Fannie Mae 2010 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, 2010
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
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of class)
8.25% Non-Cumulative Preferred Stock, Series T, stated value $25 per share
(Title of class)
8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008-1, stated value $50 per share
(Title of class)
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share
(Title of class)
7.625% Non-Cumulative Preferred Stock, Series R, stated value $25 per share
(Title of class)
6.75% Non-Cumulative Preferred Stock, Series Q, stated value $25 per share
(Title of class)
Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share
(Title of class)
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)
5.50% Non-Cumulative Preferred Stock, Series N, stated value $50 per share
(Title of class)
4.75% Non-Cumulative Preferred Stock, Series M, stated value $50 per share
(Title of class)
5.125% Non-Cumulative Preferred Stock, Series L, stated value $50 per share
(Title of class)
5.375% Non-Cumulative Preferred Stock, Series I, stated value $50 per share
(Title of class)
5.81% Non-Cumulative Preferred Stock, Series H, stated value $50 per share
(Title of class)
Variable Rate Non-Cumulative Preferred Stock, Series G, stated value $50 per share
(Title of class)
Variable Rate Non-Cumulative Preferred Stock, Series F, stated value $50 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. ¥
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 nAccelerated filer ¥Non-accelerated filer n
(Do not check if a smaller reporting company)
Smaller Reporting company n
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 last reported sale price of the common stock quoted on the New
York Stock Exchange on June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $383 million.
As of January 31, 2011, there were 1,119,639,748 shares of common stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None

Table of contents

  • Page 1
    ... 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, 2010 Commission File No.: 0-50231 Federal National Mortgage Association (Exact name of registrant as specified in its charter) Fannie Mae...

  • Page 2
    ... Information - Fair Value Balance Sheets ...126 Liquidity and Capital Management ...131 Off-Balance Sheet Arrangements ...145 Risk Management ...146 Glossary of Terms Used in This Report...190 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...192 Item 8. Financial Statements and...

  • Page 3
    ... ...202 Executive Officers ...206 Item 11. Executive Compensation...208 Compensation Discussion and Analysis ...208 Compensation Committee Report ...219 Compensation Risk Assessment ...219 Compensation Tables ...220 Item 12. Item 13. Security Ownership of Certain Beneficial Owners and Management and...

  • Page 4
    ... (Net of Tax Effect) ...Supplemental Non-GAAP Consolidated Fair Value Balance Sheets ...Activity in Debt of Fannie Mae ...Outstanding Short-Term Borrowings and Long-Term Debt...Outstanding Short-Term Borrowings ...Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year ... 73 10...

  • Page 5
    ... Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year ...Contractual Obligations ...Cash and Other Investments Portfolio ...Fannie Mae Credit Ratings ...Composition of Mortgage Credit Book of Business ...Risk Characteristics of Single-Family Conventional Business Volume...

  • Page 6
    ... to address delinquent mortgages, starting with solutions, such as modifications, that permit people to stay in their homes. When there is no lower-cost alternative, our goal is to move to foreclosure expeditiously. We describe our business activities below. As a federally chartered corporation, we...

  • Page 7
    ... took a number of extraordinary measures designed to provide fiscal stimulus, improve liquidity and protect and support the housing and financial markets. Examples of these measures include: (1) the Federal Reserve's temporary programs to purchase up to $1.25 trillion of GSE mortgage-backed...

  • Page 8
    ... The sources of the housing and mortgage market data in this table are the Federal Reserve Board, the Bureau of the Census, HUD, the National Association of Realtors, the Mortgage Bankers Association and FHFA. Homes sales data are based on information available through January 2011. Single-family...

  • Page 9
    ... Fannie Mae's serious delinquency rate, which also decreased during 2010, in "Executive Summary-Credit Performance." We estimate that total single-family mortgage originations decreased by 20.2% in 2010 to $1.5 trillion, with a purchase share of 35% and a refinance share of 65%. For 2011, we expect...

  • Page 10
    ... our efforts on minimizing our credit losses. We use home retention solutions and foreclosure alternatives to address delinquent mortgages, starting with solutions, such as modifications, that permit people to stay in their homes. When there is no lower-cost alternative, our goal is to move to...

  • Page 11
    ... consider options for the future state of Fannie Mae, Freddie Mac and the U.S. government's role in residential mortgage finance. On February 11, 2011, Treasury and HUD released a report to Congress on reforming America's housing finance market. The report provides that the Administration will work...

  • Page 12
    bonds issued by the trusts in the form of Fannie Mae MBS certificates) of these trusts as assets and liabilities in our consolidated balance sheets. Although the new accounting standards did not change the economic risk to our business, we recorded a decrease of $3.3 billion in our total deficit as ...

  • Page 13
    ... and our Capital Markets group. Our Single-Family and Multifamily businesses work with our lender customers to purchase and securitize mortgage loans customers deliver to us into Fannie Mae MBS. Our Capital Markets group manages our investment activity in mortgage-related assets, funding investments...

  • Page 14
    ... source of liquidity, guaranteeing an estimated 20.1% of multifamily mortgage debt outstanding as of September 30, 2010, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Our Expectations Regarding Profitability, the Single-Family Loans...

  • Page 15
    ... losses in 2009 and 2010 to date are attributable to these loans. Loans we acquired in 2004 were originated under more conservative acquisition policies than loans we acquired from 2005 through 2008; however, we expect them to perform close to break-even because these loans were made as home prices...

  • Page 16
    ... experienced historically low levels of delinquencies shortly after their acquisition. Table 2 shows, for singlefamily loans we acquired in each year from 2001 to 2009, the percentage that were seriously delinquent (three or more months past due or in the foreclosure process) as of the end of the...

  • Page 17
    ...unemployment rates for each month reported in the labor force statistics current population survey (CPS), Bureau of Labor Statistics. Credit Profile of Our Single-Family Acquisitions Single-family loans we purchased or guaranteed from 2005 through 2008 were acquired during a period when home prices...

  • Page 18
    ..., performing Fannie Mae loans with current LTV ratios up to 125%, and possibly lower FICO credit scores, into loans that reduce the borrowers' monthly payments or are otherwise more sustainable. A substantial portion of the refinances with higher LTV ratios were done as part of the Home Affordable...

  • Page 19
    ...of fair value losses on loans purchased out of MBS trusts reflected in our consolidated balance sheets that we estimate represents accelerated credit losses we expect to realize. For more information on our reserves for credit losses, please see "Table 11: Total Loss Reserves." The fair value losses...

  • Page 20
    ... servicers with borrowers to resolve the problem of existing or potential delinquent loan payments as "workouts," which include our home retention solutions and foreclosure alternatives discussed below. As "Table 4: Credit Statistics, Single-Family Guaranty Book of Business" illustrates, our single...

  • Page 21
    ... see "Risk Management-Credit Risk Management-Single-Family Mortgage Credit Risk Management-Management of Problem Loans and Loan Workout Metrics" for a discussion of our home retention strategies. Managing Timelines. We believe that repayment plans, short-term forbearances and loan modifications can...

  • Page 22
    ...Family Guaranty Book of Business(1) 2010 Full Year Q4 Q3 Q2 (Dollars in millions) Q1 2009 Full Year As of the end of each period: Serious delinquency rate(2) ...Nonperforming loans(3) ...Foreclosed property inventory: Number of properties ...Carrying value ...Combined loss reserves(4) ...Total loss...

  • Page 23
    ... reserve for guaranty losses related to both single-family loans backing Fannie Mae MBS that we do not consolidate in our consolidated balance sheets and single-family loans that we have guaranteed under long-term standby commitments. Prior period amounts have been restated to conform to the current...

  • Page 24
    ... of the risks to our business posed by our reliance on the issuance of debt securities to fund our operations. Outlook Overall Market Conditions. We expect weakness in the housing and mortgage markets to continue in 2011. The high level of delinquent mortgage loans will result in the foreclosure of...

  • Page 25
    ... in 2009, and Credit Losses." Uncertainty Regarding our Long-Term Financial Sustainability and Future Status. There is significant uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that we currently anticipate, such as home prices and unemployment...

  • Page 26
    ...'s commitment to support [Fannie Mae and Freddie Mac] as they continue to play a vital role in the housing market during this current crisis." Treasury and HUD's February 11, 2011 report to Congress on reforming America's housing finance market provides that the Administration will work with FHFA to...

  • Page 27
    ... purchase with an associated fair value loss for the difference between the fair value of the acquired loan and its acquisition cost, as these loans are already reflected on our consolidated balance sheet. Currently, the cost of purchasing most delinquent loans from Fannie Mae MBS trusts and holding...

  • Page 28
    ... Works with our Capital Markets group to facilitate the purchase of single-family mortgage loans for our mortgage portfolio • Credit risk management: Prices and manages the credit risk on loans in our single-family guaranty book of business • Credit loss management: Works to prevent foreclosures...

  • Page 29
    ...Fannie Mae MBS in lender swap transactions • 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 housing...

  • Page 30
    ...impairment recognized on our investments • Administrative expenses: Consists of salaries and benefits, occupancy costs, professional services, and other expenses associated with our Capital Markets business operations Revenues from our Business Segments The following table shows the percentage of...

  • Page 31
    ... modification programs in which we engage) and (2) sellers and servicers repurchase loans from us upon our demand based on a breach in the selling representations and warranties provided upon delivery of the loans. We describe the credit risk management process employed by our Single-Family business...

  • Page 32
    ... contract terms negotiated individually for each transaction. Single-Family Mortgage Servicing Servicing Generally, the servicing of the mortgage loans held in our mortgage portfolio or that back our Fannie Mae MBS is performed by mortgage servicers on our behalf. Typically, lenders who sell single...

  • Page 33
    ... rates, the multifamily market is made up of a wide variety of lending sources, including commercial banks, life insurance companies, investment banks, small community banks, FHA, state and local housing finance agencies and the GSEs. • Number of lenders; lender relationships: In 2010, we executed...

  • Page 34
    ...and MBS trade in a market in which investors expect commercial investment terms, particularly limitations on prepayments of loans and the imposition of prepayment premiums. Multifamily Mortgage Securitizations and Acquisitions Our Multifamily business generally creates multifamily Fannie Mae MBS and...

  • Page 35
    ... for managing the interest rate risk associated with our investments in mortgage assets. The business model for our Capital Markets group has evolved in recent years. Our business activity is now focused on making short-term use of our balance sheet rather than long-term investments. As...

  • Page 36
    ...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 products...

  • Page 37
    ... Rate Risk." Investment and Financing Activities Our Capital Markets group seeks to increase the liquidity of the mortgage market by maintaining a presence as an active investor in mortgage loans and mortgage-related securities and, in particular, supports the liquidity and value of Fannie Mae MBS...

  • Page 38
    ... goals of the conservatorship. The Acting Director also stated that FHFA does not expect that we will be a substantial buyer or seller of mortgages for our retained portfolio, except for purchases of delinquent mortgages out of our guaranteed MBS pools. For additional information about our business...

  • Page 39
    ... 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 Performance for 2010." Under the senior preferred stock purchase agreement, beginning on March 31, 2011, we were scheduled to begin paying...

  • Page 40
    ... States Court of Federal Claims for relief requiring Treasury to fund to us the lesser of (1) the amount necessary to cure the payment defaults on our debt and Fannie Mae MBS and (2) the lesser of (a) the deficiency amount and (b) the maximum amount that may be funded under the agreement less the...

  • Page 41
    ... under Treasury Agreements The senior preferred stock purchase agreement and warrant contain covenants that significantly restrict our business activities and require the prior written consent of Treasury before we can take certain actions. These covenants prohibit us from: • paying dividends or...

  • Page 42
    ... in a press release. Under the terms of the senior preferred stock purchase agreement, "mortgage assets" and "indebtedness" are calculated without giving effect to changes made after May 2009 to the accounting rules governing the transfer and servicing of financial assets and the extinguishment...

  • Page 43
    ... additional credit loss protection and (5) reducing Freddie Mac and Fannie Mae's portfolios, consistent with Treasury's senior preferred stock purchase agreements with the companies. In addition, the report outlines three potential options for a new long-term structure for the housing finance system...

  • Page 44
    ... incorporated into this annual report on Form 10-K. During 2010, Congress held hearings on the future status of Fannie Mae and Freddie Mac, the Congressional Budget Office released a study examining various alternatives for the future of the secondary mortgage market, and members of Congress offered...

  • Page 45
    ...are insured by FHA or guaranteed by the VA. • Loan-to-Value and Credit Enhancement Requirements. The Charter Act generally requires credit enhancement on any conventional single-family mortgage loan that we purchase or securitize if it has a loan-to-value ratio over 80% at the time of purchase. We...

  • Page 46
    ...our real property. We are not exempt from the payment of federal corporate income taxes. • Other Limitations and Requirements. We may not originate mortgage loans or advance funds to a mortgage seller on an interim basis, using mortgage loans as collateral, pending the sale of the mortgages in the...

  • Page 47
    ... agreement described under "Treasury Agreements-Covenants under Treasury Agreements," as it may be amended from time to time. The rule is effective for as long as we remain subject to the terms and obligations of the senior preferred stock purchase agreement. New Products. The GSE Act requires...

  • Page 48
    ... Fannie Mae and Freddie Mac, to ensure that we operate in a safe and sound manner. Existing risk-based capital regulation ties our capital requirements to the risk in our book of business, as measured by a stress test model. The stress test simulates our financial performance over a ten-year period...

  • Page 49
    ... or receiver. Our critical capital requirement is generally equal to the sum of 1.25% of on-balance sheet assets and 0.25% of off-balance sheet obligations. FHFA has directed us, for purposes of critical capital, to continue reporting loans backing Fannie Mae MBS held by third parties based...

  • Page 50
    ... Moreover, these modifications will count only towards the single-family low-income families refinance goal, not any of the home purchase goals. The final rule notes that "FHFA does not intend for [Fannie Mae] to undertake uneconomic or high-risk activities in support of the [housing] goals. However...

  • Page 51
    ... performance numbers and whether we met our goals. Duty to Serve The 2008 Reform Act created the duty to serve underserved markets in order for us and Freddie Mac to "provide leadership to the market in developing loan products and flexible underwriting guidelines to facilitate a secondary market...

  • Page 52
    ... or guaranteed by us or Freddie Mac, as well as other mortgage loans. These two programs were designed to expand the number of borrowers who can refinance or modify their mortgages to achieve a monthly payment that is more affordable now and into the future or to obtain a more stable loan product...

  • Page 53
    ... risks that this customer concentration poses to our business in "Risk Factors." COMPETITION Historically, our competitors have included Freddie Mac, FHA, Ginnie Mae (which primarily guarantees securities backed by FHA-insured loans), the 12 Federal Home Loan Banks ("FHLBs"), financial institutions...

  • Page 54
    ... balance sheets. Excluding these Fannie Mae MBS from the estimate of our market share, our estimated 2009 market share of new singlefamily mortgage-related securities issuances was 43.2%. We also compete for low-cost debt funding with institutions that hold mortgage portfolios, including Freddie Mac...

  • Page 55
    ..., Area 2H-3S, Washington, DC 20016. We are providing our Web site addresses and the Web site address of the SEC solely for your information. Information appearing on our Web site or on the SEC's Web site is not incorporated into this annual report on Form 10-K. FORWARD-LOOKING STATEMENTS This report...

  • Page 56
    ...as credit losses an estimated two-thirds of the fair value losses on loans purchased out of MBS trusts that are reflected in our consolidated balance sheets, and recover the remaining third through our consolidated statements of operations; • Our belief that continued federal government support of...

  • Page 57
    ... market and help borrowers; limitations on our ability to access the debt capital markets; further disruptions in the housing and credit markets; defaults by one or more institutional counterparties; our reliance on mortgage servicers; deficiencies in servicer and law firm foreclosure processes...

  • Page 58
    .... On February 11, 2011, Treasury and HUD released a report to Congress on reforming America's housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae's and Freddie Mac's role in the market and ultimately wind...

  • Page 59
    ... to pay down draws under the senior preferred stock purchase agreement, will continue to strain our financial resources and have an adverse impact on our results of operations, financial condition, liquidity and net worth, both in the short and long term. Our regulator is authorized or required to...

  • Page 60
    ... recent months, conditions in the housing market contributed to a deterioration in the credit performance of our book of business, negatively impacting serious delinquency rates, default rates and average loan loss severity on the mortgage loans we hold or that back our guaranteed Fannie Mae MBS, as...

  • Page 61
    ... preferred stock purchase agreement with Treasury includes a number of covenants that significantly restrict our business activities. We cannot, without the prior written consent of Treasury: pay dividends (except on the senior preferred stock); sell, issue, purchase or redeem Fannie Mae equity...

  • Page 62
    ...by the borrower. These activities may have short- and long-term adverse effects on our business, results of operations, financial condition, liquidity and net worth. Other agencies of the U.S. government or Congress also may ask us to undertake significant efforts to support the housing and mortgage...

  • Page 63
    ... to fund our operations. On February 11, 2011, Treasury and HUD released a report to Congress on reforming America's housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly wind down both Fannie Mae and Freddie Mac. The report...

  • Page 64
    ... since 2008 have adversely affected the liquidity and financial condition of our institutional counterparties. Our primary exposures to institutional counterparty risk are with mortgage seller/servicers that service the loans we hold in our mortgage portfolio or that back our Fannie Mae MBS; seller...

  • Page 65
    ... mortgage loans with LTV ratios over 80% at the time of acquisition. The current weakened financial condition of our mortgage insurer counterparties creates a significant risk that these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies...

  • Page 66
    ... high loan-to-value ratio loans. As our charter generally requires us to obtain credit enhancement on conventional single-family mortgage loans with loan-to-value ratios over 80% at the time of purchase, an inability to find suitable credit enhancement may inhibit our ability to pursue new business...

  • Page 67
    ...our business, results of operations and financial condition. Deficiencies in servicer and law firm foreclosure processes and the resulting foreclosure pause may cause higher credit losses and credit-related expenses. A number of our single-family mortgage servicers temporarily halted foreclosures in...

  • Page 68
    ... standards. We rely upon business processes that are highly dependent on people, legacy technology and the use of numerous complex systems and models to manage our business and produce books and records upon which our financial statements are prepared. This reliance increases the risk that we may be...

  • Page 69
    ... focus and operations during the past two years, as well as changes to our risk management processes, to keep pace with changing external conditions. These changes, in turn, have necessitated modifications to or development of new business models, processes, systems, policies, standards and controls...

  • Page 70
    ... Adjustments to models or model results are sometimes required to align the results with management's best judgment. We continually receive new economic and mortgage market data, such as housing starts and sales and home price changes. Our critical accounting estimates, such as our loss reserves and...

  • Page 71
    ... home prices or activity in the U.S. housing market would likely cause higher credit losses and credit-related expenses, and lower business volumes. We expect weakness in the real estate financial markets to continue in 2011. The deterioration in the credit condition of outstanding mortgages will...

  • Page 72
    ... in the housing market and declines in home prices, and we expect single-family mortgage debt outstanding to decrease by approximately 2% in 2011. 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...

  • Page 73
    ...the CFTC, the SEC, the Federal Deposit Insurance Corporation, the Federal Reserve and international central banking authorities directly or indirectly impact financial institutions' cost of funds for lending, capital raising and investment activities, which could increase our borrowing costs or make...

  • Page 74
    ... of operations, liquidity and financial condition, including our net worth. Shareholder Derivative Litigation Four shareholder derivative cases, filed at various times between June 2007 and June 2008, naming certain of our current and former directors and officers as defendants, and Fannie Mae as...

  • Page 75
    ... Financial Markets service. For periods prior to our stock's delisting from the NYSE on July 8, 2010, these are high and low sales prices reported in the consolidated transaction reporting system. For periods on or after July 8, 2010, these prices represent high and low trade prices. No dividends...

  • Page 76
    ... than as required by (and pursuant to) the terms of a binding agreement in effect on September 7, 2008, without the prior written consent of Treasury. We previously provided stock compensation to employees and members of the Board of Directors under the Fannie Mae Stock Compensation Plan of 1993...

  • Page 77
    ... Series 2008-1 Preferred Stock received from holders upon conversion of those shares into 520,589 shares of common stock. On January 21, 2003, we publicly announced that the Board of Directors had approved an open market share repurchase program under which we could purchase in open market...

  • Page 78
    ... to conform to the current period presentation. This data should be reviewed in conjunction with the audited consolidated financial statements and related notes and with the MD&A included in this annual report on Form 10-K. For the Year Ended December 31, 2010(1) 2009 2008 2007 2006 (Dollars and...

  • Page 79
    ... sale ...Loans held for investment, net of allowance ...Total assets ...Short-term debt ...Long-term debt ...Total liabilities ...Senior preferred stock ...Preferred stock ...Total Fannie Mae stockholders' equity (deficit) ...Net worth surplus (deficit)(10) ...Book of business data: Total mortgage...

  • Page 80
    ... Fannie Mae MBS is included only once in the reported amount. (13) Primarily includes long-term standby commitments we have issued and single-family and multifamily credit enhancements we have provided and that are not otherwise reflected in the table. (14) Reflects mortgage credit book of business...

  • Page 81
    ...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 judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses...

  • Page 82
    ... loans, acquired property, partnership investments, our guaranty assets and buy-ups, our master servicing assets, certain long-term debt arrangements and certain highly structured, complex derivative instruments. Table 5 presents a comparison, by balance sheet category, of the amount of financial...

  • Page 83
    ...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 continually refine our valuation methodologies as markets and products develop...

  • Page 84
    ...reduce costs associated with maintaining our internal model and decrease the operational risk, in the fourth quarter of 2010, we ceased to use our internally developed model and began using a third-party model to project cash flow estimates on our private-label securities. This model change resulted...

  • Page 85
    ... year, mark-to-market LTV ratio, delinquency status and loan product type. We believe that the loss severity estimates we use in determining our loss reserves reflect current available information on actual events and conditions as of each balance sheet date, including current home prices. Our loss...

  • Page 86
    ... of the credit risk profile and repayment prospects of each loan, taking into consideration available operating statements and expected cash flows from the underlying property, the estimated value of the property, the historical loan payment experience and current relevant market conditions that...

  • Page 87
    ... were consolidated in our consolidated balance sheet. We continue to record a reserve for guaranty losses related to loans in unconsolidated trusts and to loans that we have guaranteed under long-term standby commitments. CONSOLIDATED RESULTS OF OPERATIONS The section below provides a discussion of...

  • Page 88
    ...new accounting standards on our consolidated financial statements. Additionally, we expect high levels of period-to-period volatility in our results of operations and financial condition, principally due to changes in market conditions that result in periodic fluctuations in the estimated fair value...

  • Page 89
    ... most components of the average balances, we used a daily weighted average of amortized cost. When daily average balance information was not available, such as for mortgage loans, we used monthly averages. Table 8 presents the change in our net interest income between periods and the extent to which...

  • Page 90
    .../net interest yield . . Net interest income/net interest yield of consolidated trusts ...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) $848,200 $24,845 $ 29,423 $14,510...

  • Page 91
    ...vs. 2008 Variance Due to:(1) Volume Rate (Dollars in millions) Interest income: Mortgage loans of Fannie Mae ...Mortgage loans of consolidated trusts ...Total mortgage loans ...Total mortgage-related securities, net ...Non-mortgage securities(2) ...Federal funds sold and securities purchased under...

  • Page 92
    ...and an increase in average outstanding Fannie Mae MBS and other guarantees. Fee and Other Income Fee and other income includes transaction fees, technology fees and multifamily fees. Beginning in 2010, fee and other income also includes trust management income we earn as master servicer, issuer, and...

  • Page 93
    ...of the substantial majority of available-for-sale Fannie Mae MBS because these securities were eliminated in consolidation. The decline in investment gains in 2010 was partially offset by a decrease in lower of cost or fair value adjustments on held-for-sale loans due to the reclassification of most...

  • Page 94
    ... duration and prepayment risks. We generally are the purchaser of risk management derivatives. In cases where options obtained through callable debt issuances are not needed for risk management derivative purposes, we may sell options in the over-the-counter derivatives market in order to offset the...

  • Page 95
    ... Instruments" for a discussion of the effect of derivatives on our consolidated balance sheets. Mortgage Commitment Derivatives Fair Value Losses, Net Commitments to purchase or sell some mortgage-related securities and to purchase single-family mortgage loans are generally accounted for as...

  • Page 96
    ... formed for the purpose of providing equity funding for affordable multifamily rental properties. Historically, we generally received tax benefits (tax credits and tax deductions for net operating losses) on our LIHTC investments that we used to reduce our income tax expense. Given our current tax...

  • Page 97
    ... a credit to our loss reserves. Table 11 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of MBS trusts reflected in our consolidated balance sheets. Because these fair value losses lowered our recorded loan balances, we...

  • Page 98
    ...included in "Other assets" in our consolidated balance sheets. Represents the fair value losses on loans purchased out of MBS trusts reflected in our consolidated balance sheets. We summarize the changes in our combined loss reserves in Table 12. Upon recognition of the mortgage loans held by newly...

  • Page 99
    ... book of business ...Charge-offs attributable to fair value losses on: Acquired credit-impaired loans ...HomeSaver Advance loans ...Total charge-offs ...Allocation of combined loss reserves: Balance at end of each period attributable to: Single-family(1) ...Multifamily ...Total ...Single-family...

  • Page 100
    ... is taken into account, which has affected their ability to refinance or willingness to make their mortgage payments, and caused loans to remain delinquent for an extended period of time as shown in "Table 41: Delinquency Status of Single-Family Conventional Loans." • The number of loans that are...

  • Page 101
    ...value losses upon acquisition. In 2010, we acquired approximately 1,118,000 loans from MBS trusts. In 2009, we generally recorded our net investment in acquired credit-impaired loans at the lower of the acquisition cost of the loan or the estimated fair value at the date of purchase or consolidation...

  • Page 102
    ...-Single-Family Mortgage Credit Risk Management-Problem Loan Management." For a discussion of our charge-offs, see "Consolidated Results of Operations-Credit-Related Expenses-Credit Loss Performance Metrics." We provide additional information on credit-impaired loans acquired from MBS trusts in "Note...

  • Page 103
    ... 13: Nonperforming Single-Family and Multifamily Loans 2010 As of December 31, 2009 2008 2007 (Dollars in millions) 2006 On-balance sheet nonperforming loans including loans in consolidated Fannie Mae MBS trusts: Nonaccrual loans ...$152,756 Troubled debt restructurings on accrual status ...58,078...

  • Page 104
    ... 2008 primarily driven by $668 million in cash fees received from the cancellation and restructuring of some of our mortgage insurance coverage. As described in "Business-Executive Summary," although the current servicer foreclosure pause has negatively affected our serious delinquency rates, credit...

  • Page 105
    Table 14: Credit Loss Performance Metrics For the Year Ended December 31, 2010 2009 2008 Amount Ratio(1) Amount Ratio(1) Amount Ratio(1) (Dollars in millions) Charge-offs, net of recoveries (2)(3) ...$19,999 1,718 Foreclosed property expense(2)(3) ...Credit losses including the effect of fair value...

  • Page 106
    ...decline in home prices. Table 16 compares the credit loss sensitivities for the periods indicated for first lien single-family whole loans we own or that back Fannie Mae MBS, before and after consideration of projected credit risk sharing proceeds, such as private mortgage insurance claims and other...

  • Page 107
    ... manufactured housing chattel loans and reverse mortgages; and (c) long-term standby commitments. We expect the inclusion in our estimates of the excluded products may impact the estimated sensitivities set forth in this table. As a result of our adoption of the new accounting standards, the balance...

  • Page 108
    ...at least three months, before the modification of the loan can become effective. A trial modification period begins when the borrower and Fannie Mae agree to the terms of the trial modification plan. If the loan is recorded on our consolidated balance sheet, we account for the loan as a TDR, because...

  • Page 109
    ... consolidated statements of operations. Excludes loans purchased from consolidated trusts for the year ended December 31, 2010, for which no fair value losses were recognized. The decline in fair value losses on credit-impaired loans in trial modifications under the program acquired from MBS trusts...

  • Page 110
    ... Years Single-Family and Multifamily Line Item Current Segment Reporting Prior Year Segment Reporting Guaranty fee income • • At adoption of the new accounting standards, we eliminated a substantial majority of our guaranty-related assets and liabilities in our consolidated balance sheet...

  • Page 111
    ...credit-related expenses. Multifamily only • Interest payments expected to be delinquent on off-balance sheet nonperforming loans were considered in the reserve for guaranty losses. Credit-related expenses • • We recorded a fair value loss on credit-impaired loans acquired from MBS trusts...

  • Page 112
    ... our current segment reporting presentation for 2010 and our prior segment presentation for 2009 and 2008. Table 18: Business Segment Summary For the Year Ended December 31, 2010 2009 2008 (Dollars in millions) Net revenues:(1) Single-Family ...Multifamily...Capital Markets ...Consolidated trusts...

  • Page 113
    ...income, and fee and other income (expense). Beginning in 2010, the allowance for loan losses, allowance for accrued interest receivable and fair value losses previously recognized on acquired credit impaired loans are not treated as assets for Single-Family and Multifamily segment reporting purposes...

  • Page 114
    ... federal income taxes ... Net loss attributable to Fannie Mae ...$ (26,680) Other key performance data: Single-family effective guaranty fee rate (in basis points)(1)(5) . . Single-family average charged guaranty fee on new acquisitions points)(6) ...Average single-family guaranty book of business...

  • Page 115
    ... adjusted to fair value under the new segment reporting. Our average single-family guaranty book of business was relatively flat period over period despite our continued high market share because of the decline in U.S. residential mortgage debt outstanding. There were fewer new mortgage originations...

  • Page 116
    ... to increased market prices on interest only-strips. Our average single-family guaranty book of business increased by 5.5% in 2009 over 2008. We experienced an increase in our average outstanding Fannie Mae MBS and other guarantees as our market share of new single-family mortgage-related securities...

  • Page 117
    ...benefits generated from these losses. We recorded a non-cash charge in 2008 to establish a partial deferred tax asset valuation allowance against our net deferred tax assets. Multifamily Business Results Table 21 summarizes the financial results of our Multifamily business for 2010 under the current...

  • Page 118
    ...Fannie Mae ...$ Other key performance data: Multifamily effective guaranty fee rate (in basis points)(1)(6) ...Credit loss performance ratio (in basis points)(7) ...Average Multifamily guaranty book of business(8) ...Multifamily new business volumes(9) ...Multifamily units financed from new business...

  • Page 119
    ...release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Includes $19.9 billion of Fannie Mae multifamily MBS held in the mortgage portfolio, the vast majority of which have been consolidated to loans in our consolidated balance sheet...

  • Page 120
    ...'s mortgage portfolio. For a discussion on the debt issued by the Capital Markets group to fund its investment activities, see "Liquidity and Capital Management." For a discussion on the derivative instruments that Capital Markets uses to manage interest rate risk, see "Consolidated Balance Sheet...

  • Page 121
    ...(409) $(29,417) Income (loss) before federal income taxes ...Benefit (provision) for federal income taxes ...Extraordinary losses, net of tax effect ...Net income (loss) attributable to Fannie Mae ...(1) Segment statement of operations data reported under the current segment reporting basis is not...

  • Page 122
    ...'s statement of operations is limited to our funding debt, which is reported as "Debt of Fannie Mae" in our consolidated balance sheets. Net interest expense also includes an allocated cost of capital charge among the three business segments. The Capital Markets group's net interest income increased...

  • Page 123
    .... We discuss our fair value losses in "Consolidated Results of Operations-Fair Value Gains (Losses), Net." Federal Income Taxes Federal income tax provision substantially declined in 2009 compared with 2008 as we recorded a non-cash charge in 2008 to establish a partial deferred tax asset valuation...

  • Page 124
    ... for sale treatment under the new accounting standards on the transfers of financial assets. Includes scheduled repayments, prepayments, foreclosures and lender repurchases. Includes purchases of Fannie Mae MBS issued by consolidated trusts. (2) (3) The Capital Markets group's mortgage portfolio...

  • Page 125
    ... status in our consolidated financial statements. We expect to continue to purchase loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity, and other constraints including the limit on the mortgage...

  • Page 126
    .... We fund and manage the interest rate risk on these investments through the issuance of debt securities and the use of derivatives. Our debt securities and derivatives represent the major liability components of our consolidated balance sheet. As discussed in "Business-Executive Summary," on...

  • Page 127
    ... assets. Consists of: federal funds purchased and securities sold under agreements to repurchase; short-term debt; and longterm debt. Consists of: accrued interest payable; reserve for guaranty losses; servicer and MBS trust payable; and other liabilities. Consists of: preferred stock; common stock...

  • Page 128
    ... in our consolidated financial statements. Table 26: Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities Unpaid Principal Balance As of December 31, 2010 Total Noncredit Cumulative Component(2) Losses(1) (Dollars in millions) Fair Value Credit Component (3) Trading...

  • Page 129
    ...Principal Balance AvailableforSale Wraps(1) Trading Average Loss Õ† 60 Days (2)(3) Severity(3)(4) Delinquent (Dollars in millions) Average Credit Enhancement(3)(5) Monoline Financial Guaranteed Amount(6) Private-label mortgage-related securities Alt-A mortgage loans: Option ARM Alt-A mortgage loans...

  • Page 130
    ...Group Results." Debt Instruments The debt reported in our consolidated balance sheets consists of two categories of debt, which we refer to as "debt of Fannie Mae" and "debt of consolidated trusts." Debt of Fannie Mae, which consists of short-term debt, long-term debt and federal funds purchased and...

  • Page 131
    ...in fair value during the period ...Risk management derivatives fair value losses, net ...Net risk management derivative liability as of December 31, 2010 ...(1) Cash receipts from sale of derivative option contracts increase the derivative liability recorded in our consolidated balance sheets. Cash...

  • Page 132
    ... purchase agreement ...Senior preferred stock dividends...Capital transactions, net ...Other equity transactions ...Fannie Mae stockholders' deficit as of December 31, 2010 Non-GAAP consolidated fair value balance sheets: Estimated fair value of net assets as of December 31, 2009 ...Impact of new...

  • Page 133
    ...payments. Key inputs and assumptions used in our credit valuation models included the amount of estimated default costs, including estimated unrecoverable principal and interest that we expected to incur over the life of the underlying mortgage loans backing our Fannie Mae MBS, estimated foreclosure...

  • Page 134
    ... our guaranty business, versus the interest rate risk, which is measured by our Capital Markets group. As a result of our adoption of the new accounting standards, we shifted from presenting the fair value of mortgage loans separately from the fair value of net guaranty obligations of MBS trusts as...

  • Page 135
    ... sale ...Mortgage loans held for investment, net of allowance for loan losses: Of Fannie Mae ...Of consolidated trusts ...Total mortgage loans ...Advances to lenders ...Derivative assets at fair value ...Guaranty assets and buy-ups, net ...Total financial assets ...Master servicing assets and credit...

  • Page 136
    ... determined the estimated fair value of these financial instruments in accordance with the fair value accounting standard as described in "Note 19, Fair Value." Includes certain long-term debt instruments that we elected to report at fair value in our GAAP consolidated balance sheets of $3.2 billion...

  • Page 137
    ... senior preferred stock purchase agreement; • borrowings under secured and unsecured intraday funding lines of credit we have established with several large financial institutions; • guaranty fees received on Fannie Mae MBS; • borrowings against mortgage-related securities and other investment...

  • Page 138
    ...currently expect our debt funding needs will decline in future periods as we reduce the size of our mortgage portfolio in compliance with the requirement of the senior preferred stock purchase agreement that we reduce our mortgage portfolio 10% per year until it reaches $250 billion. Fannie Mae Debt...

  • Page 139
    ...On February 11, 2011, Treasury and HUD released a report to Congress on reforming America's housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance...

  • Page 140
    ... on our outstanding short-term and longterm debt based on its original contractual terms. Our total outstanding debt of Fannie Mae, which consists of federal funds purchased and securities sold under agreements to repurchase and short-term and long-term debt, excluding debt of consolidated trusts...

  • Page 141
    ... instruments that is reported at fair value. Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and, therefore, does not include the current portion of long-term debt. Reported amounts include a net discount and other cost basis adjustments...

  • Page 142
    ... 31, 2010 and 2009, respectively. The unpaid principal balance of long-term debt of Fannie Mae, which excludes unamortized discounts, premiums, fair value adjustments and other cost basis adjustments and amounts related to debt of consolidated trusts, totaled $640.5 billion and $583.4 billion as of...

  • Page 143
    ...During the 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...

  • Page 144
    ...repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities. We also intend to use funds we receive from Treasury under the senior preferred stock purchase agreement to pay our debt obligations and to pay dividends...

  • Page 145
    ...-Capital Activity-Senior Preferred Stock Purchase Agreement." Liquidity Risk Management Practices and Contingency Planning Our liquidity position could be adversely affected by many causes, both internal and external to our business, including: actions taken by the conservator, the Federal Reserve...

  • Page 146
    ...to the short- and long-term unsecured debt markets and other assumptions required by FHFA; • maintain within our cash and other investments portfolio a daily balance of U.S. Treasury securities that has a redemption amount greater than or equal to 50% of the average of the previous three month-end...

  • Page 147
    ... our credit ratings include our status as a GSE, Treasury's funding commitment under the senior preferred stock purchase agreement, the rating agencies' assessment of the general operating and regulatory environment, the credit ratings of the U.S. government, our relative position in the market, our...

  • Page 148
    financial condition, our reputation, our liquidity position, the level and volatility of our earnings, and our corporate governance and risk management policies. Our senior unsecured debt (both long-term and shortterm), qualifying subordinated debt and preferred stock are rated and monitored by ...

  • Page 149
    ... item in our consolidated balance sheet. Our ability to manage our net worth continues to be very limited. We are effectively unable to raise equity capital from private sources at this time and, therefore, are reliant on the senior preferred stock purchase agreement to address any net worth deficit...

  • Page 150
    ... 31, 2009. For information on the mortgage loans underlying both our on- and off-balance sheet Fannie Mae MBS, as well as whole mortgage loans that we own, see "Risk Management-Credit Risk Management." Partnership Investment Interests For partnership investments where we have determined that we are...

  • Page 151
    ... for the year ended December 31, 2009. As a result of our current tax position, we currently are not making any new LIHTC investments, other than pursuant to commitments existing prior to 2008, and are not recognizing any tax benefits in our consolidated statements of operations associated with the...

  • Page 152
    ... long-term earnings or in the value of our net assets due to fluctuations in interest rates. Liquidity risk is our potential inability to meet our funding obligations in a timely manner. • Operational Risk. Operational risk is the loss resulting from inadequate or failed internal processes, people...

  • Page 153
    ...the business unit chief risk officer and the business unit executive vice president and includes key business and risk leaders. Our current committee structure includes four Business Risk Committees (Capital Markets Risk, Credit Portfolio Management Risk, Multifamily Risk and Single-Family Risk) and...

  • Page 154
    ... by borrowers in the month received. Previously, we recorded these Fannie Mae MBS in our mortgage credit book of business on a scheduled basis and recognized these payments when we remitted payment to the MBS trusts one month after the unscheduled payments were received. As a result of this timing...

  • Page 155
    Table 39: Composition of Mortgage Credit Book of Business(1) As of December 31, 2010 Single-Family Multifamily Total Conventional(2) Government(3) Conventional(2) Government(3) Conventional(2) Government(3) (Dollars in millions) Mortgage assets: Mortgage loans(4) ...Fannie Mae MBS(5)(7) . . Agency ...

  • Page 156
    ... by Freddie Mac and Ginnie Mae. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount. Includes single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table. Single-Family Mortgage Credit Risk...

  • Page 157
    ...the policy. We typically collect claims under pool mortgage insurance three to six months after disposition of the property that secured the loan. For a discussion of our aggregate mortgage insurance coverage as of December 31, 2010 and 2009, see "Risk Management-Credit Risk Management-Institutional...

  • Page 158
    ... business for mortgage loans with certain risk characteristics to ensure that Fannie Mae is positioned to provide a stable source of liquidity to its lender partners; • On October 18, 2010, the Federal Reserve Board released an interim final rule on appraiser independence. Under the Dodd-Frank Act...

  • Page 159
    ... to the estimated mark-to-market LTV ratios, particularly those over 100%, as this indicates that the borrower's mortgage balance exceeds the property value. - Product type. Certain loan product types have features that may result in increased risk. Generally, intermediate-term, fixed-rate mortgages...

  • Page 160
    ... documentation and higher risk loan product types. Table 40 presents our single-family conventional business volumes and our single-family conventional guaranty book of business for the periods indicated, based on certain key risk characteristics that we use to evaluate the risk profile and credit...

  • Page 161
    ... Business Volume Book of Business(3)(4) For the Year Ended December 31, As of December 31, 2010 2009 2008 2010 2009 2008 (Dollars in millions) Property type: Single-family homes ...Condo/Co-op ...Total ...Occupancy type: Primary residence ...Second/vacation home ...Investor ...Total ...FICO credit...

  • Page 162
    ...requires primary mortgage insurance or other credit enhancement for loans that we acquire that have a LTV ratio over 80%. The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value...

  • Page 163
    ... time of purchase. For the year ended December 31, 2010, these loans accounted for 16% of our single-family business volume. The prolonged and severe decline in home prices has resulted in the overall estimated weighted average mark-to-market LTV ratio of our single-family conventional guaranty book...

  • Page 164
    ...occasionally execute third-party sales, where we sell the property to a third party immediately prior to entering the foreclosure process. When appropriate, we seek to move to foreclosure expeditiously. Our mortgage servicers are the primary point of contact for borrowers and perform a vital role in...

  • Page 165
    ... not have sufficient equity in the home to refinance or sell the property and recover enough proceeds to pay off the loan and avoid foreclosure. • High levels of unemployment are hampering the ability of many delinquent borrowers to cure delinquencies and return their loans to current status. 160

  • Page 166
    ... been executed. • Loan servicers are operating under our directive to delay foreclosure sales until they verify that borrowers are not eligible for HAMP modifications and other home retention and foreclosure-prevention alternatives have been exhausted. • A number of states have enacted laws to...

  • Page 167
    ... Serious Market of Book Delinquency LTV Outstanding Rate Ratio(1) Unpaid Principal Balance Unpaid Principal Balance Unpaid Principal Balance States: Arizona ...$ California ...Florida ...Nevada ...Select Midwest states(2) ...Product type: Alt-A(3) ...Subprime ...Vintages: 2006 ...2007 ...232...

  • Page 168
    ...the required mortgage payments. Since the cost of foreclosure can be significant to both the borrower and Fannie Mae, to avoid foreclosure and satisfy the first lien mortgage obligation, our servicers work with a borrower to sell their home prior to foreclosure in a preforeclosure sale or accept the...

  • Page 169
    ... were 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 collects all required documentation before making...

  • Page 170
    ...homes, we expect to increase the use of foreclosure alternatives. Also during 2010, we began offering an Alternative ModificationTM option for Fannie Mae borrowers who were believed to be eligible for and accepted a HAMP trial modification plan, made their required payments during their trial period...

  • Page 171
    ...lieu of foreclosure. See footnote 9 to "Table 40: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business" for states included in each geographic region. Excludes foreclosed property claims receivables, which are reported in our consolidated balance sheets as...

  • Page 172
    ... Mortgage Credit Risk Management The credit risk profile of our multifamily mortgage credit book of business is influenced by: the structure of the financing; the type and location of the property; the condition and value of the property; the financial strength of the borrower and lender; market...

  • Page 173
    ... three years ended December 31, 2010, 2009, and 2008. 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 loans and the underlying properties on...

  • Page 174
    ... Multifamily As of December 31, Credit Losses For the 2010 2009 2008 Year Ended Percentage of Serious Percentage of Serious Percentage of Serious December 31, Book Delinquency Book Delinquency Book Delinquency Outstanding Rate Outstanding Rate Outstanding Rate 2010 2009 2008 DUS small balance loans...

  • Page 175
    ... our multifamily guaranty book of business as weak economic conditions have caused new foreclosures to outpace dispositions. Institutional Counterparty Credit Risk Management We rely on our institutional counterparties to provide services and credit enhancements, including primary and pool mortgage...

  • Page 176
    ... the loans we hold in our investment portfolio or that back our Fannie Mae MBS; • third-party providers of credit enhancement on the mortgage assets that we hold in our investment portfolio or that back our Fannie Mae MBS, including mortgage insurers, financial guarantors and lenders with risk...

  • Page 177
    ... standards and financial requirements for mortgage seller/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...

  • Page 178
    ...certain business activities, transfer of exposures to third parties, receipt of additional collateral and suspension or termination of the servicing relationship. Mortgage Insurers We use several types of credit enhancement to manage our single-family mortgage credit risk, including primary and pool...

  • Page 179
    ... in home prices and changes in interest rates. From time to time, we may also discuss its situation with the rating agencies. Table 51 presents our maximum potential loss recovery for the primary and pool mortgage insurance coverage on single-family loans in our guaranty book of business by mortgage...

  • Page 180
    ... risk with the remaining mortgage insurers in the industry. Triad Guaranty Insurance Corporation ceased issuing commitments for new mortgage insurance and began to run-off its existing business in July 2008. In April 2009, Triad received an order from its regulator that changes the way it will pay...

  • Page 181
    ... the life of the loan, we use the noted risk ratings to adjust the loss severity in our best estimates of future cash flows. As the loans collectively assessed for impairment only look to the probable payments we would receive associated with our loss emergence period, we use the noted shortfall...

  • Page 182
    ... additional insurance coverage restructurings in 2011, though fewer than prior years. We generally are required pursuant to our charter to obtain credit enhancement on single-family conventional mortgage loans that we purchase or securitize with LTV ratios over 80% at the time of purchase. In...

  • Page 183
    ... time. We assumed no benefit for Ambac's financial guaranty when estimating other-than-temporary impairment. See "Consolidated Balance Sheet Analysis-Investments in Mortgage-Related Securities" for more information on our investments in private-label mortgage-related securities. Lenders with Risk...

  • Page 184
    ... balance of loans in our guaranty book of business acquired from our DUS lenders are serviced by institutions with an external investment grade credit rating or a guarantee from an affiliate with an external investment grade credit rating. Given the recourse nature of the DUS program, the lenders...

  • Page 185
    ...to interest rate and foreign currency derivatives contracts. We estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a net gain position by counterparty...

  • Page 186
    ... having to replace the mortgage pools at higher cost to meet a forward commitment to sell the MBS. We manage these risks by establishing approval standards and limits on exposure and monitoring both our exposure positions and changes in the credit quality of dealers. Document Custodians We use third...

  • Page 187
    ...our consolidated balance sheet and relative mix of debt and derivatives positions in order to remain within pre-defined risk tolerance levels that we consider acceptable. We regularly disclose two interest rate risk metrics that estimate our overall interest rate exposure: (1) fair value sensitivity...

  • Page 188
    ... of future credit performance, we do not actively manage the change in the fair value of our guaranty business that is attributable to changes in interest rates. We do not believe that periodic changes in fair value due to movements in interest rates are the best indication of the long-term value of...

  • Page 189
    ...-traded contracts that either obligate a buyer to buy an asset at a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of futures contracts we enter into include Eurodollar, U.S. Treasury and swaps. We use interest rate swaps, interest rate options...

  • Page 190
    ...interest rate risk measurement framework is based on the fair value of our assets, liabilities and derivative instruments and the sensitivity of these values to changes in market factors. Estimating the impact of prepayment risk is critical in managing interest rate risk. We use prepayment models to...

  • Page 191
    ...and manage our interest rate risk. The methodologies used to calculate risk estimates are periodically changed on a prospective basis to reflect improvements in the underlying estimation process. Below we present two quantitative metrics that provide estimates of our interest rate exposure: (1) fair...

  • Page 192
    ...The interest rate risk measures discussed above exclude the impact of changes in the fair value of our net guaranty assets resulting from changes in interest rates. We exclude our guaranty business from these sensitivity measures based on our current assumption that the guaranty fee income generated...

  • Page 193
    ... losses" 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. Also consists of the net of all other financial instruments reported in "Note 19, Fair Value." Liquidity Risk Management...

  • Page 194
    ...the loss of facilities, technology or personnel. Despite proactive planning, testing and continuous preparation of back up venues, these measures may not prevent a significant business disruption from an improbable but highly catastrophic event. Non-Mortgage Related Fraud Risk Our anti-fraud program...

  • Page 195
    ... time we acquire the loan, we record the related fair value loss as a charge against the "Reserve for guaranty losses." "Alt-A mortgage loan" or "Alt-A loan" generally refers to a mortgage loan originated under a lender's program offering reduced or alternative documentation than that required for...

  • Page 196
    ... the first lien mortgage loan current. "HomeSaver Advance fair value losses" refer to losses recorded at the time we make a HomeSaver Advance loan to a borrower, which result from our recording HomeSaver Advance loans at their estimated fair value at the date of purchase from the servicers. "Implied...

  • Page 197
    ...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 198
    ... Procedures As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Deputy Chief Financial Officer, the effectiveness of our disclosure controls and procedures as in effect as of December 31, 2010, the end of the period...

  • Page 199
    ...with authorizations of our management and our Board of Directors; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Internal control over financial...

  • Page 200
    ..., including accounting, credit and market risk management, liquidity, external communications and legal matters. • Senior officials within FHFA's Office of the Chief Accountant have met frequently with our senior finance executives regarding our accounting policies, practices and procedures. 195

  • Page 201
    CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Overview Management has evaluated, with the participation of our Chief Executive Officer and Deputy Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have ...

  • Page 202
    ... company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control...

  • Page 203
    .... We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010, of the Company and our report dated February 24, 2011 expressed an unqualified opinion...

  • Page 204
    ... 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 205
    ... 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, 68, served as Chairperson of the Board of Directors of New York...

  • Page 206
    ... and Corporate Governance Committee concluded that Mr. Harvey should continue to serve as a director due to his extensive experience in business, finance, capital markets, risk management, public policy matters, mortgage lending, low-income housing and homebuilding, which he gained in the positions...

  • Page 207
    ... business, finance, capital markets, risk management and the regulation of financial institutions, which he gained in the positions described above. David H. Sidwell, 57, served as Executive Vice President and Chief Financial Officer of Morgan Stanley from March 2004 to October 2007, when he retired...

  • Page 208
    ... taking action in the following areas: (1) actions involving capital stock, dividends, the senior preferred stock purchase agreement, increases in risk limits, material changes in accounting policy and reasonably foreseeable material increases in operational risk; (2) the creation of any subsidiary...

  • Page 209
    ... Board, as a group, must be knowledgeable in business, finance, capital markets, accounting, risk management, public policy, mortgage lending, real estate, lowincome housing, homebuilding, regulation of financial institutions and any other areas that may be relevant to the safe and sound operation...

  • Page 210
    ... and policy guidance, Delaware law (for corporate governance purposes) and in Fannie Mae's bylaws and applicable charters of Fannie Mae's Board committees. Such duties or authorities may be modified by the conservator at any time. In January 2011, the Board dissolved the Strategic Planning Committee...

  • Page 211
    ... not plan to hold an annual meeting of shareholders in 2011. For more information on the conservatorship, refer to "Business-Conservatorship and Treasury Agreements-Conservatorship." EXECUTIVE OFFICERS Our current executive officers who are not also members of the Board of Directors are listed below...

  • Page 212
    ... J. Phelan, 51, has been Executive Vice President-Chief Risk Officer, from April 2009 through February 2011. Prior to joining Fannie Mae, Mr. Phelan served as Chief Risk Officer of Wachovia Corporation, a financial holding company and bank holding company, from October 2008 to January 2009. Prior to...

  • Page 213
    ... holding company. From April 2004 to April 2008, he was Global Head, Capital Markets Operations and Institutional Clients Group Business Services. Before that, he served in a series of senior finance positions, including as Chief Financial Officer of Citigroup International, the European Investment...

  • Page 214
    ...named executives, as well as our executive life insurance program; and • We froze benefit accruals in the Executive Pension Plan for all participants, including our Chief Executive Officer, for compensation years after 2009. In addition, the Board of Directors did not increase the named executives...

  • Page 215
    ... compensation or termination benefits of any officer at the executive vice president level and above and including, regardless of title, executives who hold positions with the functions of the chief operating officer, chief financial officer, general counsel, chief business officer, chief investment...

  • Page 216
    ... of our Chief Executive Officer and Chief Financial Officer, which is similar to the pay structure created for firms that received exceptional TARP assistance. FHFA, in consultation with Treasury, approved our compensation program and the level of salary, deferred pay target and long-term incentive...

  • Page 217
    ...-Pension Benefits" and "Compensation Tables- Nonqualified Deferred Compensation." • Other Employee Benefits and Plans. In general, the named executives are eligible for employee benefits available to our employee population as a whole, including our medical insurance plans, life insurance program...

  • Page 218
    ...50% while actively balancing this market position with prudent lending and pricing. Multifamily GSE market share refers to the percentage of multifamily credit guaranty acquisitions by Fannie Mae versus Freddie Mac. • Our Capital Markets business provided liquidity to the market through securities...

  • Page 219
    ...quality office, documented the current state architecture, created a baseline future state and made a number of organizational changes to optimize the technology and operations areas. • We enhanced our talent development and review processes, and retained high-performing employees at a higher rate...

  • Page 220
    ...long-term incentive awards for the named executives took into account not only the company's performance against the 2010 corporate goals and subgoals described above, but also an assessment by the Board of Directors of each named executive's performance during the year. The Board assessed the Chief...

  • Page 221
    ... of our outstanding debt. Mr. Benson also had a significant role in obtaining funding for the company's purchase of over $200 billion in delinquent loans from our single-family MBS trusts in 2010, which had a beneficial impact on our financial results. The Chief Executive Officer also considered...

  • Page 222
    ...named executives' positions. FW Cook advised the Compensation Committee and the Board on various executive compensation matters during 2010, including the company's risk assessment of its 2010 compensation program, changes to the Chief Executive Officer's retirement benefits and various compensation...

  • Page 223
    ... or repayment of deferred pay, long-term incentive awards and any other incentive payments described above, the executive officer will also forfeit or must repay, as the case may be, deferred pay and annual incentives or long-term awards paid to him or her in the two-year period prior to the date of...

  • Page 224
    ...that the named executives' base salary, deferred pay targets and long-term incentive targets will not change in 2011. As of February 24, 2011, the Board of Directors had not established 2011 corporate performance goals for purposes of determining the first installment of the 2011 long-term incentive...

  • Page 225
    ... Plan Earnings Compensation Compensation (4) (5) ($) ($)(6) ($) Name and Principal Position Year Salary ($)(1) Bonus ($)(2) Stock Awards ($)(3) Total ($) Michael Williams(7) ...President and Chief Executive Officer David Hisey(8) ...Executive Vice President and Deputy Chief Financial Officer...

  • Page 226
    .... 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 2010 in the "Non-Equity Incentive Plan Compensation" column include the first installment of the 2010 long-term incentive award...

  • Page 227
    ... credit to the Supplemental Retirement Savings Plan for 2010 that immediately vested, and do not include these forfeited amounts. Mr. Williams became our President and Chief Executive Officer on April 21, 2009. He previously served as Fannie Mae's Executive Vice President and Chief Operating Officer...

  • Page 228
    ... any payment of his 2010 long-term incentive award or 2010 deferred pay. See "Compensation Discussion and Analysis-Determination of 2010 Compensation-Assessment of 2010 Individual Performance" for further information. Outstanding Equity Awards at 2010 Fiscal Year-End The following table shows...

  • Page 229
    ... number of shares of stock by the fair market value (based on the closing market price) of our common stock on the vesting date. We have provided no information regarding stock option exercises because no named executives exercised stock options during 2010. Name Stock Awards Number of Shares Value...

  • Page 230
    ... compensation is limited in the aggregate to 50% of Mr. Williams' base salary, and consists of his Annual Incentive Plan cash bonus for 2007 and his 2008 Retention Program awards earned for 2008 and 2009. His payments under the Executive Pension Plan are reduced by his Retirement Plan benefit...

  • Page 231
    ... the only named executives who participate in the Retirement Plan. Under the Retirement Plan, normal retirement benefits are computed on a single life basis using a formula based on final average annual earnings and years of credited service. For years of service after 1988, the pension formula is...

  • 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
    ... officer, chief financial officer, general counsel, chief business officer, chief investment officer, treasurer, chief compliance officer, chief risk officer and chief/general/internal auditor. In addition, as described below under "Potential Payments to Named Executives," in the event Fannie Mae...

  • Page 234
    ... executive officer was employed at least one complete calendar quarter during the current performance year. • Retirement. If an executive officer retires from Fannie Mae at or after age 65 with at least 5 years of service, he or she will receive the remaining installment payments of deferred pay...

  • Page 235
    ... the executive retires at or after age 60 with 5 years of service or age 65 (with no service requirement). • Retiree Medical Benefits. We currently make certain retiree medical benefits available to our full-time employees who retire and meet certain age and service requirements. The table below...

  • Page 236
    ... as our Chief Financial Officer from November 2008 to December 2010, received no severance payments from us as a result of his resignation from Fannie Mae. Director Compensation In November 2008, FHFA approved a new program under which our non-management directors receive all compensation in cash...

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

  • 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, 2010 Number of Securities...

  • Page 239
    ... Excluding 2011(2) Owned Stock Options Name and Position David C. Benson(3) ...Executive Vice President-Capital Markets Dennis R. Beresford ...Director Terence W. Edwards ...Executive Vice President-Credit Portfolio Management W. Thomas Forrester ...Director Brenda J. Gaines ...Director Charlynn...

  • Page 240
    ... 24, 2008 or may require the approval of Treasury pursuant to the senior preferred stock purchase agreement. Our Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors prohibits our directors from engaging in any conduct or activity that is inconsistent with our best...

  • Page 241
    ... Operating Officer, Chief Financial Officer, Enterprise Risk Officer, General Counsel, Chief Audit Executive or Chief Compliance Officer that may result in an actual or potential conflict of interest under the Employee Code of Conduct or Conflict of Interest Policy and Conflict of Interest Procedure...

  • Page 242
    ... quarter to determine whether to set the quarterly commitment fee. We have received an aggregate of $87.6 billion from Treasury under the senior preferred stock purchase agreement, and in February 2011, the Acting Director of FHFA submitted a request on behalf of Fannie Mae to Treasury for an...

  • Page 243
    ... 31, 2010, Fannie Mae's maximum potential risk of loss under these programs, assuming a 100% loss of principal, was approximately $7.2 billion. FHFA, as conservator, approved the senior preferred stock purchase agreement and the amendments to the agreement, our role as program administrator for HAMP...

  • Page 244
    ... book, making PHH our seventh-largest servicer. PHH also entered into transactions with us to purchase or sell approximately $16 billion in Fannie Mae, Freddie Mac and Ginnie Mae mortgage-related securities in 2010. As a single-family seller-servicer customer, PHH also pays us fees for its use...

  • Page 245
    ... Vice President-Chief Risk Officer from April 2009 through February 2011. Mr. Phelan's brother, Lawrence T. Phelan, is an equity partner with ownership interests in two law firms that perform services for Fannie Mae, as well as a minority owner in a company that performs services for these law firms...

  • Page 246
    ... seek debt financing intended specifically to be purchased by us, although, as a secondary market participant, in the ordinary course of our business we may purchase multifamily mortgage loans made to borrowing entities sponsored by Integral. See "Director Independence- Our Board of Directors" below...

  • Page 247
    ... a current executive officer of a company or other entity that does or did business with us and to which we made, or from which we received, payments within the preceding five years that, in any single fiscal year, were in excess of $1 million or 2% of the entity's consolidated gross annual revenues...

  • Page 248
    ... members. • Mr. Perry is an executive officer and majority shareholder of The Integral Group LLC, which indirectly does business with Fannie Mae. This business includes the following: • Fannie Mae purchased a 50% participation in a mortgage loan made in 2001 to a limited partnership borrower...

  • Page 249
    ...Integral Property Partnerships. 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...

  • Page 250
    ... the new accounting standard on consolidation. Mainly consists of: (1) fees billed for attest-related services on securitization transactions and (2) in 2009, reimbursement of costs associated with responding to subpoenas relating to Fannie Mae's securities litigation. Pre-Approval Policy The Audit...

  • Page 251
    ...Losses ...Note 6- Investments in Securities ...Note 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...

  • Page 252
    ... Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Federal National Mortgage Association /s/ Michael J. Williams Michael J. Williams President and Chief Executive Officer Date: February 24, 2011 KNOW ALL PERSONS...

  • Page 253
    Signature Title Date /s/ Brenda J. Gaines Brenda J. Gaines Charlynn Goins Charlynn Goins Director February 24, 2011 /s/ Director February 24, 2011 /s/ Frederick B. Harvey III Frederick B. Harvey III /s/ Egbert L. J. Perry Egbert L. J. Perry Jonathan Plutzik Jonathan Plutzik David H. ...

  • 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
    ... Mortgage Association, acting through the Federal Housing Finance Agency as its duly appointed conservator (Incorporated by reference to Exhibit 4.1 to Fannie Mae's Current Report on Form 8-K, filed October 2, 2008.) Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated...

  • Page 256
    ...Fannie Mae's Annual Report on Form 10-K for the year ended December 31, 2007, filed February 27, 2008.) Amendment to the Executive Pension Plan of the Federal National Mortgage Association, effective January 1, 2008†(Incorporated by reference to Exhibit 10.25 to Fannie Mae's Annual Report on Form...

  • Page 257
    ... Housing Finance Agency, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, dated October 19, 2009 (Incorporated by reference to Exhibit 99.1 to Fannie Mae's Current Report on Form 8-K, filed October 23, 2009.) Statement re: computation of ratios to earnings...

  • Page 258
    ....2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a) 32.1 Certification of Deputy Chief Executive Officer pursuant to 18 U.S.C. Section 1350 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 101. INS XBRL Instance Document* 101...

  • Page 259
    ... Losses...Note 6- Investments in Securities ...Note 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...

  • Page 260
    ... on the model for assessing other-than-temporary impairments, applicable to existing and new debt securities. As also discussed in Note 1 to the consolidated financial statements, the Company is currently under the control of its conservator and regulator, the Federal Housing Finance Agency ("FHFA...

  • Page 261
    ...consolidated trusts...Federal funds purchased and securities sold under agreements to repurchase ...Short-term debt: Of Fannie Mae ...Of consolidated trusts...Long-term debt: Of Fannie Mae (includes debt at fair value of $893 and $3,274, respectively) ...Of consolidated trusts (includes debt at fair...

  • Page 262
    ... Year Ended December 31, 2010 2009 2008 Consolidated Statements of Operations Interest income: Trading securities ...Available-for-sale securities ...Mortgage loans: Of Fannie Mae ...Of consolidated trusts...Other ...Total interest income ...Interest expense: Short-term debt: Of Fannie Mae ...Of...

  • Page 263
    ...funds sold and securities purchased under agreements to resell or similar agreements ...Other, net ...Net cash provided by (used in) investing activities ...Cash flows (used in) provided by financing activities: Proceeds from issuance of short-term debt of Fannie Mae ...Payments to redeem short-term...

  • Page 264
    ... Equity Loss Stock Preferred Preferred Common Preferred Stock Stock Deficit) Interest (Deficit) Capital Shares Outstanding Balance as of December 31, 2007 ...Cumulative effect from the adoption of the accounting standards on the fair value option for financial instruments and fair value measurement...

  • Page 265
    ...net loss (net of tax of $10) ...Unrealized gains on guaranty assets and guaranty fee buy-ups ...Prior service cost and actuarial gains, net of amortization for defined benefit plans ...Total comprehensive loss ...Senior preferred stock dividends ...Increase to senior preferred liquidation preference...

  • Page 266
    ... sources, including guaranty fees on the mortgage loans underlying multifamily Fannie Mae MBS and on the multifamily mortgage loans held in our portfolio, transaction fees associated with the multifamily business and bond credit enhancement fees. Our Capital Markets segment invests in mortgage loans...

  • Page 267
    ... Fannie Mae MBS and cannot be used to satisfy the general creditors of the company. As of February 24, 2011, FHFA has not exercised this power. Neither the conservatorship nor the terms of our agreements with Treasury change our obligation to make required payments on our debt securities or perform...

  • Page 268
    ... of operations. On February 11, 2011, Treasury and HUD released a report to Congress on reforming America's housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae's and Freddie Mac's role in the market and...

  • Page 269
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) institutions. The report emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. Basis of ...

  • Page 270
    ... as our reported amounts of revenues and expenses during the reporting periods. Management has made significant estimates in a variety of areas including, but not limited to, valuation of certain financial instruments and other assets and liabilities, the allowance for loan losses and reserve for...

  • Page 271
    ...via lender swap and portfolio securitization transactions, limited partnership investments in low-income housing tax credit ("LIHTC") and other housing partnerships, as well as mortgage and asset-backed trusts that were not created by us. In June 2009, the Financial Accounting Standards Board ("FASB...

  • Page 272
    ... by the single-class securitization trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS. This guaranty exposes us to credit losses on the loans underlying Fannie Mae MBS. We create single-class securitization trusts through both our lender swap and...

  • Page 273
    ... that the purchase price of the MBS does not equal the carrying value of the related consolidated debt reported in our consolidated balance sheet (including unamortized premiums, discounts or the other cost basis adjustments) at the time of purchase. We account for the sale of an MBS from Fannie Mae...

  • Page 274
    ...our consolidated financial statements both our investment in the trust and the mortgage loans of the Fannie Mae MBS trusts that we consolidate that underlie the multi-class resecuritization trust. Additionally, we recognize the unsecured corporate debt issued to third parties to fund the purchase of...

  • Page 275
    ...the sale of a Fannie Mae MBS created through the securitization of loans held for sale were reflected in the consolidated statements of cash flows based on the balance sheet classification of the associated Fannie Mae MBS as either "Net change in trading securities, excluding non-cash transfers," or...

  • Page 276
    ... our consolidated statements of operations. We measure trading securities at fair value in our consolidated balance sheets with unrealized and realized gains and losses included as a component of "Fair value losses, net" in our consolidated statements of operations. We include interest and dividends...

  • Page 277
    ...NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) "Other comprehensive loss," net of applicable taxes. In determining whether a credit loss exists, we use our best estimate of cash flows expected to be collected from the debt security. We consider guarantees, insurance contracts or other credit...

  • Page 278
    ... us as "Mortgage loans held for investment of Fannie Mae" in our consolidated balance sheets. Loans Held for Sale When we acquire mortgage loans that we intend to sell or securitize via trusts that are not consolidated, we classify the loans as held for sale ("HFS"). Prior to the adoption of the new...

  • Page 279
    ... income" in our consolidated statements of operations. We account for a minor modification as a continuation of the previously recorded loan. Loans Purchased or Eligible to be Purchased from Trusts For our single-class securitization trusts that include a Fannie Mae guaranty, we have the option...

  • Page 280
    ...in both single-family and multifamily HFI loans. This population includes both HFI loans held by Fannie Mae and by consolidated Fannie Mae MBS trusts. The reserve for guaranty losses is a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related...

  • Page 281
    ... a collective single-family loss reserve using an econometric model that derives an overall loss reserve estimate given multiple factors which include but are not limited to: origination year; loan product type; mark-to-market loan-to-value ("LTV") ratio; and delinquency status. Once loans are...

  • Page 282
    ... our lender customers. Early lender funding advances have terms up to 60 days and earn a short-term market rate of interest. In other cases, the transfers are of loans that the lender has the unilateral ability to repurchase from us. We report cash outflows from advances to lenders as an investing...

  • Page 283
    ... in our consolidated balance sheets, and create guaranteed Fannie Mae MBS backed by those loans. As guarantor, we guaranty to each MBS trust that we will supplement amounts received by the MBS trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS. This...

  • Page 284
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) and the level of credit risk we assume. In lieu of charging a higher guaranty fee for loans with greater credit risk, we may require that the lender pay an upfront fee to compensate us for assuming additional ...

  • Page 285
    ... credit risk we assume on loans underlying Fannie Mae MBS and long term standby commitments based on management's estimate of probable losses incurred on those loans as of each balance sheet date. We record this contingent liability in our consolidated balance sheets as "Reserve for guaranty losses...

  • Page 286
    ...interest income in future periods. This amount is calculated as the excess of expected cash flows, discounted at the internal rate of return at acquisition, over the amortized cost basis of the security. To reduce costs associated with maintaining our internal model and decrease the operational risk...

  • Page 287
    ... individual mortgage loans based upon coupon rate, product type and origination year and consider Fannie Mae MBS to be aggregations of similar loans for the purpose of estimating prepayments. We also recalculate the constant effective yield each reporting period to reflect the actual payments and...

  • Page 288
    ... in our consolidated balance sheets at their fair value on a trade date basis. We report derivatives in a gain position after offsetting by counterparty in "Other assets" and derivatives in a loss position after offsetting by counterparty in "Other liabilities" in our consolidated balance sheets. We...

  • Page 289
    ... billion funded to lenders in "Other assets" in our consolidated balance sheets as of December 31, 2010 and 2009, respectively. Our liability to third-party holders of Fannie Mae MBS that arises as the result of a consolidation of a securitization trust is collateralized by the underlying loans and...

  • Page 290
    ... exchange spot rates as of the balance sheet dates and report any associated gains or losses as "Debt foreign exchange gains (losses), net" which is a component of "Fair value losses, net" in our consolidated statements of operations. We classify interest expense as either short-term or long-term...

  • Page 291
    ... discount rate and the long-term rate of return on assets. In determining our net periodic benefit cost, we apply a discount rate in the actuarial valuation of our pension and postretirement benefit obligations. In determining the discount rate as of each balance sheet date, we consider the current...

  • Page 292
    ...or foreclosure. For unconsolidated MBS trusts where we are considered the transferor, when the contingency on our option to purchase loans from the trust has been met and we regain effective control over the transferred loan, we recognize the loan in our consolidated balance sheets at fair value and...

  • Page 293
    ... to changes in interest rates. Reclassifications To conform to our current period presentation, we have reclassified amounts reported in our consolidated financial statements. In our consolidated balance sheet as of December 31, 2009, we reclassified $536 million from "Allowance for loan losses" to...

  • Page 294
    ... of our single-class securitization trusts, which had significant impacts on our consolidated financial statements. The key financial statement impacts are summarized below. The mortgage loans and debt reported in our consolidated balance sheet increased significantly at the transition date because...

  • Page 295
    ... a trust will generally not qualify for sale treatment. The new accounting standards do not change the economic risk to our business, specifically our exposure to liquidity, credit, and interest rate risks. We continue to securitize mortgage loans originated by lenders in the primary mortgage market...

  • Page 296
    ... that must be eliminated for purposes of our consolidated financial statements. We also describe in this note the ongoing impacts of the new accounting standards on our consolidated statements of operations, as well as the changes we have made to our segment reporting as a result of our adoption...

  • Page 297
    ...: Of Fannie Mae ...Of consolidated trusts ...Federal funds purchased and securities sold under repurchase ...Short-term debt: Of Fannie Mae ...Of consolidated trusts ...Long-term debt: Of Fannie Mae ...Of consolidated trusts ...Reserve for guaranty losses ...Servicer and MBS trust payable...Other...

  • Page 298
    ... trusts in our consolidated balance sheet. The table below presents the impact at the transition date to our investments in securities. As of December 31, Transition As of January 1, 2009 Impact 2010 (Dollars in millions) Mortgage-related securities: Fannie Mae ...Freddie Mac ...Ginnie Mae ...Alt...

  • Page 299
    ... to estimate incurred losses for our allowance for loan losses versus our reserve for guaranty losses. Our guaranty reserve considers all contractually past due interest income including payments expected to be missed between the balance sheet date and the point of loan acquisition or foreclosure...

  • Page 300
    ... debt of Fannie Mae" or "Long-term debt of Fannie Mae." We report the debt of consolidated trusts as either "Short-term debt of consolidated trusts" or "Long-term debt of consolidated trusts." Prior period amounts have been reclassified to conform to our current period presentation. Servicer and MBS...

  • Page 301
    ...as required to permit timely payments of principal and interest on the related Fannie Mae MBS, regardless of their consolidation status. However, for consolidated trusts, our guarantee to the trust represents an intercompany activity that must be eliminated for purposes of our consolidated financial...

  • Page 302
    ... trusts to the extent that the purchase price of the debt security does not equal the carrying value of the related consolidated debt reported in our consolidated balance sheet at the time of purchase. Trust Management Income As master servicer, issuer, and trustee for Fannie Mae MBS, we earn a fee...

  • Page 303
    ... Single-Family, Multifamily (formerly "HCD"), and Capital Markets. We use these three segments to generate revenue and manage business risk, and each segment is measured based on the type of business activities it performs. We have not restated prior period results nor have we presented current year...

  • Page 304
    ... other than pursuant to existing prior commitments. We are not currently recognizing the tax benefits associated with the tax credits and net operating losses in our consolidated financial statements. Consolidated VIEs Upon adoption of the new accounting standards, if an entity is a VIE, we consider...

  • Page 305
    ... VIE. As of December 31, 2009(1) 2010(1) (Dollars in millions) Assets: Cash and cash equivalents ...Restricted cash ...Trading securities ...Available-for-sale securities ...Loans held for sale ...Loans held for investment...Accrued interest receivable ...Servicer and MBS trust receivable . Other...

  • Page 306
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) For the years ended December 31, 2010 and 2009, we recognized a loss of $3 million and a gain of $171 million, respectively, upon deconsolidation of VIEs. We recognize these amounts as a component of "Investment ...

  • Page 307
    ... trusts created via portfolio securitization transactions that do not qualify as sales in our consolidated balance sheets and in the consolidated VIEs table above. To determine the fair value of our securities created via portfolio securitizations, we utilize several independent pricing services...

  • Page 308
    ...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. Our prospective adoption on December 31, 2010 of a new accounting...

  • Page 309
    ... Of Fannie Mae December 31, 2009(1) Of Consolidated Trusts Total Total (Dollars in millions) Single-family ...$328,824 Multifamily ...95,157 Total unpaid principal balance of mortgage loans ...Unamortized premiums (discounts) and other cost basis adjustments, net ...Lower of cost or fair value...

  • Page 310
    ... the fair value option. As of December 31, 2010 Related Allowance for Accrued Interest Receivable For the Year Ended December 31, 2010 Interest Income Recognized on a Cash Basis Unpaid Principal Balance Total Recorded Investment(1) Related Allowance for Loan Losses Average Recorded Investment...

  • Page 311
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (1) (2) (3) (4) (5) (6) (7) Consists of unpaid principal balance, net of unamortized premiums and discounts, other cost basis and fair value adjustments and accrued interest receivable on HFI loans, ...

  • Page 312
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Loans Acquired in a Transfer We acquired delinquent loans from unconsolidated trusts and long-term standby commitments with an unpaid principal balance plus accrued interest of $279 million, $36.4 billion and $4.5...

  • Page 313
    ... transition date, our consolidated statements of operations no longer reflect the recognition of fair value losses on the majority of acquisitions of credit-impaired loans because the loans are already recorded in our consolidated balance sheets at the time of purchase. For the Year Ended December...

  • Page 314
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Allowance for Loan Losses The following table displays changes in both single-family and multifamily allowance for loan losses for the year ended December 31, 2010 and total allowance for loan losses for the years...

  • Page 315
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (4) (5) (6) Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers...

  • Page 316
    ...; and • agreements with seller/servicers that addressed their loan repurchase and other obligations to us impacted our expectation of future make-whole payments, resulting in a decrease in our allowance for loan losses of approximately $700 million. In the three month period ended June 30...

  • Page 317
    ... aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value. F-59

  • Page 318
    ...operations. The following table displays our investments in trading securities and the cumulative amount of net losses recognized from holding these securities as of December 31, 2010 and 2009. As of December 31, 2010 2009 (Dollars in millions) Mortgage-related securities: Fannie Mae ...Freddie Mac...

  • Page 319
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table displays information about our net trading gains and losses for the years ended December 31, 2010, 2009 and 2008. For the Year Ended December 31, 2010 2009 2008 (Dollars in millions) Net ...

  • Page 320
    ...Cost(1) As of December 31, 2010 Gross Gross Unrealized Unrealized Gross Losses Losses Unrealized OTTI(2) Other(3) Gains (Dollars in millions) Total Fair Value Fannie Mae ...Freddie Mac ...Ginnie Mae ...Alt-A private-label securities ...Subprime private-label securities . CMBS(4) ...Mortgage revenue...

  • Page 321
    ... 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 private-label securities ...Subprime private-label securities . CMBS ...Mortgage revenue bonds ...Other mortgage-related...

  • Page 322
    ...security type recognized in our consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008. For the Year Ended December 31, 2010 2009 2008 (Dollars in millions) Fannie Mae ...Alt-A private-label securities ...Subprime private-label securities . Mortgage revenue bonds...

  • Page 323
    ... of loss in value attributable to credit. To reduce costs associated with maintaining our internal model and decrease the operational risk, in the fourth quarter of 2010, we ceased to use our internally developed model and began using a third-party model to project cash flow estimates on our private...

  • Page 324
    ... on these bonds, we expect to realize no credit losses on the vast majority of our holdings due to the inherent financial strength of the issuers, or in some cases, the amount of external credit support from mortgage collateral or financial guarantees. The fair values of these bonds are likewise...

  • Page 325
    ... FINANCIAL STATEMENTS-(Continued) We analyzed commercial mortgage-backed securities ("CMBS") using a CMBS loss forecast model that incorporates a loan level loss forecast. This forecast takes into account loan performance, loan status, loan attributes, structures, metropolitan area, property type...

  • Page 326
    ... credit enhancements on taxable or tax-exempt mortgage revenue bonds issued by state and local governmental entities to finance multifamily housing for low- and moderate-income families. Additionally, we issue long-term standby commitments that require us to purchase loans from lenders if the loans...

  • Page 327
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables display the current delinquency status and certain higher risk characteristics of our single-family conventional and total multifamily guaranty book of business as of December 31, 2010 and ...

  • Page 328
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (2) (3) (4) (5) (6) (7) Consists of single-family conventional loans that were three months or more past due or in foreclosure as of December 31, 2010 and 2009. Calculated based on the aggregate unpaid ...

  • Page 329
    ... consolidated balance sheets for the years ended December 31, 2010, 2009 and 2008. For the Year Ended December 31, 2010 2009 2008 (Dollars in millions) Beginning balance, January 1...Adoption of new accounting standards ...Fair value of expected cash flows at issuance for new guaranteed Fannie Mae...

  • Page 330
    ... MBS would be subject to the credit risk on the underlying loans. We continue to recognize a guaranty obligation and a reserve for guaranty losses associated with these securities because we carry these securities in our consolidated financial statements as guaranteed Fannie Mae MBS. The fair value...

  • Page 331
    ..." in our consolidated balance sheets. The following table displays the activity and carrying amount of acquired properties held for use for the years ended December 31, 2010, 2009 and 2008. The increase in held for use property is primarily from renting properties rather than actively marketing them...

  • Page 332
    ...of one year or less) consist of both "Federal funds purchased and securities sold under agreements to repurchase" and "Short-term debt" in our consolidated balance sheets. The following table displays our outstanding short-term borrowings and weighted-average interest rates of these borrowings as of...

  • Page 333
    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, 2010 and 2009. As ...

  • Page 334
    ... indicator of expected maturity because borrowers of the underlying loans generally have the right to prepay their obligations at any time. Includes a portion of structured debt instruments that is reported at fair value. The following table displays the amount of our debt of Fannie Mae that was...

  • Page 335
    ... that we issue foreign currency debt. • Futures. These are standardized exchange-traded contracts that either obligate a buyer to buy an asset at a predetermined date and price or a seller to sell an asset at a predetermined date and price. The types of futures contracts we enter into include...

  • Page 336
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Notional and Fair Value Position of our Derivatives The following table displays the notional amount and estimated fair value of our asset and liability derivative instruments on a gross basis, before the ...

  • Page 337
    ...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, 2010, 2009 and 2008. For the Year Ended December 31, 2010 2009 2008 (Dollars in millions) Risk management derivatives: Swaps: Pay-fixed ...Receive...

  • Page 338
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Volume and Activity of our Derivatives Risk Management Derivatives The following table displays, by derivative instrument type, our risk management derivative activity for the years ended December 31, 2010 and ...

  • Page 339
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Mortgage Commitment Derivatives The following table displays, by commitment type, our mortgage commitment derivative activity for the years ended December 31, 2010 and 2009. For the Year Ended December 31, 2010 2009 Purchase Sale Purchase Sale...

  • Page 340
    ... which we estimate using the fair value of all outstanding derivative contracts in a gain position. We net derivative gains and losses with the same counterparty where a legal right of offset exists under an enforceable master netting agreement. This table excludes mortgage commitments accounted for...

  • Page 341
    ... federal tax rates for the years ended December 31, 2010, 2009 and 2008, respectively. For the Year Ended December 31, 2010 2009 2008 Statutory corporate tax rate ...Tax-exempt interest and dividends-received deductions Equity investments in affordable housing projects ...Other ...Valuation...

  • Page 342
    ... a valuation allowance, we estimate future taxable income or loss based on management-approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or...

  • Page 343
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) assets in the future. Our cumulative book taxable loss position was caused by the negative impact on our results from the weak housing and credit market conditions that deteriorated dramatically during 2008 and ...

  • Page 344
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) unrecognized tax benefits for the tax years 1999 through 2004. The IRS is currently examining our federal income tax returns for the tax years 2007 and 2008. We expect to reach a settlement agreement with the IRS ...

  • Page 345
    ...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 346
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) grant dates, the fair value of restricted stock that vested in 2010, 2009 and 2008 was $51 million, $83 million, and $103 million, respectively. The compensation expense related to restricted stock is based on the...

  • Page 347
    ... for our defined contribution plans, are included in "Salaries and employee benefits expense" in our consolidated statements of operations. For the years ended December 31, 2010, 2009 and 2008, we recognized net periodic benefit costs for our defined benefit and healthcare plans and expenses for our...

  • Page 348
    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, 2010, 2009 and 2008. The net...

  • Page 349
    ... following table displays pre-tax amounts in AOCI as of December 31, 2010 that are expected to be recognized as components of net periodic benefit cost in 2011. As of December 31, 2010 Other PostPension Retirement Plans Plan (Dollars in millions) Net actuarial loss ...Net prior service cost (credit...

  • Page 350
    ... on plan 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...

  • Page 351
    ... 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: Discount rate ...Average rate...

  • Page 352
    ...The expected long-term weighted-average rate of return on plan assets for 2010 remained unchanged from the 2009 rate of 7.5%. Changes in assumptions used in determining pension and other postretirement benefit plan expense resulted in an increase in expense of $4 million for the years ended December...

  • Page 353
    ... income securities and 0% to 5% for all other types of investments. The plan fiduciary periodically assesses our asset allocation to assure it is consistent with our plan objective. Expected Benefit Payments The following table displays the benefits we expect to pay in each of the next five years...

  • Page 354
    ... revenue and manage business risk, and each segment is based on the type of business activities it performs. Segment Reporting for 2010 Our prospective adoption of the new accounting standards had a significant impact on the presentation and comparability of our consolidated financial statements...

  • Page 355
    .... Single-Family Revenue drivers for Single-Family did not change under our current method of segment reporting. Revenue for our Single-Family business is from the guaranty fees the segment receives as compensation for assuming the credit risk on the mortgage loans underlying single-family Fannie Mae...

  • Page 356
    ...MBS trusts to Multifamily and the guaranty fees from the Capital Markets group on multifamily loans in Fannie Mae's portfolio. To reconcile to our consolidated statements of operations, we eliminate guaranty fees related to consolidated trusts. • Income (losses) from partnership investments-Income...

  • Page 357
    ... or benefit for federal income taxes. In addition, we allocate intracompany guaranty fee income as a charge from the Single-Family and Multifamily segments to Capital Markets for managing the credit risk on mortgage loans held by the Capital Markets group. With the adoption of the new accounting...

  • Page 358
    ... operating segments and our consolidated trusts. Includes cost of capital charge among our three business segments. The charge to Capital Markets represents an intracompany guaranty fee expense allocated to Capital Markets from Single-Family and Multifamily for absorbing the credit risk on mortgage...

  • Page 359
    ... to Fannie Mae ...(1) (2) (65,173) 1,375 (63,798) - $(63,798) (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 Multifamily for absorbing the credit risk on mortgage loans held...

  • Page 360
    ... recognized on acquired credit impaired loans are not treated as assets for Single-Family and Multifamily segment reporting purposes because these allowances and losses relate to loan assets that are held by the Capital Markets segment and consolidated trusts. We operate our business solely in the...

  • Page 361
    ... price shares of our common stock equal to 79.9% of the total number of shares of common stock outstanding on a fully diluted basis on the date of exercise, which would substantially dilute the ownership in Fannie Mae of our common stockholders at the time of exercise. Refer to "Senior Preferred...

  • Page 362
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Preferred Stock The following table displays our senior preferred stock and preferred stock outstanding as of December 31, 2010 and 2009. Annual Issued and Outstanding as of Dividend December 31, Rate as of Stated...

  • Page 363
    ... Board of Directors. If dividends on the preferred stock are not paid or set aside for payment for a given dividend period, dividends may not be paid on our common stock for that period. For the year ended December 31, 2008, dividends declared on preferred stock (excluding the senior preferred stock...

  • Page 364
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) After a specified period, we have the option to redeem preferred stock (other than the senior preferred stock) at its redemption price plus the dividend (whether or not declared) for the then-current period ...

  • Page 365
    ... at an annual rate of 10% per year based on the then-current liquidation preference of the senior preferred stock. As conservator and under our Charter, FHFA also has authority to declare dividends on the senior preferred stock. If at any time we fail to pay cash dividends in a timely manner, then...

  • Page 366
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) part. If we pay down the liquidation preference of each outstanding share of senior preferred stock in full, the shares will be considered redeemed as of the payment date. Common Stock Warrant The warrant gives ...

  • Page 367
    ... effect of changes in generally accepted accounting principles that occurred subsequent to the date of the agreement and that require us to recognize additional mortgage assets on our consolidated balance sheets were not considered for purposes of evaluating our compliance with the limitation on the...

  • Page 368
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In addition, the agreement provides that we may not enter into any new compensation arrangements or increase amounts or benefits payable under existing compensation arrangements with our named executive officers (as defined by SEC rules...

  • Page 369
    ...Fannie Mae MBS held by third parties; and (3) 0.25% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances. Restrictions on Capital Distributions and Dividends Under the terms of the senior preferred stock purchase agreement, we are required...

  • Page 370
    ... manage credit risk and comply with legal requirements, we typically require primary mortgage insurance or other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan to the current value of the property that serves as collateral) of a single-family...

  • Page 371
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Multifamily Loan Borrowers Numerous factors affect a multifamily borrower's ability to repay his or her loan and the value of the property underlying the loan. The most significant factors affecting credit risk ...

  • Page 372
    ... through credit enhancements, as described below under "Mortgage Insurers." The following table displays the percentage of our conventional single-family guaranty book of business that consists of interest-only loans, negative-amortizing ARMs and loans with an estimated mark-to-market LTV ratios...

  • Page 373
    ... servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. Our business with mortgage servicers is concentrated. Our ten largest single-family mortgage...

  • Page 374
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) weakened financial condition of our mortgage insurer counterparties creates an increased risk that these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. ...

  • Page 375
    ... risk of the positions. As of December 31, 2010 2009 (Dollars in millions) Fannie Mae MBS and other guarantees(1) ...Loan purchase commitments ...(1) $10,299 311 $135,697 486 Represents maximum exposure on guarantees not reflected in our consolidated balance sheets. 19. Fair Value We use fair...

  • Page 376
    ...-sale securities: Mortgage-related securities: Fannie Mae ...Freddie Mac ...Ginnie Mae ...Alt-A private-label securities ...Subprime private-label securities . CMBS ...Mortgage revenue bonds ...Other ...Total available-for-sale securities ...Mortgage loans of consolidated trusts . Other assets: Risk...

  • Page 377
    ... Assets Estimated Inputs (Level 2) (Level 3) Adjustment(1) Fair Value (Level 1) (Dollars in millions) Liabilities: Long-term debt: Of Fannie Mae: Senior fixed ...Senior floating ...Total Fannie Mae ...Of consolidated trusts ...Total long-term debt ...Other liabilities: Risk management derivatives...

  • Page 378
    ... Netting (Level 1) (Level 2) (Level 3) Adjustment(1) Fair Value (Dollars in millions) Assets: Trading securities: Mortgage-related securities: Fannie Mae ...Freddie Mac ...Ginnie Mae ...Alt-A private-label securities ...Subprime private-label securities . CMBS ...Mortgage revenue bonds ...Other...

  • Page 379
    ... our consolidated statements of operations for Level 3 assets and liabilities for the years ended December 31, 2010, 2009 and 2008. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period transferred. Fair Value Measurements Using Significant...

  • Page 380
    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, 2009 Net Unrealized Total Gains or (Losses) Gains (Losses) (Realized/Unrealized) Included in Net Purchases, ...

  • Page 381
    ... 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 382
    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, 2009 Trading Available-for-Sale Net Long-term Securities Securities Derivatives Debt (Dollars in millions) ...

  • Page 383
    ... balance sheets at fair value on a recurring basis. Fair value of performing loans represents an estimate of the prices we would receive if we were to securitize those loans and is determined based on comparisons to Fannie Mae MBS with similar characteristics, either on a pool or loan level. We use...

  • Page 384
    ... using current net operating income of the property and capitalization rates. Derivatives Assets and Liabilities (collectively "derivatives")-Derivatives are recorded in our consolidated balance sheets at fair value on a recurring basis. The valuation process for the majority of our risk management...

  • Page 385
    ... and disclosure requirements for guarantees. Short-Term Debt and Long-Term Debt (collectively "debt")-The majority of debt of Fannie Mae is recorded in our consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments. We elected the fair value option for certain...

  • Page 386
    ...(Level 3) Estimated Fair Value Total Losses (Dollars in millions) Assets: Mortgage loans held for sale, at lower of cost or fair value ...Single-family mortgage loans held for investment, at amortized cost: Of Fannie Mae ...Of consolidated trusts ...Multifamily mortgage loans held for investment...

  • Page 387
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) For the Year Ended December 31, 2009 Fair Value Measurements For the Year Ended December 31, 2009 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) ...

  • Page 388
    ... of cost or fair value in our consolidated balance sheets. At the transition date, we reclassified the majority of HFS loans to HFI, as the trusts do not have the ability to sell mortgage loans and use of such loans is limited exclusively to the settlement of obligations of the trust. The valuation...

  • Page 389
    ... assets and liabilities are reported at the lower of cost or fair value in our consolidated balance sheets. We measure the fair value of master servicing assets and liabilities based on the present value of expected cash flows of the underlying mortgage assets using management's best estimates...

  • Page 390
    ...fair values of these commitments are included as "Mortgage loans held for investment, net of allowance for loan losses." The disclosure excludes certain financial instruments, such as plan obligations for pension and postretirement health care benefits, employee stock option and stock purchase plans...

  • Page 391
    ... date. We estimate the fair value of the GO using our internal GO valuation models, which calculate the present value of expected cash flows based on management's best estimate of certain key assumptions such as current mark-to-market LTV ratios, future house prices, default rates, severity rates...

  • Page 392
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) value gains and losses associated with these instruments, refer to "Note 1, Summary of Significant Accounting Policies." As of December 31, 2010 Long-Term Long-Term Debt of Debt of Consolidated Fannie Mae Trusts...

  • Page 393
    ... and seek unspecified compensatory damages, attorneys' fees, and other fees and costs. On January 7, 2008, the court defined the class as all purchasers of Fannie Mae common stock and call options and all sellers of publicly traded Fannie Mae put options during the period from April 17, 2001 through...

  • Page 394
    ... members of Fannie Mae's Benefit Plans Committee and the Compensation Committee of Fannie Mae's Board of Directors, as fiduciaries of Fannie Mae's Employee Stock Ownership Plan ("ESOP"), breached their duties to ESOP participants and beneficiaries by investing ESOP funds in Fannie Mae common stock...

  • Page 395
    ...-balance sheet commitments for the unutilized portion of lending agreements entered into with multifamily borrowers. We lease certain premises and equipment under agreements that expire at various dates through 2029. Some of these leases provide for payment by the lessee of property taxes, insurance...

  • Page 396
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table summarizes by remaining maturity, non cancelable future commitments related to loan and mortgage purchases, unfunded lending, operating leases, and other agreements as of December 31, 2010. As ...

  • Page 397
    ...: Short-term debt: Of Fannie Mae ...Of consolidated trusts ...Long-term debt: Of Fannie Mae ...Of consolidated trusts ...Total interest expense ...Net interest income...Provision for loan losses ...Net interest income (loss) after provision for loan losses ...Guaranty fee income ...Investment gains...

  • Page 398
    ...income ...Interest expense: Short-term debt: Of Fannie Mae ...Long-term debt: Of Fannie Mae ...Of consolidated trusts ...Total interest expense ...Net interest income ...Provision for loan losses ...Net interest income after provision for loan losses...Guaranty fee income ...Investment gains (losses...

  • Page 399
    ... EXCHANGE ACT RULE 13a-14(a) I, Michael J. Williams, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2010 of Fannie Mae (formally, the Federal National Mortgage Association); 2. Based on my knowledge, this report does not contain any untrue statement...

  • Page 400
    ... EXCHANGE ACT RULE 13a-14(a) I, David C. Hisey, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2010 of Fannie Mae (formally, the Federal National Mortgage Association); 2. Based on my knowledge, this report does not contain any untrue statement...

  • Page 401
    ...the Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage Association) for the year ended December 31, 2010, 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 402
    ... Annual Report on Form 10-K of Fannie Mae (formally, the Federal National Mortgage Association) for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David C. Hisey, Executive Vice President and Deputy Chief Financial Officer...

  • Page 403
    FR005