exposure positions and changes in the credit quality of dealers. Document Custodians We use third-party...

  • Page 205
    ... fixed-price asset, liability or derivative commitments. It also includes our LIHTC partnership investment assets and preferred stock, but excludes our existing guaranty business. Our mortgage assets consist mainly of single-family fixed-rate mortgage loans that give borrowers the option to prepay...

  • Page 206
    ... the fair value of our guaranty assets and guaranty obligations. Also see "Notes to Consolidated Financial Statements-Note 20, Fair Value of Financial Instruments." Debt Instruments Historically, the primary tool we have used to fund the purchase of mortgage assets and manage the interest rate risk...

  • Page 207
    ... similar to changes in the duration of mortgage assets. See "Liquidity and Capital Management-Liquidity Management-Debt Funding" for additional information on our debt activity. Derivative Instruments Derivative instruments also are an integral part of our strategy in managing interest rate risk...

  • Page 208
    ... of our consolidated balance sheets and relative mix of our debt and derivative positions, the interest rate environment and expected trends. Table 54 presents, by derivative instrument type, our risk management derivative activity for the years ended December 31, 2008 and 2007, along with...

  • Page 209
    ..., and the increased reliance during the second half of 2008 on short-term debt and derivatives to hedge incremental fixed-rate mortgage asset purchases. The outstanding notional balance of our risk management derivatives increased by $141.1 billion during 2007, to $886.5 billion as of December 31...

  • Page 210
    ... reduction in the fair value of our net assets that has occurred over the last year. The daily average adverse impact from a 50 basis point change in interest rates and from a 25 basis point change in the slope of the yield curve was $(1.0) billion and $(0.2) billion, respectively, for December 2008...

  • Page 211
    ... calculated based on a daily average, while the quarterly disclosure reflects the estimated pre-tax impact calculated based on the estimated financial position of our net portfolio and the market environment as of the last business day of the quarter based on values used for financial reporting...

  • Page 212
    ... of the potential impact on the fair value of our trading assets, our net guaranty assets and obligations, and our other financial instruments as of December 31, 2008 and 2007, from the same hypothetical changes in the level of interest rates as presented above in Table 55. We also assume a parallel...

  • Page 213
    ... reported in our consolidated balance sheets to reflect how the risk of the interest rate and credit risk components of these loans is managed by our business segments. Consists of the net of all other financial instruments reported in "Notes to Consolidated Financial Statements- Note 20, Fair Value...

  • Page 214
    ... and monitor our exposures to interest rate, credit and other market risks. The information provided by these models is also used to make business decisions relating to asset acquisition, debt management, credit guaranty pricing, strategies, initiatives, transactions, and products. In addition, we...

  • Page 215
    ... parties. It excludes mortgage loans we securitize from our portfolio and the purchase of Fannie Mae MBS for our investment portfolio. "Buy-ups" refer to upfront payments we make to lenders to adjust the monthly contractual guaranty fee rate on a Fannie Mae MBS so that the pass-through coupon rate...

  • Page 216
    ... term "Fannie Mae MBS" refers to all forms of mortgage-related securities that we issue, including single-class Fannie Mae MBS and structured Fannie Mae MBS. "FHFA" refers to the Federal Housing Finance Agency. Following the enactment of the Federal Housing Finance Regulatory Reform Act of 2008 on...

  • Page 217
    ... principal balance of: (1) the multifamily mortgage loans we purchase for our investment portfolio; (2) the multifamily mortgage loans we securitize into Fannie Mae MBS; and (3) credit enhancements that we provide on our multifamily mortgage assets. "Multifamily mortgage credit book of business...

  • Page 218
    ... the option-adjusted spread between our assets and our funding and hedging instruments. "Outstanding Fannie Mae MBS" refers to the total unpaid principal balance of Fannie Mae MBS that is held by third-party investors and held in our mortgage portfolio. "Pay-fixed swap" refers to an agreement under...

  • Page 219
    ...; (4) single-family Fannie Mae MBS held by third parties; and (5) other credit enhancements that we provide on single-family mortgage assets. "SOP 03-3" refers to the American Institute of Certified Public Accountants' Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities...

  • Page 220
    ...total number of shares of Fannie Mae common stock outstanding on a fully diluted basis on the date of exercise. "Workout" refers to an action taken by a servicer with a borrower to resolve the problem of delinquent loan payments. Actions can include forbearance, a repayment plan, a loan modification...

  • Page 221
    ... and Procedures As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as in effect as of December 31, 2008, the end of the period...

  • Page 222
    ...with authorizations of our management and our Board of Directors; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Internal control over financial...

  • Page 223
    ... 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...

  • Page 224
    ...to Board of Directors and Audit Committee FHFA and Fannie Mae management took several actions during the fourth quarter of 2008 and first quarter of 2009 that remediated the material weakness in internal control over financial reporting relating to the lack of authority of our Board of Directors and...

  • Page 225
    ... discussed with management the disclosures contained in our annual report on Form 10-K for the year ended December 31, 2008, including the audited financial statements contained therein. • The Audit Committee reviewed and oversaw the process by which Fannie Mae's Chief Executive Officer and Chief...

  • Page 226
    ... the correct amount of other-than-temporary impairment on our private-label mortgage-related securities in our financial statements for the year ended December 31, 2008 that are included in this report. We are currently taking steps to remediate this material weakness, which we intend to complete...

  • Page 227
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Fannie Mae: We have audited Fannie Mae and consolidated entities' (In conservatorship) (the "Company") internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued...

  • Page 228
    ... have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008 of the Company and our report dated February 26, 2009 expressed an unqualified opinion on those...

  • Page 229
    ... the SEC Advisory Committee on Improvements to Financial Reporting. Mr. Beresford is a member of the Board of Directors and Chairman of the Audit Committee of Kimberly-Clark Corporation and Legg Mason, Inc. He is a certified public accountant. Mr. Beresford initially became a Fannie Mae director in...

  • Page 230
    ... Loews Corporation. Mr. Laskawy initially became a director and Chairman of Fannie Mae's Board in September 2008. Egbert L. J. Perry, 53, is the Chairman and Chief Executive Officer of the Integral Group LLC. Founded in 1993 by Mr. Perry, Integral is a real estate advisory, investment management and...

  • Page 231
    ... conservator before taking action in the following areas: (1) actions involving capital stock, dividends, the senior preferred stock purchase agreement, increases in risk limits, material changes in accounting policy and reasonably foreseeable material increases in operational risk; (2) the creation...

  • Page 232
    management, public policy, mortgage lending, real estate, low-income housing, homebuilding, regulation of financial institutions and any other areas that may be relevant to the safe and sound operation of Fannie Mae. Fannie Mae's bylaws provide that each director holds office for the term to which ...

  • Page 233
    ... filing our annual consolidated financial statements for 2008 and related certifications by our Chief Executive Officer and Chief Financial Officer required by the SarbanesOxley Act of 2002. Executive Sessions Prior to our being placed in conservatorship, our non-management directors met regularly...

  • Page 234
    ...as our principal accounting officer and is a certified public accountant. David M. Johnson, 48, has been Executive Vice President and Chief Financial Officer since November 2008. Prior to joining Fannie Mae, Mr. Johnson held the position of Executive Vice President and Chief Financial Officer of The...

  • Page 235
    ... Reporting, Analytics and Finance during 2004 and as Senior Credit Executive-Consumer, Chase Financial Services from 2003 to 2004. Michael J. Williams, 51, has been Executive Vice President and Chief Operating Officer since November 2005. Mr. Williams previously served as Fannie Mae's Executive Vice...

  • Page 236
    ... of 2008 Retention Program Conservator's determination relating to 2008 Annual Incentive Plan Bonus Payments and Stock-Based LongTerm Incentive Awards. Our compensation of executive officers for 2008 was originally structured to include three principal cash and stock components: (1) salary, (2) the...

  • Page 237
    ... design of the 2008 Retention Program. By structuring awards to provide for service-based cash payouts over a two-year period, the 2008 Retention Program was designed to provide incentives for employees to remain at Fannie Mae. Structuring executive retention awards so that payment of a portion is...

  • Page 238
    ... executive, Mr. Hisey, earned the payment of a cash bonus he was initially awarded in 2007 upon the timely filing in February 2008 of our 2007 Annual Report on Form 10-K with the SEC. Salaries and the Service-Based Portion of Retention Awards. Salary is the base component of our compensation program...

  • Page 239
    ... talent. For this purpose, we looked to the same comparator group that we used for 2007 compensation decisions. The members of this group are listed in the proxy statement on Schedule 14A we filed with the SEC on April 4, 2008. The compensation recommendation was also designed to balance our goal of...

  • Page 240
    ... table: amounts we recognized for financial statement reporting purposes during 2008 for the fair value of stock and option awards held by our named executives, changes in our executives' pension values, the value of perquisites, company contributions to 401(k) plans, life insurance premiums, tax...

  • Page 241
    ... current severance practices of other large financial firms and adjustments appropriate to Fannie Mae's circumstances. In August 2008, Mr. Levin stepped down as our Chief Business Officer following the announcement of his intention to retire in early 2009. Mr. Levin has remained employed by Fannie...

  • Page 242
    ...-based compensation. All employees, including our named executives, are prohibited from purchasing and selling derivative securities related to our equity securities, including warrants, puts and calls, or from dealing in any derivative securities other than pursuant to our stock-based benefit plans...

  • Page 243
    ...2008, 2007 and 2006 for the named executives. The amounts shown in the "Stock Awards" and "Option Awards" columns do not represent the value of stock or option awards received by the named executives for performance during the compensation year indicated. Instead, as required by SEC rules, we report...

  • Page 244
    ...76, the closing price of our common stock on December 31, 2008.(1) Change in Pension Value and Nonqualified Non-Equity Deferred Incentive Compensation All Other Plan Earnings Compensation Compensation (5) (6) ($) ($)(10) ($) Name and Principal Position Year Salary ($) Bonus ($)(2) Stock Awards...

  • Page 245
    ... related to service-based vesting conditions. For the assumptions used in calculating the value of these awards, see "Notes to Consolidated Financial Statements-Note 1, Summary of Significant Accounting Policies-Stock-Based Compensation," of our Annual Report on Form 10-K for the year ended December...

  • Page 246
    ... 10 to the Summary Compensation Table for additional information about these amounts. Perquisites and Other Personal Benefits Company Contributions to 401(k) Plan Universal Life Insurance Coverage Premiums Tax Gross-Ups Charitable Award Programs Separation Benefits Named Executive Herbert Allison...

  • Page 247
    ...our 2008 Retention Program to the extent payment of the award is based on satisfaction of performance goals, and our Stock Compensation Plan of 2003. All Other Stock Awards: Number of Shares of Stock or Units (#)(4) Grant Date Fair Value of Stock and Option Awards ($)(5) Named Executive Award Type...

  • Page 248
    ... at 2008 Fiscal Year-End The following table shows outstanding stock option awards and unvested restricted stock held by the named executives as of December 31, 2008. The market value of stock awards shown in the table below is based on a per share price of $0.76, which was the closing market price...

  • Page 249
    ... Award Type(1) Grant Date Number of Securities Underlying Unexercised Options (#) Exercisable Option Awards(2) Number of Securities Underlying Unexercised Option Options (#) Exercise Unexercisable Price ($) Option Expiration Date Stock Awards(2) Number of Market Value of Shares or Shares or...

  • Page 250
    ...been calculated by multiplying the number of shares of stock by the fair market value of our common stock on the vesting date. No information is provided regarding stock option exercises because no stock options were exercised by named executives during 2008. Name Stock Awards Number of Shares Value...

  • Page 251
    ...to as the Retirement Plan, provides benefits for eligible employees, including Messrs. Hisey, Bacon, Lund, Williams, Mudd, Swad, Dallavecchia and Levin. Normal retirement benefits are computed on a single life basis using a formula based on final average annual earnings and years of credited service...

  • Page 252
    ... 2008 Retention Program. For purposes of determining benefits under the 2003 Supplemental Pension Plan, the amount of an officer's annual cash bonus and retention bonus taken into account is limited in the aggregate to 50% of the officer's base salary. Benefits under the supplemental pension plans...

  • Page 253
    ... Financial Statements - Note 15, Employee Retirement Benefits." Consistent with the terms of our pension plans, the present value calculations include as 2008 compensation the portion of retention awards under our 2008 Retention Program that are scheduled to be paid in 2009. Mr. Mudd's employment...

  • Page 254
    ... salary and up to 100% of their bonus to future years, as determined by the named executive. Deferred amounts are deemed to be invested in mutual funds or in an investment option with earnings benchmarked to our long-term borrowing rate, as designated by the participants. The deferred compensation...

  • Page 255
    ...and our 2008 Retention Program that provides compensation that may become payable upon termination of employment in certain circumstances. Stock Compensation Plans and 2005 Performance Year Cash Awards Under the Fannie Mae Stock Compensation Plan of 1993 and the Fannie Mae Stock Compensation Plan of...

  • Page 256
    ... reported amounts represent accelerated payment of cash awards made in early 2006 in connection with long-term incentive stock awards for the 2005 performance year. Retention Awards under 2008 Retention Program. In 2008, the conservator established our 2008 Retention Program, a broad-based employee...

  • Page 257
    ..., 2008, as well as the ability to continue to participate in our health insurance plans for a one-year period ending on August 27, 2009 at employee rates, a benefit with an estimated value of $12,320, and to receive up to $18,000 in outplacement services. The terms of the separation agreements were...

  • Page 258
    ..., those available under the Director's Charitable Award Program. 2008 Non-Employee Director Compensation Table Fees Earned or Paid in Cash ($)(3) Stock Awards ($)(1)(4) Option Awards ($)(5) All Other Compensation ($)(6) Total ($)(1) Name (2) Current Directors Dennis R. Beresford ...William Thomas...

  • Page 259
    ..."Notes to Consolidated Financial Statements - Note 1, Summary of Significant Accounting Policies - Stock-Based Compensation," in our Annual Report on Form 10-K for the year ended December 31, 2005. As of December 31, 2008, the persons who served as our non-employee directors during 2008 held options...

  • Page 260
    ... of the Board, Mr. Ashley, was $500,000. Restricted Stock Awards. Under the Fannie Mae Stock Compensation Plan of 2003, each non-management director received an annual grant of restricted stock units immediately following the annual meeting of shareholders in 2008. The aggregate fair market value on...

  • Page 261
    ...The Fannie Mae Political Action Committee has ceased accepting or making contributions, and this matching contribution program has been discontinued. Stock Ownership Guidelines for Directors. In January 2009, our Board eliminated our stock ownership requirements for directors and for senior officers...

  • Page 262
    ... price is calculated for the outstanding options and does not take into account restricted stock units or deferred shares. This number of shares consists of 11,960,258 shares available under the 1985 Employee Stock Purchase Plan and 27,184,295 shares available under the Stock Compensation Plan...

  • Page 263
    ... Other Shares Common Stock Total Obtainable Beneficially Common Stock Within 60 Days of Beneficially February 15, Owned Excluding Stock Options Owned 2009 (2) Name and Position Herbert M. Allison ...President and Chief Executive Officer Kenneth J. Bacon(3) ...Executive Vice President, Housing and...

  • Page 264
    ... days in certain circumstances. Mr. Bacon's shares include 48 shares held as custodian for family members, 1,101 shares held through our ESOP and 71,807 shares of restricted stock. Mr. Dallavecchia resigned as Executive Vice President and Chief Risk Officer in August 2008. Mr. Dallavecchia's shares...

  • Page 265
    ... and approve any investment, acquisition, financing or other transaction that Fannie Mae engages in directly with any current director or executive officer or any immediate family member or affiliate of a current director or executive officer. Our Code of Conduct for employees requires that we and...

  • Page 266
    ... at the time the senior preferred stock purchase agreement was entered into. We require our directors and executive officers, not less than annually, to describe to us any situation involving a transaction with us in which a director or executive officer could potentially have a personal interest...

  • Page 267
    ... who was an executive officer of Fannie Mae in 2008. The terms of the separation agreement were approved by FHFA. Transactions involving the Integral Group Over the past seven years, our Housing and Community Development business has invested indirectly in certain LIHTC limited partnerships in which...

  • Page 268
    ... received, payments within the preceding five years that, in any single fiscal year, were in excess of $1 million or 2% of the entity's consolidated gross annual revenues, whichever is greater; or • an immediate family member of the director is a current executive officer of a corporation or other...

  • Page 269
    ...and management fee payments made, directly and indirectly, to or from Fannie Mae pursuant to these relationships with Integral fall below our Guidelines' thresholds of materiality for a Board member that is a current executive officer and controlling shareholder of a company that engages in business...

  • Page 270
    ... payments of substantially less than 2% of Moody's and our consolidated gross annual revenues. Mr. Mudd was not considered an independent director under the Guidelines because of his position as Chief Executive Officer. Item 14. Principal Accountant Fees and Services The Audit Committee of our Board...

  • Page 271
    ... of Deloitte & Touche as Fannie Mae's independent registered public accounting firm for 2008, the Audit Committee delegated the authority to pre-approve any audit and permissible non-audit services and fee increases to its Chairman, Mr. Beresford, who was required to report any such pre-approvals at...

  • Page 272
    ...Note 4- Mortgage Loans ...Note 5- Allowance for Loan Losses and Reserve for Guaranty Losses ...Note 6- Investments in Securities ...Note 7- Portfolio Securitizations ...Note 8- Financial Guarantees and Master Servicing ...Note 9- Acquired Property, Net ...Note 10- Short-term Borrowings and Long-term...

  • Page 273
    .... Federal National Mortgage Association /s/ Herbert M. Allison, Jr. Herbert M. Allison, Jr. President and Chief Executive Officer Date: February 26, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of...

  • Page 274
    ... Title Date /s/ Frederick B. Harvey III Frederick B. Harvey III /s/ Egbert L. J. Perry Egbert L. J. Perry David H. Sidwell David H. Sidwell Diana L. Taylor Diana L. Taylor Director February 26, 2009 Director February 26, 2009 /s/ Director February 26, 2009 /s/ Director February...

  • Page 275
    ... to Fannie Mae's Current Report on Form 8-K, filed September 11, 2008.) Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of September 26, 2008, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing...

  • Page 276
    ...August 2008 Fannie Mae Form of Indemnification Agreement for directors and officers of Fannie Mae Federal National Mortgage Association Supplemental Pension Plan, as amended November 20, 2007†(Incorporated by reference to Exhibit 10.10 to Fannie Mae's Annual Report on Form 10-K for the year ended...

  • Page 277
    ... Fannie Mae's Annual Report on Form 10-K for the year ended December 31, 2007, filed February 27, 2008.) Amendment to Fannie Mae Supplemental Pension Plan of 2003 for Internal Revenue Code Section 409A, adopted December 22, 2008†Executive Pension Plan of the Federal National Mortgage Association...

  • Page 278
    ... Swad and Fannie Mae, dated February 19, 2009†Statement re: computation of ratios to earnings to fixed charges Statement re: computation of ratios of earnings to combined fixed charges and preferred stock dividends Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule...

  • Page 279
    ... 4- Mortgage Loans ...Note 5- Allowance for Loan Losses and Reserve for Guaranty Losses...Note 6- Investments in Securities ...Note 7- Portfolio Securitizations ...Note 8- Financial Guarantees and Master Servicing ...Note 9- Acquired Property, Net ...Note 10- Short-term Borrowings and Long-term Debt...

  • Page 280
    ... REGISTERED PUBLIC ACCOUNTING FIRM To Fannie Mae: We have audited the accompanying consolidated balance sheets of Fannie Mae and consolidated entities (In conservatorship) (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of operations, cash flows, and changes...

  • Page 281
    ... MAE (In conservatorship) Consolidated Balance Sheets (Dollars in millions, except share amounts) As of December 31, 2008 2007 ASSETS Cash and cash equivalents ...Restricted cash ...Federal funds sold and securities purchased under agreements to resell ...Investments in securities: Trading, at fair...

  • Page 282
    ... Year Ended December 31, 2008 2007 2006 Interest income: Trading securities ...Available-for-sale securities ...Mortgage loans ...Other ...Total interest income ...Interest expense: Short-term debt ...Long-term debt ...Total interest expense ...Net interest income ...Guaranty fee income (includes...

  • Page 283
    ... and preferred stock ...Payment of cash dividends on common and preferred stock ...Net change in federal funds purchased and securities sold under agreements to repurchase Excess tax benefits from stock-based compensation ...Net cash provided by (used in) financing activities ...Net increase in cash...

  • Page 284
    ... assets and guaranty fee buy-ups (net of tax of $13) ...Net cash flow hedging losses (net of tax of $2) ...Prior service cost and actuarial gains, net of amortization for defined benefit plans (net of tax of $73) ...Total comprehensive income ...Common stock dividends ($1.90 per share) ...Preferred...

  • Page 285
    ...in net loss (net of tax of $36) ...Unrealized losses on guaranty assets and guaranty fee buy-ups ...Net cash flow hedging losses ...Prior service cost and actuarial losses, net of amortization for defined benefit plans ...Total comprehensive loss ...Common stock dividends ($0.75 per share) ...Senior...

  • Page 286
    ... the purchases of these mortgage assets. Changes in the fair value of the derivative instruments and trading securities and the impairments on available-for-sale securities also affect the net income of our Capital Markets segment. On September 7, 2008, the Secretary of the Treasury and the Director...

  • Page 287
    ... the Board to consult with and obtain the consent of the conservator before taking action in the following areas: actions involving capital stock, dividends, the senior preferred stock purchase agreement between Treasury and Fannie Mae, increases in risk limits, material changes in accounting policy...

  • Page 288
    ... sole discretion, based on adverse conditions in the U.S. mortgage market. On September 7, 2008, we issued a warrant to Treasury giving it the right to purchase, at a nominal price, shares of our common stock equal to 79.9% of the total common stock outstanding on a fully diluted basis on the date...

  • Page 289
    ... operations. Several factors contributed to the reduced demand for our debt securities, including continued severe market disruptions, market concerns about our capital position and the future of our business (including its future profitability, future structure, regulatory actions and agency status...

  • Page 290
    ... of the total number of shares of Fannie Mae common stock, on a fully diluted basis, that is exercisable at any time through September 7, 2028, we and the Treasury are deemed related parties. In addition, FHFA's common control of both us and the Federal Home Loan Mortgage Corporation ("Freddie Mac...

  • Page 291
    .... Management has made significant estimates in a variety of areas, including but not limited to, valuation of certain financial instruments and other assets and liabilities, the allowance for loan losses and reserve for guaranty losses, other-than-temporary impairment of investment securities and...

  • Page 292
    ...drivers of expected losses for these VIEs. For those mortgage-backed investment trusts that we evaluated using quantitative analyses, we used internal models to generate Monte Carlo simulations of cash flows associated with the different credit, interest rate and housing price environments. Material...

  • Page 293
    ... of mortgage loans or mortgage-related securities from our consolidated balance sheets to a trust (an SPE) to create Fannie Mae MBS, real estate mortgage investment conduits ("REMICs") or other types of beneficial interests. We account for portfolio securitizations in accordance with Statement of...

  • Page 294
    ... "Transfers from advances to lenders to investments in securities," respectively. Cash inflows associated with a sale contemporaneous with a created Fannie Mae MBS are reflected in the operating activities section of our consolidated statements of cash flows in the line item "Net decrease in trading...

  • Page 295
    ... and losses on AFS securities are recognized when securities are sold; are calculated using the specific identification method; and are recorded in "Investment losses, net" in our consolidated statements of operations. Trading securities are measured at fair value in our consolidated balance sheets...

  • Page 296
    ... method, we use the new cost basis and the expected cash flows from the security to calculate the effective yield. Mortgage Loans Upon acquisition, mortgage loans acquired that we intend to sell or securitize are classified as held for sale ("HFS") while loans acquired that we have the ability...

  • Page 297
    ... with our intent and ability to hold the securities of the consolidated entity; otherwise, such mortgage loans are classified as HFI. Loans Held for Sale Loans held for sale are reported at the lower of cost or fair value ("LOCOM") and typically only include single-family loans, because we do not...

  • Page 298
    ...the initial fair value of these loans using internal prepayment, interest rate and credit risk models that incorporated management's best estimate of certain key assumptions, such as default rates, loss severity and prepayment speeds. Beginning in July 2007, the mortgage markets experienced a number...

  • Page 299
    ... guaranty losses is a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payment of principal...

  • Page 300
    ... of current borrower financial information, operating statements on the underlying collateral, historical payment experience, collateral values when appropriate, and other related credit documentation. Multifamily loans that are categorized into pools based on their relative credit risk ratings are...

  • Page 301
    ...funding advances have terms up to 60 days and earn a shortterm market rate of interest. In other cases, the transfers are of loans that the lender has the unilateral ability to repurchase from us. We report cash outflows from advances to lenders as an investing activity in our consolidated statement...

  • Page 302
    ... 1, 2008, we measured the fair value of the guaranty obligations that we recorded when we issued Fannie Mae MBS based on management's estimate of the amount that we would be required to pay a third party of similar credit standing to assume our obligation. This amount is based on market information...

  • Page 303
    ...fee for loans with greater credit risk, we may require that the lender pay an upfront fee to compensate us for assuming additional credit risk. We refer to this payment as a risk-based pricing adjustment. Risk-based pricing adjustments do not affect the pass-through coupon remitted to Fannie Mae MBS...

  • Page 304
    ...consolidated balance sheets at fair value in "Other assets." Buy-ups issued prior to our January 1, 2007 adoption of SFAS No. 155, Accounting for Certain Hybrid Financial Instruments ("SFAS 155"), are accounted for in the same manner as AFS securities with changes in fair value recorded in AOCI, net...

  • Page 305
    ... on management's estimate of probable losses incurred on those loans as of each balance sheet date. Prior to the effective date of FIN 45, upfront cash payments received in the form of risk-based pricing adjustments or buy-downs were deferred as a component of "Other liabilities" in our consolidated...

  • Page 306
    ... or loss on the sale of those loans. The following table displays unamortized premiums, discounts, and other cost basis adjustments included in our consolidated balances sheets as of December 31, 2008 and 2007, that may result in interest income in our consolidated statements of operations in future...

  • Page 307
    ... cost basis adjustments, we aggregate similar mortgage loans or mortgage-related securities with similar prepayment characteristics. We consider Fannie Mae MBS to be aggregations of similar loans for the purpose of estimating prepayments. We aggregate individual mortgage loans based upon coupon rate...

  • Page 308
    ... calculation of gain or loss on the sale of assets. The fair values of the MSA and MSL are based on the present value of expected cash flows using management's best estimates of certain key assumptions, which include prepayment speeds, forward yield curves, adequate compensation, and discount rates...

  • Page 309
    ... based on the availability of market inputs used in determining their fair value. The availability of such market inputs is consistent across our MSAs and MSLs; therefore, we account for them as one class. SFAS 156 also changes the calculation of the gain or loss from the sale of financial assets...

  • Page 310
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) the requirements of SFAS 133. We record the purchase and sale of an existing security on its trade date when the commitment to purchase or sell the existing security settles within the period of time that is ...

  • Page 311
    ... December 31, 2008 and 2007, respectively. Our liability to third-party holders of Fannie Mae MBS that arises as the result of a consolidation of a securitization trust is fully collateralized by underlying loans and/or mortgage-related securities. When securities sold under agreements to repurchase...

  • Page 312
    ... U.S. dollars using foreign exchange spot rates as of the balance sheet date and any associated gains or losses are reported as a component of "Fair value losses, net" in our consolidated statements of operations. The classification of interest expense as either short-term or long-term is based on...

  • Page 313
    ... "Short-term debt interest expense" or "Long-term debt interest expense" in our consolidated statements of operations. Trust Management Income As master servicer, issuer and trustee for Fannie Mae MBS, we earn a fee that reflects interest earned on cash flows from the date of remittance of mortgage...

  • Page 314
    ... of "Provision (benefit) for federal income taxes" in our consolidated statements of operations. Stock-Based Compensation We account for share based payments issued to employees in accordance with SFAS No. 123 (Revised), Share-Based Payments ("SFAS 123R"), and the related FASB Staff Positions ("FSP...

  • Page 315
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) obligations. In determining the discount rate as of each balance sheet date, we consider the current yields on high-quality, corporate fixed-income debt instruments with maturities corresponding to the expected ...

  • Page 316
    ... years ended December 31, 2008, 2007 and 2006. For the Year Ended December 31, 2008 2007 2006 (Dollars in millions) Derivatives fair value losses, net ...Trading securities gains (losses), net ...Hedged mortgage assets gains, net ...Debt foreign exchange gains (losses), net Debt fair value losses...

  • Page 317
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Fair value losses, net for the year ended December 31, 2008 primarily related to a decline in interest rates, which resulted in a decrease in the value of our derivatives and an increase in hedge gains. ...

  • Page 318
    ... include investments in securities issued by VIEs, such as Fannie Mae MBS created pursuant to our securitization transactions, mortgage and asset-backed trusts that were not created by us, and limited partnership interests in LIHTC and other housing partnerships that are established to finance the...

  • Page 319
    ... retain or purchase a portion of the securities issued by each trust. However, the substantial majority of outstanding Fannie Mae MBS is held by third parties and, therefore, is generally not reflected in our consolidated balance sheets. We have securitized mortgage loans since 1981. Refer to "Note...

  • Page 320
    ... any given mortgage-related security will vary over time. Third-party ownership in these consolidated MBS trusts is recorded as a component of "Long-term debt" in our consolidated balance sheets. We also consolidate in our financial statements the assets and liabilities of limited partnerships that...

  • Page 321
    ... table displays the carrying amount and classification of assets and liabilities of consolidated VIEs as of December 31, 2008 and 2007. As of December 31, 2008 2007 (Dollars in millions) Assets: MBS trusts: Loans held for investment ...Available-for-sale securities(1) Loans held for sale ...Trading...

  • Page 322
    ...and $232 million in mortgage debt that we own or guarantee as of December 31, 2008 and 2007, respectively. The following table displays the total assets as of December 31, 2008 and 2007 of non-consolidated VIEs with which we are involved and QSPEs for which we are the sponsor or servicer but not the...

  • Page 323
    ... related to non-QSPE securitization trusts as of December 31, 2008 and 2007, respectively. Amounts consist of guaranty obligations and reserve for guaranty losses recognized for the respective periods. 4. Mortgage Loans We own both single-family mortgage loans, which are secured by four or fewer...

  • Page 324
    ... balance sheets. Refer to "Note 7, Portfolio Securitizations," for additional information on mortgage loans underlying our securities. As of December 31, 2008 2007 (Dollars in millions) Single-family:(1) Government insured or guaranteed . Conventional: Long-term fixed-rate(2) ...Intermediate-term...

  • Page 325
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) consecutive monthly payments due under the loan are delinquent in whole or in part. We purchased delinquent loans from MBS trusts with an unpaid principal balance plus accrued interest of $4.5 billion, $6.6 ...

  • Page 326
    ... the Year Ended December 31, 2008 2007 2006 (Dollars in millions) Accretion of SOP 03-3 fair value losses(1) ...$158 Interest income on SOP 03-3 loans returned to accrual status or subsequently modified as TDRs ...476 Total interest income recognized...$634 Increase in "Provision for credit losses...

  • Page 327
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Nonaccrual Loans We have single-family and multifamily loans in our mortgage portfolio, including those loans accounted for under SOP 03-3, that are subject to our nonaccrual policy. The following table displays ...

  • Page 328
    ... the year ended December 31, 2008 for these loans. The fair value discount on these loans will accrete into interest income based on the contractual term of the loan. 5. Allowance for Loan Losses and Reserve for Guaranty Losses We maintain an allowance for loan losses for loans held for investment...

  • Page 329
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays changes in the allowance for loan losses and reserve for guaranty losses for the years ended December 31, 2008, 2007 and 2006. For The Year Ended December 31, 2008 2007 2006 (Dollars ...

  • Page 330
    ... table displays our investments in trading and AFS securities, which are presented at fair value as of December 31, 2008 and 2007. As of December 31, 2008 2007 (Dollars in millions) Mortgage-related securities: Fannie Mae single-class MBS Fannie Mae structured MBS . Non-Fannie Mae structured...

  • Page 331
    ...operations. The following table displays our investments in trading securities and the amount of net losses recognized from holding these securities as of December 31, 2008 and 2007. As of December 31, 2008 2007 (Dollars in millions) Mortgage-related securities: Fannie Mae single-class MBS . Fannie...

  • Page 332
    ...losses from the sale of AFS securities are recorded in "Investment losses, net" in our consolidated statements of operations. The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the years ended December 31, 2008, 2007 and 2006. For the Year Ended...

  • Page 333
    ... credit spreads. The securities with unrealized losses for 12 consecutive months or longer had a market value as of December 31, 2008 that was on average 73% of their amortized cost basis. Unrealized losses on these securities will be recovered when market interest rates change or at maturity. Based...

  • Page 334
    ...investments in securities issued by the trusts and our guaranty and master servicing relationships. The following table displays our continuing involvement in the form of Fannie Mae MBS, guaranty asset, guaranty obligation and MSA or MSL as of December 31, 2008 and 2007. As of December 31, 2008 2007...

  • Page 335
    ... The key assumptions associated with the fair value of the guaranty obligations are future home prices and current loan to-value ratios. Our investments in Fannie Mae single-class MBS, Fannie Mae Megas, REMICs and SMBS are interests in securities with active markets. We primarily rely on third party...

  • Page 336
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays some key characteristics of the securities retained in portfolio securitizations. Fannie Mae Single-class MBS & Fannie REMICS & Mae Megas SMBS (Dollars in millions) As of December 31, 2008 Unpaid principal balance...

  • Page 337
    ...of December 31, 2008 and 2007, and a sensitivity analysis showing the impact of changes in key assumptions. Guaranty Guaranty Assets Obligations (Dollars in millions) As of December 31, 2008 Valuation at period end: Fair value...Anticipated credit losses(1) ...Weighted-average life(2) ...Prepayment...

  • Page 338
    ...as "Investment losses, net" in our consolidated statements of operations. The following table displays cash flows from our securitization trusts related to portfolio securitizations accounted for as sales for the years ended December 31, 2008, 2007 and 2006. For the Year Ended December 31, 2008 2007...

  • Page 339
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) "Managed loans" are defined as on-balance sheet mortgage loans as well as mortgage loans that have been securitized in portfolio securitizations that have qualified as sales pursuant to SFAS 140. The following ...

  • Page 340
    ... mortgage loans and mortgage-related securities backing our Fannie Mae MBS in exchange for a guaranty fee. We primarily issue single-class and multi-class Fannie Mae MBS and guarantee to the respective MBS trusts that we will supplement amounts received by the MBS trusts as required to permit timely...

  • Page 341
    ... 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. Risk Characteristics of our Book of Business The following tables display the current delinquency status and...

  • Page 342
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Percentage of Single-family Conventional Book of Business(2) Percentage Seriously Delinquent(1)(4) Estimated mark-to-market loan-to-value ratio: Greater than 100% ...95% to 100% ...Below 95% ...Geographical ...

  • Page 343
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Percentage of Multifamily Mortgage Credit Book of Business Percentage Seriously Delinquent(1)(2) Originating loan-to-value ratio: Less than or equal to 80% ...Greater than 80%...Operating debt service coverage ...

  • Page 344
    ...consolidated balance sheets for the years ended December 31, 2008, 2007 and 2006. For the Year Ended December 31, 2008 2007 2006 (Dollars in millions) Beginning balance, January 1...Fair value of expected cash flows at issuance for new guaranteed Fannie Mae MBS issuances ...Net change in fair value...

  • Page 345
    ... MBS included in "Investments in securities" was $3.8 billion and $438 million as of December 31, 2008 and 2007, respectively. Master Servicing We do not perform the day-to-day servicing of mortgage loans in an MBS trust created in a Fannie Mae securitization transaction; however, we are compensated...

  • Page 346
    ... 193 (76) (11) $224 Ending balance, December 31 ...$ 11 10. Short-term Borrowings and Long-term Debt We obtain the funds to finance our mortgage purchases and other business activities primarily by selling debt securities in the domestic and international capital markets. We issue a variety of...

  • Page 347
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) our consolidated balance sheets. The following table displays our outstanding short-term borrowings and weighted-average interest rates as of December 31, 2008 and 2007. As of December 31, 2008 2007 Weighted ...

  • Page 348
    ... a portion of structured debt instruments that is reported at fair value. Reported amounts include a net discount and other cost basis adjustments of $15.5 billion and $11.6 billion as of December 31, 2008 and 2007, respectively. Our long-term debt includes a variety of debt types. We issue both...

  • Page 349
    ..., we record a secured borrowing, to the extent of proceeds received, upon the transfer of financial assets from our consolidated balance sheets that does not qualify as a sale. Long-term debt from these transactions in our consolidated balance sheets as of December 31, 2008 and 2007 was $1.2 billion...

  • Page 350
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The table below displays the amount of our debt called and repurchased and the associated weighted-average interest rates for the years ended December 31, 2008, 2007 and 2006. For The Year Ended December 31, 2008 ...

  • Page 351
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) consolidated balance sheets. The derivatives we use for interest rate risk management purposes consist primarily of OTC contracts that fall into three broad categories: • Interest rate swap contracts. An ...

  • Page 352
    ...Year Ended December 31, 2008 2007 2006 (Dollars in millions) Amortization income of fair value-type hedges ...Amortization income (expense) of cash flow-type hedges ... $13 (1) $13 5 $18 7 In April 2008, we began to employ fair value hedge accounting for some of our interest rate risk management...

  • Page 353
    ... consolidated statements of operations, net of tax effect. We recorded a tax benefit of $8 million and a tax expense of $7 million related to extraordinary gains (losses) for the year ended December 31, 2007 and 2006, respectively. We recorded no tax benefit for extraordinary losses in 2008. Amount...

  • Page 354
    ... property, net Debt and derivative instruments ...Mortgage and mortgage-related assets ...Unrealized losses on AFS securities ...Partnership credits ...Net guaranty assets and obligations and related credits ...Cash fees and other upfront payments ...Employee compensation and benefits ...Partnership...

  • Page 355
    ... changes in connection with an IRS review of fair market value losses we recognized on certain securities held in our portfolio. The increase in our unrecognized tax benefit for the year ended December 31, 2008 is due to our current assessment of deductions taken on our prior year income tax returns...

  • Page 356
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays the changes in our unrecognized tax benefits for the years ended December 31, 2008 and 2007, respectively. For the Year Ended December 31, 2008 2007 (Dollars in millions) Unrecognized...

  • Page 357
    ...employees eligible for retirement for 2008, 2007 and 2006, respectively. Stock-Based Compensation Plans The 1985 Employee Stock Purchase Plan (the "1985 Purchase Plan") provides employees an opportunity to purchase shares of Fannie Mae common stock at a discount to the fair market value of the stock...

  • Page 358
    ... shares, treasury shares or shares purchased on the open market. Stock-Based Compensation Programs Nonqualified Stock Options Under the 2003 Plan, we may grant stock options to eligible employees and non-management members of the Board of Directors. Generally, employees and non-management directors...

  • Page 359
    ... this program and shares had a weighted-average grant date fair value of $53.18. There was no Performance-Based Stock Bonus Award offering for the years ended December 31, 2008 and 2007. Performance Share Program Under the 1993 and 2003 Plans, certain eligible employees (Senior Vice Presidents and...

  • Page 360
    ...stock activity for the years ended December 31, 2008, 2007 and 2006. 2008 Number of Shares For the Year Ended December 31, 2007 2006 Weighted Weighted Weighted Average Fair Average Fair Number Average Fair Value at Value at Number of Value at Grant Date Grant Date of Shares Shares Grant Date (Shares...

  • Page 361
    ...included in "Salaries and employee benefits expense" in our consolidated statements of operations. For the years ended December 31, 2008, 2007 and 2006, we recognized net periodic benefit costs for our defined benefit and healthcare plans and expenses for our defined contributions plans totaling $95...

  • Page 362
    ...cash and cash equivalents. The following table displays components of our net periodic benefit cost for our qualified and nonqualified pension plans and other postretirement plan for the years ended December 31, 2008, 2007 and 2006. The net periodic benefit costs for each period are calculated based...

  • Page 363
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays amounts recorded in AOCI that have not been recognized as components of net periodic benefit cost for the years ended December 31, 2008 and 2007. As of December 31, 2008 Pension Plans ...

  • Page 364
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays pre-tax amounts in AOCI as of December 31, 2008 that are expected to be recognized as components of net periodic benefit cost in 2009. As of December 31, 2008 Other PostPension Plans ...

  • Page 365
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (1) During 2008, we established a valuation allowance for the deferred tax assets recognized for our pension and other postretirement plans. As a result, the tax benefit amounts previously recorded in AOCI have ...

  • Page 366
    ...Pension Benefits Postretirement Benefits 2008 2007 2006 2008 2007 2006 Weighted-average assumptions used to determine net periodic benefit costs: Discount rate ...Average rate of increase in future compensation ...Expected long-term weighted-average rate of return on plan assets ...Weighted-average...

  • Page 367
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) We review our pension and other postretirement benefit plan assumptions on an annual basis. We calculate the net periodic benefit cost each year based on assumptions established at the end of the previous calendar...

  • Page 368
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) consequently a higher risk tolerance level. Management periodically assesses our asset allocation to assure it is consistent with our plan objectives. Expected Benefit Payments The following table displays the ...

  • Page 369
    ... as outstanding until they are committed to be released for allocation to employee accounts. Cash contributions, if any, were held in a trust managed by the plan trustee and were invested in Fannie Mae common stock. The following table displays our ESOP activity for the years ended December 31, 2008...

  • Page 370
    ... single-family Fannie Mae MBS and on the single-family mortgage loans held in our portfolio. The primary source of profit for the Single-Family segment is the difference between the guaranty fees earned and the costs of providing this service, including creditrelated losses. Housing and Community...

  • Page 371
    ..., 2008, 2007 and 2006. For the Year Ended December 31, 2008 Capital Single-Family HCD Markets Total (Dollars in millions) Net interest income (expense)(1) ...Guaranty fee income (expense)(2) ...Trust management income ...Investment losses, net ...Fair value losses, net ...Debt extinguishment losses...

  • Page 372
    ... the credit risk on mortgage loans held in our portfolio. For the Year Ended December 31, 2007 Capital Single-Family HCD Markets Total (Dollars in millions) Net interest income (expense)(1) ...Guaranty fee income (expense)(2) ...Losses on certain guaranty contracts . Trust management income...

  • Page 373
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) For the Year Ended December 31, 2006 Capital Single-Family HCD Markets Total (Dollars in millions) Net interest income (expense)(1) ...Guaranty fee income (expense)(2) ...Losses on certain guaranty contracts . Trust management income...

  • Page 374
    ... total number of shares of common stock outstanding on a fully diluted basis on the date of exercise for a nominal price, which would substantially dilute the ownership in Fannie Mae of our common stockholders at the time of exercise. Refer to the "Issuance of Senior Preferred Stock and Common Stock...

  • Page 375
    ... 3-Month LIBOR plus 4.23%. As of December 31, 2007, the annual dividend rate was 8.25%. Represents initial call date. Redeemable every two years thereafter. Represents initial call date. Redeemable every five years thereafter. On November 21, 2007, we issued 20 million shares of preferred stock in...

  • Page 376
    ... by the Board of Directors. If dividends on the preferred stock are not paid or set aside for payment for a given dividend period, dividends may not be paid on our common stock for that period. For the years ended December 31, 2008, 2007 and 2006, dividends declared on preferred stock (not including...

  • Page 377
    ... Board of Directors, out of legally available funds, cumulative quarterly cash dividends at an annual rate of 10% per year based on the then-current liquidation preference of the senior preferred stock. FHFA also has authority to declare dividends on the senior preferred stock. The initial dividend...

  • Page 378
    ... a positive net worth. The senior preferred stock purchase agreement provides that, on a quarterly basis, we generally may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected on our consolidated balance sheet for the applicable fiscal quarter...

  • Page 379
    ... for fair market value: (a) to a limited life regulated entity (in the context of receivership); (b) of assets and properties in the ordinary course of business, consistent with past practice; (c) in connection with a liquidation of Fannie Mae by a receiver; (d) of cash or cash equivalents for cash...

  • Page 380
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) officers (as defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury. Termination Provisions The senior preferred stock purchase agreement provides ...

  • Page 381
    ... to the Regulatory Reform Act, if our total assets are less than our total obligations (net worth deficit) for a period of 60 days, FHFA will be mandated by law to appoint a receiver for Fannie Mae. Treasury's funding commitment under the senior preferred stock purchase agreement is intended to...

  • Page 382
    ... of outstanding Fannie Mae MBS held by third parties; and (iii) up to 0.25% of other off-balance sheet obligations, which may be adjusted by the Director of OFHEO under certain circumstances. OFHEO's risk-based capital requirement ties our capital requirements to the risk in our mortgage credit book...

  • Page 383
    ... conventional mortgage credit book of business as of December 31, 2008. Except for California, where 16% and 15% of the gross unpaid principal balance of our conventional single-family mortgage loans held or securitized in Fannie Mae MBS as of December 31, 2008 and 2007, respectively, were located...

  • Page 384
    ...our total conventional single-family mortgage credit book of business as of December 31, 2008 and 2007, respectively. Excludes non-Fannie Mae mortgage-related securities backed by single-family mortgage loans and credit enhancements that we provide on single-family mortgage assets. Includes mortgage...

  • Page 385
    ... of our conventional single-family mortgage credit book of business that consists of interest-only loans, negative-amortizing adjustable rate mortgages ("ARMs") and loans with an estimated mark-to-market loan to value ("LTV") ratio of greater than 80% as of December 31, 2008 and 2007. Percentage of...

  • Page 386
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) significant presence in the derivatives market, most of which are based in the United States. For the year ended December 31, 2008, we recognized a loss of $104 million in our consolidated statement of operations ...

  • Page 387
    ... effect on our earnings, liquidity, financial condition and net worth. Mortgage Insurers. We had primary and pool mortgage insurance coverage on single-family mortgage loans in our guaranty book of business of $109.0 billion and $9.7 billion, respectively, as of December 31, 2008, compared with $93...

  • Page 388
    ... sheets. The fair value of these commitments are included as "Mortgage loans held for investment, net of allowance for loan losses." The disclosure excludes certain financial instruments, such as plan obligations for pension and other postretirement benefits, employee stock option and stock purchase...

  • Page 389
    ... Value Fair Value Value(1) (Dollars in millions) Financial assets: Cash and cash equivalents(2) ...Federal funds sold and securities purchased under agreements to resell ...Trading securities ...Available-for-sale securities ...Mortgage loans held for sale ...Mortgage loans held for investment, net...

  • Page 390
    ... market value of our Fannie Mae MBS as a base value, from which we subtract or add the fair value of the associated guaranty asset, guaranty obligation and master servicing arrangements. Mortgage Loans Held for Investment-Held for investment ("HFI") loans are recorded in our consolidated balance...

  • Page 391
    ...NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Short-Term Debt and Long-Term Debt-We value the majority of our short-term and long-term debt using pricing services. Where third-party pricing is not available on non-callable debt, we use a discounted cash flow approach based on the Fannie Mae...

  • Page 392
    ...and buy-ups, master servicing assets and liabilities, mortgage loans, mortgage and non-mortgage-related securities, long-term debt, derivatives, and acquired property. Recurring Change in Fair Value The following table displays our assets and liabilities measured on our consolidated balance sheet at...

  • Page 393
    ...2008 for assets and liabilities transferred into level 3 and measured in our consolidated balance sheet at fair value on a recurring basis. Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Year Ended December 31, 2008 Trading Available-for-Sale Net Long-term Securities...

  • Page 394
    ... measured in our consolidated balance sheet at fair value on a recurring basis. Interest Income Investment in Securities For the Year Ended December 31, 2008 Fair Guaranty Value Fee Investment Losses, Extraordinary Income Losses, Net Net Losses (Dollars in millions) Total Total realized and...

  • Page 395
    ...-We value our master servicing assets and liabilities based on the present value of expected cash flows of the underlying mortgage assets using management's best estimates of certain key assumptions, which include prepayment speeds, forward yield curves, adequate compensation, and discount rates...

  • Page 396
    ... trade in a market with limited observable transactions. We determine fair value based on internal models designed to estimate the present value of expected future tax benefits (tax credits and tax deductions for net operating losses) of the underlying operating properties using management...

  • Page 397
    ... to "Trading securities" in our consolidated balance sheet and are now recorded at fair value with subsequent changes in fair value recorded in "Fair value losses, net" in our consolidated statements of operations. Mortgage-related securities We elected the fair value option for certain 15-year and...

  • Page 398
    ..."Fair value losses, net" in our consolidated statement of operations for the year ended December 31, 2008, for which the fair value election was made. For the Year Ended December 31, 2008 Short-Term Long-Term Total Gains Debt Debt (Losses) (Dollars in millions) Changes in instrument-specific credit...

  • Page 399
    ... to 2008, we advanced fees and expenses of certain current and former officers and directors in connection with various legal proceedings pursuant to indemnification agreements. None of these amounts was material. Securities Class Action Lawsuits In re Fannie Mae Securities Litigation Beginning...

  • Page 400
    ...2008, a series of shareholder lawsuits were filed under the Securities Act against underwriters of issuances of certain Fannie Mae common and preferred stock. Two of these lawsuits were also filed against us and one of those two was also filed against certain former Fannie Mae officers and directors...

  • Page 401
    ... District of New York. Securities Class Action Lawsuits Pursuant to the Securities Exchange Act of 1934 On September 8, 2008, the first of several shareholder lawsuits was filed under the Exchange Act against certain current and former Fannie Mae officers and directors, underwriters of issuances of...

  • Page 402
    ..., 2008, Fogel Capital Management, Inc. filed a securities class action complaint in the U.S. District Court for the Southern District of New York against Fannie Mae and certain current and former officers and directors. The complaint's factual allegations and claims for relief are based on purchases...

  • Page 403
    ... a securities class action complaint in the U.S. District Court for the Southern District of New York against certain current and former officers and directors. Fannie Mae was not named as a defendant. The complaint was filed on behalf of purchasers of Fannie Mae's Series S Preferred Stock, from...

  • Page 404
    ...Consolidated Retirement System as lead plaintiff on behalf of purchasers of preferred stock, and appointing the Massachusetts Pension Reserves Investment Management Board and the Boston Retirement Board as lead plaintiffs on behalf of common stockholders. Shareholder Derivative Lawsuits In re Fannie...

  • Page 405
    ... the company; corporate governance changes; equitable relief in the form of attaching, impounding or imposing a constructive trust on the individual defendants' assets; restitution; and attorneys' fees and costs. On October 17, 2008, FHFA, as conservator for Fannie Mae, intervened in this action and...

  • Page 406
    ... class action complaints were filed by other plaintiffs on May 5, 2005 and May 10, 2005. These cases are based on the Employee Retirement Income Security Act of 1974 ("ERISA") and name us, our Board of Directors' Compensation Committee and certain of our former and current officers and directors...

  • Page 407
    ... 23, 2008, Mary P. Moore filed a proposed class action complaint in the U.S. District Court for the District of Columbia against our Board of Directors' Compensation Committee, our Benefits Plans Committee, and certain current and former Fannie Mae officers and directors. This case is based on ERISA...

  • Page 408
    ...multifamily borrowers whose mortgages are insured under Sections 221(d)(3), 236 and other sections of the National Housing Act and are held or serviced by us. The complaint identified as a proposed class low- and moderate-income apartment building developers who maintained uninvested escrow accounts...

  • Page 409
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) these escrow funds and are therefore liable for any economic benefit we received from the use of these funds. The plaintiffs seek a return of any profits, with accrued interest, earned by us related to the escrow ...

  • Page 410
    ...none of which are capital leases. Some of these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and other costs. Rental expenses for operating leases were $50 million, $55 million and $42 million for the years ended December 31, 2008, 2007 and 2006...

  • Page 411
    ...: Short-term debt ...Long-term debt ...Total interest expense ...Net interest income ...Guaranty fee income ...Trust management income ...Investment losses, net ...Fair value gains (losses), net ...Debt extinguishment gains (losses), net Losses from partnership investments . . Fee and other income...

  • Page 412
    ... ...Mortgage loans ...Other ...Total interest income ...Interest expense: Short-term debt ...Long-term debt ...Total interest expense ...Net interest income ...Guaranty fee income ...Losses on certain guaranty contracts ...Trust management income ...Investment gains (losses), net ...Fair value gains...

  • Page 413
    ..., the response rates we will experience, or the costs that we will incur. However, to the extent that our servicers and borrowers participate in these programs in large numbers, it is likely that the costs we incur associated with the modifications of loans in our guaranty book of business, as well...

  • Page 414
    ... M. Allison, Jr., certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2008 of Fannie Mae (formally, the Federal National Mortgage Association); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state...

  • Page 415
    ...David M. Johnson, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2008 of Fannie Mae (formally, the Federal National Mortgage Association); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state...

  • Page 416
    ...Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage Association) for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Herbert M. Allison, Jr., President and Chief Executive Officer of Fannie Mae...

  • Page 417
    ... the Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage Association) for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David M. Johnson, Executive Vice President and Chief Financial Officer...

  • Page 418
    LE050