Fannie Mae 2012 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, 2012
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
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
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
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.
Large accelerated filer Accelerated filer Non-accelerated filer
(Do not check if a smaller reporting company) Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
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 OTC Bulletin Board on
June 30, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $301 million.
As of February 28, 2013, there were 1,158,077,970 shares of common stock of the registrant outstanding.

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, 2012 Commission File No.: 0-50231 Federal National Mortgage Association (Exact name of registrant as specified in its charter) Fannie Mae...

  • Page 2
    ...Risk ...Item 8. Financial Statements and Supplementary Data ...Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Item 9A. Controls and Procedures ...Item 9B. Other Information ...PART III ...Item 10. Directors, Executive Officers and Corporate Governance...

  • Page 3
    ... Transactions, and Director Independence ...Policies and Procedures Relating to Transactions with Related Persons ...Transactions with Related Persons ...Director Independence...Item 14. Principal Accounting Fees and Services ...PART IV ...Item 15. Exhibits, Financial Statement Schedules...INDEX TO...

  • Page 4
    ... 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 and Guaranty Book of...

  • Page 5
    ... Analysis ...Multifamily Foreclosed Properties ...Repurchase Request Activity...Outstanding Repurchase Requests ...Mortgage Insurance Coverage...Rescission Rates of Mortgage Insurance...Estimated Mortgage Insurance Benefit ...Unpaid Principal Balance of Financial Guarantees...Credit Loss...

  • Page 6
    ...of 2012, which we discuss in "Executive Summary-Deferred Tax Asset Valuation Allowance." We paid Treasury senior preferred stock dividends of $4.2 billion for the first quarter of 2013, which reflected the excess of our net worth over a $3.0 billion capital reserve applicable in 2013 under the terms...

  • Page 7
    ...guaranty fees on recently acquired loans to benefit our results for years to come. Our net income of $17.2 billion in 2012 is the largest in our history. We were not required to draw funds from Treasury under the senior preferred stock purchase agreement for any quarter of 2012, and, during 2012, we...

  • Page 8
    ..., which are addressed in "Reducing Credit Losses on Our Legacy Book of Business." As part of our strategy to reduce defaults, we provided more than 275,000 loan workouts to help homeowners stay in their homes or otherwise avoid foreclosure in 2012. Helping to Build a New Housing Finance System. We...

  • Page 9
    ... to 89 days past due) declined from 2.91% as of December 31, 2011 to 2.62% as of December 31, 2012. The reduction in the delinquency rates is due, in part, to our efforts since 2009 to improve our underwriting standards and the credit quality of our single-family guaranty book of business, which has...

  • Page 10
    ...we reported losses in our consolidated statements of operations for the three years ended December 31, 2012; the impact of a reduction in funds available to us under the senior preferred stock purchase agreement that would have resulted from releasing the valuation allowance in the fourth quarter of...

  • Page 11
    ...34 billion reduction in the funds available to us under the senior preferred stock purchase agreement would have had on our business and financial results, including regulatory actions that would limit our business operations to ensure safety and soundness of the company, particularly in view of the...

  • Page 12
    .... Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points. Reflects unpaid principal balance of Fannie Mae MBS...

  • Page 13
    ... we will continue to accept deliveries of HARP loans through September 30, 2014 for loans with application dates on or before December 31, 2013. Loans we acquired under HARP represented 13% of our new single-family book of business as of December 31, 2012 and had a serious delinquency rate of 0.93...

  • Page 14
    ...of credit enhancement. As we work to reduce credit losses, we also seek to assist distressed borrowers, help stabilize communities, and support the housing market. For example, in November 2012 we, along with Freddie Mac, put into effect new, streamlined rules for short sales to enable servicers to...

  • Page 15
    ... single-family loans backing Fannie Mae MBS that we do not consolidate in our consolidated balance sheets and singlefamily loans that we have guaranteed under long-term standby commitments. For additional information on the change in our loss reserves see "Consolidated Results of Operations-Credit...

  • Page 16
    ... in "Business Segments-Capital Markets." • • • • • 2012 Acquisitions and Market Share As the leading provider of residential mortgage credit, we enable families to buy, refinance or rent a home. During 2012, we purchased or guaranteed approximately $918 billion in single-family and...

  • Page 17
    ... private capital. We currently estimate that our single-family market share was 43% in 2012, compared with 37% in 2011. These amounts represent our single-family mortgage acquisitions for each year, excluding delinquent loans we purchased from our MBS trusts, as a percentage of the single-family...

  • Page 18
    ... an applicable capital reserve amount. This capital reserve amount is $3.0 billion for each quarter of 2013 and decreases annually until it reaches zero in 2018. One of our objectives is to pay taxpayers for their investment in our company. While the senior preferred stock purchase agreement does...

  • Page 19
    ..., our future delinquency, default and severity rates, our future credit losses and loss reserves, future housing market conditions, performance and volumes and future home prices. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous...

  • Page 20
    ... until the second quarter of 2008, single-family mortgage debt outstanding has been steadily declining since then. We owned or guaranteed mortgage assets representing approximately 29% of total U.S. residential mortgage debt outstanding as of December 31, 2012. We operate our business solely in the...

  • Page 21
    ... prices on properties sold in foreclosure. The reported home price change reflects the percentage change in Fannie Mae's HPI from the fourth quarter of the prior year to the fourth quarter of the reported year. Based on the annual average 30-year fixed-rate mortgage interest rate reported by Freddie...

  • Page 22
    ... for the sole purpose of holding mortgage loans separate and apart from our assets. Our MBS trusts hold either single-family or multifamily mortgage loans or mortgage-related securities. Each trust operates in accordance with a trust agreement or a trust indenture. Each MBS trust is also governed by...

  • Page 23
    ...or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity, and other constraints, including the limit on the amount of mortgage assets that we may own pursuant to the senior preferred stock purchase agreement. For our multifamily MBS trusts, we...

  • Page 24
    ... with our Capital Markets group, through purchases of loans Credit risk management: Prices and manages the credit risk on loans in our single-family guaranty book of business Credit loss management: Works to prevent foreclosures and reduce costs of defaulted loans through home retention solutions...

  • Page 25
    ...more information about the financial results and performance of each of our segments, see "MD&A- Business Segment Results" and "Note 13, Segment Reporting." Business Segment Revenues(1) For the Year Ended December 31, 2012 2011 2010 Single-Family Credit Guaranty ...Multifamily(2) ...Capital Markets...

  • Page 26
    ... customers. Unlike our Capital Markets group, which securitizes loans from our portfolio, our Single-Family business securitizes loans solely in lender swap transactions, in which lenders deliver to us pools of mortgage loans, which are placed immediately in a trust, in exchange for Fannie Mae MBS...

  • Page 27
    ... Risk Management-Credit Risk Management-Single-Family Mortgage Credit Risk Management-Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards." Multifamily Business A core part of Fannie Mae's mission is to support the U.S. multifamily housing market to help serve...

  • Page 28
    ... Fannie Mae loans 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...

  • Page 29
    ... rate risk associated with our investments in mortgage assets. Our Capital Markets group's business activity is primarily focused more on making short-term use of our balance sheet than on long-term investments. As a result, our Capital Markets group works with lender customers to provide funds...

  • Page 30
    ... capital markets. The most active investors in our debt securities include commercial bank portfolios and trust departments, investment fund managers, insurance companies, pension funds, state and local governments, and central banks. The approved dealers for underwriting various types of Fannie Mae...

  • Page 31
    ... Act provides, however, that mortgage loans and mortgage-related assets that have been transferred to a Fannie Mae MBS trust must be held by the conservator for the beneficial owners of the Fannie Mae MBS and cannot be used to satisfy the general creditors of the company. As of April 2, 2013, FHFA...

  • Page 32
    ... to pay dividends back to Treasury; acting upon the commitment made in the Administration's 2011 White Paper that the GSEs will be wound down and will not be allowed to retain profits, rebuild capital, and return to the market in their prior form; supporting the continued flow of mortgage credit by...

  • Page 33
    ... set forth in the senior preferred stock purchase agreement. The senior preferred stock purchase agreement provides that, on a quarterly basis, we generally may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected in our consolidated balance sheet...

  • Page 34
    ...our Board of Directors, out of legally available funds, cumulative quarterly cash dividends. Beginning in 2013, the method for calculating the amount of dividends for each quarter was changed from an annual rate of 10% per year on the then-current liquidation preference of the senior preferred stock...

  • Page 35
    ...to the senior preferred stock purchase agreement) and we are limited in the amount and type of debt financing we may obtain. • Mortgage Asset Limit. We are restricted in the amount of mortgage assets that we may own. The maximum allowable amount was reduced to $650 billion on December 31, 2012. In...

  • Page 36
    ... credit loss protection and (5) reducing Fannie Mae's and Freddie Mac's portfolios, consistent with Treasury's senior preferred stock purchase agreements with the companies. In addition, the report outlines three potential options for a new long-term structure for the housing finance system...

  • Page 37
    ...contingent capital, enhanced public disclosure, short-term debt limits and other requirements as appropriate. In April 2012, the FSOC adopted a three-step analysis process to determine whether a non-bank financial institution should be designated as a systemically important financial institution and...

  • Page 38
    ... (4) the loan conforms to the standards set forth in Fannie Mae's or Freddie Mac's single-family selling guides or is determined to be eligible for purchase by Fannie Mae's or Freddie Mac's automated underwriting system. There are comparable provisions for loans insured or guaranteed by FHA, the VA...

  • Page 39
    ... upon issuance and is applicable to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Advisory Bulletin establishes guidelines for adverse classification and identification of specified single-family and multifamily assets and off-balance sheet credit exposures. The Advisory Bulletin...

  • Page 40
    ... original principal balance limits on loans we purchase or securitize that 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 single-family conventional mortgage loan that we purchase or...

  • Page 41
    ... for purposes of Sections 12, 13, 14 or 16 of the Exchange Act. Consequently, we are required to file periodic and current reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Exemption from Specified Taxes. Fannie Mae is exempt...

  • Page 42
    ... and operations of Fannie Mae, Freddie Mac and the FHLBs in the following ten areas: (1) internal controls and information systems; (2) independence and adequacy of internal audit systems; (3) management of market risk exposure; (4) management of market risk-measurement systems, risk limits, stress...

  • Page 43
    ... earnings, as determined in accordance with GAAP. Our minimum capital requirement is generally equal to the sum of 2.50% of on-balance sheet assets and 0.45% of off-balance sheet obligations. For purposes of minimum capital, FHFA has directed us to continue reporting loans backing Fannie Mae MBS...

  • Page 44
    ... still meet our goals. Our single-family housing goals performance is measured against benchmarks and against goals-qualifying originations in the primary mortgage market after the release of data reported under the Home Mortgage Disclosure Act ("HMDA"). HMDA data are typically released each year in...

  • Page 45
    ... Report and Annual Mortgage Report that is required under the Charter Act. FHFA will issue a final determination on our 2012 housing goals performance after the release of data reported under HMDA later this year. For 2011, FHFA determined that we met our single-family low-income areas home purchase...

  • Page 46
    ... of our Fannie Mae MBS and debt securities include fund managers, commercial banks, pension funds, insurance companies, foreign central banks, corporations, state and local governments and other municipal authorities. During 2012, approximately 1,100 lenders delivered single-family mortgage loans to...

  • Page 47
    ... Ginnie Mae and Freddie Mac. We currently estimate that our single-family market share was 43% in 2012, compared with 37% in 2011. These amounts represent our single-family mortgage acquisitions for each year, excluding delinquent loans we purchased from our MBS trusts, as a percentage of the single...

  • Page 48
    ... the single-family loans we acquired in 2011; Our expectation that rising guaranty fee revenue we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties will in a number of years become the primary source of our revenues; Our expectation that, if current market...

  • Page 49
    ...or perceived changes in federal government support of our business and the financial markets or our status as a GSE could materially and adversely affect our liquidity, financial condition and results of operations; Our expectation that single-family mortgage loan delinquency and severity rates will...

  • Page 50
    ...purchase loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity, and other factors including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase agreement...

  • Page 51
    ... achieve some of our corporate objectives; our reliance on mortgage servicers; guidance by the Financial Accounting Standards Board ("FASB"); operational control weaknesses; our reliance on models; the level and volatility of interest rates and credit spreads; changes in the structure and regulation...

  • Page 52
    ... the required 60 days if it has exhausted its borrowing authority, if there is a government shutdown or if we need more funds than remain available to us under the agreement. As of December 31, 2012, $117.6 billion remained available to us under the senior preferred stock purchase agreement. In...

  • Page 53
    ... the market median. Congress has considered other legislation that would alter the compensation for Fannie Mae and Freddie Mac employees. In 2011, the Financial Services Committee of the House of Representatives approved a bill that would put our employees on a federal government pay scale. Although...

  • Page 54
    ... limit on the amount of mortgage assets we are permitted to hold could constrain the amount of delinquent loans we purchase from single-family MBS trusts, which could increase our costs. Actions taken by the conservator and the restrictions set forth in the senior preferred stock purchase agreement...

  • Page 55
    ... their mortgage loans. Home price declines from 2006 to 2011 and other adverse conditions in the housing market contributed to our legacy book of business's poor credit performance, resulting in elevated serious delinquency rates and negatively impacting default rates and average loan loss severity...

  • Page 56
    ...and models to manage our business and produce books and records upon which our financial statements are prepared. This reliance increases the risk that we may be exposed to financial, reputational or other losses as a result of inadequately designed internal processes or systems, or failed execution...

  • Page 57
    ... ability to fund our business depends primarily on our ongoing access to the debt capital markets. Our level of net interest income depends on how much lower our cost of funds is compared with what we earn on our mortgage assets. Market concerns about matters such as the extent of government support...

  • Page 58
    ...debt. On August 5, 2011, Standard & Poor's Ratings Services ("S&P") lowered the long-term sovereign credit rating on the U.S. to "AA+." As a result of this action, and because we directly rely on the U.S. government for capital support, on August 8, 2011, S&P lowered our long-term senior debt rating...

  • Page 59
    ... providers of credit enhancement on the mortgage assets that we hold in our mortgage portfolio or that back our Fannie Mae MBS, including mortgage insurers, lenders with risk sharing arrangements and financial guarantors; issuers of securities held in our cash and other investments portfolio; and...

  • Page 60
    ...single-family conventional mortgage loans with loan-to-value ratios over 80% at the time of purchase. As a result, an inability to obtain mortgage insurance may inhibit our ability to serve and support the housing and mortgage markets, meet our housing goals, and help borrowers remain in their homes...

  • Page 61
    ...new federal and state servicing requirements imposed by regulatory actions and legal settlements, and the need for servicers to adapt to these changes. The slow pace of foreclosures has negatively affected our foreclosure timelines, credit-related expenses and single-family serious delinquency rates...

  • Page 62
    ... published international bank liquidity requirements may adversely affect demand by banks for our debt and Fannie Mae MBS securities in the future, which could in turn have a material adverse effect on our business, results of operations, financial condition, liquidity or net worth. Basel III, a set...

  • Page 63
    ... banks for our debt securities and Fannie Mae MBS. In addition, Basel III's revisions to international capital requirements, depending on how they are implemented in the United States, could limit some lenders' ability to count the value of their rights to service mortgage loans as assets in meeting...

  • Page 64
    ... operations primarily through the issuance of debt and invest our funds primarily in mortgage-related assets that permit mortgage borrowers to prepay their mortgages at any time. These business activities expose us to market risk, which is the risk of adverse changes in the fair value of financial...

  • Page 65
    ...of operations, net worth and financial condition. In addition, our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and the size of the U.S. residential mortgage market. Since the second quarter of 2008, single-family mortgage debt outstanding has...

  • Page 66
    ...business practices of our customers and counterparties. In addition, the actions of Treasury, the CFTC, the SEC, the FDIC, the Federal Reserve and international central banking authorities directly or indirectly impact financial institutions' cost of funds for lending, capital-raising and investment...

  • Page 67
    ... for Freddie Mac, filed 16 lawsuits on behalf of us and Freddie Mac against various financial institutions, their officers and affiliated and unaffiliated underwriters that were responsible for marketing and selling private-label mortgage-related securities to us. The lawsuits seek to recover losses...

  • Page 68
    ...into Multifamily Asset Stabilization Program In October 2011, we received notice of an ongoing investigation by the Office of Inspector General of FHFA ("FHFA OIG") and the U.S. Attorney for the Eastern District of Virginia with regard to a multifamily agreement with The Related Companies, L.P. (the...

  • Page 69
    ..., the high and low prices per share of our common stock as reported in the Bloomberg Financial Markets service. These prices represent high and low trade prices. No dividends were declared on shares of our common stock during the periods indicated. Quarter High Low 2011 First Quarter...$ 0.96...

  • Page 70
    ...to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form...

  • Page 71
    ...29,809) Credit-related income (expenses)(3) ...1,106 (124) (151) (642) (7,060) (1,776) Other expenses, net(4) ...(13,749) Benefit (provision) for federal income taxes...- 90 82 985 Net income (loss) attributable to Fannie Mae ...17,224 New business acquisition data: Fannie Mae MBS issues acquired by...

  • Page 72
    ... data: Total mortgage assets(9) ...$ 3,063,712 Unconsolidated Fannie Mae MBS, held by third parties(10) . . 16,915 (11) Other guarantees ...36,215 Mortgage credit book of business ...$ 3,116,842 Guaranty book of business(12) . Credit quality: Total nonperforming loans(13) . . Total loss reserves...

  • Page 73
    ...reporting period (adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts and HomeSaver Advance loans) divided by the average guaranty book of business during the period, expressed in basis points. See "MD&A-Consolidated Results of Operations...

  • Page 74
    ... financial statements as of December 31, 2012 and related notes, and with "Business-Executive Summary." This report contains forward-looking statements that are based upon management's current expectations and are subject to significant uncertainties and changes in circumstances. Please review...

  • Page 75
    ...securities and residual interests, certain mortgage loans, acquired property, certain long-term debt arrangements and certain highly structured, complex derivative instruments. Table 8 displays a comparison of the amount of financial assets carried in our consolidated balance sheets at fair value on...

  • Page 76
    ... loans held for investment. The reserve for guaranty losses is a liability account in our consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS...

  • Page 77
    ... recorded investment in the loan and the present value of expected cash flows discounted at the loan's original interest rate unless foreclosure is probable, at which time we measure impairment the same way we measure it for other individually impaired multifamily loans. We generally obtain property...

  • Page 78
    ... company given we are in conservatorship; and we have a limited recent history of profitability and a large number of delinquent loans in our book of business. Under the terms of the senior preferred stock purchase agreement, the amount of funding available to us after December 31, 2012 is adjusted...

  • Page 79
    .... This tax benefit would increase our net worth as of the end of the period in which we record it and, as a result, the amount of the dividend we will be required to pay Treasury in the following quarter pursuant to the terms of the senior preferred stock purchase agreement. This tax benefit would...

  • Page 80
    ... in the consolidated statements of operations and comprehensive income (loss) is affected by our investment and debt activity, asset yields (including the impact of loans on nonaccrual status) and our funding costs. Table 10 displays an analysis of our net interest income, average balances, and...

  • Page 81
    ...727 million to reduce "Interest income: Available-for-sale securities" in our consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2011. Without this adjustment the average interest rate earned on total mortgage-related securities would have been 4.36...

  • Page 82
    ... delinquent; accelerated net amortization income related to mortgage loans and debt of consolidated trusts driven by a high volume of prepayments due to declining interest rates; lower interest income on Fannie Mae mortgage loans due to a decrease in average balance and new business acquisitions...

  • Page 83
    ... rates, which allowed us to continue to replace higher-cost debt with lower-cost debt; lower interest income on mortgage securities due to a decrease in the balance of our mortgage securities, as we continue to manage our portfolio to the requirements of the senior preferred stock purchase agreement...

  • Page 84
    ...our cash flow projections on Alt-A and subprime private-label securities. The charges recorded in 2011 were partially offset by an out-ofperiod adjustment, which reduced "Other-than-temporary impairments" in our consolidated statements of operations and comprehensive loss for the year ended December...

  • Page 85
    ... debt we issue to fund our mortgage investments. We present, by derivative instrument type, the fair value gains and losses on our derivatives for the years ended December 31, 2012, 2011 and 2010 in "Note 9, Derivative Instruments." The primary factors affecting the fair value of our risk management...

  • Page 86
    ...to purchase or sell mortgage-related securities and to purchase single-family mortgage loans are generally accounted for as derivatives. For open mortgage commitment derivatives, we include changes in their fair value in our consolidated statements of operations and comprehensive income (loss). When...

  • Page 87
    ... in "Other assets" in our consolidated balance sheets. Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our consolidated balance sheets. The following table displays changes in the total allowance for loan losses, reserve for guaranty losses and the...

  • Page 88
    ...Guaranty Losses (Combined Loss Reserves) For the Year Ended December 31, 2012 2011 2010 (Dollars in millions) 2009 2008 Changes in combined loss reserves: Allowance for loan losses: Beginning balance ...Adoption of consolidation accounting guidance(1) ...(Benefit) provision for loan losses...Charge...

  • Page 89
    ...Risk Management-Institutional Counterparty Credit Risk Management" for information on mortgage insurers and outstanding mortgage seller/servicer repurchase obligations. In addition, our provision for credit losses and our loss reserves can be impacted by updates to our allowance for loan loss models...

  • Page 90
    ...that meet more than one category are included in each applicable category. Nonperforming Loans Our balance of nonperforming single-family loans remained high as of December 31, 2012 due to both high levels of delinquencies and an increase in TDRs. When a TDR occurs, the loan may return to a current...

  • Page 91
    ... and foreclosure timelines as required by our Servicing Guide, which sets forth our policies and procedures related to servicing our single-family mortgages. See "Note 20, Subsequent Events" for additional information on these agreements and their impact on our financial results. Foreclosed property...

  • Page 92
    ... loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition; single-family rate excludes charge-offs from short sales. Credit losses decreased in 2012 compared with 2011 primarily due to improved actual home prices and sales...

  • Page 93
    ... change in future expected credit losses from our existing single-family guaranty book of business from an immediate 5% decline in single-family home prices for the entire United States followed by a return to the average of the possible growth rate paths used in our internal credit pricing models...

  • Page 94
    ...products may impact the estimated sensitivities set forth in this table. The decrease in the projected credit loss sensitivities in 2012 compared with 2011 was the result of the increase in home prices and lower projected default expectations for loans in our single-family guaranty book of business...

  • Page 95
    ...21: Business Segment Summary For the Year Ended December 31, 2012 2011 (Dollars in millions) 2010 Net revenues:(1) Single-Family ...Multifamily...Capital Markets ...Consolidated trusts ...Eliminations/adjustments ...Total ...Net income (loss) attributable to Fannie Mae: Single-Family ...Multifamily...

  • Page 96
    ... Mae MBS classified as trading that are retained in the Capital Markets portfolio. Gains from partnership investments are included in other expenses in our consolidated statements of operations and comprehensive income (loss). Represents the adjustment from equity method accounting to consolidation...

  • Page 97
    ... Other key performance data: Single-family effective guaranty fee rate (in basis 28.7 points)(3)(6) ...Single-family average charged guaranty fee on 39.9 new acquisitions (in basis points)(3)(7) ...Average single-family guaranty book of business(8) $ 2,843,718 Single-family Fannie Mae MBS issuances...

  • Page 98
    ... mortgages, remained high at 49% for 2012. Despite our continued high market share, our average single-family guaranty book of business was flat in 2012 compared with 2011, primarily due to the decline in U.S. residential mortgage debt outstanding. 2011 compared with 2010 Net loss decreased in 2011...

  • Page 99
    ... federal income taxes ...Net income attributable to Fannie Mae ...$ Other key performance data: Multifamily effective guaranty fee rate (in basis points)(5)...Multifamily credit loss performance ratio (in basis points)(6)...Average multifamily guaranty book of business(7) ...Multifamily new business...

  • Page 100
    ... on unpaid principal balance. As of January 31, 2013, our Multifamily serious delinquency rate was 0.35%. Includes mortgage loans and Fannie Mae MBS issued and guaranteed by the Multifamily segment. Information is based on the Federal Reserve's December 2012 mortgage debt outstanding release. Prior...

  • Page 101
    ... "Consolidated Balance Sheet Analysis-Derivative Instruments," "Risk Management-Market Risk Management, Including Interest Rate Risk Management-Derivative Instruments" and "Note 9, Derivative Instruments." The primary sources of revenue for our Capital Markets group are net interest income and fee...

  • Page 102
    ... recognized on the Capital Markets group's statements 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 a cost of capital charge allocated among the three business segments. The decrease...

  • Page 103
    ... on the Capital Markets group's balance sheets. Mortgage-related assets held by consolidated MBS trusts are not included in the Capital Markets group's mortgage portfolio. The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury...

  • Page 104
    ... of delinquent loans from MBS trusts as discussed below. Although the Capital Markets group's mortgage portfolio decreased overall period over period, purchases, securitizations and sales activity increased in 2012 primarily as a result of lower interest rates and the implementation of changes to...

  • Page 105
    ..., servicer capacity, and other factors including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase agreement. We purchased approximately 277,000 delinquent loans with an unpaid principal balance of $45.8 billion from our single-family MBS trusts in 2012...

  • Page 106
    ..., including trading and available-for-sale securities, as of the dates indicated. The decrease during 2012 is primarily attributable to a reduction in our agency MBS investments as we continue to manage our portfolio to the requirements of the senior preferred stock purchase agreement. 101

  • Page 107
    ... and Capital Management-Liquidity Management-Debt Funding." Also see "Note 8, Short-Term Borrowings and Long-Term Debt" for additional information on our outstanding debt. The increase in debt of consolidated trusts in 2012 was primarily driven by sales of Fannie Mae MBS, which are accounted for...

  • Page 108
    ...Net Assets (Net of Tax Effect) For Year Ended (Dollars in millions) GAAP consolidated balance sheets: Fannie Mae stockholders' deficit as of December 31, 2011(1) ...Total comprehensive income...Capital transactions:(2) Funds received from Treasury under the senior preferred stock purchase agreement...

  • Page 109
    ... the value associated with new business that may be added in the future. • The fair value of our net assets is not a measure defined within GAAP and may not be comparable to similarly titled measures reported by other companies. Supplemental Non-GAAP Consolidated Fair Value Balance Sheets We...

  • Page 110
    ... ...$ Federal funds sold and securities purchased under agreements to resell or similar arrangements ...Trading securities ...Available-for-sale securities ...Mortgage loans: Mortgage loans held for sale ...Mortgage loans held for investment, net of allowance for loan losses: Of Fannie Mae...Of...

  • Page 111
    ... planning. Primary Sources and Uses of Funds Our primary source of funds is proceeds from the issuance of short-term and long-term debt securities. Accordingly, our liquidity depends largely on our ability to issue unsecured debt in the capital markets. Our status as a GSE and federal government...

  • Page 112
    ... short- and long-term unsecured debt markets and other assumptions required by FHFA; maintain within our cash and other investment portfolio a daily balance of U.S. Treasury securities and/or cash with the Federal Reserve Bank of New York that has a redemption amount of at least 50% of the average...

  • Page 113
    ... the debt of Fannie Mae. We fund our business primarily through the issuance of short-term and long-term debt securities in the domestic and international capital markets. Because debt issuance is our primary funding source, we are subject to "roll-over," or refinancing, risk on our outstanding debt...

  • Page 114
    ...requirements of the senior preferred stock purchase agreement. Our debt funding activity is influenced by the size of our mortgage portfolio, anticipated liquidity needs and our dividend payment obligations to Treasury. As we discuss in "Critical Accounting Policies and Estimates-Deferred Tax Assets...

  • Page 115
    ... value gains and losses associated with debt that we elected to carry at fair value. The unpaid principal balance of outstanding debt of Fannie Mae, which excludes unamortized discounts, premiums, fair value adjustments and other cost basis adjustments and debt of consolidated trusts, totaled $621...

  • Page 116
    ... Interest Rate Average During the Year WeightedAverage Interest Rate Outstanding Outstanding(2) (Dollars in millions) Maximum Outstanding(3) Federal funds purchase and securities sold under agreements to repurchase ...Fixed-rate short-term debt: Discount notes...Foreign exchange discount notes...

  • Page 117
    ... Interest Rate Average During the Year WeightedAverage Interest Rate Outstanding Outstanding(2) (Dollars in millions) Maximum Outstanding(3) Federal funds purchase and securities sold under agreements to repurchase ...Fixed-rate short-term debt: Discount notes ...Foreign exchange discount notes...

  • Page 118
    ... December 31, 2011. Table 36: Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year(1) _____ (1) Includes a net unamortized discount, fair value adjustments and other cost basis adjustments of $5.9 billion as of December 31, 2012. Excludes debt of consolidated trusts of...

  • Page 119
    ... risk management derivative transactions that may require cash settlement in future periods and our obligations to stand ready to perform under our guarantees relating to Fannie Mae MBS and other financial guarantees, because the amount and timing of payments under these arrangements are generally...

  • Page 120
    ... information on the composition of our cash and other investments portfolio as of the dates indicated. Table 38: Cash and Other Investments Portfolio As of December 31, 2012 2011 (Dollars in millions) 2010 Cash and cash equivalents ...Federal funds sold and securities purchased under agreements...

  • Page 121
    ... 25, 2013. Table 39: Fannie Mae Credit Ratings As of March 25, 2013 S&P Moody's Fitch Long-term senior debt ...Short-term senior debt ...Qualifying subordinated debt ...Preferred stock...Bank financial strength rating ...Outlook ... AA+ A-1+ A C - Negative (for Long Term Senior Debt and Qualifying...

  • Page 122
    ... of the end of the immediately preceding fiscal quarter. See "Risk Factors" for a discussion of the risks relating to our dividend obligations to Treasury on the senior preferred stock. OFF-BALANCE SHEET ARRANGEMENTS We enter into certain business arrangements to facilitate our statutory purpose of...

  • Page 123
    ...Fannie Mae MBS and other financial guarantees of $53.1 billion as of December 31, 2012 and $62.0 billion as of December 31, 2011. For more 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...

  • Page 124
    ... a timely manner. • Operational Risk. Operational risk is the loss resulting from inadequate or failed internal processes, people, systems, or from external events. We are also subject to a number of other risks that could adversely impact our business, financial condition, earnings and cash flow...

  • Page 125
    ...of Directors The Risk Policy & Capital Committee of the Board, pursuant to its Charter, assists the Board in overseeing our management of risk and recommends for Board approval enterprise risk governance policy and limits. In addition, the Audit Committee reviews the system of internal controls that...

  • Page 126
    ... policies and procedures to help ensure that Fannie Mae and its employees comply with the law, our Code of Conduct, and all regulatory obligations. The Chief Compliance Officer reports directly to our Chief Executive Officer and independently to the Audit Committee of the Board of Directors...

  • Page 127
    ... loan-level information, which constituted approximately 99% of each of our single-family conventional guaranty book of business and our multifamily guaranty book of business, excluding defeased loans, as of December 31, 2012 and 2011. We typically obtain this data from the sellers or servicers...

  • Page 128
    ... credit statistics we focus on and report in the sections below generally relate to our single-family conventional guaranty book of business, which represents the substantial majority of our total single-family guaranty book of business. We provide additional information on non-Fannie Mae mortgage...

  • Page 129
    ...'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 exhibit the lowest default rates, followed by long-term, fixed-rate mortgages. Historically, adjustable-rate...

  • Page 130
    ... to use the funds from a mortgage loan-either for a home purchase or refinancing of an existing mortgage. Cash-out refinancings have a higher risk of default than either mortgage loans used for the purchase of a property or other refinancings that restrict the amount of cash returned to the borrower...

  • Page 131
    ...: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1) Percent of Single-Family Conventional Business Volume(2) For the Year Ended December 31, 2012 2011 2010 Percent of Single-Family Conventional Guaranty Book of Business(3)(4) As of December 31, 2012...

  • Page 132
    ... high-balance loans that represented approximately 5% of our single-family conventional guaranty book of business as of December 31, 2012 and 2011. See "Credit Profile Summary" and "Business-Our Charter and Regulation of Our Activities-Charter Act-Loan Standards" for information on our loan limits...

  • Page 133
    ... credit profile with weighted average FICO scores of 755. Over the past several years, the prolonged and severe decline in home prices resulted in the overall estimated weighted average mark-to-market LTV ratio of our single-family conventional guaranty book of business to increase. However, in 2012...

  • Page 134
    ... the credit risk exposure relating to these loans in our single-family conventional guaranty book of business. For more information about the credit risk characteristics of loans in our single-family guaranty book of business, see "Note 3, Mortgage Loans" and "Note 6, Financial Guarantees." 129

  • Page 135
    ... time, as each month the scheduled and unscheduled payments, interest, mortgage insurance premium, servicing fee, and default-related costs accrue to increase the unpaid principal balance. The majority of these loans are home equity conversion mortgages insured by the federal government through FHA...

  • Page 136
    ..., and holding our servicers accountable for following our requirements. In 2011, we issued new standards for mortgage servicers regarding the management of delinquent loans, default prevention and foreclosure time frames under FHFA's directive to align GSE policies for servicing delinquent mortgages...

  • Page 137
    .... We include single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family delinquency rate. Seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Percentage of book outstanding calculations are...

  • Page 138
    ...share of our credit losses. California, Florida, Arizona, Nevada and some states in the Midwest experienced more significant declines in home prices coupled with unemployment rates that remain high. Table 46 displays the serious delinquency rates and other financial information for our single-family...

  • Page 139
    ...Home Affordable Program that is intended to be uniform across servicers, our aim is to help borrowers whose loan is either currently delinquent or is at imminent risk of default. HAMP modifications can include reduced interest rates, term extensions, and/or principal forbearance to bring the monthly...

  • Page 140
    ...those plans associated with loans that were 60 days or more delinquent. Forbearances reflect loans that were 90 days or more delinquent. Calculated based on loan workouts during the period as a percentage of our single-family guaranty book of business as of the end of the period. The volume of home...

  • Page 141
    ... for the periods indicated. For more information on the impact of TDRs, see "Note 3, Mortgage Loans." Table 48: Single-Family Troubled Debt Restructuring Activity(1)(2) For the Year Ended December 31, 2012 2011 2010 (Dollars in millions) Beginning balance, January 1 ...$ 177,484 $ 155,564 $ 101...

  • Page 142
    ... for use properties, which are reported in our consolidated balance sheets as a component of "Other assets" and acquisitions through deeds-in-lieu of foreclosure. See footnote 9 to "Table 41: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business" for states...

  • Page 143
    ... share of our guaranty book of business. Table 52: Single-Family Acquired Property Concentration Analysis As of For the Year Ended December 31, 2012 Percentage of Book Outstanding(1) Percentage of Properties Acquired by Foreclosure(2) As of For the Year Ended December 31, 2011 Percentage of Book...

  • Page 144
    ... the Delegated Underwriting and Servicing, or DUS®, program. Multifamily loans that we purchase or that back Fannie Mae MBS are either underwritten by a Fannie Mae-approved lender or subject to our underwriting review prior to closing, depending on the product type and/or loan size. Loans delivered...

  • Page 145
    ... with our asset management criteria. As part of our ongoing credit risk management process, we have worked with our lenders in recent years to collect limited sets of quarterly property operating measures from borrowers, in addition to more complete annual financial updates, for those loans where we...

  • Page 146
    ... Delinquency Rate 2010 Percentage of Book Outstanding Serious Delinquency Rate Percentage of Multifamily Credit Losses For the Years Ended December 31, 2012 2011 2010 DUS small balance loans (1) ...DUS non small balance loans (2) ...Non-DUS small balance loans (1) ...Non-DUS non small balance loans...

  • Page 147
    ... the mortgage assets that we hold in our investment portfolio or that back our Fannie Mae MBS, including mortgage insurers, financial guarantors and lenders with risk sharing arrangements; • custodial depository institutions that hold principal and interest payments for Fannie Mae portfolio loans...

  • Page 148
    ... concentrated, a number of our largest single-family mortgage seller/servicer counterparties have recently reduced or eliminated their purchases of mortgage loans from mortgage brokers and correspondent lenders. As a result, we are acquiring an increasing portion of our business volume directly from...

  • Page 149
    ..., additional holding costs for us, such as property taxes and insurance, repairs and maintenance, and valuation adjustments due to home price changes. See "Risk Factors" for a discussion of changes in the foreclosure environment. If we determine that a mortgage loan did not meet our underwriting or...

  • Page 150
    ... settlements for a pool of loans, and loans in which no further repurchase or reimbursement for loss was required from the mortgage seller/servicer. Excludes the impact of our January 6, 2013 resolution agreement with Bank of America, which reduced the total outstanding repurchase request balance...

  • Page 151
    ...defects, mortgage insurance coverage claims and compensatory fees. As a result of this settlement, we recorded $173 million as a benefit to "Benefit (provision) for credit losses," in our consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2012. Also...

  • Page 152
    ... paid losses, such as changes in home prices and changes in interest rates. From time to time, we may also discuss a counterparty's situation with the rating agencies. As of April 2, 2013, of our largest primary mortgage insurers: • PMI, RMIC and Triad are under various forms of supervised control...

  • Page 153
    ... coverage of our single-family guaranty book of business as of December 31, 2012. We are exposed to the risk that mortgage insurers that do not meet, or may soon fail to meet, state regulatory capital requirements may fail to pay our claims under insurance policies and that the quality and speed of...

  • Page 154
    ... severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result...

  • Page 155
    ... calculate a net present value of the expected cash flows for each loan to determine the level of impairment, which is included in our allowance for loan losses. These expected cash flow projections include proceeds from mortgage insurance, that are based, in part, on the internal credit ratings for...

  • Page 156
    ... to independent non-bank financial institutions. As of December 31, 2012, approximately 40% of the unpaid principal balance of loans in our multifamily guaranty book of business serviced by our DUS lenders was from institutions with an external investment grade credit rating or a guaranty from...

  • Page 157
    ..., federal funds sold and securities purchased under agreements to resell or similar arrangements and U.S. Treasury securities. Our cash and other investment counterparties are primarily financial institutions and the Federal Reserve Bank. See "Liquidity and Capital Management- Liquidity Management...

  • Page 158
    ... consolidated balance sheets in "Other assets." Table 63 below displays our counterparty credit exposure on outstanding risk management derivative instruments in a gain position by counterparty credit ratings and the number of counterparties for over-the-counter derivatives as of December 31, 2012...

  • Page 159
    ...our corporate market risk policy and limits that are established by our Chief Market Risk Officer and our Chief Risk Officer and are subject to review and approval by our Board of Directors. Our Capital Markets Group has primary responsibility for executing our interest rate risk management strategy...

  • Page 160
    ...For mortgage assets in our portfolio that we intend to hold to maturity to realize the contractual cash flows, we accept period-to-period volatility in our financial performance attributable to changes in mortgage-to-debt spreads that occur after our purchase of mortgage assets. For more information...

  • Page 161
    ... cash flows between assets and liabilities in order to manage the duration risk associated with an investment in long-term fixed-rate assets. Callable debt helps us manage the prepayment risk associated with fixed-rate mortgage assets because the duration of callable debt changes when interest rates...

  • Page 162
    ... or minus 100 basis points; (2) the monthly disclosure reflects the estimated pre-tax impact on the market value of our net portfolio calculated based on a daily average, while the quarterly disclosure reflects the estimated pre-tax impact calculated based on the estimated financial position of our...

  • Page 163
    ...for the three months ended December 31, 2012 and 2011. The effective duration gap was (0.1) months for the last three months of 2012 which was the same average duration for the last three months of 2011. Table 64: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope...

  • Page 164
    ...-term changes in interest rates over the next twelve months. Table 66: Interest Rate Sensitivity of Financial Instruments As of December 31, 2012 Pre-Tax Effect on Estimated Fair Value Change in Interest Rates (in basis points) Estimated Fair Value -100 -50 +50 +100 (Dollars in billions) Trading...

  • Page 165
    ... due cash flows. We record our net investment in such loans at the lower of the acquisition cost of the loan or the estimated fair value of the loan at the date of acquisition. Typically, loans we acquire from our unconsolidated MBS trusts pursuant to our option to purchase upon default meet these...

  • Page 166
    ... our consolidated balance sheet and charged against our loss reserves when the balance is deemed uncollectible, which is generally at foreclosure. "Conventional mortgage" refers to a mortgage loan that is not guaranteed or insured by the U.S. government or its agencies, such as the VA, the FHA or...

  • Page 167
    ... calculating severity rates. For example, the numerator may reflect items such as foreclosed property expenses, taxes and insurance, and expected recoveries from pool insurance, while the denominator may reflect items such as purchased interest, basis, and selling costs. "Single-class Fannie Mae MBS...

  • Page 168
    ... limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer...

  • Page 169
    ... control over financial reporting. Internal control over financial reporting, as defined in rules promulgated under the Exchange Act, is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management...

  • Page 170
    ... set of disclosure controls and procedures relating to Fannie Mae, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible...

  • Page 171
    ... internal control over financial reporting. Change in Management Effective April 3, 2013, David C. Benson, who currently serves as Fannie Mae's Executive Vice President-Capital Markets, Securitization & Corporate Strategy, will become Fannie Mae's Executive Vice President and Chief Financial Officer...

  • Page 172
    ... responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit...

  • Page 173
    including the United States Department of Treasury and the Company's conservator and regulator, the Federal Housing Finance Agency. /s/ Deloitte & Touche LLP Washington, DC April 2, 2013 168

  • Page 174
    ... 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" below for further information...

  • Page 175
    ... as Managing Director of Corporate Finance. Mr. Harvey was a member of the Board of Directors of the Federal Home Loan Bank of Atlanta from 1996 to 1999, a director of the National Housing Trust from 1990 to 2008, and also served as an executive committee member of the National Housing Conference...

  • Page 176
    ... 2008 as a director of the Federal Reserve Bank of Atlanta. Mr. Perry has been a Fannie Mae director since December 2008. Mr. Perry is a member of the Compensation Committee, the Risk Policy & Capital Committee, and the Strategic Initiatives Committee. The Nominating & Corporate Governance Committee...

  • Page 177
    ... areas engaging in redemptions or repurchases of our subordinated debt, except as may be necessary to comply with the senior preferred stock purchase agreement; increases in Board risk limits, material changes in accounting policy, and reasonably foreseeable material increases in operational risk...

  • Page 178
    ... our Corporate Governance guidelines provide that the Board, as a group, must be knowledgeable in business, finance, capital markets, accounting, risk management, public policy, mortgage lending, real estate, low-income housing, homebuilding, regulation of financial institutions, and any other areas...

  • Page 179
    ... 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. The Board oversees risk management primarily through the Risk Policy & Capital Committee. This...

  • Page 180
    ... not plan to hold an annual meeting of shareholders in 2013. 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 181
    ... of Manager, Early Funding Programs from March 1994 to December 1996. Mr. Bon Salle joined Fannie Mae in September 1992 as a senior capital markets analyst. Effective April 3, 2013, Mr. Bon Salle will become Fannie Mae's Executive Vice President-Single-Family Underwriting, Pricing & Capital Markets...

  • Page 182
    ... and an at-risk portion that is subject to reduction based on corporate and individual performance. In addition, effective January 1, 2013, our Chief Executive Officer's total target direct compensation consists solely of a base salary of $600,000. Under the 2012 executive compensation program, FHFA...

  • Page 183
    ...long-term incentive awards that were granted under our prior executive compensation program. This installment is required to be reported as 2012 compensation for purposes of the "Summary Compensation Table for 2012, 2011 and 2010" because it was determined based on performance for both 2011 and 2012...

  • Page 184
    ... benefits we offer to our named executives and certain other officers identified by FHFA. Under the terms of the senior preferred stock purchase agreement with Treasury, we may not enter into any new compensation arrangements with, or increase amounts or benefits payable under existing compensation...

  • Page 185
    on the date of the senior preferred stock purchase agreement. This effectively eliminates our ability to offer stockbased compensation. • Under the Housing and Economic Recovery Act of 2008 and related regulations issued by FHFA, the Director of FHFA has the authority to prohibit or limit us from ...

  • Page 186
    ... features of our 2012 executive compensation program for our named executives. All elements of our named executives' direct compensation are paid in cash because we are prohibited from paying new stock-based compensation under the senior preferred stock purchase agreement without Treasury's consent...

  • Page 187
    ... by providing The plan supplements the company's qualified defined retirement savings. contribution plan by providing benefits to participants whose annual eligible earnings exceed the IRS limit on eligible compensation for 401(k) plans. The named executives who joined the company after 2007 (Mr...

  • Page 188
    ..., General Counsel and Corporate Secretary. Mr. Mayopoulos did not receive any increase in his 2012 compensation as a result of his promotion to Chief Executive Officer. Moreover, Mr. Mayopoulos' total direct compensation for 2013 will consist solely of $600,000 in base salary. He will not earn any...

  • Page 189
    ...to replace, the Summary Compensation Table required under applicable SEC rules, which is included below under "Compensation Tables-Summary Compensation Table for 2012, 2011 and 2010." 2012 Corporate Performance-Based AtRisk Deferred Salary 2012 Base Salary Rate (1) 2012 Individual Performance-Based...

  • Page 190
    ... employed by Fannie Mae on the payment date for that installment. Although long-term incentive awards are not a component of the company's 2012 executive compensation program, the second installment of the 2011 long-term incentive award is required to be reported as 2012 compensation for purposes...

  • Page 191
    ... managing a high quality new book of business that we expect will be profitable over its lifetime; managing substantial leadership transitions, including a change in the company's chief executive officer; reducing the company's single-family serious delinquency rate to 3.29% as of December 31, 2012...

  • Page 192
    ... loan delivery data by July 23, 2012. - Deliver new ULDD data point in compliance with SEC Rule 15Ga-1 by November 30, 2012. - Notify market of optional ULDD data points, including those necessary to improve disclosure and for other business uses in 2012. - Notify market of servicing data standard...

  • Page 193
    ... operations without government guarantees. Review the likely viability of these models operating on a stand-alone basis after attracting private capital and adjusting pricing if needed. - Perform analysis of investments portfolio as described in the strategic plan by the fourth quarter of 2012...

  • Page 194
    ... Freddie Mac charge on single-family mortgages in states where costs related to foreclosure practices are significantly higher than the national average. 20.0% - Set uniform pricing across loan sellers to extent practicable. - Set plan to price for state law effects on mortgage credit losses given...

  • Page 195
    ...internal controls and risk management governance, as of year end, certain aspects of the company's internal control environment continued to need strengthening. Assessment of Corporate Performance of 2011 Long-Term Incentive Award Goals (Second Installment) In March 2011, the Board established 2012...

  • Page 196
    ... of the 2011 long-term incentive awards for executive officers would be funded at 95% of target. The Board of Directors and FHFA approved the Compensation Committee's determination. The table below presents our 2012 corporate performance goals and related metrics for purposes of determining...

  • Page 197
    ...'s ability to assist troubled borrowers while further developing a high-quality book of new business. Mr. Mayopoulos also oversaw the organization's achievement of a substantial portion of its 2012 Operating Plan deliverables and improvement in the company's risk and control environment. The Board...

  • Page 198
    ... into business activities and performance, developed a plan to modernize the company's financial reporting capabilities, and restructured the Finance organization's shared services group to increase focus on critical capabilities. The Chief Executive Officer, the Compensation Committee and the Board...

  • Page 199
    ...; reviewing the company's risk assessment of its 2012 compensation program; assisting the Compensation Committee in its evaluation of the company's performance against the 2012 conservatorship scorecard and the 2012 corporate performance goals relating to the second installment of the 2011 long-term...

  • Page 200
    ... February 2013) with the market median of 2011 direct compensation for comparable positions in the applicable comparator group of companies based on McLagan's proprietary database and as disclosed in the companies' annual reports, proxy statements and SEC filings. The benchmarking took into account...

  • Page 201
    ... of Chief Executive Officers in the applicable comparator group of companies. Effective January 1, 2013, Mr. Mayopoulos' total direct compensation consists solely of $600,000 in base salary, which is 94% below the market median of 2011 total direct compensation for Chief Executive Officers in...

  • Page 202
    ... he earned for 2012 on the applicable payment dates in 2013, and he was paid the second installment of his 2011 long-term incentive award in February 2013. He also continues to be eligible to participate in the employee benefit programs made available to all Fannie Mae executives. CFO Compensation...

  • Page 203
    ... the named executives' 2013 at-risk deferred salary. 1. Achieve key financial targets, including acquiring and managing a profitable, high-quality book of new business from 2009 forward. Metrics associated with this goal consist of generating projected returns in excess of our cost of capital on our...

  • Page 204
    ...our 2012 employee compensation policies and practices. In conducting this risk assessment, we reviewed, among other things, our compensation plans, pay profiles, performance goals and performance appraisal management process. We also assessed whether policies, procedures or other mitigating controls...

  • Page 205
    ... of their 2011 long-term incentive award in February 2013, and this installment is required to be reported as 2012 compensation for purposes of the table. Although long-term incentive awards were eliminated as a component of the 2012 executive compensation program, the named executives were entitled...

  • Page 206
    ... and December 2013. More information about 2012 deferred salary is presented in "Compensation Discussion and Analysis-2012 Executive Compensation Program-Elements of 2012 Executive Compensation Program-Direct Compensation." As described in footnote 10 below, amounts shown for 2012 and 2011 in this...

  • Page 207
    ...reporting under GAAP, using a discount rate of 4.15% as of December 31, 2012. None of our named executives received above-market or preferential earnings on nonqualified deferred compensation. Mr. Williams left the company in July 2012 and began receiving retirement benefit payments in February 2013...

  • Page 208
    ...annual rate of $720,000 to an annual rate of $950,000, and his at-risk deferred salary target increased from an annual target of $480,000 to an annual target of $600,000. Mr. Nichols' total target direct compensation was increased in connection with his promotion to Chief Risk Officer in August 2011...

  • Page 209
    ... and Analysis-2012 Executive Compensation Program- Elements of 2012 Executive Compensation Program-Direct Compensation." Deferred salary amounts shown represent only the at-risk, performance-based portion of the named executives' 2012 deferred salary. Estimated Future Payouts Under Non-Equity...

  • Page 210
    ... no named executives exercised stock options during 2012. Stock Awards Name Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($) Timothy Mayopoulos ...Michael Williams...Susan McFarland ...David Benson ...Terence Edwards ...John Nichols ...Pension Benefits Retirement Savings Plan...

  • Page 211
    ... compensation for executive officers includes deferred salary under our current executive compensation program and other types of incentive compensation paid in prior years under our prior executive compensation programs. For purposes of determining benefits under the 2003 Supplemental Pension Plan...

  • Page 212
    ... 31, 2012. Pension Benefits for 2012 Number of Years Credited Service (#)(1) Present Value of Accumulated Benefit ($)(2) Name Plan Name Timothy Mayopoulos ...Not applicable Michael Williams...Retirement Plan Supplemental Pension Plan(3) 2003 Supplemental Pension Plan(3) Executive Pension Plan Not...

  • Page 213
    ... 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 214
    ... if the named executive's employment had terminated on December 31, 2012, taking into account the named executive's compensation and service levels as of that date. The discussion below does not reflect retirement or deferred compensation plan benefits to which our named executives may be entitled...

  • Page 215
    ... executive compensation program. These provisions do not apply to deferred salary awarded in 2012 or subsequent years. As of the date of this filing, there are no remaining unpaid installments of 2011 deferred salary or 2011 long-term incentive awards. In general, an executive officer, including...

  • Page 216
    ... earned but unpaid 2012 at-risk deferred salary target, reduced by the amounts determined by FHFA and the Board in early 2013 as a result of corporate and individual performance). See the "At-Risk Deferred Salary (Performance-Based)" sub-column of the "Summary Compensation Table for 2012, 2011 and...

  • Page 217
    ... Non-Management Directors Our non-management directors receive a retainer at an annual rate of $160,000, with no meeting fees. Committee chairs and Audit Committee members receive an additional retainer at an annual rate of $25,000 for the Audit Committee chair, $15,000 for the Risk Policy & Capital...

  • Page 218
    ... average exercise price is calculated for the outstanding options and does not take into account deferred shares. This number of shares consists of 11,960,258 shares available under the 1985 Employee Stock Purchase Plan and 29,288,094 shares available under the Stock Compensation Plan of 2003...

  • Page 219
    ... and Chief Financial Officer John R. Nichols...Executive Vice President and Chief Risk Officer Egbert L. J. Perry ...Director Jonathan Plutzik ...Director David H. Sidwell ...Director Michael J. Williams(4) ...Former President and Chief Executive Officer All directors and current executive officers...

  • Page 220
    ... Governance Committee Charter and our Board's delegation of authorities and reservation of powers require the Nominating & Corporate Governance Committee to approve any transaction that Fannie Mae engages in with any director, nominee for director or executive officer, or any immediate family member...

  • Page 221
    ...for employees requires that our executive officers report to the Compliance & Ethics division any existing or currently proposed transaction with us, whether or not in the ordinary course of business, in which the executive officer or any immediate family member of the executive officer has a direct...

  • Page 222
    ... efficient loan modifications by servicers; • creating, making available and managing the process for servicers to report modification activity and program performance; • calculating incentive compensation consistent with program guidelines; • acting as record-keeper for executed loan...

  • Page 223
    ... book, making PHH our sixth-largest servicer. PHH also entered into transactions with us to purchase or sell $4.4 billion in agency mortgage-related securities in 2012. As a single-family seller-servicer customer, PHH also pays us fees for its use of certain Fannie Mae technology, enters into risk...

  • Page 224
    ...but one of our directors, our Chief Executive Officer, is independent. Based on its review, the Board has determined that all of our non-employee directors meet the director independence requirements set forth in FHFA's corporate governance regulations and in our Corporate Governance Guidelines. 219

  • Page 225
    ... five years that, in any single fiscal year, were in excess of $1 million or 2% of the entity's consolidated gross annual revenues, whichever is greater; or • an immediate family member of the director is a current executive officer of a company or other entity that does or did business with...

  • Page 226
    ... made by or to Fannie Mae pursuant to these relationships during the past five years fell below our Guidelines' thresholds of materiality for a Board member that is a current executive officer, employee, controlling shareholder or partner of a company engaged in business with Fannie Mae. In light of...

  • Page 227
    ...a current executive officer, employee, controlling shareholder or partner of a company that engages in business with Fannie Mae. In addition, as a limited partner or member in the LIHTC funds, which in turn are limited partners in the Integral Property Partnerships, Fannie Mae has no direct dealings...

  • Page 228
    ... services on debt offerings, securitization transactions and compliance with our covenants of the Senior Preferred Stock Purchase Agreement. Consists of fees billed for analysis and assessment of the finance organization and human capital continuity planning. (2) Pre-Approval Policy The Audit...

  • Page 229
    ... Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Federal National Mortgage Association /s/ Timothy J. Mayopoulos Timothy J. Mayopoulos President and Chief Executive Officer Date: April 2, 2013 KNOW...

  • Page 230
    Signature Title Date /s/ Brenda J. Gaines Brenda J. Gaines Director April 2, 2013 /s/ Charlynn Goins Charlynn Goins Director April 2, 2013 /s/ Frederick B. Harvey III Frederick B. Harvey III Director April 2, 2013 /s/ Robert H. Herz Robert H. Herz Director April 2, 2013 /s/ Egbert L. ...

  • Page 231
    ...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 as of May 6, 2009, between the United States Department of the Treasury and Federal National Mortgage Association, acting through the Federal Housing...

  • Page 232
    ... to Fannie Mae Supplemental Pension Plan of 2003 for 2012 Executive Compensation Program, adopted May 18, 2012†(Incorporated by reference to Exhibit 10.2 to Fannie Mae's Quarterly Report on Form 10-Q, filed August 8, 2012.) Executive Pension Plan of the Federal National Mortgage Association as...

  • Page 233
    ... Mae's Annual Report on Form 10-K for the year ended December 31, 2011, filed February 29, 2012.) Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of September 26, 2008, between the United States Department of the Treasury and Federal National Mortgage Association, acting...

  • Page 234
    ... Program Modifications among the Department of Treasury, the Federal Housing Finance Agency, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation, dated November 23, 2011 (Incorporated by reference to Exhibit 10.42 to Fannie Mae's Annual Report on Form 10-K for the year...

  • Page 235
    ...of Cash Flows ...Consolidated Statements of Changes in Equity (Deficit) ...Notes to Consolidated Financial Statements...Note 1-Summary of Significant Accounting Policies...Note 2-Consolidations and Transfers of Financial Assets ...Note 3-Mortgage Loans ...Note 4-Allowance for Loan Losses and Reserve...

  • Page 236
    ... Mae: We have audited the accompanying consolidated balance sheets of Fannie Mae and consolidated entities (in conservatorship) (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), cash flows, and changes in equity...

  • Page 237
    ...of December 31, 2012 2011 ASSETS Cash and cash equivalents ...Restricted cash (includes $61,976 and $45,900, respectively, related to consolidated trusts) ...Federal funds sold and securities purchased under agreements to resell or similar arrangements ...Investments in securities: Trading, at fair...

  • Page 238
    FANNIE MAE (In conservatorship) Consolidated Statements of Operations and Comprehensive Income (Loss) (Dollars and shares in millions, except per share amounts) For the Year Ended December 31, 2012 2011 2010 Interest income: Trading securities ...Available-for-sale securities ...Mortgage loans (...

  • Page 239
    ... Fannie Mae ...Proceeds from repayments of loans held for investment of consolidated trusts...Net change in restricted cash ...Advances to lenders ...Proceeds from disposition of acquired property and preforeclosure sales ...Net change in federal funds sold and securities purchased under agreements...

  • Page 240
    ... fee buyups...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 ...Conversion of convertible preferred stock into common stock ...Other ...Balance...

  • Page 241
    ...the listed securities on the New York Stock Exchange and the Chicago Stock Exchange was July 7, 2010, and since July 8, 2010, the securities have been traded on the over-the-counter market. The conservator has the power to transfer or sell any asset or liability of Fannie Mae (subject to limitations...

  • Page 242
    ... required to pay Treasury on the senior preferred stock changed as of January 1, 2013. The method for calculating the amount of dividends payable on the senior preferred stock in effect prior to this amendment, which remained in effect through December 31, 2012, was to apply an annual dividend rate...

  • Page 243
    ... or loss upon modification of the senior preferred stock purchase agreement. Consistent with our accounting policy, dividends on the modified senior preferred stock will continue to be accrued upon declaration, which occurs each quarter when FHFA directs us to pay the quarterly dividend to Treasury...

  • Page 244
    ... income (loss) for the year ended December 31, 2011. In 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac pursuant to which we agreed to provide assistance to state and local housing finance agencies ("HFAs") through two primary programs: a temporary credit...

  • Page 245
    ... our deferred tax assets. We continually monitor delinquency and default trends and periodically make changes in our historically developed assumptions to better reflect present conditions. In the three months ended September 30, 2012, we enhanced our collective single-family loss reserve model and...

  • Page 246
    ... types of VIE entities with which we are involved are securitization trusts guaranteed by us 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...

  • Page 247
    ...that the purchase price of the MBS does not equal the carrying value of the related consolidated debt reported in our consolidated balance sheets (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 248
    ... the purchase and subsequent sale of such securities as the transfer of an investment security in accordance with the accounting guidance for transfers of financial assets. Single-Class Resecuritization Trusts Single-class resecuritization trusts are created by depositing Fannie Mae MBS into a new...

  • Page 249
    ... short-term investments classified as cash equivalents. In the presentation of our consolidated statements of cash flows, we present cash flows from derivatives that do not contain financing elements and mortgage loans held for sale as operating activities. We present cash flows from federal funds...

  • Page 250
    ... debt of Fannie Mae and the debt of consolidated trusts, as applicable. We present our non-cash activities in the consolidated statements of cash flows at the associated unpaid principal balance. Restricted Cash We and our servicers advance payments on delinquent loans to consolidated Fannie Mae MBS...

  • Page 251
    ... will generally be classified as HFI in our consolidated balance sheets both prior to and subsequent to their securitization. We report HFI loans at their outstanding unpaid principal balance adjusted for any deferred and unamortized cost basis adjustments, including purchase premiums, discounts and...

  • Page 252
    ... or cash upon completion of a short sale. We recognize incurred losses by recording a charge to the provision for loan losses, which is a component of "Benefit (provision) for credit losses" in our consolidated statements of operations and comprehensive income (loss). In the three months ended...

  • Page 253
    ...the trust from the current balance sheet date until the point of loan acquisition or foreclosure. We recognize incurred losses by recording a charge to the provision for guaranty losses, which is a component of "Benefit (provision) for credit losses," in our consolidated statements of operations and...

  • Page 254
    ... We categorize loan credit risk based on relevant observable data about a borrower's ability to pay, including multifamily market economic fundamentals, review of available current borrower financial information, operating statements on the underlying collateral, current debt service coverage ratios...

  • Page 255
    ...-cash transfer in our consolidated statements of cash flows in the line item entitled "Transfers from advances to lenders to loans held for investment of consolidated trusts." Acquired Property, Net "Acquired property, net" includes foreclosed property and any receivable outstanding on short sales...

  • Page 256
    ...provide for delivery of securities within the time generally established by regulations or conventions in the market in which the trade occurs and are exempt from application of the derivative accounting literature. Commitments to purchase or sell securities that we account for on a trade-date basis...

  • Page 257
    ... to fund our general business activities. The debt of consolidated trusts represents the amount of Fannie Mae MBS issued from such trusts which is held by third-party certificateholders and prepayable without penalty at any time. We report deferred items, including premiums, discounts and other cost...

  • Page 258
    ... trusts to the extent that the purchase price of the MBS does not equal the carrying value of the related consolidated MBS debt reported in our balance sheets (including unamortized premiums, discounts and other cost basis adjustments) at the time of purchase. Income Taxes We recognize deferred tax...

  • Page 259
    ... fee for servicing delays within their control when they fail to comply with established loss mitigation and foreclosure timelines per our Servicing Guide, which sets forth our policies and procedures related to servicing our single-family mortgages. Compensatory fees are intended to compensate...

  • Page 260
    ... tax credits and net operating losses that may reduce our federal income tax liability. Our LIHTC investments primarily represent limited partnership interests in entities that have been organized by a fund manager who acts as the general partner. These fund investments seek out equity investments...

  • Page 261
    ... sheets due to consolidation of certain multi-class resecuritization trusts. Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the unpaid principal balance of the assets covered by our guaranty. However, our securities issued by Fannie Mae...

  • Page 262
    ... loans or mortgagerelated securities to one or more trusts or special purpose entities. We are considered to be the transferor when we transfer assets from our own portfolio in a portfolio securitization transaction. For the years ended December 31, 2012, 2011 and 2010, the unpaid principal balance...

  • Page 263
    ... balance, net of unamortized premiums and discounts, other cost basis adjustments, and an allowance for loan losses. We report HFS loans at the lower of cost or fair value determined on a pooled basis, and record valuation changes in our consolidated statements of operations and comprehensive income...

  • Page 264
    ... status to reflect the change in our assessment of collectibility resulting from this agreement, see "Note 20, Subsequent Events." Consists of mortgage loans that are not included in other loan classes. Consists of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government...

  • Page 265
    ...The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value. The...

  • Page 266
    ... principal balance, and related allowance as of December 31, 2012 and 2011 and interest income recognized and average recorded investment for the years ended December 31, 2012 and 2011 for individually impaired loans. As of December 31, 2012 Related Allowance for Loan Losses Related Allowance for...

  • Page 267
    ... Alt-A. The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no valuation allowance is required. Includes single-family loans restructured in a TDR with a recorded investment of $193.4 billion and $161.9 billion as of December 31, 2012 and 2011...

  • Page 268
    ... the number of loans and recorded investment in loans that had a payment default for the years ended December 31, 2012 and 2011 and were modified in a TDR in the twelve months prior to the payment default. For purposes of this disclosure, we define loans that had a payment default as: single-family...

  • Page 269
    ...loan was on accrual status. The following table displays changes in single-family, multifamily and total allowance for loan losses for the years ended December 31, 2012, 2011 and 2010. For the Year Ended December 31, 2012 Of Fannie Mae Of Consolidated Trusts Of Fannie Mae 2011 Of Consolidated Trusts...

  • Page 270
    ...2012, 2011 and 2010, respectively. Includes transfers from trusts for delinquent loan purchases. Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The (benefit) provision for credit...

  • Page 271
    ... losses for the years ended December 31, 2012, 2011, and 2010. For the Year Ended December 31, 2012 2011 (Dollars in millions) 2010 Reserve for guaranty losses: Beginning balance, January 1 ...$ 994 Adoption of consolidation accounting guidance ...- Provision for guaranty losses ...339 (174) Charge...

  • Page 272
    ... sale of securities from new portfolio securitizations included in "Note 2, Consolidations and Transfers of Financial Assets." The following tables display the amortized cost, gross unrealized gains and losses and fair value by major security type for AFS securities we held as of December 31, 2012...

  • Page 273
    ... (4) Amortized cost consists of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments as well as the credit component of other-than-temporary impairments ("OTTI") recognized in our consolidated statements of operations and comprehensive income (loss). Represents...

  • Page 274
    ... cash flows indicate that we will recover these unrealized losses over the lives of the securities. The following table displays our net other-than-temporary impairments by major security type recognized in our consolidated statements of operations and comprehensive income (loss) for the years ended...

  • Page 275
    ... discounting the projected cash flows from econometric models to estimate the portion of loss in value attributable to credit. Separate components of a third-party model project regional home prices, unemployment and interest rates. The model combines these factors with available current information...

  • Page 276
    ... the securities, calculated as the ratio of remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance. The average monthly voluntary prepayment rate, weighted by security unpaid principal balance. The average percent current credit enhancement provided...

  • Page 277
    ... credit loss or, if a loss was projected, that present value of expected cash flows was greater than the security's cost basis. 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...

  • Page 278
    ... 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 longterm standby commitments that generally require us to purchase loans from lenders if the loans meet certain delinquency...

  • Page 279
    ...) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) For single-family loans, management monitors the serious delinquency rate, which is the percentage of single-family loans 90 days or more past due or in the foreclosure process, and loans that have higher risk characteristics, such as high...

  • Page 280
    ... MBS are actively traded. Fannie Mae MBS receive high credit quality ratings primarily because of our guaranty. Absent our guaranty, Fannie Mae MBS would be subject to the credit risk on the underlying loans. We continue to recognize a guaranty obligation and a reserve for guaranty losses associated...

  • Page 281
    ... to sell or that are not ready for immediate sale in their current condition, which are reflected in "Other assets" 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, 2012, 2011 and...

  • Page 282
    ... 2011 WeightedAverage Interest Rate(1) Outstanding Outstanding (Dollars in millions) Fixed-rate short-term debt: Discount notes(2) ...$ 104,730 Foreign exchange discount notes(3) ...503 Other(4)...- Total short-term debt of Fannie Mae ...105,233 Debt of consolidated trusts ...3,483 Total short...

  • Page 283
    ... balance sheets that did not qualify as a sale under the accounting guidance for the transfer of financial instruments. Reported amounts include a net unamortized discount, fair value adjustments and other cost basis adjustments of $6.0 billion and $9.2 billion as of December 31, 2012 and 2011...

  • Page 284
    ... debt instruments that is reported at fair value. The following table displays the amount of our debt of Fannie Mae that was called and repurchased and the associated weighted-average interest rates for the years ended December 31, 2012, 2011 and 2010. For the Year Ended December 31, 2012 2011...

  • Page 285
    ... execution of our strategy than debt securities. We typically do not settle the notional amount of our risk management derivatives; rather, notional amounts provide the basis for calculating actual payments or settlement amounts. The derivatives we use for interest rate risk management purposes...

  • Page 286
    ... received as of December 31, 2012 and $779 million was received as of December 31, 2011. (2) A majority of our derivative instruments contain provisions that require our senior unsecured debt to maintain a minimum credit rating from S&P and Moody's. If our senior unsecured debt were to fall below...

  • Page 287
    ... cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. 10. Income Taxes We operate as a government-sponsored enterprise. We are subject to federal income tax, but we are exempt from state and local income taxes. Deferred Tax Assets and Liabilities We recognize deferred...

  • Page 288
    ... we reported losses in our consolidated statements of operations for the three-years ended December 31, 2012; the impact of a reduction in funds available to us under the senior preferred stock purchase agreement that would have resulted from releasing the valuation allowance during the three months...

  • Page 289
    ...of December 31, 2012 2011 (Dollars in millions) Deferred tax assets: Allowance for loan losses and basis in acquired property, net...Mortgage and mortgage-related assets ...Debt and derivative instruments ...Partnership credits ...Partnership and other equity investments ...Unrealized losses on AFS...

  • Page 290
    ... tax rates and the statutory federal tax rates for the years ended December 31, 2012, 2011 and 2010, respectively. For the Year Ended December 31, 2012 2011 2010 Statutory corporate tax rate ...Tax-exempt interest ...Equity investments in affordable housing projects ...Other ...Valuation allowance...

  • Page 291
    ... 2012, 2011 and 2010, respectively. In 2012, the terms of the senior preferred stock purchase agreement were amended to ultimately require the payment of our entire net worth to Treasury. Although the calculation of earnings per share presented above and on our consolidated statements of operations...

  • Page 292
    ...funding requirement and maximum funding limit under the Employee Retirement Income Security Act of 1974 ("ERISA") and IRS regulations. Our nonqualified defined benefit pension plans consist of an Executive Pension Plan, Supplemental Pension Plan and the Supplemental Pension Plan of 2003. These plans...

  • Page 293
    ... and 2011. For the Year Ended 2012 2011 Other PostOther PostPension Retirement Pension Retirement Plans Plan Plans Plan (Dollars in millions) Actuarial Loss: Beginning balance, January 1...Current year actuarial loss (gain) ...Amortization...Ending balance, December 31 ...Prior Service Cost (Credit...

  • Page 294
    ... plan increase the plan assets while contributions to the unfunded plans are made to fund current period benefit payments or to fulfill annual funding requirements. We were not required to make minimum contributions to our qualified pension plan for each of the years in the three-year period ended...

  • Page 295
    ... 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 of increase in future...

  • Page 296
    ... benefit obligations. The assets of the qualified pension plan consist of exchange-listed stocks, held in broadly diversified index funds. We also invest in a broadly diversified indexed fixed income account. In addition, the plan holds liquid short-term investments that provide for monthly pension...

  • Page 297
    ...contribution plan. This plan supplements our Retirement Savings Plan to provide benefits to employees who are not grandfathered under our defined benefit pension plan and whose annual eligible earnings exceed the IRS annual limit on eligible compensation for 401(k) plans. We credit to the plan 8% of...

  • Page 298
    ... guaranty fees the segment receives as compensation for assuming the credit risk on the mortgage loans underlying single-family Fannie Mae MBS, most of which are held within consolidated trusts, and on the single-family mortgage loans held in our mortgage portfolio. The primary source of profit for...

  • Page 299
    ... any cost basis adjustments. It excludes interest expense on debt issued by consolidated trusts. Therefore, the interest expense recognized on the Capital Markets group income statement is limited to our funding debt, which is reported as "Debt of Fannie Mae" in our consolidated balance sheets. Net...

  • Page 300
    ... (Continued) 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. The following tables display our business segment financial results for the years ended December 31, 2012, 2011 and...

  • Page 301
    ...) For the Year Ended December 31, 2011 Business Segments SingleFamily Multifamily Capital Markets Other Activity/Reconciling Items Consolidated Trusts(1) Eliminations/ Adjustments(2) Total Results (Dollars in millions) Net interest (loss) income...$ (2,411) Provision for credit losses ...(26,453...

  • Page 302
    ... Fannie Mae MBS classified as trading that are retained in the Capital Markets portfolio. Gains (losses) from partnership investments are included in other expenses in our consolidated statements of operations and comprehensive income (loss). Represents the adjustment from equity method accounting...

  • Page 303
    ... 31, 2012 2011 (Dollars in millions) Single-Family ...$ 17,595 $ 11,822 Multifamily ...5,182 5,747 Capital Markets...723,217 836,700 Consolidated trusts ...2,749,571 2,676,952 (273,143) (319,737) Eliminations/adjustments ...Total assets ...$ 3,222,422 $ 3,211,484 We operate our business solely in...

  • Page 304
    ...following table displays our senior preferred stock and preferred stock outstanding as of December 31, 2012 and 2011. Issued and Outstanding as of December 31, 2012 Title Issue Date Shares Amount Shares 2011 Amount Stated Value per Share Annual Dividend Rate as of December 31, 2012 Redeemable on or...

  • Page 305
    ... quarterly thereafter at a per annum rate equal to the greater of 7.75% or 3-Month LIBOR plus 4.23%. As of December 31, 2012, the annual dividend rate was 7.75%. Represents initial call date. Redeemable every five years thereafter. On May 19, 2008, we issued 80 million shares of preferred stock...

  • Page 306
    ... the applicable capital reserve amount as of the end of a quarter, then we will not be required to accrue or pay any dividends in the next quarter. The senior preferred stock ranks prior to our common stock and all other outstanding series of our preferred stock as to both dividends and rights upon...

  • Page 307
    ...quarter of 2012 and 2011. In addition, pursuant to the amendment to the senior preferred stock purchase agreement described in "Note 1, Summary of Significant Accounting Policies," the periodic commitment fee under the agreement was suspended effective January 1, 2013. Covenants The senior preferred...

  • Page 308
    ... 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 in our consolidated balance sheets were not considered for purposes of evaluating our compliance with the limitation on the...

  • Page 309
    ... funds provided to us by Treasury pursuant to the senior preferred stock purchase agreement, as the senior preferred stock does not qualify as core capital due to its cumulative dividend provisions. Pursuant to the GSE Act, if the Director of FHFA makes a written determination that our total assets...

  • Page 310
    ...billion, respectively. Under the terms of the senior preferred stock purchase agreement, starting January 1, 2013, we are required to pay Treasury each quarter dividends equal to the excess of our net worth as of the end of the preceding quarter over an applicable capital reserve amount. As a result...

  • Page 311
    ... we perform detailed loan reviews that evaluate borrower and geographic concentrations, lender qualifications, counterparty risk, property performance and contract compliance. We generally require mortgage servicers to submit periodic property operating information and condition reviews, allowing us...

  • Page 312
    ... in our singlefamily conventional guaranty book of business. For more information about the credit risk characteristics of loans in our single-family guaranty book of business, see "Note 3, Mortgage Loans" and "Note 6, Financial Guarantees." The Alt-A mortgage loans and Fannie Mae MBS backed by Alt...

  • Page 313
    ...Other assets" in our consolidated balance sheets as of December 31, 2012 and $3.6 billion as of December 31, 2011 related to amounts claimed on insured, defaulted loans, of which $1.1 billion as of December 31, 2012 and $639 million as of December 31, 2011 was due from our mortgage sellers/servicers...

  • Page 314
    .... Parties Associated with Our Off-Balance Sheet Transactions. We enter into financial instrument transactions that create offbalance sheet credit risk in the normal course of our business. These transactions are designed to meet the financial needs of our customers, and manage our credit, market or...

  • Page 315
    ... time we implemented this process enhancement, the impact of this enhancement was an increase in the estimated fair value of HARP loans of $7.4 billion as of March 31, 2012. In the three months ended September 30, 2012, we updated our assumptions for prepayment speeds, severities and default rates...

  • Page 316
    ...: 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 management...

  • Page 317
    ...millions) Quoted Prices in Active Markets for Identical Assets (Level 1) Estimated Fair Value Liabilities: Long-term debt: Of Fannie Mae: Senior fixed ...Senior floating...Total of Fannie Mae...Of consolidated trusts ...Total long-term debt ...Other liabilities: Risk management derivatives: Swaps...

  • Page 318
    ...-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 319
    ...Inputs Assets (Level 1) (Level 3) Adjustment(1) (Level 2) (Dollars in millions) Estimated Fair Value Liabilities: Long-term debt: Of Fannie Mae: Senior fixed ...Senior floating ...Total of Fannie Mae ...Of consolidated trusts ...Total long-term debt...Other liabilities: Risk management derivatives...

  • Page 320
    ...changes in fair value, including both realized and unrealized gains and losses, recognized in our consolidated statements of operations and comprehensive income (loss) for Level 3 assets and liabilities for the years ended December 31, 2012, 2011 and 2010. When assets and liabilities are transferred...

  • Page 321
    ..., 2010 Included in Other Comprehensive Income (Loss)(1) Purchases(2) Sales(2) Issues(3) Settlements(3) Transfers out of Level 3(4) Transfers into Level 3(4) Balance, December 31, 2011 (Dollars in millions) Trading securities: Mortgage-related: Fannie Mae ...Ginnie Mae ...Alt-A private-label...

  • Page 322
    ...display realized and unrealized gains and losses included in our consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010, for our Level 3 assets and liabilities measured in our consolidated balance sheets at fair value on a recurring...

  • Page 323
    ...: Assets: Mortgage loans held for sale, at lower of cost or fair value ...Single-family mortgage loans held for investment, at amortized cost:(1) Of Fannie Mae ...Of consolidated trusts...Multifamily mortgage loans held for investment, at amortized cost ...Acquired property, net: Single-family...

  • Page 324
    ... Inputs (Level 3) Estimated Fair Value Total Gains (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...

  • Page 325
    ...(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 326
    ... in millions) Range(1) Weighted Average(1) Fair Value Recurring fair value measurements: Trading securities: Mortgage-related securities: Agency(2) ...Consensus Single Vendor Total Agency ...Alt-A private-label securities ...Discounted Cash Flow $ 44 27 71 Default Rate (%) Prepayment Speed...

  • Page 327
    ... 31, 2012 Significant Unobservable Valuation Techniques Inputs(1) Range(1) (Dollars in millions) Weighted Average(1) Fair Value Available-for-sale securities: Mortgage-related securities: Agency(2) ...Other Alt-A private-label securities. . Discounted Cash Flow $ Default Rate (%) Prepayment...

  • Page 328
    ... Discounted Cash Flow Single Vendor Total single-family ...Multifamily ...Build-Up Total mortgage loans of consolidated trusts ...Net derivatives ...Dealer Mark Internal Model Total net derivatives...Long-term debt: Of Fannie Mae: Senior floating ...Discounted Cash Flow Of consolidated trusts...

  • Page 329
    ... 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, at amortized cost ... Consensus Internal Model Internal Model Appraisals Broker Price Opinions Asset...

  • Page 330
    ...GO using our internal GO valuation models, which calculate the present value of expected cash flows based on management's best estimate of certain key assumptions such as current mark-to-market LTV ratios, future house prices, default rates, severity rates and required rate of return. We may further...

  • Page 331
    ...in this calculation include rental income, fees associated with rental income, expenses associated with the property including taxes, payroll, insurance and other items, and capitalization rates, which are determined through market extraction and the debt service coverage ratio. The sales comparison...

  • Page 332
    .... Acquired Property, Net and Other Assets Acquired property, net represents foreclosed property received in full satisfaction of a loan net of a valuation allowance. Acquired property is initially recorded in our consolidated balance sheets at its fair value less its estimated cost to sell. The...

  • Page 333
    ... that cannot be corroborated by observable market data, we classify them as Level 3 of the valuation hierarchy. 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...

  • Page 334
    ... of our financial assets and liabilities. Thirdparty vendor prices are primarily used to estimate fair value for trading securities, available-for-sale securities, debt of Fannie Mae, and consolidated MBS debt. Our Pricing Group performs various review and validation procedures prior to utilizing...

  • Page 335
    ... commitments are included as "Mortgage loans held for investment, net of allowance for loan losses." The disclosure excludes certain financial instruments, such as plan obligations for pension and postretirement health care benefits, employee stock option and stock purchase plans, and also excludes...

  • Page 336
    ... cash...$ Federal funds sold and securities purchased under agreements to resell or similar arrangements . Trading securities ...Available-for-sale securities...Mortgage loans held for sale ...Mortgage loans held for investment, net of allowance for loan losses: Of Fannie Mae ...Of consolidated...

  • Page 337
    ...-term nature and the negligible inherent credit risk. Were we to calculate the fair value of these instruments we would use discounted cash flow models that use observable inputs such as spreads based on market assumptions, resulting in Level 2 classification. Advances to lenders also include loans...

  • Page 338
    ...of operations and comprehensive income (loss). The following table displays the fair value and unpaid principal balance of the financial instruments for which we have made fair value elections as of December 31, 2012 and 2011. As of December 31, 2012 Loans of Consolidated Trusts(1) Long-Term Debt of...

  • Page 339
    ... notes and thus created a floating-rate LIBOR-based debt instrument. The change in value of these LIBOR-based cash flows based on the Fannie Mae yield curve at the beginning and end of the period represents the instrument-specific risk. 18. Commitments and Contingencies We are party to various types...

  • Page 340
    ...accounting and the amortization of premiums and discounts, and seek unspecified compensatory damages, attorneys' fees, and other fees and costs. On January 7, 2008, the court defined the class as all purchasers of Fannie Mae common stock and call options and all sellers of publicly traded Fannie Mae...

  • Page 341
    ... complaint filed in 2009, plaintiffs allege that certain of our current and former officers and directors, including former members of Fannie Mae's Benefit Plans Committee and the Compensation Committee of Fannie Mae's Board of Directors, as fiduciaries of Fannie Mae's Employee Stock Ownership Plan...

  • Page 342
    ... in the form of rescission, actual damages (including interest), and exemplary and punitive damages. Plaintiff filed a second amended complaint, allowing plaintiff's Securities Exchange Act claims premised on Fannie Mae's subprime and Alt-A disclosures and risk management disclosures to proceed...

  • Page 343
    ... years ended December 31, 2012, 2011 and 2010, respectively. 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, 2012. As of December 31, 2012 Loans...

  • Page 344
    ... the operating results to be expected for a full year or for other interim periods. For the 2012 Quarter Ended March 31 Interest income: Trading securities...Available-for-sale securities...Mortgage loans...Other ...Total interest income...Interest expense: Short-term debt ...Long-term debt...Total...

  • Page 345
    FANNIE MAE (In conservatorship) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) For the 2011 Quarter Ended March 31 Interest income: Trading securities ...Available-for-sale securities...Mortgage loans ...Other...Total interest income ...Interest expense: Short-term debt...Long-term debt ...

  • Page 346
    ... 31, 2012. For loans that had previously charged off, for the year ended December 31, 2012, we recognized foreclosed property income and a benefit for credit losses for cash received under the terms of the resolution agreement for which we had an outstanding repurchase request or mortgage insurance...

  • Page 347
    ... in "Foreclosed property (income) expense" in our consolidated statement of operations and comprehensive income (loss) as a result of the compensatory fee agreement. Any remaining amount will be recognized in 2013 once we have completed a sufficient portion of the loan review process to determine...

  • Page 348
    FR013