FannieMae Q3.09.30.2014 10Q

 

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 September 30, 2014
OR
o
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 o
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 o
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 þ
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ
As of September 30, 2014, there were 1,158,082,750 shares of common stock of the registrant outstanding.
 



TABLE OF CONTENTS
 
 
Page
PART I—Financial Information
1
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II—Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

i


MD&A TABLE REFERENCE
Table
Description
Page
1
Single-Family Acquisitions Statistics
5
2
Credit Statistics, Single-Family Guaranty Book of Business
7
3
Summary of Condensed Consolidated Results of Operations
19
4
Analysis of Net Interest Income and Yield
20
5
Rate/Volume Analysis of Changes in Net Interest Income
22
6
Fair Value (Losses) Gains, Net
23
7
Total Loss Reserves
24
8
Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)
25
9
Troubled Debt Restructurings and Nonaccrual Loans
27
10
Credit Loss Performance Metrics
28
11
Single-Family Credit Loss Sensitivity
29
12
Single-Family Business Results
31
13
Multifamily Business Results
34
14
Capital Markets Group Results
36
15
Capital Markets Group’s Mortgage Portfolio Activity
38
16
Capital Markets Group’s Mortgage Portfolio Composition
39
17
Capital Markets Group’s Mortgage Portfolio
40
18
Summary of Condensed Consolidated Balance Sheets
41
19
Summary of Mortgage-Related Securities at Fair Value
42
20
Comparative Measures—GAAP Change in Stockholders’ Equity and Non-GAAP Change in Fair Value of Net Assets
43
21
Supplemental Non-GAAP Consolidated Fair Value Balance Sheets
45
22
Activity in Debt of Fannie Mae
47
23
Outstanding Short-Term Borrowings and Long-Term Debt
49
24
Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year
50
25
Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year
51
26
Cash and Other Investments Portfolio
51
27
Fannie Mae Credit Ratings
52
28
Composition of Mortgage Credit Book of Business
55
29
Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period
57
30
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business
59
31
Delinquency Status of Single-Family Conventional Loans
64
32
Single-Family Serious Delinquency Rates
65
33
Single-Family Conventional Serious Delinquent Loan Concentration Analysis
66
34
Statistics on Single-Family Loan Workouts
67
35
Single-Family Foreclosed Properties
68
36
Single-Family Foreclosed Property Status
69
37
Multifamily Lender Risk-Sharing
70
38
Multifamily Guaranty Book of Business Key Risk Characteristics
70
39
Multifamily Concentration Analysis
71
40
Multifamily Foreclosed Properties
71
41
Mortgage Insurance Coverage
73
42
Estimated Mortgage Insurance Benefit
75

ii


Table
Description
Page
43
Unpaid Principal Balance of Financial Guarantees
75
44
Credit Loss Exposure of Risk Management Derivative Instruments
78
45
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
81
46
Derivative Impact on Interest Rate Risk (50 Basis Points)
82



iii


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 fiduciary 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, 2013 (“2013 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 2013 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 our forward-looking statements due to a variety of factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this report and in “Risk Factors” in our 2013 Form 10-K.
You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2013 Form 10-K.
INTRODUCTION
Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. We serve an essential role in the functioning of the U.S. housing market and are investing in improvements to the U.S. housing finance system. Our public mission is to support liquidity and stability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold, and to increase the supply of affordable housing. Our charter does not permit us to originate loans or lend money directly to consumers in the primary mortgage market.
Fannie Mae provides reliable, large-scale access to affordable mortgage credit and indirectly enables families to buy, refinance or rent homes. We securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. One of our key functions is to evaluate, price and manage the credit risk on the loans and securities that we guarantee. We also purchase mortgage loans and mortgage-related securities for securitization and sale at a later date and, to a declining extent, for our retained mortgage portfolio. We use the term “acquire” in this report to refer to both our securitizations and our purchases of mortgage-related assets. We obtain funds to support our business activities by issuing a variety of debt securities in the domestic and international capital markets, which attracts global capital to the United States housing market.
Our conservatorship has no specified termination date, and we do not know when or how the conservatorship will terminate, whether we will continue to exist following conservatorship, what changes to our business structure will be made during or following the conservatorship, or what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated. In addition, our agreements with Treasury that provide for financial support include covenants that significantly restrict our business activities and provide for dividends to accrue at a rate equal to our net worth less a capital reserve amount, allowing us to retain only a limited and decreasing amount of our net worth. We provide additional information on the conservatorship, the provisions of our agreements with Treasury, and their impact on our business in our 2013 Form 10-K in “Business—Conservatorship and Treasury Agreements” and “Risk Factors.” We discuss the uncertainty of our future in “Executive Summary—Outlook” and “Risk Factors” in this report. We discuss proposals for housing finance reform that could materially affect our business in “Legislative and Regulatory Developments” in this report, in our quarterly report on Form 10-Q for the quarter ended June 30, 2014 (“Second Quarter 2014 Form 10-Q”) and in our quarterly report on Form 10-Q for the quarter ended March 31, 2014 (“First Quarter 2014 Form 10-Q”), and in “Business—Housing Finance Reform” in our 2013 Form 10-K.

1



Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and has made a commitment under a senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions, 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
Our Strategy and Progress
We are focused on:
achieving strong financial performance and strengthening our book of business;
supporting the housing recovery by providing reliable, large-scale access to affordable mortgage credit and helping struggling homeowners; and
helping to build a sustainable housing finance system.
Achieving strong financial performance and strengthening our book of business
Our actions to accomplish these goals have had a positive impact:
Financial Performance. We reported net income of $3.9 billion for the third quarter of 2014, compared with net income of $8.7 billion for the third quarter of 2013. See “Summary of Our Financial Performance” below for an overview of our financial performance for the third quarter and first nine months of 2014, compared with the third quarter and first nine months of 2013. We expect to remain profitable for the foreseeable future. For more information regarding our expectations for our future financial performance, see “Outlook—Financial Results” and “Outlook—Revenues” below.
Dividend Payments to Treasury. With our expected December 2014 dividend payment to Treasury, we will have paid a total of $134.5 billion in dividends to Treasury on our senior preferred stock. The aggregate amount of draws we have received from Treasury to date under the senior preferred stock purchase agreement is $116.1 billion. Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws. See “Outlook—Dividend Obligations to Treasury” below for more information regarding our dividend payments to Treasury.
Book of Business. Changes we have made beginning in 2008 to strengthen our underwriting and eligibility standards have improved the credit quality of our single-family guaranty book of business. Single-family loans we have acquired since the beginning of 2009 (referred to as our “new single-family book of business”) comprised 80% of our single-family guaranty book of business as of September 30, 2014, while the single-family loans we acquired prior to 2009 (referred to as our “legacy book of business”) comprised 20% of our single-family guaranty book of business. As described below in “Strengthening Our Book of Business—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, which has decreased each quarter since the first quarter of 2010, was 1.96% as of September 30, 2014, compared with 2.38% as of December 31, 2013. See “Improving the Credit Performance of our Book of Business” below for additional information on the credit performance of the mortgage loans in our single-family guaranty book of business for each of the last seven quarters, and for a description of our strategies for reducing credit losses.
Although we have improved our financial performance and the quality of our book of business since entering into conservatorship in 2008, we remain under conservatorship and subject to the restrictions of the senior preferred stock purchase agreement with Treasury. As a result of the senior preferred stock purchase agreement and directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zero by 2018), rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. See “Business—Conservatorship and Treasury Agreements” in our 2013 Form 10-K for more information regarding our conservatorship and our senior preferred stock purchase agreement with Treasury. In addition, the future of our company remains uncertain. Congress continues to consider options for reform of the housing finance system, including the GSEs, and we cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. See “Legislative and Regulatory Developments” in this report, in our Second Quarter 2014 Form 10-Q and in our First Quarter 2014 Form 10-Q,

2



and “Business—Housing Finance Reform” in our 2013 Form 10-K for information on recent proposals for housing finance reform.
Supporting the housing recovery by providing reliable, large-scale access to affordable mortgage credit and helping struggling homeowners
We continued our efforts to support the housing recovery in the third quarter of 2014. We remained the largest single issuer of mortgage-related securities in the secondary market during the third quarter of 2014 and a continuous source of liquidity in the multifamily market. We also continued to help struggling homeowners. In the third quarter of 2014, we provided approximately 39,000 loan workouts to help homeowners stay in their homes or otherwise avoid foreclosure. We discuss our activities to support the housing and mortgage markets in “Contributions to the Housing and Mortgage Markets” below.
Helping to build a sustainable housing finance system
We also continued our efforts to help lay the foundation for a safer, transparent and sustainable housing finance system, including pursuing the strategic goals identified by our conservator, as well as investing in improvements to our business and infrastructure. We discuss these efforts, as well as FHFA’s 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac and FHFA’s related 2014 conservatorship scorecard, in our Second Quarter 2014 Form 10-Q in “MD&A—Executive Summary—Helping to Build a Sustainable Housing Finance System” and in “MD&A—Legislative and Regulatory Developments—Housing Finance Reform and the Role of the GSEs—Conservator Developments.”
Summary of Our Financial Performance
Comprehensive Income
Quarterly Results
We recognized comprehensive income of $4.0 billion in the third quarter of 2014, consisting of net income of $3.9 billion and other comprehensive income of $95 million. In comparison, we recognized comprehensive income of $8.6 billion in the third quarter of 2013, consisting of net income of $8.7 billion and other comprehensive loss of $134 million. The decrease in our comprehensive income was primarily due to a decline in credit-related income and a shift to fair value losses from fair value gains.
The decline in credit-related income was mainly attributable to home prices increasing at a slower pace in the third quarter of 2014 as compared with the third quarter of 2013. In addition, the third quarter of 2013 benefited from foreclosed property income primarily due to the recognition of income related to our compensatory fee agreement with Bank of America. We recognized fair value losses in the third quarter of 2014 primarily due to increases in shorter-term swap rates. We recognized fair value gains in the third quarter of 2013 as longer-term swap rates increased.
Year-to-Date Results
We recognized comprehensive income of $13.4 billion in the first nine months of 2014, consisting of net income of $12.9 billion and other comprehensive income of $512 million. In comparison, we recognized comprehensive income of $78.2 billion in the first nine months of 2013, consisting of net income of $77.5 billion and other comprehensive income of $686 million. The decrease in comprehensive income was primarily driven by a provision for federal income taxes in the first nine months of 2014 compared with a benefit for federal income taxes in the first nine months of 2013 primarily due to the release of our valuation allowance against our deferred tax assets in the first quarter of 2013. For a discussion of the release of our valuation allowance against our deferred tax assets in 2013, see “Critical Accounting Policies and Estimates—Deferred Tax Assets” in our 2013 Form 10-K.
Our pre-tax income was $19.0 billion in the first nine months of 2014 compared with $30.3 billion in the first nine months of 2013. The decrease in our pre-tax income was primarily due to a decrease in credit-related income and a shift to fair value losses from fair value gains.
The decline in credit-related income was primarily due to the same factors that impacted the third quarters of 2014 and 2013, as discussed above. We recognized fair value losses in the first nine months of 2014 primarily due to declines in longer-term swap rates. We recognized fair value gains in the first nine months of 2013 as longer-term swap rates increased.
We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in periodic fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and securities. The estimated fair value of our derivatives and securities may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage spreads and implied volatility, as well as activity related to these financial instruments. While the estimated fair value of our

3



derivatives that serve to mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements. In addition, our credit-related income or expense can vary substantially from period to period primarily due to changes in home prices, borrower payment behavior and economic conditions.
See “Consolidated Results of Operations” for more information on our results.
Net Worth
Our net worth decreased to $6.4 billion as of September 30, 2014 from $9.6 billion as of December 31, 2013 primarily due to our payments to Treasury of $16.6 billion in senior preferred stock dividends, partially offset by our comprehensive income of $13.4 billion during the first nine months of 2014. Our expected dividend payment of $4.0 billion for the fourth quarter of 2014 is calculated based on our net worth of $6.4 billion as of September 30, 2014 less the applicable capital reserve amount of $2.4 billion.
Strengthening Our Book of Business
New Book of Business
Beginning in 2008, we took actions to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. These actions have improved the credit quality of our book of business. Given their strong credit risk profile and based on their performance so far, we expect that in the aggregate the loans we have acquired since January 1, 2009, which comprised 80% of our single-family guaranty book of business as of September 30, 2014, will be profitable over their lifetime, by which we mean that we expect our guaranty 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. 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 2013 Form 10-K for a discussion of factors that could cause our expectations regarding the performance of the loans in our single-family book of business to change. For information on certain credit characteristics of our new single-family book of business as compared with our legacy book of business, see “Table 29: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period.” For more information on the credit risk profile of our single-family guaranty book of business, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “Table 30: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” in that section.
Our new single-family book of business includes loans that are refinancings of loans that were in our legacy book of business, including loans acquired under our Refi PlusTM initiative, which has provided refinancing flexibility to eligible Fannie Mae borrowers since 2009. Our Refi Plus initiative includes loans acquired under the Obama Administration’s Home Affordable Refinance Program (“HARP®”). As of September 30, 2014, 61% of the loans in our single-family guaranty book of business were non-Refi Plus loans acquired since the beginning of 2009, 19% were Refi Plus loans, and the remaining 20% were acquired prior to 2009. Information about the impact of HARP and Refi Plus on the credit characteristics of our new single-family book of business appears in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Credit Profile Summary—HARP and Refi Plus Loans” and in “Table 29: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period.”
Recently Acquired Single-Family Loans
Table 1 below displays information regarding our average charged guaranty fee on and specified risk characteristics of the single-family loans we acquired in each of the last seven quarters. Table 1 also displays the volume of our single-family Fannie Mae MBS issuances for these periods, which is indicative of the volume of single-family loans we acquired for these periods.

4



Table 1: Single-Family Acquisitions Statistics
 
 
2014
 
2013
 
 
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
Single-family average charged guaranty fee on new acquisitions (in basis points)(1)(2)
 
63.5

 
62.6

 
63.0

 
61.2

 
58.7

 
56.9

 
54.4

 
Single-family Fannie Mae MBS issuances (in millions)(3)
 
$
105,563

 
$
84,096

 
$
76,972

 
$
117,809

 
$
186,459

 
$
206,978

 
$
221,865

 
Select risk characteristics of single-family conventional acquisitions:(4)
 
 
 


 

 


 

 


 


 
Weighted average FICO credit score at origination
 
744

 
744

 
741

 
745

 
750

 
754

 
757

 
Weighted average original loan-to-value ratio(5)
 
77

%
77

%
77

%
77

%
76

%
75

%
75

%
Original loan-to-value ratio over 80%(5)(6)
 
32

%
32

%
31

%
33

%
31

%
29

%
26

%
Loan purpose:
 
 
 


 

 

 

 


 

 
Purchase
 
57

%
54

%
45

%
49

%
38

%
25

%
17

%
Refinance
 
43

%
46

%
55

%
51

%
62

%
75

%
83

%
__________
(1) 
Includes the impact of a 10 basis point guaranty fee increase implemented pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 (the “TCCA”), the incremental revenue from which must be remitted to Treasury. The resulting revenue is included in guaranty fee income and the expense is recognized as “TCCA fees.”
(2) 
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.
(3)
Consists of unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the period.
(4) 
Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition. Single-family business volume refers to both single-family mortgage loans we purchase for our retained mortgage portfolio and single-family mortgage loans we guarantee.
(5) 
The original loan-to-value (“LTV”) ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available.
(6) 
We purchase loans with original LTV ratios above 80% as part of our mission to serve the primary mortgage market and provide liquidity to the housing finance system. Except as permitted under HARP, our charter generally requires primary mortgage insurance or other credit enhancement for loans that we acquire that have an LTV ratio over 80%.
The increase in our average charged guaranty fee on newly acquired single-family loans in the third quarter of 2014 as compared with the third quarter of 2013 was driven primarily by an increase in loan level price adjustments charged on our acquisitions in the third quarter of 2014, as these acquisitions included a higher proportion of loans with higher loan-to-value (“LTV”) ratios and a higher proportion of loans with lower FICO credit scores. Loan level price adjustments refer to one-time cash fees that we charge at the time we initially acquire a loan based on the credit characteristics of the loan. See “Legislative and Regulatory Developments—Potential Changes to Our Single-Family Guaranty Fee Pricing” in our Second Quarter 2014 Form 10-Q for information on potential future changes to our guaranty fee pricing.
The increase in our acquisitions of loans with higher LTV ratios in the third quarter of 2014 as compared with the third quarter of 2013 was primarily due to a decline in the percentage of our acquisitions consisting of refinance loans and a corresponding increase in the percentage of our acquisitions consisting of home purchase loans, which typically have higher LTV ratios than non-HARP refinance loans. In the third quarter of 2014, refinancings comprised approximately 43% of our single-family conventional business volume, compared with approximately 62% in the third quarter of 2013. In addition, we experienced a decline in the average FICO credit scores of our acquisitions in the third quarter of 2014 as compared with the third quarter of 2013. Despite this shift in the credit risk profile of our acquisitions, the single-family loans we acquired in the third quarter of 2014 continued to have a strong credit profile, with a weighted average original LTV ratio of 77% and a weighted average FICO credit score of 744. For more information on the credit risk profile of our single-family conventional

5



loan acquisitions in the third quarter of 2014, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “Table 30: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” in that section.
We expect refinancings to constitute a smaller portion of our single-family business volume in 2014 than in 2013. As a result, we expect to acquire a higher proportion of loans with higher LTV ratios in 2014 than in 2013. Overall mortgage originations also declined significantly in the first nine months of 2014 as compared with the first nine months of 2013, and we expect mortgage originations in 2014 to be lower overall than in 2013.
Pursuant to FHFA’s 2014 conservatorship scorecard and our statutory mission, we are continuing to work to increase access to mortgage credit for creditworthy borrowers, consistent with the full extent of our applicable credit requirements and risk management practices. As part of this effort, we are encouraging lenders to originate loans to the full extent of our applicable credit requirements. Some actions we are taking in this regard include: providing additional clarity regarding seller and servicer representations and warranties and remedies for poor performance; making new quality control tools available to lenders, such as Collateral UnderwriterTM; conducting increased outreach to lenders and other industry stakeholders to increase awareness of our available products and programs; and conducting consumer research to provide industry partners with information to support their efforts to reach underserved market segments. We also plan to offer a 97% LTV ratio product to all customers in 2015. To the extent we are able to encourage lenders to increase access to mortgage credit, we may acquire a greater number of single-family loans with higher risk characteristics than we have acquired in recent periods; however, we believe our single-family acquisitions will continue to have a strong overall credit risk profile given our current underwriting and eligibility standards and product design.
Whether the loans we acquire in the future will exhibit an overall credit profile and performance 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, the Federal Housing Administration (“FHA”) and the Department of Veterans Affairs (“VA”), the percentage of loan originations representing refinancings, changes in interest rates, our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers, government policy, market and competitive conditions, and the volume and characteristics of HARP loans we acquire in the future. In addition, if our lender customers retain more of the higher-quality loans they originate, it could negatively affect the credit risk profile of our new single-family acquisitions.
Improving the Credit Performance of our Book of Business
We continue our efforts to improve the credit performance of our book of business. In addition to acquiring loans with strong credit profiles, as we discuss above in “Strengthening Our Book of Business,” we continue to execute on our strategies for reducing credit losses, such as helping eligible Fannie Mae borrowers with high LTV ratio loans refinance into more sustainable loans through HARP, offering borrowers loan modifications that can significantly reduce their monthly payments, pursuing foreclosure alternatives and managing our real estate owned (“REO”) inventory to minimize costs and maximize sales proceeds. As we work to reduce credit losses, we also seek to assist struggling homeowners, help stabilize communities and support the housing market.
Table 2 presents information for each of the last seven quarters about the credit performance of mortgage loans in our single-family guaranty book of business and our workouts. The term “workouts” refers to both home retention solutions (loan modifications and other solutions that enable a borrower to stay in his or her home) and foreclosure alternatives (short sales and deeds-in-lieu of foreclosure). The workout information in Table 2 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.

6



Table 2: Credit Statistics, Single-Family Guaranty Book of Business(1)
  
2014
 
2013
 
  
Q3 YTD
 
Q3
 
Q2
 
Q1
 
Full
Year
 
Q4
 
Q3
 
Q2
 
Q1
 
  
(Dollars in millions)
 
As of the end of each period: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Serious delinquency rate(2)
1.96

%
1.96

%
2.05

%
2.19

%
2.38

%
2.38

%
2.55

%
2.77

%
3.02

%
Seriously delinquent loan count
340,897

 
340,897

 
357,267

 
383,810

 
418,837

 
418,837

 
447,840

 
483,253

 
527,529

 
Troubled debt restructurings on accrual status(3)
$
144,802

 
$
144,802

 
$
144,911

 
$
144,077

 
$
140,512

 
$
140,512

 
$
138,165

 
$
136,558

 
$
134,325

 
Nonaccrual loans(4)
66,673

 
66,673

 
69,550

 
73,972

 
81,355

 
81,355

 
86,848

 
93,883

 
102,602

 
Foreclosed property inventory:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties(5)
92,386

 
92,386

 
96,796

 
102,398

 
103,229

 
103,229

 
100,941

 
96,920

 
101,449

 
Carrying value
$
10,209

 
$
10,209

 
$
10,347

 
$
10,492

 
$
10,334

 
$
10,334

 
$
10,036

 
$
9,075

 
$
9,263

 
Combined loss reserves(6)
37,854

 
37,854

 
39,984

 
42,919

 
44,705

 
44,705

 
45,608

 
49,930

 
56,626

 
Total loss reserves(7)
39,330

 
39,330

 
41,657

 
44,760

 
46,689

 
46,689

 
47,664

 
52,141

 
59,114

 
During the period: 
 
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreclosed property (number of properties): 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisitions(5)
91,372

 
27,798

 
31,678

 
31,896

 
144,384

 
32,208

 
37,353

 
36,106

 
38,717

 
Dispositions
(102,215
)
 
(32,208
)
 
(37,280
)
 
(32,727
)
 
(146,821
)
 
(29,920
)
 
(33,332
)
 
(40,635
)
 
(42,934
)
 
Credit-related income(8)
$
3,531

 
$
748

 
$
1,781

 
$
1,002

 
$
11,205

 
$
848

 
$
3,642

 
$
5,681

 
$
1,034

 
Credit losses(9)
4,362

 
1,738

 
1,497

 
1,127

 
4,452

 
325

 
1,083

 
1,541

 
1,503

 
REO net sales prices to unpaid principal balance(10)
69

%
69

%
69

%
68

%
67

%
68

%
68

%
68

%
65

%
Short sales net sales price to unpaid principal balance(11)
71

%
72

%
72

%
71

%
67

%
70

%
68

%
67

%
64

%
Loan workout activity (number of loans): 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home retention loan workouts(12)
102,522

 
30,584

 
33,639

 
38,299

 
172,029

 
41,053

 
39,559

 
43,782

 
47,635

 
Short sales and deeds-in-lieu of foreclosure
27,635

 
7,992

 
9,516

 
10,127

 
61,949

 
13,021

 
15,092

 
17,710

 
16,126

 
Total loan workouts
130,157

 
38,576

 
43,155

 
48,426

 
233,978

 
54,074

 
54,651

 
61,492

 
63,761

 
Loan workouts as a percentage of the average balance of delinquent loans in our guaranty book of business(13)
24.09

%
22.46

%
24.69

%
25.70

%
26.01

%
26.59

%
25.32

%
26.93

%
25.88

%
__________
(1) 
Our single-family guaranty book of business consists of (a) single-family mortgage loans of Fannie Mae, (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 retained mortgage portfolio for which we do not provide a guaranty.
(2) 
Calculated based on the number of single-family conventional loans that are 90 days or more past due or in the foreclosure process, divided by the number of loans in our single-family conventional guaranty book of business. We include 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) 
A troubled debt restructuring (“TDR”) is a modification to the contractual terms of a loan in which a concession is granted to a borrower experiencing financial difficulty.

7



(4) 
We generally classify single-family loans as nonaccrual when the payment of principal or interest on the loan is two or more months past due according to its contractual terms. Excludes off-balance sheet loans in unconsolidated Fannie Mae MBS trusts that would meet our criteria for nonaccrual status if the loans had been on-balance sheet.
(5) 
Includes acquisitions through deeds-in-lieu of foreclosure. Also includes held for use properties, which are reported in our condensed consolidated balance sheets as a component of “Other assets.”
(6) 
Consists of the allowance for loan losses for single-family loans recognized in our condensed consolidated balance sheets and the reserve for guaranty losses related to both loans backing Fannie Mae MBS that we do not consolidate in our condensed consolidated balance sheets and 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 Income—Benefit for Credit Losses.”
(7) 
Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable and (c) allowance for preforeclosure property taxes and insurance receivables.
(8) 
Consists of (a) the benefit for credit losses and (b) foreclosed property (expense) income.
(9) 
Consists of (a) charge-offs, net of recoveries and (b) foreclosed property (expense) income, adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts.
(10) 
Calculated as the amount of sale proceeds received on disposition of REO properties during the respective period, excluding those subject to repurchase requests made to our sellers or servicers, divided by the aggregate unpaid principal balance of the related loans at the time of foreclosure. Net sales price represents the contract sales price less selling costs for the property and other charges paid by the seller at closing.
(11) 
Calculated as the amount of sale proceeds received on properties sold in short sale transactions during the respective period divided by the aggregate unpaid principal balance of the related loans. Net sales price represents the contract sales price less the selling costs for the property and other charges paid by the seller at the closing, including borrower relocation incentive payments and subordinate lien(s) negotiated payoffs.
(12) 
Consists of (a) modifications, which do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as TDRs, or repayment plans or forbearances that have been initiated but not completed and (b) repayment plans and forbearances completed. See “Table 34: 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.
(13) 
Calculated based on annualized problem loan workouts during the period as a percentage of the average balance of delinquent loans in our single-family guaranty book of business.
We provide additional information on our credit-related expense or income in “Consolidated Results of Operations—Credit-Related Income” and on the credit performance of mortgage loans in our single-family book of business in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
We provide more information on our efforts to reduce our credit losses in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” and “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” in both this report and our 2013 Form 10-K. See also “Risk Factors” in our 2013 Form 10-K, where we describe factors that may adversely affect the success of our efforts, including our reliance on third parties to service our loans, conditions in the foreclosure environment, and risks relating to our mortgage insurer counterparties.
Contributions to the Housing and Mortgage Markets
Liquidity and Support Activities
As the largest provider of residential mortgage credit in the United States, we indirectly enable families to buy, refinance or rent homes. During the third quarter of 2014, we continued to provide critical 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 $123 billion in liquidity to the mortgage market in the third quarter of 2014 through our purchases and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 228,000 mortgage refinancings and approximately 265,000 home purchases, and provided financing for approximately 124,000 units of multifamily housing.
Our role in the market enables borrowers to have reliable access to affordable mortgage credit, including a variety of conforming mortgage products such as the prepayable 30-year fixed-rate mortgage that protects homeowners from fluctuations in interest rates.

8



We provided approximately 39,000 loan workouts in the third quarter of 2014 to help homeowners stay in their homes or otherwise avoid foreclosure. Our loan workout efforts have helped to stabilize neighborhoods, home prices and the housing market.
We helped borrowers refinance loans, including through our Refi Plus initiative. We acquired over 68,000 Refi Plus loans in the third quarter of 2014. Refinancings delivered to us through Refi Plus in the third quarter of 2014 reduced borrowers’ monthly mortgage payments by an average of $159. 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 in the third quarter of 2014 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 2013 Form 10-K in “Business—Business Segments—Capital Markets.”
2014 Market Share
We remained the largest single issuer of mortgage-related securities in the secondary market during the third quarter of 2014, with an estimated market share of new single-family mortgage-related securities issuances of 38%, compared with 39% in the second quarter of 2014 and 48% in the third quarter of 2013. See “Outlook—Revenues” for a discussion of the impact on our market share of the decline in originations that are refinancings.
We remained a continuous source of liquidity in the multifamily market in the third quarter and first nine months of 2014. We owned or guaranteed approximately 19% of the outstanding debt on multifamily properties as of June 30, 2014 (the latest date for which information is available).
Housing and Mortgage Market and Economic Conditions
Economic growth slowed in the third quarter of 2014 compared with the second quarter of 2014. According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 3.5% on an annualized basis in the third quarter of 2014, compared with an increase of 4.6% in the second quarter of 2014. The overall economy gained an estimated 671,000 non-farm jobs in the third quarter of 2014. According to the U.S. Bureau of Labor Statistics, over the 12 months ending in September 2014, the economy created an estimated 2.7 million non-farm jobs. The unemployment rate was 5.9% in September 2014, compared with 6.1% in June 2014.
According to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $9.86 trillion of single-family debt outstanding, was estimated to be approximately $10.81 trillion as of June 30, 2014 (the latest date for which information is available), compared with $10.80 trillion as of March 31, 2014.
Housing activity increased during the third quarter of 2014 as compared with the second quarter of 2014. Total existing home sales averaged 5.1 million units annualized in the third quarter of 2014, a 5.2% increase from the second quarter of 2014, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 10% of existing home sales in September 2014, compared with 11% in June 2014 and 14% in September 2013. According to the U.S. Census Bureau, new single-family home sales increased during the third quarter of 2014, averaging an annualized rate of 446,000 units, a 4.5% increase from the second quarter of 2014.
The number of months’ supply, or the inventory/sales ratio, of available existing homes and of new homes each decreased in the third quarter of 2014. According to the U.S. Census Bureau, the number of months’ supply of new homes was 5.3 months as of September 30, 2014, compared with 5.8 months as of June 30, 2014. According to data from the National Association of REALTORS®, the months’ supply of existing unsold homes was 5.3 months as of September 30, 2014, compared with a 5.5 months’ supply as of June 30, 2014.
The overall mortgage market serious delinquency rate, which has trended down since peaking in the fourth quarter of 2009, remained historically high at 4.8% as of June 30, 2014 (the latest date for which information is available), according to the Mortgage Bankers Association National Delinquency Survey, compared with 5.0% as of March 31, 2014. We provide information about Fannie Mae’s serious delinquency rate, which also decreased in the second quarter of 2014, in “Improving the Credit Performance of our Book of Business.”
Based on our home price index, we estimate that home prices on a national basis increased by 1.2% in the third quarter of 2014 and by 5.3% in the first nine months of 2014, following increases of 8.2% in 2013 and 4.1% in 2012. Despite the recent

9



increases in home prices, we estimate that, through September 30, 2014, home prices on a national basis remained 9.5% below 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.
Many homeowners continue to have “negative equity” in their homes as a result of declines in home prices since 2006, which means their principal mortgage balance exceeds the current market value of their home. This increases the likelihood that borrowers will abandon their mortgage obligations and that the loans will become delinquent and proceed to foreclosure. According to CoreLogic, Inc. the number of residential properties with mortgages in a negative equity position in the second quarter of 2014 was approximately 5.3 million, down from 6.3 million in the first quarter of 2014 and from 7.2 million in the second quarter of 2013. The percentage of properties with mortgages in a negative equity position in the second quarter of 2014 was 10.7%, down from 12.7% in the first quarter of 2014 and from 14.9% in the second quarter of 2013.
Thirty-year mortgage rates ended the quarter at 4.20% for the week of September 25, 2014, up from 4.14% for the week of June 26, 2014, according to Freddie Mac.
During the third quarter of 2014, the multifamily sector continued to exhibit solid fundamentals, according to preliminary third-party data, with flat vacancy levels and increasing rent growth. The national multifamily vacancy rate for institutional investment-type apartment properties remained at an estimated 4.75% as of September 30, 2014, unchanged from June 30, 2014, and compared with 5.10% as of September 30, 2013.
National asking rents increased by an estimated 1.00% during the third quarter of 2014, compared with an increase of 0.75% during the second quarter of 2014. Continued demand for multifamily rental units was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 37,000 units during the third quarter of 2014, according to preliminary data from Reis, Inc., compared with approximately 35,000 units during the second quarter of 2014.
As a result of the continued demand for multifamily rental units over the past few years, there has been an increase in the amount of new multifamily construction development nationally. Approximately 264,000 new multifamily units are expected to be completed this year. The bulk of this new supply is concentrated in a limited number of metropolitan areas. As a result, multifamily fundamentals could be impacted in certain localized areas, producing a temporary slowdown in net absorption rates, occupancy levels and effective rents in those areas during the remainder of 2014 and into early 2015.
Outlook
Uncertainty Regarding our Future Status. We expect continued significant uncertainty regarding the future of our company and the housing finance system, 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, what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to exist following conservatorship.
We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. See “Legislative and Regulatory Developments” in this report, in our Second Quarter 2014 Form 10‑Q and in our First Quarter 2014 Form 10-Q, and “Business—Housing Finance Reform” in our 2013 Form 10-K, for discussion of proposals for reform of the housing finance system, including the GSEs, that could materially affect our business, including proposed federal legislation that, among other things, would require the wind down of Fannie Mae and Freddie Mac. See “Risk Factors” in both this report and in our 2013 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.
Financial Results. Our financial results continued to be strong in the third quarter of 2014, with net income of $3.9 billion. We expect to remain profitable for the foreseeable future. While we expect our annual net income to remain strong over the next few years, we expect our annual net income to be substantially lower than our net income for 2013. We discuss the reasons for this expectation, and note our expectation that certain factors that contributed to a large portion of our 2013 net income will not contribute as significantly or at all to our earnings in 2014 or future years, in “Business—Executive Summary—Outlook—Financial Results” in our 2013 Form 10-K. Our earnings will be affected by a number of factors, including: changes in interest rates; changes in home prices; our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Some of these factors, such as changes in interest rates or home prices, could result in significant variability in our earnings from quarter to quarter or year to year. Our expectations for our future financial results do not take into account the impact on our business of potential future legislative or regulatory changes, which could have a material impact on our financial results, particularly the enactment of housing finance reform legislation as noted in “Uncertainty Regarding our Future Status” above.

10



Revenues. We currently have two primary sources of revenues: (1) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets; and (2) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties. Our “retained mortgage portfolio” refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties). Historically, we have generated the majority of our revenues from the difference between the interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. As we discuss in our 2013 Form 10-K in “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury Agreements,” we are required to reduce the size of our retained mortgage portfolio each year until we hold no more than $250 billion in mortgage assets by the end of 2018. In addition, as described in “Legislative and Regulatory Developments—Housing Finance Reform and the Role of the GSEs—Conservator Developments,” our conservator recently requested that we further cap our retained mortgage portfolio each year at 90% of the annual limit under our senior preferred stock purchase agreement with Treasury.
As a result of both the shrinking of our retained mortgage portfolio and the impact of guaranty fee increases, an increasing portion of our revenues in recent years has been derived from guaranty fees rather than from interest income earned on our retained mortgage portfolio assets. We recognize almost all of our guaranty fee revenue in net interest income in our condensed consolidated statement of operations and comprehensive income due to the consolidation of the substantial majority of our MBS trusts on our condensed consolidated balance sheet. The percentage of our net interest income derived from guaranty fees on loans underlying our Fannie Mae MBS has increased in recent periods. We estimate that approximately half of our net interest income for the first nine months of 2014 was derived from guaranty fees on loans underlying our Fannie Mae MBS, compared with approximately one-third of our net interest income for the first nine months of 2013. We expect that guaranty fees will continue to account for an increasing portion of our revenues.
The decrease in the balance of mortgage assets held in our retained mortgage portfolio contributed to a decline in our net interest income and revenues in the third quarter of 2014 as compared with the third quarter of 2013. We expect continued decreases in the size of our retained mortgage portfolio, which will continue to negatively impact our net interest income and revenues; however, we also expect increases in our guaranty fee revenues will at least partially offset the negative impact of the decline in our retained mortgage portfolio. We expect our guaranty fee revenues to increase over the long term, as loans with lower guaranty fees liquidate from our book of business and are replaced with new loans with higher guaranty fees. The extent to which the positive impact of increased guaranty fee revenues will offset the negative impact of the decline in the size of our retained mortgage portfolio will depend on many factors, including: changes to guaranty fee pricing we may make in the future; the size, composition and quality of our guaranty book of business; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio, including the pace at which we are required by our conservator to reduce the size of our portfolio and the types of assets we are required to sell; economic and housing market conditions, including changes in interest rates; our market share; and legislative and regulatory changes.
Although our single-family acquisition volume declined significantly in the first nine months of 2014 as compared with the first nine months of 2013, liquidations of loans from our single-family guaranty book of business also declined. Accordingly, the size of our single-family guaranty book of business remained relatively flat during the first nine months of 2014, and our single-family guaranty fee revenues continued to increase. The decline in our single-family acquisition volume reflects a decrease in originations of single-family mortgages that are refinancings. The decrease in refinancings as a percentage of originations has reduced our market share. See “Contributions to the Housing and Mortgage Markets—2014 Market Share” above for information on our market share and “Overall Market Conditions” below for information on our expectations for refinancing originations.
We expect our single-family acquisition volumes this year to continue to remain lower than prior year volumes; however, we also expect liquidations of loans from our single-family guaranty book of business to remain lower. As a result, we do not expect these lower volumes to have a material adverse effect on the size of our single-family guaranty book of business or on our single-family guaranty fee revenues in the near term. However, if the current reduction in our acquisition volume accelerates or remains ongoing for a significant period of time or if the rate of liquidations of loans from our single-family guaranty book increases without a corresponding increase in our acquisitions, it could adversely affect the size of our single-family guaranty book of business and our single-family guaranty fee revenues over the long term.
Dividend Obligations to Treasury. We expect to retain only a limited amount of any future net worth because we are required by the dividend provisions of the senior preferred stock and quarterly directives from our conservator to pay Treasury each quarter the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $2.4 billion for each quarter of 2014 and then decreases by $600 million annually until it reaches zero in 2018.

11



From 2009 through the first quarter of 2012, we received a total of $116.1 billion from Treasury under the senior preferred stock purchase agreement. This funding provided us with the capital and liquidity needed to fulfill our mission of providing liquidity and support to the nation’s housing finance markets and to avoid a trigger of mandatory receivership under the Federal Housing Finance Regulatory Reform Act of 2008 (the “2008 Reform Act”). In addition, a portion of the $116.1 billion we received from Treasury was drawn to pay dividends to Treasury because, prior to 2013, our dividend payments on the senior preferred stock accrued at an annual rate of 10%, and we were directed by our conservator to pay these dividends to Treasury each quarter even when we did not have sufficient income to pay the dividend. We have not received funds from Treasury under the agreement since the first quarter of 2012. From 2008 through the third quarter of 2014, we paid a total of $130.5 billion in dividends to Treasury on the senior preferred stock. Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Accordingly, the current aggregate liquidation preference of the senior preferred stock is $117.1 billion, due to the initial $1.0 billion liquidation preference of the senior preferred stock (for which we did not receive cash proceeds) and the $116.1 billion we have drawn from Treasury.
The Director of FHFA directs us to make dividend payments on the senior preferred stock on a quarterly basis. In December 2014, we expect to pay Treasury additional senior preferred stock dividends of $4.0 billion for the fourth quarter of 2014.
Overall Market Conditions. We expect that single-family mortgage loan serious delinquency and severity rates will continue their downward trend, but at a slower pace than in recent years. We expect that single-family serious delinquency and severity rates will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans with high mark-to-market LTV ratios originated prior to 2009 to work their way through the foreclosure process. Despite steady demand and stable fundamentals at the national level, the multifamily sector may continue to exhibit below average fundamentals in certain local markets and with certain properties.
The increase in mortgage rates since the first half of 2013 has resulted in a decline in single-family mortgage originations, driven by a decline in refinancings. We forecast that total originations in the U.S. single-family mortgage market in 2014 will decrease from 2013 levels by approximately 41%, from an estimated $1.87 trillion in 2013 to $1.10 trillion in 2014, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $1.12 trillion in 2013 to $425.6 billion in 2014. We forecast that the amount of total single-family mortgage debt outstanding will remain relatively flat in 2014, ending the year at an estimated $9.91 trillion as of December 31, 2014, compared with $9.89 trillion as of December 31, 2013.
In recent years, the Federal Reserve has purchased a significant amount of mortgage-backed securities issued by us, Freddie Mac and Ginnie Mae. The Federal Reserve began to taper these purchases in January 2014. In October 2014, the Federal Reserve announced that it will conclude its asset purchase program by the end of October; however, it stated that it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. Any change in the Federal Reserve’s policy towards the reinvestment of principal payments of mortgage-backed securities, or possible future sales of mortgage-backed securities by the Federal Reserve, could result in increases in mortgage interest rates and adversely affect our single-family business volume, which could adversely affect our results of operations and financial condition. See “Risk Factors” in our 2013 Form 10-K for a description of the potential risks to our business as a result of increases in mortgage interest rates.
Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 1.2% in the third quarter of 2014 and by 5.3% in the first nine months of 2014. We expect that home prices on a national basis will be relatively flat in the fourth quarter of 2014. Future home price changes may be very different from our expectations as a result of significant inherent uncertainty in the current market environment, including uncertainty about the effect of recent and future changes in mortgage rates; actions the federal government has taken and may take with respect to fiscal policies, mortgage finance programs and policies, and housing finance reform; the Federal Reserve’s purchases and sales of mortgage-backed securities; the impact of those actions on and changes generally in unemployment and the general economic and interest rate environment; and the impact on the U.S. economy of global economic and political conditions. We also expect significant regional variation in the timing and rate of home price growth.
Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. We currently realize losses on loans, through our charge-offs, at the time of foreclosure or when we accept short sales or deeds-in-lieu of foreclosure. Our credit losses were $1.7 billion in the third quarter of 2014, compared with $1.1 billion in the third quarter of 2013, and $4.3 billion in the first nine months of 2014, compared with $4.2 billion in the first nine months of 2013. Although our credit losses have declined in recent years, we expect our credit losses in 2014 and 2015 will be higher than in 2013. The amounts we recognized in 2013 pursuant to a number of repurchase and compensatory fee resolution agreements reduced our 2013 credit losses from what they otherwise would have been. Moreover, we expect our approach to implementing the charge-off provisions of FHFA’s Advisory Bulletin AB 2012-02 in 2015 will increase our credit losses for

12



2015 from what they otherwise would be. We expect our credit losses to resume their downward trend beginning in 2016. See “Legislative and Regulatory Developments—FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans” for further information about this Advisory Bulletin.
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 were $39.7 billion as of September 30, 2014, down from $47.3 billion as of December 31, 2013. We expect the overall decline in our loss reserves in 2014 will be lower than the decline in 2013. We expect our approach to charging off the population of loans subject to FHFA’s Advisory Bulletin AB 2012-02 in the first quarter of 2015 will contribute to a decline in our loss reserves during the period, as the corresponding allowance is removed on the loans that are subject to charge off. Although our loss reserves have declined substantially from their peak and are expected to decline further, we expect our loss reserves will remain elevated relative to the levels experienced prior to the 2008 housing crisis 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 our reserves will continue to reflect these concessions until the loans are fully repaid or default.
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 regarding our future performance, including estimates and expectations regarding our future financial results and profitability, the level and sources of our revenues, our future dividend payments to Treasury, the profitability and performance of single-family loans we have acquired, the level and credit characteristics of our future acquisitions, future liquidations of loans from our single-family guaranty book of business, the size of our single-family guaranty book of business in the future, our future credit losses and our future loss reserves. We also present a number of estimates and expectations in this executive summary regarding future housing market conditions, including expectations regarding future delinquency and severity rates, future mortgage originations, future refinancings, future single-family mortgage debt outstanding, future home prices and future conditions in the multifamily market. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. Our future estimates of our performance and housing market conditions, as well as the actual results, 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 and housing market variables; our future guaranty fee pricing and the impact of that pricing on our competitive environment; our future serious delinquency rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; 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 legislative or regulatory changes that have a significant impact on our business, such as the enactment of housing finance reform legislation; actions we may be required to take by FHFA, as our conservator or as our regulator, such as changes in the type of business we do; future updates to our models relating to our loss reserves, including the assumptions used by these models; future changes to our accounting policies; 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 loans; the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies; whether our counterparties meet their obligations in full; resolution or settlement agreements we may enter into with our counterparties; changes in the fiscal and monetary policies of the Federal Reserve, including any change in the Federal Reserve’s policy towards the reinvestment of principal payments of mortgage-backed securities or any future sales of such securities; changes in the fair value of our assets and liabilities; impairments of our assets; changes in generally accepted accounting principles (“GAAP”); credit availability; global political risks; natural disasters, terrorist attacks, pandemics or other major disruptive events; information security breaches; and other factors, including those discussed in “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report and in our 2013 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.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The information in this section updates and supplements information regarding legislative and regulatory developments set forth in “Business—Housing Finance Reform” and “Business—Our Charter and Regulation of Our Activities” in our 2013 Form 10-K and in “MD&A—Legislative and Regulatory Developments” in our First Quarter 2014 Form 10-Q and in our Second Quarter 2014 Form 10-Q. Also see “Risk Factors” in this report and in our 2013 Form 10-K for a discussion of risks relating to legislative and regulatory matters.

13



Housing Finance Reform and the Role of the GSEs
Legislative Developments
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, Fannie Mae and Freddie Mac should play in that system. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010, called for enactment of meaningful structural reforms of Fannie Mae and Freddie Mac. See “Business—Housing Finance Reform” in our 2013 Form 10-K and “MD&A—Legislative and Regulatory Developments” in our First Quarter 2014 Form 10-Q and in our Second Quarter 2014 Form 10-Q for a description of activities relating to GSE reform that occurred from 2011 through the second quarter of 2014, including descriptions of: the Administration’s housing policy priorities, which include winding down Fannie Mae and Freddie Mac through a responsible transition; the Administration’s February 2011 report on GSE reform, which discusses potential options for a new long-term structure for the housing finance system following the wind-down of Fannie Mae and Freddie Mac; and legislation considered in the current Congress relating to housing finance system reform and the terms of Fannie Mae’s and Freddie Mac’s senior preferred stock purchase agreements with Treasury.
Congress has continued to consider housing finance reform and the future of the GSEs this year. On May 15, 2014, the Senate Banking Committee approved the Housing Finance Reform and Taxpayer Protection Act of 2014, which is also known as the Johnson-Crapo bill. This bill, if enacted in its current form, would result in the wind-down and eventual liquidation of Fannie Mae and Freddie Mac and would materially affect our business prior to our eventual liquidation. Despite activity at the committee level, neither the full Senate nor the full House of Representatives has considered the Johnson-Crapo bill or any other housing finance reform bill in the current Congress.
We expect Congress to continue to consider housing finance reform legislation. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. As a result, there continues to be significant uncertainty regarding the future of our company. See “Risk Factors” in this report and our 2013 Form 10-K for discussions of the risks to our business relating to the uncertain future of our company and of how the uncertain future of our company may adversely affect our ability to retain and recruit well-qualified employees, including senior management.
Conservator Developments
In addition to the legislative debate, actions taken by our conservator have an impact on the role of the GSEs in the nation’s housing finance system now and in the future. See “MD&A—Executive Summary—Helping to Build a Sustainable Housing Finance System” and “MD&A—Legislative and Regulatory Developments—Housing Finance Reform and the Role of the GSEs—Conservator Developments” in our Second Quarter 2014 Form 10-Q for a discussion of FHFA’s 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, and FHFA’s related 2014 conservatorship scorecard.
Single GSE Security. FHFA’s 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac includes the goal of developing a single GSE mortgage-backed security. In August 2014, FHFA published a request for public input on a proposed structure for a single security that would be issued and guaranteed by Fannie Mae or Freddie Mac. FHFA’s request for public input states that development of the single security will be a multi-year initiative, and that FHFA’s goal for the proposed single security structure is for legacy Fannie Mae MBS and legacy Freddie Mac PCs to be fungible with the new single security for purposes of fulfilling “to-be-announced” (“TBA”) contracts. Many of the proposed features of the single security are similar to those of current Fannie Mae MBS. We believe the development of a single common security would likely reduce, and could eliminate, the trading advantage Fannie Mae mortgage-backed securities have over Freddie Mac mortgage-backed securities. If this occurs, we believe it would negatively impact our ability to compete for mortgage assets in the secondary market, and therefore could adversely affect our results of operations. See “Risk Factors” for a discussion of the risks to our business associated with a single common security for Fannie Mae and Freddie Mac, as well as other risks associated with FHFA’s 2014 strategic plan.
FHFA Strategic Plan. In August 2014, FHFA also issued a Strategic Plan: Fiscal Years 2015-2019 for public input. Like FHFA’s 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, FHFA’s Strategic Plan for 2015-2019 identifies as important priorities for FHFA the ongoing work to develop a common securitization infrastructure, improve the liquidity of GSE securities and build more accurate and uniform mortgage data standards.
Common Securitization Platform. In October 2013, Fannie Mae and Freddie Mac established Common Securitization Solutions, LLC (“CSS”), a jointly owned limited liability company formed to design, develop, build and ultimately operate a common securitization platform. The intended purpose of the common securitization platform is to replace certain elements of Fannie Mae’s and Freddie Mac’s proprietary systems for securitizing mortgages and performing associated back office and administrative functions. Fannie Mae and Freddie Mac recently took further steps to develop CSS’s capabilities with the execution of three agreements on November 3, 2014. Fannie Mae and Freddie Mac entered into an Amended and Restated

14



Limited Liability Company Agreement with CSS that provides further detail regarding the rights, obligations and understandings between the companies with respect to CSS, including the governance of CSS. In connection with the agreement, the companies appointed a chief executive officer and four members of the CSS Board of Managers, two each from Fannie Mae and Freddie Mac. Fannie Mae, Freddie Mac and CSS also entered into a contribution agreement providing for, among other things, the contribution by Fannie Mae and Freddie Mac of intellectual property and cash resources to CSS, as well as the assignment of various agreements necessary for CSS’s development and operation of securitization functions. In addition, Fannie Mae and Freddie Mac each entered into a separate agreement with CSS with respect to the administrative support services the companies will provide to CSS until CSS has the capabilities to provide these services on its own. Although these are important steps towards the further development of the common securitization platform, we expect it will be several years before CSS will have sufficient operational capabilities to serve its intended purpose as a common securitization platform for us and Freddie Mac.
Portfolio Reduction Plan. Under our senior preferred stock purchase agreement with Treasury, by December 31 of each year, we are required to reduce our mortgage assets to 85% 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 in 2018. FHFA’s 2014 conservatorship scorecard required us to submit a portfolio plan to FHFA outlining how we will meet, even under adverse conditions, the reductions in our portfolio required by our senior preferred stock purchase agreement with Treasury. We initially submitted this plan to FHFA in July 2014. In October 2014, FHFA requested that we revise our plan to cap the portfolio each year at 90% of the annual limit under our senior preferred stock purchase agreement with Treasury. FHFA’s request noted that we may seek FHFA permission to increase this cap to 95% of the annual limit under our senior preferred stock purchase agreement with Treasury upon written request and with a documented basis for exception, such as changed market conditions. We submitted a revised portfolio plan to FHFA in October 2014 that complies with FHFA’s request to cap our portfolio at 90% of the annual limit under our senior preferred stock purchase agreement with Treasury. Accordingly, under our revised portfolio plan, we plan to reduce our mortgage portfolio to no more than $422.7 billion as of December 31, 2014, in compliance with both our senior preferred stock purchase agreement with Treasury and FHFA’s request. See “Business Segment Results—Capital Markets Group Results—The Capital Markets Group’s Mortgage Portfolio” for more information about our mortgage portfolio.
2013 Housing Goals Performance
We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. Our single-family performance is measured against the lower of benchmarks established by FHFA or goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed. In our 2013 Form 10-K, we reported that we believed we met all of the FHFA-established single-family benchmarks for 2013 except for the single-family very low-income families home purchase goal benchmark, as well as both of our 2013 multifamily goals, and that FHFA would issue a final determination on our 2013 housing goals performance after the release of data reported under the Home Mortgage Disclosure Act (“HMDA”). In October 2014, FHFA notified us that it had preliminarily determined that we met all of our single-family and multifamily housing goals for 2013, except for the single-family very low-income families home purchase goal. FHFA preliminarily determined that our performance for this goal, which was 6% of our 2013 acquisitions of single-family owner-occupied purchase money mortgage loans, failed to meet both the applicable benchmark of 7% and the overall market level for 2013 of 6.3%. See “Business—Our Charter and Regulation of Our Activities—The GSE Act—Housing Goals and Duty to Serve Undeserved Markets—Housing Goals” in our 2013 Form 10-K for a more detailed discussion of our housing goals.
Proposed Housing Goals for 2015 to 2017
In August 2014, FHFA published a proposed rule that would establish single-family and multifamily housing goals for Fannie Mae and Freddie Mac for 2015 to 2017. Comments on the proposed rule were due in October 2014. FHFA will issue a final rule after considering the comments received on the proposed rule.
Proposed Single-Family Housing Goals
FHFA’s proposed rule requests comment on three alternative approaches for measuring Fannie Mae and Freddie Mac’s performance on the single-family housing goals for 2015 to 2017:
Alternative 1 would use the current two-step process, which measures performance by comparing it to both (1) benchmark levels that are set prospectively and (2) actual market levels that are determined retrospectively based on HMDA data;
Alternative 2 would measure performance against prospective benchmark levels only; and

15



Alternative 3 would measure performance against retrospective market levels only.
FHFA has proposed the following single-family home purchase and refinance housing goal benchmarks for 2015 to 2017 under Alternative 1. A home purchase mortgage may be counted toward more than one home purchase benchmark.
Low-Income Families Home Purchase Benchmark: At least 23% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to low-income families (defined as income equal to or less than 80% of area median income). This is the same benchmark currently applicable for 2014.
Very Low-Income Families Home Purchase Benchmark: At least 7% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to very low-income families (defined as income equal to or less than 50% of area median income). This is the same benchmark currently applicable for 2014.
Low-Income Areas Home Purchase Goal Benchmark: The benchmark level for our acquisitions of single-family owner-occupied purchase money mortgage loans for families in low-income areas is set annually by notice from FHFA, based on the benchmark level for the low-income areas home purchase subgoal (below), plus an adjustment factor reflecting the additional incremental share of mortgages for moderate-income families (defined as income equal to or less than 100% of area median income) in designated disaster areas.
Low-Income Areas Home Purchase Subgoal Benchmark: At least 14% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to families in low-income census tracts or to moderate-income families in high-minority census tracts. This is an increase from the benchmark of 11% currently applicable for 2014.
Low-Income Families Refinancing Benchmark: At least 27% of our acquisitions of single-family owner-occupied refinance mortgage loans must be affordable to low-income families. This is an increase from the benchmark of 20% currently applicable for 2014.
Under Alternative 1, if we do not meet these benchmarks, we may still meet our goals. Our single-family housing goals performance would be measured against both these benchmarks and against goals-qualifying originations in the primary mortgage market after the release of HMDA data, which is typically released each year in the fall. We would be in compliance with the housing goals if we meet either the benchmarks or market share measures.
FHFA’s proposed rule noted that, if it were to adopt Alternative 2, it would consider adopting single-family benchmark levels that are lower than the proposed levels for Alternative 1 described above. Alternative 3 would not involve setting prospective benchmark levels.
Proposed Multifamily Housing Goals
FHFA’s proposed rule also includes benchmark levels for a multifamily special affordable housing goal and subgoal, and establishes a new subgoal for small multifamily properties (defined as those with 5 to 50 units) affordable to low-income families. FHFA’s proposed multifamily benchmark levels for Fannie Mae for 2015 to 2017 would be the same levels currently applicable to Fannie Mae for 2014: 250,000 units per year must be affordable to low-income families and 60,000 units per year must be affordable to very low-income families. FHFA’s proposed new subgoal for Fannie Mae for small multifamily properties affordable to low-income families increases each year: 20,000 units in 2015; 25,000 units in 2016; and 30,000 units in 2017. There is no market-based alternative measurement for the multifamily goal or subgoals.
The Dodd-Frank Act: Margin and Capital Requirements for Covered Swap Entities
In September 2014, the Federal Reserve Board, the Federal Deposit Insurance Corporation (“FDIC”), FHFA, the Farm Credit Administration and the Office of the Comptroller of the Currency issued new proposed rules under the Dodd-Frank Act governing margin and capital requirements applicable to entities that are subject to their oversight. These proposed rules would require that, for all trades that have not been submitted to a derivatives clearing organization, we collect from and provide to our counterparties collateral in excess of the amounts we have historically collected or provided relative to our level of activity. We continue to evaluate the potential impact of this rule on our business.
The Dodd-Frank Act: Final Risk Retention Rule
In October 2014, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Securities and Exchange Commission (“SEC”), FHFA and the Department of Housing and Urban Development issued a final rule requiring securitizers to retain a portion of the credit risk in assets transferred, sold or conveyed through the issuance of asset-backed securities, with certain exceptions. This rule was mandated by Section 941 of the Dodd-Frank Act. The final rule requires securitizers to retain at least 5% of the credit risk of the assets they securitize. The rule offers

16



several compliance options, one of which is to have either Fannie Mae or Freddie Mac (so long as they are in conservatorship or receivership) securitize and fully guarantee the assets, in which case no further retention of credit risk is required. In addition, securities backed solely by mortgage loans meeting the definition of a “qualified residential mortgage” are exempt from the risk retention requirements of the rule. The rule defines qualified residential mortgage to have the same meaning as the term “qualified mortgage” as defined by the Consumer Financial Protection Bureau (“CFPB”) in connection with its “ability to repay” rule under Regulation Z. Generally, a loan will be a qualified mortgage under the CFPB’s ability to repay rule if, among other things, (1) the points and fees paid in connection with the loan do not exceed 3% of the total loan amount, (2) the loan term does not exceed 30 years, (3) the loan is fully amortizing with no negative amortization, interest-only or balloon features and (4) the debt-to-income ratio on the loan does not exceed 43% at origination. The CFPB also defined a special class of conventional mortgage loans that will be qualified mortgages if they (1) meet the points and fees, term and amortization requirements of qualified mortgages generally and (2) are eligible for sale to Fannie Mae or Freddie Mac. This class of qualified mortgages expires on the earlier of January 10, 2021 or when the GSEs cease to be in conservatorship or receivership. The final risk retention rule will become effective one year after publication in the Federal Register for single-family mortgage loans and two years after publication in the Federal Register for multifamily mortgage loans. We continue to evaluate the potential impact of this rule on our business.
Final Bank Minimum Liquidity Standards
In September 2014, U.S. banking regulators issued a final regulation setting minimum liquidity standards for large U.S. banks generally in accordance with Basel III standards. Although we are not subject to banking regulations, U.S. banks currently hold large amounts of our outstanding debt and Fannie Mae MBS securities and, as a result, our business may be affected by these new minimum liquidity standards.
Under the final rule, U.S. banks subject to the standards are required to hold a minimum level of high-quality liquid assets based on projections of their short-term cash needs. The debt and mortgage-related securities of Fannie Mae and Freddie Mac are permitted to count toward only up to 40% of the banks’ high-quality liquid asset requirement, and then only after applying a 15% discount to the market value of those securities. The final rule becomes effective January 1, 2015 and provides for a transition period. Banks subject to the rule are required to maintain a minimum liquidity coverage ratio of 80% beginning on January 1, 2015, 90% beginning on January 1, 2016 and 100% beginning on January 1, 2017.
Prior U.S. banking regulations did not limit the amount of Fannie Mae or Freddie Mac debt and mortgage-related securities that banks were permitted to count toward their liquidity requirements. Accordingly, the implementation of this rule could materially adversely affect demand by banks for Fannie Mae debt securities and MBS, which could adversely affect the price of those securities and could have a material adverse effect on our business, results of operations, financial condition, liquidity and net worth.
Dismissal of Lawsuit Relating to Conservatorship Operations
In June 2011, FHFA issued a final rule establishing a framework for conservatorship and receivership operations for the GSEs, which became effective in July 2011. The rule includes a provision that FHFA, as conservator, will not pay securities litigation claims against us during conservatorship, unless the Director of FHFA determines it is in the interest of the conservatorship. In August 2011, an action was brought in the U.S. District Court for the District of Columbia against FHFA and FHFA’s Director by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio challenging the rule’s provisions regarding nonpayment of securities litigation claims. In October 2014, the plaintiffs voluntarily dismissed this action without prejudice.
FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans
In April 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”). The Advisory Bulletin requires, among other things, 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 and adjusted for any credit enhancements, as a “loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those involving properly secured loans with an LTV ratio equal to or less than 60%). The Advisory Bulletin also requires us to charge off the portion of the loan classified as a “loss.” Our current analytics and historical data do not support charging off loans at 180 days delinquent. As a result, for the vast majority of our delinquent single-family loans, we expect to continue to charge off the loan at the date of foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale). For a small subset of delinquent loans deemed to be uncollectible prior to foreclosure by our historical data, we will classify them as “loss” and charge off the portion of the loan classified as “loss” prior to the date of foreclosure or other liquidation event, which given our current credit analytics and historical data, will be when the loans are excessively delinquent and the outstanding loan balance

17



exceeds the fair value of the underlying property. Under our approach to adopting the charge-off provisions of the Advisory Bulletin in the first quarter of 2015, our allowance for loan losses on the charged-off loans will be eliminated and the corresponding recorded investment in the loans will be reduced by the amounts that are charged off. We do not expect that the adoption of the Advisory Bulletin will have a material impact on our financial position or results of operations.
For information on the risks presented by our adoption of the Advisory Bulletin, see “Risk Factors” in our 2013 Form 10-K. See “Executive Summary—Outlook” for a discussion of the expected impact of our implementation of the charge-off provisions of the Advisory Bulletin on our credit losses and loss reserves.
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” in this report and in our 2013 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. See “Risk Factors” in our 2013 Form 10-K for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified four 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; and
•    Deferred Tax Assets.
See “MD&A—Critical Accounting Policies and Estimates” in our 2013 Form 10-K for a discussion of these critical accounting policies and estimates. We describe below significant changes we made in the third quarter of 2014 to the model and the assumptions used in estimating our allowance for loan losses, which is a component of our total loss reserves.
Total Loss Reserves
Our total single-family and multifamily loss reserves consist of the following components:
Allowance for loan losses;
Allowance for accrued interest receivable;
Reserve for guaranty losses; and
Allowance for preforeclosure property tax and insurance receivable.
We continually monitor prepayment, delinquency, modification, default and loss severity trends and periodically make changes in our historically developed assumptions to better reflect present conditions of loan performance. In the third quarter of 2014, we updated the model and the assumptions used to estimate cash flows for individually impaired single-family loans within our allowance for loan losses. In addition to incorporating recent loan performance, this update better captures regional variations in expected future cash flows, particularly with respect to expectations of future home prices. This update resulted in a decrease to our allowance for loan losses as of September 30, 2014 and an incremental benefit for credit losses of approximately $600 million for the third quarter of 2014.

18



CONSOLIDATED RESULTS OF OPERATIONS
This section 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 3 displays a summary of our condensed consolidated results of operations for the periods indicated.
Table 3: Summary of Condensed Consolidated Results of Operations
 
For the Three Months
 
For the Nine Months
 
Ended September 30,
 
Ended September 30,
 
2014
 
2013
 
Variance
 
2014
 
2013
 
Variance
 
(Dollars in millions)
Net interest income
$
5,184

 
$
5,582

 
$
(398
)
 
$
14,826

 
$
17,553

 
$
(2,727
)
Fee and other income
826

 
741

 
85

 
5,564

 
1,794

 
3,770

Net revenues
6,010

 
6,323

 
(313
)
 
20,390

 
19,347

 
1,043

Investment gains, net
177

 
648

 
(471
)
 
829

 
1,056

 
(227
)
Fair value (losses) gains, net
(207
)
 
335

 
(542
)
 
(2,331
)
 
1,998

 
(4,329
)
Administrative expenses
(706
)
 
(646
)
 
(60
)
 
(2,075
)
 
(1,913
)
 
(162
)
Credit-related income
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
1,085

 
2,609

 
(1,524
)
 
3,498

 
8,949

 
(5,451
)
Foreclosed property (expense) income
(249
)
 
1,165

 
(1,414
)
 
227

 
1,757

 
(1,530
)
Total credit-related income
836

 
3,774

 
(2,938
)
 
3,725

 
10,706

 
(6,981
)
Other non-interest expenses(1)
(418
)
 
(335
)
 
(83
)
 
(1,518
)
 
(901
)
 
(617
)
Income before federal income taxes
5,692

 
10,099

 
(4,407
)
 
19,020

 
30,293

 
(11,273
)
(Provision) benefit for federal income taxes
(1,787
)
 
(1,355
)
 
(432
)
 
(6,123
)
 
47,231

 
(53,354
)
Net income
3,905

 
8,744

 
(4,839
)
 
12,897

 
77,524

 
(64,627
)
Less: Net income attributable to noncontrolling interest

 
(7
)
 
7

 
(1
)
 
(18
)
 
17

Net income attributable to Fannie Mae
$
3,905

 
$
8,737

 
$
(4,832
)
 
$
12,896

 
$
77,506

 
$
(64,610
)
Total comprehensive income attributable to Fannie Mae
$
4,000

 
$
8,603

 
$
(4,603
)
 
$
13,408

 
$
78,192

 
$
(64,784
)
__________
(1) 
Consists of net other-than-temporary impairments; debt extinguishment gains, net; TCCA fees and other expenses, net.
Net Interest Income
We currently have two primary sources of net interest income: (1) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets; and (2) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties, which we refer to as mortgage loans of consolidated trusts.
Table 4 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 5 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.

19



Table 4: Analysis of Net Interest Income and Yield
 
For the Three Months Ended September 30,
 
2014
 
2013
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
(Dollars in millions)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
282,019

 
$
2,562

 
3.63
%
 
$
320,651

 
$
2,948

 
3.68
%
Mortgage loans of consolidated trusts
2,762,984

 
25,217

 
3.65
 
 
2,721,041

 
25,351

 
3.73
 
Total mortgage loans(1)
3,045,003

 
27,779

 
3.65
 
 
3,041,692

 
28,299

 
3.72
 
Mortgage-related securities
140,357

 
1,652

 
4.71
 
 
191,284

 
2,189

 
4.58
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(96,785
)
 
(1,113
)
 
4.60
 
 
(124,991
)
 
(1,464
)
 
4.69
 
Total mortgage-related securities, net
43,572

 
539

 
4.95
 
 
66,293

 
725

 
4.37
 
Non-mortgage securities(2)
32,283

 
7

 
0.08
 
 
35,959

 
6

 
0.07
 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
38,488

 
9

 
0.09
 
 
54,623

 
9

 
0.06
 
Advances to lenders
3,794

 
20

 
2.06
 
 
5,250

 
28

 
2.09
 
Total interest-earning assets
$
3,163,140

 
$
28,354

 
3.59
%
 
$
3,203,817

 
$
29,067

 
3.63
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt(3)
$
101,497

 
$
25

 
0.10
%
 
$
92,591

 
$
28

 
0.12
%
Long-term debt
383,412

 
2,050

 
2.14
 
 
495,042

 
2,551

 
2.06
 
Total short-term and long-term funding debt
484,909

 
2,075

 
1.71
 
 
587,633

 
2,579

 
1.76
 
Debt securities of consolidated trusts
2,820,711

 
22,208

 
3.15
 
 
2,790,170

 
22,370

 
3.21
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(96,785
)
 
(1,113
)
 
4.60
 
 
(124,991
)
 
(1,464
)
 
4.69
 
Total debt securities of consolidated trusts held by third parties
2,723,926

 
21,095

 
3.10
 
 
2,665,179

 
20,906

 
3.14
 
Total interest-bearing liabilities
$
3,208,835

 
$
23,170

 
2.89
%
 
$
3,252,812

 
$
23,485

 
2.89
%
Net interest income/net interest yield
 
 
$
5,184

 
0.66
%
 
 
 
$
5,582

 
0.70
%


20



 
For the Nine Months Ended September 30,
 
2014
 
2013
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
(Dollars in millions)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
289,028

 
$
7,828

 
3.61
%
 
$
332,803

 
$
9,987

 
4.00
%
Mortgage loans of consolidated trusts
2,766,787

 
76,704

 
3.70
 
 
2,694,339

 
75,592

 
3.74
 
Total mortgage loans(1)
3,055,815

 
84,532

 
3.69
 
 
3,027,142

 
85,579

 
3.77
 
Mortgage-related securities
148,195

 
5,190

 
4.67
 
 
215,302

 
7,361

 
4.56
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(101,608
)
 
(3,542
)
 
4.65
 
 
(139,372
)
 
(4,890
)
 
4.68
 
Total mortgage-related securities, net
46,587

 
1,648

 
4.72
 
 
75,930

 
2,471

 
4.34
 
Non-mortgage securities(2)
33,435

 
22

 
0.09
 
 
44,157

 
32

 
0.10
 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
33,557

 
20

 
0.08
 
 
65,496

 
58

 
0.12
 
Advances to lenders
3,303

 
57

 
2.28
 
 
5,593

 
85

 
2.00
 
Total interest-earning assets
$
3,172,697

 
$
86,279

 
3.63
%
 
$
3,218,318

 
$
88,225

 
3.66
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt(3)
$
81,844

 
$
65

 
0.10
%
 
$
103,419

 
$
106

 
0.14
%
Long-term debt
409,633

 
6,524

 
2.12
 
 
505,903

 
7,778

 
2.05
 
Total short-term and long-term funding debt
491,477

 
6,589

 
1.79
 
 
609,322

 
7,884

 
1.73
 
Debt securities of consolidated trusts
2,820,774

 
68,406

 
3.23
 
 
2,772,826

 
67,678

 
3.25
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(101,608
)
 
(3,542
)
 
4.65
 
 
(139,372
)
 
(4,890
)
 
4.68
 
Total debt securities of consolidated trusts held by third parties
2,719,166

 
64,864

 
3.18
 
 
2,633,454

 
62,788

 
3.18
 
Total interest-bearing liabilities
$
3,210,643

 
$
71,453

 
2.97
%
 
$
3,242,776

 
$
70,672

 
2.91
%
Net interest income/net interest yield
 
 
$
14,826

 
0.62
%
 
 
 
$
17,553

 
0.73
%

 
As of September 30,
 
2014
 
2013
Selected benchmark interest rates(4)
 
 
 
 
 
3-month LIBOR
0.24
%
 
0.25
%
2-year swap rate
0.82
 
 
0.46
 
5-year swap rate
1.93
 
 
1.54
 
30-year Fannie Mae MBS par coupon rate
3.20
 
 
3.29
 
__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $436 million and $1.4 billion for the third quarter and first nine months of 2014, respectively, compared with $688 million and $2.2 billion for the third quarter and first nine months of 2013, respectively.
(2) 
Includes cash equivalents.
(3) 
Includes federal funds purchased and securities sold under agreements to repurchase.
(4) 
Data from IntercontinentalExchange Group, Inc., Thomson Reuters and Bloomberg L.P.

21



Table 5: Rate/Volume Analysis of Changes in Net Interest Income
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2014 vs. 2013
 
September 30, 2014 vs. 2013
  
Total
 
Variance Due to:(1)
 
Total
 
Variance Due to:(1)
  
Variance
 
Volume
 
Rate
 
Variance
 
Volume
 
Rate
 
(Dollars in millions) 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
(386
)
 
$
(351
)
 
$
(35
)
 
$
(2,159
)
 
$
(1,240
)
 
$
(919
)
Mortgage loans of consolidated trusts
(134
)
 
387

 
(521
)
 
1,112

 
2,016

 
(904
)
Total mortgage loans
(520
)
 
36

 
(556
)
 
(1,047
)
 
776

 
(1,823
)
Total mortgage-related securities, net
(186
)
 
(273
)
 
87

 
(823
)
 
(1,029
)
 
206

Non-mortgage securities(2)
1

 
(1
)
 
2

 
(10
)
 
(7
)
 
(3
)
Federal funds sold and securities purchased under agreements to resell or similar arrangements

 
(3
)
 
3

 
(38
)
 
(23
)
 
(15
)
Advances to lenders
(8
)
 
(8
)
 

 
(28
)
 
(38
)
 
10

Total interest income
$
(713
)
 
$
(249
)
 
$
(464
)
 
$
(1,946
)
 
$
(321
)
 
$
(1,625
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt(3)
(3
)
 
3

 
(6
)
 
(41
)
 
(20
)
 
(21
)
Long-term debt
(501
)
 
(594
)
 
93

 
(1,254
)
 
(1,525
)
 
271

Total short-term and long-term funding debt
(504
)
 
(591
)
 
87

 
(1,295
)
 
(1,545
)
 
250

Total debt securities of consolidated trusts held by third parties
189

 
568

 
(379
)
 
2,076

 
2,482

 
(406
)
Total interest expense
$
(315
)
 
$
(23
)
 
$
(292
)
 
$
781

 
$
937

 
$
(156
)
Net interest income
$
(398
)
 
$
(226
)
 
$
(172
)
 
$
(2,727
)
 
$
(1,258
)
 
$
(1,469
)
__________
(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 decreased in the third quarter and first nine months of 2014 compared with the third quarter and first nine months of 2013, primarily due to a decline in the average balance of our retained mortgage portfolio. The average balance of our retained mortgage portfolio was 17% lower in the third quarter of 2014 than in the third quarter of 2013 and was 20% lower in the first nine months of 2014 than in the first nine months of 2013. In addition, net amortization income related to mortgage loans and debt of consolidated trusts declined compared with the prior year periods due to a decline in prepayments. The decrease in net interest income was partially offset by increased guaranty fee revenue, as loans with higher guaranty fees have become a larger part of our guaranty book of business. We recognize almost all of our guaranty fee revenue in net interest income due to the consolidation of the substantial majority of loans underlying our MBS trusts on our balance sheet.
Net interest yield decreased in the third quarter and first nine months of 2014 compared with the third quarter and first nine months of 2013 due to the decline in the percentage of net interest income from our retained mortgage portfolio, which has a higher net interest yield than the net interest yield from guaranty fees.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. Fee and other income increased in the first nine months of 2014 compared with the first nine months of 2013, primarily as a result of $4.8 billion recognized as income in the first nine months of 2014 compared with $561 million in the first nine months of 2013, both resulting from settlement agreements resolving certain lawsuits relating to PLS sold to us. See “Legal Proceedings—FHFA Private-Label Mortgage-Related Securities Litigation” for additional information.

22



Investment Gains, Net
Investment gains, net include gains and losses recognized from the sale of available-for-sale (“AFS”) securities, gains and losses recognized on the securitization of loans and securities from our retained mortgage portfolio and gains and losses recognized on the consolidation and deconsolidation of securities. Investment gains decreased in the third quarter of 2014 compared with the third quarter of 2013 primarily due to fewer sales of non-agency mortgage-related securities in the third quarter of 2014 compared with the third quarter of 2013. Investment gains decreased in the first nine months of 2014 compared with the first nine months of 2013 primarily due to an increase in losses on the consolidation and deconsolidation of securities.
Fair Value (Losses) Gains, Net
Table 6 displays the components of our fair value gains and losses.
Table 6: Fair Value (Losses) Gains, Net
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in millions)
Risk management derivatives fair value (losses) gains attributable to:
 
 
 
 
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(314
)
 
$
(229
)
 
$
(770
)
 
$
(610
)
Net change in fair value during the period
(93
)
 
942

 
(1,513
)
 
2,445

Total risk management derivatives fair value (losses) gains, net
(407
)
 
713

 
(2,283
)
 
1,835

Mortgage commitment derivatives fair value (losses) gains, net
(73
)
 
(169
)
 
(728
)
 
459

Total derivatives fair value (losses) gains, net
(480
)
 
544

 
(3,011
)
 
2,294

Trading securities gains (losses), net
50

 
(57
)
 
444

 
111

Other, net(1)
223

 
(152
)
 
236

 
(407
)
Fair value (losses) gains, net
$
(207
)
 
$
335

 
$
(2,331
)
 
$
1,998

  
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
5-year swap rate:
 
 
 
 
 
 
 
As of January 1
1.79
%
 
0.86
%
As of March 31
1.80
%
 
0.95
%
As of June 30
1.70
%
 
1.57
%
As of September 30
1.93
%
 
1.54
%
10-year swap rate:
 
 
 
 
 
 
 
As of January 1
3.09
%
 
1.84
%
As of March 31
2.84
%
 
2.01
%
As of June 30
2.63
%
 
2.70
%
As of September 30
2.64
%
 
2.77
%
__________
(1) 
Consists of debt fair value gains (losses), net; debt foreign exchange gains (losses), net; and mortgage loans fair value gains (losses), net.
Risk Management Derivatives Fair Value (Losses) 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 interest rate risk. We recognized risk management derivative fair value losses in the third quarter of 2014 primarily due to increases in shorter-term swap rates. We recognized risk management derivative fair value losses for the first nine months of 2014 primarily as a result of decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates during the period. We recognized risk management derivative fair value gains in the third quarter and first nine months of 2013 primarily as a result of increases in the fair value of our pay-fixed derivatives as longer-term swap rates increased during the periods.

23



We present, by derivative instrument type, the fair value gains and losses, net on our derivatives for the three and nine months ended September 30, 2014 and 2013 in “Note 9, Derivative Instruments.”
Mortgage Commitment Derivatives Fair Value (Losses) Gains, Net
We recognized fair value losses on our mortgage commitments in the third quarter and first nine months of 2014 primarily due to losses on commitments to sell mortgage-related securities driven by an increase in prices as interest rates decreased during the commitment period. We recognized fair value losses on our mortgage commitments in the third quarter of 2013 primarily due to losses on commitments to sell mortgage-related securities driven by higher prices as interest rates decreased during the commitment period. We recognized fair value gains on our mortgage commitments in the first nine months of 2013 primarily due to gains on commitments to sell mortgage-related securities driven by lower prices as interest rates increased during the commitment period.
Trading Securities Gains (Losses), Net
Gains from trading securities in the third quarter and first nine months of 2014 were driven by higher prices on securities primarily due to a decrease in interest rates, in addition to a narrowing of credit spreads on PLS.
Losses from trading securities in the third quarter of 2013 were primarily driven by lower prices on commercial mortgage-backed securities (“CMBS”) and PLS due to a widening of credit spreads. Gains from trading securities in the first nine months of 2013 were primarily driven by gains from higher prices on Alt-A and subprime PLS, due to the narrowing of credit spreads on these securities as well as improvements in the credit outlook of certain financial guarantors of these securities in the first quarter of 2013. These gains were partially offset by the losses on CMBS in the second and third quarters of 2013.
Credit-Related Income
We refer to our benefit for loan losses and (benefit) provision for guaranty losses collectively as our “benefit for credit losses.” Credit-related income consists of our benefit for credit losses and foreclosed property expense (income).
Benefit for Credit Losses
Table 7 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. The fair value losses shown in Table 7 represent credit losses we expect to realize in the future or amounts that 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.”
Table 7: Total Loss Reserves
 
As of
 
September 30,
2014
 
December 31, 2013
 
 
(Dollars in millions)
 
Allowance for loan losses
 
$
36,931

 
 
 
$
43,846

 
Reserve for guaranty losses(1)
 
1,324

 
 
 
1,449

 
Combined loss reserves
 
38,255

 
 
 
45,295

 
Allowance for accrued interest receivable
 
764

 
 
 
1,156

 
Allowance for preforeclosure property taxes and insurance receivable(2)
 
718

 
 
 
839

 
Total loss reserves
 
39,737

 
 
 
47,290

 
Fair value losses previously recognized on acquired credit-impaired loans(3)
 
10,211

 
 
 
11,316

 
Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans
 
$
49,948

 
 
 
$
58,606

 
__________
(1) 
Amount included in “Other liabilities” in our condensed consolidated balance sheets.

24



(2) 
Amount included in “Other assets” in our condensed consolidated balance sheets.
(3) 
Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets.
Table 8 displays changes in the total allowance for loan losses, reserve for guaranty losses and the total combined loss reserves for the periods indicated.
Table 8: Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
39,067

 
$
49,643

 
$
43,846

 
$
58,795

Benefit for loan losses
(1,051
)
 
(2,600
)
 
(3,481
)
 
(9,033
)
Charge-offs(1)
(1,561
)
 
(2,325
)
 
(5,071
)
 
(7,263
)
Recoveries
275

 
294

 
1,124

 
2,138

Other(2)
201

 
157

 
513

 
532

Ending balance
$
36,931

 
$
45,169

 
$
36,931

 
$
45,169

Reserve for guaranty losses:

 

 
 
 

Beginning balance
$
1,384

 
$
1,230

 
$
1,449

 
$
1,231

(Benefit) provision for guaranty losses
(34
)
 
(9
)
 
(17
)
 
84

Charge-offs
(26
)
 
(28
)
 
(103
)
 
(123
)
Recoveries

 

 
(5
)
 
1

Ending balance
$
1,324

 
$
1,193

 
$
1,324

 
$
1,193

Combined loss reserves:

 

 
 
 

Beginning balance
$
40,451

 
$
50,873

 
$
45,295

 
$
60,026

Benefit for credit losses
(1,085
)
 
(2,609
)
 
(3,498
)
 
(8,949
)
Charge-offs(1)
(1,587
)
 
(2,353
)
 
(5,174
)
 
(7,386
)
Recoveries
275

 
294

 
1,119

 
2,139

Other(2)
201

 
157

 
513

 
532

Ending balance
$
38,255

 
$
46,362

 
$
38,255

 
$
46,362



25



 
 
As of
 
 
September 30,
2014
 
December 31, 2013
 
 
(Dollars in millions)
Allocation of combined loss reserves:
 
 
 
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
 
 
 
Single-family
 
 
$
37,854

 
 
 
$
44,705

 
Multifamily
 
 
401

 
 
 
590

 
       Total
 
 
$
38,255

 
 
 
$
45,295

 
Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:
 
 
 
 
 
 
 
 
Single-family
 
 
1.33
%
 
 
 
1.55
%
 
Multifamily
 
 
0.20

 
 
 
0.29

 
Combined loss reserves as a percentage of:
 
 
 
 
 
 
 
 
Total guaranty book of business
 
 
1.25
%
 
 
 
1.47
%
 
Recorded investment in nonaccrual loans(3)
 
 
56.26

 
 
 
54.20

 
_________
(1) 
Includes accrued interest of $72 million and $100 million for the three months ended September 30, 2014 and 2013, respectively, and $241 million and $337 million for the nine months ended September 30, 2014 and 2013, respectively.
(2) 
Amounts represent the net activity recorded in our allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable from borrowers. The benefit for credit losses, charge-offs and recoveries 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.
(3) 
Excludes off-balance sheet loans in unconsolidated Fannie Mae MBS trusts that would meet our criteria for nonaccrual status if the loans had been on-balance sheet.
The amount of our benefit or 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 and servicer repurchase obligations. In addition, our benefit or provision for credit losses and our loss reserves can be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses.
We recognized a benefit for credit losses in the third quarter and first nine months of 2014 primarily due to increases in home prices of 1.2% in the third quarter of 2014 and 5.3% in the first nine months of 2014. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our total loss reserves and provision for credit losses. In addition, in the third quarter of 2014, we updated the model and the assumptions used to estimate cash flows for individually impaired single-family loans within our allowance for loan losses, which resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $600 million for the third quarter and first nine months of 2014. For additional information, see “Critical Accounting Policies and Estimates—Total Loss Reserves.”
We recognized a benefit for credit losses in the third quarter and first nine months of 2013 primarily due to increases in home prices, including the sales prices of our REO properties as a result of strong demand in the first nine months of 2013. Home prices increased by 2.1% in the third quarter of 2013 and 8.3% in the first nine months of 2013. In addition, in the first nine months of 2013, we updated the assumptions and data used to estimate our allowance for loan losses for individually impaired single-family loans, which resulted in a decrease to our allowance for loan losses and an incremental benefit for credit losses of approximately $2.2 billion for the first nine months of 2013.
We discuss our expectations regarding our future loss reserves in “Executive Summary—Outlook—Loss Reserves.”

26



Troubled Debt Restructurings and Nonaccrual Loans
Table 9 displays the composition of loans restructured in a troubled debt restructuring (“TDR”) that are on accrual status and loans on nonaccrual status. The table includes 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.”
Table 9: Troubled Debt Restructurings and Nonaccrual Loans