Fannie Mae 2009 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, 2009
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 ¥No n
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ¥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. n
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, 2009
(the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $645 million.
As of January 31, 2010, there were 1,116,805,764 shares of common stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None

Table of contents

  • Page 1
    ... 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...

  • Page 2
    ... of Equity Securities ...Selected Financial Data ...Management's Discussion and Analysis of Financial Condition and Results of Operations ...Critical Accounting Policies and Estimates ...Consolidated Results of Operations ... Business Segment Results...105 Consolidated Balance Sheet Analysis ...110...

  • Page 3
    ... and Corporate Governance ...195 Directors ...195 Corporate Governance ...198 Executive Officers ...202 Item 11. Executive Compensation...204 Compensation Discussion and Analysis ...204 Compensation Committee Report ...219 Item 12. Item 13. Item 14. Compensation Tables ...220 Security Ownership of...

  • Page 4
    ... MBS Trusts ...Credit Loss Performance Metrics ...Credit Loss Concentration Analysis ...Single-Family Credit Loss Sensitivity ...Impairments and Fair Value Losses on Loans in HAMP ...Business Segment Summary ...Single-Family Business Results ...HCD Business Results ...Capital Markets Group Results...

  • Page 5
    ......Multifamily Foreclosed Properties ...Mortgage Insurance Coverage...Activity and Maturity Data for Risk Management Derivatives ...Fair Value Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve ...Duration Gap ...Interest Rate Sensitivity of Financial Instruments...

  • Page 6
    ... "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")-Glossary of Terms Used in This Report." Item 1. Business OVERVIEW Fannie Mae is a government-sponsored enterprise that was chartered by Congress in 1938 to support liquidity, stability and affordability...

  • Page 7
    ... housing market by providing assistance to homeowners and preventing foreclosures; and (3) the first-time and move-up homebuyer tax credits, enacted to help increase home sales and stabilize home prices. Total U.S. residential mortgage debt outstanding, which includes $10.9 trillion of single-family...

  • Page 8
    ... Mortgage Market Analysis Group. Certain previously reported data may have been changed to reflect revised historical data from any or all of these organizations. Calculated internally using property data information on loans purchased by Fannie Mae, Freddie Mac and other third-party home sales data...

  • Page 9
    ...foreclosures, declining house prices, increasing loan-to-value ratios, increased cash sales, reduced household formation, and reduced home equity extraction. Total U.S. residential mortgage debt outstanding fell by approximately 3.1% in the third quarter of 2009 on an annualized basis, compared with...

  • Page 10
    ...our actual results to differ, perhaps materially, from our forward-looking statements. Please also see "MD&A-Glossary of Terms Used in This Report." Our Mission Our public mission is to support liquidity and stability in the secondary mortgage market and increase the supply of affordable housing. In...

  • Page 11
    ...senior preferred stock purchase agreement, reflects the "Total deficit" reported in our consolidated balance sheets prepared in accordance with GAAP as of the end of each period. We generally may request funds under Treasury's commitment on a quarterly basis in order to maintain a positive net worth...

  • Page 12
    ... Federal Reserve's program to purchase mortgage-backed securities of Fannie Mae, Freddie Mac and Ginnie Mae and debt securities of Fannie Mae, Freddie Mac and the Federal Home Loan Banks had a positive impact on the fair value of our net assets. The significant purchasing of agency MBS and debt by...

  • Page 13
    ... discussed below, to minimize credit losses on loans already in our book, during 2008 and early 2009 we made changes in our pricing and eligibility standards that helped to improve the risk profile of our new single-family business in 2009 and support sustainable homeownership. In 2009, we purchased...

  • Page 14
    ... levels of mortgage insurance and higher LTV ratios than what would have been allowed under our traditional standards. • We strengthened our credit loss management operations by adding 214 new full-time employees and a substantial number of contractors, and by hiring an Executive Vice President...

  • Page 15
    Table 1: Credit Statistics, Single-Family Guaranty Book of Business(1) 2009 Full Year Q4 Q3 Q2 (Dollars in millions) Q1 2008 Full Year As of the end of each period: Serious delinquency rate(2) ...Nonperforming loans(3) ...Foreclosed property inventory (number of properties) ...Combined loss ...

  • Page 16
    ... delinquent status and an improvement in our loss severities due to stabilizing home prices as well as an increase in the number of loans acquired from our MBS trusts in order to complete workouts for the loans. To the extent that the acquisition cost of these loans exceeded the estimated fair value...

  • Page 17
    ... preforeclosure sales and deeds-in-lieu of foreclosure. Our initiatives to increase the number of borrowers eligible to refinance their mortgages help borrowers obtain a monthly payment that is more affordable now and into the future or a more stable loan product, such as a fixed-rate mortgage loan...

  • Page 18
    ... single-family loans and approximately 372,000 multifamily units. The $823.6 billion in new single-family and multifamily business in 2009 consisted of $496.0 billion in Fannie Mae MBS acquired by third parties, and $327.6 billion in mortgage loans and mortgage-related securities that we purchased...

  • Page 19
    ... Reserve's program to purchase agency MBS and debt, as of the date of this filing, demand for our long-term debt securities continues to be strong. See "MD&A-Liquidity and Capital Management-Liquidity Management" for more information on our debt funding activities and "Risk Factors" for a discussion...

  • Page 20
    ... homebuyer tax credit, combined with historically low mortgage rates, should support a strong sales pace through the first half of 2010 before slowing somewhat in the second half. We also expect home sales to start a longer term growth path by the end of 2010, if the labor market shows improvement...

  • Page 21
    ... a discussion of legislation being considered that could affect our business, including a list of possible reform options for the GSEs. MORTGAGE SECURITIZATIONS We support market liquidity by securitizing mortgage loans, which means we place loans in a trust and Fannie Mae MBS backed by the mortgage...

  • Page 22
    ...issuing Fannie Mae MBS using mortgage loans and mortgage-related securities that we hold in our mortgage portfolio. We currently securitize a majority of the single-family mortgage loans we purchase. MBS Trusts We serve as trustee for our MBS trusts, each of which is established for the sole purpose...

  • Page 23
    ... underlying mortgage assets are allocated to the remaining classes in accordance with the terms of the securities' structures. As a result, each of the classes in a multi-class MBS may have a different coupon rate, average life, repayment sensitivity or final maturity. Structured Fannie Mae MBS are...

  • Page 24
    ... Fannie Mae MBS, which we refer to as "lender swap" transactions • Mortgage acquisitions: Works with our Capital Markets group to facilitate the purchase of single-family mortgage loans for our mortgage portfolio • Credit risk management: Prices and manages the credit risk on loans in our single...

  • Page 25
    ... MBS • Mortgage acquisitions: Works with our Capital Markets group to facilitate the purchase of multifamily mortgage loans for our mortgage portfolio • Affordable housing investments: Provides funding for investments in affordable multifamily rental and for-sale housing projects • Credit risk...

  • Page 26
    ... and key metrics used in measuring and evaluating our single-family credit risk in "MD&A-Risk Management-Credit Risk Management." Mortgage Securitizations and Acquisitions Our Single-Family business securitizes single-family mortgage loans and issues single-class Fannie Mae MBS, which are described...

  • Page 27
    ...repurchase claims. Housing and Community Development Business Our HCD business works with our lender customers to provide funds to the mortgage market by securitizing multifamily mortgage loans into Fannie Mae MBS. Our HCD business also works with our Capital Markets group to facilitate the purchase...

  • Page 28
    ... Mortgage Credit Risk Management." Mortgage Securitizations and Acquisitions Our HCD business generally creates multifamily Fannie Mae MBS and acquires multifamily mortgage assets in the same manner as our Single-Family business, as described above in "Single-Family Credit Guaranty Business-Mortgage...

  • Page 29
    ... rate risk associated with our investments in mortgage assets. The business model for our Capital Markets group continues to evolve. Our business activity is increasingly focused on making short-term use of our balance sheet rather than on long-term buy and hold strategies. As a result, our Capital...

  • Page 30
    ... see "Mortgage Securitizations-Single-Class and Multi-Class Fannie Mae MBS." Other Customer Services Our Capital Markets group provides our lender customers and their affiliates with services that include offering to purchase a wide variety of mortgage assets, including non-standard mortgage loan...

  • Page 31
    ...its assets, and succeeded to the title to the books, records and assets of any other legal custodian of Fannie Mae. The conservator has since delegated specified authorities to our Board of Directors, which are described in "Directors, Executive Officers and Corporate Governance-Corporate Governance...

  • Page 32
    ... or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator. In addition, the conservator directed the Board to consult with and obtain the approval of the conservator before taking action in specified areas, as described in "Directors, Executive...

  • Page 33
    ... stock purchase agreement provides that the deficiency amount will be calculated differently if we become subject to receivership or other liquidation process. We discuss our net worth deficits and FHFA's requests on our behalf for funds from Treasury in "Executive Summary-Summary of our Financial...

  • Page 34
    ... year at a time, in its sole discretion, based on adverse conditions in the U.S. mortgage market. We may elect to pay the quarterly commitment fee in cash or add the amount of the fee to the liquidation preference of the senior preferred stock. The senior preferred stock purchase agreement provides...

  • Page 35
    ... "MD&A-Consolidated Results of Operations-Losses from Partnership Investments" for information on the resulting other-than-temporary impairment losses we recognized during the fourth quarter of 2009. We also are subject to limits, which are described below, on the amount of mortgage assets that we...

  • Page 36
    ... mortgages out of Fannie Mae MBS trusts. See "MD&A-Consolidated Balance Sheet Analysis-Mortgage Investments" for information on our plans to purchase delinquent loans from single-family Fannie Mae MBS trusts. • Debt Limit. We are subject to a limit on the amount of our indebtedness. Our debt limit...

  • Page 37
    ... to develop loan products and flexible underwriting guidelines to facilitate a secondary market for "energy-efficient" and "location-efficient" mortgages. The legislation would also allow Fannie Mae and Freddie Mac additional credit toward their housing goals for purchases of energy-efficient and 32

  • Page 38
    ...the terms of mortgages on principal residences for borrowers in Chapter 13 bankruptcy. Specifically, the House bill would allow bankruptcy judges to adjust interest rates, extend repayment terms and lower the outstanding principal amount to the current estimated fair value of the underlying property...

  • Page 39
    ...securitize mortgage loans secured by either a single-family or multifamily property. Single-family conventional mortgage loans are subject to maximum original principal balance limits, known as "conforming loan limits." The conforming loan limits are established each year based on the average prices...

  • Page 40
    ... Limitations and Requirements. We may not originate mortgage loans or advance funds to a mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale of the mortgages in the secondary market. In addition, we may only purchase or securitize mortgages on properties located...

  • Page 41
    ... have not been paying our debts as they become due for 60 days. Affordable Housing Allocations. We are required to make annual allocations to fund government affordable housing programs, based on the dollar amount of our total new business purchases, at the rate of 4.2 basis points per dollar. FHFA...

  • Page 42
    ... for Fannie Mae and Freddie Mac, to ensure that we operate in a safe and sound manner. Existing risk-based capital regulation ties our capital requirements to the risk in our book of business, as measured by a stress test model. The stress test simulates our financial performance over a ten-year...

  • Page 43
    ... of single-family, owner-occupied properties located in metropolitan areas. Since 1995, we have also been required to meet a subgoal for multifamily special affordable housing that is expressed as a dollar amount. The 2008 Reform Act changed the structure of the housing goals and created a new duty...

  • Page 44
    ... loan modifications that we make in accordance with the Making Home Affordable Program to be treated as mortgage purchases and count towards the housing goals. Purchases of loans on single-family properties with a maximum original principal balance higher than the nationwide conforming loan limit...

  • Page 45
    ..., such as a fixed-rate mortgage loan in lieu of an adjustable-rate mortgage loan. In March 2009, we announced our participation in the Making Home Affordable Program and released guidelines for Fannie Mae sellers and servicers in offering HARP and HAMP for Fannie Mae borrowers. We also serve as...

  • Page 46
    ... Fannie Mae loans. This program replaced the streamlined refinance options we previously offered. Home Affordable Modification Program HAMP is aimed at helping borrowers whose loan either is currently delinquent or is at imminent risk of default by modifying their mortgage loan to make their monthly...

  • Page 47
    ... Preparing the requisite forms, tools and training to facilitate efficient loan modifications by servicers; • Creating, making available and managing the process for servicers to report modification activity and program performance; • Acting as paying agent to calculate and remit subsidies and...

  • Page 48
    ... that operate within the primary mortgage market where mortgage loans are originated and funds are loaned to borrowers. Our customers include mortgage banking companies, savings and loan associations, savings banks, commercial banks, credit unions, community banks, insurance companies, and state and...

  • Page 49
    ... of new single-family mortgage-related securities issuances was 46.3% in 2009 and 45.4% in 2008, compared with 33.9% in 2007. Our estimated market share in 2009 of 46.3% includes $94.6 billion of whole loans held for investment in our mortgage portfolio that were securitized into Fannie Mae MBS in...

  • Page 50
    ... are completed and permanent modification offers are extended; • Our expectation that the actions we take to stabilize the housing market and minimize our credit losses will continue to have, at least in the short term, a material adverse effect on our business, results of operations, financial...

  • Page 51
    ... a source of liquidity in the event our access to the unsecured debt market becomes impaired, by using these assets as collateral for secured borrowing; • Our expectations regarding the impact of the new consolidation accounting standards on our accounting, financial statements, financial results...

  • Page 52
    ... our book of business for a relatively long time, due to the historically low interest rates throughout 2009; • Our expectation that we will significantly increase our purchases of delinquent loans from single-family MBS trusts; • Our expectations regarding our new executive compensation program...

  • Page 53
    ... or results to differ materially from those described in the forward-looking statements contained in this report, including, but not limited to, the following: our ability to maintain a positive net worth; adverse effects from activities we undertake to support the mortgage market and help borrowers...

  • Page 54
    ... senior preferred stock purchase agreements with Fannie Mae and Freddie Mac, Treasury announced that it expected to provide a preliminary report about longer term reform of the federal government's role in the housing market around the time President Obama released his fiscal 2011 budget. Treasury...

  • Page 55
    ...guaranteed Fannie Mae MBS. When borrowers fail to make required payments of principal and interest on their mortgage loans, we are exposed to the risk of credit losses and credit-related expenses. Conditions in the housing and financial markets worsened dramatically during 2008 and remained stressed...

  • Page 56
    ... subprime mortgage loans. We also have incurred significant losses relating to the non-mortgage investment securities in our cash and other investments portfolio, primarily as a result of a substantial decline in the market value of these assets due to the financial market crisis. The fair value of...

  • Page 57
    ...of delinquent loans we purchase from singlefamily MBS trusts. Please see "Business-Mortgage Securitizations-Purchases of Loans from our MBS Trusts" for more information about these planned purchases. We discuss the powers of the conservator, the terms of the senior preferred stock purchase agreement...

  • Page 58
    ...we discuss in "MD&A-Consolidated Results of Operations-Financial Impact of the Making Home Affordable Program on Fannie Mae." During 2009, we were subject to housing goals that required that a specified portion of our mortgage purchases relate to the purchase or securitization of mortgage loans that...

  • Page 59
    ...for longer-term reform of Fannie Mae and Freddie Mac as appropriate. Please see "MD&A-Liquidity and Capital Management-Liquidity Management-Debt Funding-Debt Funding Activity" for a more complete discussion of actions taken by the federal government to support us and the financial markets. There can...

  • Page 60
    ... our Fannie Mae MBS; third-party providers of credit enhancement on the mortgage assets that we hold in our mortgage portfolio or that back our Fannie Mae MBS, including mortgage insurers, lenders with risk sharing arrangements, and financial guarantors; issuers of securities held in our cash and...

  • Page 61
    ... single-family mortgage loans with loan-to-value ratios over 80% at the time of purchase, an inability to find suitable credit enhancement may inhibit our ability to pursue new business opportunities, meet our housing goals and otherwise support the housing and mortgage markets. For example...

  • Page 62
    ... a timely manner. Effective January 1, 2010, we adopted new accounting standards for transfers of financial assets and consolidation, which will result in our recording on our consolidated balance sheet substantially all of the loans held in our MBS trusts. Implementation of these standards required...

  • Page 63
    ... failed execution of internal processes or systems. For example, in July and August 2009, we publicly identified errors in certain information reported about our MBS trusts and published corrected data relating to these errors. We are implementing our operational risk management framework to support...

  • Page 64
    ...our Single Family business, two Executive Vice Presidents leading our Capital Markets group, and two Chief Technology Officers, as well as significant departures by various other members of senior management. Our Chief Risk Officer, General Counsel and Chief Technology Officer were new to Fannie Mae...

  • Page 65
    ... debt and invest our funds primarily in mortgagerelated assets that permit the mortgage borrowers to prepay the mortgages at any time. These business activities expose us to market risk, which is the risk of adverse changes in the fair value of financial instruments resulting from changes in market...

  • Page 66
    ... conditions in the U.S. housing market over the past approximately two years has therefore had a significant adverse effect on our results of operations, financial condition and net worth, which is likely to continue. We could be required to pay substantial judgments, settlements or other penalties...

  • Page 67
    ... in the housing market and declines in home prices, and we expect single-family mortgage debt outstanding to decrease by 1.7% in 2010. A decline in the rate of growth in mortgage debt outstanding reduces the unpaid principal balance of mortgage loans available for us to purchase or securitize, which...

  • Page 68
    ... on our ability to conduct business, which could lead to financial losses. Substantially all of our senior management and investment personnel work out of our offices in the Washington, DC metropolitan area. If a disruption occurs and our senior management or other employees are unable to occupy our...

  • Page 69
    ... results of operations, liquidity and financial condition, including our net worth. Shareholder Derivative Litigation Four shareholder derivative cases, filed at various times between June 2007 and June 2008, naming certain of our current and former directors and officers as defendants, and Fannie...

  • Page 70
    ... documents and information from the Financial Crisis Inquiry Commission in connection with its statutory mandate to examine the causes, domestic and global, of the current financial crisis in the United States. We are cooperating with this inquiry. Item 4. Submission of Matters to a Vote of Security...

  • Page 71
    ... Island 02940. Common Stock Data The following table shows, for the periods indicated, the high and low sales prices per share of our common stock in the consolidated transaction reporting system as reported in the Bloomberg Financial Markets service, as well as the dividends per share declared in...

  • Page 72
    ... number of shares of our common stock outstanding on a fully diluted basis on the date of exercise. Recent Sales of Unregistered Securities We previously provided stock compensation to employees and members of the Board of Directors under the Fannie Mae Stock Compensation Plan of 1993 and the Fannie...

  • Page 73
    ... site address solely for your information. Information appearing on our Web site is not incorporated into this annual report on Form 10-K. Purchases of Equity Securities by the Issuer The following table shows shares of our common stock we repurchased during the fourth quarter of 2009. Total Number...

  • Page 74
    ... MD&A included in this annual report on Form 10-K. 2009 For the Year Ended December 31, 2008 2007 2006 2005 (Dollars in millions, except per share amounts) Statement of operations data:(1) Net interest income ...Guaranty fee income ...Losses on certain guaranty contracts ...Net other-than-temporary...

  • Page 75
    ...data:(1) Investments in securities: Fannie Mae MBS ...Other agency MBS ...Mortgage revenue bonds...Other mortgage-related securities...Non-mortgage-related securities ...Mortgage loans:(9) Loans held for sale ...Loans held for investment, net of allowance Total assets ...Short-term debt ...Long-term...

  • Page 76
    ... in the reported amount. (13) Primarily includes long-term standby commitments we have issued and single-family and multifamily credit enhancements we have provided and that are not otherwise reflected in the table. (14) Reflects mortgage credit book of business less non-Fannie Mae mortgage-related...

  • Page 77
    ... our actual results to differ, perhaps materially, from our forward-looking statements. Please also see "MD&A-Glossary of Terms Used in This Report." CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with GAAP requires management to make a number of...

  • Page 78
    ..., relevant market information, we estimate their fair values based on single source quotations from brokers or dealers or by using internal calculations or discounted cash flow techniques that incorporate inputs, such as prepayment rates, discount rates and delinquency, default and cumulative loss...

  • Page 79
    ... LIHTC investments using internal models that estimate the present value of the expected future tax benefits (tax credits and tax deductions for net operating losses) expected to be generated from the properties underlying these investments. Our estimates are based on assumptions that other market...

  • Page 80
    ... as liquidity, bid-ask spreads and credit considerations. These adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. All of these processes are executed before we use the prices in preparing our financial statements. We...

  • Page 81
    ...a market participant would require to assume our existing obligations. Fair Value of Loans Purchased with Evidence of Credit Deterioration We have the option to purchase delinquent loans underlying our Fannie Mae MBS under specified conditions, which we describe in "Business-Mortgage Securitizations...

  • Page 82
    .... If the loan is returned to accrual status, we recover the acquired credit-impaired loan fair value loss over the contractual life of the loan as a component of net interest income (via an adjustment of the effective yield of the loan). If we foreclose upon a loan purchased from an MBS trust, we...

  • Page 83
    ...," which means it returns to accrual status, pays off or is resolved through a modification, long-term forbearance or a repayment plan, the credit-impaired loan's fair value loss would be recovered over the life of the loan as a component of net interest income through an adjustment of the effective...

  • Page 84
    ...process. These prices, which reflect the significant decline in the value of mortgage assets due to the deterioration in the housing and credit markets, have resulted in a substantial increase in the credit-impaired loans fair value loss we record when we purchase a delinquent loan from an MBS trust...

  • Page 85
    ...The reserve for guaranty losses is a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payment...

  • Page 86
    ... multifamily property. The collective multifamily loss reserve for all other multifamily loans in our multifamily guaranty book of business is established using an internal model that applies loss factors to loans with similar risk ratings. Our loss factors are developed based on our historical data...

  • Page 87
    ... rates and more current financial information from borrowers. Combined Loss Reserves Our combined loss reserves increased by $40.1 billion during 2009 to $64.9 billion as of December 31, 2009, reflecting further deterioration in both our single-family and multifamily guaranty book of business...

  • Page 88
    ... consolidated results of operations. Table 3: Summary of Consolidated Results of Operations For the Year Ended December 31, Variance 2009 2008 2007 2009 vs. 2008 2008 vs. 2007 (Dollars in millions, except per share amounts) Net interest income ...Guaranty fee income ...Trust management income . Fee...

  • Page 89
    ...,845 Impact of net non-interest bearing funding ...$ 29,423 Net interest income/net interest yield ...$14,510 Selected benchmark interest rates at end of period:(3) 3-month LIBOR ...2-year swap interest rate...5-year swap interest rate...30-year Fannie Mae MBS par coupon rate ...(1) 5.05% 4.96 0.46...

  • Page 90
    ...: Short-term debt ...Long-term debt ...Federal funds purchased and securities sold under agreements to repurchase ...Total interest expense ... (1,186) (4,660) 2 (5,844) $ 4,201 Net interest income ...$ 5,728 (1) (2) Combined rate/volume variances are allocated to both rate and volume based on...

  • Page 91
    ... recognize guaranty fee income. We recognize upfront risk-based pricing adjustments and buy-down payments over the expected life of the underlying assets of the related MBS trusts as a component of guaranty fee income. We record buy-up payments as an asset and reduce the recorded asset as cash flows...

  • Page 92
    ...pricing as a component in estimating the fair value of our buy-ups and certain guaranty assets. The increase in our average outstanding Fannie Mae MBS and other guarantees for 2009 was driven by continued high market share of new singlefamily mortgage-related securities issuances and because new MBS...

  • Page 93
    ... payments to us by servicers and the date of distribution of these payments to MBS certificateholders. The decreases in trust management income in 2009 as compared with 2008 and in 2008 as compared with 2007 were attributable to significantly lower short-term interest rates. Fee and Other Income Fee...

  • Page 94
    ...indicated. Table 7: Fair Value Gains (Losses), Net For the Year Ended December 31, 2009 2008 2007 (Dollars in millions) Risk management derivatives fair value gains (losses) attributable to: Net contractual interest income (expense) accruals on interest rate swaps ...Net change in fair value during...

  • Page 95
    ... by gains on our net-pay fixed book due to higher swap rates. We recorded risk management derivative losses in 2008 and 2007 primarily attributable to the decline in swap interest rates, which resulted in substantial fair value losses on our pay-fixed swaps that exceeded our fair value gains on our...

  • Page 96
    ... and non-LIHTC investments formed for the purpose of providing equity funding for affordable multifamily rental properties. We generally receive tax benefits (tax credits and tax deductions for net operating losses) on our LIHTC investments that we have historically used to reduce our income tax...

  • Page 97
    ... Table 8. Table 8: Credit-Related Expenses For the Year Ended December 31, 2009 2008 2007 (Dollars in millions) Provision for credit losses attributable to guaranty book of business ...Provision for credit losses attributable to acquired credit-impaired loans and HomeSaver Advance fair value losses...

  • Page 98
    ... credit losses inherent in our guaranty book of business as of each balance sheet date. We establish our loss reserves through the provision for credit losses for losses that we believe have been incurred and will eventually be reflected over time in our charge-offs. When we determine that a loan...

  • Page 99
    ... book of business ...Charge-offs attributable to fair value losses on: Credit-impaired loans acquired from MBS trusts ...HomeSaver Advance loans...Total charge-offs ...Allocation of combined loss reserves: Balance at end of each period attributable to: Single-family ...Multifamily ...Total ...Single...

  • Page 100
    ... keep borrowers in their homes, and new laws enacted in a number of states that lengthen the time required to complete a foreclosure. • As shown in Table 43, our average loan loss severity, or average initial charge-off per default, increased primarily as a result of the decline in home prices and...

  • Page 101
    ...-Mortgage Credit Risk Management-Single-Family Mortgage Credit Risk Management-Problem Loan Management and Foreclosure Prevention." For additional discussions on our charge-offs, see "Credit Loss Performance Metrics." As discussed above, our nonperforming single-family loans increased substantially...

  • Page 102
    ...our loss mitigation efforts, as well as changes in interest rates and other market factors. See "Business-Mortgage Securitizations-Purchases of Loan from our MBS Trusts" for additional information on the provisions in our MBS trust agreements that govern the purchase of loans from our MBS trusts and...

  • Page 103
    ...(1) Calculated based on the estimated fair value at the date of acquisition of credit-impaired loans divided by the unpaid principal balance and accrued interest of these loans at the date of acquisition. The value of primary mortgage insurance is included as a component of the average market price...

  • Page 104
    ... Market Discount Losses (Dollars in millions) Net Investment Balance as of December 31, 2007 ...Purchases of delinquent loans ...Provision for credit losses ...Principal repayments ...Modifications and troubled debt restructurings Foreclosures, transferred to REO ...Balance as of December 31, 2008...

  • Page 105
    ... in the housing market with associated home price declines that have increased defaults and average loss severity. Table 14 provides an analysis of our credit losses in certain higher risk loan categories, loan vintages and loans within certain states that continue to account for a disproportionate...

  • Page 106
    ...decline in home prices. Table 15 compares the credit loss sensitivities for the periods indicated for first lien single-family whole loans we own or that back Fannie Mae MBS, before and after consideration of projected credit risk sharing proceeds, such as private mortgage insurance claims and other...

  • Page 107
    Table 15: Single-Family Credit Loss Sensitivity(1) As of December 31, 2009 2008 (Dollars in millions) Gross single-family credit loss sensitivity ...Less: Projected credit risk sharing proceeds ...Net single-family credit loss sensitivity ...Outstanding single-family whole loans and Fannie Mae MBS ...

  • Page 108
    ... modification period is purchased from the MBS trust to maintain compliance with the terms of the trust. These loans are considered credit-impaired at acquisition, and therefore we record a fair value loss for any excess of the loan's acquisition cost over its fair value. At that time, our reserve...

  • Page 109
    ... collective reserves are calculated. Effective January 1, 2010, we adopted new accounting standards for transfers of financial assets and consolidation, which resulted in our recording on our consolidated balance sheet substantially all of the loans held in our MBS trusts. Under the new accounting...

  • Page 110
    ...provide a discussion of these results. Table 17: Business Segment Summary For the Year Ended December 31, 2009 2008 2007 (Dollars in millions) Net revenues:(1) Single-Family ...Housing and Community Development ...Capital Markets ...Total ...Net income (loss): Single-Family ...Housing and Community...

  • Page 111
    .... • Our average single-family guaranty book of business increased by 5.5% in 2009 over 2008. We experienced an increase in our average outstanding Fannie Mae MBS and other guarantees as our market share of new single-family mortgage-related securities issuances remained high and new MBS issuances...

  • Page 112
    ... guaranty fee rate for 2008 also reflected the impact of guaranty fee pricing changes we implemented to address the current risks in the housing market and a shift in the composition of our new business to a greater proportion of higher-quality, lower risk and lower guaranty fee mortgages. The...

  • Page 113
    ... the financial results for our HCD business for the periods indicated. Table 19: HCD Business Results For the Year Ended December 31, Variance 2009 2008 2007 2009 vs. 2008 2008 vs. 2007 (Dollars in millions) Statement of operations data:(1) Guaranty fee income ...Other income(2) ...Losses on...

  • Page 114
    ... 20: Capital Markets Group Results For the Year Ended December 31, Variance 2009 2008 2007 2009 vs. 2008 2008 vs. 2007 (Dollars in millions) Statement of operations data:(1) Net interest income...Investment gains (losses), net ...Net other-than-temporary impairments Fair value losses, net...Fee and...

  • Page 115
    ... Markets group resulted in a provision for federal income taxes of $8.5 billion for 2008, compared with a tax benefit of $1.1 billion for 2007. CONSOLIDATED BALANCE SHEET ANALYSIS We seek to structure the composition of our balance sheet and manage its size to comply with our regulatory requirements...

  • Page 116
    .... The major asset components of our consolidated balance sheet include our mortgage investments and our cash and other investments portfolio. We fund and manage the interest rate risk on these investments through the issuance of debt securities and the use of derivatives. Our debt securities and...

  • Page 117
    ... ...Total multifamily ...Total mortgage loans ...Unamortized premiums and other cost basis adjustments, net ...Lower of cost or market adjustments on loans held for sale ...Allowance for loan losses for loans held for investment ...Total mortgage loans, net ...Mortgage-related securities: Fannie Mae...

  • Page 118
    ... months period subject to market, servicer capacity, and other constraints including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase agreement. As of December 31, 2009, the total unpaid principal balance of all loans in single-family MBS trusts that...

  • Page 119
    ... and transfers of financial assets will not affect these calculations. Mortgage-Related Securities Our mortgage investment securities are classified in our consolidated balance sheets as either trading or available for sale and reported at fair value. Gains and losses on trading securities are...

  • Page 120
    ...financial guarantees. Reflects the ratio of the current amount of the securities that will incur losses in the securitization structure before any losses are allocated to securities that we own. Percentage generally calculated based on the quotient of the total unpaid principal balance of all credit...

  • Page 121
    ...be required to sell prior to recovery of the amortized cost basis. Instead, we record this amount in AOCI. Table 25 displays the estimated noncredit and credit-related components of the fair value losses on our trading securities and our available-for-sale securities. Table 25: Analysis of Losses on...

  • Page 122
    ... Balance Available for Sale Wraps(1) Trading Average Loss Severity(3)(4) Average Credit Enhancement(5) Monoline Financial Guaranteed Amount(6) Õ† 60 Days Delinquent(2)(3) (Dollars in Millions) Private-label mortgage-related securities backed by:(7) Alt-A mortgage loans: Option ARM Alt-A mortgage...

  • Page 123
    ... (9) Debt Instruments We issue debt instruments as the primary means to fund our mortgage investments and manage interest rate risk exposure. Our total outstanding debt, which consists of federal funds purchased and securities sold under agreements to repurchase, short-term debt and long-term debt...

  • Page 124
    ... "Consolidated Results of Operations-Fair Value Gains (Losses), Net," "Risk Management-Market Risk Management, Including Interest Rate Risk Management" and "Note 10, Derivative Instruments and Hedging Activities." SUPPLEMENTAL NON-GAAP INFORMATION-FAIR VALUE BALANCE SHEETS As part of our disclosure...

  • Page 125
    ...reported in our consolidated balance sheets. Represents capital transactions, which are reflected in the consolidated statements of changes in equity. Represents estimated fair value of net assets (net of tax effect) presented in "Table 29: Supplemental NonGAAP Consolidated Fair Value Balance Sheets...

  • Page 126
    ...what the market has currently estimated and priced into these fair value measures. Moreover, the fair value balance sheet reflects only the value of the assets and liabilities of the enterprise as of a point in time (the balance sheet date) and does not reflect the value of new assets or liabilities...

  • Page 127
    ...to Supplemental Non-GAAP Financial Measures In reviewing our non-GAAP fair value balance sheets, there are a number of important factors and limitations to consider. The estimated fair value of our net assets is calculated as of a particular point in time based on our existing assets and liabilities...

  • Page 128
    ...Adjustment(1) Fair Value Value Adjustment(1) Fair Value (Dollars in millions) Assets: Cash and cash equivalents ...$ 9,882 Federal funds sold and securities purchased under agreements to resell ...53,684 Trading securities ...111,939 Available-for-sale securities ...237,728 Mortgage loans: Mortgage...

  • Page 129
    ...is managed by our guaranty businesses, and the interest rate risk, which is managed by our Capital Markets group. We report the estimated fair value of the credit risk components separately in our supplemental non-GAAP consolidated fair value balance sheets as "Guaranty assets of mortgage loans held...

  • Page 130
    ... to long-term debt funding has been primarily due to actions taken by the federal government to support us and the financial markets. Liquidity Management Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. Liquidity management involves forecasting...

  • Page 131
    ...international investors. Purchasers of our debt securities include fund managers, commercial banks, pension funds, insurance companies, foreign central banks, corporations, state and local governments, and other municipal authorities. Since 2009, the Federal Reserve has been supporting the liquidity...

  • Page 132
    ... activity resulting from consolidations and intraday loans. Short-term debt consists of borrowings with an original contractual maturity of one year or less. Includes federal funds purchased and securities sold under agreements to repurchase. Includes debt issued and repaid to Fannie Mae MBS trusts...

  • Page 133
    ...liquidity of the financial markets overall, including several asset purchase programs and several asset financing programs. The Treasury credit facility that we entered into in September 2008 terminated on December 31, 2009 in accordance with its terms. Fannie Mae did not request any funds or borrow...

  • Page 134
    ...debt basis adjustments and debt recorded from consolidations. Because of our debt limit, we may be restricted in the amount of debt we issue to fund our operations. Table 31: Outstanding Short-Term Borrowings and Long-Term Debt(1) December 31, 2009 December 31, 2008 Weighted Weighted Average Average...

  • Page 135
    ...Year Weighted Average Interest (2) Rate Outstanding (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 . Other fixed-rate short-term debt . Floating...

  • Page 136
    ...other cost basis adjustments. Average amount outstanding during the year has been calculated using month-end balances. Maximum outstanding represents the highest month-end outstanding balance during the year. Includes a portion of structured debt instruments that is reported at fair value. Maturity...

  • Page 137
    ... unamortized net discount and other cost basis adjustments of $15.6 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 mortgage loans and mortgage-related securities...

  • Page 138
    ... multifamily borrowers. Excludes risk management derivative transactions that may require cash settlement in future periods and our obligations to stand ready to perform under our guarantees relating to Fannie Mae MBS and other financial guarantees, because the amount and timing of payments under...

  • Page 139
    ... of long-term or short-term unsecured debt securities; • routine operational testing of our ability to rely upon identified sources of liquidity, such as mortgage repurchase agreements; and • periodic review and testing of our liquidity management controls by our internal audit department...

  • Page 140
    ... unencumbered mortgage assets in our mortgage portfolio, which could be used as collateral for secured borrowing. During 2009, we made enhancements to our systems to facilitate the securitization of a significant portion of the single-family whole loans in our mortgage portfolio into Fannie Mae MBS...

  • Page 141
    ... to accept Fannie Mae MBS as collateral. As a result, we may not be able to borrow against these securities in sufficient amounts to meet our liquidity needs. Credit Ratings Our ability to access the capital markets and other sources of funding, as well as our cost of funds, is highly dependent...

  • Page 142
    ... 2008 to increase our cash and cash equivalent balances in light of market conditions. Net cash generated from operating activities totaled $15.9 billion, resulting primarily from the proceeds from maturities or sales of our short-term, liquid investments, which are classified as trading securities...

  • Page 143
    ... requirements are not automatically affected by the new accounting standards. Capital Activity Following our entry into conservatorship, FHFA advised us to manage to a positive net worth, which is represented as the "total deficit" line item in our consolidated balance sheet. See "Executive Summary...

  • Page 144
    ... and prior, most MBS trusts created as part of our guaranteed securitizations were not consolidated by the company for financial reporting purposes because the trusts were considered QSPEs under the accounting rules governing the transfer and servicing of financial assets and the extinguishment of...

  • Page 145
    ... off-balance sheet Fannie Mae MBS, as well as whole mortgage loans that we own, see "Risk Management-Credit Risk Management-Single Family Mortgage Credit Risk Management." For additional information on our securitization transactions, see "Note 2, Consolidations," "Note 6, Portfolio Securitizations...

  • Page 146
    ... our MBS trusts, are subject to the new consolidation standards. Based on our analysis, we are required to consolidate the substantial majority of our MBS trusts and record the underlying assets (typically mortgage loans) and debt (typically bonds issued by the trusts in the form of Fannie Mae MBS...

  • Page 147
    ... for all of our investments in single-class Fannie Mae MBS classified as trading, the reversal of the related fair value gains and losses previously recorded in earnings. The adoption of these new accounting standards will not significantly impact our required level of capital under existing minimum...

  • Page 148
    ... initiative. RISK MANAGEMENT Our business activities expose us to the following four major categories of risk: credit risk, market risk (including interest rate and liquidity risk), operational risk and model risk, which often overlap. We seek to manage these risks and mitigate our losses by using...

  • Page 149
    ...our long-term earnings or in the value of our net assets due to fluctuations in interest rates. Liquidity risk is the potential inability of the Company to meet its funding obligations in a timely manner. • Operational Risk. Operational risk is the loss resulting from inadequate or failed internal...

  • Page 150
    ... of the Board of Directors, and audit personnel are compensated on objectives set for the group by the Audit Committee rather than corporate financial results or goals. The Chief Audit Executive reports only administratively to management and may be removed only upon Board approval. Internal Audit...

  • Page 151
    ...Credit Risk Management Mortgage credit risk is the risk that a borrower will fail to make required mortgage payments. We are exposed to credit risk on our mortgage credit book of business because we either hold mortgage assets, have issued a guaranty in connection with the creation of Fannie Mae MBS...

  • Page 152
    Table 41: Composition of Mortgage Credit Book of Business As of December 31, 2009 Single-Family Multifamily Total Conventional(1) Government(2) Conventional(1) Government(2) Conventional(1) Government(2) (Dollars in millions) Mortgage portfolio:(3) Mortgage loans(4) ...Fannie Mae MBS(5) ...Agency ...

  • Page 153
    ... total single-family guaranty book of business. We provide information on the performance of non-Fannie Mae mortgage-related securities held in our portfolio, including the impairment that we have recognized on these securities, in "Consolidated Balance Sheet Analysis-Trading and Available-for-Sale...

  • Page 154
    ... collect claims under pool mortgage insurance three to six months after disposition of the property that secured the loan. For additional discussion of our aggregate mortgage insurance coverage as of December 31, 2009 and 2008 and the increase in mortgage insurance rescissions, see "Risk Management...

  • Page 155
    ... documentation and higher risk loan product types. Table 42 presents our conventional single-family business volumes and our conventional single-family guaranty book of business for the periods indicated, based on certain key risk characteristics that we use to evaluate the risk profile and credit...

  • Page 156
    Table 42: Risk Characteristics of Conventional Single-Family Business Volume and Guaranty Book of Business(1) Percent of Conventional Single-Family Business Volume(2) For The Year Ended December 31, 2009 2008 2007 Percent of Conventional Single-Family Guaranty Book of Business(3) As of December 31, ...

  • Page 157
    ...-market LTV ratios in this table. Percentages calculated based on unpaid principal balance of loans at time of acquisition. Single-family business volume refers to both single-family mortgage loans we purchase for our mortgage portfolio and single-family mortgage loans we securitize into Fannie Mae...

  • Page 158
    ...We calculate our mark-to-market LTV ratios based on the unpaid principal balance of the loan as of the date of each reported period divided by the estimated current value of the property underlying the loan, which we determine using an internal valuation model that estimates periodic changes in home...

  • Page 159
    ... more monthly payments past due or in the foreclosure process. Unless otherwise noted, single-family delinquency data is calculated based on number of loans. We include conventional single-family loans that we own and that back Fannie Mae MBS in the calculation of the single-family delinquency rate...

  • Page 160
    ... single-family guaranty book of business (based on number of loans), average default rate and average loss severity as of the periods indicated. Table 43: Delinquency Status, Default Rate and Loss Severity of Conventional Single-Family Loans As of December 31, 2009 2008 2007 As of period end...

  • Page 161
    ... conventional single-family guaranty book of business. However, certain states, certain higher risk loan categories, such as Alt-A loans, subprime loans, loans with higher mark-to-market LTVs, and our 2006 and 2007 loan vintages continue to exhibit higher than average delinquency rates and account...

  • Page 162
    ... that we complete increases. Management of Problem Loans Early intervention for a potential or existing problem loan is critical to helping borrowers avoid foreclosure and stay in their homes. If a borrower does not make the required payments, we work with the servicers of our loans to offer workout...

  • Page 163
    ... Home Affordable Program. Intended to be uniform across servicers, HAMP is aimed at helping borrowers whose loan is either currently delinquent or is at imminent risk of default. HAMP modifications can include reduced interest rates, term extensions, and/or principal forbearance to bring the monthly...

  • Page 164
    ... type, for periods indicated. These statistics do not include trial modifications under HAMP or repayment and forbearance plans that have been initiated but not completed. Table 46: Statistics on Single-Family Loan Workouts 2009 Unpaid Principal Balance For the Year Ended December 2008 Unpaid Number...

  • Page 165
    ... and initiated plans will be completed. There have been only a limited number of permanent HAMP modifications because the program entails at least a three month trial period. During this trial period, the loan servicer evaluates the borrower's ability to make the required modified loan payment and...

  • Page 166
    ...values and the stock market and high unemployment. Modifications may also not be sufficient to help borrowers with second liens and significant non-mortgage debt obligations. However, as we complete an increasing number of loan modifications, we are able to reduce the current stress on our servicers...

  • Page 167
    ... 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 guaranty book of business as of the end of each...

  • Page 168
    ... Risk Management The credit risk profile of our multifamily mortgage credit book of business is influenced by, among other things, the structure of the financing; the type and location of the property; the condition and value of the property; the financial strength of the borrower and lender; market...

  • Page 169
    ... 2008 and 6% for year ended 2007. We present the current risk profile of our multifamily guaranty book of business in "Note 7, Financial Guarantees and Master Servicing." We monitor the performance and risk concentrations of our multifamily loan and equity investments and the underlying properties...

  • Page 170
    ... of liquidity in the market. Institutional Counterparty Credit Risk Management We rely on our institutional counterparties to provide services and credit enhancements, including primary and pool mortgage insurance coverage, risk sharing agreements with lenders and financial guaranty contracts, that...

  • Page 171
    ... in the financial services industry may negatively impact our business." Mortgage Servicers Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our...

  • Page 172
    ... and financial requirements for mortgage servicers. For example, we require servicers to collect and retain a sufficient level of servicing fees to reasonably compensate a replacement servicer in the event of a servicing contract breach. In addition, we perform periodic on-site and financial reviews...

  • Page 173
    .... Mortgage Insurers We use several types of credit enhancement to manage our single-family mortgage credit risk, including primary and pool mortgage insurance coverage. Mortgage insurance "risk in force" represents our maximum potential loss recovery under the applicable mortgage insurance policies...

  • Page 174
    ... A number of our mortgage insurers have publicly disclosed that they may exceed the state-imposed risk-tocapital limits under which they operate some time during 2010 and they may not have access to sufficient capital to continue to write new business in accordance with state regulatory requirements...

  • Page 175
    ... best estimates of future cash flows. As the loans collectively assessed for impairment only look to the probable payments we would receive associated with our loss emergence period, we use the noted shortfall to adjust the loss severity. When an insured loan held in Fannie Mae's mortgage portfolio...

  • Page 176
    ... from the insurer. We calculate a net present value of the expected cash flow projections of each loan to determine the level of impairment, which is included in our allowance for loan losses or reserve for guaranty losses. Also, as our internal credit ratings of our mortgage insurer counterparties...

  • Page 177
    ... the year ended December 31, 2009, we recognized other-than-temporary impairments of $293 million related to securities for which we had obtained financial guarantees. See "Consolidated Balance Sheet Analysis- Trading and Available-for-Sale Investment Securities-Investments in Private-Label Mortgage...

  • Page 178
    ... federal funds sold and securities purchased under agreements to resell, asset-backed securities, corporate debt securities, and other non-mortgage related securities. See "Liquidity and Capital Management-Liquidity Management-Liquidity Contingency Planning" for more detailed information on our cash...

  • Page 179
    ... a gain position are reported in our consolidated balance sheets as "Derivative assets at fair value." We present our credit loss exposure for our outstanding risk management derivative contracts, by counterparty credit rating, as of December 31, 2009 and 2008 in "Note 10, Derivative Instruments and...

  • Page 180
    ... assets or compensate us for the cost to cancel or replace the transaction. We manage this risk by determining position limits with these counterparties, based upon our assessment of their creditworthiness, and monitoring and managing these exposures. Debt Security and Mortgage Dealers The credit...

  • Page 181
    ...the resulting impact of changes in the spread between our mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. Interest Rate Risk Management Our goal is to manage market risk...

  • Page 182
    ... non-mortgage securities, our outstanding debt used to fund those assets and the derivatives used to supplement our debt instruments and manage interest rate risk, and any fixed-price asset, liability or derivative commitments. Our mortgage assets consist mainly of single-family fixed-rate mortgage...

  • Page 183
    ...primary tool we have used to fund the purchase of mortgage assets and manage the interest rate risk implicit in our mortgage assets is the variety of debt instruments we issue. The debt we issue is a mix that typically consists of short- and long-term, non-callable debt and callable debt. The varied...

  • Page 184
    .... Includes MBS options, swap credit enhancements and mortgage insurance contracts. Includes matured, called, exercised, assigned and terminated amounts. Amounts reported in the table are based on contractual maturities. Some of these amounts represent swaps that are callable by Fannie Mae or by...

  • Page 185
    ... account current market conditions, the current mortgage rates of our existing outstanding loans, loan age and other factors. The reliability of our interest rate risk analysis depends on the availability and quality of historical data for each of the types of securities in our net portfolio. Fair...

  • Page 186
    ...-tax impact calculated based on the estimated financial position of our net portfolio and the market environment as of the last business day of the quarter based on values used for financial reporting; and (3) the monthly disclosure shows the most adverse pre-tax impact on the fair value of our net...

  • Page 187
    ..., such as multifamily loans and CMBS. (5) The models used by Barclays Capital and Fannie Mae to estimate durations are different. Table 55: Duration Gap 30-Year Fannie Mae Mortgage Index Fannie Mae Option Adjusted Effective Duration(1) Duration Gap (In months) Month December 2008 . January 2009...

  • Page 188
    ... from "Mortgage loans" reported in our consolidated balance sheets to reflect how the risk of the interest rate and credit risk components of these loans are managed by our business segments. Consists of the net of all other financial instruments reported in "Note 19, Fair Value." Liquidity Risk...

  • Page 189
    ...interest rate risk). We use the information provided by models to make key business decisions related to such areas as credit guaranty fee pricing, credit loss mitigation, asset acquisition, and debt issuances. We also use the results of models to report our financial performance and determine asset...

  • Page 190
    ...of the results. Based on management experience and judgment, we may periodically make adjustments to the methodologies used to address the limitations inherent in our models and reflect enhancements in the underlying estimation processes. Although we continue to work to improve our process for model...

  • Page 191
    ...mortgage assets. It excludes mortgage loans we securitize from our portfolio and the purchase of Fannie Mae MBS for our investment portfolio. "Buy-ups" refer to upfront payments we make to lenders to adjust the monthly contractual guaranty fee rate on a Fannie Mae MBS so that the pass-through coupon...

  • Page 192
    ... of our debt and derivative instruments are also frequently quoted to swaps. The OAS of our net mortgage assets is therefore the combination of these two spreads to swaps and is the option-adjusted spread between our assets and our funding and hedging instruments. "Outstanding Fannie Mae MBS" refers...

  • Page 193
    ...about market risk is set forth in "MD&A-Risk Management-Market Risk Management, including Interest Rate Risk Management." Item 8. Financial Statements and Supplementary Data Our consolidated financial statements and notes thereto are included elsewhere in this annual report on Form 10-K as described...

  • Page 194
    ... under the federal securities laws; and • we had a material weakness in our internal control over financial reporting with respect to our controls over the change management process we apply to applications and models we use in accounting for (1) our provision for credit losses and (2) other-than...

  • Page 195
    ...to design and implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures...

  • Page 196
    ...the estimation of cash flows. As a result, incorrect data and assumptions were used in our accounting for our provision for credit losses and for other-than-temporary impairment on our private-label mortgage-related securities. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Overview Management...

  • Page 197
    ... financial reporting with respect to our controls over the change management process we apply to applications and models we use in accounting for (1) our provision for credit losses and (2) other-thantemporary impairment on our private-label mortgage-related securities. As a result, incorrect data...

  • Page 198
    ...to management of information known to the Federal Housing Finance Agency that is needed to meet its disclosure obligations under the federal securities laws as they relate to financial reporting. • Change Management for Applications and Models used in Accounting for Provision for Credit Losses and...

  • Page 199
    ... (a) the identification of loan populations and (b) the estimation of cash flows. As a result, incorrect data and assumptions were initially used in accounting for the provision for credit losses and for other-than-temporary impairment on private-label mortgage-related securities. These material...

  • Page 200
    ... areas: • business; • finance; • capital markets; • accounting; • risk management; • public policy; • mortgage lending, real estate, low-income housing and/or homebuilding; and • the regulation of financial institutions. See "Corporate Governance-Composition of Board of Directors...

  • Page 201
    ... experience in business, finance, accounting, risk management, public policy matters, mortgage lending, low-income housing, and the regulation of financial institutions, which she gained in the positions described above. Charlynn Goins, 67, served as Chairman of the Board of Directors of New York...

  • Page 202
    ... and investing in mixed-income, mixed-use communities, affordable/work force housing and commercial real estate projects in markets across the country. Mr. Perry currently serves as Chair of the Board of Directors of Atlanta Life Financial Group, where he serves as a member of the Audit Committee...

  • Page 203
    ...as a director due to his extensive experience in business, finance, capital markets, accounting, risk management and the regulation of financial institutions, which he gained in the positions described above. Michael J. Williams, 52, has been President and Chief Executive Officer of Fannie Mae since...

  • Page 204
    ... 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 of any subsidiary or affiliate or any substantial...

  • Page 205
    ... knowledgeable in business, finance, capital markets, accounting, risk management, public policy, mortgage lending, real estate, low-income housing, homebuilding, regulation of financial institutions and any other areas that may be relevant to the safe and sound operation of Fannie Mae. In addition...

  • Page 206
    ... and Ms. Gaines, all of whom are independent under the New York Stock Exchange, or NYSE, listing standards, Fannie Mae's Corporate Governance Guidelines and other SEC rules and regulations applicable to audit committees. The Board has determined that Mr. Beresford, Mr. Forrester and Ms. Gaines...

  • Page 207
    ...Merrill Lynch in the areas of risk management, trading, debt syndication and e-commerce based in New York and London. Terence W. Edwards, 54, has been Executive Vice President-Credit Portfolio Management since September 2009, when he joined Fannie Mae. Prior to joining Fannie Mae, Mr. Edwards served...

  • Page 208
    ... November 2008 to April 2009, and as Executive Vice President and Chief Risk Officer from August 2008 to November 2008. Prior to that time, Mr. Shaw served as Senior Vice President-Credit Risk Oversight beginning in April 2006, when he joined Fannie Mae. Prior to that time, Mr. Shaw was employed at...

  • Page 209
    ... pay or long-term incentive awards based on materially inaccurate performance metrics. Given Fannie Mae's essential role in supporting the housing and mortgage markets during this critical time, attracting and retaining high-quality executives remains a top priority of both the Board of Directors...

  • Page 210
    ...-Capital Markets; and • Timothy J. Mayopoulos, Executive Vice President, General Counsel and Corporate Secretary. Executive Compensation Objectives What are the goals and objectives for our executive compensation program? Given Fannie Mae's essential role in providing liquidity to the mortgage...

  • Page 211
    ... "Compensation Tables-Potential Payments Upon Termination or Change-in-Control" below, we will pay installments of deferred pay only if the named executive is employed by Fannie Mae on the scheduled payment dates. • Long-term Incentive Award. A long-term incentive award is a performance-based cash...

  • Page 212
    ...'s employment is terminated is provided below in "Compensation Tables-Potential Payments Upon Termination or Change-in-Control." 2008 Retention Program Following our entry into conservatorship in September 2008, FHFA determined that no executive officer would receive a cash bonus or long-term...

  • Page 213
    ...a description of the 2008 Retention Program, please refer to "Executive Compensation- Compensation Discussion and Analysis" in our 2008 Form 10-K. Why was this mix of base salary, deferred pay and long-term incentive awards selected? FHFA worked with our management and Board of Directors, and sought...

  • Page 214
    ... amount of the final payment of the 2008 Retention Program awards, the Compensation Committee and the Board of Directors reviewed and discussed information provided by senior management on our ongoing performance relative to our corporate performance goals on a periodic basis during 2009. In January...

  • Page 215
    funding for the pool for 2009 long-term incentive awards for executive officers and for the final payment of the 2008 Retention Program awards from the level it had initially determined. Based on this guidance, the Compensation Committee, with input from the Board, reassessed its initial funding ...

  • Page 216
    ... of the final performance-based portion of the 2008 Retention Program awards for the applicable named executives. Fannie Mae had three overall corporate performance goals for 2009, with related objectives designed to achieve each of these overall goals. Management and the Board of Directors, in...

  • Page 217
    ... the credit risk and expected profitability of this new business. We exceeded this objective for 2009, achieving a market share for new single-family mortgage-related securities issuances of 46.3% for 2009 and actively balancing this market position with prudent lending and pricing. • Multifamily...

  • Page 218
    ... implementation of new accounting rules on consolidation, certain costs relating to HAMP and other extraordinary expenses, and (b) limit the number of our employees to 5,800. This objective was to be balanced against our other corporate goals and objectives when evaluating our performance against it...

  • Page 219
    ...failed execution of internal processes or systems. For example, in July and August 2009, we publicly identified errors in certain information reported about our MBS trusts and published corrected data relating to these errors. • Credit. The second objective was to develop and implement a new Board...

  • Page 220
    ... company's achievement or substantial achievement of each of its 2009 performance goals, the level of funding for the pool for 2009 long-term incentive awards for executive officers and for the final payment of the 2008 Retention Program awards should also take into account the level of the company...

  • Page 221
    ... "Summary Compensation Table for 2009, 2008 and 2007." We describe the elements of each named executive's performance that the Board of Directors considered in determining his 2009 long-term incentive award below. What elements of Mr. Williams', our current Chief Executive Officer's, performance did...

  • Page 222
    ...Chief Executive Officer from September 2008 to April 2009, did not receive any salary, deferred pay or long-term incentive award for his service to the company. As set forth in the "Components of 'All Other Compensation' for 2009" table below, Mr. Allison participated in our executive life insurance...

  • Page 223
    ... and repayment provisions described above do not apply to payments to executive officers under the 2008 Retention Program. Certain of the bonus or other incentive-based or equity-based compensation for our Chief Executive Officer and Chief Financial Officer also may be subject to a requirement that...

  • Page 224
    ... Executive Pension Plan for all participants, including Messrs. Williams and Bacon. COMPENSATION COMMITTEE REPORT The Compensation Committee of the Board of Directors of Fannie Mae has reviewed and discussed the Compensation Discussion and Analysis included in this Form 10-K with management. Based...

  • Page 225
    ... The grant date fair value of restricted stock for each year is the average of the high and low trading price of our common stock on the date of grant. Amounts shown for 2009 in the "Non-Equity Incentive Plan Compensation" column include long-term incentive awards awarded based on 2009 corporate and...

  • Page 226
    ... "Non-Equity Incentive Plan Compensation" column represents the amount he earned under our Annual Incentive Plan in 2007. This amount was paid to Mr. Williams in 2008. The reported amounts represent change in pension value. We calculated these amounts using the same assumptions we use for financial...

  • Page 227
    ... the executive life insurance benefit and therefore we no longer pay for universal life insurance coverage for our current or retired executive officers. Amounts shown in the "Tax Gross-Ups" column for Mr. Allison reflect amounts we paid to cover the withholding tax that resulted from our payment of...

  • Page 228
    ... long-term incentive awards?" Outstanding Equity Awards at 2009 Fiscal Year-End The following table shows outstanding stock option awards and unvested restricted stock held by the named executives as of December 31, 2009. The market value of stock awards shown in the table below is based on a per...

  • Page 229
    ...retirement program in both 2007 and 2009. The primary changes in 2007 were to limit ongoing participation in our defined benefit pension plans, including our Retirement Plan, Executive Pension Plan, Supplemental Pension Plan and 2003 Supplemental Pension Plan, which are described below, to employees...

  • Page 230
    ... benefits are computed on a single life basis using a formula based on final average annual earnings and years of credited service. Participants are fully vested when they complete five years of credited service. Since 1989, provisions of the Internal Revenue Code of 1986, as amended, have limited...

  • Page 231
    ...and benefits under the Retirement Plan will be paid in the form of a single life monthly annuity for the life of the named executive. The postretirement mortality assumption is based on the RP 2000 white collar mortality table projected to 2010. The final payments of the 2008 Retention Program award...

  • Page 232
    ... may change their investment elections on a daily basis. Amounts deferred under the Supplemental Retirement Savings Plan are payable to participants in the January or July following separation from service with us, subject to a six month delay in payment for the 50 most highly-compensated officers...

  • Page 233
    ...'s employment had terminated on December 31, 2009, taking into account the named executive's compensation and service levels as of that date and based on a per share price of $1.18, which was the closing price of our common stock on December 31, 2009. The discussion below does not reflect retirement...

  • Page 234
    ... executive retires at or after age 60 with 5 years of service or age 65 (with no service requirement). In early 2006, Messrs. Williams, Bacon and Benson received a portion of their long-term incentive stock awards for the 2005 performance year in the form of cash awards payable in four equal annual...

  • Page 235
    ... These values are based on a per share price of $1.18, which was the closing price of our common stock on December 31, 2009. The reported amounts represent accelerated payment of cash awards made in early 2006 in connection with long-term incentive stock awards for the 2005 performance year. Assumes...

  • Page 236
    ..., who served as our Chief Executive Officer from September 2008 to April 2009, received no payments from us as a result of his resignation from Fannie Mae. We paid the premium for universal life insurance coverage for Mr. Allison under our executive life insurance program before he left the company...

  • Page 237
    ...-1 basis. Stock Ownership Guidelines for Directors. In January 2009, our Board eliminated our stock ownership requirements for directors and for senior officers in light of the difficulty of meeting the requirements at current market prices and because we have ceased paying stock-based compensation...

  • Page 238
    ...than as required by the terms of any binding agreement in effect on the date of the senior preferred stock purchase agreement, including as required by the terms of outstanding stock options and restricted stock units. Equity Compensation Plan Information As of December 31, 2009 Number of Securities...

  • Page 239
    ...(2) Owned Stock Options Name and Position Herbert M. Allison ...Former President and Chief Executive Officer Kenneth J. Bacon(3) ...Executive Vice President, Housing and Community Development David C. Benson(4) ...Executive Vice President, Capital Markets Dennis R. Beresford ...Director W. Thomas...

  • Page 240
    ...in which Fannie Mae is a participant and in which any of our directors and executive officers or their immediate family members has an interest to determine whether any of those persons has a material interest in the relationship or transaction. Our current written policies and procedures for review...

  • Page 241
    ... Board's delegation of authorities and reservation of powers require the Nominating and Corporate Governance Committee to review and approve any transaction that Fannie Mae engages in with any director, nominee for director or executive officer, or any immediate family member of a director, nominee...

  • Page 242
    ... or pursuant to a contractual obligation or customary employment arrangement in existence at the time the senior preferred stock purchase agreement was entered into. We require our directors and executive officers, not less than annually, to describe to us any situation involving a transaction with...

  • Page 243
    ... under the Making Home Affordable Program is the Home Affordable Modification Program, or HAMP, which is aimed at helping borrowers whose loan is either currently delinquent or at imminent risk of default by modifying their mortgage loan to make their monthly payments more affordable. In addition to...

  • Page 244
    ... of loans for direct payment and the delivery of pools of mortgage loans in exchange for Fannie Mae MBS. We acquired most of these mortgage loans pursuant to our early funding programs. This represented approximately 2% of our single-family business volume in 2009 and made PHH our seventh-largest...

  • Page 245
    ... Procedure for employees, Mr. Edwards reported his ongoing financial interest in PHH Corporation at the time of his employment and requested review and approval of the conflict. Our Chief Executive Officer reviewed and approved of the conflict, and to address the conflict has required that Mr...

  • Page 246
    ... auditor and personally worked on our audit within that time; or • an immediate family member of the director is a current partner of our external auditor, or is a current employee of our external auditor and personally works on Fannie Mae's audit, or, within the preceding five years, was (but...

  • Page 247
    ...or advisory Board members of other companies that engage in business with Fannie Mae. The payments made by or to Fannie Mae pursuant to these relationships during the past five years fell below our Guidelines' thresholds of materiality for a Board member that is a current executive officer, employee...

  • Page 248
    .... The aggregate debt service and other required payments made, directly and indirectly, to or on behalf of Fannie Mae pursuant to these relationships with Integral fall below our Guidelines' thresholds of materiality for a Board member who is a current executive officer, employee, controlling...

  • Page 249
    ...as all payments to holders are made through the Federal Reserve, and most of these securities are held in turn by financial intermediaries. The Board of Directors noted that transactions by this company in Fannie Mae fixed income securities are entered into in the ordinary course of business of this...

  • Page 250
    ...public accounting firm and management are required to present reports on the nature of the services provided by the independent registered public accounting firm for the past year and the fees for such services, categorized into audit services, audit-related services, tax services and other services...

  • Page 251
    ... 7- Financial Guarantees and Master Servicing ...Note 8- Acquired Property, Net ...Note 9- Short-term Borrowings and Long-term Debt ...Note 10- Derivative Instruments and Hedging Activities ...Note 11- Income Taxes ...Note 12- Loss Per Share ...Note 13- Stock-Based Compensation ...Note 14- Employee...

  • Page 252
    ...J. Williams President and Chief Executive Officer Date: February 26, 2010 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date...

  • Page 253
    Signature Title Date /s/ Frederick B. Harvey III Frederick B. Harvey III /s/ Egbert L. J. Perry Egbert L. J. Perry Jonathan Plutzik Jonathan Plutzik David H. Sidwell David H. Sidwell Director February 26, 2010 Director February 26, 2010 /s/ Director February 26, 2010 /s/ Director ...

  • Page 254
    ... Exhibit 3.2 to Fannie Mae's Annual Report on Form 10-K for the year ended December 31, 2008, filed February 26, 2009.) Certificate of Designation of Terms of Fannie Mae Preferred Stock, Series D (Incorporated by reference to Exhibit 4.1 to Fannie Mae's registration statement on Form 10, filed March...

  • Page 255
    ... 99.1 to Fannie Mae's Current Report on Form 8-K, filed December 24, 2009.) Long-Term Incentive Plan, effective December 16, 2009†Deferred Pay Plan, effective December 16, 2009†Description of Fannie Mae's compensatory arrangements with its non-employee directors for the year ended December 31...

  • Page 256
    ... Mortgage Association, effective December 16, 2009†Fannie Mae Annual Incentive Plan, as amended December 10, 2007†(Incorporated by reference to Exhibit 10.17 to Fannie Mae's Annual Report on Form 10-K for the year ended December 31, 2007, filed February 27, 2008.) Fannie Mae Stock Compensation...

  • Page 257
    ...year ended December 31, 2007, filed February 27, 2008.) Form of Restricted Stock Units Award Document†(Incorporated by reference to Exhibit 99.2 to Fannie Mae's Current Report on Form 8-K, filed January 26, 2007.) Form of Nonqualified Stock Option Grant Award Document for Non-Management Directors...

  • Page 258
    ... States Department of the Treasury, the participating Housing Finance Agency and U.S. Bank National Association, dated as of December 18, 2009P 99.5 Form of Agreement to Purchase Participation by and among U.S. Department of the Treasury, Fannie Mae and Federal Home Loan Mortgage Corporation, dated...

  • Page 259
    ... 7- Financial Guarantees and Master Servicing ...Note 8- Acquired Property, Net ...Note 9- Short-term Borrowings and Long-term Debt ...Note 10- Derivative Instruments and Hedging Activities ...Note 11- Income Taxes ...Note 12- Loss Per Share ...Note 13- Stock-Based Compensation ...Note 14- Employee...

  • Page 260
    ... 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, on...

  • Page 261
    ...and MBS trust receivable...Other assets ...Total assets ...LIABILITIES AND EQUITY (DEFICIT) Liabilities: Accrued interest payable ...Federal funds purchased and securities sold under agreements to repurchase ...Short-term debt (includes debt at fair value of $- and $4,500, respectively) ...Long-term...

  • Page 262
    ...the Year Ended December 31, 2009 2008 2007 Consolidated Statements of Operations 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...

  • Page 263
    ... ...Current and deferred federal income taxes ...Extraordinary losses, net of tax effect ...Derivatives fair value adjustments ...Purchases of loans held for sale ...Proceeds from repayments of loans held for sale ...Net decrease in trading securities, excluding non-cash transfers ...Net change in...

  • Page 264
    ..., 2007 ...Cumulative effect from the adoption of the FASB guidance on the fair value option for financial instruments and the FASB guidance on fair value measurement, net of tax ...Balance as of January 1, 2008, adjusted . . Change in investment in noncontrolling interest ...Comprehensive loss: Net...

  • Page 265
    ... in net loss (net of tax of $119) ...Unrealized gains on guaranty assets and guaranty fee buy-ups ...Amortization of net cash flow hedging gains ...Prior service cost and actuarial gains, net of amortization for defined benefit plans ...Total comprehensive loss ...Senior preferred stock dividends...

  • Page 266
    ...-Family Credit Guaranty ("Single-Family"), Housing and Community Development ("HCD") and Capital Markets. Our Single-Family segment generates revenue primarily from the guaranty fees on the mortgage loans underlying guaranteed single-family Fannie Mae mortgage-backed securities ("Fannie Mae MBS...

  • Page 267
    ...on holders of our common stock, preferred stock, debt securities and Fannie Mae MBS. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. Senior Preferred Stock and...

  • Page 268
    ...funding commitment to us under the senior preferred stock purchase agreement; • Treasury's credit facility that was available to us; • Federal Reserve's active program to purchase debt securities of Fannie Mae, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), and the Federal Home Loan...

  • Page 269
    ... on payments with respect to our debt securities or guaranteed Fannie Mae MBS, to the holders of that debt and MBS. On December 24, 2009, Treasury announced an update on initiatives established under the Housing and Economic Recovery Act ("HERA") of 2008, which supports housing market stabilization...

  • Page 270
    ... has purchased participation interests in the temporary credit and liquidity facilities. In December 2009, under the new issue bond program, we issued to Treasury $3.5 billion of partially guaranteed pass-through securities backed by new single-family and certain new multifamily housing bonds...

  • Page 271
    ... risk, the two primary drivers of expected losses for these VIEs. For those mortgage-backed investment trusts that we evaluated using quantitative analyses, we used internal models to generate Monte Carlo simulations of cash flows associated with the different credit, interest rate and housing price...

  • Page 272
    ... to use the tax credits to offset taxable income. The projection of these cash flows and probabilities thereof requires significant management judgment because of the inherent limitations that relate to the use of historical data for the projection of future events. Additionally, we reviewed similar...

  • Page 273
    ... our consolidated balance sheets to a trust to create Fannie Mae MBS, real estate mortgage investment conduits ("REMICs") or other types of beneficial interests. We evaluate a transfer of financial assets via portfolio securitizations to determine whether the transfer qualifies as a sale. Transfers...

  • Page 274
    ... same pools of loans, we calculate the specific cost of each security as the average price of the trades that delivered those securities. Currently, we do not have any securities classified as held-to-maturity, although we may elect to do so in the future. We determine fair value using quoted market...

  • Page 275
    ... loss," net of applicable taxes. In determining whether a credit loss exists, we use the best estimate of cash flows expected to be collected from the debt security. We consider guarantees, insurance contracts or other credit enhancements (such as collateral) in determining our best estimate of cash...

  • Page 276
    ... multifamily loans from our portfolio. Any excess of an HFS loan's cost over its fair value is recognized as a valuation allowance, with changes in the valuation allowance recognized as "Investment gains (losses), net" in our consolidated statements of operations. We recognize interest income...

  • Page 277
    ... from Trusts For MBS trusts that include a Fannie Mae guaranty, we have the option to purchase loans from the trust after four or more consecutive monthly payments due under the loan are delinquent in whole, or in part. With respect to single-family mortgage loans in MBS trusts with issue dates on...

  • Page 278
    ... from MBS trusts upon an assessment of what a market participant would pay for the loan at the date of acquisition. Prior to July 2007, we estimated the initial fair value of these loans using internal prepayment, interest rate and credit risk models that incorporated management's best estimate of...

  • Page 279
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payment of...

  • Page 280
    ...losses. We stratify multifamily loans into different risk rating categories based on the credit risk inherent in each individual loan. We categorize credit risk based on relevant observable data about a borrower's ability to pay, including reviews of current borrower financial information, operating...

  • Page 281
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) historical payment experience, collateral values when appropriate, and other related credit documentation. Multifamily loans that are categorized into pools based on their relative credit risk ratings are assigned...

  • Page 282
    ... classified as held for use are recorded in "Other assets" in our consolidated balance sheets. Guaranty Accounting Our primary guaranty transactions result from mortgage loan securitizations in which we issue Fannie Mae MBS. The majority of our Fannie Mae MBS issuances fall within two broad...

  • Page 283
    ...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 284
    ... basis over the term of the unconsolidated Fannie Mae MBS. We recognized a contingent liability based on management's estimate of probable losses incurred on those loans as of each balance sheet date, and we deferred upfront cash payments received in the form of risk-based pricing adjustments or buy...

  • Page 285
    ... to stand ready to perform over the term of our guaranty and any incurred credit losses in our "Guaranty obligations" and "Reserve for guaranty losses," respectively. We disclose the aggregate amount of Fannie Mae MBS held as "Investments in securities" in our consolidated balance sheets as well as...

  • Page 286
    ... calculation of the gain or loss on the sale of those loans. The following table displays unamortized premiums, discounts, and other cost basis adjustments included in our consolidated balances sheets as of December 31, 2009 and 2008, that may result in interest income in our consolidated statements...

  • Page 287
    ... guaranty price adjustments based upon our estimate of the cash flows of the mortgage loans underlying the related Fannie Mae MBS, which includes an estimate of prepayments. For each reporting period, we recalculate the constant effective yield to reflect the actual payments and our new estimate of...

  • Page 288
    ... 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 289
    ... to purchase single-family mortgage loans generally are derivatives. Our commitments to purchase multifamily loans are not derivatives because they do not meet the criteria for net settlement. For those commitments that we account for as derivatives, we report them in our consolidated balance sheets...

  • Page 290
    ... use is recorded as "Restricted cash" in our consolidated balance sheets. We primarily net our obligation to return cash collateral pledged to us against "Derivative assets at fair value" in our consolidated balance sheets as part of our counterparty netting calculation. We accepted cash collateral...

  • Page 291
    ...-party holders of Fannie Mae MBS that arises as the result of a consolidation of a securitization trust is fully collateralized by the underlying loans and/or mortgage-related securities. When securities sold under agreements to repurchase meet all of the conditions of a secured financing, we report...

  • Page 292
    ..." or "Long-term debt interest expense" in our consolidated statements of operations. Trust Management Income As master servicer, issuer and trustee for Fannie Mae MBS, we earn a fee that reflects interest earned on MBS trust cash flows from the date of remittance of mortgage and other payments to us...

  • Page 293
    ... information and the estimated future long-term investment returns for each class of assets. We measure plan assets and obligations as of the date of our consolidated financial statements. We recognize the over-funded or under-funded status of our benefit plans as a prepaid benefit cost (an asset...

  • Page 294
    ... the loan on our consolidated balance sheets at fair value and record a corresponding liability to the MBS trust. Fair Value Measurements We estimate fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants...

  • Page 295
    ... losses on derivatives, trading securities, debt carried at fair value, foreign currency debt, and adjustments to the carrying amount of hedged mortgage assets. The following table displays the composition of "Fair value losses, net" for the years ended December 31, 2009, 2008 and 2007. For the Year...

  • Page 296
    ... of tax, for the years ended December 31, 2008 and 2007, respectively, from "Changes in net unrealized loss on available-for-sale securities" to "Reclassification adjustment for other-than-temporary impairments recognized in net loss" in our Consolidated Statements of Changes in Stockholders' Equity...

  • Page 297
    ... for all of our investments in single-class Fannie Mae MBS classified as trading, the reversal of the related fair value gains and losses previously recorded in earnings. The adoption of these new accounting standards will not significantly impact our required level of capital under existing minimum...

  • Page 298
    ...-family housing. These interests may also include our guaranty to the entity. Types of VIEs Securitization Trusts Under our lender swap and portfolio securitization transactions, mortgage loans are transferred to a trust specifically for the purpose of issuing a single class of guaranteed securities...

  • Page 299
    ... mortgage market, our ownership percentage in any given mortgage-related security will vary over time. We record third-party ownership in these consolidated MBS trusts as a component of "Long-term debt" in our consolidated balance sheets. We also consolidate in our financial statements the assets...

  • Page 300
    ... 146 5,843 $69,599 Total MBS trusts(1) ...Limited partnerships: Partnership investments ...Cash, cash equivalents and restricted cash ...Total limited partnership investments ... Total assets of consolidated VIEs ...$61,000 Liabilities: Long-term debt ...$ 5,218 Partnership liabilities ...385 Total...

  • Page 301
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays the total assets as of December 31, 2009 and 2008 of non-consolidated VIEs with which we are involved and QSPEs for which we are the sponsor or servicer but not the transferor. As of ...

  • Page 302
    ... amount outstanding, net of unamortized premiums and discounts, other cost basis adjustments, and an allowance for loan losses. We report HFS loans at the lower of cost or fair value determined on a pooled basis, and record valuation changes in our consolidated statements of operations. F-44

  • Page 303
    ...and 2008. The table excludes loans underlying securities that are not consolidated, as those mortgage loans are not included in our consolidated balance sheets. As of December 31, 2009 2008 (Dollars in millions) Single-family:(1) Government insured or guaranteed . Conventional: Long-term fixed rate...

  • Page 304
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) With respect to single-family mortgage loans in MBS trusts with issue dates on or after January 1, 2009, we also have the option to purchase the loan from the trust after the loan has been delinquent for at least one monthly payment...

  • Page 305
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) We estimate the cash flows expected to be collected at acquisition using internal prepayment, interest rate and credit risk models that incorporate management's best estimate of certain key assumptions, such as ...

  • Page 306
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Nonaccrual Loans We have single-family and multifamily loans in our mortgage portfolio, including acquired credit-impaired loans, that are subject to our nonaccrual policy. The following table displays information...

  • Page 307
    ... for loan losses for loans held for investment in our mortgage portfolio and a reserve for guaranty losses related to loans backing Fannie Mae MBS and loans that we have guaranteed under long-term standby commitments. We calculate the allowance and reserve based on our estimate of incurred losses as...

  • Page 308
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) subject to risks and uncertainties particularly in the current uncertain credit environment. We have experienced higher default and loan loss severity rates during 2009 as compared to 2008, which has increased our...

  • Page 309
    ... following table displays information about our net trading gains and losses for the years ended December 31, 2009, 2008 and 2007. For the Year Ended December 31, 2009 2008 2007 (Dollars in millions) Net trading gains (losses): Mortgage-related securities ...$2,457 Non-mortgage-related securities...

  • Page 310
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Available-for-Sale Securities We measure AFS securities at fair value with unrealized gains and losses recorded as a component of AOCI, net of tax, in our consolidated balance sheets. We record realized gains and ...

  • Page 311
    ...31, 2008(1) Less Than 12 12 Consecutive Consecutive Months Months or Longer Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value (Dollars in millions) Fannie Mae ...Freddie Mac ...Ginnie Mae ...Alt-A ...Subprime ...CMBS ...Mortgage revenue bonds ...Other mortgage-related securities...

  • Page 312
    ... losses for 12 consecutive months or longer, on average, had a market value as of December 31, 2009 that was 84% of their amortized cost basis. Based on our review for impairments of AFS securities, which includes an evaluation of the collectability of cash flows and any intent or requirement...

  • Page 313
    ...mortgage loans and the coupon on the bonds is smaller. While current market interest rates are still low by historical standards, the forward curve is now higher than prior expectations, leading to increased loss expectations. The net projected home price impact for the year was estimated to account...

  • Page 314
    ... credit support from mortgage collateral or financial guarantees. The fair values of these bonds are likewise impacted by the low levels of market liquidity and high required returns, which has led to unrealized losses in the portfolio that we deem to be temporary. Other mortgage-related securities...

  • Page 315
    ... pools of mortgage loans or mortgage-related securities to one or more trusts or special purpose entities. We are considered to be the transferor when we transfer assets from our own portfolio in a portfolio securitization. For the years ended December 31, 2009 and 2008, the unpaid principal balance...

  • Page 316
    ... are future home prices and current loan-to-value ratios. Our investments in Fannie Mae single-class MBS, Fannie Mae Megas, REMICs and SMBS are interests in securities with markets. We primarily rely on third-party prices to estimate the fair value of these interests. For the purpose of this...

  • Page 317
    ... used for our guaranty obligation at time of securitization. The average number of years for which each dollar of unpaid principal on a loan or mortgage-related security remains outstanding. Represents the expected 12-month average prepayment rate, which is based on the constant annualized...

  • Page 318
    ...annualized prepayment rate for mortgage loans. The interest rate used in determining the present value of future cash flows, derived from the forward curve based on interest rate swaps, excluding the option adjusted spreads. The present value of anticipated credit losses is calculated as the average...

  • Page 319
    ..., 2009, 2008 and 2007. For the Year Ended December 31, 2009 2008 2007 (Dollars in millions) Proceeds from the initial sale of securities (new securitizations) . Guaranty and other income ...Principal and interest received on retained interests...Purchases of previously transferred financial assets...

  • Page 320
    ...-Long-term debt ...$ 949 $12,719 $ 1,168 7. Financial Guarantees and Master Servicing We generate revenue by absorbing the credit risk of mortgage loans and mortgage-related securities backing our Fannie Mae MBS in exchange for a guaranty fee. We primarily issue single-class and multi-class...

  • Page 321
    ... rate, which is the percentage of single-family loans three or more months past due and the percentage of multifamily loans two or more months past due, of loans with certain risk characteristics such as mark-to-market, loan-to-value ratio and operating debt service coverage. We use this information...

  • Page 322
    ... 31, 2008(1) Percentage of Single-family Percentage Guaranty Book Seriously (3) of Business Delinquent(2)(4) Estimated mark-to-market loan-to-value ratio: 100.01% to 110% ...110.01% to 120% ...120.01% to 125% ...Greater than 125% ...Geographical Distribution: Arizona ...California ...Florida...

  • Page 323
    ... book of business. Includes multifamily loans that were two months or more past due as of December 31, 2009 and 2008. Guaranty Obligations The following table displays changes in our "Guaranty obligations" in our consolidated balance sheets for the years ended December 31, 2009, 2008, and 2007...

  • Page 324
    ..., 2008, and 2007. For the Year Ended December 31, 2009 2008 2007 (Dollars in millions) Beginning balance, January 1...$ 7,043 Fair Value of expected cash flows at issuance for new guaranteed Fannie Mae MBS issuance ...4,135 Net change in fair value of guaranty assets from portfolio securitizations...

  • Page 325
    ... servicing income, referred to as "Trust management income" in our consolidated statements of operations, of $40 million, $261 million and $588 million for the years ended December 31, 2009, 2008 and 2007, respectively. 8. Acquired Property, Net Acquired property, net consists of held for sale...

  • Page 326
    ... immediate sale in their current condition and are reflected in "Other assets" in our consolidated balance sheets. The following table displays the carrying amount of acquired properties held for use for the years ended December 31, 2009, 2008 and 2007. For the Year Ended December 31, 2009 2008 2007...

  • Page 327
    ...year or less) consist of both "Federal funds purchased and securities sold under agreements to repurchase" and "Short-term debt" in our consolidated balance sheets. The following table displays our outstanding short-term borrowings and weighted-average interest rates as of December 31, 2009 and 2008...

  • Page 328
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Long-term Debt Long-term debt represents borrowings with an original contractual maturity of greater than one year. The following table displays our outstanding long-term debt as of December 31, 2009 and 2008. As ...

  • Page 329
    ..., we record a secured borrowing, to the extent of proceeds received, upon a transfer of financial assets from our consolidated balance sheets that does not qualify as a sale. Long-term debt from these transactions in our consolidated balance sheets as of December 31, 2009 and 2008 was $949 million...

  • Page 330
    ..., such as cost, efficiency, the effect on our liquidity, results of operations, and our overall interest rate risk management strategy. We choose to use derivatives when we believe they will provide greater relative value or more efficient execution of our strategy than debt securities. We typically...

  • Page 331
    ... our consolidated balance sheets. We record all derivative gains and losses, including accrued interest, in "Fair value losses, net" in our consolidated statements of operations. Hedging Activities In 2008, we began to employ fair value hedge accounting for some of our interest rate risk management...

  • Page 332
    ...NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Notional and Fair Value Position of our Derivatives The following table displays the notional amount and estimated fair value of our asset and liability derivative instruments on a gross basis, before the application of master netting agreements...

  • Page 333
    ... following table displays the outstanding notional balances and the estimated fair value of our derivative instruments as of December 31, 2008. As of December 31, 2008 Notional Estimated Amount Fair Value (Dollars in millions) Risk management derivatives: Swaps: Pay-fixed ...Receive-fixed ...Basis...

  • Page 334
    ...The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives for the years ended December 31, 2009, 2008 and 2007. For the Year Ended December 31, 2009 2008 2007 (Dollars in millions) Risk management derivatives: Swaps: Pay-fixed ...Receive...

  • Page 335
    ... NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Volume and Activity of our Derivatives Risk Management Derivatives The following table displays, by derivative instrument type, our risk management derivative activity for the year ended December 31, 2009. Interest Rate Swaps ReceiveFixed Basis...

  • Page 336
    ... to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a net gain position by counterparty where the right of legal offset exists, such as master netting agreements, and...

  • Page 337
    ... tax rates and the statutory federal tax rates for the years ended December 31, 2009, 2008 and 2007, respectively. For the Year Ended December 31, 2009 2008 2007 Statutory corporate tax rate ...Tax-exempt interest and dividends-received deductions . Equity investments in affordable housing projects...

  • Page 338
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) eligible for the low-income housing tax credit and other equity investments that provide tax credits. In addition, our effective tax rates for the years ended December 31, 2009 and 2008 were impacted by the ...

  • Page 339
    ... an agreement of $1.2 billion, net of tax credits, with the IRS on the audits of our 2005 and 2006 federal income tax returns. The decrease in our unrecognized tax benefits during the year ended December 31, 2009 is due to our settlement reached with the IRS regarding certain tax positions related...

  • Page 340
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) to fair market value losses and the settlement of tax years 2005 through 2006. The decrease in our unrecognized tax benefits represents a temporary difference, and therefore does not result in a change to our effective tax rate. During...

  • Page 341
    ...Stock-Based Compensation Plans The 1985 Employee Stock Purchase Plan (the "1985 Purchase Plan") provided employees an opportunity to purchase shares of Fannie Mae common stock at a discount to the fair market value of the stock during specified purchase periods. Our Board of Directors sets the terms...

  • Page 342
    ... compensation cost...Expected weighted-average life of unvested restricted stock ... $ 56 1.6 years $ 148 2.4 years $ 148 2.4 years Nonqualified Stock Options Under the 2003 Plan and prior to conservatorship, we could have granted stock options to eligible employees and non-management members...

  • Page 343
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays nonqualified stock option activity for 2009, 2008 and 2007. For the Year Ended December 31, 2008 2007 WeightedWeightedWeightedWeighted- Average Weighted- Average Weighted- Average Fair...

  • Page 344
    ... to a qualified irrevocable trust that is maintained for the sole benefit of plan participants and their beneficiaries. Contributions to our qualified pension plan are subject to a minimum funding requirement and a maximum funding limit under the Employee Retirement Income Security Act of 1974...

  • Page 345
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays components of our net periodic benefit cost for our qualified and nonqualified pension plans and other postretirement plan for the years ended December 31, 2009, 2008 and 2007. The net...

  • Page 346
    ... MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays the changes in the pre-tax amounts recognized in AOCI for the years ended December 31, 2009 and 2008. For the Year Ended December 31, 2009 Pension Plans NonQualified Qualified 2008 Pension...

  • Page 347
    ... assets ...Employer contributions ...Plan participants' contributions ...Benefits paid ... Fair value of plan assets at end of year ...Funded status at end of year ...Amounts Recognized in our Consolidated Balance Sheets Accrued benefit cost ...Accumulated other comprehensive (income) loss ...Net...

  • Page 348
    ...2008 2007 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 assumptions used to determine benefit obligation at year-end...

  • Page 349
    .... In determining our net periodic benefit costs, we assess the discount rate to be used in the annual actuarial valuation of our pension and other postretirement benefit obligations at year-end. We consider the current yields on high-quality, corporate fixed-income debt instruments with maturities...

  • Page 350
    ... assets of the qualified pension plan consist primarily of exchange-listed stocks, held in broadly diversified index funds. We also invest in a broadly diversified indexed fixed income account. In addition, the plan holds liquid short-term investments that provide for monthly pension payments, plan...

  • Page 351
    ... balances to a variety of investment options. We match employee contributions in cash up to 3% of base salary for grandfathered employees and of eligible earnings for other employees. Eligible earnings consists of base pay, overtime pay and eligible bonuses. For new hires after 2007 and for non...

  • Page 352
    ... Our three reportable segments are: Single-Family, HCD, and Capital Markets. We use these three segments to generate revenue and manage business risk, and each segment is based on the type of business activities it performs. These activities are discussed below. Our Chief Executive Officer has been...

  • Page 353
    ... makes debt and equity investments to expand the supply of affordable and market-rate rental housing in the United States primarily by: (i) working with our lender customers to securitize multifamily mortgage loans into Fannie Mae MBS and to facilitate the purchase of multifamily mortgage loans for...

  • Page 354
    ..., 2008 and 2007. For the Year Ended December 31, 2009 Capital Single-Family HCD Markets Total (Dollars in millions) Net interest income (expense)(1) ...Guaranty fee income (expense)(2) ...Trust management income ...Investment gains (losses), net ...Net other-than-temporary impairments . Fair value...

  • Page 355
    ... 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 (3) ...Net other-than-temporary impairments(3) . Fair value losses, net ...Debt...

  • Page 356
    ...(3) ... Net income (loss) attributable to Fannie Mae ...$ (858) (1) (2) (3) Includes cost of capital charge. The charge to Capital Markets represents an intercompany guaranty fee expense allocated to Capital Markets from Single-Family and HCD for absorbing the credit risk on mortgage loans held in...

  • Page 357
    ... right to purchase for a nominal price shares of our common stock equal to 79.9% of the total number of shares of common stock outstanding on a fully diluted basis on the date of exercise, which would substantially dilute the ownership in Fannie Mae of our common stockholders at the time of exercise...

  • Page 358
    ... paid in cash full cumulative dividends (including any unpaid dividends added to the liquidation preference), the dividend rate will be 12% per year. Initial Stated Value per share was $1,000. Based on our draws of funds under the Senior Preferred Stock Variable Liquidation Preference agreement with...

  • Page 359
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (5) (6) (7) (8) (9) (10) (11) (12) (13) Rate effective September, 30 2008. Variable dividend rate resets every two years at a per annum rate equal to the two-year CMT rate minus 0.18% with a cap of 11% per ...

  • Page 360
    ... participating securities for purposes of calculating earnings per share. On May 19, 2008, we received gross proceeds of $2.0 billion from the issuance of 80 million shares of 8.25% Non-Cumulative Preferred Stock, Series T, with a stated value of $25 per share. Subsequent to the initial issuance...

  • Page 361
    ... eliminate our net worth deficit as of December 31, 2009. Holders of the senior preferred stock are entitled to receive when, as and if declared by our Board of Directors, out of legally available funds, cumulative quarterly cash dividends at an annual rate of 10% per year based on the then-current...

  • Page 362
    ... fee for up to one year at a time, in its sole discretion, based on adverse conditions in the U.S. mortgage market. We may elect to pay the periodic commitment fee in cash or add the amount of the fee to the liquidation preference of the senior preferred stock. Funding Commitment Treasury's funding...

  • Page 363
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) preferred stock purchase agreement also provides that, if we have a deficiency amount as of the date of completion of the liquidation of our assets, we may request funds from Treasury in an amount up to the ...

  • Page 364
    ..., the holders of these debt securities or Fannie Mae MBS may file a claim for relief in the United States Court of Federal Claims. The relief, if granted, would require Treasury to fund to us the lesser of (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS and...

  • Page 365
    ... income (loss) or (b) senior preferred stock. Generally, the sum of (a) 2.50% of on-balance sheet assets; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to 0.45% of other off-balance sheet obligations, which may be adjusted by the Director...

  • Page 366
    ... concentrations of credit risk exist among single-family and multifamily borrowers (including geographic concentrations and loans with certain non-traditional features), mortgage insurers, mortgage servicers, derivative counterparties and parties associated with our off-balance sheet transactions...

  • Page 367
    ... securitized in Fannie Mae MBS as of December 31, 2009 and 2008, respectively, were located, no other significant concentrations existed in any state. To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance or other credit enhancements if the current...

  • Page 368
    ... MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays the regional geographic concentration of single-family and multifamily loans in our mortgage portfolio and those loans held or securitized in Fannie Mae MBS as of December 31, 2009 and 2008...

  • Page 369
    ...-label mortgage-related securities backed by subprime mortgage loans. Other Concentrations Mortgage Servicers. Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required...

  • Page 370
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Mortgage Insurers. Mortgage insurance "risk in force" represents our maximum potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of $106...

  • Page 371
    ... obtained financial guarantees, it could reduce the fair value of our mortgage-related securities and result in financial losses to us, which could have a material adverse effect on our earnings, liquidity, financial condition and net worth. Nine financial guarantors provided bond insurance coverage...

  • Page 372
    ...2009 Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Estimated Assets Inputs Inputs Netting (Level 1) (Level 2) (Level 3) Adjustment(1) Fair Value (Dollars in millions) Assets: Trading securities: Mortgage-related securities: Fannie Mae ...Freddie...

  • Page 373
    ... 31, 2008 Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Inputs Netting Assets Estimated Inputs (Level 2) (Level 3) Adjustment(1) Fair Value (Level 1) (Dollars in millions) Assets: Trading securities...Available-for-sale securities . . Derivative...

  • Page 374
    ... Loss Balance, December 31, 2009 Trading securities: Mortgage-related: Fannie Mae ...Alt-A ...Subprime ...Mortgage revenue bonds ...Other ...Non-mortgage-related: Asset-backed securities ...Corporate debt securities ...Total trading securities ...Available-for-sale securities: Mortgage...

  • Page 375
    ... FINANCIAL STATEMENTS-(Continued) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Year Ended December 31, 2008 Guaranty Assets Available-for-Sale Net and Securities Derivatives Buy-ups (Dollars in millions) Trading Securities Long-Term Debt Beginning balance...

  • Page 376
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Year Ended December 31, 2008 Trading Available-for-Sale Net Long-term Securities Securities Derivatives Debt (Dollars in millions) ...

  • Page 377
    ... principal amount outstanding, net of cost basis adjustments. We elected the fair value option for all structured debt instruments which are recorded in our consolidated balance sheets at fair value on a recurring basis. We use pricing services to measure the fair value of our debt instruments. When...

  • Page 378
    ... that require internal model results that cannot be corroborated by observable market data are classified as Level 3. Non-recurring Changes in Fair Value The following tables display assets and liabilities measured in our consolidated balance sheets at fair value on a non-recurring basis; that...

  • Page 379
    ... based on indicative dealer prices and Level 3 inputs include the estimated value of primary mortgage insurance on loans that have coverage. Mortgage Loans Held for Investment-HFI loans are reported in our consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments...

  • Page 380
    ... of accounting. Investments in LIHTC partnerships trade in a market with limited observable transactions. We measure the fair value of LIHTC investments using internal models that estimate the present value of the expected future tax benefits (tax credits and tax deductions for net operating losses...

  • Page 381
    ... Value Value Fair Value (Dollars in millions) Financial assets: Cash and cash equivalents(1) ...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 382
    ... at the measurement date. We estimate the fair value of the GO using our internal GO valuation models which calculate the present value of expected cash flows based on management's best estimate of certain key assumptions such as default rates, severity rates and required rate of return. We further...

  • Page 383
    .... For the Year Ended December 31, 2009 Short-Term Debt Long-Term Debt Total Gains (Losses) Short-Term Debt 2008 Long-Term Debt Total Gains (Losses) (Dollars in millions) Changes in instrument-specific credit risk ...Other changes in fair value ...Debt fair value losses, net... $- - $- $ 33 (64...

  • Page 384
    ... inflated prices for our common stock and seek unspecified compensatory damages, attorneys' fees, and other fees and costs. On January 7, 2008, the court defined the class as all purchasers of Fannie Mae common stock and call options and all sellers of publicly traded Fannie Mae put options during...

  • Page 385
    .... In re 2008 Fannie Mae ERISA Litigation In a consolidated complaint filed on September 11, 2009, plaintiffs allege that certain of our current and former officers and directors, including former members of Fannie Mae's Benefit Plans Committee and the Compensation Committee of Fannie Mae's Board of...

  • Page 386
    ... benefit we received from the use of these funds. The plaintiffs seek a return of any profits, with accrued interest, earned by us related to the escrow accounts at issue, as well as attorneys' fees and costs. Our motions to dismiss and for summary judgment with respect to the statute of limitations...

  • Page 387
    ...other costs. Rental expenses for operating leases were $62 million, $50 million and $55 million for the years ended December 31, 2009, 2008 and 2007, respectively. The following table summarizes by remaining maturity, non cancelable future commitments related to loan and mortgage purchases, unfunded...

  • Page 388
    .... Fair value gains (losses), net ...Debt extinguishment losses, net...Losses from partnership investments . . Fee and other income...Administrative expenses: Salaries and employee benefits Professional services ...Occupancy expenses...Other administrative expenses ...impairments ... ... Non-interest...

  • Page 389
    ... 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 ...Trust management income ...Investment gains (losses), net...

  • Page 390
    ... loan and its acquisition cost, as these loans will already be reflected on our consolidated balance sheet. Currently, the cost of purchasing most delinquent loans from Fannie Mae MBS trusts and holding them in our portfolio is less than the cost of advancing delinquent payments to security holders...

  • Page 391
    ...that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2009 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 a material fact necessary...

  • Page 392
    ...that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2009 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 a material fact necessary...

  • Page 393
    ...the Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage Association) for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Williams, President and Chief Executive Officer of Fannie Mae...

  • Page 394
    ... the Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage Association) for the year ended December 31, 2009, 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 395
    FR001