Document
 

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, 2016
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:
(800) 2FANNIE (800-232-6643)
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, 2016, there were 1,158,082,750 shares of common stock of the registrant outstanding.
 



TABLE OF CONTENTS
 
 
Page
PART I—Financial Information
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
Credit Statistics, Single-Family Guaranty Book of Business
5
2
Single-Family Acquisitions Statistics
7
3
Summary of Condensed Consolidated Results of Operations
16
4
Analysis of Net Interest Income and Yield
17
5
Rate/Volume Analysis of Changes in Net Interest Income
19
6
Fair Value Losses, Net
20
7
Total Loss Reserves
22
8
Changes in Combined Loss Reserves
22
9
Troubled Debt Restructurings and Nonaccrual Loans
24
10
Credit Loss Performance Metrics
25
11
Credit Loss Concentration Analysis
26
12
Single-Family Business Results
28
13
Multifamily Business Results
30
14
Capital Markets Group Results
32
15
Capital Markets Group’s Mortgage Portfolio Activity
34
16
Capital Markets Group’s Mortgage Portfolio Composition
35
17
Capital Markets Group’s Mortgage Portfolio
36
18
Summary of Condensed Consolidated Balance Sheets
36
19
Summary of Mortgage-Related Securities at Fair Value
37
20
Activity in Debt of Fannie Mae
39
21
Outstanding Short-Term Borrowings and Long-Term Debt
41
22
Cash and Other Investments Portfolio
42
23
Composition of Mortgage Credit Book of Business
44
24
Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
46
25
Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2016
48
26
Credit Risk Transferred Pursuant to CAS and CIRT Transactions
50
27
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business
52
28
Delinquency Status and Activity of Single-Family Conventional Loans
56
29
Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
58
30
Statistics on Single-Family Loan Workouts
59
31
Single-Family Foreclosed Properties
60
32
Multifamily Guaranty Book of Business Key Risk Characteristics
61
33
Mortgage Insurance Coverage
64
34
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
69
35
Derivative Impact on Interest Rate Risk (50 Basis Points)
70

ii


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, 2015 (“2015 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 in this report and the more detailed information in our 2015 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 our 2015 Form 10-K.
You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2015 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, primarily for securitization and sale at a later date. 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.
We remain in conservatorship and our conservatorship has no specified termination date. We do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated or whether we will continue to exist following conservatorship. In addition, as a result of our agreements with Treasury and dividend 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. Our senior preferred stock purchase agreement with Treasury also includes covenants that significantly restrict our business activities. Congress and the Obama Administration continue to consider options for reform of the housing finance system, including the GSEs. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation or actions the Administration or FHFA may take with respect to housing finance reform. The conservatorship, the uncertainty of our future, limitations on executive and employee compensation, and negative publicity concerning the GSEs have had and are likely to continue to have an adverse effect on our ability to retain and recruit well-qualified executives and other employees. We provide additional information on the conservatorship, the provisions of our agreements with Treasury, and their impact on our business in our 2015 Form 10-K in “Business—Conservatorship and Treasury Agreements” and “Risk Factors.” We discuss the uncertainty of our future in

1



“Executive Summary—Outlook” and “Risk Factors” in this report. We discuss proposals for housing finance reform that could materially affect our business in our 2015 Form 10-K in “Business—Housing Finance Reform.”
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
Overview
We reported net income of $3.2 billion for the third quarter of 2016, compared with net income of $2.0 billion for the third quarter of 2015. See “Summary of Our Financial Performance” below for an overview of our financial performance for the third quarter and first nine months of 2016, compared with the third quarter and first nine months of 2015. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. For more information regarding our expectations for our future financial performance, see “Outlook” below.
With our expected December 2016 dividend payment to Treasury, we will have paid a total of $154.4 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. For more information regarding our dividend payments to Treasury, see “Treasury Senior Preferred Stock Purchase Agreement” below.
Our Strategy and Business Objectives
Our vision is to be America’s most valued housing partner and to provide liquidity, access to credit and affordability in all U.S. housing markets at all times, while effectively managing and reducing risk to our business, taxpayers and the housing finance system. In support of this vision, we are focused on:
advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers;
providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners; and
serving customer needs and improving our business efficiency.
Advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers
We have significantly changed our business model since we entered conservatorship in 2008 and our business continues to evolve. We have strengthened our underwriting and eligibility standards, we are moving from a portfolio-focused business to a guaranty-focused business and we are transferring an increasing portion of the credit risk on our guaranty book of business. These changes are transforming our business model and reducing certain risks of our business as compared with our business prior to entering conservatorship.
Stronger underwriting and eligibility standards. Beginning in 2008, we made changes to strengthen our underwriting and eligibility standards that have improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. See “Single-Family Guaranty Book of Business” below for information on the credit performance of the mortgage loans in our single-family guaranty book of business and on our recent single-family acquisitions.
Moving from a portfolio-focused business to a guaranty-focused business. In recent years, an increasing portion of our net interest income has been derived from the guaranty fees we receive for managing the credit risk on loans underlying our Fannie Mae MBS, rather than from interest income on our retained mortgage portfolio assets. This shift has been driven by both the impact of guaranty fee increases implemented in 2012 and the reduction of our retained mortgage portfolio in accordance with the requirements of our senior preferred stock purchase agreement with Treasury and direction from FHFA. 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). In the first nine months of 2016, more

2



than two-thirds of our net interest income was derived from our guaranty business. As described in more detail in “Outlook—Revenues” below, we expect that guaranty fees will continue to account for an increasing portion of our net interest income.
Transferring a portion of the mortgage credit risk on our single-family book of business. In late 2013, we began entering into credit risk transfer transactions with the goal of transferring, to the extent economically sensible, a portion of the mortgage credit risk on some of the recently-acquired loans in our single-family book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. As of September 30, 2016, $594 billion in outstanding unpaid principal balance of our single-family loans, or approximately 21% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a Connecticut Avenue SecuritiesTM (“CAS”) or a Credit Insurance Risk TransferTM (“CIRTTM”) transaction. We intend to continue to engage in credit risk transfer transactions on an ongoing basis, subject to market conditions. Over time, we expect that a larger portion of our single-family conventional guaranty book of business will be covered by credit risk transfer transactions. For further discussion of our credit risk transfer transactions, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk-Sharing Transactions.”
Our business also continues to evolve as a result of our many other efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator, and we continue to invest significant resources towards these goals. See “Business—Executive Summary—Helping to Build a Sustainable Housing Finance System” in our 2015 Form 10-K for a discussion of these efforts and FHFA’s strategic goals for our conservatorship, including a description of some of the actions we are taking pursuant to the mandates of FHFA’s conservatorship scorecards in order to build the policies and infrastructure for a sustainable housing finance system. For more information on FHFA’s 2016 conservatorship scorecard objectives, see our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on December 17, 2015.
Providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners
We continued to provide reliable, large-scale access to affordable mortgage credit to the U.S. housing market in the third quarter of 2016 and remained a leading source of liquidity in the single-family and multifamily markets. We also continued to help struggling homeowners. In the third quarter of 2016, we provided approximately 26,500 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.
Serving customer needs and improving our business efficiency
We are continuing our initiatives to better serve our customers’ needs and improve our business efficiency in 2016. These initiatives include continuing to revise and clarify lenders’ representation and warranty obligations, implementing innovative new and enhanced tools that deliver greater value and certainty to lenders, simplifying our business processes, and updating our infrastructure. We discuss these initiatives in “Serving Customer Needs and Improving Our Business Efficiency” below and in our 2015 Form 10-K in “Business—Executive Summary.”
Summary of Our Financial Performance
Comprehensive Income
Quarterly Results
We recognized comprehensive income of $3.0 billion in the third quarter of 2016, consisting of net income of $3.2 billion and other comprehensive loss of $207 million. In comparison, we recognized comprehensive income of $2.2 billion in the third quarter of 2015, consisting of net income of $2.0 billion and other comprehensive income of $253 million. The increase in our net income in the third quarter of 2016 compared with the third quarter of 2015 was primarily driven by a decrease in fair value losses, partially offset by a decrease in credit-related income and lower net revenues.
We recognized fair value losses of $491 million in the third quarter of 2016 compared with fair value losses of $2.6 billion in the third quarter of 2015. Fair value losses in the third quarter of 2016 were primarily due to losses on CAS debt carried at fair value primarily due to tightening spreads between CAS debt yields and LIBOR during the period. Fair value losses in the third quarter of 2015 were primarily driven by losses on our risk management derivatives resulting from declines in longer-term swap rates during the period.
We recognized credit-related income of $563 million in the third quarter of 2016 compared with credit-related income of $1.1 billion in the third quarter of 2015. Credit-related income in the third quarter of 2016 was driven by a $673 million benefit for credit losses during the quarter, which was primarily attributable to an increase in home prices, including distressed property

3



valuations. 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. Credit-related income in the third quarter of 2015 was driven by a benefit for credit losses that was primarily attributable to an increase in home prices as well as a decrease in interest rates during the period. As interest rates decline, we expect an increase in future prepayments on single-family individually impaired loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the impairment relating to concessions provided on these loans and results in a decrease in our provision for credit losses.
Net revenues, which consist of net interest income and fee and other income, were $5.6 billion in the third quarter of 2016 and $5.8 billion in the third quarter of 2015. We recognized net interest income of $5.4 billion in the third quarter of 2016 and $5.6 billion in the third quarter of 2015. The decline in net interest income was primarily due to a decline in the average balance of our retained mortgage portfolio, partially offset by an increase in guaranty fee revenue.
Year-to-Date Results
We recognized comprehensive income of $6.8 billion in the first nine months of 2016, consisting of net income of $7.3 billion and other comprehensive loss of $484 million. In comparison, we recognized comprehensive income of $8.4 billion in the first nine months of 2015, consisting of net income of $8.5 billion and other comprehensive loss of $120 million. The decrease in our net income was primarily driven by an increase in fair value losses and a decrease in net revenues, partially offset by a shift to credit-related income from credit-related expense.
Fair value losses of $5.0 billion in the first nine months of 2016 and $1.9 billion in the first nine months of 2015 were primarily driven by losses on our risk management derivatives resulting from declines in longer-term swap rates during the periods.
Net revenues were $16.0 billion in the first nine months of 2016 and $17.5 billion in the first nine months of 2015. We recognized net interest income of $15.5 billion in the first nine months of 2016 and $16.3 billion in the first nine months of 2015. The decline in net interest income was primarily a result of the same factors that affected our results for the third quarter of 2016, as described above.
We recognized credit-related income of $3.0 billion in the first nine months of 2016. In comparison, we recognized credit-related expense of $102 million in the first nine months of 2015. Credit-related income in the first nine months of 2016 was primarily attributable to a $3.5 billion benefit for credit losses during the period, which was primarily driven by an increase in home prices, including distressed property valuations, and a decrease in interest rates. Credit-related expense in the first nine months of 2015 was comprised of foreclosed property expense, partially offset by a benefit for credit losses. Foreclosed property expense in the first nine months of 2015 was primarily driven by property preservation costs, which include property tax and insurance expenses relating to our single-family foreclosed properties. The benefit for credit losses in the first nine months of 2015 was primarily driven by higher home prices. This was partially offset by the impact from the redesignation of certain nonperforming single-family loans from held for investment (“HFI”) to held for sale (“HFS”). These loans were adjusted to the lower of cost or fair value, which reduced our benefit for credit losses. Additionally, interest rates increased during the first nine months of 2015, which also partially offset our benefit for credit losses.
We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and certain 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 and credit spreads, and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, cash and other investments portfolio, and outstanding debt of Fannie Mae. Some of these financial instruments in our net portfolio are not recorded at fair value in our condensed consolidated financial statements, and as a result we may experience accounting gains or losses due to changes in interest rates or other market conditions that may not be indicative of the economic interest rate risk exposure of our net portfolio. See “Risk Management—Market Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period based on factors such as changes in actual and expected home prices, borrower payment behavior, the types and volume of our loss mitigation activities, the volumes of foreclosures completed, redesignations of loans from HFI to HFS, and fluctuations in interest rates.
See “Consolidated Results of Operations” for more information on our results.

4



Net Worth
Our net worth increased to $4.2 billion as of September 30, 2016 from $4.1 billion as of December 31, 2015, primarily due to our comprehensive income of $6.8 billion, offset by our payments to Treasury of $6.7 billion in senior preferred stock dividends during the first nine months of 2016. Our expected dividend payment of $3.0 billion for the fourth quarter of 2016 is calculated based on our net worth of $4.2 billion as of September 30, 2016 less the applicable capital reserve amount of $1.2 billion.
Single-Family Guaranty Book of Business
Credit Performance
We continued to acquire loans with strong credit profiles and to execute on our strategies for reducing credit losses in the third quarter of 2016, such as helping eligible Fannie Mae borrowers with high loan-to-value (“LTV”) ratio loans refinance into more sustainable loans through the Administration’s Home Affordable Refinance Program® (“HARP®”), offering borrowers loan modifications that can significantly reduce their monthly payments, pursuing foreclosure alternatives and managing our real estate owned (“REO”) inventory to appropriately manage 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 1 presents information 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 1 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.
Table 1: Credit Statistics, Single-Family Guaranty Book of Business(1)
  
2016
 
 
2015
 
  
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)
1.24

%
1.24

%
1.32

%
1.44

%
 
1.55

%
1.55

%
1.59

%
1.66

%
1.78

%
Seriously delinquent loan count
211,485

 
211,485

 
225,590

 
247,281

 
 
267,174

 
267,174

 
275,548

 
287,372

 
308,546

 
Foreclosed property inventory:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties(3)
41,973

 
41,973

 
45,981

 
52,289

 
 
57,253

 
57,253

 
60,958

 
68,717

 
79,319

 
Carrying value
$
4,833

 
$
4,833

 
$
5,301

 
$
5,963

 
 
$
6,608

 
$
6,608

 
$
7,245

 
$
7,997

 
$
8,915

 
Combined loss reserves
$
22,796

 
$
22,796

 
$
23,856

 
$
26,092

 
 
$
28,325

 
$
28,325

 
$
29,404

 
$
31,510

 
$
32,157

 
During the period: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit-related income (expense)(4)
$
2,894

 
$
531

 
$
1,535

 
$
828

 
 
$
(1,035
)
 
$
(819
)
 
$
1,029

 
$
(1,238
)
 
$
(7
)
 
Credit losses(5)
$
3,003

 
$
622

 
$
812

 
$
1,569

 
 
$
10,731

 
$
2,081

 
$
1,168

 
$
2,109

 
$
5,373

 
REO net sales price to unpaid principal balance(6)
74

%
74

%
75

%
73

%
 
72

%
73

%
72

%
72

%
70

%
Short sales net sales price to unpaid principal balance(7)
74

%
75

%
73

%
73

%
 
73

%
74

%
74

%
74

%
73

%
Loan workout activity (number of loans): 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home retention loan workouts(8)
67,470

 
22,468

 
22,807

 
22,195

 
 
100,208

 
20,300

 
23,571

 
27,769

 
28,568

 
Short sales and deeds-in-lieu of foreclosure
13,208

 
4,004

 
4,464

 
4,740

 
 
22,077

 
4,761

 
5,531

 
6,128

 
5,657

 
Total loan workouts
80,678

 
26,472

 
27,271

 
26,935

 
 
122,285

 
25,061

 
29,102

 
33,897

 
34,225

 
Loan workouts as a percentage of delinquent loans in our guaranty book of business(9)
19.68

%
19.85

%
20.59

%
19.24

%
 
19.95

%
16.66

%
19.28

%
22.69

%
21.71

%

5



__________
(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.
(3) 
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.”
(4) 
Consists of (a) the benefit for credit losses and (b) foreclosed property expense.
(5) 
Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense, adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts.
(6) 
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.
(7) 
Calculated as the amount of sale proceeds received on properties sold in short sale transactions during the respective periods 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.
(8) 
Consists of (a) modifications, which do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as troubled debt restructurings (“TDRs”), or repayment plans or forbearances that have been initiated but not completed and (b) repayment plans and forbearances completed. See “Table 30: 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.
(9) 
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.
Beginning in 2008, we took actions to significantly strengthen our underwriting and eligibility standards to promote sustainable homeownership and stability in the housing market. These actions have improved the credit quality of our book of business and contributed to improvement in our credit performance. For 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 27: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business.”
Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010, and was 1.24% as of September 30, 2016, compared with 1.55% as of December 31, 2015. We continue to experience disproportionately higher serious delinquency rates and credit losses from single-family loans originated in 2005 through 2008 than from loans originated in other years. Single-family loans originated in 2005 through 2008 constituted 9% of our single-family book of business as of September 30, 2016, but constituted 53% of our seriously delinquent single-family loans as of September 30, 2016 and drove 60% of our single-family credit losses in the third quarter of 2016. For information on the credit performance of our single-family book of business based on loan vintage, see “Table 11: Credit Loss Concentration Analysis” in “Consolidated Results of Operations—Credit-Related Income (Expense)—Credit Loss Performance Metrics” and “Table 29: Single-Family Conventional Seriously Delinquent Loan Concentration Analysis” in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.” For information on certain credit characteristics of our single-family book of business based on the period in which we acquired the loans, see “Table 24: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period” in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
We provide additional information on our credit-related income or expense and our credit losses in “Consolidated Results of Operations—Credit-Related Income (Expense).” We provide more information on the credit performance of mortgage loans in our single-family book of business and our efforts to reduce our credit losses in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.” See also “Risk Factors” in our 2015 Form 10-K, where we describe factors that may increase our credit-related expense and credit losses, as well as factors that may adversely affect the success of our efforts to reduce our credit losses.

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Recently Acquired Single-Family Loans
Table 2 below displays information regarding our average charged guaranty fee on and select risk characteristics of the single-family loans we acquired in each of the last seven quarters, including HARP acquisitions. Table 2 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 in these periods.
Table 2: Single-Family Acquisitions Statistics
 
2016
 
2015
 
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
 
(Dollars in millions)
 
Single-family average charged guaranty fee on new acquisitions, net of TCCA fee (in basis points)(1)
46.2

 
47.2

 
49.2

 
50.5

 
50.6

 
49.9

 
51.2

 
Single-family Fannie Mae MBS issuances
$
166,023

 
$
132,086

 
$
101,797

 
$
104,359

 
$
126,144

 
$
130,974

 
$
110,994

 
Select risk characteristics of single-family conventional acquisitions:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average FICO® credit score at origination
752

 
749

 
746

 
746

 
747

 
750

 
748

 
FICO credit score at origination less than 660
4

%
4

%
6

%
6

%
6

%
5

%
5

%
Weighted average original LTV ratio(3)
74

%
75

%
75

%
75

%
76

%
74

%
74

%
Original LTV ratio over 80%(3)(4)
27

%
28

%
27

%
30

%
30

%
27

%
26

%
Original LTV ratio over 95%(3)
3

%
3

%
3

%
3

%
3

%
3

%
2

%
Loan purpose:
 
 
 
 
 
 

 

 


 

 
Purchase
47

%
47

%
46

%
50

%
54

%
40

%
37

%
Refinance
53

%
53

%
54

%
50

%
46

%
60

%
63

%
__________
(1) 
Excludes the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 (the “TCCA”). This TCCA-related fee is unrelated to our pricing strategy, as the incremental revenue from this fee is remitted to Treasury and not retained by us. Average charged guaranty fee is calculated based on the average contractual fee rate, net of TCCA fee, 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.
(2) 
Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition.
(3) 
The original 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.
(4) 
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 average charged guaranty fee on our newly-acquired single family loans declined in the first nine months of 2016 compared with the first nine months of 2015, due to both: (1) changes in the contractual guaranty fee rates we charged for some loan types in response to market conditions; and (2) a decrease in the loan level price adjustments we charged on our acquisitions driven by improved credit risk metrics on these acquisitions as compared with our acquisitions in the first nine

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months of 2015. Loan level price adjustments are one-time cash fees that we charge at the time we acquire a loan based on the loan’s features.
In July 2016, FHFA advised us that it had established minimum base guaranty fees that generally apply to our acquisitions of 30-year and 15-year fixed-rate loans in lender swap transactions. These new minimum base guaranty fees were implemented in November 2016 and may affect our average charged guaranty fee on newly-acquired single family loans in future periods. For further discussion of FHFA’s establishment of minimum base guaranty fees, see “MD&A—Legislative and Regulatory Developments—FHFA Developments—Establishment of Minimum Base Guaranty Fees” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (“Second Quarter 2016 Form 10-Q”).
The single-family loans we acquired in the third quarter of 2016 continued to have a strong credit profile, with a weighted average original LTV ratio of 74% and a weighted average FICO credit score of 752. For more information on the credit risk profile of our single-family conventional loan acquisitions in the third quarter and first nine months of 2016, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “Table 27: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” in that section.
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 guaranty fee pricing and any impact of that pricing on the volume and mix of loans we acquire; our future 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 and high LTV refinance 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.
Providing Access to Credit Opportunities for Creditworthy Borrowers
We are continuing our efforts 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 these efforts, in 2014 we changed our eligibility requirements to increase our maximum LTV ratio from 95% to 97% for loans meeting certain criteria, and in 2015 we announced an improved affordable lending product, HomeReady®, which is designed for creditworthy borrowers with lower and moderate incomes and provides expanded eligibility for financing homes in designated low-income communities. We began acquiring loans under our revised eligibility criteria in December 2014 and under HomeReady in December 2015. See “Business—Executive Summary—Single-Family Guaranty Book of Business—Providing Access to Credit Opportunities for Creditworthy Borrowers” in our 2015 Form 10-K for more information regarding these loans, including a discussion of their eligibility requirements, the number of these loans acquired in 2015 and our expectations regarding our future acquisitions of these loans.
We continue to seek new ways to responsibly expand access to mortgage credit. FHFA’s 2016 conservatorship scorecard specifies that in 2016 we should continue to assess impediments to credit access and develop recommendations to address these barriers. 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 acquired in recent periods; however, we expect our single-family acquisitions will continue to have a strong overall credit risk profile given our current underwriting and eligibility standards and product design. We actively monitor the credit risk profile and credit performance of our single-family loan acquisitions, in conjunction with housing market and economic conditions, to determine if our pricing, eligibility and underwriting criteria accurately reflect the risks associated with loans we acquire or guarantee.
Contributions to the Housing and Mortgage Markets
Liquidity and Support Activities
As a leading provider of residential mortgage credit in the United States, we indirectly enable families to buy, refinance or rent homes. During the third quarter of 2016, we continued to provide critical liquidity and support to the U.S. mortgage market in a number of important ways:

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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 $184 billion in liquidity to the mortgage market in the third quarter of 2016 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 375,000 mortgage refinancings and approximately 338,000 home purchases, and provided financing for approximately 240,000 units of multifamily housing.
Our role in the market enables qualified 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.
We provided approximately 26,500 loan workouts in the third quarter of 2016 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, which offers additional refinancing flexibility to eligible borrowers who are current on their loans, whose loans are owned or guaranteed by us and who meet certain additional criteria. We acquired approximately 35,000 Refi Plus loans in the third quarter of 2016. Refinancings delivered to us through Refi Plus in the third quarter of 2016 reduced borrowers’ monthly mortgage payments by an average of $219.
We support affordability in the multifamily rental market. Approximately 90% of the multifamily units we financed in the third quarter of 2016 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
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 our 2015 Form 10-K in “Business—Business Segments—Capital Markets.”
2016 Market Share
We were one of the largest issuers of mortgage-related securities in the secondary market during the third quarter of 2016. Our estimated market share of new single-family mortgage-related securities issuances was 38% in both the third quarter and second quarter of 2016, compared with 36% in the third quarter of 2015.
Historically, Fannie Mae MBS has had a trading advantage over comparable Freddie Mac Participation Certificates (“Freddie Mac PCs”); however, recently, there has no longer been a significant price difference between Fannie Mae MBS and comparable Freddie Mac PCs. We believe a significant driver of the recent convergence in price between Fannie Mae MBS and comparable Freddie Mac PCs is the market’s expectation of a single GSE mortgage-backed security in the future. Despite this price convergence, our market share of new single-family mortgage-related securities issuances remained unchanged in the third quarter of 2016 as compared with the prior quarter. If our market share declines in the future due to this trend or other factors, it could adversely affect our financial results.
We remained a continuous source of liquidity in the multifamily market in the third quarter and first nine months of 2016. We owned or guaranteed approximately 19% of the outstanding debt on multifamily properties as of June 30, 2016 (the latest date for which information is available).
Serving Customer Needs and Improving Our Business Efficiency
We are engaged in various initiatives to better serve our customers’ needs and improve our business efficiency. We are committed to providing our lender partners with the products, services and tools they need to serve the market more effectively and efficiently. To further this commitment, we are focused on continuing to revise and clarify lenders’ representation and warranty obligations, implementing innovative new and enhanced tools that deliver greater value and certainty to lenders, and making our customers’ interactions with us simpler and more efficient.
Continuing to revise and clarify lenders’ representation and warranty obligations. We have taken several actions in recent years to improve our representation and warranty framework and revise and clarify lenders’ representation and warranty obligations to us. These actions have significantly reduced uncertainty surrounding lenders’ repurchase risk relating to loans they deliver to us, and our intention is that these actions will encourage lenders to safely expand their lending to a wider range of qualified borrowers. As of September 30, 2016, over 2.8 million loans in our book of business had obtained relief from repurchases for breaches of certain representations and warranties. We continue to work on new ways to reduce or clarify lenders’ repurchase risk. For example, we are leveraging the verification tools we offer through our Desktop Underwriter® automated underwriting system to expand the representation and warranty relief we provide to lenders. In October 2016, we announced that we will provide lenders with representation and warranty relief with respect to borrower

9



data that has been validated by Desktop Underwriter and with respect to property value where the appraisal has received a qualifying risk score in our Collateral Underwriter® appraisal review tool. See “Business—Executive Summary—Serving Customer Needs and Improving Our Business Efficiency” in our 2015 Form 10-K and “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in both our 2015 Form 10-K and this report for further discussion of changes to our representation and warranty framework and actions we have taken to reduce and clarify lenders’ repurchase risk.
Implementing innovative new and enhanced tools that deliver greater value and certainty to lenders. As described in “Business—Executive Summary—Serving Customer Needs and Improving Our Business Efficiency” in our 2015 Form 10-K, in 2015 we implemented a number of changes designed to help our customers originate mortgages with increased certainty, efficiency and lower costs. We continue to focus on improving our business to provide value to customers. For example:
In September 2016, we incorporated trended credit data into Desktop Underwriter. Trended credit data refers to additional historical information on a borrower’s use of revolving credit accounts, including the balance, scheduled payments and actual payments made on these accounts. Incorporating trended credit data is expected to improve the accuracy of Desktop Underwriter’s credit risk assessment and benefit borrowers who regularly pay down their revolving debt. The September 2016 update to Desktop Underwriter also added the ability to underwrite loans where the borrower does not have a credit score, automating what was previously a manual process for lenders.
In October 2016, we began offering third-party validation of borrower income data through Desktop Underwriter. We plan to expand this third-party validation service to borrower asset and employment data in December 2016.
We expect these enhancements to Desktop Underwriter will help our lender customers originate mortgages with increased certainty, efficiency and lower costs, and also help increase access to credit for creditworthy borrowers.
Making our customers’ interactions with us simpler and more efficient. We are also engaged in a multi-year effort to improve our business efficiency and agility through simplification of our business processes and enhancements to our infrastructure. Many of these improvements are also designed to enhance our customers’ experience when doing business with us, including making our customers’ interactions with us simpler and more efficient. These efforts include replacing some of our systems with simpler, more automated infrastructure that will enable us to more efficiently process transactions and manage our book of business, as well as to better adapt to industry and regulatory changes in the future. We are also implementing infrastructure improvements to support the integration of our business with the common securitization platform and our ability to issue a single security. For information about the common securitization platform and single security, see “Business—Housing Finance Reform—Conservator Developments” in our 2015 Form 10-K and “MD&A—Legislative and Regulatory Developments—FHFA Developments—Common Securitization Platform and Single Security” in our Second Quarter 2016 Form 10-Q.
Treasury Senior Preferred Stock Purchase Agreement
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 triggering mandatory receivership under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE 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 2016, we paid a total of $151.4 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 has directed us to make dividend payments on the senior preferred stock on a quarterly basis. We expect to pay Treasury a senior preferred stock dividend of $3.0 billion by December 31, 2016 for the fourth quarter of 2016.
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 any dividends declared

10



consisting of 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 $1.2 billion for each quarter of 2016, will decrease to $600 million in 2017 and will decrease to zero in 2018. Those dividend payment provisions are referred to as “net worth sweep” dividend provisions.
Although we expect to remain profitable on an annual basis for the foreseeable future, due to our expectation of continued declining capital and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter, particularly as our capital reserve amount approaches or reaches zero. If that were to occur, we would be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. See “Risk Factors” in our 2015 Form 10-K for a discussion of the risks associated with our limited and declining capital.
As described in “Legal Proceedings” and “Note 16, Commitments and Contingencies,” several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against one or more of the United States, Treasury and FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac, including challenges to the net worth sweep dividend provisions of the senior preferred stock. We are also a party to some of those lawsuits. We cannot predict the course or the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits.
Housing and Mortgage Market and Economic Conditions
According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 2.9% on an annualized basis in the third quarter of 2016, compared with an increase of 1.4% in the second quarter of 2016. The overall economy gained an estimated 575,000 non-farm jobs in the third quarter of 2016. According to the U.S. Bureau of Labor Statistics, over the 12 months ending in September 2016, the economy created an estimated 2.4 million non-farm jobs. The unemployment rate was 5.0% in September 2016, compared with 4.9% in June 2016.
According to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $10.1 trillion of single-family debt outstanding, was estimated to be approximately $11.2 trillion as of June 30, 2016 (the latest date for which information is available) and $11.1 trillion as of March 31, 2016.
Housing sales were mixed in the third quarter of 2016 as compared with the second quarter of 2016. Total existing home sales averaged 5.4 million units annualized in the third quarter of 2016, a 2.2% decrease from the second quarter of 2016, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 4% of existing home sales in September 2016, compared with 6% in June 2016 and 7% in September 2015. According to the U.S. Census Bureau, new single-family home sales increased during the third quarter of 2016, averaging an annualized rate of 599,000 units, a 6.1% gain from the second quarter of 2016.
The number of months’ supply, or the inventory/sales ratio, of available existing homes remained unchanged in the third quarter of 2016, while the supply of available new homes decreased during the quarter. According to the National Association of REALTORS, the months’ supply of existing unsold homes was 4.5 months as of September 30, 2016 and June 30, 2016. According to the U.S. Census Bureau, the months’ supply of new single-family unsold homes was 4.8 months as of September 30, 2016, compared with 5.2 months as of June 30, 2016.
The overall mortgage market serious delinquency rate fell to 3.1% as of June 30, 2016 (the latest date for which information is available), according to the Mortgage Bankers Association’s National Delinquency Survey, its lowest level since the third quarter of 2007, compared with 3.3% as of March 31, 2016. We provide information about Fannie Mae’s serious delinquency rate, which decreased in the third quarter of 2016, in “Single-Family Guaranty Book of Business—Credit Performance.”
Based on our home price index, we estimate that home prices on a national basis increased by 1.5% in the third quarter of 2016 and by 5.7% in the first nine months of 2016, following increases of 4.7% in 2015, 4.3% in 2014 and 7.8% in 2013. Despite the recent increases in home prices, we estimate that, through September 30, 2016, home prices on a national basis remained 1.1% 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.
Thirty-year fixed-rate mortgage rates ended the quarter at 3.42% for the week of September 29, 2016, down from 3.48% for the week of June 30, 2016, according to Freddie Mac’s Primary Mortgage Market Survey®.

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Recently, the prices of Fannie Mae MBS and comparable Freddie Mac PCs in the “To-Be-Announced” (“TBA”) market have converged. For example, Fannie Mae fixed-rate 30-year MBS with a coupon of 3.0% traded 13 basis points higher than the comparable Freddie Mac Gold fixed-rate PC security as of June 30, 2016, compared with only 3 basis points higher as of September 30, 2016.
During the third quarter of 2016, the multifamily sector exhibited stable fundamentals, according to preliminary third-party data, with the estimated national vacancy level remaining at the same level as in the second quarter of 2016, coupled with increasing rent growth. The estimated national multifamily vacancy rate for institutional investment-type apartment properties was 5.0% as of September 30, 2016, the same as of June 30, 2016, but up from 4.8% as of September 30, 2015. National asking rents increased by an estimated 1.0% during the third quarter of 2016, the same percentage as during the second quarter of 2016, but down from the estimated 1.3% increase during the third quarter of 2015. Because estimated multifamily rent growth has outpaced wage growth over the past few years, multifamily rental housing affordability has declined in recent years.
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 38,000 units during the third quarter of 2016, according to preliminary data from Reis, Inc. While that is an increase from the approximately 36,000 units absorbed during the second quarter of 2016, the pace of absorption slowed compared with the approximately 41,000 units absorbed during the third quarter of 2015. 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. Nearly 364,000 new multifamily units are expected to be completed this year. Although the bulk of this new supply is concentrated in a limited number of metropolitan areas, we believe this increase in supply will result in an increase in the national multifamily vacancy rate and a slowdown in rent growth next year.
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 exist in its current form, the extent of our role in the market, how long we will be in conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, 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 “Business—Housing Finance Reform” in our 2015 Form 10-K for a discussion of proposals for reform of the housing finance system, including the GSEs, that could materially affect our business, including proposals to wind down Fannie Mae and Freddie Mac. See “Risk Factors” in both this report and our 2015 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.
Financial Results. We continued to be profitable in the third quarter of 2016, with net income of $3.2 billion. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: 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. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our expectation of continued declining capital and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter, particularly as our capital reserve amount approaches or reaches zero. See “Treasury Senior Preferred Stock Purchase Agreement” above and “Risk Factors” in our 2015 Form 10-K for more information on, and the risks associated with, our limited and declining capital. In addition, 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.
Revenues. We currently have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) 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. In recent years, an increasing portion of our net interest income has been derived from guaranty fees rather than from our retained mortgage portfolio assets, due to the impact of guaranty fee increases implemented in 2012 and the reduction of our retained mortgage portfolio. More than two-thirds of our net interest income for the first nine months of 2016 was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees. We expect that guaranty fees will continue to account for an increasing portion of our net interest income.

12



We expect continued decreases in the size of our retained mortgage portfolio, which will continue to negatively impact our net interest income and net revenues; however, we also expect increases in our guaranty fee revenues will partially offset the negative impact of the decline in our retained mortgage portfolio. We expect our guaranty fee revenues to increase over the next several years, 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 and their impact on our competitive environment and guaranty fee revenues; 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; economic and housing market conditions, including changes in interest rates; our market share; and legislative and regulatory changes.
Overall Market Conditions. While we expect the single-family serious delinquency rate for the overall mortgage market will continue to decline, we believe the rate of decline will be gradual. We expect the national single-family serious delinquency rate will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans originated prior to 2009 to work their way through the foreclosure process.
We forecast that total originations in the U.S. single-family mortgage market in 2016 will increase from 2015 levels by approximately 6% from an estimated $1.73 trillion in 2015 to $1.83 trillion in 2016, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will increase from an estimated $808 billion in 2015 to $820 billion in 2016.
Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 1.5% in the third quarter of 2016 and by 5.7% in the first nine months of 2016. We expect the rate of home price appreciation in 2016 to be slightly higher than the rate in 2015. 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. Our credit losses were $3.0 billion for the first nine months of 2016, down from $8.7 billion for the first nine months of 2015. We expect our credit losses to be lower in 2016 than our 2015 credit losses. See “Consolidated Results of Operations—Credit-Related Income (Expense)—Credit Loss Performance Metrics” for a discussion of our credit losses for the third quarter and first nine months of 2016 and 2015, including the impact on our credit losses for the first nine months of 2015 of our adoption of FHFA’s 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”) and a change in our accounting policy for nonaccrual loans, which collectively resulted in $3.6 billion in charge-offs in the first nine months of 2015.
Loss Reserves. Our combined loss reserves were $23.0 billion as of September 30, 2016, down from $28.6 billion as of December 31, 2015. Our loss reserves have declined substantially from their peak and are expected to decline further. For a discussion of the factors that contributed to the decline in our loss reserves in the third quarter and first nine months of 2016, see “Consolidated Results of Operations—Credit-Related Income (Expense)” and “Consolidated Balance Sheet Analysis—Mortgage Loans.”
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 future revenues and net interest income, our future dividend payments to Treasury, the credit characteristics of, and the credit risk posed by, our future acquisitions, our future credit risk transfer transactions, 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 single-family loan delinquency rates, future mortgage originations, future refinancings, 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, including negative interest rates; changes in unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our guaranty fee revenues and competitive environment; our future serious delinquency rates; our future objectives and activities in support of those objectives, including actions we may take to

13



reach additional underserved creditworthy borrowers; future legislative or regulatory requirements or 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, in its role as our conservator or as our regulator, such as changes in the type of business we do or implementation of a single security for Fannie Mae and Freddie Mac; limitations on our business imposed by FHFA, in its role as our conservator or as our regulator; 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; the volume and pace of future nonperforming loan sales and their impact on our results and serious delinquency rates; 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; changes in generally accepted accounting principles (“GAAP”); credit availability; global political risks; natural disasters, environmental 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 2015 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 2015 Form 10-K and in “MD&A—Legislative and Regulatory Developments” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (“First Quarter 2016 Form 10-Q”) and in our Second Quarter 2016 Form 10-Q. Also see “Risk Factors” in this report and in our 2015 Form 10-K for a discussion of risks relating to legislative and regulatory matters.
Housing Finance Reform
Congress continues to consider housing finance reform that could result in significant changes in our structure and role in the future. As described in “Business—Housing Finance Reform—Legislative Developments” in our 2015 Form 10-K, in the first session of the 114th Congress, which convened in January 2015, several bills were introduced and considered in the Senate and the House of Representatives relating to Fannie Mae, Freddie Mac and the housing finance system, two of which were enacted into law.
We expect Congress to continue to consider legislation relating to the GSEs and housing finance reform, including conducting hearings and considering legislation that would alter the housing finance system or the activities or operations of the GSEs. See “Risk Factors” in this report and our 2015 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.
Dodd-Frank Act—FHFA Rule Regarding Stress Testing
Pursuant to an FHFA rule implementing a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are required to conduct an annual stress test, based on our data as of December 31, using three different scenarios of financial conditions provided by FHFA: baseline, adverse and severely adverse. As required by the rule, we published our most recent stress test results for the severely adverse scenario on our website on August 8, 2016.
2015 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 October 2016, after the release of data reported under the Home Mortgage Disclosure Act, FHFA notified us that it had preliminarily determined that we met three of our five single-family housing goals and all of our multifamily housing goals for 2015. For the single-family low-income families home purchase goal, FHFA preliminarily determined that our performance was 23.5% of our 2015 acquisitions of single-family owner-occupied purchase money mortgage loans, which failed to meet the FHFA-established benchmark of 24% or the overall market level of 23.6% for 2015. For the single-family

14



very low-income families home purchase goal, FHFA preliminarily determined that our performance was 5.6% of our 2015 acquisitions of single-family owner-occupied purchase money mortgage loans, which failed to meet the FHFA-established benchmark of 6% or the overall market level of 5.8% for 2015.
If FHFA’s final determination is that we did not meet these housing goals, it will determine whether the goals were feasible. If FHFA finds that these goals were feasible, we may become subject to a housing plan that could require us to take additional steps that could have an adverse effect on our results of operations and financial condition. The housing plan must describe the actions we would take to meet the goal in the next calendar year and be approved by FHFA. The potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and civil money penalties.
See “Business—Our Charter and Regulation of Our Activities—The GSE Act—Housing Goals and Duty to Serve Underserved Markets—Housing Goals for 2015 to 2017” in our 2015 Form 10-K for a more detailed discussion of our housing goals.
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 2015 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 2015 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 two 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: fair value measurement and combined loss reserves.
See “MD&A—Critical Accounting Policies and Estimates” in our 2015 Form 10-K for a discussion of these critical accounting policies and estimates.
CONSOLIDATED RESULTS OF OPERATIONS
This section provides a discussion of our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements, including the accompanying notes.

15



Table 3: Summary of Condensed Consolidated Results of Operations
 
For the Three Months
 
For the Nine Months
 
Ended September 30,
 
Ended September 30,
 
2016
 
2015
 
Variance
 
2016
 
2015
 
Variance
 
(Dollars in millions)
Net interest income
$
5,435

 
$
5,588

 
$
(153
)
 
$
15,490

 
$
16,332

 
$
(842
)
Fee and other income
175

 
259

 
(84
)
 
552

 
1,123

 
(571
)
Net revenues
5,610

 
5,847

 
(237
)
 
16,042

 
17,455

 
(1,413
)
Investment gains, net
467

 
299

 
168

 
934

 
1,155

 
(221
)
Fair value losses, net
(491
)
 
(2,589
)
 
2,098

 
(4,971
)
 
(1,902
)
 
(3,069
)
Administrative expenses
(661
)
 
(952
)
 
291

 
(2,027
)
 
(2,364
)
 
337

Credit-related income (expense)
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
673

 
1,550

 
(877
)
 
3,458

 
1,050

 
2,408

Foreclosed property expense
(110
)
 
(497
)
 
387

 
(507
)
 
(1,152
)
 
645

Total credit-related income (expense)
563

 
1,053

 
(490
)
 
2,951

 
(102
)
 
3,053

Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees
(465
)
 
(413
)
 
(52
)
 
(1,358
)
 
(1,192
)
 
(166
)
Other expenses, net
(300
)
 
(215
)
 
(85
)
 
(818
)
 
(412
)
 
(406
)
Income before federal income taxes
4,723

 
3,030

 
1,693

 
10,753

 
12,638

 
(1,885
)
Provision for federal income taxes
(1,527
)
 
(1,070
)
 
(457
)
 
(3,475
)
 
(4,150
)
 
675

Net income attributable to Fannie Mae
$
3,196

 
$
1,960

 
$
1,236

 
$
7,278

 
$
8,488

 
$
(1,210
)
Total comprehensive income attributable to Fannie Mae
$
2,989

 
$
2,213

 
$
776

 
$
6,794

 
$
8,368

 
$
(1,574
)
Net Interest Income
We currently have two primary sources of net interest income: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) 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. 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 Fannie Mae MBS in consolidated trusts on our balance sheet. Those guaranty fees are the primary component of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.

16



Table 4 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities. 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.
Table 4: Analysis of Net Interest Income and Yield
 
For the Three Months Ended September 30,
 
2016
 
2015
 
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
$
226,334

 
$
2,357

 
4.17
%
 
$
252,272

 
$
2,443

 
3.87
%
Mortgage loans of consolidated trusts
2,837,241

 
23,254

 
3.28
 
 
2,796,172

 
24,537

 
3.51
 
Total mortgage loans(1)
3,063,575

 
25,611

 
3.34
 
 
3,048,444

 
26,980

 
3.54
 
Mortgage-related securities
63,796

 
616

 
3.86
 
 
106,939

 
1,153

 
4.31
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(44,538
)
 
(413
)
 
3.71
 
 
(74,903
)
 
(810
)
 
4.33
 
Total mortgage-related securities, net
19,258

 
203

 
4.22
 
 
32,036

 
343

 
4.28
 
Non-mortgage-related securities(2)
57,013

 
71

 
0.49
 
 
47,794

 
17

 
0.14
 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
30,770

 
39

 
0.50
 
 
26,110

 
15

 
0.23
 
Advances to lenders
4,961

 
27

 
2.14
 
 
4,354

 
22

 
1.98
 
Total interest-earning assets
$
3,175,577

 
$
25,951

 
3.27
%
 
$
3,158,738

 
$
27,377

 
3.47
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
50,579

 
$
55

 
0.43
%
 
$
83,870

 
$
36

 
0.17
%
Long-term funding debt
302,629

 
1,647

 
2.18
 
 
331,417

 
1,861

 
2.25
 
Total funding debt
353,208

 
1,702

 
1.93
 
 
415,287

 
1,897

 
1.83
 
Debt securities of consolidated trusts
2,884,409

 
19,227

 
2.67
 
 
2,835,104

 
20,702

 
2.92
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(44,538
)
 
(413
)
 
3.71
 
 
(74,903
)
 
(810
)
 
4.33
 
Total debt securities of consolidated trusts held by third parties
2,839,871

 
18,814

 
2.65
 
 
2,760,201

 
19,892

 
2.88
 
Total interest-bearing liabilities
$
3,193,079

 
$
20,516

 
2.57
%
 
$
3,175,488

 
$
21,789

 
2.74
%
Net interest income/net interest yield
 
 
$
5,435

 
0.68
%
 
 
 
$
5,588

 
0.71
%


17



 
For the Nine Months Ended September 30,
 
2016
 
2015
 
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
$
232,222

 
$
7,082

 
4.07
%
 
$
261,794

 
$
7,280

 
3.71
%
Mortgage loans of consolidated trusts
2,826,405

 
71,746

 
3.38
 
 
2,789,593

 
73,426

 
3.51
 
Total mortgage loans(1)
3,058,627

 
78,828

 
3.44
 
 
3,051,387

 
80,706

 
3.53
 
Mortgage-related securities
73,820

 
2,237

 
4.04
 
 
114,732

 
3,869

 
4.50
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(50,854
)
 
(1,524
)
 
4.00
 
 
(79,914
)
 
(2,650
)
 
4.42
 
Total mortgage-related securities, net
22,966

 
713

 
4.14
 
 
34,818

 
1,219

 
4.67
 
Non-mortgage-related securities(2)
53,509

 
182

 
0.45
 
 
44,836

 
42

 
0.12
 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
25,885

 
92

 
0.47
 
 
30,708

 
40

 
0.17
 
Advances to lenders
4,219

 
68

 
2.11
 
 
4,166

 
64

 
2.02
 
Total interest-earning assets
$
3,165,206

 
$
79,883

 
3.36
%
 
$
3,165,915

 
$
82,071

 
3.46
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
55,580

 
$
161

 
0.38
%
 
$
90,707

 
$
98

 
0.14
%
Long-term funding debt
308,349

 
5,237

 
2.26
 
 
345,503

 
5,706

 
2.20
 
Total funding debt
363,929

 
5,398

 
1.98
 
 
436,210

 
5,804

 
1.77
 
Debt securities of consolidated trusts
2,870,629

 
60,519

 
2.81
 
 
2,843,823

 
62,585

 
2.93
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(50,854
)
 
(1,524
)
 
4.00
 
 
(79,914
)
 
(2,650
)
 
4.42
 
Total debt securities of consolidated trusts held by third parties
2,819,775

 
58,995

 
2.79
 
 
2,763,909

 
59,935

 
2.89
 
Total interest-bearing liabilities
$
3,183,704

 
$
64,393

 
2.70
%
 
$
3,200,119

 
$
65,739

 
2.74
%
Net interest income/net interest yield
 
 
$
15,490

 
0.65
%
 
 
 
$
16,332

 
0.69
%

 
As of September 30,
 
2016
 
2015
Selected benchmark interest rates
 
 
 
 
 
3-month LIBOR
0.85
%
 
0.33
%
2-year swap rate
1.01
 
 
0.75
 
5-year swap rate
1.18
 
 
1.38
 
10-year swap rate
1.46
 
 
2.00
 
30-year Fannie Mae MBS par coupon rate
2.36
 
 
2.80
 
__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Typically, interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $318 million and $977 million, respectively, for the third quarter and first nine months of 2016 compared with $409 million and $1.3 billion, respectively, for the third quarter and first nine months of 2015.
(2) 
Includes cash equivalents.

18



Table 5: Rate/Volume Analysis of Changes in Net Interest Income
  
For the Three Months Ended
 
For the Nine Months Ended
  
September 30, 2016 vs. 2015
 
September 30, 2016 vs. 2015
  
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
$
(86
)
 
$
(262
)
 
$
176

 
$
(198
)
 
$
(865
)
 
$
667

Mortgage loans of consolidated trusts
(1,283
)
 
356

 
(1,639
)
 
(1,680
)
 
960

 
(2,640
)
Total mortgage loans
(1,369
)
 
94

 
(1,463
)
 
(1,878
)
 
95

 
(1,973
)
Total mortgage-related securities, net
(140
)
 
(133
)
 
(7
)
 
(506
)
 
(381
)
 
(125
)
Non-mortgage-related securities(2)
54

 
4

 
50

 
140

 
10

 
130

Federal funds sold and securities purchased under agreements to resell or similar arrangements
24

 
3

 
21

 
52

 
(7
)
 
59

Advances to lenders
5

 
3

 
2

 
4

 
1

 
3

Total interest income
$
(1,426
)
 
$
(29
)
 
$
(1,397
)
 
$
(2,188
)
 
$
(282
)
 
$
(1,906
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
19

 
(19
)
 
38

 
63

 
(50
)
 
113

Long-term funding debt
(214
)
 
(158
)
 
(56
)
 
(469
)
 
(627
)
 
158

Total funding debt
(195
)
 
(177
)
 
(18
)
 
(406
)
 
(677
)
 
271

Total debt securities of consolidated trusts held by third parties
(1,078
)
 
649

 
(1,727
)
 
(940
)
 
1,475

 
(2,415
)
Total interest expense
$
(1,273
)
 
$
472

 
$
(1,745
)
 
$
(1,346
)
 
$
798

 
$
(2,144
)
Net interest income
$
(153
)
 
$
(501
)
 
$
348

 
$
(842
)
 
$
(1,080
)
 
$
238

__________
(1) 
Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.
(2) 
Includes cash equivalents.
Net interest income decreased in the third quarter and first nine months of 2016 compared with the third quarter and first nine months of 2015, primarily due to a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio pursuant to the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s additional portfolio cap. The average balance of our retained mortgage portfolio was 19% lower in the third quarter and first nine months of 2016 compared with the third quarter and first nine months of 2015. The decrease in net interest income was partially offset by increased guaranty fee revenue, as loans with higher guaranty fees became a larger part of our guaranty book of business in the third quarter and first nine months of 2016. Net interest yield decreased in the third quarter and first nine months of 2016 compared with the third quarter and first nine months of 2015, 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. See “Business Segment Results—The Capital Markets Group’s Mortgage Portfolio” for more information about our retained mortgage portfolio.
Fee and Other Income
Fee and other income includes transaction fees, multifamily fees, technology fees and other miscellaneous income. Fee and other income decreased in the third quarter of 2016 compared with the third quarter of 2015 primarily due to lower multifamily fees driven by a decrease in yield maintenance income resulting from lower prepayment volumes. Fee and other income decreased in the first nine months of 2016 compared with the first nine months of 2015 primarily due to a gain of $227 million in the second quarter of 2015 from the sale of our remaining unsecured bankruptcy claims against Lehman Brothers and its subsidiaries. In addition, we recognized lower multifamily fees in the first nine months of 2016 driven by a decrease in yield maintenance income resulting from lower prepayment volumes. We recognized lower technology fees in the first nine months of 2016 as a result of eliminating fees charged to our customers for using our Desktop Underwriter and Desktop Originator® systems beginning in June 2015.

19



Investment Gains, Net
Investment gains, net primarily includes gains and losses recognized from the sale of available-for-sale (“AFS”) securities and loans, gains and losses recognized on the consolidation and deconsolidation of securities, net other-than-temporary impairments recognized on our investments, and lower of cost or fair value adjustments on HFS loans. Investment gains increased in the third quarter of 2016 compared with the third quarter of 2015 primarily due to higher gains on sales of AFS securities in the third quarter of 2016 compared with the third quarter of 2015 as a result of an increase in sales volume and higher prices in the third quarter of 2016. Investment gains decreased in the first nine months of 2016 compared with the first nine months of 2015 primarily due to gains on sales of multifamily loans in 2015 that did not occur in 2016 and greater losses on HFS loans due to lower of cost or fair value adjustments in the first nine months of 2016 compared with the first nine months of 2015.
Fair Value Losses, Net
Table 6 displays the components of our fair value gains and losses.
Table 6: Fair Value Losses, Net
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Risk management derivatives fair value gains (losses) attributable to:
 
 
 
 
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(295
)
 
$
(266
)
 
$
(855
)
 
$
(694
)
Net change in fair value during the period
362

 
(2,138
)
 
(2,639
)
 
(916
)
Total risk management derivatives fair value gains (losses), net
67

 
(2,404
)
 
(3,494
)
 
(1,610
)
Mortgage commitment derivatives fair value losses, net
(216
)
 
(361
)
 
(945
)
 
(427
)
Total derivatives fair value losses, net
(149
)
 
(2,765
)
 
(4,439
)
 
(2,037
)
Trading securities gains, net
38

 
13

 
88

 
69

CAS debt gains (losses), net
(388
)
 
135

 
(616
)
 
26

Other, net(1)
8

 
28

 
(4
)
 
40

Fair value losses, net
$
(491
)
 
$
(2,589
)
 
$
(4,971
)
 
$
(1,902
)
__________
(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 Gains (Losses), 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 gains in the third quarter of 2016 primarily as a result of increases in the fair value of our pay-fixed derivatives due to increases in longer-term swap rates during the period. We recognized risk management derivative fair value losses in the third quarter of 2015 and first nine months of 2015 and 2016 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 periods.
We present, by derivative instrument type, the fair value gains and losses, net on our derivatives in “Note 9, Derivative Instruments.”
Mortgage Commitment Derivatives Fair Value Losses, Net
We recognized fair value losses on our mortgage commitments in the third quarter and first nine months of 2016 and 2015 primarily due to losses on commitments to sell mortgage-related securities driven by an increase in prices as interest rates decreased during the commitment periods.

20



CAS Debt Fair Value Gains (Losses), Net
We enter into various credit risk transfer transactions, including the issuance of CAS debt, in order to reduce the economic risk to us and to taxpayers of future borrower defaults. CAS debt we issued prior to 2016 is reported at fair value as “Debt of Fannie Mae” in our condensed consolidated balance sheets. We recognized fair value losses on CAS debt reported at fair value in the third quarter and first nine months of 2016 primarily due to tightening spreads between CAS yields and LIBOR during the periods. We recognized fair value gains on CAS debt reported at fair value in the third quarter and first nine months of 2015 primarily due to widening spreads between CAS yields and LIBOR during the periods. For further discussion of our credit risk transfer transactions, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk—Credit Risk-Sharing Transactions.”
Administrative Expenses
Administrative expenses decreased in the third quarter and first nine months of 2016 compared with the third quarter and first nine months of 2015 primarily due to the recognition of expenses related to the settlement of our defined benefit pension plan obligations in the third quarter of 2015. The actuarial losses of $305 million, previously recorded in “Accumulated other comprehensive income,” were recognized in “Administrative expenses” and the associated tax amounts were recognized in “Provision for federal income taxes” in our condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2015.
Credit-Related Income (Expense)
We refer to our provision (benefit) for loan losses and provision (benefit) for guaranty losses collectively as our “provision (benefit) for credit losses.” Credit-related income (expense) consists of our provision (benefit) for credit losses and foreclosed property expense (income).
Benefit for Credit Losses
Our total loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans. We establish our loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be realized over time in our financial statements. When we reduce our loss reserves, we recognize a benefit for credit losses. When we determine that a loan is uncollectible, typically upon foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale), we recognize a charge-off against our loss reserves. For a subset of delinquent single-family loans, we charge off the portion of the loans that is deemed uncollectible prior to foreclosure when the loans have been delinquent for a specified length of time and meet specified mark-to-market LTV ratios. We also recognize charge-offs upon the redesignation of nonperforming loans from HFI to HFS. We record recoveries of previously charged-off amounts as a reduction to charge-offs.
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.”

21



Table 7: Total Loss Reserves
 
As of
 
September 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
Allowance for loan losses
 
$
22,706

 
 
 
$
27,951

 
Reserve for guaranty losses
 
297

 
 
 
639

 
Combined loss reserves
 
23,003

 
 
 
28,590

 
Other
 
88

 
 
 
184

 
Total loss reserves
 
23,091

 
 
 
28,774

 
Fair value losses previously recognized on acquired credit-impaired loans(1)
 
7,037

 
 
 
8,083

 
Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans
 
$
30,128

 
 
 
$
36,857

 
__________
(1) 
Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets.
The reserve for guaranty losses decreased from December 31, 2015 to September 30, 2016 primarily due to increased collateral underlying certain trusts, as well as lower interest rates and higher home prices.
Table 8: Changes in Combined Loss Reserves
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
 
 
 
 
Beginning balance
$
24,089

 
$
31,808

 
$
28,590

 
$
36,787

Benefit for credit losses
(673
)
 
(1,550
)
 
(3,458
)
 
(1,050
)
Charge-offs(1)
(630
)
 
(801
)
 
(2,761
)
 
(8,287
)
Recoveries
207

 
250

 
536

 
1,132

Other(2)
10

 
(12
)
 
96

 
1,113

Ending balance
$
23,003

 
$
29,695

 
$
23,003

 
$
29,695

 
As of
 
September 30,
2016
 
December 31, 2015
 
(Dollars in millions)
Allocation of combined loss reserves:
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
Single-family
$
22,796

 
 
$
28,325

 
Multifamily
207

 
 
265

 
       Total
$
23,003

 
 
$
28,590

 
Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:
 
 
 
 
 
Single-family
0.81

%
 
1.00

%
Multifamily
0.09

 
 
0.12

 
Combined loss reserves as a percentage of:
 
 
 
 
 
Total guaranty book of business
0.75

%
 
0.94

%
Recorded investment in nonaccrual loans
51.33

 
 
57.86

 

22



_________
(1) 
Our charge-offs for 2015 include the initial charge-offs associated with our approach to adopting the charge-off provisions of the Advisory Bulletin, as well as charge-offs relating to a change in accounting policy for nonaccrual loans.
(2) 
Amounts represent changes in other loss reserves which are reflected in benefit for credit losses, charge-offs and recoveries.
The amount of our provision or benefit for credit losses may vary from period to period based on factors such as changes in actual and expected home prices, borrower payment behavior, the types and volumes of our loss mitigation activities, the volumes of foreclosures completed, redesignations of loans from HFI to HFS, and fluctuations in interest rates. In addition, our provision or benefit 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.
Our benefit for credit losses decreased in the third quarter of 2016 compared to the third quarter of 2015 primarily due to a small increase in interest rates in the third quarter of 2016 compared to a decline in interest rates in the third quarter of 2015, as well as a smaller benefit from forecasted and actual home price increases as housing market conditions continued to improve and we had fewer nonperforming loans held for investment in our book of business in the third quarter of 2016 compared with the third quarter of 2015.
Our benefit for credit losses increased in the first nine months of 2016 compared to the first nine months of 2015 primarily due to declining interest rates in the first nine months of 2016 compared with increasing interest rates in the first nine months of 2015. Also contributing to the increase in our benefit for credit losses in the first nine months of 2016 was a smaller negative impact resulting from the redesignation of loans from HFI to HFS compared with the first nine months of 2015.
The following factors contributed to our benefit for credit losses in each of the periods presented:
We recognized a benefit for credit losses in the third quarter of 2016 primarily due to an increase in home prices, including distressed property valuations. 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.
We recognized a benefit for credit losses in the first nine months of 2016 due to higher home prices, including distressed property valuations, and a decline in interest rates. As interest rates decline, we expect an increase in future prepayments on single-family individually impaired loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the impairment relating to concessions provided on these loans and results in a decrease in the provision for credit losses.
We recognized a benefit for credit losses in the third quarter of 2015 primarily due to an increase in home prices and a decrease in interest rates.
We recognized a benefit for credit losses in the first nine months of 2015 primarily due to an increase in home prices. Additionally, our benefit for credit losses in the first nine months of 2015 was impacted by the redesignation of certain nonperforming single-family loans with an aggregate unpaid principal balance of $5.3 billion from HFI to HFS. These loans were adjusted to the lower of cost or fair value, which partially offset our benefit for credit losses. Interest rates increased during the first nine months of 2015, which also partially offset our benefit for credit losses in the first nine months of 2015. As interest rates increase, we expect a decline in future prepayments on individually impaired loans, including modified loans. Lower expected prepayments lengthen the expected lives of modified loans, which increases the impairment related to concessions provided on these loans and results in an increase in the provision for credit losses.
Our approach to the adoption of the charge-off provisions of the Advisory Bulletin on January 1, 2015 had no impact on the amount of benefit for credit losses that we recognized in the third quarter or first nine months of 2015.
We discuss our expectations regarding our future loss reserves in “Executive Summary—Outlook—Loss Reserves.”

23



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 our recorded investment in HFI and HFS 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
 
As of
 
September 30,
2016
 
December 31, 2015
 
(Dollars in millions)
TDRs on accrual status:
 
 
 
 
 
 
 
Single-family
 
$
131,966

 
 
 
$
140,588

 
Multifamily
 
230

 
 
 
376

 
Total TDRs on accrual status
 
$
132,196

 
 
 
$
140,964

 
Nonaccrual loans:
 
 
 
 
 
 
 
Single-family
 
$
44,319

 
 
 
$
48,821

 
Multifamily
 
498

 
 
 
591

 
Total nonaccrual loans
 
$
44,817

 
 
 
$
49,412

 
Accruing on-balance sheet loans past due 90 days or more(1)
 
$
414

 
 
 
$
499

 
 
For the Nine Months
 
 
Ended September 30,
 
 
 
2016
 
 
 
2015
 
 
 
(Dollars in millions)
 
Interest related to on-balance sheet TDRs and nonaccrual loans:
 
 
 
 
 
 
 
Interest income forgone(2)
 
$
3,312

 
 
 
$
4,146

 
Interest income recognized for the period(3)
 
4,565

 
 
 
4,876

 
__________
(1) 
Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consists of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default.
(2) 
Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms.
(3) 
Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans.
Foreclosed Property Expense
Foreclosed property expense decreased in the third quarter and first nine months of 2016 compared with the third quarter and first nine months of 2015 primarily due to a decline in the number of foreclosed properties and lower operating expenses relating to property tax and insurance costs on our single-family foreclosed properties.
Credit Loss Performance Metrics
Our credit-related income (expense) should be considered in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonaccrual loans and TDRs, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses. We believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are

24



able to evaluate our credit performance on a more consistent basis among periods. Table 10 displays the components of our credit loss performance metrics as well as our single-family and multifamily initial charge-off severity rates.
Table 10: Credit Loss Performance Metrics
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
(Dollars in millions) 
Charge-offs, net of recoveries
$
423

 
5.6
bps
 
$
551

 
7.2
bps
 
$
2,225

 
9.8
bps
 
$
3,600

 
15.8
bps
Adoption of Advisory Bulletin and change in accounting policy(2)

 
 
 

 
 
 

 
 
 
3,555

 
15.6
 
Foreclosed property expense
110

 
1.4
 
 
497

 
6.5
 
 
507

 
2.2
 
 
1,152

 
5.0
 
Credit losses including the effect of fair value losses on acquired credit-impaired loans
533

 
7.0
 
 
1,048

 
13.7
 
 
2,732

 
12.0
 
 
8,307

 
36.4
 
Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property expense(3)
83

 
1.1
 
 
103

 
1.4
 
 
273

 
1.1
 
 
349

 
1.5
 
Credit losses and credit loss ratio
$
616

 
8.1
bps
 
$
1,151

 
15.1
bps
 
$
3,005

 
13.1
bps
 
$
8,656

 
37.9
bps
Credit losses attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
$
622

 
 
 
 
$
1,168

 
 
 
 
$
3,003

 
 
 
 
$
8,650

 
 
 
Multifamily(4)
(6
)
 
 
 
 
(17
)
 
 
 
 
2

 
 
 
 
6

 
 
 
     Total
$
616

 
 
 
 
$
1,151

 
 
 
 
$
3,005

 
 
 
 
$
8,656

 
 
 
Single-family initial charge-off severity rate(5)
 
 
16.0
%
 
 
 
17.0
%
 
 
 
20.3
%
 
 
 
27.0
%
Multifamily initial charge-off severity rate(5)
 
 
22.0
%
 
 
 
17.0
%
 
 
 
15.4
%
 
 
 
23.4
%
__________
(1) 
Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period.
(2) 
Our charge-offs for 2015 include the initial charge-offs associated with our approach to adopting the charge-off provisions of the Advisory Bulletin, as well as charge-offs relating to a change in accounting policy for nonaccrual loans.
(3) 
Includes fair value losses from acquired credit-impaired loans.
(4) 
Negative credit losses are the result of recoveries on previously charged-off amounts.
(5) 
Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition. The single-family rate includes charge-offs pursuant to the provisions of the Advisory Bulletin and charge-offs of property tax and insurance receivables, while it excludes charge-offs from short sales and third-party sales. Multifamily rate is net of risk-sharing agreements.
Credit losses and our credit loss ratio decreased in the third quarter of 2016 compared with the third quarter of 2015 primarily due to lower foreclosed property expense and lower charge-offs.
Credit losses and our credit loss ratio decreased in the first nine months of 2016 compared with the first nine months of 2015 primarily due to our approach to adopting the charge-off provisions of the Advisory Bulletin and a change in our accounting policy for nonaccrual loans in the first quarter of 2015. Additionally, lower charge-offs in the first nine months of 2016 compared with the first nine months of 2015 contributed to the decrease in our credit losses and credit loss ratio in the first nine months of 2016.
We discuss our expectations regarding our future credit losses in “Executive Summary—Outlook—Credit Losses.”

25



Table 11 displays concentrations of our single-family credit losses based on geography, credit characteristics and loan vintages.
Table 11: Credit Loss Concentration Analysis
 
Percentage of Single-Family Conventional Guaranty Book of Business Outstanding(1)
 
Percentage of Single-Family Credit Losses(2)