10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

þ

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   For the quarterly period ended March 31, 2012
   OR

¨

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  

For the transition period from                      to                     

Commission File No.: 0-50231

Federal National Mortgage Association

(Exact name of registrant as specified in its charter)

Fannie Mae

 

Federally chartered corporation    52-0883107

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

3900 Wisconsin Avenue, NW

Washington, DC

  

20016

(Zip Code)

(Address of principal executive offices)   

Registrant’s telephone number, including area code:

(202) 752-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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 þ    Non-accelerated filer ¨    Smaller reporting company ¨
                                 (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of March 31, 2012, there were 1,158,069,699 shares of common stock of the registrant outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Part I—Financial Information    1  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets      84   
   Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)      85   
   Condensed Consolidated Statements of Cash Flows      86   
  

Note 1—Summary of Significant Accounting Policies

     87   
  

Note 2—Consolidations and Transfers of Financial Assets

     91   
  

Note 3—Mortgage Loans

     94   
  

Note 4—Allowance for Loan Losses

     101   
  

Note 5—Investments in Securities

     105   
  

Note 6—Financial Guarantees

     112   
  

Note 7—Acquired Property, Net

     115   
  

Note 8—Short-Term Borrowings and Long-Term Debt

     116   
  

Note 9—Derivative Instruments

     117   
  

Note 10—Segment Reporting

     121   
  

Note 11—Concentrations of Credit Risk

     124   
  

Note 12—Fair Value

     125   
  

Note 13—Commitments and Contingencies

     151   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      1   
   Introduction      1   
   Executive Summary      1   
   Legislative and Regulatory Developments      12   
   Critical Accounting Policies and Estimates      16   
   Consolidated Results of Operations      17   
   Business Segment Results      28   
   Consolidated Balance Sheet Analysis      36   
   Supplemental Non-GAAP Information—Fair Value Balance Sheets      40   
   Liquidity and Capital Management      44   
   Off-Balance Sheet Arrangements      52   
   Risk Management      52   
   Forward-Looking Statements      79   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      155   
Item 4.    Controls and Procedures      155   
PART II—Other Information      158   
Item 1.    Legal Proceedings      158   
Item 1A.    Risk Factors      159   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      163   
Item 3.    Defaults Upon Senior Securities      165   
Item 4.    Mine Safety Disclosures      165   
Item 5.    Other Information      165   

Item 6.

   Exhibits      165   

 

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MD&A TABLE REFERENCE

 

Table

  

Description

   Page  
1    Treasury Draws and Dividend Payments      4   
2    Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period      6   
3    Credit Statistics, Single-Family Guaranty Book of Business      8   
4    Level 3 Recurring Financial Assets at Fair Value      17   
5    Summary of Condensed Consolidated Results of Operations      18   
6    Analysis of Net Interest Income and Yield      19   
7    Rate/Volume Analysis of Changes in Net Interest Income      20   
8    Impact of Nonaccrual Loans on Net Interest Income      21   
9    Fair Value Gains, Net      21   
10    Total Loss Reserves      23   
11    Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)      24   
12    Nonperforming Single-Family and Multifamily Loans      26   
13    Credit Loss Performance Metrics      27   
14    Single-Family Credit Loss Sensitivity      28   
15    Single-Family Business Results      29   
16    Multifamily Business Results      30   
17    Capital Markets Group Results      32   
18    Capital Markets Group’s Mortgage Portfolio Activity      34   
19    Capital Markets Group’s Mortgage Portfolio Composition      35   
20    Summary of Condensed Consolidated Balance Sheets      36   
21    Summary of Mortgage-Related Securities at Fair Value      37   
22    Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities      38   
23    Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities (Including Wraps)      39   
24    Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect)      41   
25    Supplemental Non-GAAP Consolidated Fair Value Balance Sheets      43   
26    Activity in Debt of Fannie Mae      45   
27    Outstanding Short-Term Borrowings and Long-Term Debt      47   
28    Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year      48   
29    Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year      49   
30    Cash and Other Investments Portfolio      49   
31    Fannie Mae Credit Ratings      50   
32    Composition of Mortgage Credit Book of Business      53   
33    Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business      55   
34    Delinquency Status of Single-Family Conventional Loans      59   
35    Single-Family Serious Delinquency Rates      60   
36    Single-Family Conventional Serious Delinquency Rate Concentration Analysis      61   
37    Statistics on Single-Family Loan Workouts      62   
38    Percentage of Loan Modifications That Were Current or Paid Off at One and Two Years Post-Modification      63   

 

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Table

  

Description

   Page  
39    Single-Family Foreclosed Properties      64   
40    Single-Family Foreclosed Property Status      65   
41    Multifamily Lender Risk-Sharing      66   
42    Multifamily Guaranty Book of Business Key Risk Characteristics      66   
43    Multifamily Concentration Analysis      67   
44    Multifamily Foreclosed Properties      68   
45    Repurchase Request Activity      70   
46    Outstanding Repurchase Requests      70   
47    Mortgage Insurance Coverage      72   
48    Rescission Rates of Mortgage Insurance Claims      73   
49    Estimated Mortgage Insurance Benefit      74   
50    Unpaid Principal Balance of Financial Guarantees      74   
51    Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve      78   
52    Derivative Impact on Interest Rate Risk (50 Basis Points)      79   

 

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PART I—FINANCIAL INFORMATION

 

Item  2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. Our directors do not have any duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator. We describe the rights and powers of the conservator, key provisions of our agreements with the U.S. Department of the Treasury (“Treasury”), and their impact on shareholders in our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes and the more detailed information in our 2011 Form 10-K.

This report contains forward-looking statements that are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this report. Our actual results may differ materially from those reflected in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Risk Factors” and elsewhere in this report and in “Risk Factors” in our 2011 Form 10-K.

You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2011 Form 10-K.

 

 

INTRODUCTION

 

 

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Our public mission is to support liquidity and stability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold, and increase the supply of affordable housing. Our charter does not permit us to originate loans and lend money directly to consumers in the primary mortgage market. Our most significant activity is securitizing mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. We also purchase mortgage loans and mortgage-related securities for our mortgage portfolio. We use the term “acquire” in this report to refer to both our guarantees and our purchases of mortgage loans. We obtain funds to support our business activities by issuing a variety of debt securities in the domestic and international capital markets.

We are a corporation chartered by the U.S. Congress. Our conservator, FHFA, is a U.S. government agency. Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock. Moreover, Treasury has made a commitment under a senior preferred stock purchase agreement to provide us with funds under specified conditions and, after 2012, up to a maximum amount, to maintain a positive net worth. The U.S. government does not guarantee our securities or other obligations.

Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.

 

 

EXECUTIVE SUMMARY

 

 

The actions we have been taking since 2009 to provide liquidity and support to the market, grow a strong new book of business and minimize losses on loans we acquired prior to 2009 are having a positive impact on our business and our performance:

 

   

Financial Results.    Despite ongoing weakness in the housing and mortgage markets, we experienced significant improvement in our financial results for the first quarter of 2012, as compared with the first

 

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quarter of 2011. As described under “Summary of Our Financial Performance for the First Quarter of 2012,” we generated positive net worth for the quarter and were not required to draw funds from Treasury for the quarter under the senior preferred stock purchase agreement. We expect our financial results for 2012 to be significantly better than our 2011 results.

 

   

Strong New Book of Business.    Single-family loans we have acquired since the beginning of 2009 constituted 56% of our single-family guaranty book of business as of March 31, 2012, while the single-family loans we acquired prior to 2009 shrank to 44% of our single-family book of business. We refer to the single-family loans we have acquired since the beginning of 2009 as our “new single-family book of business” and the single-family loans we acquired prior to 2009 as our “legacy book of business.” As described below in “Our Strong New Book of Business,” we expect that our new single-family book of business will be profitable over its lifetime.

 

   

Credit Performance.    Our single-family serious delinquency rate has steadily declined each quarter since the first quarter of 2010, and was 3.67% as of March 31, 2012, compared with 5.47% as of March 31, 2010. See “Credit Performance” below for additional information about the credit performance of the mortgage loans in our single-family guaranty book of business.

 

   

Reducing Credit Losses and Helping Homeowners.    We continued to execute on our strategies for reducing credit losses on our legacy book of business, which are described below under “Reducing Credit Losses on Our Legacy Book of Business.” As part of our strategy to reduce defaults, we provided nearly 78,000 workouts to help homeowners retain their homes or otherwise avoid foreclosure in the first quarter of 2012.

 

   

Providing Liquidity and Support to the Mortgage Market.    We continued to be a leading provider of liquidity to the mortgage market in the first quarter of 2012. As described below under “Providing Liquidity and Support to the Mortgage Market,” we remained the largest single issuer of mortgage-related securities in the secondary mortgage market in the first quarter of 2012 and remained a constant source of liquidity in the multifamily market.

 

   

Helping to Build a New Housing Finance System.    We also continued our work during the first quarter of 2012 to help build a new housing finance system, including pursuing the strategic goals identified by our conservator: build a new infrastructure for the secondary mortgage market; gradually contract our dominant presence in the marketplace while simplifying and shrinking our operations; and maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. For more information on our strategic goals, see “Business—Executive Summary—Our Business Objectives and Strategy” in our 2011 Form 10-K and “Executive Compensation—Compensation Discussion and Analysis—2012 Executive Compensation Program—2012 Corporate Performance Objectives” in Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K/A”).

Providing Liquidity and Support to the Mortgage Market

Our Liquidity and Support Activities

We provide liquidity and support to the U.S. mortgage market in a number of important ways:

 

   

We serve as a stable source of liquidity for purchases of homes and financing of multifamily rental housing, as well as for refinancing existing mortgages. We provided approximately $2.6 trillion in liquidity to the mortgage market from January 1, 2009 through March 31, 2012 through our purchases and guarantees of loans, which enabled borrowers to refinance 7.4 million mortgages and purchase 2.1 million homes, and provided financing for over 1.2 million units of multifamily housing.

 

   

We have strengthened our underwriting and eligibility standards to support sustainable homeownership. As a result, our new single-family book of business has a strong credit risk profile. Our support enables borrowers to have access to a variety of conforming mortgage products, including long-term, fixed-rate mortgages, such as the prepayable 30-year fixed-rate mortgage that protects homeowners from interest rate swings.

 

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We helped over 1,000,000 homeowners retain their homes or otherwise avoid foreclosure from January 1, 2009 through March 31, 2012, which helped to support neighborhoods, home prices and the housing market. Moreover, borrowers’ ability to pay their modified loans has improved in recent periods as we have enhanced the structure of our modifications. One year after modification, 74% of the modifications we made in the first quarter of 2011 were current or paid off, compared with 65% of the modifications we made in the first quarter of 2010.

 

   

We helped borrowers refinance loans through our Refi Plus™ initiative, which includes loans refinanced under the Obama Administration’s Home Affordable Refinance Program (“HARP”). The Refi Plus initiative provides expanded refinance opportunities for eligible Fannie Mae borrowers. From April 1, 2009, the date we began accepting delivery of Refi Plus loans, through March 31, 2012, we have acquired approximately 2,000,000 loans refinanced under our Refi Plus initiative. Refinances delivered to us through Refi Plus in the first quarter of 2012 reduced borrowers’ monthly mortgage payments by an average of $191. Some borrowers’ monthly payments increased as they took advantage of the ability to refinance through Refi Plus to reduce the term of their loan, to switch from an adjustable-rate mortgage to a fixed rate mortgage, or to switch from an interest-only mortgage to a fully amortizing mortgage.

 

   

We support affordability in the multifamily rental market. Over 85% of the multifamily units we financed from 2009 through 2011 were affordable to families earning at or below the median income in their area.

 

   

In addition to purchasing and guaranteeing loans, we provide funds to the mortgage market through short-term financing and other activities. These activities are described in more detail in our 2011 Form 10-K in “Business—Business Segments—Capital Markets.”

2012 Acquisitions and Market Share

In the first quarter of 2012, we purchased or guaranteed approximately $221 billion in loans, measured by unpaid principal balance, which includes $14.2 billion in delinquent loans we purchased from our single-family MBS trusts. These activities enabled our lender customers to finance approximately 934,000 single-family conventional loans and loans for approximately 117,000 units in multifamily properties during the first quarter of 2012.

We remained the largest single issuer of mortgage-related securities in the secondary market during the first quarter of 2012, with an estimated market share of new single-family mortgage-related securities issuances of 51%. Our estimated market share of new single-family mortgage-related securities issuances was 54% in the fourth quarter of 2011 and 49% in the first quarter of 2011.

We remained a constant source of liquidity in the multifamily market. We owned or guaranteed approximately 21% of the outstanding debt on multifamily properties as of December 31, 2011 (the latest date for which information was available).

Summary of Our Financial Performance for the First Quarter of 2012

We experienced a significant improvement in our financial results in the first quarter of 2012 compared with the first quarter of 2011, even though our results continued to be impacted by weakness in the housing and mortgage markets.

Total Comprehensive Income (Loss)

We recognized total comprehensive income of $3.1 billion in the first quarter of 2012, consisting of net income of $2.7 billion and other comprehensive income of $362 million. In comparison, we recognized a total comprehensive loss of $6.3 billion in the first quarter of 2011, consisting of a net loss of $6.5 billion and other comprehensive income of $181 million.

The significant improvement in our financial results in the first quarter of 2012 compared with the first quarter of 2011 was due to an $8.7 billion decrease in our credit-related expenses, primarily driven by: (1) a less significant decline in home prices as the housing market continued to stabilize; we estimate that home prices declined by

 

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0.8% in the first quarter of 2012 compared with a 2.0% decline in the first quarter of 2011, which represented over half of the 2011 home price decline; (2) a 25% decline in our inventory of single-family real-estate owned (“REO”) properties compared with the first quarter of 2011 coupled with improved sales prices on dispositions of our REO properties resulting from strong demand in markets with limited REO supply; and (3) lower single-family serious delinquency rates, which declined to 3.67% as of the end of the first quarter of 2012 from 4.27% as of the end of the first quarter of 2011. We discuss below our expectations regarding our future credit-related expenses and loss reserves.

See “Consolidated Results of Operations” for more information on our results.

Net Worth

Our net worth of $268 million as of March 31, 2012 reflects our total comprehensive income of $3.1 billion largely offset by our payment to Treasury of $2.8 billion in senior preferred stock dividends during the first quarter of 2012.

In the first quarter of 2012, we received $4.6 billion in funds from Treasury to eliminate our net worth deficit as of December 31, 2011. As a result of our positive net worth as of March 31, 2012, we will not request a draw this quarter from Treasury under the senior preferred stock purchase agreement. The aggregate liquidation preference on the senior preferred stock remains at $117.1 billion, which requires an annualized dividend payment of $11.7 billion. The amount of this dividend payment exceeds our reported annual net income for every year since our inception. As of March 31, 2012, we have paid an aggregate of $22.6 billion to Treasury in dividends on the senior preferred stock.

Table 1 below displays our senior preferred stock dividend payments to Treasury and Treasury draws since entering conservatorship on September 6, 2008.

Table 1:    Treasury Draws and Dividend Payments

 

     2008     2009     2010     2011     2012
(first quarter)
    Cumulative
Total
 
     (Dollars in billions)  

Treasury draws(1)(2)

   $ 15.2     $ 60.0     $ 15.0     $ 25.9     $      $ 116.1  

Senior preferred stock dividends(3)

            2.5       7.7       9.6       2.8        22.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Treasury draws less senior preferred stock dividends

   $ 15.2     $ 57.5     $ 7.3     $ 16.3     $ (2.8   $ 93.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative percentage of senior preferred stock dividends to Treasury draws

     0.2     3.3     11.3     17.1     19.5     19.5

 

(1) 

Represents the total draws received from Treasury and / or being requested based on our quarterly net worth deficits for the periods presented. Draw requests are funded in the quarter following each quarterly net worth deficit.

 

(2) 

Treasury draws do not include the initial $1.0 billion liquidation preference of the senior preferred stock, for which we did not receive any cash proceeds.

 

(3) 

Represents total quarterly cash dividends paid to Treasury during the periods presented based on an annual rate of 10% per year on the aggregate liquidation preference of the senior preferred stock.

 

Total Loss Reserves

Our total loss reserves consist of (1) our allowance for loan losses, (2) our allowance for accrued interest receivable, (3) our allowance for preforeclosure property taxes and insurance receivables, and (4) our reserve for guaranty losses. Our total loss reserves, which reflect our estimate of the probable losses we have incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans, decreased to $74.6 billion as of March 31, 2012 from $76.9 billion as of December 31, 2011. Our total loss reserve coverage to total nonperforming loans was 30% as of March 31, 2012, compared with 31% as of December 31, 2011.

 

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Our Expectations Regarding Future Loss Reserves and Credit-Related Expenses

We expect the trends of stabilizing home prices and declining single-family serious delinquency rates to continue. As a result, we believe that our total loss reserves peaked as of December 31, 2011 and will not increase above $76.9 billion in the foreseeable future. We also believe that our credit-related expenses will be lower in 2012 than in 2011.

Although we expect these positive trends to continue, the amount of credit-related expenses we incur in future periods could vary significantly from period to period and may be affected by many different factors, such as those described below. Moreover, although we believe that our total loss reserves peaked as of December 31, 2011, we expect our loss reserves will remain significantly elevated relative to historical levels for an extended period because (1) we expect future defaults on loans that we acquired prior to 2009 and the resulting charge-offs will occur over a period of years and (2) a significant portion of our reserves represents concessions granted to borrowers upon modification of their loans and will remain in our reserves until the loans are fully repaid or default.

Our expectations regarding our future credit-related expenses and loss reserves are based on our current expectations and assumptions about many factors that are subject to change. Factors that could result in higher credit-related expenses and loss reserves than we currently expect include: a drop in actual or expected home prices; an increase in our serious delinquency rate; an increase in interest rates; an increase in unemployment rates; future legislative or regulatory requirements that have a significant impact on our business, such as a requirement that we implement a principal forgiveness program; future updates to our models relating to our loss reserves, including the assumptions used by these models; future changes to accounting policies relating to our loss reserves; significant changes in modification and foreclosure activity; changes in borrower behavior, such as an increasing number of underwater borrowers who strategically default on their mortgage loan; failures by our mortgage seller/servicers to fulfill their repurchase obligations to us; and many other factors, including those discussed in “Outlook—Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations” in this report and in “Risk Factors” in both this report and in our 2011 Form 10-K. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.

In addition, in April 2012, FHFA issued an Advisory Bulletin that could have an impact on the amount of our future credit-related expenses and loss reserves; however, we are still assessing the impact of the Advisory Bulletin. See “Legislative and Regulatory DevelopmentsFHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans” for additional information.

Our Strong New Book of Business

Since 2009, we have seen the effect of actions we took, beginning in 2008, to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. Given their strong credit risk profile and based on their performance so far, we expect that the single-family loans we have acquired since the beginning of 2009, in the aggregate, will be profitable over their lifetime, by which we mean that we expect our fee income on these loans to exceed our credit losses and administrative costs for them. In contrast, we expect that the single-family loans we acquired from 2005 through 2008, in the aggregate, will not be profitable over their lifetime. Loans we have acquired since the beginning of 2009 comprised 56% of our single-family guaranty book of business as of March 31, 2012. Our 2005 through 2008 acquisitions are becoming a smaller percentage of our single-family guaranty book of business and, as shown in Table 2 below, have decreased to 29% of our single-family guaranty book of business as of March 31, 2012.

Our expectations regarding the ultimate performance of our loans are based on numerous expectations and assumptions, including those relating to expected changes in regional and national home prices, borrower behavior, public policy and other macroeconomic factors. If future conditions are more unfavorable than our expectations, the loans we acquired since the beginning of 2009 could become unprofitable. For example, home prices are a key factor affecting the profitability we expect. As home prices decline, the loan-to-value (“LTV”) ratios on our loans increase, and both the probability of default and the estimated severity of loss increase. If

 

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home prices decline significantly from March 2012 levels, the loans we acquired since the beginning of 2009 could become unprofitable. See “Outlook—Home Price Declines” for our current expectations regarding home price declines. Also see “Outlook—Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations” in this report and “Risk Factors” in both this report and our 2011 Form 10-K for a discussion of factors that could cause our expectations regarding the performance of the loans in our new single-family book of business to change.

Table 2 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business as of March 31, 2012 by acquisition period, which illustrates the improvement in the credit risk profile of loans we acquired beginning in 2009 compared with loans we acquired in 2005 through 2008.

Table 2:    Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period

 

     As of March 31, 2012  
     % of
Single-Family
Conventional
Guaranty Book
of Business(1)
    Current
Estimated
Mark-to-Market
LTV Ratio(1)
    Current
Mark-to-Market
LTV Ratio
>100%(1)(2)
    Serious
Delinquency
Rate(3)
 

Year of Acquisition:

        

New Single-Family Book of Business:

        

2012

     7     70     4       

2011

     18        71        5        0.09

2010

     16        73        7        0.36   

2009

     15        74        8        0.69   
  

 

 

       

Total New Single-Family Book of Business

     56       72        6        0.32   

Legacy Book of Business:

        

2005-2008

     29        105        48        9.25   

2004 and prior

     15        61        9        3.31   
  

 

 

       

Total Single-Family Book of Business

     100     80     19     3.67
  

 

 

       

 

(1) 

Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of March 31, 2012.

 

(2) 

The majority of loans in our new single-family book of business as of March 31, 2012 with mark-to-market LTV ratios over 100% were loans acquired under our Refi Plus initiative. See “Risk Management–Credit Risk Management–Single-Family Mortgage Credit Risk Management” for further information on Refi Plus.

 

(3) 

The serious delinquency rate of loans acquired in 2012 is zero because they were originated so recently that most of them could not yet become seriously delinquent. The serious delinquency rates for loans acquired in more recent years will be higher after the loans have aged, but we do not expect them to approach the levels of the March 31, 2012 serious delinquency rates of loans in our legacy book of business.

The single-family loans that we acquired in the first quarter of 2012 had a weighted average FICO credit score at origination of 763 and an average original LTV ratio of 70%. Of the single-family loans we acquired in the first quarter of 2012, approximately 11% had an original LTV ratio greater than 90% and 1% had a FICO credit score at origination of less than 620. See Table 2 in our 2011 Form 10-K for information regarding the credit risk profile of the single-family conventional loans we acquired during specified previous periods.

Since 2009, our acquisitions have included a significant number of loans refinanced under our Refi Plustm initiative, which provides expanded refinance opportunities for eligible Fannie Mae borrowers. Our acquisitions under Refi Plus include our acquisitions under HARP, which was established by the Administration to help borrowers who may otherwise be unable to refinance the mortgage loan on their primary residence due to a decline in home values. The approximately 239,000 loans we acquired under Refi Plus in the first quarter of 2012 constituted approximately 22% of our total single-family acquisitions for the period, measured by unpaid principal balance, compared with approximately 24% of total single-family acquisitions in all of 2011. Under

 

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Refi Plus we acquire refinancings of performing Fannie Mae loans that, in some cases, have higher LTV ratios and/or lower FICO credit scores than we generally require. As a result, while it is too early to determine the ultimate performance of these Refi Plus loans, they may not perform as well as the other loans we have acquired since the beginning of 2009. However, we expect Refi Plus loans will perform better than the loans they replace because Refi Plus loans reduce the borrowers’ monthly payments or otherwise should provide more stability than the borrowers’ old loans (for example, by refinancing into a mortgage with a fixed interest rate instead of an adjustable rate).

Whether the loans we acquire in the future will exhibit an overall credit profile similar to our more recent acquisitions will depend on a number of factors, including our future pricing and eligibility standards and those of mortgage insurers and the Federal Housing Administration (“FHA”), the percentage of loan originations representing refinancings, our future objectives, government policy, market and competitive conditions, and the volume and characteristics of loans we acquire under HARP.

See “Business—Executive Summary—Our Strong New Book of Business and Expected Losses on our Legacy Book of Business—Building a Strong New Single-Family Book of Business” in our 2011 Form 10-K for a more detailed discussion of the changes in the credit profile of our single-family acquisitions. In addition, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” for more detail regarding the credit risk characteristics of our single-family guaranty book of business.

Reducing Credit Losses on Our Legacy Book of Business

To reduce the credit losses we ultimately incur on our legacy book of business, we have been focusing our efforts on the following strategies:

 

   

Helping underwater and other eligible Fannie Mae borrowers refinance to a more sustainable loan through our Refi Plus initiative;

 

   

Reducing defaults by offering borrowers solutions that enable them to keep their homes (“home retention solutions”);

 

   

Pursuing “foreclosure alternatives,” which help borrowers avoid foreclosure and reduce the severity of the losses we incur overall;

 

   

Efficiently managing timelines for home retention solutions, foreclosure alternatives, and foreclosures;

 

   

Improving servicing standards and servicers’ execution and consistency;

 

   

Managing our REO inventory to minimize costs and maximize sales proceeds; and

 

   

Pursuing contractual remedies from lenders, servicers and providers of credit enhancement.

See “Business—Executive Summary—Reducing Credit Losses on our Legacy Book of Business” in our 2011 Form 10-K, as well as “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in both this report and our 2011 Form 10-K, for more information on the strategies and actions we are taking to minimize our credit losses.

Credit Performance

Table 3 presents information for each of the last five quarters about the credit performance of mortgage loans in our single-family guaranty book of business and our workouts. The term “workouts” refers to home retention solutions and foreclosure alternatives. The workout information in Table 3 does not reflect repayment plans and forbearances that have been initiated but not completed, nor does it reflect trial modifications that have not become permanent.

 

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Table 3:    Credit Statistics, Single-Family Guaranty Book of Business(1)

 

     2012     2011  
     Q1     Full
Year
    Q4     Q3     Q2     Q1  
           (Dollars in millions)  

As of the end of each period:

            

Serious delinquency rate(2)

     3.67     3.91     3.91     4.00     4.08     4.27

Seriously delinquent loan count

     650,918       690,911       690,911       708,847       729,772       767,161  

Nonperforming loans(3)

   $ 243,981     $ 248,379     $ 248,379     $ 248,134     $ 245,848     $ 248,444  

Foreclosed property inventory:

            

Number of properties

     114,157       118,528       118,528       122,616       135,719       153,224  

Carrying value

   $ 9,721     $ 9,692     $ 9,692     $ 11,039     $ 12,480     $ 14,086  

Combined loss reserves(4)

   $ 69,633     $ 71,512     $ 71,512     $ 70,741     $ 68,887     $ 66,240  

Total loss reserves(5)

   $ 73,119     $ 75,264     $ 75,264     $ 73,973     $ 73,116     $ 70,466  

During the period:

            

Foreclosed property (number of properties):

            

Acquisitions(6)

     47,700       199,696       47,256       45,194       53,697       53,549  

Dispositions

     (52,071     (243,657     (51,344     (58,297     (71,202     (62,814

Credit-related expenses(7)

   $ 2,385     $ 27,218     $ 5,397     $ 4,782     $ 5,933     $ 11,106  

Credit losses(8)

   $ 4,955     $ 18,346     $ 4,548     $ 4,384     $ 3,810     $ 5,604  

Loan workout activity (number of loans):

            

Home retention loan workouts(9)

     55,535       248,658       60,453       68,227       59,019       60,959  

Short sales and deeds-in-lieu of foreclosure

     22,213       79,833       22,231       19,306       21,176       17,120  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loan workouts

     77,748       328,491       82,684       87,533       80,195       78,079  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan workouts as a percentage of delinquent loans in our guaranty book of business(10)

     28.85     27.05     27.24     28.39     25.71     25.01

 

(1) 

Our single-family guaranty book of business consists of (a) single-family mortgage loans held in our mortgage portfolio, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae mortgage-related securities held in our mortgage portfolio for which we do not provide a guaranty.

 

(2)

Calculated based on the number of single-family conventional loans that are three or more months past due and loans that have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our single-family conventional guaranty book of business. We include all of the single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family serious delinquency rate.

 

(3)

Represents the total amount of nonperforming loans including troubled debt restructurings. A troubled debt restructuring is a restructuring of a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. We generally classify loans as nonperforming when the payment of principal or interest on the loan is two months or more past due.

 

(4)

Consists of the allowance for loan losses for loans recognized in our condensed consolidated balance sheets and the reserve for guaranty losses related to both single-family loans backing Fannie Mae MBS that we do not consolidate in our condensed consolidated balance sheets and single-family loans that we have guaranteed under long-term standby commitments. For additional information on the change in our loss reserves see “Consolidated Results of Operations—Credit-Related Expenses—Provision for Credit Losses.”

 

(5)

Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable, and (c) allowance for preforeclosure property taxes and insurance receivables.

 

(6)

Includes acquisitions through deeds-in-lieu of foreclosure.

 

(7)

Consists of (a) the provision (benefit) for credit losses and (b) foreclosed property expense (income).

 

(8)

Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense, adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts.

 

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(9)

Consists of (a) modifications, which do not include trial modifications or repayment plans or forbearances that have been initiated but not completed and (b) repayment plans and forbearances completed. See “Table 37: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk Management–Single-Family Mortgage Credit Risk Management–Problem Loan Management–Loan Workout Metrics” for additional information on our various types of loan workouts.

 

(10) 

Calculated based on annualized problem loan workouts during the period as a percentage of delinquent loans in our single-family guaranty book of business as of the end of the period.

Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010. The decrease in our serious delinquency rate is primarily the result of home retention solutions, foreclosure alternatives and completed foreclosures, as well as our acquisition of loans with stronger credit profiles since the beginning of 2009, as these loans are now 56% of our single-family guaranty book of business, resulting in a smaller percentage of our loans becoming seriously delinquent.

Although our single-family serious delinquency rate has decreased significantly since the first quarter of 2010, our serious delinquency rate and the period of time that loans remain seriously delinquent has been negatively affected in recent periods by the increase in the average number of days it is taking to complete a foreclosure. As described in “Business—Executive Summary—Reducing Credit Losses on Our Legacy Book of Business—Managing Timelines for Workouts and Foreclosures” in our 2011 Form 10-K, high levels of foreclosures, continuing issues in the servicer foreclosure process and changing legislative, regulatory and judicial requirements have lengthened the time it takes to foreclose on a mortgage loan in many states. We expect serious delinquency rates will continue to be affected in the future by home price changes, changes in other macroeconomic conditions, the length of the foreclosure process, the volume of loan modifications, and the extent to which borrowers with modified loans continue to make timely payments. We expect the number of our single-family loans that are seriously delinquent to remain well above pre-2008 levels for years. In addition, given the large anticipated supply of single-family homes in the market, we anticipate that it will take a significant amount of time before our REO inventory is reduced to pre-2008 levels.

We provide additional information on our credit-related expenses in “Consolidated Results of Operations—Credit-Related Expenses” and on the credit performance of mortgage loans in our single-family book of business and our loan workouts in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”

Housing and Mortgage Market and Economic Conditions

Economic growth slowed in the first quarter of 2012 compared with the fourth quarter of 2011. The inflation-adjusted U.S. gross domestic product, or GDP, rose by 2.2% on an annualized basis in the first quarter of 2012, according to the Bureau of Economic Analysis advance estimate, compared with an increase of 3.0% in the fourth quarter of 2011. The overall economy gained an estimated 688,000 jobs in the first quarter. According to the U.S. Bureau of Labor Statistics, over the past 12 months ending in March 2012, the economy created 2.0 million non-farm jobs. The unemployment rate was 8.2% in March 2012, compared with 8.5% in December 2011. We expect that housing will start to recover if the employment market continues to improve.

Housing activity showed some improvement during the first quarter of 2012. Total existing home sales averaged 4.6 million units annualized in the first quarter of 2012, a 4.7% increase from the fourth quarter of 2011, according to data available through March 2012 from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 29% of existing home sales in March 2012, compared with 32% in December 2011 and 40% in March 2011. New single-family home sales strengthened during the quarter, averaging an annualized rate of 337,000 units, a 3.7% increase from the prior quarter.

The overall mortgage market serious delinquency rate, which has trended down since peaking in the fourth quarter of 2009, remained historically high at 7.7% as of December 31, 2011, according to the Mortgage Bankers Association National Delinquency Survey. According to the National Association of REALTORS® April 2012 Existing Home Sales Report, the months’ supply of existing unsold homes was 6.3 months as of March 31, 2012, compared with 6.4 months as of December 31, 2011 and 8.5 months as of March 31, 2011. Properties that are

 

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vacant and held off the market, combined with a portion of properties backing seriously delinquent mortgages not currently listed for sale, represent a significant shadow inventory putting downward pressure on home prices.

We estimate that home prices on a national basis declined by 0.8% in the first quarter of 2012 and have declined by 23.9% from their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and are subject to change as additional data become available. The decline in home prices over the past several years has left many homeowners with “negative equity” in their homes, which means their principal mortgage balance exceeds the current market value of their home. This increases the likelihood that borrowers will walk away from their mortgage obligations and that the loans will become delinquent and proceed to foreclosure. According to CoreLogic, approximately 11 million, or 23%, of all residential properties with mortgages were in a negative equity position in the fourth quarter of 2011. This potential supply also weighs on the supply/demand balance putting downward pressure on both home prices and rents. See “Risk Factors” in our 2011 Form 10-K for a description of risks to our business associated with the weak economy and housing market.

During the first quarter of 2012, the multifamily sector remained fairly stable and continued to benefit from ongoing rental demand, positive job growth and limited new apartment supply. Preliminary third-party data for the first quarter of 2012 indicates that the national multifamily vacancy rate for institutional investment-type apartment properties decreased to an estimated 6.0% as of March 31, 2012, compared to an estimated 6.3% as of December 31, 2011 and an estimated 7.0% as of March 31, 2011. In addition, asking rents increased in the first quarter of 2012 by an estimated 1% on a national basis. As indicated by data from Axiometrics, multifamily concession rates, the rental discount rate as a percentage of asking rents, declined during the first quarter to -2.7% as of March 2012, after having increased slightly during fourth quarter of 2011 to end the year at -3.5%. The increase in rental demand is also reflected in an estimated positive net absorption, or increase in the number of occupied rental units after deducting new supply added during the period, of more than 36,000 units during the first quarter, according to preliminary data from Reis, Inc.

Outlook

Overall Market Conditions.    We expect weakness in the housing and mortgage markets to continue in 2012. The high level of delinquent mortgage loans will ultimately result in high levels of foreclosures, which is likely to add to the excess housing inventory.

We expect that single-family default and severity rates will remain high in 2012, but will be lower than in 2011. Despite signs of multifamily sector improvement at the national level, we expect multifamily foreclosures in 2012 to remain generally commensurate with 2011 levels as certain local markets and properties continue to exhibit weak fundamentals. Conditions may worsen if the unemployment rate increases on either a national or regional basis.

We expect that changes to HARP announced in October 2011 will result in our acquisition of more refinancings in 2012 than we would have acquired in the absence of the changes; however, we expect fewer refinancings overall in 2012 than in 2011. For a description of the changes to HARP announced in October 2011, see “Business—Making Home Affordable Program—Changes to the Home Affordable Refinance Program” in our 2011 Form 10-K. Our loan acquisitions also have been negatively affected by the decrease in the maximum size of loans we may acquire in specified high-cost areas from $729,750 to $625,500, which went into effect in the fourth quarter of 2011. As a result of these factors, we expect our loan acquisitions for 2012 will be lower than in 2011.

We estimate that total originations in the U.S. single-family mortgage market in 2012 will decrease from 2011 levels by approximately 8%, from an estimated $1.36 trillion to an estimated $1.26 trillion, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decline from approximately $900 billion to approximately $800 billion. Refinancings comprised approximately 83% of our single-family business volume in the first quarter of 2012, compared with approximately 76% for all of 2011.

Home Price Declines.    We estimate that U.S. home prices have declined by 23.9% from their peak in the third quarter of 2006. While the rate of decline in home prices has moderated in recent quarters, we expect that home prices on a national basis will decline further before stabilizing in 2013. We currently expect a peak-to-trough home price decline on a national basis ranging from 24% to 30%, but believe that it would take the occurrence of

 

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an additional adverse economic event to reach the high end of the range. Future home price changes may be very different from our estimates as a result of significant inherent uncertainty in the current market environment, including uncertainty about the effect of actions the federal government has taken and may take with respect to tax policies, mortgage finance programs and policies, and housing finance reform; the management of the Federal Reserve’s MBS holdings; and the impact of those actions on home prices, unemployment and the general economic and interest rate environment. Because of these uncertainties, the actual home price decline we experience may differ significantly from these estimates. We also expect significant regional variation in home price declines and stabilization.

Our estimates of home price declines are based on our home price index, which is calculated differently from the S&P/Case-Shiller U.S. National Home Price Index and therefore results in different percentages for comparable declines. Our 24% to 30% peak-to-trough home price decline estimate corresponds to an approximate 34% to 41% peak-to-trough decline using the S&P/Case-Shiller index method. Our estimates differ from the S&P/Case-Shiller index in two principal ways: (1) our estimates weight expectations by number of properties, whereas the S&P/Case-Shiller index weights expectations based on property value, causing home price changes on higher priced homes to have a greater effect on the overall result; and (2) the S&P/Case-Shiller index includes sales of foreclosed homes while our estimates attempt to exclude foreclosed home sales, because we believe that differing maintenance practices and the forced nature of the sales make foreclosed home prices less representative of market values. We believe, however, that the impact of sales of foreclosed homes is indirectly reflected in our estimates as a result of their impact on the pricing of non-distressed sales. We estimate S&P/Case-Shiller comparison numbers by adjusting our internal home price estimates to compensate for the differences between our method and the S&P/Case-Shiller index method. In addition to these differences, our estimates are based on our own internally available data combined with publicly available data, and are therefore based on data collected nationwide, whereas the S&P/Case-Shiller index is based on publicly available data, which may be limited in certain geographic areas of the country. Our comparative calculations to the S&P/Case-Shiller index provided above are not adjusted to compensate for this data pool difference.

Credit-Related Expenses and Credit Losses.    Our credit-related expenses, which include our provision for credit losses, reflect our recognition of losses on our loans. Through our provision for credit losses, we recognize credit-related expenses on loans in the period in which we determine that we have incurred a probable loss on the loans as of the end of the period, or in which we have granted concessions to the borrowers. Accordingly, our credit-related expenses in each period are affected by changes in actual and expected home prices, borrower payment behavior, the types and volumes of loss mitigation activities and foreclosures we complete, and estimated recoveries from our lender and mortgage insurer counterparties. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. We realize losses on loans, through our charge-offs, when foreclosure sales are completed or when we accept short sales or deeds-in-lieu of foreclosure.

We expect that our credit-related expenses will remain high in 2012 but that, overall, our credit-related expenses will be lower in 2012 than in 2011. In addition, we expect our credit losses to remain high in 2012. To the extent delays in foreclosures continue in 2012, our realization of some credit losses will be delayed. We further describe our outlook for credit-related expenses in “Summary of Our Financial Performance for the First Quarter of 2012—Our Expectations Regarding Future Loss Reserves and Credit-Related Expenses.”

Uncertainty Regarding our Future Status and Long-Term Financial Sustainability.    There is significant uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that we currently anticipate, such as home prices and unemployment, may cause our future credit-related expenses and credit losses to vary significantly from our current expectations. Although Treasury’s funds under the senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend payments are substantial. We expect to request additional draws under the senior preferred stock purchase agreement in future periods, which will further increase the dividends we owe to Treasury on the senior preferred stock. We expect that, over time, our dividend obligation to Treasury will increasingly drive our future draws under the senior preferred stock purchase agreement. Although we may experience period-to-period volatility in earnings and comprehensive income, we do not expect to generate net income or comprehensive income in excess of our annual dividend obligation to Treasury over the long term. As a result of these factors, there is significant uncertainty about our long-term financial sustainability.

 

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In addition, there is significant uncertainty regarding the future of our company, including how long the company will continue to be in its current form, the extent of our role in the market, what form we will have, and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated. We expect this uncertainty to continue. In February 2011, Treasury and the Department of Housing and Urban Development (“HUD”) released a report to Congress on reforming America’s housing finance market. The report states that the Administration will work with FHFA to determine the best way to responsibly wind down both Fannie Mae and Freddie Mac. The report emphasizes the importance of providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. In February 2012, Treasury Secretary Geithner stated that the Administration intended to release new details in the spring of 2012 around approaches to housing finance reform, including winding down Fannie Mae and Freddie Mac, and to work with Congressional leaders to explore options for legislation, but that he does not expect housing finance reform legislation to be enacted in 2012.

We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding long-term reform of the GSEs. See “Legislative and Regulatory Developments” in this report and “Business—Legislative and Regulatory Developments” in our 2011 Form 10-K for discussions of recent legislative reform of the financial services industry and proposals for GSE reform that could affect our business. See “Risk Factors” in our 2011 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.

Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations.    We present a number of estimates and expectations in this executive summary, including estimates and expectations regarding our future financial results, the profitability of single-family loans we have acquired, our single-family credit losses, our loss reserves and credit-related expenses, and our draws from and dividends to be paid to Treasury. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors, including future home prices and the future performance of our loans. Our future estimates of our performance, as well as the actual amounts, may differ materially from our current estimates and expectations as a result of: the timing and level of, as well as regional variation in, home price changes; changes in interest rates, unemployment rates and other macroeconomic variables; government policy; the length of time it takes to complete foreclosures; changes in generally accepted accounting principles (“GAAP”); credit availability; borrower behavior; the volume of loans we modify; the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies; whether our counterparties meet their obligations to us; changes in the fair value of our assets and liabilities; impairments of our assets; and many other factors, including those discussed in “Risk Factors,” “Forward-Looking Statements” and elsewhere in this report, and in “Risk Factors” in our 2011 Form 10-K. For example, if the economy were to enter a deep recession, we would expect actual outcomes to differ substantially from our current expectations.

 

 

LEGISLATIVE AND REGULATORY DEVELOPMENTS

 

 

The information in this section updates and supplements information regarding legislative and regulatory developments set forth in “Business—Legislative and Regulatory Developments” and “Business—Our Charter and Regulation of Our Activities” in our 2011 Form 10-K.

GSE Reform

Policymakers and others have focused significant attention in recent years on how to reform the nation’s housing finance system, including what role, if any, the GSEs should play. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010, calls for enactment of meaningful structural reforms of Fannie Mae and Freddie Mac. The Dodd-Frank Act also required the Treasury Secretary to submit a report to Congress with recommendations for ending the conservatorships of Fannie Mae and Freddie Mac.

In February 2011, Treasury and HUD released their report to Congress on reforming America’s housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both institutions.

 

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The report identifies a number of policy steps that could be used to wind down Fannie Mae and Freddie Mac, reduce the government’s role in housing finance and help bring private capital back to the mortgage market. These steps include (1) increasing guaranty fees, (2) gradually increasing the level of required down payments so that any mortgages insured by Fannie Mae or Freddie Mac eventually have at least a 10% down payment, (3) reducing conforming loan limits to those established in the Federal Housing Finance Regulatory Reform Act of 2008 (the “2008 Reform Act”), (4) encouraging Fannie Mae and Freddie Mac to pursue additional credit loss protection and (5) reducing Fannie Mae’s and Freddie Mac’s portfolios, consistent with Treasury’s senior preferred stock purchase agreements with the companies.

In addition, the report outlines three potential options for a new long-term structure for the housing finance system following the wind-down of Fannie Mae and Freddie Mac. The first option would privatize housing finance almost entirely. The second option would add a government guaranty mechanism that could scale up during times of crisis. The third option would involve the government offering catastrophic reinsurance behind private mortgage guarantors. Each of these options assumes the continued presence of programs operated by FHA, the Department of Agriculture and the Veterans Administration to assist targeted groups of borrowers. The report does not state whether or how the existing infrastructure or human capital of Fannie Mae may be used in the establishment of such a reformed system. The report emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. A copy of the report can be found on the Housing Finance Reform section of Treasury’s Web site, www.Treasury.gov. We are providing Treasury’s Web site address solely for your information, and information appearing on Treasury’s Web site is not incorporated into this quarterly report on Form 10-Q.

In February 2012, Treasury Secretary Geithner stated that the Administration intended to release new details in the spring of 2012 around approaches to housing finance reform, including winding down Fannie Mae and Freddie Mac, and to work with Congressional leaders to explore options for legislation, but that he does not expect housing finance reform legislation to be enacted in 2012.

During 2011, Congress held hearings on the future status of Fannie Mae and Freddie Mac, and members of Congress offered legislative proposals relating to the future status of the GSEs. We expect hearings on GSE reform to continue in 2012 and additional legislation to be considered and proposals to be discussed, including proposals that would result in a substantial change to our business structure or that involve Fannie Mae’s liquidation or dissolution. Several bills have been introduced that would place the GSEs into receivership after a period of time and either grant federal charters to new entities to engage in activities similar to those currently engaged in by the GSEs or leave secondary mortgage market activities to entities in the private sector. For example, legislation has been introduced in both the House of Representatives and the Senate that would require FHFA to make a determination within two years of enactment regarding whether the GSEs were financially viable and, if the GSEs were determined not to be financially viable, to place them into receivership. As drafted, these bills may upon enactment impair our ability to issue securities in the capital markets and therefore our ability to conduct our business, absent the federal government providing an explicit guarantee of our existing and future liabilities.

In addition to bills that seek to resolve the status of the GSEs, numerous bills have been introduced and considered that could constrain the current operations of the GSEs or alter the existing authority that FHFA or Treasury has over the enterprises. For example, the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services Committee has approved bills that would:

 

   

suspend current compensation packages and apply a government pay scale for GSE employees;

 

   

require the GSEs to increase guaranty fees;

 

   

subject GSE loans to the risk retention standards in the Dodd-Frank Act;

 

   

require a quicker reduction of GSE portfolios than required under the senior preferred stock purchase agreement;

 

   

require Treasury to pre-approve all GSE debt issuances;

 

   

repeal the GSEs’ affordable housing goals;

 

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provide additional authority to FHFA’s Inspector General;

 

   

prohibit FHFA from approving any new GSE products during conservatorship or receivership, with certain exceptions;

 

   

prevent Treasury from amending the senior preferred stock purchase agreement to reduce the current dividend rate on our senior preferred stock;

 

   

abolish the Affordable Housing Trust Fund that the GSEs are required to fund except when such contributions have been temporarily suspended by FHFA;

 

   

require FHFA to identify mission critical assets of the GSEs and require the GSEs to dispose of non-mission critical assets;

 

   

cap the maximum aggregate amount of funds Treasury or any other agency or entity of the federal government can provide to the GSEs subject to certain qualifications;

 

   

grant FHFA the authority to revoke the enterprises’ charters following receivership under certain circumstances; and

 

   

subject the GSEs to the Freedom of Information Act.

Of these bills that passed at a subcommittee level, the only one that has passed the full committee is the bill that would put GSE employees on a government pay scale. We expect additional legislation relating to the GSEs to be introduced and considered by Congress in 2012. We cannot predict the prospects for the enactment, timing or content of legislative proposals concerning the future status of the GSEs, their regulation or operations.

In sum, there continues to be uncertainty regarding the future of our company, including how long the company will continue to exist in its current form, the extent of our role in the market, what form we will have, and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated. See “Risk Factors” in our 2011 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company. Also see “Risk Factors” in this report for a discussion of how the uncertain future of our company may adversely affect our ability to retain and recruit well-qualified employees, including senior management.

Compensation

In April 2012, the Stop Trading on Congressional Knowledge Act (the “STOCK Act”) was enacted, which includes a provision that prohibits senior executives at Fannie Mae and Freddie Mac from receiving bonuses during any period of conservatorship on or after the date of enactment of the law. Congress has also considered other legislation that would alter the compensation for Fannie Mae and Freddie Mac employees. In 2011, the House Financial Services Committee passed a bill that would place all Fannie Mae and Freddie Mac employees on a pay scale similar to that provided for federal government employees. Additional legislative proposals related to compensation for Fannie Mae and Freddie Mac employees may be considered by Congress in 2012.

If legislation is adopted that results in a significant reduction in compensation to our employees, it could cause a substantial number of our most skilled and experienced employees to leave and significantly impede our ability to retain and attract employees in a competitive marketplace, as we discuss in “Risk Factors.”

Enhanced Supervision and Prudential Standards under the Dodd-Frank Act

The Dodd-Frank Act established the Financial Stability Oversight Council (the “FSOC”), chaired by the Secretary of the Treasury, to ensure that all financial companies whose failure could pose a threat to the financial stability of the United States—not just banks—will be subject to strong oversight. Under the Dodd-Frank Act, the FSOC is responsible for designating systemically important nonbank financial companies, while the Federal Reserve is to establish stricter prudential standards that will apply to certain bank holding companies and to systemically important nonbank financial companies. The Federal Reserve must establish standards related to risk-based capital, leverage limits, liquidity, credit concentrations, resolution plans, reporting credit exposures and other risk management measures. On December 20, 2011, the Board of Governors of the Federal Reserve

 

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System issued proposed rules addressing a number of these enhanced prudential standards. The Federal Reserve may also impose other standards related to contingent capital, enhanced public disclosure, short-term debt limits and other requirements as appropriate.

On April 11, 2012, the FSOC published a final rule and interpretive guidance describing the manner in which it intends to apply the statutory standards and procedures for determining whether a nonbank financial company will be subject to supervision by, and the prudential standards of, the Federal Reserve Board. The rule outlines the evaluation process that the FSOC intends to use in making these determinations. In making its determinations, factors the FSOC may consider include: company size, leverage, interconnectedness, liquidity risk, maturity mismatch, importance to the economic system, and the extent to which a company is already regulated.

Depending on the scope and final form of the Federal Reserve’s enhanced standards, and the extent to which they apply to us if we are designated by the FSOC as a systemically important nonbank financial company, or to our customers and other counterparties, their adoption and application could increase our costs, pose operational challenges and adversely affect demand for our debt and Fannie Mae MBS.

FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans

On April 9, 2012, FHFA issued an Advisory Bulletin, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention,” which was effective 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 assets and off-balance sheet credit exposures. The Advisory Bulletin indicates that this guidance considers and is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000.

Among other requirements, the Advisory Bulletin requires that we classify the portion of an outstanding single-family loan balance in excess of the fair value of the underlying property, less costs to sell, as “loss” when the loan is no more than 180 days delinquent, except in certain specified circumstances (such as properly secured loans with an LTV ratio equal to or less than 60%), and charge off the portion of the loan classified as “loss.” The Advisory Bulletin also specifies that, if we subsequently receive full or partial payment of a previously charged-off loan, we may report a recovery of the amount, either through our loss reserves or as a reduction in our foreclosed property expenses.

The accounting methods outlined in FHFA’s Advisory Bulletin are different from our current methods of accounting for single-family loans that are 180 days or more delinquent. As described in “Risk Factors,” we believe that implementation of these changes in our accounting methods present significant operational challenges for us. We have not yet determined when we will implement the accounting changes specified in the Advisory Bulletin. We are currently assessing the impact of implementing these accounting changes on our future financial results.

For additional information on legislative and regulatory matters affecting us, refer to “Business—Legislative and Regulatory Developments” and “Business—Our Charter and Regulation of Our Activities” in our 2011 Form 10-K. Also see “Risk Factors” in this report and our 2011 Form 10-K for a discussion of risks relating to our business relating to legislative and regulatory matters.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

 

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” of this report and in our 2011 Form 10-K.

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors. We have identified three of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting policies and estimates are as follows:

 

   

Fair Value Measurement

 

   

Total Loss Reserves

 

   

Other-Than-Temporary Impairment of Investment Securities

See “MD&A—Critical Accounting Policies and Estimates” in our 2011 Form 10-K for a detailed discussion of these critical accounting policies and estimates. We provide below information about our Level 3 assets and liabilities as of March 31, 2012 as compared with December 31, 2011.

Fair Value Measurement

The use of fair value to measure our assets and liabilities is fundamental to our financial statements and is a critical accounting estimate because we account for and record a portion of our assets and liabilities at fair value. In determining fair value, we use various valuation techniques. We describe the valuation techniques and inputs used to determine the fair value of our assets and liabilities and disclose their carrying value and fair value in “Note 12, Fair Value.”

Fair Value Hierarchy—Level 3 Assets and Liabilities

The assets and liabilities that we have classified as Level 3 consist primarily of financial instruments for which there is limited market activity and therefore little or no price transparency. As a result, the valuation techniques that we use to estimate the fair value of Level 3 instruments involve significant unobservable inputs, which generally are more subjective and involve a high degree of management judgment and assumptions. Our Level 3 assets and liabilities consist of certain mortgage-backed securities and residual interests, certain mortgage loans, certain acquired property, certain long-term debt arrangements and certain highly structured, complex derivative instruments.

Table 4 presents a comparison of the amount of financial assets carried in our condensed consolidated balance sheets at fair value on a recurring basis (“recurring assets”) that were classified as Level 3 as of March 31, 2012 and December 31, 2011. The availability of observable market inputs to measure fair value varies based on changes in market conditions, such as liquidity. As a result, we expect the amount of financial instruments carried at fair value on a recurring basis and classified as Level 3 to vary each period.

 

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Table 4:    Level 3 Recurring Financial Assets at Fair Value

 

     As of  
     March 31, 2012     December 31, 2011  
     (Dollars in millions)  

Trading securities

   $ 2,756     $ 4,238  

Available-for-sale securities

     27,853       29,492  

Mortgage loans

     2,271       2,319  

Other assets

     203       238  
  

 

 

   

 

 

 

Level 3 recurring assets

   $ 33,083     $ 36,287  
  

 

 

   

 

 

 

Total assets

   $ 3,209,940     $ 3,211,484  

Total recurring assets measured at fair value

   $ 157,492     $ 156,552  

Level 3 recurring assets as a percentage of total assets

     1     1

Level 3 recurring assets as a percentage of total recurring assets measured at fair value

     21     23

Total recurring assets measured at fair value as a percentage of total assets

     5     5

Assets measured at fair value on a nonrecurring basis and classified as Level 3, which are not presented in the table above, primarily include mortgage loans and acquired property. The fair value of Level 3 nonrecurring assets totaled $28.5 billion as of March 31, 2012 and $69.0 billion for the year ended December 31, 2011.

Financial liabilities measured at fair value on a recurring basis and classified as Level 3 consisted of long-term debt with a fair value of $1.3 billion as of March 31, 2012 and $1.2 billion as of December 31, 2011, and other liabilities with a fair value of $159 million as of March 31, 2012 and $173 million as of December 31, 2011.

 

 

CONSOLIDATED RESULTS OF OPERATIONS

 

 

The section below provides a discussion of our condensed consolidated results of operations for the periods indicated and should be read together with our condensed consolidated financial statements, including the accompanying notes.

Table 5 displays our condensed consolidated results of operations for the periods indicated.

 

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Table 5:    Summary of Condensed Consolidated Results of Operations

 

     For the Three Months
Ended March 31,
       
       2012         2011       Variance  
     (Dollars in millions)  

Net interest income

   $ 5,197     $ 4,960     $ 237  

Fee and other income

     375       237       138  
  

 

 

   

 

 

   

 

 

 

Net revenues

   $ 5,572     $ 5,197     $ 375  
  

 

 

   

 

 

   

 

 

 

Investment gains, net

     116       75       41  

Net other-than-temporary impairments

     (64     (44     (20

Fair value gains, net

     283       289       (6

Administrative expenses

     (564     (605     41  

Credit-related expenses

      

Provision for credit losses

     (2,000     (10,554     8,554  

Foreclosed property expense

     (339     (488     149  
  

 

 

   

 

 

   

 

 

 

Total credit-related expenses

     (2,339     (11,042     8,703  

Other non-interest expenses(1)

     (286     (339     53  
  

 

 

   

 

 

   

 

 

 

Income (loss) before federal income taxes

     2,718       (6,469     9,187  

Provision for federal income taxes

            (2 )     2   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     2,718       (6,471     9,189  

Less: Net loss attributable to the noncontrolling interest

     1              1  
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Fannie Mae

   $ 2,719     $ (6,471   $ 9,190  
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to Fannie Mae

   $ 3,081     $ (6,290   $ 9,371  

 

(1) 

Consists of debt extinguishment (losses) gains, net and other expenses.

Net Interest Income

Table 6 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities for the periods indicated. For most components of the average balances, we use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Table 7 displays the change in our net interest income between periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.

 

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Table 6:    Analysis of Net Interest Income and Yield

 

     For the Three Months Ended March 31,  
    2012     2011  
          Interest     Average           Interest     Average  
     Average
Balance
    Income/
Expense
    Rates
Earned/Paid
    Average
Balance
    Income/
Expense
    Rates
Earned/Paid
 
    (Dollars in millions)  

Interest-earning assets:

           

Mortgage loans of Fannie Mae

  $ 378,344     $ 3,569       3.77   $ 405,820     $ 3,725       3.67

Mortgage loans of consolidated trusts

    2,600,221       29,001       4.46       2,598,508       31,865       4.91  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

    2,978,565       32,570       4.37       3,004,328       35,590       4.74  

Mortgage-related securities

    288,449       3,458       4.80       334,057       4,245       5.08  

Elimination of Fannie Mae MBS held in portfolio

    (186,214     (2,305     4.95       (214,370     (2,793     5.21  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-related securities, net

    102,235       1,153       4.51       119,687       1,452       4.85  

Non-mortgage securities(1)

    68,936       23       0.13       79,719       45       0.23  

Federal funds sold and securities purchased under agreements to resell or similar arrangements

    37,485       13       0.14       13,743       7       0.20  

Advances to lenders

    5,050       25       1.96       4,089       21       2.05  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

  $ 3,192,271     $ 33,784       4.23   $ 3,221,566     $ 37,115       4.61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

           

Short-term debt(2)

  $ 133,307     $ 41       0.12   $ 138,848     $ 104       0.30

Long-term debt

    578,155       3,185       2.20       631,917       4,196       2.66  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term and long-term funding debt

    711,462       3,226       1.81       770,765       4,300       2.23  

Debt securities of consolidated trusts

    2,666,552       27,666       4.15       2,652,024       30,648       4.62  

Elimination of Fannie Mae MBS held in portfolio

    (186,214     (2,305     4.95       (214,370     (2,793     5.21  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities of consolidated trusts held by third parties

    2,480,338       25,361       4.09       2,437,654       27,855       4.57  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

  $ 3,191,800     $ 28,587       3.58   $ 3,208,419     $ 32,155       4.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impact of net non-interest bearing funding

  $ 471         0.00   $ 13,147         0.02
 

 

 

     

 

 

   

 

 

     

 

 

 

Net interest income/net interest yield

    $ 5,197       0.65     $ 4,960       0.62
   

 

 

   

 

 

     

 

 

   

 

 

 

Net interest income/net interest yield of consolidated trusts(3)

    $ 1,335       0.21     $ 1,217       0.19
   

 

 

   

 

 

     

 

 

   

 

 

 

 

     As of March 31,  
Selected benchmark interest rates(4)    2012     2011  

3-month LIBOR

     0.47     0.30

2-year swap rate

     0.58       1.00  

5-year swap rate

     1.27       2.47  

30-year Fannie Mae MBS par coupon rate

     3.06       4.30  

 

(1)

Includes cash equivalents.

 

(2) 

Includes federal funds purchased and securities sold under agreements to repurchase.

 

(3) 

Net interest income of consolidated trusts represents interest income from mortgage loans of consolidated trusts less interest expense from debt securities of consolidated trusts. Net interest yield is calculated based on net interest income from consolidated trusts divided by average balance of mortgage loans of consolidated trusts.

 

(4) 

Data from British Bankers’ Association, Thomson Reuters Indices and Bloomberg L.P.

 

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Table 7:    Rate/Volume Analysis of Changes in Net Interest Income

 

    For the Three Months Ended
March 31, 2012 vs. 2011
 
    Total
Variance
    Variance Due to:(1)  
    Volume     Rate  
    (Dollars in millions)  

Interest income:

     

Mortgage loans of Fannie Mae

  $ (156   $ (257   $ 101   

Mortgage loans of consolidated trusts

    (2,864     21       (2,885
 

 

 

   

 

 

   

 

 

 

Total mortgage loans

    (3,020     (236     (2,784

Mortgage-related securities

    (787     (556     (231 )  

Elimination of Fannie Mae MBS held in portfolio

    488       354       134   
 

 

 

   

 

 

   

 

 

 

Total mortgage-related securities, net

    (299     (202     (97 )  

Non-mortgage securities(2)

    (22     (5     (17 )  

Federal funds sold and securities purchased under agreements to resell or similar arrangements

    6       9       (3 )  

Advances to lenders

    4       5       (1 )  
 

 

 

   

 

 

   

 

 

 

Total interest income

    (3,331     (429     (2,902
 

 

 

   

 

 

   

 

 

 

Interest expense:

     

Short-term debt(3)

    (63     (4     (59 )  

Long-term debt

    (1,011     (337     (674 )  
 

 

 

   

 

 

   

 

 

 

Total short-term and long-term funding debt

    (1,074     (341     (733 )  

Debt securities of consolidated trusts

    (2,982     167       (3,149

Elimination of Fannie Mae MBS held in portfolio

    488       354       134   
 

 

 

   

 

 

   

 

 

 

Total debt securities of consolidated trusts held by third parties

    (2,494     521       (3,015
 

 

 

   

 

 

   

 

 

 

Total interest expense

    (3,568     180       (3,748
 

 

 

   

 

 

   

 

 

 

Net interest income

  $ 237     $ (609   $ 846   
 

 

 

   

 

 

   

 

 

 

 

(1)

Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.

 

(2)

Includes cash equivalents.

 

(3)

Includes federal funds purchased and securities sold under agreements to repurchase.

Net interest income increased in the first quarter of 2012, as compared with the first quarter of 2011, primarily due to lower interest expense on debt, which was partially offset by lower interest income on loans and securities. The primary drivers of these changes were:

 

   

lower interest expense on funding debt due to lower funding needs and lower borrowing rates, which allowed us to continue to replace higher-cost debt with lower-cost debt;

 

   

lower interest income on mortgage securities due to lower interest rates and a decrease in the balance of our mortgage securities, as we continue to manage our portfolio requirements; and

 

   

lower interest income on mortgage loans we hold in our portfolio due to a decrease in average balance and new business acquisitions which continued to replace higher-yielding loans with loans issued at lower mortgage rates. The reduction in interest income was partially offset by a reduction in the amount of interest income not recognized for nonaccrual mortgage loans, due to a decline in the balance of nonaccrual loans in our condensed consolidated balance sheets as we continue to complete a high number of loan modifications and foreclosures.

Additionally, our net interest income and net interest yield were higher than they would have otherwise been in the first quarter of 2012 and 2011 because our debt funding needs were lower than would otherwise have been required as a result of funds we received from Treasury under the senior preferred stock purchase agreement. Further, dividends paid to Treasury are not recognized as interest expense.

Table 8 displays the interest income not recognized for loans on nonaccrual status and the resulting reduction in our net interest yield on total interest earning assets for the periods indicated.

 

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Table 8:    Impact of Nonaccrual Loans on Net Interest Income

 

     For the Three Months Ended March 31,  
     2012     2011  
     Interest
Income not
Recognized
for
Nonaccrual
Loans(1)
    Reduction
in Net
Interest
Yield(2)
    Interest
Income not
Recognized
for
Nonaccrual
Loans(1)
    Reduction
in Net
Interest
Yield(2)
 
     (Dollars in millions)  

Mortgage loans of Fannie Mae

   $ (982 )       $ (1,362  

Mortgage loans of consolidated trusts

     (180 )         (258 )    
  

 

 

     

 

 

   

Total mortgage loans

   $ (1,162     (15 )bp    $ (1,620     (20 )bp 
  

 

 

     

 

 

   

 

(1) 

Amount includes cash received for loans on nonaccrual status.

 

(2) 

Calculated based on annualized interest income not recognized divided by total interest-earning assets, expressed in basis points.

For a discussion of the interest income from the assets we have purchased and the interest expense from the debt we have issued, see the discussion of our Capital Markets group’s net interest income in “Business Segment Results.”

Fair Value Gains, Net

Table 9 displays the components of our fair value gains and losses.

Table 9:    Fair Value Gains, Net

 

     For the Three Months Ended
March 31,
 
       2012         2011    
     (Dollars in millions)  

Risk management derivatives fair value gains (losses) attributable to:

    

Net contractual interest expense accruals on interest rate swaps

   $ (374   $ (635

Net change in fair value during the period

     553       751  
  

 

 

   

 

 

 

Total risk management derivatives fair value gains, net

     179       116  

Mortgage commitment derivatives fair value (losses) gains, net

     (205     23  
  

 

 

   

 

 

 

Total derivatives fair value (losses) gains, net

     (26     139  
  

 

 

   

 

 

 

Trading securities gains, net

     284       225  

Other, net(1)

     25       (75
  

 

 

   

 

 

 

Fair value gains, net

   $ 283     $ 289  
  

 

 

   

 

 

 
     2012     2011  

5-year swap rate:

    

As of January 1

     1.22     2.18

As of March 31

     1.27       2.47  

 

(1)

Consists of debt fair value gains (losses), net, debt foreign exchange gains (losses), net, and mortgage loans fair value gains (losses), net.

We can expect high levels of period-to-period volatility in our results of operations and financial condition due to changes in market conditions that result in periodic fluctuations in the estimated fair value of financial instruments that we mark to market through our earnings. These instruments include trading securities and derivatives. The estimated fair value of our trading securities and derivatives may fluctuate substantially from

 

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period to period because of changes in interest rates, credit spreads and interest rate volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives may fluctuate, some of the financial instruments that the derivatives hedge are not recorded at fair value in our condensed consolidated financial statements.

Risk Management Derivatives Fair Value Gains, Net

Risk management derivative instruments are an integral part of our interest rate risk management strategy. We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which includes prepayment risk. We recorded risk management derivative fair value gains in the first quarter of 2012 and 2011 primarily as a result of an increase in the fair value of our pay-fixed derivatives due to an increase in swap rates. The gains in the first quarter of 2011 were partially offset by fair value losses due to time decay on our purchased options.

We present, by derivative instrument type, the fair value gains and losses on our derivatives for the three months ended March 31, 2012 and 2011 in “Note 9, Derivative Instruments.”

Mortgage Commitment Derivatives Fair Value (Losses) Gains, Net

We recognized fair value losses on our mortgage commitments in the first quarter of 2012 primarily due to losses on commitments to sell mortgage-related securities as a result of an increase in prices as interest rates decreased during the commitment period. We recognized fair value gains on our mortgage commitments in the first quarter of 2011 primarily due to gains on commitments to sell mortgage-related securities as a result of a decrease in prices as interest rates increased during the commitment period.

Trading Securities Gains, Net

The gains from our trading securities in the first quarter of 2012 and 2011 were primarily driven by the narrowing of credit spreads on commercial mortgage-backed securities (“CMBS”).

Credit-Related Expenses

We refer to our provision for loan losses and our provision for guaranty losses collectively as our “provision for credit losses.” Credit-related expenses consist of our provision for credit losses and foreclosed property expense.

Provision for Credit Losses

Our total loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans, as of each balance sheet date. We establish our loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be reflected over time in our charge-offs. When we determine that a loan is uncollectible, typically upon foreclosure, we record a charge-off against our loss reserves. We record recoveries of previously charged-off amounts as a reduction to charge-offs.

Table 10 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets. Because these fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of business and consequently require lower total loss reserves. For these reasons, we consider these fair value losses as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize these amounts as credit losses on the acquired loans in the future. As of March 31, 2012, we estimate that nearly two-thirds of this amount represents credit losses we expect to realize in the future and over one-third will eventually be recovered, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan. We exclude these fair value losses from our credit loss calculation as described in “Credit Loss Performance Metrics.”

 

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Table 10:    Total Loss Reserves

 

     As of  
     March 31, 2012      December 31, 2011  
     (Dollars in millions)  

Allowance for loan losses

   $ 70,109      $ 72,156  

Reserve for guaranty losses(1)

     997        994  
  

 

 

    

 

 

 

Combined loss reserves

     71,106        73,150  

Allowance for accrued interest receivable

     2,223        2,496  

Allowance for preforeclosure property taxes and insurance receivable(2)

     1,282        1,292  
  

 

 

    

 

 

 

Total loss reserves

     74,611        76,938  

Fair value losses previously recognized on acquired credit impaired loans(3)

     15,609        16,273  
  

 

 

    

 

 

 

Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans

   $ 90,220      $ 93,211  
  

 

 

    

 

 

 

 

(1)

Amount included in “Other liabilities” in our condensed consolidated balance sheets.

 

(2) 

Amount included in “Other assets” in our condensed consolidated balance sheets.

 

(3) 

Represents the fair value losses on loans purchased out of previously unconsolidated MBS trusts reflected in our condensed consolidated balance sheets.

 

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The following table displays changes in the total allowance for loan losses, reserve for guaranty losses and the total combined loss reserves for the three months ended March 31, 2012 and 2011.

Table 11:    Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)

 

    For the Three Months Ended March 31,  
    2012     2011  
    Of
Fannie
Mae
    Of
Consolidated
Trusts
    Total     Of
Fannie
Mae
    Of
Consolidated
Trusts
    Total  
    (Dollars in millions)  

Changes in combined loss reserves:

           

Allowance for loan losses(1):

           

Beginning balance

  $ 57,309     $ 14,847     $ 72,156     $ 48,530     $ 13,026     $ 61,556  

Provision for loan losses

    1,383       597       1,980       7,159       3,428       10,587  

Charge-offs(2)(3)

    (4,533     (263     (4,796     (5,705     (448     (6,153

Recoveries

    421       65       486       530       952       1,482  

Transfers(4)

    2,201       (2,201            3,207       (3,207       

Other(5)

    220       63       283       (13     98       85  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance(6)

  $ 57,001     $ 13,108     $ 70,109     $ 53,708     $ 13,849     $ 67,557  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for guaranty losses:

           

Beginning balance

  $ 994     $      $ 994     $ 323     $      $ 323  

Provision (benefit) for guaranty losses

    20              20       (33            (33

Charge-offs

    (51            (51     (35            (35

Recoveries

    34              34       2              2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 997     $      $ 997     $ 257     $      $ 257  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined loss reserves(1):

           

Beginning balance

  $ 58,303     $ 14,847     $ 73,150     $ 48,853     $ 13,026     $ 61,879  

Total provision for credit losses

    1,403       597       2,000       7,126       3,428       10,554  

Charge-offs(2)(3)

    (4,584     (263     (4,847     (5,740     (448     (6,188

Recoveries

    455       65       520       532       952       1,484  

Transfers(4)

    2,201       (2,201            3,207       (3,207       

Other(5)

    220       63       283       (13     98       85  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance(6)

  $ 57,998     $ 13,108     $ 71,106     $ 53,965     $ 13,849     $ 67,814  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    As of  
    March 31,
2012
    December 31,
2011
 

Allocation of combined loss reserves:

   

Balance at end of each period attributable to:

   

Single-family

  $ 69,633     $ 71,512  

Multifamily

    1,473       1,638  
 

 

 

   

 

 

 

Total

  $ 71,106     $ 73,150  
 

 

 

   

 

 

 

Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:

   

Single-family

    2.44     2.52

Multifamily

    0.75       0.84  

Combined loss reserves as a percentage of:

   

Total guaranty book of business

    2.33     2.41

Recorded investment in nonperforming loans

    28.79       29.03  

 

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(1) 

Includes an out-of-period adjustment of $548 million to increase the provision for loan losses for the three months ended March 31, 2012.

 

(2)

Includes accrued interest of $273 million and $386 million for the three months ended March 31, 2012 and 2011, respectively.

 

(3)

While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Accordingly, charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default.

 

(4)

Includes transfers from trusts for delinquent loan purchases.

 

(5)

Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The provision for credit losses, charge-offs, recoveries and transfer activity included in this table reflects all changes for both the allowance for loan losses and the valuation allowances for accrued interest and preforeclosure property taxes and insurance receivable that relate to the mortgage loans.

 

(6)

Includes $353 million and $412 million as of March 31, 2012 and 2011, respectively, for acquired credit-impaired loans.

Our provision for credit losses continues to be a key driver of our results for each period presented. The amount of our provision for credit losses varies from period to period based on changes in actual and expected home prices, borrower payment behavior, the types and volumes of loss mitigation activities and foreclosures completed, and actual and estimated recoveries from our lender and mortgage insurer counterparties. See “Risk Management— Credit 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 that we use to estimate our loss reserves.

In April 2012, FHFA issued an Advisory Bulletin that could have an impact on our provision for credit losses in the future; however, we are still assessing the impact of the Advisory Bulletin. See “Legislative and Regulatory DevelopmentsFHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans” for additional information.

Our provision for credit losses significantly decreased in the first quarter of 2012 compared with the first quarter of 2011 primarily due to: (1) a less significant decline in home prices as the housing market continued to stabilize; we estimate that home prices declined by 0.8% in the first quarter of 2012 compared with a 2.0% decline in the first quarter of 2011, which represented over half of the 2011 home price decline; (2) improved sales prices on dispositions of our REO inventory resulting from strong demand in markets with limited REO supply; and (3) lower single-family serious delinquency rates, which declined to 3.67% as of the end of the first quarter of 2012 from 4.27% as of the end of the first quarter of 2011. We discuss our expectations regarding our future credit-related expenses and loss reserves in “Executive Summary—Summary of Our Financial Performance for the First Quarter of 2012—Our Expectations Regarding Future Loss Reserves and Credit-Related Expenses.”

We continue to experience high volumes of loan modifications involving concessions to borrowers, which are considered troubled debt restructurings (“TDRs”). Individual impairment for a TDR is based on the restructured loan’s expected cash flows over the life of the loan, taking into account the effect of any concessions granted to the borrower, discounted at the loan’s original effective interest rate. The allowance calculated for an individually impaired loan has generally been greater than the allowance that would be calculated under the collective reserve.

Nonperforming Loans

Our balance of nonperforming single-family loans remained high as of March 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 status, but it will continue to be classified as a nonperforming loan as the loan is not performing in accordance with its original terms. Table 12 displays the composition of our nonperforming loans, which includes our single-family and multifamily held-for-investment and held-for-sale mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”

 

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Table 12:    Nonperforming Single-Family and Multifamily Loans

 

     As of  
     March 31,
2012
    December 31,
2011
 
     (Dollars in millions)  

On-balance sheet nonperforming loans including loans in consolidated Fannie Mae MBS trusts:

    

Nonaccrual loans

   $ 131,764     $ 142,998  

Troubled debt restructurings on accrual status(1)

     115,069       108,797  
  

 

 

   

 

 

 

Total on-balance sheet nonperforming loans

     246,833       251,795  
  

 

 

   

 

 

 

Off-balance sheet nonperforming loans in unconsolidated

    

Fannie Mae MBS trusts(2)

     149       154  
  

 

 

   

 

 

 

Total nonperforming loans

     246,982       251,949  

Allowance for loan losses and allowance for accrued interest receivable related to individually impaired on-balance sheet nonperforming loans

     (47,720     (47,711
  

 

 

   

 

 

 

Total nonperforming loans, net of allowance

   $ 199,262     $ 204,238  
  

 

 

   

 

 

 

Accruing on-balance sheet loans past due 90 days or more(3)

   $ 757     $ 768  

 

     For the Three Months
Ended March 31,
 
         2012              2011      
     (Dollars in millions)  

Interest related to on-balance sheet nonperforming loans:

     

Interest income forgone(4)

   $ 2,300      $ 2,827  

Interest income recognized for the period(5)

     1,433        1,388  

 

(1) 

Includes HomeSaver Advance first-lien loans on accrual status.

 

(2) 

Represents loans that would meet our criteria for nonaccrual status if the loans had been on-balance sheet.

 

(3)

Recorded investment in loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of this amount consists of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default.

 

(4)

Represents the amount of interest income we did not record but would have recorded during the period for on-balance sheet nonperforming loans as of the end of each period had the loans performed according to their original contractual terms.

 

(5)

Represents interest income recognized during the period for on-balance sheet loans classified as nonperforming as of the end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans.

Foreclosed Property Expense

Foreclosed property expense decreased in the first quarter of 2012 compared with the first quarter of 2011 primarily due to improved sales prices on dispositions of our REO properties resulting from strong demand in markets with limited REO supply, and a 25% decline in our inventory of single-family REO properties. We had fewer REO properties in the first quarter of 2012 compared with the first quarter of 2011, primarily driven by delays in the foreclosure process, which resulted in lower foreclosed property expense.

Credit Loss Performance Metrics

Our credit-related expenses should be considered in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonperforming loans in our mortgage portfolio, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest

 

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income on acquired credit-impaired loans from credit losses. We believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our credit performance on a more consistent basis among periods.

Table 13 displays the components of our credit loss performance metrics as well as our average single-family and multifamily default rate and initial charge-off severity rate.

Table 13:    Credit Loss Performance Metrics

 

      For the Three Months Ended March 31,  
     2012      2011   
     Amount      Ratio(1)     Amount      Ratio(1)  
     (Dollars in millions)  

Charge-offs, net of recoveries

   $ 4,327        56.8 bp    $ 4,704        61.2 bp 

Foreclosed property expense

     339        4.5        488        6.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Credit losses including the effect of fair value losses on acquired credit-impaired loans

     4,666        61.3        5,192        67.6   

Plus: Impact of acquired credit-impaired loans on charge-offs, foreclosed property expense(2)

     425        5.6        494        6.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Credit losses and credit loss ratio

   $ 5,091        66.9 bp    $ 5,686        74.1 bp 
  

 

 

    

 

 

   

 

 

    

 

 

 

Credit losses attributable to:

          

Single-family

   $ 4,955        $ 5,604     

Multifamily

     136          82     
  

 

 

      

 

 

    

Total

   $ 5,091        $ 5,686     
  

 

 

      

 

 

    

Single-family default rate

        0.41        0.44

Single-family initial charge-off severity rate(3)

        33.43        35.93

Average multifamily default rate

        0.15        0.12

Average multifamily initial charge-off severity rate(3)

        43.95        36.85

 

(1)

Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period.

 

(2) 

Includes fair value losses from acquired credit impaired loans.

 

(3)

Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition; single-family rate excludes charge-offs from short sales.

Credit losses decreased in the first quarter of 2012 compared with the first quarter of 2011 primarily due to: (1) improved sales prices on dispositions of our REO property; and (2) lower REO acquisitions primarily due to delays in the foreclosure process.

Our 2009 through first quarter of 2012 vintages accounted for approximately 3% of our single-family credit losses for the first quarter of 2012. Credit losses on mortgage loans typically do not peak until the third through sixth years following origination; however, this range can vary based on many factors, including changes in macroeconomic conditions and foreclosure timelines. We provide more detailed credit performance information, including serious delinquency rates by geographic region and foreclosure activity, in “Risk Management—Credit Risk Management—Mortgage Credit Risk Management.”

Regulatory Hypothetical Stress Test Scenario

Under a September 2005 agreement with FHFA’s predecessor, the Office of Federal Housing Enterprise Oversight, we are required to disclose on a quarterly basis the present value of the change in future expected credit losses from our existing single-family guaranty book of business from an immediate 5% decline in single-

 

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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. The sensitivity results represent the difference between future expected credit losses under our base case scenario, which is derived from our internal home price path forecast, and a scenario that assumes an instantaneous nationwide 5% decline in home prices.

Table 14 displays the credit loss sensitivities as of the dates indicated for first-lien single-family whole loans we own or that back Fannie Mae MBS, before and after consideration of projected credit risk sharing proceeds, such as private mortgage insurance claims and other credit enhancements.

Table 14:    Single-Family Credit Loss Sensitivity(1)

 

     As of  
     March 31,
2012
    December 31,
2011
 
     (Dollars in millions)  

Gross single-family credit loss sensitivity

   $ 23,861     $ 21,922  

Less: Projected credit risk sharing proceeds

     (1,787     (1,690
  

 

 

   

 

 

 

Net single-family credit loss sensitivity

   $ 22,074     $ 20,232  
  

 

 

   

 

 

 

Outstanding single-family whole loans and loans underlying Fannie Mae MBS

   $ 2,785,358     $ 2,769,454  

Single-family net credit loss sensitivity as a percentage of outstanding single-family whole loans and Fannie Mae MBS

     0.79     0.73

 

(1)

Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on 97% of our total single-family guaranty book of business as of March 31, 2012 and December 31, 2011. The mortgage loans and mortgage-related securities that are included in these estimates consist of: (a) single-family Fannie Mae MBS (whether held in our mortgage portfolio or held by third parties), excluding certain whole loan REMICs and private-label wraps; (b) single-family mortgage loans, excluding mortgages secured only by second liens, manufactured housing chattel loans and reverse mortgages; and (c) long-term standby commitments. We expect the inclusion in our estimates of the excluded products may impact the estimated sensitivities set forth in this table.

Because these sensitivities represent hypothetical scenarios, they should be used with caution. Our regulatory stress test scenario is limited in that it assumes an instantaneous uniform 5% nationwide decline in home prices, which is not representative of the historical pattern of changes in home prices. Changes in home prices generally vary on a regional, as well as a local, basis. In addition, these stress test scenarios are calculated independently without considering changes in other interrelated assumptions, such as unemployment rates or other economic factors, which are likely to have a significant impact on our future expected credit losses.

 

 

BUSINESS SEGMENT RESULTS

 

 

Results of our three business segments are intended to reflect each segment as if it were a stand-alone business. Under our segment reporting structure, the sum of the results for our three business segments does not equal our condensed consolidated results of operations as we separate the activity related to our consolidated trusts from the results generated by our three segments. In addition, because we apply accounting methods that differ from our condensed consolidated results for segment reporting purposes, we include an eliminations/adjustments category to reconcile our business segment results and the activity related to our consolidated trusts to our condensed consolidated results of operations. We describe the management reporting and allocation process used to generate our segment results in our 2011 Form 10-K in “Notes to Consolidated Financial Statements—Note 14, Segment Reporting.” We are working on reorganizing our company by function rather than by business in order to improve our operational efficiencies and effectiveness. In future periods, we may change some of our management reporting and how we report our business segment results.

In this section, we summarize our segment results for the first quarter of 2012 and 2011 in the tables below and provide a comparative discussion of these results. This section should be read together with our comparative discussion of our condensed consolidated results of operations in “Consolidated Results of Operations.” See “Note 10, Segment Reporting” of this report for a reconciliation of our segment results to our condensed consolidated results.

 

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Single-Family Business Results

Table 15 displays the financial results of our Single-Family business for the periods indicated. The primary source of revenue for our Single-Family business is guaranty fee income. Expenses primarily include credit-related expenses, net interest loss and administrative expenses.

Table 15:    Single-Family Business Results

 

     For the Three Months Ended March 31,  
     2012      2011     Variance  
     (Dollars in millions)  

Net interest loss

   $ (379   $ (898   $ 519  

Guaranty fee income(1)

     1,911       1,871       40  

Credit-related expenses(2)

     (2,385     (11,106     8,721  

Other expenses(3)

     (415     (586     171  
  

 

 

   

 

 

   

 

 

 

Loss before federal income taxes

     (1,268     (10,719     9,451  

Provision for federal income taxes

            (2     2  
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Fannie Mae

   $ (1,268   $ (10,721   $ 9,453  
  

 

 

   

 

 

   

 

 

 

Single-family effective guaranty fee rate (in basis points)(4)

     26.8       26.0    

Single-family average charged guaranty fee on new acquisitions (in basis points)(5)

     28.9       26.1    

Average single-family guaranty book of business(6)

   $ 2,850,007     $ 2,881,300    

Single-family Fannie Mae MBS issuances(7)

   $ 196,755     $ 166,673    

 

(1) 

Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive income (loss).

 

(2) 

Consists of the provision for credit losses and foreclosed property expense.

 

(3) 

Consists of investment gains, net, fair value losses, fee and other income, administrative expenses and other expenses.

 

(4) 

Calculated based on annualized Single-Family segment guaranty fee income divided by the average single-family guaranty book of business, expressed in basis points.

 

(5) 

Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points.

 

(6) 

Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.

 

(7) 

Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the period.

Our average single-family guaranty book of business was relatively flat period over period despite our continued high market share because of the decline in U.S. residential mortgage debt outstanding. Our estimated market share of new single-family mortgage-related securities issuances, which excludes previously securitized mortgages, remained high at 51% for the first quarter of 2012 compared with 49% for the first quarter of 2011.

Net Interest Loss

Net interest loss for the Single-Family business segment primarily consists of: (1) the cost to reimburse the Capital Markets group for interest income not recognized for loans in our mortgage portfolio on nonaccrual status; (2) the cost to reimburse MBS trusts for interest income not recognized for loans in consolidated trusts on nonaccrual status; and (3) income from cash payments received on loans that have been placed on nonaccrual status.

 

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Net interest loss decreased in the first quarter of 2012 compared with the first quarter of 2011 primarily due to a significant decrease in interest income not recognized for loans on nonaccrual status as high loan workout volumes over the past several quarters have driven the decline in the number of loans on nonaccrual status.

Credit-Related Expenses

Credit-related expenses and credit losses in the Single-Family business represent the substantial majority of our consolidated totals. We provide a discussion of our credit-related expenses and credit losses in “Consolidated Results of Operations—Credit-Related Expenses.”

Multifamily Business Results

Multifamily business results primarily reflect our multifamily guaranty business. Our multifamily business results also include activity relating to our low income housing tax credit (“LIHTC”) and equity investments. Although we are no longer making new LIHTC or equity investments, we continue to make contractually required contributions for our legacy investments. Activity from multifamily products is also reflected in the Capital Markets group results, which include net interest income related to multifamily loans and securities, gains and losses from the sale of multifamily Fannie Mae MBS and re-securitizations, and other miscellaneous income. Estimated net interest income earned on multifamily mortgage loans and multifamily Fannie Mae MBS in the Capital Markets group results was $204 million for the three months ended March 31, 2012 and $230 million for the three months ended March 31, 2011.

Table 16 displays the financial results of our Multifamily business for the periods indicated. The primary sources of revenue for our Multifamily business are guaranty fee income and fee and other income. Expenses primarily include administrative expenses.

Table 16:    Multifamily Business Results

 

      For the Three Months Ended March 31,  
         2012             2011             Variance      
     (Dollars in millions)  

Guaranty fee income(1)

   $ 243     $ 209     $ 34  

Fee and other income

     47       58       (11

Gains (losses) from partnership investments(2)

     11       (12     23  

Credit-related income(3)

     46       64       (18

Other expenses(4)

     (68     (67     (1
  

 

 

   

 

 

   

 

 

 

Income before federal income taxes

     279       252       27  

Provision for federal income taxes

            (5     5  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Fannie Mae

   $ 279     $ 247     $ 32  
  

 

 

   

 

 

   

 

 

 

Multifamily effective guaranty fee rate (in basis points)(5)

     49.6       44.0    

Multifamily credit loss performance ratio (in basis points)(6)

     27.8       17.3    

Average multifamily guaranty book of business(7)

   $ 196,019     $ 190,012    

Multifamily new business volumes(8)

   $ 7,159     $ 5,024    

Multifamily units financed from new business volumes

     117,000       83,000    

Multifamily Fannie Mae MBS issuances(9)

   $ 8,851     $ 8,581    

Multifamily Fannie Mae structured securities issuances (issued by Capital Markets group)(10)

   $ 2,238     $ 1,400    

Additional net interest income earned on Fannie Mae multifamily mortgage loans and MBS (included in Capital Markets Group's results)(11)

   $ 204     $ 230    

Average Fannie Mae multifamily mortgage loans and MBS in Capital Markets Group’s portfolio(12)

   $ 103,989      $ 114,375    

 

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     As of  
     March 31,
2012
    December 31,
2011
 
     (Dollars in millions)  

Multifamily serious delinquency rate

     0.37     0.59

Percentage of multifamily guaranty book of business with credit enhancement

     90     90

Fannie Mae percentage of total multifamily mortgage debt outstanding(13)

     21.2     21.0

Multifamily Fannie Mae MBS outstanding(14)

   $ 107,868     $ 101,574  

 

 (1)

Guaranty fee income is included in fee and other income in our condensed consolidated statements of operations and comprehensive income (loss).

 

 (2)

Gains (losses) from partnership investments are included in other expenses in our condensed consolidated statements of operations and comprehensive income (loss). Gains (losses) from partnership investments are reported using the equity method of accounting. As a result, net income (loss) attributable to noncontrolling interest from partnership investments is not included in income (loss) for the Multifamily segment.

 

 (3)

Consists of the benefit for credit losses and foreclosed property expense.

 

 (4)

Consists of net interest loss, investment gains, administrative expenses, and other expenses.

 

 (5)

Calculated based on annualized Multifamily segment guaranty fee income divided by the average multifamily guaranty book of business, expressed in basis points.

 

 (6)

Calculated based on the annualized Multifamily credit losses divided by the average multifamily guaranty book of business, expressed in basis points.

 

 (7)

Consists of multifamily mortgage loans held in our mortgage portfolio, multifamily mortgage loans held by consolidated trusts, multifamily Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on multifamily mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.

 

 (8)

Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations) and multifamily loans purchased during the period.

 

 (9)

Reflects unpaid principal balance of multifamily Fannie Mae MBS issued during the period. Includes: (a) issuances of new MBS, (b) $1.6 billion and $3.5 billion of Fannie Mae portfolio securitization transactions for the three months ended March 31, 2012 and 2011, respectively, and (c) $163 million and $119 million of conversions of adjustable-rate loans to fixed-rate loans and discount MBS (“DMBS”) to MBS for the three months ended March 31, 2012 and 2011, respectively.

 

(10) 

Reflects original unpaid principal balance of out-of-portfolio multifamily structured securities issuances by our Capital Markets Group.

 

(11) 

Interest expense estimate based on allocated duration-matched funding costs. Net interest income was reduced by guaranty fees allocated to Multifamily from the Capital Markets Group on multifamily loans in Fannie Mae’s portfolio.

 

(12) 

Based on unpaid principal balance.

 

(13) 

Includes mortgage loans and Fannie Mae MBS issued and guaranteed by the Multifamily segment. Information as of March 31, 2012 is as of December 31, 2011 and is based on the Federal Reserve’s December 2011 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Information as of December 31, 2011 is as of September 30, 2011 and is based on the Federal Reserve’s September 2011 mortgage debt outstanding release. Prior period amounts may have been changed to reflect revised historical data from the Federal Reserve.

 

(14) 

Includes $29.3 billion and $28.3 billion of Fannie Mae multifamily MBS held in the mortgage portfolio, the vast majority of which have been consolidated to loans in our condensed consolidated balance sheets, as of March 31, 2012 and December 31, 2011, respectively; and $1.4 billion of bonds issued by HFAs as of March 31, 2012 and December 31, 2011.

Guaranty Fee Income

Multifamily guaranty fee income increased in the first quarter of 2012 compared with the first quarter of 2011 primarily due to higher fees charged on new acquisitions. New acquisitions with higher guaranty fees have become an increasingly large part of our multifamily guaranty book of business.

Credit-Related Income

Multifamily credit-related income decreased in the first quarter of 2012 compared with the first quarter of 2011, primarily driven by a lower decrease in the reserve for guaranty losses than in the first quarter of 2011.

 

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Multifamily credit losses, which consist of net charge-offs and foreclosed property expense, were $136 million for the first quarter of 2012 compared with $82 million for the first quarter of 2011. Although national multifamily market fundamentals continued to improve in the first quarter of 2012, certain local markets and properties continued to underperform compared to the rest of the nation.

Capital Markets Group Results

Table 17 displays the financial results of our Capital Markets group for the periods indicated. Following the table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s mortgage portfolio. For a discussion of the debt issued by the Capital Markets group to fund its investment activities, see “Liquidity and Capital Management.” For a discussion of the derivative instruments that Capital Markets uses to manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments” and “Risk Management—Market Risk Management, Including Interest Rate Risk Management—Derivative Instruments” in our 2011 Form 10-K and “Notes to Consolidated Financial Statements—Note 9, Derivative Instruments” in both this report and our 2011 Form 10-K. The primary sources of revenue for our Capital Markets group are net interest income and fee and other income. Expenses and other items that impact income or loss primarily include fair value gains and losses, investment gains and losses, allocated guaranty fee expense, other-than-temporary impairments and administrative expenses.

Table 17:    Capital Markets Group Results

 

      For the Three Months Ended March 31,  
          2012             2011         Variance  
     (Dollars in millions)  

Net interest income(1)

   $ 3,541     $ 3,710     $ (169

Investment gains, net(2)

     1,007       870       137  

Net other-than-temporary impairments

     (64     (44     (20

Fair value gains, net(3)

     170       218       (48

Fee and other income

     180       75       105  

Other expenses(4)

     (530     (553     23  
  

 

 

   

 

 

   

 

 

 

Income before federal income taxes

     4,304       4,276       28  

Benefit for federal income taxes

            5       (5
  

 

 

   

 

 

   

 

 

 

Net income attributable to Fannie Mae

   $ 4,304     $ 4,281     $ 23  
  

 

 

   

 

 

   

 

 

 

 

(1) 

Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $1.4 billion and $2.0 billion for the three months ended March 31, 2012 and 2011, respectively. Capital Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest expense on the corresponding debt of such trusts.

 

(2) 

We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities.

 

(3) 

Includes fair value gains or losses on derivatives and trading securities that we own, regardless of whether the trust has been consolidated.

 

(4) 

Includes allocated guaranty fee expense, debt extinguishment losses, net, administrative expenses, and other expenses. Gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group’s results because purchases of securities are recognized as such.

Net Interest Income

The Capital Markets group reports interest income and amortization of cost basis adjustments only on securities and loans that are held in our portfolio. For mortgage loans held in our mortgage portfolio, when interest income is no longer recognized in accordance with our nonaccrual accounting policy, the Capital Markets group

 

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recognizes interest income reimbursements that the group receives, for the contractual interest due on nonaccrual loans from the Single-Family and Multifamily businesses. These reimbursements decreased in the first quarter of 2012 due to the decrease of nonaccrual loans in our portfolio. The interest expense recognized on the Capital Markets group’s statement of operations primarily relates to the cost of our funding debt which is reported as “Debt of Fannie Mae” in our condensed consolidated balance sheets. Net interest income also includes a cost of capital charge allocated among the three business segments.

The Capital Markets group’s net interest income decreased in the first quarter of 2012 compared with the first quarter of 2011 primarily due to a decrease in the balance of mortgage-related securities and lower interest rates on loans in our mortgage portfolio. This decrease in interest income on our interest earning assets was partially offset by a decline in interest expense due to lower funding needs and lower borrowing rates, which allowed us to continue to replace higher-cost debt with lower-cost debt.

Our net interest income and net interest yield were higher than they would have otherwise been in the first quarter of 2012 and 2011 because our debt funding needs were lower than would otherwise have been required as a result of funds we received from Treasury under the senior preferred stock purchase agreement. Further, dividends paid to Treasury are not recognized as interest expense.

We supplement our issuance of debt securities with derivative instruments to further reduce duration risk, which includes prepayment risk. The effect of these derivatives, in particular the periodic net interest expense accruals on interest rate swaps, is not reflected in Capital Markets’ net interest income but is included in our results as a component of “Fair value gains, net” and is displayed in “Table 9: Fair Value Gains, Net.” If we had included the economic impact of adding the net contractual interest accruals on our interest rate swaps in our Capital Markets’ interest expense, Capital Markets’ net interest income would have decreased by $374 million in the first quarter of 2012 compared with a decrease of $635 million in the first quarter of 2011.

Investment Gains, Net

Investment gains increased in the first quarter of 2012 compared with the first quarter of 2011 due to a higher volume of securitizations and increased gains on sale of available-for-sale (“AFS”) securities.

Fair Value Gains, Net

The derivatives fair value gains and losses that are reported for the Capital Markets group are consistent with the same gains and losses reported in our condensed consolidated results of operations. We discuss our derivatives fair value gains and losses in “Consolidated Results of Operations—Fair Value Gains, Net.”

The gains on our trading securities for the segment during the first quarter of 2012 and 2011 were attributable to a narrowing of credit spreads on CMBS, partially offset by losses on agency MBS due to an increase in interest rates during the periods.

The Capital Markets Group’s Mortgage Portfolio

The Capital Markets group’s mortgage portfolio consists of mortgage loans and mortgage-related securities that we own. Mortgage-related securities held by Capital Markets include Fannie Mae MBS and non-Fannie Mae mortgage-related securities. The Fannie Mae MBS that we own are maintained as securities on the Capital Markets group’s balance sheet. 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. By December 31 of each year, we are required to reduce our mortgage assets to 90% of the maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250 billion. The maximum allowable amount of mortgage assets we may own was reduced to $729 billion as of December 31, 2011 and will be reduced to $656.1 billion as of December 31, 2012. As of March 31, 2012, we owned $691.7 billion in mortgage assets, compared with $708.4 billion as of December 31, 2011.

 

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Table 18 displays our Capital Markets group’s mortgage portfolio activity for the periods indicated.

Table 18:    Capital Markets Group’s Mortgage Portfolio Activity(1)

 

      For the Three  Months
Ended March 31,
 
         2012             2011      
     (Dollars in millions)  

Mortgage loans:

    

Beginning balance

   $ 398,271     $ 427,074  

Purchases

     53,925       38,074  

Securitizations(2)

     (38,372     (23,983

Liquidations(3)

     (19,047     (19,309
  

 

 

   

 

 

 

Mortgage loans, ending balance

     394,777       421,856  

Mortgage securities:

    

Beginning balance

     310,143       361,697  

Purchases(4)

     4,971       5,090  

Securitizations(2)

     38,372       23,983  

Sales

     (41,246     (35,426

Liquidations(3)

     (15,354     (19,582
  

 

 

   

 

 

 

Mortgage securities, ending balance

     296,886       335,762  
  

 

 

   

 

 

 

Total Capital Markets mortgage portfolio

   $ 691,663     $ 757,618  
  

 

 

   

 

 

 

 

(1) 

Based on unpaid principal balance.

(2) 

Includes portfolio securitization transactions that do not qualify for sale treatment under GAAP.

(3) 

Includes scheduled repayments, prepayments, foreclosures and lender repurchases.

(4) 

Includes purchases of Fannie Mae MBS issued by consolidated trusts.

 

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Table 19 displays the composition of the Capital Markets group’s mortgage portfolio as of March 31, 2012 and December 31, 2011.

Table 19:    Capital Markets Group’s Mortgage Portfolio Composition(1)

 

     As of  
     March 31,
2012
     December 31,
2011
 
     (Dollars in millions)  

Capital Markets group's mortgage loans:

     

Single-family loans

     

Government insured or guaranteed

   $ 41,592      $ 41,555  

Conventional:

     

Long-term, fixed-rate

     248,326        245,810  

Intermediate-term, fixed-rate

     10,189        10,289  

Adjustable-rate

     21,990        23,490  
  

 

 

    

 

 

 

Total single-family conventional

     280,505        279,589  
  

 

 

    

 

 

 

Total single-family loans

     322,097        321,144  
  

 

 

    

 

 

 

Multifamily loans

     

Government insured or guaranteed

     349        362  

Conventional:

     

Long-term, fixed-rate

     3,512        3,629  

Intermediate-term, fixed-rate

     55,281        58,885  

Adjustable-rate

     13,538        14,251  
  

 

 

    

 

 

 

Total multifamily conventional

     72,331        76,765  
  

 

 

    

 

 

 

Total multifamily loans

     72,680        77,127  
  

 

 

    

 

 

 

Total Capital Markets group's mortgage loans

     394,777        398,271  
  

 

 

    

 

 

 

Capital Markets group's mortgage-related securities:

     

Fannie Mae

     209,834        220,061  

Freddie Mac

     13,504        14,509  

Ginnie Mae

     1,015        1,043  

Alt-A private-label securities

     19,056        19,670  

Subprime private-label securities

     16,175        16,538  

CMBS

     22,674        23,226  

Mortgage revenue bonds

     10,518        10,899  

Other mortgage-related securities

     4,110        4,197  
  

 

 

    

 

 

 

Total Capital Markets group's mortgage-related securities(2)

     296,886        310,143  
  

 

 

    

 

 

 

Total Capital Markets group's mortgage portfolio

   $ 691,663      $ 708,414  
  

 

 

    

 

 

 

 

 

(1) 

Based on unpaid principal balance.

 

(2) 

The fair value of these mortgage-related securities was $303.8 billion and $316.5 billion as of March 31, 2012 and December 31, 2011, respectively.

The Capital Markets group’s mortgage portfolio decreased as of March 31, 2012 compared with December 31, 2011 primarily due to liquidations, partially offset by purchases of delinquent loans from MBS trusts. The total unpaid principal balance of nonperforming loans in the Capital Markets group’s mortgage portfolio was $236.2 billion as of March 31, 2012 and December 31, 2011. This population includes loans that have been modified and have been classified as TDRs, as well as unmodified delinquent loans that are on nonaccrual status in our condensed consolidated financial statements.

 

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We expect to continue to purchase loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity, and other factors including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase agreement. We purchased approximately 84,900 delinquent loans with an unpaid principal balance of $14.2 billion from our single-family MBS trusts in the first quarter of 2012. As of March 31, 2012, the total unpaid principal balance of all loans in single-family MBS trusts that were delinquent as to four or more consecutive monthly payments was $4.6 billion.

 

 

CONSOLIDATED BALANCE SHEET ANALYSIS

 

 

The section below provides a discussion of our condensed consolidated balance sheets as of the dates indicated and should be read together with our condensed consolidated financial statements, including the accompanying notes.

Table 20 displays a summary of our condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011.

Table 20:    Summary of Condensed Consolidated Balance Sheets

 

     As of        
     March 31,
2012
    December 31,
2011
    Variance  
     (Dollars in millions)  

Assets

      

Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements

   $ 37,049     $ 63,539     $ (26,490

Restricted cash

     55,921       50,797       5,124  

Investments in securities(1)

     149,585       151,780       (2,195

Mortgage loans:

      

Of Fannie Mae

     377,257       380,379       (3,122

Of consolidated trusts

     2,616,577       2,590,398       26,179  

Allowance for loan losses

     (70,109     (72,156     2,047  
  

 

 

   

 

 

   

 

 

 

Mortgage loans, net of allowance for loan losses

     2,923,725       2,898,621       25,104  

Other assets(2)

     43,660       46,747       (3,087
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,209,940     $ 3,211,484     $ (1,544
  

 

 

   

 

 

   

 

 

 

Liabilities and equity (deficit)

      

Debt:

      

Of Fannie Mae

   $ 685,974     $ 732,444     $ (46,470

Of consolidated trusts

     2,498,233       2,457,428       40,805  

Other liabilities(3)

     25,465       26,183       (718
  

 

 

   

 

 

   

 

 

 

Total liabilities

     3,209,672       3,216,055       (6,383
  

 

 

   

 

 

   

 

 

 

Senior preferred stock

     117,149       112,578       4,571  

Other deficit(4)

     (116,881     (117,149     268  
  

 

 

   

 

 

   

 

 

 

Total equity (deficit)

     268       (4,571     4,839  
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity (deficit)

   $ 3,209,940     $ 3,211,484     $ (1,544
  

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $51.9 billion as of March 31, 2012 and $49.8 billion as of December 31, 2011 of non-mortgage-related securities that are included in our other investments portfolio, which we present in “Table 30: Cash and Other Investments Portfolio.”

 

(2) 

Consists of accrued interest receivable, net; acquired property, net; and other assets.

 

(3) 

Consists of accrued interest payable and other liabilities.

 

(4) 

Consists of preferred stock, common stock, accumulated deficit, accumulated other comprehensive loss, treasury stock, and noncontrolling interest.

 

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Cash and Other Investments Portfolio

Our cash and other investments portfolio consists of cash and cash equivalents, federal funds sold and securities purchased under agreements to resell or similar arrangements, and investments in non-mortgage-related securities. See “Liquidity and Capital Management—Liquidity Management—Cash and Other Investments Portfolio” for additional information on our cash and other investments portfolio.

Restricted Cash

Restricted cash primarily includes unscheduled borrower payments received by the servicer or consolidated trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash increased as of March 31, 2012 compared with the balance as of December 31, 2011 primarily due to an increase in refinance activity, resulting in an increase in unscheduled payments received.

Investments in Mortgage-Related Securities

Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as either trading or available-for-sale and are measured at fair value. Unrealized and realized gains and losses on trading securities are included as a component of “Fair value gains, net” and unrealized gains and losses on available-for-sale securities are included in “Other comprehensive income” in our condensed consolidated statements of operations and comprehensive income (loss). Realized gains and losses on available-for-sale securities are recognized when securities are sold in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income (loss). See “Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities, including the composition of our trading and available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related to our available-for-sale securities as of March 31, 2012 and December 31, 2011.

Table 21 displays the fair value of our investments in mortgage-related securities, including trading and available-for-sale securities, as of the dates indicated.

Table 21:    Summary of Mortgage-Related Securities at Fair Value

 

     As of  
     March 31,
2012
     December 31,
2011
 
     (Dollars in millions)  

Mortgage-related securities:

     

Fannie Mae

   $ 21,793      $ 24,274  

Freddie Mac

     14,518        15,555  

Ginnie Mae

     1,152        1,189  

Alt-A private-label securities

     12,927        13,032  

Subprime private-label securities

     8,900        8,866  

CMBS

     24,485        24,437  

Mortgage revenue bonds

     10,407        10,978  

Other mortgage-related securities

     3,477        3,601  
  

 

 

    

 

 

 

Total

   $ 97,659      $ 101,932  
  

 

 

    

 

 

 

Investments in Private-Label Mortgage-Related Securities

We classify private-label securities as Alt-A, subprime, multifamily or manufactured housing if the securities were labeled as such when issued. We have also invested in private-label subprime mortgage-related securities that we have resecuritized to include our guaranty (“wraps”).

 

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The continued negative impact of the current economic environment, including sustained weakness in the housing market and high unemployment, has adversely affected the performance of our Alt-A and subprime private-label securities. The unpaid principal balance of our investments in Alt-A and subprime securities was $35.2 billion as of March 31, 2012, of which $29.5 billion was rated below investment grade. Table 22 displays the unpaid principal balance and the fair value of our investments in Alt-A and subprime private-label securities along with an analysis of the cumulative losses on these investments as of March 31, 2012. As of March 31, 2012 and December 31, 2011, we had realized actual cumulative principal shortfalls of approximately 6% of the total cumulative credit losses reported in this table and reflected in our condensed consolidated financial statements.

Table 22:    Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities

 

     As of March 31, 2012  
     Unpaid
Principal
Balance
     Fair
Value
     Total
Cumulative
Losses(1)
    Noncredit
Component(2)
    Credit
Component(3)
 
     (Dollars in millions)  

Trading securities:(4)

            

Alt-A private-label securities

   $ 2,629      $ 1,338      $ (1,251   $ (102 )     $ (1,149

Subprime private-label securities

     2,558        1,305        (1,252 )       (344 )       (908 )  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     5,187        2,643        (2,503     (446 )       (2,057
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Available-for-sale securities:(4)

            

Alt-A private-label securities

     16,427        11,589        (5,409     (1,306     (4,103

Subprime private-label securities

     13,617        7,595        (6,061 )       (1,668     (4,393
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     30,044        19,184        (11,470     (2,974     (8,496
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Grand Total

   $ 35,231      $ 21,827      $ (13,973   $ (3,420   $ (10,553
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

(1)

Amounts reflect the difference between the fair value and unpaid principal balance net of unamortized premiums, discounts and certain other cost basis adjustments.

 

(2) 

Represents the estimated portion of the total cumulative losses that is noncredit-related. We have calculated the credit component based on the difference between the amortized cost basis of the securities and the present value of expected future cash flows. The remaining difference between the fair value and the present value of expected future cash flows is classified as noncredit-related.

 

(3) 

For securities classified as trading, amounts reflect the estimated portion of the total cumulative losses that is credit-related. For securities classified as available-for-sale, amounts reflect the estimated portion of total cumulative other-than-temporary credit impairment losses, net of accretion, that are recognized in our condensed consolidated statements of operations and comprehensive income (loss).

 

(4)

Excludes resecuritizations, or wraps, of private-label securities backed by subprime loans that we have guaranteed and hold in our mortgage portfolio as Fannie Mae securities.

Table 23 displays the 60 days or more delinquency rates and average loss severities for the loans underlying our Alt-A and subprime private-label mortgage-related securities for the most recent remittance period of the current reporting quarter. The delinquency rates and average loss severities are based on available data provided by Intex Solutions, Inc. (“Intex”) and CoreLogic, LoanPerformance (“CoreLogic”). We also present the average credit enhancement and monoline financial guaranteed amount for these securities as of March 31, 2012. Based on the stressed condition of our non-governmental financial guarantors, we believe that all but one of these counterparties may not be able to fully meet their obligations to us in the future. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Financial Guarantors” for additional information on our financial guarantor exposure and the counterparty risk associated with our financial guarantors.

 

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Table 23:    Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities (Including Wraps)

 

    As of March 31, 2012  
    Unpaid Principal Balance     ³ 60 Days
Delinquent(2)(3)
    Average
Loss
Severity(3)(4)
    Average
Credit
Enhancement(3)(5)
    Monoline
Financial
Guaranteed
Amount(6)
 
    Trading     Available-
for-Sale
    Wraps(1)          
    (Dollars in millions)  

Private-label mortgage-related securities backed by:(7)

  

     

Alt-A mortgage loans:

             

Option ARM Alt-A mortgage loans:

             

2004 and prior

  $      $ 469      $        30.0     60.3     15.3   $   

2005

           1,267               40.7        62.9        37.3        241   

2006

           1,136               43.4        68.2        25.5        85   

2007

    1,819                     44.3        65.2        54.7        602   

Other Alt-A mortgage loans:

             

2004 and prior

           5,885               10.3        54.4        12.4        12   

2005

    82       3,911        108        21.7        60.3        5.4          

2006

    60       3,646               26.3        60.9        0.6          

2007

    668              162        39.4        71.7        32.9        266   

2008(8)

           113                                      
 

 

 

   

 

 

   

 

 

         

 

 

 

Total Alt-A mortgage loans:

    2,629       16,427        270              1,206   
 

 

 

   

 

 

   

 

 

         

 

 

 

Subprime mortgage loans:

             

2004 and prior

           1,580        940        22.4        82.9        60.9        601   

2005(8)

           163        1,221        39.5        79.0        57.4        223   

2006

           11,283               46.3        81.7        17.3        52   

2007

    2,558       591        5,326        45.9        77.3        21.5        173   
 

 

 

   

 

 

   

 

 

         

 

 

 

Total subprime mortgage loans:

    2,558       13,617        7,487              1,049   
 

 

 

   

 

 

   

 

 

         

 

 

 

Total Alt-A and subprime mortgage loans:

  $ 5,187     $ 30,044      $ 7,757            $ 2,255   
 

 

 

   

 

 

   

 

 

         

 

 

 

 

(1) 

Represents our exposure to private-label Alt-A and subprime mortgage-related securities that have been resecuritized (or wrapped) to include our guarantee.

 

(2)

Delinquency data provided by Intex, where available, for loans backing Alt-A and subprime private-label mortgage-related securities that we own or guarantee. The reported Intex delinquency data reflect information from March 2012 remittances for February 2012 payments. For consistency purposes, we have adjusted the Intex delinquency data, where appropriate, to include all bankruptcies, foreclosures and REO in the delinquency rates.

 

(3) 

The average delinquency, severity and credit enhancement metrics are calculated for each loan pool associated with securities where Fannie Mae has exposure and are weighted based on the unpaid principal balance of those securities.

 

(4)

Severity data obtained from CoreLogic, where available, for loans backing Alt-A and subprime private-label mortgage-related securities that we own or guarantee. The CoreLogic severity data reflect information from March 2012 remittances for February 2012 payments. For consistency purposes, we have adjusted the severity data, where appropriate.

 

(5) 

Average credit enhancement percentage reflects both subordination and financial guarantees. Reflects the ratio of the current amount of the securities that will incur losses in the securitization structure before any losses are allocated to securities that we own or guarantee. Percentage generally calculated based on the quotient of the total unpaid principal balance of all credit enhancements in the form of subordination or financial guarantee of the security divided by the total unpaid principal balance of all of the tranches of collateral pools from which credit support is drawn for the security that we own or guarantee. Beginning in March 2012, in calculating the weighted average credit enhancement percentage for bonds in the population that show negative credit enhancement in Intex due to under-collateralization, the negative credit enhancement amounts have been replaced with zero values.

 

(6) 

Reflects amount of unpaid principal balance supported by financial guarantees from monoline financial guarantors.

 

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(7) 

Vintages are based on series date and not loan origination date.

 

(8) 

The unpaid principal balance includes private-label Real Estate Mortgage Investment Conduit (“REMIC”) securities that have been resecuritized totaling $113 million for the 2008 vintage of other Alt-A loans and $14 million for the 2005 vintage of subprime loans. These securities are excluded from the delinquency, severity and credit enhancement statistics reported in this table.

Mortgage Loans

The increase in mortgage loans, net of the allowance for loan losses, in the first quarter of 2012 was primarily driven by securitization activity from our lender swap and portfolio securitization programs. For additional information on our mortgage loans, see “Note 3, Mortgage Loans.” For additional information on the mortgage loan purchase and sale activities reported by our Capital Markets group, see “Business Segment Results—Capital Markets Group Results.”

Debt

Debt of Fannie Mae is the primary means of funding our mortgage investments. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in “Liquidity and Capital Management—Liquidity Management—Debt Funding.” Also see “Note 8, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.

Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. The increase in debt of consolidated trusts in the first quarter of 2012 was primarily driven by securitization activity from our lender swap and portfolio securitization programs.

 

 

SUPPLEMENTAL NON-GAAP INFORMATION—FAIR VALUE BALANCE SHEETS

 

 

As part of our disclosure requirements with FHFA, we disclose on a quarterly basis supplemental non-GAAP consolidated fair value balance sheets, which reflect our assets and liabilities at estimated fair value.

Table 24 summarizes changes in our stockholders’ equity (deficit) reported in our GAAP condensed consolidated balance sheets and in the estimated fair value of our net assets in our non-GAAP consolidated fair value balance sheets for the three months ended March 31, 2012. The estimated fair value of our net assets is calculated based on the difference between the fair value of our assets and the fair value of our liabilities, adjusted for noncontrolling interests. We use various valuation techniques to estimate fair value, some of which incorporate internal assumptions that are subjective and involve a high degree of management judgment. We describe the specific valuation techniques used to determine fair value and disclose the carrying value and fair value of our financial assets and liabilities in “Note 12, Fair Value.”

 

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Table 24:    Comparative Measures—GAAP Change in Stockholders’ Equity (Deficit) and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect)

 

     For the Three Months Ended
March 31, 2012
 
     (Dollars in millions)  

GAAP consolidated balance sheets:

  

Fannie Mae stockholders’ deficit as of December 31, 2011(1)

   $ (4,624

Total comprehensive income

     3,080  

Capital transactions:(2)

  

Funds received from Treasury under the senior preferred stock purchase agreement

     4,571  

Senior preferred stock dividends

     (2,819
  

 

 

 

Capital transactions, net

     1,752  

Other

     2  
  

 

 

 

Fannie Mae stockholders' equity as of March 31, 2012(1)

   $ 210  
  

 

 

 

Non-GAAP consolidated fair value balance sheets:

  

Estimated fair value of net assets as of December 31, 2011

   $ (127,848

Capital transactions, net

     1,752  

Change in estimated fair value of net assets, excluding capital transactions

     (11,549
  

 

 

 

Decrease in estimated fair value of net assets, net

     (9,797
  

 

 

 

Estimated fair value of net assets as of March 31, 2012

   $ (137,645
  

 

 

 

 

(1)

Our net worth, as defined under the senior preferred stock purchase agreement, is equivalent to the “Total equity (deficit)” amount reported in our condensed consolidated balance sheets. Our net worth, or total deficit, consists of “Total Fannie Mae’s stockholders’ equity (deficit)” and “Noncontrolling interest” reported in our condensed consolidated balance sheets.

 

(2) 

Represents capital transactions, which are reported in our condensed consolidated financial statements.

During the first quarter of 2012, the estimated fair value of our net assets, excluding capital transactions, decreased by $11.5 billion. We adopted ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS related to fair value measurement, which resulted in our determination to reflect the fair value of modified loans and certain delinquent loans in the principal markets for whole loans versus the GSE securitization market. This adoption resulted in a net decrease to fair value of $24.4 billion. This decrease was offset by an enhanced estimation process used to value HARP loans that resulted in an increase of $7.4 billion to the fair value of these loans.

Excluding the impact of the changes described above, the estimated fair value of our net assets, excluding capital transactions, increased primarily attributable to income from the spread between our mortgage assets and associated debt and derivatives as well as a tightening of the option-adjusted spread levels. These increases in fair value were partially offset by credit-related items due to declining actual home prices and an increase in interest rates which increased the weighted average life of the guaranty book of business.

Cautionary Language Relating to Supplemental Non-GAAP Financial Measures

In reviewing our non-GAAP consolidated fair value balance sheets, there are a number of important factors and limitations to consider. The estimated fair value of our net assets is calculated as of a particular point in time based on our existing assets and liabilities. It does not incorporate other factors that may have a significant impact on our long-term fair value, including revenues generated from future business activities in which we expect to engage, the value from our foreclosure and loss mitigation efforts or the impact that legislation or potential regulatory actions may have on us. As a result, the estimated fair value of our net assets presented in our non-GAAP consolidated fair value balance sheets does not represent an estimate of our net realizable value, liquidation value or our market value as a whole. Amounts we ultimately realize from the disposition of assets or settlement of liabilities may vary materially from the estimated fair values presented in our non-GAAP consolidated fair value balance sheets.

 

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In addition, the fair value of our net assets attributable to common stockholders presented in our fair value balance sheet does not represent an estimate of the value we expect to realize from operating the company or what we expect to draw from Treasury under the terms of our senior preferred stock purchase agreement, primarily because:

 

   

The estimated fair value of our credit exposures significantly exceeds our projected credit losses as fair value takes into account certain assumptions about liquidity and required rates of return that a market participant may demand in assuming a credit obligation. Because we do not generally intend to have other parties assume the credit risk inherent in our book of business, and therefore would not be obligated to pay a market premium for its assumption, we do not expect the current market premium portion of our current estimate of fair value to impact future Treasury draws;

 

   

The fair value balance sheet does not reflect amounts we expect to draw in the future to pay dividends on the senior preferred stock; and

 

   

The fair value of our net assets reflects a point in time estimate of the fair value of our existing assets and liabilities, and does not incorporate the value associated with new business that may be added in the future.

The fair value of our net assets is not a measure defined within GAAP and may not be comparable to similarly titled measures reported by other companies.

Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

We display our non-GAAP fair value balance sheets as of the dates indicated in Table 25.

 

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Table 25:    Supplemental Non-GAAP Consolidated Fair Value Balance Sheets

 

    As of March 31, 2012     As of December 31, 2011  
    GAAP
Carrying
Value
    Fair Value
Adjustment(1)
    Estimated
Fair Value
    GAAP
Carrying
Value
    Fair Value
Adjustment(1)
    Estimated
Fair Value
 
    (Dollars in millions)  

Assets:

           

Cash and cash equivalents

  $ 77,970     $      $ 77,970      $ 68,336      $      $ 68,336   

Federal funds sold and securities purchased under agreements to resell or similar arrangements

    15,000              15,000        46,000               46,000   

Trading securities

    75,806              75,806        74,198               74,198   

Available-for-sale securities

    73,779              73,779        77,582               77,582   

Mortgage loans:

           

Mortgage loans held for sale

    282       4        286        311        14        325   

Mortgage loans held for investment, net of allowance for loan losses:

           

Of Fannie Mae

    320,032       (47,953     272,079        322,825        (27,829 )      294,996   

Of consolidated trusts

    2,603,411       69,620 (2)      2,673,031 (3)      2,575,485        76,540 (2)      2,652,025 (3) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

    2,923,725       21,671        2,945,396 (4)      2,898,621        48,725        2,947,346 (4) 

Advances to lenders

    3,548       (89     3,459 (5)(6)      5,538        (118 )      5,420 (5)(6) 

Derivative assets at fair value

    365              365 (5)(6)      561               561 (5)(6) 

Guaranty assets and buy-ups, net

    497       423        920 (5)(6)      503        398        901 (5)(6) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

    3,170,690        22,005        3,192,695 (7)      3,171,339        49,005        3,220,344 (7) 

Credit enhancements

    453       2,396        2,849 (5)(6)      455        2,550        3,005 (5)(6) 

Other assets

    38,797       (242     38,555 (5)(6)      39,690        (258 )      39,432 (5)(6) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,209,940     $ 24,159      $ 3,234,099      $ 3,211,484      $ 51,297      $ 3,262,781   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

           

Short-term debt:

           

Of Fannie Mae

  $ 110,852     $ 13      $ 110,865      $ 146,752      $ 30      $ 146,782   

Of consolidated trusts

    4,495              4,495        4,973               4,973   

Long-term debt:

           

Of Fannie Mae

    575,122 (8)     25,370        600,492        585,692 (8)      28,291        613,983   

Of consolidated trusts

    2,493,738 (8)     134,754 (2)      2,628,492        2,452,455 (8)      144,202 (2)      2,596,657   

Derivative liabilities at fair value

    522              522 (9)(10)      916               916 (9)(10) 

Guaranty obligations

    799       3,016        3,815 (9)(10)      811        3,133        3,944 (9)(10) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

    3,185,528       163,153        3,348,681 (7)      3,191,599        175,656        3,367,255 (7) 

Other liabilities

    24,144       (1,139     23,005 (9)(10)      24,456        (1,135 )      23,321 (9)(10)