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 June 30, 2018
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
3900 Wisconsin Avenue, NW
Washington, DC 20016

(800) 2FANNIE
(800-232-6643)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
Emerging growth company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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 June 30, 2018, there were 1,158,087,567 shares of common stock of the registrant outstanding.
 





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

Fannie Mae Second Quarter 2018 Form 10-Q
i


 
 
MD&A | Introduction


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 provided for the exercise of certain functions by our Board of Directors. 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.

 
 
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. Congress continues to consider options for reform of the housing finance system, including Fannie Mae. As a result of our agreements with the U.S. Department of the Treasury (“Treasury”) and directives from our conservator, we are not permitted to retain more than $3.0 billion in capital reserves or to pay dividends or other distributions to stockholders other than Treasury. Our agreements with Treasury also include covenants that significantly restrict our business activities. For additional information on the conservatorship, the uncertainty of our future, our agreements with Treasury, and recent actions and statements relating to housing finance reform by the Administration, Congress and FHFA, see “Business—Conservatorship and Treasury Agreements,” “Business—Legislation and Regulation” and “Risk Factors” in our Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”) and “Legislation and Regulation” and “Risk Factors” in our Form 10-Q for the quarter ended March 31, 2018 (“First Quarter 2018 Form 10-Q”) and in this report.
 
 
 
 
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 2017 Form 10-K. You can find a “Glossary of Terms Used in This Report” in the MD&A of our 2017 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 these forward-looking statements. 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 2017 Form 10-K.
Introduction
Fannie Mae provides a stable source of liquidity to the mortgage market and increases the availability and affordability of housing in the United States. We operate in the secondary mortgage market, primarily working with lenders. We do not originate loans or lend money directly to consumers in the primary mortgage market. Instead, we securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee (which we refer to as Fannie Mae MBS); purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date; and engage in other activities that increase the supply of affordable housing. Our common stock is traded in the OTCQB market and quoted under the ticker symbol “FNMA.”
Through our single-family and multifamily business segments, we provided $125 billion in liquidity to the mortgage market in the second quarter of 2018, which enabled the financing of 665,000 home purchases, refinancings or rental units.

Fannie Mae Second Quarter 2018 Form 10-Q
1


 
 
MD&A | Introduction


Fannie Mae Provided $125 Billion in Liquidity in the Second Quarter of 2018
capturea06.jpg
Executive Summary
Summary of Our Financial Performance
chart-f9bc4f66ee525d944cb.jpg












 


 
Quarterly Results
 
The increase in our net income in the second quarter of 2018, compared with the second quarter of 2017, was primarily driven by a shift to fair value gains in the second quarter of 2018 from fair value losses in the second quarter of 2017. We discuss the drivers of net fair value gains (losses) in “Consolidated Results of Operations—Fair Value Gains (Losses), Net.”




Fannie Mae Second Quarter 2018 Form 10-Q
2


 
 
MD&A | Executive Summary


chart-32b17a0af70d5709038.jpg




 

 
Year-to-Date Results
 
The increase in our net income in the first half of 2018, compared with the first half of 2017, was primarily driven by a shift to fair value gains in the first half of 2018 from fair value losses in the first half of 2017. We discuss the drivers of net fair value gains (losses) in “Consolidated Results of Operations—Fair Value Gains (Losses), Net.”



See “Consolidated Results of Operations” for more information on our financial results.
Net Worth
Our net worth of $7.5 billion as of June 30, 2018 reflects our comprehensive income of $4.5 billion for the second quarter of 2018 and $3.0 billion in retained capital reserves.
Financial Performance Outlook
We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors could result in significant volatility in our financial results from quarter to quarter or year to year. We expect volatility from quarter to quarter in our financial results due to 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. Other factors that may result in volatility in our quarterly financial results include developments that affect our loss reserves, such as changes in interest rates, home prices or accounting standards, or events such as natural disasters.
The potential for significant volatility in our financial results could result in a net loss in a future quarter. We are permitted to retain up to $3.0 billion in capital reserves as a buffer in the event of a net loss in a future quarter. However, any net loss we experience in the future could be greater than the amount of our capital reserves, resulting in a net worth deficit for that quarter. See “Risk Factors” in our 2017 Form 10-K for a discussion of the risks associated with the limitations on our ability to rebuild our capital reserves, including factors that could result in a net loss or net worth deficit in a future quarter.

Fannie Mae Second Quarter 2018 Form 10-Q
3


 
 
MD&A | Executive Summary


Treasury Draws and Dividend Payments
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Pursuant to the senior preferred stock purchase agreement, we issued shares of senior preferred stock to Treasury in 2008. Acting as successor to the rights, titles, powers and privileges of the Board, the conservator has declared and directed us to pay dividends to Treasury on the senior preferred stock on a quarterly basis for every dividend period for which dividends were payable since we entered into conservatorship in 2008.
The chart below shows the funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement, as well as the dividend payments we have made to Treasury on the senior preferred stock, since entering into conservatorship.
chart-b0305f910bce5c2182c.jpg
__________
(1) 
Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our prior draws of funds from Treasury, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Amounts may not sum due to rounding.
(2) 
Treasury draws are shown in the period for which requested, not when the funds were received by us. Draw requests have been funded in the quarter following a net worth deficit.
We expect to pay Treasury a third quarter 2018 dividend of $4.5 billion by September 30, 2018. The current dividend provisions of the senior preferred stock provide for quarterly dividends consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds a $3.0 billion capital reserve amount. We refer to this as a “net worth sweep” dividend. As noted above, our net worth was $7.5 billion as of June 30, 2018.
If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $113.9 billion. If we were to draw additional funds from Treasury under the agreement in respect of 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. For a description of the terms of the senior preferred stock purchase agreement and the senior preferred stock, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2017 Form 10-K.
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

Fannie Mae Second Quarter 2018 Form 10-Q
4


 
 
MD&A | Executive Summary


a positive net worth under specified conditions, the U.S. government does not guarantee our securities or other obligations.
Legislation and Regulation
The information in this section updates and supplements information regarding legislation and regulation affecting our business set forth in “Business—Legislation and Regulation” in our 2017 Form 10-K and in “MD&A—Legislation and Regulation” in our First Quarter 2018 Form 10-Q. Also see “Risk Factors” in this report and in our 2017 Form 10-K for discussions of risks relating to legislative and regulatory matters.
Housing Finance Reform
On June 21, 2018, the Administration released a federal government reform and reorganization plan which addressed, among many other matters, reforming the federal role in housing finance. In the plan, the Administration proposes ending the conservatorships of Fannie Mae and Freddie Mac, returning them to fully private, shareholder-owned companies and eliminating their statutory charters, while providing a federal regulator with the authority to oversee the companies and approve other guarantors to compete with the incumbent enterprises. The proposal asserts that if the companies lost some of the benefits that have led them to dominate the market, it would enable other private companies to begin competing in the secondary mortgage market.
The proposal also states that Fannie Mae and Freddie Mac, along with other potential guarantors, would have access to an explicit and limited government guarantee on the mortgage-backed securities they issue through the establishment of a mortgage insurance fund paid for by the companies and other guarantors. The proposal suggests that the newly-privatized Fannie Mae and Freddie Mac would focus on secondary market liquidity for loans to qualified borrowers. The proposal notes that the U.S. Department of Housing and Urban Development (“HUD”) would assume primary responsibility for supporting the needs of low- and moderate-income borrowers that cannot be fulfilled through traditional underwriting and that would be partially subsidized through a fee levied on the outstanding volume of mortgage-backed securities issued by guarantors. The proposal acknowledges that legislative and policy changes would be required for its implementation.
We expect Congress, the Administration and FHFA to continue considering housing finance reform that could result in significant changes in our structure and role in the future. As a result, there continues to be significant uncertainty regarding the future of our company.
See “Risk Factors” in our 2017 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.
Single-Counterparty Credit Limit
On June 14, 2018, the Federal Reserve adopted a rule to restrict the counterparty credit exposure of very large banking organizations. Beginning in 2020, any bank holding company with $250 billion or more in total consolidated assets must limit their exposure to any counterparty and its affiliates to no more than 25% of tier 1 capital, and any U.S. banking organization that is a global systemically important bank (“U.S. GSIB”) must adhere to a stricter limit of 15% of tier 1 capital for exposures to any other U.S. GSIB or non-bank entity supervised by the Federal Reserve. Similarly, limits are set on counterparty credit exposures held by U.S. intermediate holding companies that are subsidiaries of foreign banking organizations. While Fannie Mae is in conservatorship, exposures involving claims on or directly and fully guaranteed by Fannie Mae are exempt from these restrictions and Fannie Mae MBS and debt can be used as collateral to reduce a banking organization’s counterparty exposure. At this time, we do not know what impact, if any, this rule will have on our customers’ business practices, or whether and to what extent this rule may adversely affect demand for or the liquidity of securities we issue.
Proposed Capital Requirements
We are required by 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”), to maintain sufficient capital to meet minimum and risk-based capital levels established by FHFA in order to be classified as “adequately capitalized.” However, because we are under conservatorship, FHFA has suspended our capital classifications and advised us that we will not be subject to corrective action requirements that would ordinarily result from our receiving a capital classification of “undercapitalized.”

Fannie Mae Second Quarter 2018 Form 10-Q
5


 
MD&A | Legislation and Regulation


On June 12, 2018, FHFA proposed new capital requirements for Fannie Mae and Freddie Mac, which would also be suspended while we remain in conservatorship. The proposed rule would implement a new framework for risk-based capital requirements and a revised minimum leverage capital requirement. The proposed risk-based capital framework would provide a granular assessment of credit risk specific to different mortgage loan categories, as well as components for market risk, operational risk, and a going-concern buffer. The proposed rule includes two alternative leverage ratio proposals on which FHFA is seeking feedback.
See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Capital” in our 2017 Form 10-K for information about capital requirements under the current rule.
FHFA Structure
On July 16, 2018, in connection with litigation related to Fannie Mae’s and Freddie Mac’s senior preferred stock purchase agreements with Treasury, the U.S Court of Appeals for the Fifth Circuit held that FHFA’s structure violates the Constitution’s separation of powers and concluded that the Housing and Economic Recovery Act’s removal restriction, which permits removal of FHFA’s Director only “for cause by the President,” is inoperative and should be severed from the remainder of the statute. FHFA has broad powers over our business in its role as our conservator and as our regulator. As a result, changes in the Director of FHFA can result in changes in FHFA’s strategic goals for our conservatorship or other material changes in our business. See “Risk Factors” in our 2017 Form 10-K for a discussion of risks relating to our conservatorship and FHFA regulation. The court left intact the remainder of the statute and FHFA’s past actions, including the third amendment to the senior preferred stock purchase agreement. See “Legal Proceedings—Senior Preferred Stock Purchase Agreements Litigation—Southern District of Texas” for additional information about the litigation.

Fannie Mae Second Quarter 2018 Form 10-Q
6


 
MD&A | Key Market Economic Indicators


Key Market Economic Indicators
The table below displays certain macroeconomic indicators that can significantly influence our business and financial results. We expect home prices on a national basis to continue to grow in 2018 at a similar rate as in 2017. We also expect significant regional variation in the timing and rate of home price growth.
Selected Key Market Economic Indicators
 
 
 
 
 
For the Three Months
 
For the Six Months
 
Ended June 30,
Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Home price change based on Fannie Mae national home price index(1)
2.7
%
 
3.0
%
 
4.1
%
 
4.1
%
 
Growth in U.S. gross domestic product ("GDP"), annualized percentage change(2)
4.1
%
 
3.0
%
 
 
As of
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
U.S. unemployment rate
4.0
%
 
4.1
%
 
4.4
%
2-year swap rate
2.79

 
2.08

 
1.62

10-year swap rate
2.93

 
2.40

 
2.28

10-year Treasury rate
2.86

 
2.41

 
2.30

30-year Fannie Mae MBS par coupon rate
3.60

 
3.00

 
3.03

_______
(1) 
Calculated internally using property data information on loans purchased by Fannie Mae or Freddie Mac and property data information obtained from other third-party data providers. Fannie Mae’s home price index is a weighted repeat transactions index, measuring average price changes in repeat transactions on the same properties. Fannie Mae’s home price index excludes prices on properties sold in foreclosure. Fannie Mae’s home price estimates are based on preliminary data and are subject to change as additional data becomes available.
(2) 
According to the U.S. Bureau of Economic Analysis and subject to revision.

Uncertainty and concerns associated with trade policy have recently intensified, which could impact economic growth and inflation. See “Key Market Economic Indicators” in our 2017 Form 10-K for a description of how changes in GDP, unemployment rates, home prices and interest rates can affect our financial results.


Fannie Mae Second Quarter 2018 Form 10-Q
7


 
MD&A | Consolidated Results of Operations


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.
Summary of Condensed Consolidated Results of Operations
 
For the Three Months
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
 
2018
 
2017
 
Variance
 
2018
 
2017
 
Variance
 
(Dollars in millions)
Net interest income
$
5,377

 
$
5,002

 
$
375

 
$
10,609

 
$
10,348

 
$
261

Fee and other income
239

 
353

 
(114
)
 
559

 
602

 
(43
)
Net revenues
5,616

 
5,355

 
261

 
11,168

 
10,950

 
218

Investment gains, net
277

 
385

 
(108
)
 
527

 
376

 
151

Fair value gains (losses), net
229

 
(691
)
 
920

 
1,274

 
(731
)
 
2,005

Administrative expenses
(755
)
 
(686
)
 
(69
)
 
(1,505
)
 
(1,370
)
 
(135
)
Credit-related income:
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
1,296

 
1,267

 
29

 
1,513

 
1,663

 
(150
)
Foreclosed property expense
(139
)
 
(34
)
 
(105
)
 
(301
)
 
(251
)
 
(50
)
Total credit-related income
1,157

 
1,233

 
(76
)
 
1,212

 
1,412

 
(200
)
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees
(565
)
 
(518
)
 
(47
)
 
(1,122
)
 
(1,021
)
 
(101
)
Other expenses, net
(366
)
 
(291
)
 
(75
)
 
(569
)
 
(673
)
 
104

Income before federal income taxes
5,593

 
4,787

 
806

 
10,985

 
8,943

 
2,042

Provision for federal income taxes
(1,136
)
 
(1,587
)
 
451

 
(2,267
)
 
(2,970
)
 
703

Net income
$
4,457

 
$
3,200

 
$
1,257

 
$
8,718

 
$
5,973

 
$
2,745

Total comprehensive income
$
4,459

 
$
3,117

 
$
1,342

 
$
8,397

 
$
5,896

 
$
2,501

Net Interest Income
We have two primary sources of net interest income:
guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and
the difference between interest income earned on the assets in our retained mortgage portfolio and other investments portfolio and the interest expense associated with the debt that funds those assets.
The table below displays the components of our net interest income from our guaranty book of business and our retained mortgage portfolio.
Components of Net Interest Income
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
Variance
 
2018
 
2017
 
Variance
 
 
(Dollars in millions)
Net interest income from portfolios(1)
$
1,215

 
$
1,126

 
$
89

 
$
2,293

 
$
2,209

 
$
84

 
Net interest income from guaranty book of business:
 
 
 
 
 
 
 
 
 
 
 
 
Base guaranty fee income, net of TCCA
2,110

 
2,024

 
86

 
4,199

 
4,010

 
189

 
Base guaranty fee income related to TCCA(2)
565

 
518

 
47

 
1,122

 
1,021

 
101

 
Net amortization income
1,487

 
1,334

 
153

 
2,995

 
3,108

 
(113
)
 
Total net interest income from guaranty book of business
4,162

 
3,876

 
286

 
8,316

 
8,139

 
177

 
Total net interest income
$
5,377

 
$
5,002

 
$
375

 
$
10,609

 
$
10,348

 
$
261

 
__________
(1) 
Includes interest income from assets held in our retained mortgage portfolio and other investments portfolio, as well as other assets used to generate lender liquidity. Also includes interest expense on outstanding Connecticut Avenue

Fannie Mae Second Quarter 2018 Form 10-Q
8


 
MD&A | Consolidated Results of Operations


Securities® of $339 million and $241 million for the three months ended June 30, 2018 and 2017, respectively, and $641 million and $449 million for the six months ended June 30, 2018 and 2017, respectively.
(2) 
Revenues generated by the 10 basis point guaranty fee increase we implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
Net interest income increased in the second quarter and first half of 2018 compared with the second quarter and first half of 2017 due to:
An increase in income from our guaranty book of business as the size of our guaranty book of business increased and loans with higher base guaranty fees comprised a larger part of our guaranty book of business in the second quarter and first half of 2018 than in the second quarter and first half of 2017.
We initially recognize mortgage loans and debt of consolidated trusts in our consolidated balance sheet at fair value. We recognize the difference between the initial fair value and the carrying value of these mortgage loans and debt as cost basis adjustments in our consolidated balance sheet. We amortize cost basis adjustments, including premiums and discounts on mortgage loans and securities, as a yield adjustment over the contractual life of the loan or security as a component of net interest income.
The impact of net premiums and discounts on net interest income can vary:
The net premium position of our consolidated debt will amortize as income over time.
The net discount position on our mortgage loans of Fannie Mae was primarily recorded upon the acquisition of credit-impaired loans. The extent to which we may record income in future periods as we amortize this discount will be based on the actual performance of the loans.
The timing of when this amortization income is recognized in our consolidated statements of income can vary based on a number of factors, the most significant of which is interest rates. In a rising interest rate environment, our mortgage loans tend to prepay more slowly, which typically results in lower net amortization income from cost basis adjustments on our consolidated debt. Conversely, in a declining interest rate environment, our mortgage loans tend to prepay faster, resulting in higher net amortization income from cost basis adjustments on our consolidated debt.
The following charts display information about the outstanding net premium and net discount positions on our debt of consolidated trusts and loans of Fannie Mae.
chart-a1792f3455f75e97880.jpgchart-238e6b26e39656e1ab3.jpg

Fannie Mae Second Quarter 2018 Form 10-Q
9


 
MD&A | Consolidated Results of Operations


The table below displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities for the periods indicated. For most components of the average balances, we use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages.
Analysis of Net Interest Income and Yield

For the Three Months Ended June 30,

2018

2017

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
$
156,392


$
1,786


4.57
%

$
190,255

 
$
1,978

 
4.16
%
Mortgage loans of consolidated trusts
3,065,008


26,521


3.46


2,951,028

 
25,033

 
3.39

Total mortgage loans(1)
3,221,400


28,307


3.51


3,141,283

 
27,011

 
3.44

Mortgage-related securities
10,964


106


3.87


13,860

 
127

 
3.64

Non-mortgage-related securities(2)
54,678


262


1.89


54,542

 
140

 
1.02

Federal funds sold and securities purchased under agreements to resell or similar arrangements
31,939


149


1.84


37,136

 
87

 
0.93

Advances to lenders
4,202


33


3.12


4,208

 
28

 
2.64

Total interest-earning assets
$
3,323,183


$
28,857


3.47
%

$
3,251,029

 
$
27,393

 
3.37
%
Interest-bearing liabilities:







 
 
 
 
 
Short-term funding debt
$
25,204


$
(108
)

1.69
%

$
30,320

 
$
(56
)
 
0.73
%
Long-term funding debt
203,165


(1,135
)

2.23


263,064

 
(1,388
)
 
2.11

Connecticut Avenue Securities® (“CAS”)
23,887


(339
)

5.68


18,923

 
(241
)
 
5.09

Total debt of Fannie Mae
252,256


(1,582
)

2.51


312,307

 
(1,685
)
 
2.16

Debt securities of consolidated trusts held by third parties
3,065,489


(21,898
)

2.86


2,949,510

 
(20,706
)
 
2.81

Total interest-bearing liabilities
$
3,317,745


$
(23,480
)

2.83
%

$
3,261,817

 
$
(22,391
)
 
2.75
%
Net interest income/net interest yield


$
5,377


0.65
%

 
 
$
5,002

 
0.62
%


Fannie Mae Second Quarter 2018 Form 10-Q
10


 
MD&A | Consolidated Results of Operations


 
For the Six Months Ended June 30,
 
2018
 
2017
 
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
$
159,721

 
$
3,522

 
4.41
%
 
$
195,302

 
$
4,071

 
4.17
%
Mortgage loans of consolidated trusts
3,056,594

 
52,819

 
3.46

 
2,937,007

 
49,987

 
3.40

Total mortgage loans(1)
3,216,315

 
56,341

 
3.50

 
3,132,309

 
54,058

 
3.45

Mortgage-related securities
10,750

 
206

 
3.83

 
14,627

 
269

 
3.66

Non-mortgage-related securities(2)
53,200

 
469

 
1.75

 
55,264

 
241

 
0.87

Federal funds sold and securities purchased under agreements to resell or similar arrangements
34,649

 
291

 
1.67

 
38,851

 
153

 
0.78

Advances to lenders
4,024

 
64

 
3.16

 
4,356

 
56

 
2.55

Total interest-earning assets
$
3,318,938

 
$
57,371

 
3.46
%
 
$
3,245,407

 
$
54,777

 
3.38
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
28,204

 
$
(214
)
 
1.51
%
 
$
31,381

 
$
(99
)
 
0.63
%
Long-term funding debt
208,751

 
(2,293
)
 
2.20

 
267,990

 
(2,866
)
 
2.14

Connecticut Avenue Securities® (“CAS”)
23,184

 
(641
)
 
5.53

 
17,904

 
(449
)
 
5.02

Total debt of Fannie Mae
260,139

 
(3,148
)
 
2.42

 
317,275

 
(3,414
)
 
2.15

Debt securities of consolidated trusts held by third parties
3,057,812

 
(43,614
)
 
2.85

 
2,937,399

 
(41,015
)
 
2.79

Total interest-bearing liabilities
$
3,317,951

 
$
(46,762
)
 
2.82
%
 
$
3,254,674

 
$
(44,429
)
 
2.73
%
Net interest income/net interest yield
 
 
$
10,609

 
0.64
%
 
 
 
$
10,348

 
0.64
%
__________
(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 $97 million and $265 million, respectively, for the second quarter and first half of 2018, compared with $186 million and $402 million, respectively, for the second quarter and first half of 2017.
(2) 
Includes cash equivalents.

Fannie Mae Second Quarter 2018 Form 10-Q
11


 
MD&A | Consolidated Results of Operations


Fair Value Gains (Losses), Net
The estimated fair value of our derivatives, trading securities and other financial instruments carried at fair value 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. While the estimated fair value of our derivatives that serve to mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements.
The table below displays the components of our fair value gains and losses.
Fair Value Gains (Losses), Net
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
Risk management derivatives fair value gains (losses) attributable to:
 
 
 
 
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(286
)
 
$
(224
)
 
$
(501
)
 
$
(479
)
Net change in fair value during the period
324

 
(78
)
 
838

 
289

Total risk management derivatives fair value gains (losses), net
38

 
(302
)
 
337

 
(190
)
Mortgage commitment derivatives fair value gains (losses), net
(76
)
 
(192
)
 
488

 
(272
)
Total derivatives fair value gains (losses), net
(38
)
 
(494
)
 
825

 
(462
)
Trading securities gains, net
21

 
18

 
119

 
86

CAS fair value gains (losses), net
27

 
(169
)
 
19

 
(331
)
Other, net
219

 
(46
)
 
311

 
(24
)
Fair value gains (losses), net
$
229

 
$
(691
)
 
$
1,274

 
$
(731
)
Fair value gains in the second quarter of 2018 were primarily driven by price decreases during the quarter on long-term debt of consolidated trusts held at fair value, which are included in “Other, net.”
Fair value gains in the first half of 2018 were primarily driven by:
increases in the fair value of our mortgage commitment derivatives due to gains on commitments to sell mortgage-related securities as a result of a decrease in the prices of securities as interest rates increased during the commitment periods;
increases in the fair value of our pay-fixed risk management derivatives due to an increase in longer-term swap rates during the period; and
fair value decreases during the period on long-term debt of consolidated trusts held at fair value.
Fair value losses in the second quarter and first half of 2017 were primarily driven by:
decreases in the fair value of our pay-fixed risk management derivatives due to declines in longer-term swap rates during the second quarter;
decreases in the fair value of our mortgage commitments due to losses on commitments to sell mortgage-related securities due to an increase in prices as interest rates decreased during the commitment periods; and
fair value losses on CAS debt reported at fair value resulting from tightening spreads between CAS debt yields and LIBOR during the periods. 

Fannie Mae Second Quarter 2018 Form 10-Q
12


 
MD&A | Consolidated Results of Operations


Credit-Related Income
Benefit for Credit Losses
The table below provides quantitative analysis of the drivers of our single-family benefit for credit losses for the periods presented. Many of the drivers that contribute to our benefit for credit losses overlap or are interdependent. The attribution shown below is based on internal allocation estimates. The table below also displays our multifamily benefit for credit losses.
Components of Benefit for Credit Losses
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in billions)
Benefit for credit losses:
 
 
 
 
 
 
 
Changes in loan activity(1)
$
0.5

 
$
0.1

 
$
0.3

 
$
0.1

Redesignation of held for investment (“HFI”) loans to held for sale (“HFS”) loans
0.8

 
0.4

 
1.0

 
0.5

Actual and forecasted home prices
0.4

 
0.6

 
0.7

 
1.2

Actual and projected interest rates
(0.3
)
 
0.1

 
(0.7
)
 
(0.1
)
Other(2)
(0.1
)
 
0.1

 
0.2

 
*

Single-family benefit for credit losses
1.3

 
1.3

 
1.5

 
1.7

Multifamily benefit for credit losses
*

 
*

 
*

 
*

Total benefit for credit losses
$
1.3

 
$
1.3

 
$
1.5

 
$
1.7

_________
*
Represents less than $50 million.
(1) 
Primarily consists of changes in the allowance due to loan delinquency, loan liquidations, new troubled debt restructurings, amortization of concessions granted to borrowers and the impact of FHFA’s Advisory Bulletin 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”).
(2) 
Primarily consists of the impact of model and assumption changes that are not separately included in the other components.
The primary factors that impacted our benefit for credit losses in the second quarter and first half of 2018 were:
The redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS as we no longer intend to hold them for the foreseeable future or to maturity. Upon redesignation of these loans, we recorded the loans at the lower of cost or fair value with a charge-off to the allowance for loan losses. Amounts recorded in the allowance related to the loans exceeded the amounts charged off, which contributed to the benefit for credit losses.
An increase in home prices, which contributed to the benefit for credit losses. 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 loss reserves and provision for credit losses.
The benefit for credit losses was partially offset by the impact of higher actual and projected mortgage interest rates. As mortgage interest rates rise, we expect a decrease in future prepayments on single-family individually impaired loans, including modified loans. Lower expected prepayments lengthen the expected lives of modified loans, which increases the impairment relating to concessions provided on these loans and results in an increase in the provision for credit losses.
The following factors contributed to our benefit for credit losses in the second quarter and first half of 2017:
Higher actual and forecasted home prices in the periods.
The redesignation of certain reperforming and nonperforming single-family loans from HFI to HFS during the periods.

Fannie Mae Second Quarter 2018 Form 10-Q
13


 
MD&A | Consolidated Results of Operations


Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) Fees
Pursuant to the TCCA, FHFA directed us to increase our single-family guaranty fees by 10 basis points and remit this increase to Treasury. This TCCA-related revenue is included in “Net interest income” and the expense is recognized as “TCCA fees” in our condensed consolidated financial statements. TCCA fees increased in the first half of 2018 compared with the first half of 2017 as our book of business subject to the TCCA continued to grow. We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase.
Federal Income Taxes
The decrease in our provision for federal income taxes in the second quarter and first half of 2018 as compared to the second quarter and first half of 2017 was the result of the Tax Cuts and Jobs Act of 2017, which reduced the federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018. This decline was the primary driver of the reduction in our effective tax rate to 20.3% for the three months ended June 30, 2018 and 20.6% for the six months ended June 30, 2018, compared with 33.2% for both the three and six months ended June 30, 2017. Our effective tax rates for all the periods presented were different from the prevailing federal statutory rate primarily due to the benefits of our investments in housing projects eligible for low-income housing tax credits.
Consolidated Balance Sheet Analysis
This section provides a discussion of our condensed consolidated balance sheets and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Summary of Condensed Consolidated Balance Sheets
 
As of
 
 
 
June 30, 2018
 
December 31, 2017
 
Variance
 
(Dollars in millions)
Assets 
 
 
 
 
 
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
$
37,153

 
$
51,580

 
$
(14,427
)
Restricted cash
27,876

 
28,150

 
(274
)
Investments in securities(1)
46,104

 
39,522

 
6,582

Mortgage loans:
 
 
 
 
 
Of Fannie Mae
154,471

 
167,793

 
(13,322
)
Of consolidated trusts
3,070,965

 
3,029,816

 
41,149

Allowance for loan losses
(16,812
)
 
(19,084
)
 
2,272

Mortgage loans, net of allowance for loan losses
3,208,624

 
3,178,525

 
30,099

Deferred tax assets, net
15,375

 
17,350

 
(1,975
)
Other assets
28,232

 
30,402

 
(2,170
)
Total assets
$
3,363,364

 
$
3,345,529

 
$
17,835

Liabilities and equity (deficit)
 
 
 
 
 
Debt:
 
 
 
 
 
Of Fannie Mae
$
250,690

 
$
276,752

 
$
(26,062
)
Of consolidated trusts
3,086,799

 
3,053,302

 
33,497

Other liabilities
18,416

 
19,161

 
(745
)
Total liabilities
3,355,905

 
3,349,215

 
6,690

Fannie Mae stockholders’ equity (deficit):
 
 
 
 
 
Senior preferred stock
120,836

 
117,149

 
3,687

Other net deficit
(113,377
)
 
(120,835
)
 
7,458

Total equity (deficit)
7,459

 
(3,686
)
 
11,145

Total liabilities and equity (deficit)
$
3,363,364

 
$
3,345,529

 
$
17,835


Fannie Mae Second Quarter 2018 Form 10-Q
14


 
MD&A | Consolidated Balance Sheet Analysis


__________
(1) 
Includes $35.8 billion as of June 30, 2018 and $29.2 billion as of December 31, 2017 of non-mortgage-related securities.
Mortgage Loans, Net of Allowance for Loan Losses
The mortgage loans reported in our condensed consolidated balance sheet are classified as either HFS or HFI and include loans owned by Fannie Mae and loans held in consolidated trusts.
Mortgage loans, net of allowance for loan losses increased as of June 30, 2018 compared with December 31, 2017 primarily driven by:
an increase in mortgage loans due to acquisitions, partially offset by liquidations and sales; and
a decrease in our allowance for loan losses primarily driven by the redesignation of single-family loans from HFI to HFS.
For additional information on our mortgage loans, see “Note 3, Mortgage Loans,” and for additional information on changes in our allowance for loan losses, see “Note 4, Allowance for Loan Losses.”
Debt
The decrease in debt of Fannie Mae from December 31, 2017 to June 30, 2018 was primarily driven by lower funding needs. The increase in debt of consolidated trusts from December 31, 2017 to June 30, 2018 was primarily driven by sales of Fannie Mae MBS, which are accounted for as issuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party. See “Liquidity and Capital Management—Liquidity Management—Debt Funding” for a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt. Also see “Note 7, Short-Term and Long-Term Debt” for additional information on our outstanding debt.
Stockholders’ Equity (Deficit)
The shift from a net deficit of $3.7 billion as of December 31, 2017 to net equity of $7.5 billion as of June 30, 2018 reflects:
our comprehensive income of $8.4 billion for the first half of 2018;
our receipt of $3.7 billion from Treasury during the first quarter of 2018 pursuant to the senior preferred stock purchase agreement, which eliminated our net worth deficit as of December 31, 2017; and
our dividend payment to Treasury of $938 million in the second quarter of 2018.


Fannie Mae Second Quarter 2018 Form 10-Q
15


 
MD&A | Retained Mortgage Portfolio


Retained Mortgage Portfolio
Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own, including Fannie Mae MBS and non-Fannie Mae mortgage-related securities. Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio. We use our retained mortgage portfolio primarily to provide liquidity to the mortgage market and support our loss mitigation activities. Previously, we also used our retained mortgage portfolio for investment purposes.
The chart below separates the instruments within our retained mortgage portfolio, measured by unpaid principal balance, into three categories based on each instrument’s use:
Lender liquidity, which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the single-family and multifamily mortgage markets.
Loss mitigation supports our loss mitigation efforts through the purchase of delinquent loans from MBS trusts.
Other represents assets that were previously purchased for investment purposes. More than half of the balance of “Other” consisted of reverse mortgage loans and Fannie Mae-wrapped reverse mortgage securities as of June 30, 2018. We expect the amount of assets in “Other” will decline over time as they liquidate, mature or are sold.
Retained Mortgage Portfolio
(Dollars in billions)
chart-1f9112c53e4250a083e.jpgchart-da3edd290fda542fb49.jpgchart-5cfc59889be25f9aa7c.jpg
 
 
Lender liquidity
 
 
Loss mitigation
 
 
Other

Fannie Mae Second Quarter 2018 Form 10-Q
16


 
MD&A | Retained Mortgage Portfolio


The table below displays the components of our retained mortgage portfolio, measured by unpaid principal balance.
Retained Mortgage Portfolio
 
As of
 
June 30, 2018
 
December 31, 2017
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
Mortgage loans(1)
 
$
135,856

 
 
 
$
146,316

 
Reverse mortgages
 
23,664

 
 
 
26,458

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
43,161

 
 
 
31,719

 
Fannie Mae-wrapped reverse mortgage securities
 
6,390

 
 
 
6,689

 
Ginnie Mae reverse mortgage securities
 
1,926

 
 
 
527

 
Other Fannie Mae-wrapped securities(3)
 
677

 
 
 
3,414

 
Private-label and other securities(3)
 
3,220

 
 
 
2,588

 
Total single-family mortgage-related securities(4)
 
55,374

 
 
 
44,937

 
Total single-family mortgage loans and mortgage-related securities
 
214,894

 
 
 
217,711

 
Multifamily:
 
 
 
 
 
 
 
Mortgage loans(5)
 
3,784

 
 
 
4,591

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
6,686

 
 
 
7,860

 
Commercial mortgage-backed securities (“CMBS”)
 

 
 
 
24

 
Mortgage revenue bonds
 
441

 
 
 
597

 
Total multifamily mortgage-related securities(6)
 
7,127

 
 
 
8,481

 
Total multifamily mortgage loans and mortgage-related securities
 
10,911

 
 
 
13,072

 
Total retained mortgage portfolio
 
$
225,805

 
 
 
$
230,783

 
__________
(1) 
Includes single-family loans classified as TDRs that were on accrual status of $79.9 billion and $86.3 billion as of June 30, 2018 and December 31, 2017, respectively, and single-family loans on nonaccrual status of $30.2 billion and $33.1 billion as of June 30, 2018 and December 31, 2017, respectively.
(2) 
Includes Fannie Mae, Freddie Mac and Ginnie Mae mortgage-related securities, excluding Fannie Mae-wrapped securities and Ginnie Mae reverse mortgage securities.
(3) 
The increase in private-label and other securities and the corresponding decrease in other Fannie Mae-wrapped securities from December 31, 2017 to June 30, 2018 was due to the dissolution of a Fannie Mae-wrapped private-label securities trust during the first quarter of 2018.
(4) 
The fair value of these single-family mortgage-related securities was $56.6 billion and $46.7 billion as of June 30, 2018 and December 31, 2017, respectively.
(5) 
Includes multifamily loans classified as TDRs that were on accrual status of $64 million and $84 million as of June 30, 2018 and December 31, 2017, respectively, and multifamily loans on nonaccrual status of $200 million and $122 million as of June 30, 2018 and December 31, 2017, respectively.
(6) 
The fair value of these multifamily mortgage-related securities was $7.4 billion and $9.0 billion as of June 30, 2018 and December 31, 2017, respectively.
The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury, as described in “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2017 Form 10-K. Our retained mortgage portfolio is below the final $250 billion cap under the senior preferred stock purchase agreement that becomes effective on December 31, 2018. We expect the size of our retained mortgage portfolio will continue to decrease in 2018.

Fannie Mae Second Quarter 2018 Form 10-Q
17


 
MD&A | Retained Mortgage Portfolio


In support of our loss mitigation strategy, we purchased $10.5 billion of loans from our single-family MBS trusts in the first half of 2018, the substantial majority of which were delinquent. See “MD&ARetained Mortgage Portfolio—Purchases of Loans from Our MBS Trusts” in our 2017 Form 10-K for more information relating to our purchases of loans from MBS trusts.
Total Book of Business
The table below displays the composition of our total book of business based on unpaid principal balance. Our single-family book of business accounted for 91% of our total book of business as of June 30, 2018 and December 31, 2017. While our total book of business includes all of our mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
Composition of Total Book of Business
 
As of
 
June 30, 2018
 
December 31, 2017
 
Single-Family 
 
Multifamily 
 
Total 
 
Single-Family 
 
Multifamily 
 
Total 
 
(Dollars in millions)
Guaranty book of business(1)
$
2,949,038

 
$
291,352

 
$
3,240,390

 
$
2,931,356

 
$
280,502

 
$
3,211,858

Non-Fannie Mae mortgage securities(2)
6,907

 
441

 
7,348

 
4,005

 
621

 
4,626

Total book of business
$
2,955,945

 
$
291,793

 
$
3,247,738

 
$
2,935,361

 
$
281,123

 
$
3,216,484

Guaranty Book of Business Detail:
 
 
 
 
 
 
 
 
 
 
 
Conventional guaranty book of business(3)
$
2,912,112

 
$
290,119

 
$
3,202,231

 
$
2,890,908

 
$
279,235

 
$
3,170,143

Government guaranty book of business(4)
$
36,926

 
$
1,233

 
$
38,159

 
$
40,448

 
$
1,267

 
$
41,715

__________
(1) 
Includes other single-family Fannie Mae guarantees of $1.7 billion and $1.8 billion as of June 30, 2018 and December 31, 2017, respectively, and other multifamily Fannie Mae guarantees of $12.1 billion and $12.4 billion as of June 30, 2018 and December 31, 2017, respectively. The unpaid principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(2) 
Includes mortgage-related securities issued by Freddie Mac and Ginnie Mae, mortgage revenue bonds, Alt-A and subprime private-label securities, and CMBS.
(3) 
Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
(4) 
Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
The GSE Act requires us to set aside each year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases and to pay this amount to specified HUD and Treasury funds. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps. In February 2018, we paid $239 million to the funds based on our new business purchases in 2017. Our new business purchases were $249.3 billion for the first half of 2018. Accordingly, we recognized an expense of $105 million related to this obligation for the first half of 2018. We expect to pay this amount, plus additional amounts to be accrued based on our new business purchases in the second half of 2018, to the funds on or before March 1, 2019. See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Affordable Housing Allocations” in our 2017 Form 10-K for more information regarding this obligation.

Fannie Mae Second Quarter 2018 Form 10-Q
18


 
MD&A | Business Segments


Business Segments
We have two reportable business segments: Single-Family and Multifamily. This section describes each segment’s business and credit metrics, and financial results.
Single-Family Business
Single-Family Mortgage Market
Housing sales slightly declined in the second quarter of 2018 compared with the first quarter of 2018. Total existing home sales averaged 5.4 million units annualized in the second quarter of 2018, compared with 5.5 million units in the first quarter of 2018, according to data from the National Association of REALTORS®. According to the U.S. Census Bureau, new single-family home sales decreased during the second quarter of 2018, averaging an annualized rate of 646,000 units, compared with 656,000 units in the first quarter of 2018.
The 30-year fixed mortgage rate averaged 4.55% during the week ended June 30, 2018, compared with 4.44% during the week ended March 31, 2018, according to Freddie Mac’s Primary Mortgage Market Survey®.
We forecast that total originations in the U.S. single-family mortgage market in 2018 will decrease from 2017 levels by approximately 8%, from an estimated $1.83 trillion in 2017 to $1.69 trillion in 2018, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $650 billion in 2017 to $481 billion in 2018.
Single-Family Market Share
The chart below displays our market share of single-family mortgage-related securities issuances in the second quarter of 2018 as compared with that of our primary competitors for the issuance of single-family mortgage-related securities.
chart-4dfe8d0123cd5f0396e.jpg
We estimate our market share of single-family mortgage-related securities issuances was 36% in the second quarter of 2018, compared with 42% in the first quarter of 2018 and 39% in the second quarter of 2017.
Single-Family Business Metrics
Single-family Fannie Mae MBS issuances decreased in the second quarter of 2018, primarily as a result of lower refinancing activity during the quarter. However, single-family Fannie Mae MBS outstanding increased as of June 30, 2018 compared to March 31, 2018 because acquisitions during the quarter outpaced liquidations, which slowed as a result of a decline in prepayments due to the rising interest rate environment.

Fannie Mae Second Quarter 2018 Form 10-Q
19


 
MD&A | Business Segments


chart-e4a1fb16f3075d23ab3.jpg
__________
(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 single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
Our average charged guaranty fee on newly acquired single-family loans, net of TCCA fees, increased from 48.0 basis points in the second quarter of 2017 to 49.0 basis points in the second quarter of 2018, primarily driven by an increase in the total base guaranty fees charged on our 2018 acquisitions.
Average Charged Guaranty Fee on Single-Family Guaranty Book of Business and
Average Charged Guaranty Fee on New Single-Family Acquisitions(1) 

chart-80eb4de18ea3545c8aa.jpg
__________
(1) 
Calculated based on the average guaranty fee rate for our single-family guaranty arrangements during the period plus the recognition of any upfront cash payments over an estimated average life. Excludes the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.

Fannie Mae Second Quarter 2018 Form 10-Q
20


 
MD&A | Business Segments


Single-Family Business Financial Results
Single-Family Business Financial Results
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
Variance
 
2018
 
2017
 
Variance
 
(Dollars in millions)
Net interest income(1)
$
4,723

 
$
4,366

 
$
357

 
$
9,284

 
$
9,122

 
$
162

Fee and other income
69

 
111

 
(42
)
 
227

 
187

 
40

Net revenues
4,792

 
4,477

 
315

 
9,511

 
9,309

 
202

Investment gains, net
252

 
321

 
(69
)
 
494

 
271

 
223

Fair value gains (losses), net
278

 
(685
)
 
963

 
1,312

 
(697
)
 
2,009

Administrative expenses
(649
)
 
(600
)
 
(49
)
 
(1,292
)
 
(1,201
)
 
(91
)
Credit-related income(2)
1,159

 
1,223

 
(64
)
 
1,193

 
1,407

 
(214
)
TCCA fees(1)
(565
)
 
(518
)
 
(47
)
 
(1,122
)
 
(1,021
)
 
(101
)
Other expenses, net
(270
)
 
(155
)
 
(115
)
 
(402
)
 
(411
)
 
9

Income before federal income taxes
4,997

 
4,063

 
934

 
9,694

 
7,657

 
2,037

Provision for federal income taxes
(1,044
)
 
(1,401
)
 
357

 
(2,060
)
 
(2,653
)
 
593

Net income
$
3,953

 
$
2,662

 
$
1,291

 
$
7,634

 
$
5,004

 
$
2,630

__________
(1) 
Reflects the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA, the incremental revenue from which is remitted to Treasury. The resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.”
(2) 
Consists of the benefit (provision) for credit losses and foreclosed property expense.
Net interest income
Single-family net interest income increased in the second quarter and first half of 2018 compared with the second quarter and first half of 2017. The drivers of net interest income for the single-family segment for these periods are consistent with the drivers of net interest income for our condensed consolidated statements of operations and comprehensive income for the same periods, which we discuss in “Consolidated Results of OperationsNet Interest Income.”
Investment gains, net
Investment gains decreased in the second quarter of 2018 compared with the second quarter of 2017 primarily due to gains on sales of AFS securities during the second quarter of 2017. We did not recognize any gains on sales of AFS securities during the second quarter of 2018. Investment gains increased in the first half of 2018 compared with the first half of 2017 primarily driven by a higher volume of reperforming loan sales and higher gains on sales of AFS securities during the first half of 2018.
Fair value gains (losses), net
We recognized fair value gains in the second quarter and first half of 2018, a shift from fair value losses recognized in the second quarter and first half of 2017. The drivers of fair value gains and losses for the single-family segment in the second quarter and first half of 2017 and 2018 are consistent with the drivers of fair value gains and losses for our condensed consolidated statements of operations and comprehensive income for the same periods, which we discuss in “Consolidated Results of OperationsFair Value Gains (Losses), Net.”
Credit-related income
We recognized lower single-family credit-related income in the second quarter and first half of 2018 compared with the second quarter and first half of 2017. The drivers of credit-related income for the single-family segment in the second quarter and first half of 2017 and 2018 are consistent with the drivers of credit-related income for our condensed consolidated statements of operations and comprehensive income for the same periods, which we discuss in “Consolidated Results of Operations—Credit-Related Income.”

Fannie Mae Second Quarter 2018 Form 10-Q
21


 
MD&A | Business Segments


Single-Family Mortgage Credit Risk Management
This section updates our discussion of single-family mortgage credit risk management in our 2017 Form 10-K in “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk Management.”
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
For information on our underwriting and servicing standards, quality control process, repurchase requests, and representation and warranty framework, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2017 Form 10-K.

Fannie Mae Second Quarter 2018 Form 10-Q
22


 
MD&A | Business Segments


Single-Family Portfolio Diversification and Monitoring
For information on key loan attributes, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and Monitoring” in our 2017 Form 10-K. The table below displays our single-family conventional business volumes and our single-family conventional guaranty book of business, based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans.
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)
 
Percent of Single-Family Conventional Business
Volume at Acquisition(2)
Percent of Single-Family
Conventional Guaranty Book of
Business(3)(4)
As of
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
June 30, 2018
 
December 31, 2017
Original LTV ratio:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
16

%
17

%
17

%
19

%
 
20

%
 
 
20

%
60.01% to 70%
11

 
12

 
12

 
13

 
 
14

 
 
 
14

 
70.01% to 80%
37

 
39

 
38

 
39

 
 
38

 
 
 
38

 
80.01% to 90%
13

 
13

 
12

 
12

 
 
11

 
 
 
11

 
90.01% to 95%
15

 
15

 
14

 
13

 
 
10

 
 
 
10

 
95.01% to 100%
8

 
4

 
7

 
4

 
 
4

 
 
 
4

 
Greater than 100%
*

 
*

 
*

 
*

 
 
3

 
 
 
3

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Weighted average
77

%
76

%
76

%
75

%
 
75

%
 
 
75

%
Average loan amount
$
231,490

 
$
225,194

 
$
231,890

 
$
223,305

 
 
$
168,532

 
 
 
$
166,643

 
Estimated mark-to-market LTV ratio:(6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
 
 
 
 
 
 
 
 
 
55

%
 
 
52

%
60.01% to 70%
 
 
 
 
 
 
 
 
 
18

 
 
 
18

 
70.01% to 80%
 
 
 
 
 
 
 
 
 
15

 
 
 
17

 
80.01% to 90%
 
 
 
 
 
 
 
 
 
8

 
 
 
8

 
90.01% to 100%
 
 
 
 
 
 
 
 
 
3

 
 
 
4

 
Greater than 100%
 
 
 
 
 
 
 
 
 
1

 
 
 
1

 
Total
 
 
 
 
 
 
 
 
 
100

%
 
 
100

%
Weighted average
 
 
 
 
 
 
 
 
 
56

%
 
 
58

%
Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate:(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term
89

%
84

%
88

%
82

%
 
81

%
 
 
80

%
Intermediate-term
9

 
13

 
10

 
15

 
 
15

 
 
 
15

 
Total fixed-rate
98

 
97

 
98

 
97

 
 
96

 
 
 
95

 
Adjustable-rate
2

 
3

 
2

 
3

 
 
4

 
 
 
5

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Number of property units:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 unit
98

%
97

%
97

%
97

%
 
97

%
 
 
97

%
2-4 units
2

 
3

 
3

 
3

 
 
3

 
 
 
3

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%

Fannie Mae Second Quarter 2018 Form 10-Q
23


 
MD&A | Business Segments


 
Percent of Single-Family Conventional Business
Volume at Acquisition(2)
Percent of Single-Family Conventional Guaranty Book of
Business(3)(4)
As of
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
June 30, 2018
 
December 31, 2017
Property type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family homes
90

%
90

%
90

%
90

%
 
91

%
 
 
91

%
Condo/Co-op
10

 
10

 
10

 
10

 
 
9

 
 
 
9

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Occupancy type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary residence
89

%
88

%
89

%
89

%
 
89

%
 
 
89

%
Second/vacation home
5

 
5

 
4

 
4

 
 
4

 
 
 
4

 
Investor
6

 
7

 
7

 
7

 
 
7

 
 
 
7

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
FICO credit score at origination:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
*

%
*

%
*

%
*

%
 
2

%
 
 
2

%
620 to < 660
6

 
5

 
6

 
5

 
 
5

 
 
 
5

 
660 to < 700
14

 
13

 
14

 
13

 
 
12

 
 
 
12

 
700 to < 740
23

 
23

 
23

 
23

 
 
20

 
 
 
20

 
>= 740
57

 
59

 
57

 
59

 
 
61

 
 
 
61

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Weighted average