e10vq
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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, 2010
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
(State or other jurisdiction of
incorporation or organization)
  52-0883107
(I.R.S. Employer
Identification No.)
     
3900 Wisconsin Avenue, NW
Washington, DC
(Address of principal executive offices)
  20016
(Zip Code)
 
 
Registrant’s telephone number, including area code:
(202) 752-7000
 
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. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of September 30, 2010, there were 1,119,413,062 shares of common stock of the registrant outstanding.
 


Table of Contents

 
TABLE OF CONTENTS
 
                 
Part I—Financial Information     1  
  Item 1.     Financial Statements     113  
        Condensed Consolidated Balance Sheets     113  
        Condensed Consolidated Statements of Operations     114  
        Condensed Consolidated Statements of Cash Flows     115  
        Condensed Consolidated Statements of Changes in Equity (Deficit)     116  
        Note 1—Summary of Significant Accounting Policies     117  
            136  
        Note 3—Consolidations and Transfers of Financial Assets     146  
        Note 4—Mortgage Loans     151  
        Note 5—Allowance for Loan Losses and Reserve for Guaranty Losses     154  
        Note 6—Investments in Securities     156  
        Note 7—Financial Guarantees     163  
        Note 8—Acquired Property, Net     167  
        Note 9—Short-Term Borrowings and Long-Term Debt     168  
        Note 10—Derivative Instruments     170  
        Note 11—Income Taxes     176  
        Note 12—Employee Retirement Benefits     176  
        Note 13—Segment Reporting     177  
        Note 14—Regulatory Capital Requirements     184  
        Note 15—Concentration of Credit Risk     185  
        Note 16—Fair Value     187  
        Note 17—Commitments and Contingencies     205  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     1  
        Introduction     1  
        Executive Summary     2  
        Legislation     18  
        Regulatory Action     19  
        Critical Accounting Policies and Estimates     20  
        Consolidated Results of Operations     24  
        Business Segment Results     44  
        Consolidated Balance Sheet Analysis     58  
        Supplemental Non-GAAP Information—Fair Value Balance Sheets     64  
        Liquidity and Capital Management     70  
        Off-Balance Sheet Arrangements     77  
        Risk Management     79  
        Impact of Future Adoption of New Accounting Pronouncements     108  
        Forward-Looking Statements     108  
  Item 3.     Quantitative and Qualitative Disclosures about Market Risk     209  
  Item 4.     Controls and Procedures     209  


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PART II—Other Information     212  
  Item 1.     Legal Proceedings     212  
  Item 1A.     Risk Factors     212  
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds     217  
  Item 3.     Defaults Upon Senior Securities     220  
  Item 4.     [Removed and Reserved]     220  
  Item 5.     Other Information     220  
  Item 6.     Exhibits     220  


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MD&A TABLE REFERENCE
 
                 
Table
 
Description
  Page
 
 
1
    Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First Nine Months of 2010     4  
 
2
    Serious Delinquency Rates by Year of Acquisition     5  
 
3
    Credit Profile of Single-Family Conventional Loans Acquired     6  
 
4
    Credit Statistics, Single-Family Guaranty Book of Business     12  
 
5
    Level 3 Recurring Financial Assets at Fair Value     22  
 
6
    Summary of Condensed Consolidated Results of Operations     26  
 
7
    Analysis of Net Interest Income and Yield     27  
 
8
    Rate/Volume Analysis of Changes in Net Interest Income     29  
 
9
    Fair Value Gains (Losses), Net     31  
 
10
    Credit-Related Expenses     33  
 
11
    Total Loss Reserves     34  
 
12
    Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)     35  
 
13
    Nonperforming Single-Family and Multifamily Loans     38  
 
14
    Credit Loss Performance Metrics     40  
 
15
    Credit Loss Concentration Analysis     41  
 
16
    Single-Family Credit Loss Sensitivity     42  
 
17
    Impairments and Fair Value Losses on Loans in HAMP     43  
 
18
    Business Segment Results     47  
 
19
    Single-Family Business Results     49  
 
20
    Multifamily Business Results     51  
 
21
    Capital Markets Group Results     53  
 
22
    Capital Markets Group’s Mortgage Portfolio Activity     56  
 
23
    Capital Markets Group’s Mortgage Portfolio Composition     57  
 
24
    Summary of Condensed Consolidated Balance Sheets     59  
 
25
    Cash and Other Investments Portfolio     60  
 
26
    Analysis of Losses on Alt-A and Subprime Private-Label Mortgage-Related Securities     61  
 
27
    Credit Statistics of Loans Underlying Alt-A and Subprime Private-Label Mortgage-Related Securities (Including Wraps)     62  
 
28
    Changes in Risk Management Derivative Assets (Liabilities) at Fair Value, Net     64  
 
29
    Comparative Measures—GAAP Change in Stockholders’ Deficit and Non-GAAP Change in Fair Value of Net Assets (Net of Tax Effect)     65  
 
30
    Supplemental Non-GAAP Consolidated Fair Value Balance Sheets     68  
 
31
    Activity in Debt of Fannie Mae     71  
 
32
    Outstanding Short-Term Borrowings and Long-Term Debt     73  
 
33
    Maturity Profile of Outstanding Debt of Fannie Mae Maturing Within One Year     74  
 
34
    Maturity Profile of Outstanding Debt of Fannie Mae Maturing in More Than One Year     75  
 
35
    Fannie Mae Credit Ratings     76  


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Table
 
Description
  Page
 
 
36
    On- and Off-Balance Sheet MBS and Other Guaranty Arrangements     78  
 
37
    Composition of Mortgage Credit Book of Business     80  
 
38
    Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business     84  
 
39
    Delinquency Status of Single-Family Conventional Loans     89  
 
40
    Serious Delinquency Rates     90  
 
41
    Single-Family Conventional Serious Delinquency Rate Concentration Analysis     91  
 
42
    Statistics on Single-Family Loan Workouts     92  
 
43
    Loan Modification Profile     93  
 
44
    Single-Family Foreclosed Properties     94  
 
45
    Single-Family Acquired Property Concentration Analysis     95  
 
46
    Multifamily Serious Delinquency Rates     97  
 
47
    Multifamily Foreclosed Properties     98  
 
48
    Mortgage Insurance Coverage     100  
 
49
    Activity and Maturity Data for Risk Management Derivatives     105  
 
50
    Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve     107  
 
51
    Derivative Impact on Interest Rate Risk (50 Basis Points)     107  


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PART I—FINANCIAL INFORMATION
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. Our directors do not have any duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator. We describe the rights and powers of the conservator, key provisions of our agreements with the U.S. Department of the Treasury (“Treasury”), and their impact on shareholders in our Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”
 
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes, and the more detailed information contained in our 2009 Form 10-K.
 
This report contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Our actual results may differ materially from those reflected in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Risk Factors” and elsewhere in this report and in “Risk Factors” in our 2009 Form 10-K. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this report.
 
You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2009 Form 10-K.
 
 
INTRODUCTION
 
Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938 to support liquidity, stability and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Our most significant activities include providing market liquidity by securitizing mortgage loans originated by lenders in the primary mortgage market into Fannie Mae mortgage-backed securities, which we refer to as Fannie Mae MBS, and purchasing mortgage loans and mortgage-related securities in the secondary market for our mortgage portfolio. We acquire funds to purchase mortgage-related assets for our mortgage portfolio by issuing a variety of debt securities in the domestic and international capital markets. We also make other investments that increase the supply of affordable housing. Our charter does not permit us to originate loans and lend money directly to consumers in the primary mortgage market.
 
Although we are a corporation chartered by the U.S. Congress, our conservator is a U.S. government agency, Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and Treasury has made a commitment under a senior preferred stock purchase agreement to provide us with funds under specified conditions to maintain a positive net worth, the U.S. government does not guarantee our securities or other obligations.


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EXECUTIVE SUMMARY
 
Our Mission, Objectives and Strategy
 
Our public mission is to support liquidity and stability in the secondary mortgage market and increase the supply of affordable housing. We are concentrating our efforts on two objectives: supporting liquidity, stability and affordability in the mortgage market and minimizing our credit losses from delinquent loans. Please see “Business—Executive Summary—Our Business Objectives and Strategy” in our 2009 Form 10-K for more information on these and our other business objectives, which have been approved by FHFA. Below we discuss our contributions to the liquidity of the mortgage market, the performance of the single-family loans we have acquired since January 2009, our single-family credit losses, and our strategies and actions to reduce credit losses on our single-family loans.
 
Providing Mortgage Market Liquidity
 
We support liquidity and stability in the secondary mortgage market, serving as a stable source of funds for purchases of homes and multifamily housing and for refinancing existing mortgages. We provide this financing through the activities of our three complementary businesses: Single-Family Credit Guaranty (“Single-Family”), Multifamily Credit Guaranty (“Multifamily,” formerly “HCD”) and Capital Markets. Our Single-Family and Multifamily businesses work with our lender customers to purchase and securitize mortgage loans they deliver to us into Fannie Mae MBS. Our Capital Markets group manages our investment activity in mortgage-related assets, funding investments primarily through proceeds we receive from the issuance of debt securities in the domestic and international capital markets. The Capital Markets group is increasingly focused on making short-term use of our balance sheet rather than on long-term buy and hold strategies and, in this role, the group works with lender customers to provide funds to the mortgage market through short-term financing, investing and other activities. These include whole loan conduit activities, early funding activities, dollar roll transactions, and Real Estate Mortgage Investment Conduit (“REMIC”) and other structured securitization activities, which we describe in more detail in our 2009 Form 10-K in “Business—Business Segments—Capital Markets Group.”
 
During the first nine months of 2010, we purchased or guaranteed approximately $613 billion in loans, measured by unpaid principal balance, which includes approximately $195 billion in delinquent loans we purchased from our single-family MBS trusts. Our purchases and guarantees financed approximately 1,749,000 single-family conventional loans, excluding delinquent loans purchased from our MBS trusts, and approximately 199,000 units in multifamily properties.
 
We remained the largest single issuer of mortgage-related securities in the secondary market during the third quarter of 2010, with an estimated market share of new single-family mortgage-related securities of 44.5%, compared with 39.1% in the second quarter of 2010. If the Federal Housing Administration (“FHA”) continues to be the lower-cost option for some consumers, and in some cases the only option, for loans with higher loan-to-value (“LTV”) ratios, our market share could be adversely impacted if the market shifts away from refinance activity, which is likely to occur when interest rates rise. In the multifamily market, we remain a constant source of liquidity and have been successful with our goal of expanding our multifamily MBS business and broadening our multifamily investor base.


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Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in 2009, and Credit Losses
 
In this section we discuss our expectations regarding profitability, the performance and credit profile of the single-family loans we have purchased or guaranteed since the beginning of 2009, shortly after entering into conservatorship in late 2008, and our expected single-family credit losses. We refer to loans we have purchased or guaranteed as loans that we have “acquired.”
 
  •  Since the beginning of 2009, we have acquired single-family loans that have a strong overall credit profile and are performing well. We expect these loans will be profitable, by which we mean they will generate more fee income than credit losses and administrative costs, as we discuss in “Expected Profitability of Our Single-Family Acquisitions” below. For further information, see “Table 2: Serious Delinquency Rates by Year of Acquisition” and “Table 3: Credit Profile of Single-Family Conventional Loans Acquired.”
 
  •  The vast majority of our realized credit losses in 2009 and 2010 on single-family loans are attributable to single-family loans that we purchased or guaranteed from 2005 through 2008. While these loans will give rise to additional credit losses that we have not yet realized, we estimate that we have reserved for the substantial majority of the remaining losses.
 
Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations
 
In this discussion, we present a number of estimates and expectations regarding the profitability of the loans we have acquired, our single-family credit losses, and our draws from and dividends to be paid to Treasury. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors, including future home prices and the future performance of our loans. Our future estimates of these amounts, as well as the actual amounts, may differ materially from our current estimates and expectations as a result of home price changes, changes in interest rates, unemployment, direct and indirect consequences resulting from failures by servicers to follow proper procedures in the administration of foreclosure cases, government policy, changes in generally accepted accounting principles (“GAAP”), credit availability, social behaviors, other macro-economic variables, the volume of loans we modify, the effectiveness of our loss mitigation strategies, management of our real estate owned (“REO”) inventory and pursuit of contractual remedies, changes in the fair value of our assets and liabilities, impairments of our assets, or many other factors, including those discussed in “Risk Factors,” “Forward-Looking Statements,” and elsewhere in this report and in “Risk Factors” and “Forward-Looking Statements” in our 2009 Form 10-K. For example, if the economy were to enter a deep recession during this time period, we would expect actual outcomes to differ substantially from our current expectations.
 
Expected Profitability of Our Single-Family Acquisitions
 
While it is too early to know how loans we have acquired since January 1, 2009 will ultimately perform, given their strong credit risk profile, low levels of payment delinquencies shortly after their acquisition, and low serious delinquency rate, we expect that, over their lifecycle, these loans will be profitable. Table 1 provides information about whether we expect loans we acquired in 1991 through September 30, 2010 to be profitable. The expectations reflected in Table 1 are based on the credit risk profile of the loans we have acquired, which we discuss in more detail in “Table 3: Credit Profile of Single-Family Conventional Loans Acquired” and in “Table 38: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business.” These expectations are also based on numerous other assumptions, including our expectations regarding home price declines set forth below in “Outlook.” As shown in Table 1, we expect loans we have acquired in 2009 and 2010 to be profitable. If future macroeconomic conditions turn out to be significantly more adverse than our expectations, these loans could become unprofitable. For example, we believe that these loans would become unprofitable if home prices declined more than 20% from their September 2010 levels over the next five years based on our home price index, which would be an approximately 34% decline from their peak in the third quarter of 2006.


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Table 1:   Expected Lifetime Profitability of Single-Family Loans Acquired in 1991 through the First Nine Months of 2010
 
(TABLE LOGO)
 
As Table 1 shows, the key years in which we acquired loans that we expect will be unprofitable are 2005 through 2008, and the vast majority of our realized credit losses in 2009 and 2010 to date are attributable to these loans. Loans we acquired in 2004 were originated under more conservative acquisition policies than loans we acquired from 2005 through 2008; however, we expect them to perform close to break-even because those loans were made as home prices were rapidly increasing and therefore suffered from the subsequent decline in home prices.
 
Loans we have acquired since the beginning of 2009 comprised over 35% of our single-family guaranty book of business as of September 30, 2010. Our 2005 to 2008 acquisitions are becoming a smaller percentage of our guaranty book of business, having decreased from 63% of our guaranty book of business as of December 31, 2008 to 42% as of September 30, 2010.
 
Performance of Our Single-Family Acquisitions
 
In our experience, an early predictor of the ultimate performance of loans is the rate at which the loans become seriously delinquent within a short period of time after acquisition. Loans we acquired in 2009 have experienced historically low levels of delinquencies shortly after their acquisition. Table 2 shows, for loans we acquired in each year since 2001, the percentage that were seriously delinquent (three or more months past due or in the foreclosure process) as of the end of the third quarter following the acquisition year. As Table 2 shows, the percentage of our 2009 acquisitions that were seriously delinquent as of the end of the third quarter following their acquisition year was more than nine times lower than the average comparable serious delinquency rate for loans acquired in 2005 through 2008. Table 2 also shows serious delinquency rates for each year’s acquisitions as of September 30, 2010. Except for the most recent acquisition years, whose serious


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delinquency rates are likely lower than they will be after the loans have aged, Table 2 shows that the September 30, 2010 serious delinquency rate generally tracks the trend of the serious delinquency rate as of the end of the third quarter following the year of acquisition. Below the table we provide information about the economic environment in which the loans were acquired, specifically home price appreciation and unemployment levels.
 
Table 2:  Serious Delinquency Rates by Year of Acquisition
 
(PERFORMANCE GRAPH)
 
For 2009, the serious delinquency rate as of September 30, 2010 is the same as the serious delinquency rate as of the end of the third quarter following the acquisition year.
 
(1) Based on Fannie Mae’s house price index (“HPI”), which measures average price changes based on repeat sales on the same properties. For year-to-date 2010, the data show an initial estimate based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of September 2010, supplemented by preliminary data that became available in October 2010. Including subsequently available data may lead to materially different results.
 
(2) Based on national unemployment rate from the labor force statistics current population survey (CPS), Bureau of Labor Statistics.


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Credit Profile of Our Single-Family Acquisitions
 
Single-family loans we purchased or guaranteed from 2005 through 2008 were acquired during a period when home prices were rising rapidly, peaked, and then started to decline sharply, and underwriting and eligibility standards were more relaxed than they are now. These loans were characterized, on average and as discussed below, by higher LTV ratios and lower FICO credit scores than loans we have acquired since January 1, 2009. In addition, many of these loans were Alt-A loans or had other higher-risk loan attributes such as interest-only payment features. As a result of the sharp declines in home prices, 25% of the loans that we acquired from 2005 through 2008 had mark-to-market LTV ratios that were greater than 100% as of September 30, 2010, which means the principal balance of the borrower’s primary mortgage exceeded the current market value of the borrower’s home. This percentage is higher when second lien loans secured by the same properties that secure our loans are considered. The sharp decline in home prices and the severe economic recession that began in December 2007 significantly and adversely impacted the performance of loans we acquired from 2005 through 2008. We are taking a number of actions to reduce our credit losses, and we describe these actions and our strategy below in “Our Strategies and Actions to Reduce Credit Losses on Loans in our Single-Family Guaranty Book of Business.”
 
In 2009, we began to see the effect of actions we took, beginning in 2008, to significantly tighten our underwriting and eligibility standards and change our pricing to promote and provide prudent sustainable homeownership options and stability in the housing market. As a result of these changes and other market conditions, we reduced our acquisitions of loans with higher-risk loan attributes. The loans we have purchased or guaranteed since January 1, 2009 have had a better credit risk profile overall than loans we acquired in 2005 through 2008, and their early performance has been strong. Our experience has been that loans with stronger credit risk profiles perform better than loans without stronger credit risk profiles. For example, one measure of a loan’s credit risk profile that we believe is a strong predictor of performance is LTV ratio, which indicates the amount of equity a borrower has in the underlying property. As Table 3 demonstrates, the loans we have acquired since January 1, 2009 have a strong credit risk profile, with lower original LTV ratios, higher FICO credit scores, and a product mix with a greater percentage of fully amortizing fixed-rate mortgage loans than loans we acquired from 2005 through 2008.
 
Table 3:  Credit Profile of Single-Family Conventional Loans Acquired(1)
 
                 
    Acquisitions from
       
    2009 through the First
    Acquisitions from
 
    Nine Months of 2010     2005 through 2008  
 
Weighted average loan-to-value ratio at origination
    68 %     73 %
Weighted average FICO credit score at origination
    761       722  
Fully amortizing, fixed-rate loans
    95 %     86 %
Alt-A loans(2)
    1 %     14 %
Subprime
          *  
Interest-only
    1 %     12 %
Original loan-to-value ratio > 90
    5 %     11 %
FICO credit score < 620
    *       5 %
 
 
Represent less than 0.5% of the total acquisitions.
 
(1) Loans that meet more than one category are included in each applicable category.
 
(2) Newly originated Alt-A loans acquired in 2009 and 2010 consist of the refinance of existing Alt-A loans.
 
Improvements in the credit risk profile of our 2009 and 2010 acquisitions over prior years reflect changes that we made to our pricing and eligibility standards, as well as changes mortgage insurers made to their eligibility standards. In addition, FHA’s role as the lower-cost option for some consumers for loans with higher LTV ratios has also reduced our acquisitions of these types of loans. In October 2010, changes to FHA’s pricing structure became effective, which may reduce its cost advantage to some consumers. The credit risk profile of


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our 2009 and 2010 acquisitions has been influenced further by a significant percentage of refinanced loans, which generally perform well as they demonstrate a borrower’s desire to maintain homeownership. In the first nine months of 2010 our acquisitions of refinanced loans included a significant number of loans under the Home Affordable Refinance Program (“HARP”), which involves refinancing existing, performing Fannie Mae loans with current LTV ratios between 80% and 125% and possibly lower FICO credit scores into loans that reduce the borrowers’ monthly payments or are otherwise more sustainable, such as fixed-rate loans. Due to the volume of HARP loans, the LTV ratios at origination for our 2010 acquisitions to date are higher than for our 2009 acquisitions. However, the overall credit profile of our 2010 acquisitions is expected to remain significantly stronger than the credit profile of our 2005 through 2008 acquisitions. Whether the loans we acquire in the future exhibit an overall credit profile similar to our acquisitions since January 1, 2009 will also depend on a number of factors, including our future eligibility standards and those of mortgage insurers, the percentage of loan originations representing refinancings, our future objectives, and market and competitive conditions.
 
The changes we made to our pricing and eligibility standards and underwriting beginning in 2008 were intended to more accurately reflect the risk in the housing market and to significantly reduce our acquisitions of loans with higher-risk attributes. These changes included the following:
 
  •  Established a minimum FICO credit score and reduced maximum debt-to-income ratio for most loans;
 
  •  Limited or eliminated certain loan products with higher-risk characteristics, including discontinuing the acquisition of newly originated Alt-A loans, except for those that represent the refinancing of an existing Alt-A Fannie Mae loan (we may also continue to selectively acquire seasoned Alt-A loans that meet acceptable eligibility and underwriting criteria; however, we expect our acquisitions of Alt-A mortgage loans to continue to be minimal in future periods);
 
  •  Implemented a more comprehensive risk assessment model in Desktop Underwriter®, our proprietary automated underwriting system, and a comprehensive risk assessment worksheet to assist lenders in the manual underwriting of loans;
 
  •  Increased our guaranty fee pricing to better align risk and pricing;
 
  •  Updated our policies regarding appraisals of properties backing loans; and
 
  •  Established a national down payment policy requiring borrowers to have a minimum down payment (or minimum equity, for refinances) of 3%, in most cases.
 
If we had applied our current pricing and eligibility standards and underwriting to loans we acquired in 2005 through 2008, our losses on loans acquired in those years would have been lower, although we would still have experienced losses due to the rise and subsequent sharp decline in home prices and increased unemployment.
 
Expectations Regarding Credit Losses
 
The single-family credit losses we have realized from the beginning of 2009 through September 30, 2010, combined with the amounts we have reserved for single-family credit losses as of September 30, 2010, total approximately $110 billion. The vast majority of these losses are attributable to single-family loans we purchased or guaranteed from 2005 through 2008.
 
While loans we acquired in 2005 through 2008 will give rise to additional credit losses that we have not yet realized, we estimate that we have reserved for the substantial majority of the remaining losses. While we believe our results of operations have already reflected a substantial majority of the credit losses we have yet to realize on these loans, we expect that defaults on these loans and the resulting charge-offs will occur over a


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period of years. In addition, we anticipate that it will take years to dispose of the REO we expect to acquire upon their default, given the large current and anticipated supply of single-family homes in the market.
 
We show how we calculate our realized credit losses in “Table 14: Credit Loss Performance Metrics.” Our reserves for credit losses consist of our allowance for loan losses, our allowance for accrued interest receivable, our allowance for preforeclosure property taxes and insurance receivables, our reserve for guaranty losses, and the portion of fair value losses on loans purchased out of MBS trusts reflected in our condensed consolidated balance sheets that we estimate represents accelerated credit losses we expect to realize.
 
As a result of the substantial reserving for and realizing of our credit losses to date, we have drawn a significant amount of funds from Treasury through September 30, 2010. As our draws from Treasury for credit losses abate, we expect our draws instead to be driven increasingly by dividend payments to Treasury.
 
Our Strategies and Actions to Reduce Credit Losses on Loans in our Single-Family Guaranty Book of Business
 
To reduce the credit losses we ultimately incur on our book of business, we are focusing our efforts on the following strategies:
 
  •  Reducing defaults to avoid losses that would otherwise occur;
 
  •  Pursuing foreclosure alternatives to reduce the severity of the losses we incur;
 
  •  Managing timelines efficiently;
 
  •  Managing our REO inventory to reduce costs and maximize sales proceeds; and
 
  •  Pursuing contractual remedies from lenders and providers of credit enhancement, including mortgage insurers.
 
As “Table 4: Credit Statistics, Single-Family Guaranty Book of Business” illustrates, our single-family serious delinquency rate decreased to 4.56% as of September 30, 2010 from 4.99% as of June 30, 2010. This decrease is primarily the result of the approximately 218,000 workouts and foreclosed property acquisitions completed during the quarter and reflects our work with servicers to reduce delays in determining and executing the appropriate approach for a given loan. As of September 30, 2010, we experienced the first year-over-year decline in our serious delinquency rate since 2007. We expect serious delinquency rates may be affected in the future by home price changes, changes in other macroeconomic conditions, and the extent to which borrowers with modified loans again become delinquent in their payments.
 
Reducing Defaults.  We are working to reduce defaults through improved servicing, refinancing initiatives and solutions that help borrowers retain their homes, such as modifications. We refer to actions taken by our servicers with borrowers to resolve the problem of existing or potential delinquent loan payments as “workouts,” which include the home retention solutions and the foreclosure alternatives discussed below.
 
  •  Improved Servicing.  Our mortgage servicers are the primary point of contact for borrowers and perform a vital role in our efforts to reduce defaults and pursue foreclosure alternatives. We seek to improve the servicing of our delinquent loans through a variety of means, including:
 
  •  improving our communications with and training of our servicers;
 
  •  increasing the number of our personnel who manage our servicers and are on-site;


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  •  directing servicers to contact borrowers at an earlier stage of delinquency and improve telephone communications with borrowers;
 
  •  holding servicers accountable for following our requirements; and
 
  •  working with some of our servicers to test and implement high-touch protocols for servicing our higher risk loans, including lowering the ratio of loans per servicer employee, prescribing borrower outreach strategies to be used at earlier stages of delinquency, and providing distressed borrowers a single point of contact to resolve issues.
 
  •  Refinancing Initiatives.  Our refinancing initiatives help borrowers obtain a monthly payment that is more affordable now and into the future and/or a more stable loan product, such as a fixed-rate mortgage loan in lieu of an adjustable-rate mortgage loan, which may help prevent delinquencies and defaults. In the third quarter of 2010, we acquired or guaranteed approximately 159,000 loans through our Refi Plustm initiative, which provides expanded refinance opportunities for eligible Fannie Mae borrowers. On average, borrowers who refinanced during the third quarter of 2010 through our Refi Plus initiative reduced their monthly mortgage payments by $141. Of the loans refinanced through our Refi Plus initiative, approximately 51,000 loans were refinanced under HARP, which permits borrowers to benefit from lower levels of mortgage insurance and higher LTV ratios than those that would be allowed under our traditional standards. Overall, in the third quarter of 2010, we acquired or guaranteed approximately 541,000 loans that were refinancings, compared with approximately 354,000 loans in the second quarter of 2010, as mortgage rates remained at historically low levels.
 
  •  Home Retention Solutions.  Our home retention solutions are intended to help borrowers stay in their homes and include loan modifications, repayment plans and forbearances. In the third quarter of 2010, we completed home retention workouts for over 113,000 loans with an aggregate unpaid principal balance of $23 billion. On a loan count basis, this represented a 14% decrease from home retention workouts completed in the second quarter of 2010. In the third quarter of 2010, we completed approximately 106,000 loan modifications, compared with approximately 122,000 loan modifications in the second quarter of 2010. Modifications decreased in the third quarter as we began verifying borrower income prior to completing Fannie Mae modifications for borrowers who were ineligible under the Home Affordable Modification Program (“HAMP”), which reduced our modifications outside the program. Our modification statistics do not include trial modifications under HAMP, but do include conversions of trial HAMP modifications to permanent modifications. Our repayment plans and forbearances also decreased in the third quarter from their second quarter levels.
 
It is too early to determine the ultimate success of the loan modifications we completed during the third quarter of 2010. Of the loans we modified during 2009, approximately 53% were current or had paid off as of nine months following the loan modification date, compared with approximately 31% for loans we modified during 2008. Please see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Management of Problem Loans and Loan Workout Metrics” for a discussion of the significant uncertainty regarding the ultimate long-term success of our modification efforts.
 
During the third quarter of 2010, we introduced our Second Lien Modification Program, which is designed to work in tandem with HAMP by lowering payments on second lien mortgage loans for borrowers whose second lien mortgage loan is owned by us and whose first lien mortgage loan has been modified under HAMP, even where we do not own the first lien mortgage loan. This program will be implemented in the coming months.
 
  •  Discouraging Strategic Defaults.  During the second quarter of 2010, we announced that borrowers without extenuating circumstances must wait seven years after a foreclosure before becoming eligible for a new Fannie Mae-backed mortgage loan. The extended waiting period is designed to increase disincentives for borrowers to walk away from their mortgages without working with servicers to pursue


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  alternatives to foreclosure. Conversely, borrowers with extenuating circumstances or those who agree to foreclosure alternatives may qualify for new mortgage loans eligible to be acquired by Fannie Mae in as little as two to three years.
 
Pursuing Foreclosure Alternatives.  If we are unable to provide a viable home retention solution for a problem loan, we seek to offer foreclosure alternatives and complete them in a timely manner. These foreclosure alternatives are primarily preforeclosure sales, which are sometimes referred to as “short sales,” as well as deeds-in-lieu of foreclosure. These alternatives are intended to reduce the severity of our loss resulting from a borrower’s default while permitting the borrower to avoid going through a foreclosure. In the third quarter of 2010, we completed approximately 20,900 preforeclosure sales and deeds-in-lieu of foreclosures, compared with approximately 21,500 in the second quarter of 2010. The decrease was primarily due to weak market conditions affecting pre-foreclosure sales during the quarter. We have increasingly relied on foreclosure alternatives as a growing number of borrowers have faced longer-term economic hardships that cannot be solved through a home retention solution, and we expect the volume of our foreclosure alternatives through 2010 to remain higher than 2009 volumes.
 
Managing Timelines.  A key theme underlying our strategies for reducing our credit losses is minimizing delays. We believe that repayment plans, short-term forbearances and loan modifications can be most effective in preventing defaults when completed at an early stage of delinquency. Similarly, we believe that our foreclosure alternatives are more likely to be successful in reducing our loss severity if they are executed expeditiously. Accordingly, it is important to work with delinquent borrowers early in the delinquency to determine whether a home retention or foreclosure alternative will be viable and, where no alternative is viable, to reduce delays in proceeding to foreclosure. We are working to manage our foreclosure timelines more efficiently. As of September 30, 2010, 46% of the seriously delinquent loans in our single-family conventional guaranty book of business were in the process of foreclosure, compared with 38% as of June 30, 2010. During the third quarter of 2010, we announced adjustments to the time frames within which we expect foreclosures to be completed in four states. To hold servicers accountable for meeting their servicing obligations, we also reiterated at that time that we may exercise our right to assess fees on servicers to compensate us for delays. As we discuss below in “Servicer Foreclosure Process Deficiencies and Foreclosure Pause,” we cannot yet predict the extent to which the pause in foreclosures implemented by a number of our servicers in response to the discovery of deficiencies in their foreclosure processes will delay our foreclosures or increase our credit losses. In connection with the foreclosure pause, we recently reminded servicers again that we may exercise our right to assess fees on them to compensate us for damages resulting from their failure to take diligent action, consistent with applicable laws, in compliance with our servicing requirements. For additional discussion of the foreclosure pause and its potential consequences, please see “Risk Factors.”
 
Managing Our REO Inventory.  Since January 2009, we have strengthened our REO sales capabilities by significantly increasing the number of resources in this area, and we are working to manage our REO inventory to reduce costs and maximize sales proceeds. During the third quarter of 2010, we acquired approximately 85,000 foreclosed single-family properties, up from approximately 69,000 during the second quarter of 2010, and we disposed of approximately 48,000 single-family properties. The carrying value of the single-family REO we held as of September 30, 2010 was $16.4 billion, and we expect our REO inventory at the end of the year to remain higher than 2009 levels. Given the large number of seriously delinquent loans in our single-family guaranty book of business and the large current and anticipated supply of single-family homes in the market, we expect it will take a number of years before our REO inventory approaches pre-2008 levels.
 
Pursuing Contractual Remedies.  We conduct reviews of delinquent loans and, when we discover loans that do not meet our underwriting and eligibility requirements, we make demands for lenders to repurchase these loans or compensate us for losses sustained on the loans. We also make demands for lenders to repurchase or compensate us for loans for which the mortgage insurer rescinds coverage. In 2009 and during the first nine months of 2010, the number of repurchase and reimbursement requests remained high. During the third quarter of 2010, lenders repurchased from us or reimbursed us for losses on approximately $1.6 billion in


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loans, measured by unpaid principal balance, pursuant to their contractual obligations. In addition, as of September 30, 2010, we had outstanding requests for lenders to repurchase from us or reimburse us for losses on $7.7 billion in loans, of which 36% had been outstanding for more than 120 days. We are also pursuing contractual remedies from providers of credit enhancement on our loans, including mortgage insurers. We received proceeds under our mortgage insurance policies for single-family loans of $1.6 billion for the third quarter of 2010. Please see “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” for a discussion of our repurchase and reimbursement requests and outstanding receivables from mortgage insurers, as well as the risk that one or more of these counterparties fails to fulfill its obligations to us.
 
The actions we have taken to stabilize the housing market and minimize our credit losses have had and may continue to have, at least in the short term, a material adverse effect on our results of operations and financial condition, including our net worth. See “Consolidated Results of Operations—Financial Impact of the Making Home Affordable Program on Fannie Mae” for information on HAMP’s financial impact on us during the third quarter of 2010 and the $2.0 billion we incurred in loan impairments in connection with HAMP during the quarter. These actions have been undertaken with the goal of reducing our future credit losses below what they otherwise would have been. It is difficult to predict how effective these actions ultimately will be in reducing our credit losses and, in the future, it may be difficult to measure the impact our actions ultimately have on our credit losses.
 
Credit Performance
 
Table 4 presents information for the first three quarters of 2010 and for each quarter of 2009 about the credit performance of mortgage loans in our single-family guaranty book of business and our loan workouts. The workout information in Table 4 does not reflect repayment plans and forbearances that have been initiated but not completed, nor does it reflect trial modifications under HAMP that have not become permanent.


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Table 4:  Credit Statistics, Single-Family Guaranty Book of Business(1)
 
                                                                         
    2010     2009  
                            Full
                         
    YTD     Q3     Q2     Q1     Year     Q4     Q3     Q2     Q1  
    (Dollars in millions)  
 
As of the end of each period:
                                                                       
Serious delinquency rate(2)
    4.56 %     4.56 %     4.99 %     5.47 %     5.38 %     5.38 %     4.72 %     3.94 %     3.15 %
Nonperforming loans(3)
  $ 212,305     $ 212,305     $ 217,216     $ 222,892     $ 215,505     $ 215,505     $ 197,415     $ 170,483     $ 144,523  
Foreclosed property inventory:
                                                                       
Number of properties
    166,787       166,787       129,310       109,989       86,155       86,155       72,275       62,615       62,371  
Carrying value
  $ 16,394     $ 16,394     $ 13,043     $ 11,423     $ 8,466     $ 8,466     $ 7,005     $ 6,002     $ 6,215  
Combined loss reserves(4)
  $ 58,451     $ 58,451     $ 59,087     $ 58,900     $ 62,312     $ 62,312     $ 64,200     $ 53,844     $ 40,882  
Total loss reserves(5)
  $ 63,105     $ 63,105     $ 64,877     $ 66,479     $ 62,848     $ 62,848     $ 64,724     $ 54,152     $ 41,082  
During the period:
                                                                       
Foreclosed property (number of properties):
                                                                       
Acquisitions(6)
    216,116       85,349       68,838       61,929       145,617       47,189       40,959       32,095       25,374  
Dispositions
    (135,484 )     (47,872 )     (49,517 )     (38,095 )     (123,000 )     (33,309 )     (31,299 )     (31,851 )     (26,541 )
Credit-related expenses(7)
  $ 22,356     $ 5,559     $ 4,871     $ 11,926     $ 71,320     $ 10,943     $ 21,656     $ 18,391     $ 20,330  
Credit losses(8)
  $ 20,022     $ 8,037     $ 6,923     $ 5,062     $ 13,362     $ 3,976     $ 3,620     $ 3,301     $ 2,465  
Loan workout activity (number of loans):
                                                                       
Home retention loan workouts(9)
    350,585       113,367       132,192       105,026       160,722       49,871       37,431       33,098       40,322  
Preforeclosure sales and deeds-in-lieu of foreclosure
    59,759       20,918       21,515       17,326       39,617       13,459       11,827       8,360       5,971  
                                                                         
Total loan workouts
    410,344       134,285       153,707       122,352       200,339       63,330       49,258       41,458       46,293  
                                                                         
Loan workouts as a percentage of our delinquent loans in our guaranty book of business(10)
    38.56 %     37.86 %     41.18 %     31.59 %     12.24 %     15.48 %     12.98 %     12.42 %     16.12 %
 
 
(1) Our single-family guaranty book of business consists of (a) single-family mortgage loans held in our mortgage portfolio, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae mortgage-related securities held in our mortgage portfolio for which we do not provide a guaranty.
 
(2) Calculated based on the number of single-family conventional loans that are three or more months past due and loans that have been referred to foreclosure but not yet foreclosed upon, divided by the number of loans in our single-family conventional guaranty book of business. We include all of the single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family serious delinquency rate.
 
(3) Represents the total amount of nonperforming loans, including troubled debt restructurings and HomeSaver Advance first-lien loans, which are unsecured personal loans in the amount of past due payments used to bring mortgage loans current, that are on accrual status. A troubled debt restructuring is a restructuring of a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. We generally classify loans as nonperforming when the payment of principal or interest on the loan is two months or more past due.
 
(4) Consists of the allowance for loan losses for loans recognized in our condensed consolidated balance sheets and the reserve for guaranty losses related to both single-family loans backing Fannie Mae MBS that we do not consolidate in


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our condensed consolidated balance sheets and single-family loans that we have guaranteed under long-term standby commitments. Prior period amounts have been restated to conform to the current period presentation. The amounts shown as of March 31, 2010, June 30, 2010 and September 30, 2010 reflect a decrease from the amount shown as of December 31, 2009 as a result of the adoption of the new accounting standards. For additional information on the change in our loss reserves see “Consolidated Results of Operations—Credit-Related Expenses—Provision for Credit Losses.”
 
(5) Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable, and (c) allowance for preforeclosure property taxes and insurance receivables.
 
(6) Includes acquisitions through deeds-in-lieu of foreclosure.
 
(7) Consists of the provision for loan losses, the provision (benefit) for guaranty losses and foreclosed property expense.
 
(8) Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense; adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts and HomeSaver Advance loans.
 
(9) Consists of (a) modifications, which do not include trial modifications under HAMP or repayment plans or forbearances that have been initiated but not completed; (b) repayment plans and forbearances completed and (c) HomeSaver Advance first-lien loans. See “Table 42: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk Management” for additional information on our various types of loan workouts.
 
(10) Calculated based on annualized problem loan workouts during the period as a percentage of delinquent loans in our single-family guaranty book of business as of the end of the period.
 
We provide additional information on our credit-related expenses in “Consolidated Results of Operations—Credit-Related Expenses” and on the credit performance of mortgage loans in our single-family book of business and our loan workouts in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
 
Servicer Foreclosure Process Deficiencies and Foreclosure Pause
 
Recently, a number of our single-family mortgage servicers temporarily halted foreclosures in some or all states after discovering deficiencies in their processes relating to the execution of affidavits in connection with the foreclosure process. Deficiencies include improperly notarized affidavits and affidavits signed without appropriate knowledge and review of the documents. These foreclosure process deficiencies have generated significant public concern, are currently being investigated by various government agencies and by the attorneys general of all fifty states, and have resulted in courts in at least two states issuing rules applying to the foreclosure process that we anticipate will increase costs and may result in delays.
 
We have directed our servicers to review their policies and procedures relating to the execution of affidavits, verifications and other legal documents in connection with the foreclosure process. We are also addressing concerns that have been raised regarding the practices of some law firms that handle the foreclosure process for our mortgage servicers in Florida. In the case of one firm under investigation by the Florida attorney general’s office, we instructed the firm to stop processing foreclosures and other legal matters for our mortgage loans except as necessary to avoid prejudice to our legal interests, and have stopped servicers from referring new Fannie Mae matters to the firm. We are in the process of expanding the list of law firms that our servicers may use to process foreclosures in Florida.
 
The Acting Director of FHFA issued statements on October 1 and October 13, 2010 regarding servicers’ foreclosure processing issues. We are currently coordinating with FHFA regarding appropriate corrective actions consistent with the four-point policy framework issued by FHFA on October 13, 2010. Under this framework, servicers are required to (1) review their processes and verify that all documents are in compliance with legal requirements; (2) remediate problems identified through this review in an appropriate, timely and sustainable manner; (3) report suspected fraudulent activity; and (4) without delay, proceed to foreclose on mortgage loans that have no problems relating to process, on which the borrower has stopped payment, and for which foreclosure alternatives have been unsuccessful. During the first nine months of 2010, 80% of the single-family properties we acquired through foreclosures involved mortgages on which the borrowers had made three or fewer payments in the preceding 12 months.


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Although we expect the foreclosure pause will likely negatively affect our serious delinquency rates, credit-related expenses and foreclosure timelines, we cannot yet predict the extent of its impact. The foreclosure pause also could negatively affect housing market conditions and delay the recovery of the housing market. At this time, we cannot predict how long the pause on foreclosures will last, how many of our loans will be affected by it or its ultimate impact on our business or the housing market. See “Risk Factors” for further information about the potential impact of the servicer foreclosure process deficiencies and the foreclosure pause on our business, results of operations, financial condition and liquidity position.
 
New Accounting Standards and Consolidation of a Substantial Majority of our MBS Trusts
 
Effective January 1, 2010, we prospectively adopted new accounting standards on the transfers of financial assets and the consolidation of variable interest entities. We refer to these accounting standards together as the “new accounting standards.” In this report, we also refer to January 1, 2010 as the “transition date.”
 
Our adoption of the new accounting standards had a major impact on the presentation of our condensed consolidated financial statements. The new standards require that we consolidate the substantial majority of Fannie Mae MBS trusts we guarantee and recognize the underlying assets (typically mortgage loans) and debt (typically bonds issued by the trusts in the form of Fannie Mae MBS certificates) of these trusts as assets and liabilities in our condensed consolidated balance sheets.
 
Although the new accounting standards did not change the economic risk to our business, we recorded a decrease of $3.3 billion in our total deficit as of January 1, 2010 to reflect the cumulative effect of adopting these new standards. We provide a detailed discussion of the impact of the new accounting standards on our accounting and financial statements in “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation of Variable Interest Entities.” Upon adopting the new accounting standards, we changed the presentation of segment financial information that is currently evaluated by management, as we discuss in “Business Segment Results—Changes to Segment Reporting.”
 
Summary of Our Financial Performance for the Third Quarter and First Nine Months of 2010
 
Our financial results for the third quarter and the first nine months of 2010 reflect the continued weakness in the housing and mortgage markets, which remain under pressure from high levels of unemployment and underemployment.
 
Quarterly Results
 
Net loss.  We recognized a net loss of $1.3 billion for the third quarter of 2010, driven primarily by credit-related expenses of $5.6 billion, which were partially offset by net interest income of $4.8 billion. Including dividends on senior preferred stock, the net loss attributable to common stockholders we recognized for the third quarter of 2010 was $3.5 billion and our diluted loss per share was $0.61. In comparison, we recognized a net loss of $1.2 billion, a net loss attributable to common stockholders of $3.1 billion and a diluted loss per share of $0.55 for the second quarter of 2010. We recognized a net loss of $18.9 billion, a net loss attributable to common stockholders of $19.8 billion and a diluted loss per share of $3.47 for the third quarter of 2009.
 
The $121 million increase in our net loss in the third quarter of 2010 compared with the second quarter of 2010 was primarily due to a $710 million increase in credit-related expenses, driven in part by valuation adjustments that reduced the value of our REO inventory, and higher expenses due to increased acquisitions of foreclosed properties; and a $189 million increase in net other-than-temporary impairments, driven by a decline in forecasted home prices for certain geographic regions that resulted in a decrease in projected cash flows on subprime and Alt-A securities.
 
The increase in credit-related expenses and net other-than-temporary impairments from the second quarter of 2010 was partially offset by a $569 million increase in net interest income and a $222 million increase in net


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fair value gains. Net interest income increased driven by lower debt funding costs and the purchase from MBS trusts of the substantial majority of the single-family loans that are four or more monthly payments delinquent, as the cost of purchasing these delinquent loans and holding them in our portfolio is less than the cost of advancing delinquent payments to security holders. The increase in net fair value gains was mainly driven by gains on our trading securities, as interest rates declined and credit spreads narrowed.
 
Our net loss decreased $17.5 billion in the third quarter of 2010 compared with the third quarter of 2009. The primary drivers of this decrease were a $16.4 billion decrease in credit-related expenses, due to the factors described below; $525 million in net fair value gains compared with $1.5 billion in net fair value losses in the prior period; a $946 million increase in net interest income; and a $613 million decrease in net other-than-temporary impairments. These reductions in losses were offset in part by a $1.9 billion decrease in guaranty fee income due to our adoption of the new accounting standards effective January 1, 2010. Upon adoption of these new accounting standards, we eliminated substantially all of our guaranty-related assets and liabilities in our condensed consolidated balance sheet, and therefore we no longer recognize income or loss for consolidated trusts from amortizing these assets and liabilities or from changes in their fair value.
 
Our credit-related expenses, which consist of the provision for loan losses and the provision for guaranty losses (collectively referred to as the “provision for credit losses”) plus foreclosed property expense, were $5.6 billion for the third quarter of 2010 compared with $22.0 billion for the third quarter of 2009. The reduction in credit-related expenses was due primarily to the moderate decline in our total loss reserves during the third quarter of 2010 compared with the substantial increase in our total loss reserves during the third quarter of 2009. The substantial increase in our total loss reserves during the third quarter of 2009 reflected the significant growth in the number of loans that were seriously delinquent during that period and higher losses on defaulted loans driven by the sharp decline in home prices, which were partly the result of the deterioration in economic conditions during 2009. In the third quarter of 2010, our provision for credit losses was substantially lower due to the lack of growth in the number of loans that were seriously delinquent and the absence of a significant decline in home prices, which resulted in a decrease of our reserves during the third quarter of 2010. Additionally, due to our adoption of the new accounting standards, during 2010 we recognized an insignificant amount of fair value losses on credit impaired loans. By contrast, in the third quarter of 2009, we recognized a significant amount of fair value losses on acquired credit-impaired loans.
 
Year-to-Date Results
 
Net loss.  We recognized a net loss of $14.1 billion for the first nine months of 2010, driven primarily by credit-related expenses of $22.3 billion, administrative expenses of $2.0 billion and net fair value losses of $877 million, which were offset in part by net interest income of $11.8 billion. Our net loss for the first nine months of 2010 included an out-of-period adjustment of $1.1 billion related to an additional provision for losses on preforeclosure property taxes and insurance receivables. Including dividends on senior preferred stock, the net loss attributable to common stockholders we recognized for the first nine months of 2010 was $19.6 billion and our diluted loss per share was $3.45. In comparison, we recognized a net loss of $56.8 billion, a net loss attributable to common stockholders of $58.1 billion and a diluted loss per share of $10.24 for the first nine months of 2009.
 
The $42.7 billion decrease in our net loss for the first nine months of 2010 compared with the first nine months of 2009 was due primarily to a $39.3 billion decrease in credit-related expenses due to the factors described below, a $6.6 billion decrease in net other-than-temporary impairments as a result of the adoption of a new other-than-temporary impairment accounting standard in the second quarter of 2009, as we only recognize the credit portion of an other-than-temporary impairment in our condensed consolidated statements of operations, a $1.4 billion decrease in losses from partnership investments, and a $1.3 billion decrease in net fair value losses driven by our risk management derivatives. These reductions in losses were partially offset by lower guaranty fee income of $5.2 billion resulting from our adoption of the new accounting standards effective January 1, 2010.


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Our credit-related expenses were $22.3 billion for the first nine months of 2010 compared with $61.6 billion for the first nine months of 2009. The reduction in credit-related expenses was driven by the moderate increase in our total loss reserves during the first nine months of 2010, compared with the substantial increase in our total loss reserves during the first nine months of 2009. The substantial increase in our total loss reserves during the first nine months of 2009 reflected the significant growth in the number of loans that were seriously delinquent during that period, and higher losses on defaulted loans driven by the sharp decline in home prices, which were partly the result of the economic deterioration during 2009. Our provision for credit losses was substantially lower in the first nine months of 2010, because there has not been an increase in the number of seriously delinquent loans and the decline in home prices was not substantial, therefore we did not need to substantially increase our total loss reserves in the first nine months of 2010. Additionally, due to our adoption of the new accounting standards, during 2010 we recognized an insignificant amount of fair value losses on credit impaired loans. By contrast, in the first nine months of 2009, we recognized a significant amount of fair value losses on acquired credit-impaired loans.
 
Net worth.  We had a net worth deficit of $2.4 billion as of September 30, 2010, compared with a net worth deficit of $1.4 billion as of June 30, 2010 and $15.3 billion as of December 31, 2009. Our net worth as of September 30, 2010 was negatively impacted by the recognition of our net loss of $1.3 billion and senior preferred stock dividends of $2.1 billion paid during the third quarter. These reductions in our net worth were offset by our receipt of $1.5 billion in funds from Treasury on September 30, 2010 under our senior preferred stock purchase agreement with Treasury as well as by a reduction in unrealized losses in our holdings of available-for-sale securities of $705 million for the third quarter. Our net worth, which is the basis for determining the amount that Treasury has committed to provide us under the senior preferred stock purchase agreement, equals the “Total deficit” reported in our condensed consolidated balance sheet. In November 2010, the Acting Director of FHFA submitted a request to Treasury on our behalf for $2.5 billion to eliminate our net worth deficit as of September 30, 2010. When Treasury provides the requested funds, the aggregate liquidation preference on the senior preferred stock will be $88.6 billion, which will require an annualized dividend payment of $8.9 billion. This amount exceeds our reported annual net income for each of the last eight fiscal years, in most cases by a significant margin. Through September 30, 2010, we have paid an aggregate of $8.1 billion to Treasury in dividends on the senior preferred stock.
 
Total loss reserves.  Our total loss reserves, which reflect our estimate of the probable losses we have incurred in our guaranty book of business, declined as of September 30, 2010 as compared with June 30, 2010. Our total loss reserves were $64.7 billion as of September 30, 2010 and $66.7 billion as of June 30, 2010, compared with $61.4 billion as of January 1, 2010 and $64.9 billion as of December 31, 2009. Our total loss reserve coverage to total nonperforming loans was 30.34% as of September 30, 2010, compared with 30.56% as of June 30, 2010 and 29.98% as of December 31, 2009.
 
Housing and Mortgage Market and Economic Conditions
 
During the third quarter of 2010, the United States economic recovery continued at a very slow pace. The U.S. gross domestic product, or GDP, rose by 2.0% on an annualized basis during the quarter, according to the Bureau of Economic Analysis advance estimate. Housing activity experienced a pullback after the expiration of the home buyer tax credit, with housing starts and home sales declining sharply in the third quarter. The overall economy lost jobs in the third quarter due to the layoff of census workers; however, the private sector continued its recent trend of moderate employment growth throughout the quarter. Unemployment was 9.6% in September 2010, compared with 9.5% in June 2010, based on data from the U.S. Bureau of Labor Statistics.
 
The Mortgage Bankers Association National Delinquency Survey reported that, as of June 30, 2010, the most recent date for which information is available, 9.11% of borrowers were seriously delinquent (90 days or more past due or in the foreclosure process), which we estimate represents nearly five million mortgages. In September, the supply of single-family homes as measured by the inventory/sales ratio remained above long-term average levels. Properties that are vacant and held off the market, combined with the portion of seriously


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delinquent mortgages not currently listed for sale, represent a significant shadow inventory putting downward pressure on both home prices and rents.
 
We estimate that home prices on a national basis declined by 1.0% in the third quarter of 2010 and have declined by 18.1% from their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and are subject to change as additional data become available. The decline in home prices has left many homeowners with “negative equity” in their mortgages, which means their principal mortgage balance exceeds the current market value of their home. This creates a risk that borrowers might walk away from their mortgage obligations and for the loans to become delinquent and proceed to foreclosure.
 
The multifamily sector improved during the third quarter of 2010 despite high unemployment. Multifamily fundamentals continued to strengthen, likely driven by slight increases in private sector payrolls and the uncertainty surrounding single-family housing prices. Many tenants appear to be staying in apartments rather than purchasing a home due to uncertainty surrounding home values. Preliminary third-party data suggests that the rate of apartment vacancies continued to fall for the third quarter in a row in the third quarter of 2010. Rents also appear to have risen in the third quarter of 2010, with overall rent growth up for the first nine months of 2010. As a result, rent concessions to secure tenancy fell again for the third quarter in a row.
 
See “Risk Factors” in our 2009 Form 10-K for a description of risks to our business associated with the weak economy and housing market.
 
Outlook
 
Overall Market Conditions.  We expect weakness in the housing and mortgage markets to continue throughout 2010 and into 2011. The high level of delinquent mortgage loans will result in the foreclosure of troubled loans, which is likely to add to the excess housing inventory. Home sales will likely be slow until the unemployment rate improves. In addition, the servicer foreclosure process deficiencies described above create uncertainty for potential home buyers. Foreclosed homes account for a substantial part of the existing home market. Thus, a widespread foreclosure pause could suppress home sales in the near term and interfere with the housing recovery.
 
We expect that default and severity rates and the level of foreclosures will remain high for the remainder of 2010. In addition, we expect that home prices in 2010 will decline slightly on a national basis, more so in some geographic areas than in others. Despite the initial signs of multifamily sector improvement, we expect multifamily charge-offs to remain at elevated levels throughout 2010 and 2011. All of these conditions, as well as the level of single-family delinquencies, may worsen if the unemployment rate increases on either a national or regional basis. We expect the decline in residential mortgage debt outstanding to continue through 2010, which would mark three consecutive annual declines. Approximately 73% of our single-family business in the third quarter of 2010 consisted of refinancings. We expect these trends, combined with an expected decline in total originations in 2010, will result in lower business volume in 2010 as compared with 2009.
 
Home Price Declines.  We expect that home prices on a national basis will decline slightly in 2010 and into 2011 before stabilizing, and that the peak-to-trough home price decline on a national basis will range between 19% and 25%. These estimates are based on our home price index, which is calculated differently from the S&P/Case-Shiller U.S. National Home Price Index and therefore results in different percentages for comparable declines. These estimates also contain significant inherent uncertainty in the current market environment regarding a variety of critical assumptions we make when formulating these estimates, including: the effect of actions the federal government has taken and may take with respect to the national economic recovery; the impact of the end of the Federal Reserve’s MBS purchase program; and the impact of those actions on home prices, unemployment and the general economic and interest rate environment. Because of these uncertainties, the actual home price decline we experience may differ significantly from these estimates. We also expect significant regional variation in home price declines and stabilization.


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Our 19% to 25% peak-to-trough home price decline estimate corresponds to an approximate 32% to 40% peak-to-trough decline using the S&P/Case-Shiller index method. Our estimates differ from the S&P/Case-Shiller index in two principal ways: (1) our estimates weight expectations by number of properties, whereas the S&P/Case-Shiller index weights expectations based on property value, causing home price declines on higher priced homes to have a greater effect on the overall result; and (2) contrary to the S&P/Case-Shiller index, our estimates do not include known sales of foreclosed homes because we believe that differing maintenance practices and the forced nature of the sales make foreclosed home prices less representative of market values. The S&P/Case-Shiller comparison numbers are calculated using our models and assumptions, but modified to use these two factors (weighting of expectations based on property value and the inclusion of foreclosed property sales). In addition to these differences, our estimates are based on our own internally available data combined with publicly available data, and are therefore based on data collected nationwide, whereas the S&P/Case-Shiller index is based only on publicly available data, which may be limited in certain geographic areas of the country. Our comparative calculations to the S&P/Case-Shiller index provided above are not modified to account for this data pool difference.
 
Credit-Related Expenses and Credit Losses.  We expect that our credit-related expenses will remain high for the remainder of 2010. However, we expect that, if current trends continue, our credit-related expenses will be lower in 2010 than in 2009. We describe our credit loss outlook above under “Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in 2009, and Credit Losses.”
 
Uncertainty Regarding our Long-Term Financial Sustainability and Future Status.  There is significant uncertainty in the current market environment, and any changes in the trends in macroeconomic factors that we currently anticipate, such as home prices and unemployment, may cause our future credit-related expenses and credit losses to vary significantly from our current expectations. Although Treasury’s funds under the senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend payments are substantial. Given our expectations regarding future losses, which we describe above under “Our Expectations Regarding Profitability, the Single-Family Loans We Acquired Beginning in 2009, and Credit Losses,” we do not expect to earn profits in excess of our annual dividend obligation to Treasury for the indefinite future. As a result of these factors, there is significant uncertainty as to our long-term financial sustainability.
 
In addition, there is significant debate regarding the future of Fannie Mae and Freddie Mac, and proposals to reform them. We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding longer-term reform of the GSEs. Please see “Legislation” for a discussion of recent legislative reform of the financial services industry, and proposals for GSE reform, that could affect our business.
 
 
LEGISLATION
 
Financial Regulatory Reform Legislation
 
On July 21, 2010, President Obama signed into law financial regulatory reform legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will significantly change the regulation of the financial services industry, including by its creation of new standards related to regulatory oversight of systemically important financial companies, derivatives transactions, asset-backed securitization, mortgage underwriting and consumer financial protection. The Dodd-Frank Act will directly affect our business since new and additional regulatory oversight and standards will apply to us. We may also be affected by provisions of the Dodd-Frank Act and implementing regulations that impact the activities of our customers and counterparties in the financial services industry. Extensive regulatory guidance is needed to implement and clarify many of the provisions of the Dodd-Frank Act and agencies have just begun to initiate the required administrative processes. It is therefore difficult to assess fully the impact of this legislation on our business and industry at this time. Refer to “Legislation—Financial Regulatory Reform Legislation” in our Second Quarter 2010 Form 10-Q for a further description of the Dodd-Frank Act and its potential impact on our business and industry. Also see “Risk Factors” for a discussion of the potential risks to our business resulting from the Dodd-Frank Act.


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GSE Reform
 
The Dodd-Frank Act does not contain substantive GSE reform provisions, but does state that it is the sense of Congress that efforts to regulate the terms and practices related to residential mortgage credit would be incomplete without enactment of meaningful structural reforms of Fannie Mae and Freddie Mac. The Dodd-Frank Act also requires the Treasury Secretary to submit a report to Congress by January 31, 2011, with recommendations for ending the conservatorships of Fannie Mae and Freddie Mac. In August, September and October 2010, the Obama Administration hosted conferences on housing finance reform, at which proposals regarding the future of Fannie Mae and Freddie Mac were discussed. Since June 2009, Congressional committees and subcommittees have held hearings to discuss the present condition and future status of Fannie Mae and Freddie Mac. We expect hearings on GSE reform to continue and additional proposals to be discussed. We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding the future status of the GSEs. See “Risk Factors” for a discussion of the risks to our business relating to the uncertain future of our company.
 
 
REGULATORY ACTION
 
2010-2011 Housing Goals
 
On September 14, 2010, FHFA published a final rule establishing 2010 and 2011 housing goals for Fannie Mae. The final rule implements a new goal structure established by the Federal Housing Finance Regulatory Reform Act of 2008 (the “2008 Reform Act”) and sets new housing goals.
 
FHFA’s final rule and a subsequent notice received in October 2010 established the following single-family home purchase and refinance housing goal benchmarks for 2010 and 2011. A home purchase mortgage may be counted toward more than one home purchase benchmark.
 
  •  Low-Income Families Home Purchase Benchmark:  At least 27% of our purchases of single-family owner-occupied purchase money mortgage loans must be affordable to low-income families (defined as income equal to or less than 80% of area median income).
 
  •  Very Low-Income Families Home Purchase Benchmark:  At least 8% of our purchases of single-family owner-occupied purchase money mortgage loans must be affordable to very low-income families (defined as income equal to or less than 50% of area median income).
 
  •  Low-Income Areas Home Purchase Benchmarks:  For 2010, at least 24% of our purchases of single-family owner-occupied purchase money mortgage loans must be for families in low-income areas, including high-minority areas and disaster areas. At least 13% of our purchases must be for families in low-income and high-minority areas. FHFA has not specified a low-income areas benchmark for 2011.
 
  •  Low-Income Families Refinancing Benchmark:  At least 21% of our purchases of single-family owner-occupied refinance mortgage loans must be affordable to low-income families.
 
If we do not meet these benchmarks, we may still meet our goals. The final rule specifies that our single-family housing goals performance will be measured against these benchmarks and against goals-qualifying originations in the primary mortgage market. We will be in compliance with the housing goals if we meet either the benchmarks or market share measures.
 
The final rule also established a new multifamily goal and subgoal. Our multifamily mortgage purchases must finance at least 177,750 units affordable to families with incomes no higher than 80% of area median income, of which at least 42,750 units must be affordable to families with incomes no higher than 50% of area median income. There is no market-based alternative measurement for the multifamily goals.


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FHFA’s final rule made significant changes to prior housing goals regulations regarding the types of products that count towards the housing goals. Private-label mortgage-related securities, second liens and single-family government loans do not count towards the housing goals. In addition, only permanent modifications of mortgages under HAMP completed during the year will count towards the housing goals; trial modifications will not be counted. Moreover, these modifications will count only towards the single-family low-income families refinance goal, not any of the home purchase goals.
 
The final rule notes that “FHFA does not intend for [Fannie Mae] to undertake uneconomic or high-risk activities in support of the [housing] goals. However, the fact that [Fannie Mae is] in conservatorship should not be a justification for withdrawing support from these market segments.” If our efforts to meet our goals prove to be insufficient, FHFA will determine whether the goals were feasible. If FHFA finds that our 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 will 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 “Risk Factors” for a description of how we may be unable to meet our housing goals and how actions we may take to meet these goals and other regulatory requirements could adversely affect our business, results of operations and financial condition.
 
Delisting of our Common and Preferred Stock
 
We were directed by FHFA to delist our common stock and each listed series of our preferred stock from the New York Stock Exchange and the Chicago Stock Exchange. The last trading day for our listed securities on these exchanges was July 7, 2010, and since July 8, 2010, these securities have been quoted in the over-the-counter market. See “Risk Factors” for a description of the risks to our business relating to the delisting of our common and preferred stock.
 
For additional information on regulatory matters affecting us, refer to “Business—Our Charter and Regulation of Our Activities” in our 2009 Form 10-K and “MD&A—Regulatory Action” in our quarterly report on Form 10-Q for the quarter ended June 30, 2010 (“Second Quarter 2010 Form 10-Q”).
 
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” of this report and in our 2009 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” and “MD&A—Risk Management—Model Risk Management” in our 2009 Form 10-K for a discussion of the risk associated with the use of models. Also see “Risk Factors” and “MD&A—Critical Accounting Policies and Estimates” in our 2009 Form 10-K for additional information about our accounting policies we have identified as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and how the use of reasonably different


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estimates and assumptions could have a material impact on our reported results and operations or financial condition. These critical accounting policies and estimates are as follows:
 
  •  Fair Value Measurement
 
  •  Allowance for Loan Losses and Reserve for Guaranty Losses
 
  •  Other-Than-Temporary Impairment of Investment Securities
 
Effective January 1, 2010, we adopted the new accounting standards on the transfers of financial assets and the consolidation of variable interest entities. Refer to “Note 1, Summary of Significant Accounting Policies” and “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation of Variable Interest Entities” for additional information.
 
We provide below information about our Level 3 assets and liabilities as of September 30, 2010 compared to December 31, 2009 and describe any significant changes in the judgments and assumptions we made during the first nine months of 2010 in applying our critical accounting policies and significant changes to critical estimates as well as the impact of the new accounting standards on our allowance for loan losses and reserve for guaranty losses.
 
Fair Value Measurement
 
The use of fair value to measure our assets and liabilities is fundamental to our financial statements and is a critical accounting estimate because we account for and record a portion of our assets and liabilities at fair value. In determining fair value, we use various valuation techniques. We describe the valuation techniques and inputs used to determine the fair value of our assets and liabilities and disclose their carrying value and fair value in “Note 16, Fair Value.”
 
Fair Value Hierarchy—Level 3 Assets and Liabilities
 
The assets and liabilities that we have classified as Level 3 in the fair value hierarchy consist primarily of financial instruments for which there is limited market activity and therefore little or no price transparency. As a result, the valuation techniques that we use to estimate the fair value of Level 3 instruments involve significant unobservable inputs, which generally are more subjective and involve a high degree of management judgment and assumptions. Our Level 3 assets and liabilities consist of certain mortgage- and asset-backed securities and residual interests, certain mortgage loans, acquired property, partnership investments, our guaranty assets and buy-ups, our master servicing assets and certain highly structured, complex derivative instruments.
 
Table 5 presents a comparison, by balance sheet category, of the amount of financial assets carried in our condensed consolidated balance sheets at fair value on a recurring basis and classified as Level 3 as of September 30, 2010 and December 31, 2009. The availability of observable market inputs to measure fair value varies based on changes in market conditions, such as liquidity. As a result, we expect the amount of financial instruments carried at fair value on a recurring basis and classified as Level 3 to vary each period.


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Table 5:  Level 3 Recurring Financial Assets at Fair Value
 
                 
    As of  
    September 30,
    December 31,
 
Balance Sheet Category
  2010     2009  
    (Dollars in millions)  
 
Trading securities
  $ 4,962     $ 8,861  
Available-for-sale securities
    35,368       36,154  
Mortgage loans
    53        
Derivatives assets
    381       150  
Guaranty assets and buy-ups
    17       2,577  
                 
Level 3 recurring assets
  $ 40,781     $ 47,742  
                 
Total assets
  $ 3,229,622     $ 869,141  
Total recurring assets measured at fair value
  $ 179,291     $ 353,718  
Level 3 recurring assets as a percentage of total assets
    1 %     5 %
Level 3 recurring assets as a percentage of total recurring assets measured at fair value
    23 %     13 %
Total recurring assets measured at fair value as a percentage of total assets
    6 %     41 %
 
The decrease in assets classified as Level 3 during the first nine months of 2010 includes a $2.6 billion decrease due to derecognition of guaranty assets and buy-ups at the transition date as well as net transfers of approximately $3.9 billion in assets to Level 2 from Level 3. The assets transferred from Level 3 consist primarily of Fannie Mae guaranteed mortgage-related securities and private-label mortgage-related securities.
 
Assets measured at fair value on a nonrecurring basis and classified as Level 3, which are not presented in the table above, primarily include held-for-sale loans, held-for-investment loans, acquired property and partnership investments. The fair value of Level 3 nonrecurring assets totaled $46.0 billion during the first nine months of 2010, and $21.2 billion during the year ended December 31, 2009.
 
Financial liabilities measured at fair value on a recurring basis and classified as Level 3 consisted of long-term debt with a fair value of $536 million as of September 30, 2010 and $601 million as of December 31, 2009, and derivatives liabilities with a fair value of $159 million as of September 30, 2010 and $27 million as of December 31, 2009.
 
Allowance for Loan Losses and Reserve for Guaranty Losses
 
We maintain an allowance for loan losses for loans classified as held for investment, including both loans held by us and by consolidated Fannie Mae MBS trusts. We maintain a reserve for guaranty losses for loans held in unconsolidated Fannie Mae MBS trusts we guarantee and loans that we have guaranteed under long-term standby commitments. We report the allowance for loan losses and reserve for guaranty losses as separate line items in our condensed consolidated balance sheets. These amounts, which we collectively refer to as our combined loss reserves, represent probable losses incurred in our guaranty book of business as of the balance sheet date. The allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our recorded investment in loans held for investment. The reserve for guaranty losses is a liability account in our condensed consolidated balance sheets that reflects an estimate of incurred credit losses related to our guaranty to each unconsolidated Fannie Mae MBS trust that we will supplement amounts received by the Fannie Mae MBS trust as required to permit timely payments of principal and interest on the related Fannie Mae MBS. As a result, the guaranty reserve considers not only the principal and interest due on the loan at the current balance sheet date, but also an estimate of any additional interest payments due to the trust from the current balance sheet date until the point of loan acquisition or foreclosure. We maintain separate loss reserves for single-family and multifamily loans. Our single-family and multifamily loss reserves consist of a specific loss reserve for individually impaired loans and a collective loss reserve for all other loans.


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We have an established process, using analytical tools, benchmarks and management judgment, to determine our loss reserves. Although our loss reserve process benefits from extensive historical loan performance data, this process is subject to risks and uncertainties, including a reliance on historical loss information that may not be representative of current conditions. We continually monitor delinquency and default trends and make changes in our historically developed assumptions and estimates as necessary to better reflect present conditions, including current trends in borrower risk and/or general economic trends, changes in risk management practices, and changes in public policy and the regulatory environment. We also consider the recoveries that we will receive on mortgage insurance and other credit enhancements entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction, as such recoveries reduce the severity of the loss associated with defaulted loans. Due to the stress in the housing and credit markets, and the speed and extent of deterioration in these markets, our process for determining our loss reserves has become significantly more complex and involves a greater degree of management judgment than prior to this period of economic stress.
 
Single-Family Loss Reserves
 
We establish a specific single-family loss reserve for individually impaired loans, which includes loans we restructure in troubled debt restructurings, certain nonperforming loans in MBS trusts and acquired credit-impaired loans that have been further impaired subsequent to acquisition. The single-family loss reserve for individually impaired loans has grown as a proportion of the total single-family reserve in recent periods due to increases in the population of restructured loans. We typically measure impairment based on the difference between our recorded investment in the loan and the present value of the estimated cash flows we expect to receive, which we calculate using the effective interest rate of the original loan or the effective interest rate at acquisition for a credit-impaired loan. However, when foreclosure is probable on an individually impaired loan, we measure impairment based on the difference between our recorded investment in the loan and the fair value of the underlying property, adjusted for the estimated discounted costs to sell the property and estimated insurance or other proceeds we expect to receive.
 
We establish a collective single-family loss reserve for all other single-family loans in our single-family guaranty book of business using an econometric model that estimates the probability of default of loans to derive an overall loss reserve estimate given multiple factors such as: origination year, mark-to-market LTV ratio, delinquency status and loan product type. We believe that the loss severity estimates we use in determining our loss reserves reflect current available information on actual events and conditions as of each balance sheet date, including current home prices. Our loss severity estimates do not incorporate assumptions about future changes in home prices. We do, however, use a one-quarter look back period to develop our loss severity estimates for all loan categories.
 
In the second quarter of 2010, we updated our allowance for loan loss model to reflect a change in our cohort structure for our severity calculations to use mark-to-market LTV ratios rather than LTV ratios at origination, which we believe better reflects the current values of the loans. This model change resulted in a change in estimate and a decrease to our allowance for loan losses of approximately $1.6 billion.
 
Combined Loss Reserves
 
Upon recognition of the mortgage loans held by newly consolidated trusts at the transition date of our adoption of the new accounting standards, we increased our “Allowance for loan losses” by $43.6 billion and decreased our “Reserve for guaranty losses” by $54.1 billion. The decrease in our combined loss reserves of $10.5 billion reflects the difference in the methodology used to estimate incurred losses under our allowance for loan losses versus our reserve for guaranty losses and recording the portion of the reserve related to accrued interest to “Allowance for accrued interest receivable” in our condensed consolidated balance sheets. Our guaranty reserve considers not only the principal and interest due on a loan at the current balance sheet date, but also any interest payments expected to be missed from the balance sheet date until the point of loan acquisition or foreclosure. However, our loan loss allowance is an asset valuation allowance, and thus we


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consider only our net recorded investment in the loan at the balance sheet date, which includes only interest income accrued while the loan was on accrual status.
 
Upon adoption of the new accounting standards, we derecognized the substantial majority of the “Reserve for guaranty losses” relating to loans in previously unconsolidated trusts that were consolidated in our condensed consolidated balance sheet. We continue to record a reserve for guaranty losses related to loans in unconsolidated trusts and to loans that we have guaranteed under long-term standby commitments.
 
In addition to recognizing mortgage loans held by newly consolidated trusts at the transition date, we also recognized the associated accrued interest receivable from the mortgage loans held by the newly consolidated trusts. The accrued interest included delinquent interest on such loans which was previously considered in estimating our “Reserve for guaranty losses.” As a result, at transition, we reclassified $7.0 billion from our “Reserve for guaranty losses” to “Allowance for accrued interest receivable” in our condensed consolidated balance sheet. We collectively refer to our combined loss reserves, “Allowance for accrued interest receivable” and “Allowance for preforeclosure property tax and insurance” as our total loss reserves. For further information on our total loss reserves, see “Consolidated Results of Operations—Credit-Related Expenses—Provision for Credit Losses.”
 
 
CONSOLIDATED RESULTS OF OPERATIONS
 
The section below provides a discussion of our condensed consolidated results of operations for the periods indicated. You should read this section together with our condensed consolidated financial statements including the accompanying notes.
 
As discussed in “Executive Summary,” prospectively adopting the new accounting standards had a significant impact on the presentation and comparability of our condensed consolidated financial statements due to the consolidation of the substantial majority of our single-class securitization trusts and the elimination of previously recorded deferred revenue from our guaranty arrangements. While some line items in our condensed consolidated statements of operations were not impacted, others were impacted significantly, which reduces the comparability of our results for the third quarter and first nine months of 2010 with the results of these periods in prior years. The following table describes the impact to our third quarter and first nine months of 2010 results for those line items that were impacted significantly as a result of our adoption of the new accounting standards.


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Item     Consolidation Impact
Net interest income
      We now recognize the underlying assets and liabilities of the substantial majority of our MBS trusts in our condensed consolidated balance sheets, which increases both our interest-earning assets and interest-bearing liabilities and related interest income and interest expense.
        Contractual guaranty fees and the amortization of deferred cash fees received after December 31, 2009 are recognized into interest income.
        We now include nonperforming loans from the majority of our MBS trusts in our consolidated financial statements, which decreases our net interest income as we do not recognize interest income on these loans while we continue to recognize interest expense for amounts owed to MBS certificateholders.
        Trust management income and certain fee income from consolidated trusts are now recognized as interest income.
           
Guaranty fee income
      Upon adoption of the new accounting standards, we eliminated substantially all of our guaranty-related assets and liabilities in our condensed consolidated balance sheets. As a result, consolidated trusts’ deferred cash fees and non-cash fees through December 31, 2009 were recognized into our total deficit through the transition adjustment effective January 1, 2010, and we no longer recognize income or loss from amortizing these assets and liabilities nor do we recognize changes in their fair value. As noted above, we now recognize both contractual guaranty fees and the amortization of deferred cash fees received after December 31, 2009 through interest income, thereby reducing guaranty fee income to only those amounts related to unconsolidated trusts and other credit enhancements arrangements, such as our long-term standby commitments.
           
Credit-related expenses
      As the majority of our trusts are consolidated, we no longer record fair value losses on credit-impaired loans acquired from the substantial majority of our trusts.
        The substantial majority of our combined loss reserves are now recognized in our allowance for loan losses to reflect the loss allowance against the consolidated mortgage loans. We use a different methodology to estimate incurred losses for our allowance for loan losses as compared with our reserve for guaranty losses which will reduce our credit-related expenses.
           
Investment gains, net
      Our portfolio securitization transactions that reflect transfers of assets to consolidated trusts do not qualify as sales, thereby reducing the amount we recognize as portfolio securitization gains and losses.
        We no longer designate the substantial majority of our loans held for securitization as held-for-sale as the substantial majority of related MBS trusts will be consolidated, thereby reducing lower of cost or fair value adjustments.
        We no longer record gains or losses on the sale from our portfolio of the substantial majority of our available-for-sale MBS because these securities were eliminated in consolidation.
           
Fair value gains (losses), net
      We no longer record fair value gains or losses on the majority of our trading MBS, thereby reducing the amount of securities subject to recognition of changes in fair value in our condensed consolidated statement of operations.
           
Other expenses
      Upon purchase of MBS securities issued by consolidated trusts where the purchase price of the MBS does not equal the carrying value of the related consolidated debt, we recognize a gain or loss on debt extinguishment.
           
 
See “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation of Variable Interest Entities” for a further discussion of the impacts of the new accounting standards on our condensed consolidated financial statements.


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Table 6 summarizes our condensed consolidated results of operations for the periods indicated.
 
Table 6:  Summary of Condensed Consolidated Results of Operations(1)
 
                                                 
    For the
    For the
 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     Variance     2010     2009     Variance  
    (Dollars in millions)  
 
Net interest income
  $ 4,776     $ 3,830     $ 946     $ 11,772     $ 10,813     $ 959  
Guaranty fee income
    51       1,923       (1,872 )     157       5,334       (5,177 )
Fee and other income
    253       194       59       674       583       91  
                                                 
Net revenues
  $ 5,080     $ 5,947     $ (867 )   $ 12,603     $ 16,730     $ (4,127 )
                                                 
Investment gains, net
    82       785       (703 )     271       963       (692 )
Net other-than-temporary impairments
    (326 )     (939 )     613       (699 )     (7,345 )     6,646  
Fair value gains (losses), net
    525       (1,536 )     2,061       (877 )     (2,173 )     1,296  
Income (losses) from partnership investments
    47       (520 )     567       (37 )     (1,448 )     1,411  
Administrative expenses
    (730 )     (562 )     (168 )     (2,005 )     (1,595 )     (410 )
Credit-related expenses(2)
    (5,561 )     (21,960 )     16,399       (22,296 )     (61,616 )     39,320  
Other non-interest expenses(3)
    (457 )     (242 )     (215 )     (1,110 )     (1,108 )     (2 )
                                                 
Loss before federal income taxes
    (1,340 )     (19,027 )     17,687       (14,150 )     (57,592 )     43,442  
Benefit for federal income taxes
    (9 )     (143 )     134       (67 )     (743 )     676  
                                                 
Net loss
    (1,331 )     (18,884 )     17,553       (14,083 )     (56,849 )     42,766  
Less: Net (income) loss attributable to the noncontrolling interest
    (8 )     12       (20 )     (4 )     55       (59 )
                                                 
Net loss attributable to Fannie Mae
  $ (1,339 )   $ (18,872 )   $ 17,533     $ (14,087 )   $ (56,794 )   $ 42,707  
                                                 
 
 
(1) Certain prior period amounts have been reclassified to conform to the current period presentation.
 
(2) Consists of provision for loan losses, provision for guaranty losses and foreclosed property expense.
 
(3) Consists of debt extinguishment losses, net and other expenses.


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Net Interest Income
 
Table 7 presents 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 used a daily weighted average of amortized cost. When daily average balance information was not available, such as for mortgage loans, we used monthly averages. Table 8 presents 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 7:  Analysis of Net Interest Income and Yield
 
                                                 
    For the Three Months Ended September 30,  
    2010     2009  
          Interest
    Average
          Interest
    Average
 
    Average
    Income/
    Rates
    Average
    Income/
    Rates
 
    Balance     Expense     Earned/Paid     Balance     Expense     Earned/Paid  
    (Dollars in millions)  
 
Interest-earning assets:
                                               
Mortgage loans(1)
  $ 2,973,954     $ 36,666       4.93 %   $ 419,177     $ 5,290       5.05 %
Mortgage securities
    132,531       1,561       4.71       354,664       4,285       4.83  
Non-mortgage securities(2)
    102,103       62       0.24       58,077       52       0.35  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    14,193       10       0.28       34,393       23       0.26  
Advances to lenders
    3,643       21       2.26       4,951       25       1.98  
                                                 
Total interest-earning assets
  $ 3,226,424     $ 38,320       4.75 %   $ 871,262     $ 9,675       4.44 %
                                                 
Interest-bearing liabilities:
                                               
Short-term debt
  $ 250,761     $ 194       0.30 %   $ 265,760     $ 390       0.57 %
Long-term debt
    2,960,690       33,350       4.51       569,624       5,455       3.83  
Federal funds purchased and securities sold under agreements to repurchase
    45             0.03       41             1.68  
                                                 
Total interest-bearing liabilities
  $ 3,211,496     $ 33,544       4.18 %   $ 835,425     $ 5,845       2.79 %
                                                 
Impact of net non-interest bearing funding
  $ 14,928               0.02 %   $ 35,837               0.11 %
                                                 
Net interest income/net interest yield
          $ 4,776       0.59 %           $ 3,830       1.76 %
                                                 
Selected benchmark interest rates at end of period:(3)
                                               
3-month LIBOR
                    0.30 %                     0.29 %
2-year swap interest rate
                    0.60                       1.29  
5-year swap interest rate
                    1.51                       2.65  
30-year Fannie Mae MBS par coupon rate
                    3.39                       4.24  
 


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    For the Nine Months Ended September 30,  
    2010     2009  
          Interest
    Average
          Interest
    Average
 
    Average
    Income/
    Rates
    Average
    Income/
    Rates
 
    Balance     Expense     Earned/Paid     Balance     Expense     Earned/Paid  
    (Dollars in millions)  
 
Interest-earning assets:
                                               
Mortgage loans(1)
  $ 2,982,899     $ 111,917       5.00 %   $ 428,981     $ 16,499       5.13 %
Mortgage securities
    140,150       4,965       4.72       348,212       13,067       5.00  
Non-mortgage securities(2)
    93,548       165       0.23       53,957       211       0.52  
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    33,849       54       0.21       49,326       237       0.63  
Advances to lenders
    2,947       57       2.55       5,062       77       2.01  
                                                 
Total interest-earning assets
  $ 3,253,393     $ 117,158       4.80 %   $ 885,538     $ 30,091       4.53 %
                                                 
Interest-bearing liabilities:
                                               
Short-term debt
  $ 227,790     $ 479       0.28 %   $ 295,224     $ 2,097       0.94 %
Long-term debt
    3,003,373       104,907       4.66       566,813       17,181       4.04  
Federal funds purchased and securities sold under agreements to repurchase
    28             0.04       41             1.39  
                                                 
Total interest-bearing liabilities
  $ 3,231,191     $ 105,386       4.35 %   $ 862,078     $ 19,278       2.98 %
                                                 
Impact of net non-interest bearing funding
  $ 22,202               0.03 %   $ 23,460               0.08 %
                                                 
Net interest income/net interest yield
          $ 11,772       0.48 %           $ 10,813       1.63 %
                                                 
 
 
(1) Interest income includes interest income on acquired credit-impaired loans of $466 million and $142 million for the three months ended September 30, 2010 and 2009, respectively and $1.6 billion and $551 million for the nine months ended September 30, 2010 and 2009, respectively, which included accretion income of $231 million and $79 million for the three months ended September 30, 2010 and 2009, respectively, and $785 million and $342 million for the nine months ended September 30, 2010 and 2009, respectively, relating to a portion of the fair value losses recorded upon the acquisition of the loans. Average balance includes loans on nonaccrual status, for which interest income is recognized when collected.
 
(2) Includes cash equivalents.
 
(3) Data from British Bankers’ Association, Thomson Reuters Indices and Bloomberg.

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Table 8:  Rate/Volume Analysis of Changes in Net Interest Income
 
                                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,
    Ended September 30,
 
    2010 vs. 2009     2010 vs. 2009  
    Total
    Variance Due to:(1)     Total
    Variance Due to:(1)  
    Variance     Volume     Rate     Variance     Volume     Rate  
    (Dollars in millions)  
 
Interest income:
                                               
Mortgage loans
  $ 31,376     $ 31,501     $ (125 )   $ 95,418     $ 95,832     $ (414 )
Mortgage securities
    (2,724 )     (2,619 )     (105 )     (8,102 )     (7,408 )     (694 )
Non-mortgage securities(2)
    10       31       (21 )     (46 )     106       (152 )
Federal funds sold and securities purchased under agreements to resell or similar arrangements
    (13 )     (14 )     1       (183 )     (58 )     (125 )
Advances to lenders
    (4 )     (7 )     3       (20 )     (37 )     17  
                                                 
Total interest income
    28,645       28,892       (247 )     87,067       88,435       (1,368 )
                                                 
Interest expense:
                                               
Short-term debt
    (196 )     (21 )     (175 )     (1,618 )     (396 )     (1,222 )
Long-term debt
    27,895       26,771       1,124       87,726       84,723       3,003  
                                                 
Total interest expense
    27,699       26,750       949       86,108       84,327       1,781  
                                                 
Net interest income
  $ 946     $ 2,142     $ (1,196 )   $ 959     $ 4,108     $ (3,149 )
                                                 
 
 
(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 increased in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 primarily as a result of an increase in interest income due to the recognition of contractual guaranty fees in interest income upon adoption of the new accounting standards and a reduction in the interest expense on debt that we have issued as lower borrowing rates allowed us to replace higher-cost debt with lower-cost debt. Partially offsetting these positive effects, for the first nine months of 2010, was lower interest income from the interest earning assets that we own due to lower yields on our mortgage and non-mortgage assets. In addition, for the third quarter and first nine months of 2010, there was a reduction in interest income due to a significant increase in the number of nonperforming loans in our condensed consolidated balance sheets, since we do not recognize interest income on nonperforming loans that have been placed on nonaccrual status.
 
For the third quarter of 2010, interest income that we did not recognize for nonaccrual mortgage loans, net of recoveries, was $1.8 billion, which reduced our net interest yield by 23 basis points, compared with $335 million for the third quarter of 2009, which reduced our net interest yield by 15 basis points. Of the $1.8 billion of interest income that we did not recognize for nonaccrual mortgage loans in the third quarter of 2010, $1.5 billion was related to the unsecuritized mortgage loans that we own. For the first nine months of 2010, the interest income that we did not recognize for nonaccrual mortgage loans, net of recoveries, was $6.7 billion, with a 28 basis point reduction in net interest yield, compared with $804 million for the first nine months of 2009, with a 12 basis point reduction in net interest yield. Of the $6.7 billion of interest income that we did not recognize for nonaccrual mortgage loans in the first nine months of 2010, $3.3 billion was related to the unsecuritized mortgage loans that we own.
 
Net interest yield significantly decreased in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009. We recognize the contractual guaranty fee and the amortization of deferred cash fees received after December 31, 2009 on the underlying mortgage loans of consolidated trusts as interest income, which represents the spread between the net interest yield on the underlying mortgage assets and the rate on the debt of the consolidated trusts. Upon adoption of the new accounting standards, our


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interest-earning assets and interest-bearing liabilities both increased by approximately $2.4 trillion. The lower spread on these interest-earning assets and liabilities had the impact of reducing our net interest yield for the third quarter and first nine months of 2010 as compared with the third quarter and first nine months of 2009.
 
Net interest income in the second and third quarters of 2010, compared with the first quarter of 2010, benefited from the purchase from single-family MBS trusts of the substantial majority of the loans that are four or more consecutive monthly payments delinquent as the cost of purchasing these delinquent loans and holding them in our portfolio is less than the cost of advancing delinquent payments to security holders.
 
The net interest income for our Capital Markets group reflects interest income from the assets that we have purchased and the interest expense from the debt we have issued. See “Business Segment Results” for a detailed discussion of our Capital Markets group’s net interest income.
 
Guaranty Fee Income
 
Guaranty fee income decreased in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 because we consolidated the substantial majority of our MBS trusts and we recognize interest income and expense, instead of guaranty fee income, from consolidated trusts. At adoption of the new accounting standards, our guaranty-related assets and liabilities pertaining to previously unconsolidated trusts were eliminated; therefore, we no longer recognize amortization of previously recorded deferred cash and non-cash fees or fair value adjustments related to our guaranty to these trusts. Guaranty fee income for the third quarter and first nine months of 2010 reflects guaranty fees earned from unconsolidated trusts and other credit enhancement arrangements, such as our long-term standby commitments.
 
We continue to report guaranty fee income for our Single-Family business and our Multifamily business as a separate line item in “Business Segment Results.”
 
Investment Gains, Net
 
Investment gains declined in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 due to a decline in gains from securitizations and gains from sales of available-for-sale securities as a result of adopting the new accounting standards. Under these standards, our portfolio securitization transactions that reflect transfers of assets to consolidated trusts no longer qualify for sale treatment, which reduced our portfolio securitization gains and losses; and we no longer record gains and losses on the sale from our portfolio of the substantial majority of available-for-sale Fannie Mae MBS because these securities were eliminated in consolidation. In the third quarter and first nine months of 2009, we recognized securitization gains due to MBS issuances and sales related to whole loan conduit activity and recognized gains on available-for-sale securities due to tightening of investment spreads on agency MBS, which led to higher sale prices. The decline in investment gains for the third quarter and first nine months of 2010 was partially offset by a decrease in lower of cost or fair value adjustments on held-for-sale loans due to the reclassification of most of our held-for-sale loans to held for investment upon adoption of the new accounting standards. In the third quarter and first nine months of 2009, we recorded lower of cost or fair value adjustments on loans primarily driven by a decline in the credit quality of these loans.
 
Net Other-Than-Temporary Impairment
 
For the third quarter of 2010, net other-than-temporary impairment decreased compared with the third quarter of 2009, primarily as a result of lower impairment on Alt-A and subprime securities. The net other-than-temporary impairment charge recorded in the third quarter of 2010 was primarily driven by a net decline in forecasted home prices for certain geographic regions which resulted in a decrease in the present value of our cash flow projections on Alt-A and subprime securities. See “Note 6, Investments in Securities” for additional information regarding the net other-than-temporary impairment recognized in the third quarter of 2010.


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Net other-than-temporary impairment for the first nine months of 2010 significantly decreased compared with the first nine months of 2009, driven primarily by the adoption of a new accounting standard effective April 1, 2009. As a result of this accounting standard, beginning with the second quarter of 2009, we recognize only the credit portion of other-than-temporary impairment in our condensed consolidated statements of operations. Approximately 77% of the impairment recorded in the first nine months of 2009 was recorded in the first quarter of 2009 prior to the change in accounting standards. The net other-than-temporary impairment charge recorded in the first nine months of 2010 was primarily driven by a net decline in forecasted home prices for certain geographic regions which resulted in a decrease in the present value of our cash flow projections on Alt-A and subprime securities. The net other-than-temporary impairment charge recorded in the first nine months of 2009 before our adoption of this accounting standard included both the credit and non-credit components of the loss in fair value and was driven primarily by additional impairment losses on some of our Alt-A and subprime securities that we had previously impaired, as well as impairment losses on other Alt-A and subprime securities, due to continued deterioration in the credit quality of the loans underlying these securities and further declines in the expected cash flows.
 
Fair Value Gains (Losses), Net
 
Table 9 presents the components of fair value gains and losses.
 
Table 9:  Fair Value Gains (Losses), Net
 
                                 
    For the
    For the
 
    Three Months
    Nine Months
 
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    (Dollars in millions)  
 
Risk management derivatives fair value gains (losses) losses attributable to:
                               
Net contractual interest expense accruals on interest rate swaps
  $ (673 )   $ (968 )   $ (2,264 )   $ (2,687 )
Net change in fair value during the period
    732       (909 )     342       (1,182 )
                                 
Total risk management derivatives fair value gains (losses), net
    59       (1,877 )     (1,922 )     (3,869 )
Mortgage commitment derivatives fair value losses, net
    (183 )     (1,246 )     (1,361 )     (1,497 )
                                 
Total derivatives fair value losses, net
    (124 )     (3,123 )     (3,283 )     (5,366 )
                                 
Trading securities gains, net
    889       1,683       2,587       3,411  
Debt foreign exchange losses, net
    (117 )     (47 )     (40 )     (161 )
Debt fair value losses, net
    (48 )     (49 )     (66 )     (57 )
Mortgage loans fair value losses, net
    (75 )           (75 )      
                                 
Fair value gains (losses), net
  $ 525     $ (1,536 )   $ (877 )   $ (2,173 )
                                 
                                 
 
                 
    2010     2009  
 
5-year swap interest rate:
               
As of January 1
    2.98 %     2.13 %
As of March 31
    2.73       2.22  
As of June 30
    2.06       2.97  
As of September 30
    1.51       2.65  
 
Risk Management Derivatives Fair Value Gains (Losses), Net
 
We supplement our issuance of debt securities with derivative instruments to further reduce duration and prepayment risks. We recorded derivative gains in the third quarter of 2010 primarily due to gains on our foreign currency swaps. We use foreign currency swaps to manage the foreign exchange impact of foreign currency denominated debt issuances. The gains recognized on our foreign currency swaps mostly offset the


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fair value losses on our foreign currency denominated debt. Derivative gains for the third quarter of 2010 were partially offset by time decay on our purchased options.
 
We recorded derivative losses in the first nine months of 2010 primarily as a result of: (1) time decay on our purchased options; (2) a decrease in the fair value of our pay-fixed derivatives during the first quarter of 2010 due to a decline in swap rates during that period; and (3) a decrease in implied interest rate volatility, which reduced the fair value of our purchased options.
 
The derivative losses for the third quarter of 2009 were driven by a decrease in swap rates, which resulted in net losses on our net pay-fixed swap position, and by time decay associated with our purchased options.
 
For the first nine months of 2009, increases in swap rates resulted in gains on our net pay-fixed swap position; however, these gains were more than offset by losses on our option-based derivatives, as swap rate increases drove losses on our receive-fixed swaptions, and by time decay associated with our purchased options.
 
For additional information on our risk management derivatives, refer to “Note 10, Derivative Instruments.”
 
Mortgage Commitment Derivatives Fair Value Losses, Net
 
Commitments to purchase or sell some mortgage-related securities and to purchase single-family mortgage loans generally are derivatives, and changes in their fair value are recognized in our condensed consolidated statements of operations. We recognized losses on our mortgage securities commitments in the third quarter and first nine months of 2010 primarily due to losses on our commitments to sell because mortgage-related securities prices increased during the commitment period.
 
We recognized losses on our mortgage securities commitments in the third quarter and first nine months of 2009 primarily due to a large volume of commitments to sell, which were mainly associated with dollar roll transactions, and an increase in mortgage-related securities prices during the commitment period.
 
Trading Securities Gains, Net
 
Gains on trading securities in the third quarter and first nine months of 2010 were primarily driven by a decrease in interest rates and narrowing of credit spreads, primarily on commercial mortgage backed securities (“CMBS”).
 
The gains on our trading securities during the third quarter of 2009 were primarily attributable to the narrowing of credit spreads on CMBS, as well as to a decline in interest rates. The gains on our trading securities during the first nine months of 2009 were primarily attributable to the narrowing of credit spreads on CMBS, asset-backed securities, corporate debt securities and agency MBS, partially offset by an increase in interest rates in the first nine months of 2009.
 
Income (Losses) from Partnership Investments
 
In the fourth quarter of 2009, we reduced the carrying value of our low-income housing tax credit (“LIHTC”) investments to zero. As a result, we no longer recognize net operating losses or other-than-temporary impairment on our LIHTC investments, which resulted in a shift to income from partnership investments in the third quarter of 2010 from losses on these investments in the third quarter of 2009 and a decrease in losses from partnership investments in the first nine months of 2010 compared with the first nine months of 2009.


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Administrative Expenses
 
Administrative expenses increased in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 due to an increase in employees and third-party services primarily related to our foreclosure prevention and credit loss mitigation efforts.
 
Credit-Related Expenses
 
Credit-related expenses consist of the provision for loan losses, provision for guaranty losses and foreclosed property expense. We detail the components of our credit-related expenses in Table 10.
 
Table 10:  Credit-Related Expenses
 
                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    (Dollars in millions)  
 
Provision for loan losses
  $ 4,696     $ 2,546     $ 20,930     $ 7,670  
Provision for guaranty losses
    78       19,350       111       52,785  
                                 
Total provision for credit losses(1)
    4,774       21,896       21,041       60,455  
Foreclosed property expense
    787       64       1,255       1,161  
                                 
Credit-related expenses
  $ 5,561     $ 21,960     $ 22,296     $ 61,616  
                                 
 
 
(1) Includes credit losses attributable to acquired credit-impaired loans and HomeSaver Advance fair value losses of $41 million and $7.7 billion for the three months ended September 30, 2010 and 2009, respectively, and $146 million and $11.4 billion for the nine months ended September 30, 2010 and 2009, respectively.
 
Provision for Credit Losses
 
Table 11 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of MBS trusts reflected in our condensed consolidated balance sheets. We consider these fair value losses previously recognized as an “effective reserve” for credit losses because the mortgage loan balances were reduced by these fair value losses at acquisition. We exclude these fair value losses from our credit loss calculation as described in “Consolidated Results of Operations—Credit-Related Expenses—Credit Loss Performance Metrics.” We estimate that approximately half of this amount represents credit losses we expect to realize in the future and approximately half will eventually be recovered through our condensed consolidated statements of operations, primarily as net interest income if the loan cures or foreclosed property income if the sale of the collateral exceeds the recorded investment of the credit-impaired loan. See “MD&A—Critical Accounting Policies and Estimates—Fair Value of Loans Purchased with Evidence of Credit Deterioration” in our 2009 Form 10-K for additional information on how acquired credit-impaired loan fair value losses, credit-related expenses and credit losses related to loans underlying our guaranty contracts are recorded in our consolidated financial statements.


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Table 11:  Total Loss Reserves
 
                 
    As of  
    September 30,
    December 31,
 
    2010     2009  
    (Dollars in millions)  
 
Allowance for loan losses
  $ 59,740     $ 9,925  
Reserve for guaranty losses
    276       54,430  
                 
Combined loss reserves
    60,016       64,355  
Allowance for accrued interest receivable
    3,785       536  
Allowance for preforeclosure property taxes and insurance receivable(1)
    928        
                 
Total loss reserves
    64,729       64,891  
Fair value losses previously recognized on acquired credit impaired loans(2)
    19,823       22,295  
                 
Total loss reserves and fair value losses previously recognized on acquired credit impaired loans
  $ 84,552     $ 87,186  
                 
 
 
(1) Amount included in other assets in our condensed consolidated balance sheets.
 
(2) Represents the fair value losses on loans purchased out of MBS trusts reflected in our condensed consolidated balance sheets.
 
We summarize the changes in our combined loss reserves in Table 12. Upon recognition of the mortgage loans held by newly consolidated trusts on January 1, 2010, we increased our “Allowance for loan losses” and decreased our “Reserve for guaranty losses.” The impact at transition is reported as “Adoption of new accounting standards” in Table 12. The decrease in the combined loss reserves from transition represents a difference in the methodology used to estimate incurred losses for our allowance for loan losses as compared with our reserve for guaranty losses and our separate presentation of the portion of the allowance related to accrued interest as our “Allowance for accrued interest receivable.” These changes are discussed in “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation of Variable Interest Entities.”


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Table 12:  Allowance for Loan Losses and Reserve for Guaranty Losses (Combined Loss Reserves)
 
                                                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    Of
    Of
                Of
    Of
             
    Fannie
    Consolidated
                Fannie
    Consolidated
             
    Mae     Trusts     Total           Mae     Trusts     Total        
    (Dollars in millions)  
 
Changes in combined loss reserves:
                                                               
Allowance for loan losses:
                                                               
Beginning balance(1)
  $ 42,844     $ 17,738     $ 60,582     $ 6,532     $ 8,078     $ 1,847     $ 9,925     $ 2,772  
Adoption of new accounting standards
                                  43,576       43,576        
Provision for loan losses
    2,144       2,552       4,696       2,546       11,008       9,922       20,930       7,670  
Charge-offs(2)
    (5,946 )     (1,243 )     (7,189 )     (448 )     (12,097 )     (6,645 )     (18,742 )     (1,757 )
Recoveries
    205       304       509       52       367       872       1,239       155  
Transfers(3)
    5,131       (5,131 )                 41,606       (41,606 )            
Net reclassifications(1)(4)
    895       247       1,142       (215 )     (3,689 )     6,501       2,812       (373 )
                                                                 
Ending balance(1)(5)
  $ 45,273     $ 14,467     $ 59,740     $ 8,467     $ 45,273     $ 14,467     $ 59,740     $ 8,467  
                                                                 
Reserve for guaranty losses:
                                                               
Beginning balance
  $ 246     $     $ 246     $ 48,280     $ 54,430     $     $ 54,430     $ 21,830  
Adoption of new accounting standards
                            (54,103 )           (54,103 )      
Provision for guaranty losses
    78             78       19,350       111             111       52,785  
Charge-offs
    (48 )           (48 )     (10,901 )     (165 )           (165 )     (18,159 )
Recoveries
                      176       3             3       449  
                                                                 
Ending balance
  $ 276     $     $ 276     $ 56,905     $ 276     $     $ 276     $ 56,905  
                                                                 
Combined loss reserves:
                                                               
Beginning balance(1)
  $ 43,090     $ 17,738     $ 60,828     $ 54,812     $ 62,508     $ 1,847     $ 64,355     $ 24,602  
Adoption of new accounting standards
                            (54,103 )     43,576       (10,527 )      
Total provision for credit losses
    2,222       2,552       4,774       21,896       11,119       9,922       21,041       60,455  
Charge-offs(2)
    (5,994 )     (1,243 )     (7,237 )     (11,349 )     (12,262 )     (6,645 )     (18,907 )     (19,916 )
Recoveries
    205       304       509       228       370       872       1,242       604  
Transfers(3)
    5,131       (5,131 )                 41,606       (41,606 )            
Net reclassifications(1)(4)
    895       247       1,142       (215 )     (3,689 )     6,501       2,812       (373 )
                                                                 
Ending balance(1)(5)
  $ 45,549     $ 14,467     $ 60,016     $ 65,372     $ 45,549     $ 14,467     $ 60,016     $ 65,372  
                                                                 
Attribution of charge-offs:
                                                               
Charge-offs attributable to guaranty book of business
                  $ (7,196 )   $ (3,637 )                   $ (18,761 )   $ (8,514 )
Charge-offs attributable to fair value losses on:
                                                               
Acquired credit-impaired loans
                    (41 )     (7,688 )                     (146 )     (11,190 )
HomeSaver Advance loans
                          (24 )                           (212 )
                                                                 
Total charge-offs
                  $ (7,237 )   $ (11,349 )                   $ (18,907 )   $ (19,916 )
                                                                 
 


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    As of  
    September 30,
    December 31,
 
    2010     2009  
 
Allocation of combined loss reserves:
               
Balance at end of each period attributable to:
               
Single-family(1)
  $ 58,451     $ 62,312  
Multifamily
    1,565       2,043  
                 
Total
  $ 60,016     $ 64,355  
                 
Single-family and multifamily loss reserves as a percentage of applicable guaranty book of business:
               
Single-family(1)
    2.05 %     2.14 %
Multifamily
    0.84       1.10  
Combined loss reserves as a percentage of:
               
Total guaranty book of business(1)
    1.98 %     2.08 %
Total nonperforming loans(1)
    28.13       29.73  
 
 
(1) Prior period amounts have been reclassified and respective percentages have been recalculated to conform to the current period presentation.
 
(2) Includes accrued interest of $811 million and $416 million for the three months ended September 30, 2010 and 2009, respectively and $2.0 billion and $990 million for the nine months ended September 30, 2010 and 2009, respectively.
 
(3) Includes transfers from trusts for delinquent loan purchases.
 
(4) Represents reclassification of amounts recorded in provision for loan losses and charge-offs that relate to allowance for accrued interest receivable and preforeclosure property taxes and insurance due from borrowers.
 
(5) Includes $397 million and $1.1 billion as of September 30, 2010 and 2009, respectively, for acquired credit-impaired loans.
 
Our provision for credit losses decreased, in both the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009, primarily due to the moderate change in our total loss reserves during the third quarter and first nine months of 2010 compared with the substantial increase in our total loss reserves during the third quarter and first nine months of 2009. The substantial increase in our total loss reserves during the third quarter and first nine months of 2009 reflected the significant growth in the number of loans that were seriously delinquent during that period, which was partly the result of the economic deterioration during 2009. Another impact of the economic deterioration during 2009 was sharply falling home prices, which resulted in higher losses on defaulted loans, further increasing the loss reserves. Our provision for credit losses was substantially lower in both the third quarter and first nine months of 2010, because there was not an increase in the number of seriously delinquent loans, nor a sharp decline in home prices, and therefore we did not need to substantially increase our reserves in the third quarter or first nine months of 2010. Although lower for the third quarter and first nine months of 2010 than in 2009, our provision for credit losses, level of delinquencies and our total loss reserves remained high due to the following factors:
 
  •  A high level of nonperforming loans, delinquencies, and defaults due to the general deterioration in our guaranty book of business. Factors contributing to these conditions include the following:
 
  •  Continued stress on a broader segment of borrowers due to continued high levels of unemployment and underemployment and the prolonged decline in home prices has resulted in high delinquency rates on loans in our single-family guaranty book of business that do not have characteristics typically associated with higher-risk loans.
 
  •  Certain loan categories continued to contribute disproportionately to the increase in our nonperforming loans and credit losses. These categories include: loans on properties in certain Midwest states, California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans related to higher-risk product types, such as Alt-A loans. Although we have identified each year of our 2005 through 2008 vintages as not profitable, the largest and most disproportionate contributors to credit

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  losses have been the 2006 and 2007 vintages. Accordingly, our concentration statistics throughout the MD&A display details for only these two vintages.
 
  •  The prolonged decline in home prices has also resulted in negative home equity for some borrowers, especially when the impact of existing second mortgage liens is taken into account, which has affected their ability to refinance or willingness to make their mortgage payments, and caused loans to remain delinquent for an extended period of time as shown in “Table 39: Delinquency Status of Single-Family Conventional Loans.”
 
  •  The number of loans that are seriously delinquent remained high due to delays in foreclosures because: (1) we require servicers to exhaust foreclosure prevention alternatives as part of our efforts to help borrowers stay in their homes; (2) recent legislation or judicial changes in the foreclosure process in a number of states have lengthened the foreclosure timeline; and (3) some jurisdictions are experiencing foreclosure processing backlogs due to high foreclosure case volumes. However, during the third quarter of 2010, the number of loans that transitioned out of seriously delinquent status exceeded the number of loans that became seriously delinquent, primarily due to the increase in loan modifications and foreclosure alternatives and higher volume of foreclosures.
 
  •  A greater proportion of our total loss reserves is attributable to individual impairment rather than the collective reserve for loan losses. We consider a loan to be individually impaired when, based on current information, it is probable that we will not receive all amounts due, including interest, in accordance with the contractual terms of the loan agreement. Individually impaired loans currently include, among others, those restructured in a troubled debt restructuring (“TDR”), which is a form of restructuring a mortgage loan in which a concession is granted to a borrower experiencing financial difficulty. Any impairment recognized on these loans is part of our provision for loan losses and allowance for loan losses. The higher level of workouts initiated as a result of our foreclosure prevention efforts through the first nine months of 2010, including HAMP, increased our total number of individually impaired loans, especially those considered to be TDRs, compared with the third quarter and first nine months of 2009. Frequently, the allowance calculated for an individually impaired loan is greater than the allowance which would be calculated under the collective reserve. Individual impairment for TDRs is based on the restructured loan’s expected cash flows over the life of the loan, taking into account the effect of any concessions granted to the borrower, discounted at the loan’s original effective interest rate. The model includes forward looking assumptions using multiple scenarios of the future economic environment, including interest rates and home prices.
 
  •  We recorded an out-of-period adjustment of $1.1 billion to our provision for loan losses in the second quarter of 2010, related to an additional provision for losses on preforeclosure property taxes and insurance receivables. For additional information about this adjustment, please see “Note 5, Allowance for Loan Losses and Reserve for Guaranty Losses.”
 
The decline in our fair value losses on acquired credit impaired loans was another significant factor contributing to the decline in our provision for credit losses for the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009. While we acquired significantly more credit-impaired loans from MBS trusts in the third quarter and first nine months of 2010, we experienced a significant decline in fair value losses on acquired credit-impaired loans because of our adoption of the new accounting standards. Only purchases of credit-deteriorated loans from unconsolidated MBS trusts or as a result of other credit guarantees generate fair value losses upon acquisition. In the third quarter of 2010, we acquired approximately 138,000 loans from MBS trusts and during the first nine months of 2010, we acquired approximately 996,000 loans from MBS trusts.
 
Loans in certain states, certain higher-risk categories and our 2006 and 2007 vintages continue to contribute disproportionately to our credit losses, as displayed in Table 15. Our combined single-family loss reserves are also disproportionately higher for certain states, Alt-A loans and our 2006 and 2007 vintages. The Midwest accounted for approximately 13% of our combined single-family loss reserves as of both September 30, 2010 and December 31, 2009. Our mortgage loans in California, Florida, Arizona and Nevada together accounted for approximately 53% of


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our combined single-family loss reserves as of both September 30, 2010 and December 31, 2009. Our Alt-A loans represented approximately 31% of our combined single-family loss reserves as of September 30, 2010, compared with approximately 35% as of December 31, 2009, and our 2006 and 2007 loan vintages together accounted for approximately 67% of our combined single-family loss reserves as of September 30, 2010, compared with approximately 69% as of December 31, 2009.
 
For additional discussions on delinquent loans and concentrations, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Problem Loan Management.” For discussions on our charge-offs, see “Consolidated Results of Operations—Credit-Related Expenses—Credit Loss Performance Metrics.”
 
Our balance of nonperforming single-family loans remained high as of September 30, 2010 due to both high levels of delinquencies and an increase in TDRs. The composition of our nonperforming loans is shown in Table 13. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 4, Mortgage Loans.”
 
Table 13:  Nonperforming Single-Family and Multifamily Loans
 
                 
    As of  
    September 30,
    December 31,
 
    2010     2009  
    (Dollars in millions)  
 
On-balance sheet nonperforming loans including loans in
consolidated Fannie Mae MBS trusts:
               
Nonaccrual loans
  $ 159,325     $ 34,079  
Troubled debt restructurings on accrual status
    49,667       6,922  
HomeSaver Advance first-lien loans on accrual status
    4,189       866  
                 
Total on-balance sheet nonperforming loans
    213,181       41,867  
                 
Off-balance sheet nonperforming loans in unconsolidated Fannie Mae MBS trusts:
               
Nonperforming loans, excluding HomeSaver Advance first-lien loans(1)
    164       161,406  
HomeSaver Advance first-lien loans(2)
    1       13,182  
                 
Total off-balance sheet nonperforming loans
    165       174,588  
                 
Total nonperforming loans
  $ 213,346     $ 216,455  
                 
Accruing on-balance sheet loans past due 90 days or more(3)
  $ 801     $ 612  
                 
 
                 
    For the
  For the
    Nine Months Ended
  Year Ended
    September 30,
  December 31,
    2010   2009
    (Dollars in millions)
 
Interest related to on-balance sheet nonperforming loans:
               
Interest income forgone(4)
  $ 6,118     $ 1,341  
Interest income recognized for the period(5)
    6,136       1,206  
 
 
(1) Represents loans that would meet our criteria for nonaccrual status if the loans had been on-balance sheet.
 
(2) Represents all off-balance sheet first-lien loans associated with unsecured HomeSaver Advance loans, including first-lien loans that are not seriously delinquent.
 
(3) Recorded investment of loans as of the end of each period that are 90 days or more past due and continuing to accrue interest, including loans insured or guaranteed by the U.S. government and loans where we have recourse against the seller in the event of a default.
 
(4) Represents the amount of interest income that would have been recorded during the period for on-balance sheet nonperforming loans as of the end of each period had the loans performed according to their original contractual terms.
 
(5) Represents interest income recognized during the period based on stated coupon rate for on-balance sheet loans classified as nonperforming as of the end of each period.


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Foreclosed Property Expense
 
Foreclosed property expense increased during the third quarter of 2010 compared with the third quarter of 2009 primarily due to valuation adjustments that reduced the value of our REO inventory and the substantial increase in our REO inventory in 2010. In addition, we recognized $23 million in the third quarter of 2010 from the cancellation and restructuring of some of our mortgage insurance coverage, compared with a recognition of $235 million in the third quarter of 2009. These amounts represented an acceleration of, and discount on, claims to be paid pursuant to the coverage in order to reduce our future exposure to our mortgage insurers.
 
The increase in foreclosed property expense during the first nine months of 2010 compared with the first nine months of 2009 was driven primarily by the substantial increase in our REO inventory and by an increase in valuation adjustments that reduced the value of our REO inventory. The increase in foreclosed property expense was partially offset by the recognition of $796 million in the first nine months of 2010 from the cancellation and restructuring of some of our mortgage insurance coverage compared with a recognition of $235 million from restructurings in the first nine months of 2009. In addition, during the second quarter of 2010, we began recording expenses related to preforeclosure property taxes and insurance to the provision for loan losses.
 
As described in “Executive Summary,” although we expect the current servicer foreclosure pause will likely negatively affect our serious delinquency rates, credit-related expenses and foreclosure timelines, we cannot yet predict the extent of its impact.
 
Credit Loss Performance Metrics
 
Our credit-related expenses should be considered in conjunction with our credit loss performance. These 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 HomeSaver Advance loans and the acquisition of credit-impaired loans. We also exclude interest forgone on nonperforming loans in our mortgage portfolio, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses.
 
Historically, management viewed our credit loss performance metrics, which include our historical credit losses and our credit loss ratio, as indicators of the effectiveness of our credit risk management strategies. As our credit losses are now at such high levels, management has shifted focus away from the credit loss ratio to measure performance and has focused more on our loss mitigation strategies and the reduction of our credit losses on an absolute basis. However, 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. They also provide a consistent treatment of credit losses for on- and off-balance sheet loans. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans and HomeSaver Advance loans, investors are able to evaluate our credit performance on a more consistent basis among periods. Table 14 details the components of our credit loss performance metrics as well as our average single-family default rate and average single-family loss severity rate.


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Table 14:  Credit Loss Performance Metrics
 
                                                                 
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2010     2009     2010     2009  
    Amount     Ratio(1)     Amount     Ratio(1)     Amount     Ratio(1)     Amount     Ratio(1)  
    (Dollars in millions)  
 
Charge-offs, net of recoveries(2)
  $ 6,728       88.4  bp   $ 11,121       145.0 bp   $ 17,665       76.9  bp   $ 19,312       85.0  bp
Foreclosed property expense(2)
    787       10.3       64       0.9       1,255       5.5       1,161       5.1  
                                                                 
Credit losses including the effect of fair value losses on acquired credit-impaired loans and HomeSaver Advance loans
    7,515       98.7       11,185       145.9       18,920       82.4       20,473       90.1  
Less: Fair value losses resulting from acquired credit-impaired loans and HomeSaver Advance loans
    (41 )     (0.5 )     (7,712 )     (100.6 )     (146 )     (0.6 )     (11,402 )     (50.2 )
Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property expense
    750       9.9       213       2.8       1,642       7.1       441       1.9  
                                                                 
Credit losses and credit loss ratio
  $ 8,224       108.1 bp   $ 3,686       48.1 bp   $ 20,416       88.9 bp   $ 9,512       41.8 bp
                                                                 
Credit losses attributable to:
                                                               
Single-family
  $ 8,037             $ 3,620             $ 20,022             $ 9,386          
Multifamily
    187               66               394               126          
                                                                 
Total
  $ 8,224             $ 3,686             $ 20,416             $ 9,512          
                                                                 
Average single-family default rate
            0.63 %             0.30 %             1.63 %             0.71 %
Average single-family loss severity rate(3)
            33.30               37.70               34.20               37.60  
 
 
(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) Beginning in the second quarter of 2010, expenses relating to preforeclosure taxes and insurance, previously recorded as foreclosed property expense, were recorded as charge-offs. The impact of including these costs was 7.7 and 4.6 basis points for the three and nine months ended September 30, 2010, respectively.
 
(3) Excludes fair value losses on credit-impaired loans acquired from MBS trusts and HomeSaver Advance loans and charge-offs from preforeclosure sales.
 
The increase in our credit losses reflects the increase in the number of defaults, particularly due to our prior acquisition of loans with higher-risk attributes compared with current underwriting standards, the prolonged period of high unemployment and the decline in home prices. In addition, defaults in the third quarter and first nine months of 2009 were lower than they could have been due to the foreclosure moratoria during the end of 2008 and first quarter of 2009. The increase in defaults during the third quarter and first nine months of 2010 was partially offset by a slight reduction in average loss severity as home prices have improved in some geographic regions.
 
Table 15 provides an analysis of our credit losses in certain higher-risk loan categories, loan vintages and loans within certain states that continue to account for a disproportionate share of our credit losses as compared with our other loans.


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Table 15:  Credit Loss Concentration Analysis
 
                                                         
                      Percentage of
 
                      Single-
 
                      Family
 
    Percentage of
    Credit Losses  
    Single-Family Conventional
    For the Three
    For the Nine
 
    Guaranty Book
    Months
    Months
 
    of Business Outstanding as of(1)     Ended
    Ended
 
    September 30,
    December 31,
    September 30,
    September 30,     September 30,  
    2010     2009     2009     2010     2009     2010     2009  
 
Geographical distribution:
                                                       
Arizona, California, Florida and Nevada
    28 %     28 %     28 %     57 %     57 %     57 %     57 %
Illinois, Indiana, Michigan and Ohio
    11       11       11       13       15       14       15  
All other states
    61       61       61       30       28       29       28  
Select higher-risk product features(2)
    23       24       25       63       69       64       70  
Vintages:
                                                       
2006
    9       11       11       30       30       30       31  
2007
    13       15       16       35       38       36       36  
All other vintages
    78       74       73       35       32       34       33  
 
 
(1) Calculated based on the unpaid principal balance of loans, where we have detailed loan-level information, for each category divided by the unpaid principal balance of our single-family conventional guaranty book of business.
 
(2) Includes Alt-A loans, subprime loans, interest-only loans, loans with original LTV ratios greater than 90%, and loans with FICO credit scores less than 620.
 
Our 2009 and 2010 vintages accounted for less than 1% of our single-family credit losses for the third quarter and first nine months of 2010. Typically, credit losses on mortgage loans do not peak until the third through fifth years following origination. We provide more detailed credit performance information, including serious delinquency rates by geographic region, statistics on nonperforming loans and foreclosure activity in “Risk Management—Credit Risk Management—Mortgage Credit Risk Management.”
 
Regulatory Hypothetical Stress Test Scenario
 
Under a September 2005 agreement with the Office of Federal Housing Enterprise Oversight, we are required to disclose on a quarterly basis the present value of the change in future expected credit losses from our existing single-family guaranty book of business from an immediate 5% decline in single-family home prices for the entire United States. Although other provisions of the September 2005 agreement were suspended in March 2009 by FHFA until further notice, this disclosure requirement was not suspended. For purposes of this calculation, we assume that, after the initial 5% shock, home price growth rates return to the average of the possible growth rate paths used in our internal credit pricing models. The sensitivity results represent the difference between future expected credit losses under our base case scenario, which is derived from our internal home price path forecast, and a scenario that assumes an instantaneous nationwide 5% decline in home prices.
 
Table 16 compares the credit loss sensitivities for the periods indicated for first lien single-family whole loans we own or that back Fannie Mae MBS, before and after consideration of projected credit risk sharing proceeds, such as private mortgage insurance claims and other credit enhancement.


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Table 16:  Single-Family Credit Loss Sensitivity(1)
 
                 
    As of  
    September 30,
    December 31,
 
    2010     2009  
    (Dollars in millions)  
 
Gross single-family credit loss sensitivity
  $ 22,899     $ 18,311  
Less: Projected credit risk sharing proceeds
    (2,848 )     (2,533 )
                 
Net single-family credit loss sensitivity
  $ 20,051     $ 15,778  
                 
Outstanding single-family whole loans and Fannie Mae MBS(2)
  $ 2,835,138     $ 2,830,004  
Single-family net credit loss sensitivity as a percentage of outstanding single-family whole loans and Fannie Mae MBS
    0.71 %     0.56 %
 
 
(1) Represents total economic credit losses, which consist of credit losses and forgone interest. Calculations are based on approximately 99% and 97% of our total single-family guaranty book of business as of September 30, 2010 and December 31, 2009, respectively. The mortgage loans and mortgage-related securities that are included in these estimates consist of: (a) single-family Fannie Mae MBS (whether held in our mortgage portfolio or held by third parties), excluding certain whole loan REMICs and private-label wraps; (b) single-family mortgage loans, excluding mortgages secured only by second liens, subprime mortgages, manufactured housing chattel loans and reverse mortgages; and (c) long-term standby commitments. We expect the inclusion in our estimates of the excluded products may impact the estimated sensitivities set forth in this table.
 
(2) As a result of our adoption of the new accounting standards, the balance reflects a reduction as of September 30, 2010 from December 31, 2009 due to unscheduled principal payments.
 
Because these sensitivities represent hypothetical scenarios, they should be used with caution. Our regulatory stress test scenario is limited in that it assumes an instantaneous uniform 5% nationwide decline in home prices, which is not representative of the historical pattern of changes in home prices. Changes in home prices generally vary on a regional, as well as a local, basis. In addition, these stress test scenarios are calculated independently without considering changes in other interrelated assumptions, such as unemployment rates or other economic factors, which are likely to have a significant impact on our future expected credit losses.
 
Other Non-Interest Expenses
 
Other non-interest expenses consist of credit enhancement expenses, which reflect the amortization of the credit enhancement asset we record at the inception of guaranty contracts; costs associated with the purchase of additional mortgage insurance to protect against credit losses; net gains and losses on the extinguishment of debt; servicer and borrower incentive fees in connection with loans modified under HAMP; and other miscellaneous expenses. Other non-interest expenses increased during the third quarter of 2010 compared with the third quarter of 2009 primarily due to an increase in net losses recorded on the extinguishment of debt, because our borrowing costs declined and it became advantageous for us to redeem higher cost debt and replace it with lower cost debt, and an increase in HAMP incentive payments. This increase was partially offset by lower expenses for legal claim reserves.
 
Other non-interest expenses slightly increased for the first nine months of 2010 compared with the first nine months of 2009, primarily due to an increase in net losses recorded on the extinguishment of debt and an increase in HAMP incentive payments. This increase was partially offset by lower interest expense associated with unrecognized tax benefits related to certain unresolved tax positions and lower expenses for legal claim reserves.
 
Federal Income Taxes
 
We recognized an income tax benefit for the first nine months of 2010 primarily due to the reversal of a portion of the valuation allowance for deferred tax assets resulting from a settlement agreement reached with the IRS for our unrecognized tax benefits for the tax years 1999 to 2004. However, we were not able to recognize an income tax benefit for our pre-tax loss in the third quarter and first nine months of 2010 as it is


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more likely than not that we will not generate sufficient taxable income in the foreseeable future to realize our net deferred tax assets.
 
We recognized a benefit for federal income taxes for the third quarter and first nine months of 2009 due primarily to the benefit of carrying back a portion of our 2009 tax loss to prior years, net of the reversal of the use of certain tax credits.
 
Financial Impact of the Making Home Affordable Program on Fannie Mae
 
Home Affordable Refinance Program
 
Because we already own or guarantee the mortgage loans that we refinance under HARP, our expenses under that program consist mostly of limited administrative costs.
 
Home Affordable Modification Program
 
We discuss below how modifying loans under HAMP that we own or guarantee directly affects our financial results.
 
Impairments and Fair Value Losses on Loans Under HAMP
 
Table 17 provides information about the impairments and fair value losses associated with mortgage loans owned or guaranteed by Fannie Mae entering trial modifications under HAMP. These amounts have been included in the calculation of our credit-related expenses in our condensed consolidated statements of operations for 2009 and the third quarter and first nine months of 2010. Please see “MD&A—Consolidated Results of Operations—Financial Impact of the Making Home Affordable Program on Fannie Mae” in our 2009 Form 10-K for a detailed discussion on these impairments and fair value losses.
 
When we begin to individually assess a loan for impairment, we exclude the loan from the population of loans on which we calculate our collective loss reserves. Table 17 does not reflect the potential reduction of our combined loss reserves from excluding individually impaired loans from this calculation.
 
Table 17:  Impairments and Fair Value Losses on Loans in HAMP(1)
 
                                 
    For the
    For the
 
    Three Months
    Nine Months
 
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    (Dollars in millions)  
 
Impairments(2)
  $ 1,974     $ 5,722     $ 11,776     $ 7,368  
Fair value losses on credit-impaired loans acquired from MBS trusts(3)
          3,669       6       3,758  
                                 
Total
  $ 1,974     $ 9,391     $ 11,782     $ 11,126  
                                 
Loans entered into a trial modification under the program
    18,300       150,700       134,900       185,400  
Credit-impaired loans acquired from MBS trusts in trial modifications under the program(4)
    4       27,945       62       28,600  
 
 
(1) Includes amounts for loans that entered into a trial modification under the program but that have not yet received, or that have been determined to be ineligible for, a permanent modification under the program. Some of these ineligible loans have since been modified outside of the program. Also includes loans that entered into a trial modification prior to the end of the periods presented, but were reported from servicers to us subsequent to that date.
 
(2) Impairments consist of (a) impairments recognized on loans accounted for as loans restructured in a troubled debt restructuring and (b) incurred credit losses on loans in MBS trusts that have entered into a trial modification and been individually assessed for incurred credit losses. Amount includes impairments recognized subsequent to the date of loan acquisition.


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(3) These fair value losses are recorded as charge-offs against the “Reserve for guaranty losses” and have the effect of increasing the provision for guaranty losses in our condensed consolidated statements of operations.
 
(4) Excludes loans purchased from consolidated trusts for the three and nine months ended September 30, 2010 for which no fair value losses were recognized.
 
Servicer and Borrower Incentives
 
We incurred $96 million during the third quarter of 2010 and $334 million in the first nine months of 2010 in paid and accrued incentive fees for servicers and borrowers in connection with loans modified under HAMP, which we recorded as part of “Other expenses.”
 
Overall Impact of the Making Home Affordable Program
 
Because of the unprecedented nature of the circumstances that led to the Making Home Affordable Program, we cannot quantify what the impact would have been on Fannie Mae if the Making Home Affordable Program had not been introduced. We do not know how many loans we would have modified under alternative programs, what the terms or costs of those modifications would have been, how many foreclosures would have resulted nationwide, and at what pace, or the impact on housing prices if the program had not been put in place. As a result, the amounts we discuss above are not intended to measure how much the program is costing us in comparison to what it would have cost us if we did not have the program at all.
 
 
BUSINESS SEGMENT RESULTS
 
In this section, we discuss changes to our presentation for reporting results for our three business segments, Single-Family, Multifamily (formerly known as HCD) and Capital Markets, which have been revised due to our prospective adoption of the new accounting standards. We then discuss our business segment results. This section should be read together with our condensed consolidated results of operations in “Consolidated Results of Operations.” In October 2010, we began referring to our “HCD” business segment as our “Multifamily” business segment to better reflect the segment’s focus on multifamily rental housing finance, especially affordable rentals, which is an increasingly important part of our company’s mission.
 
Changes to Segment Reporting
 
Our prospective adoption of the new accounting standards had a significant impact on the presentation and comparability of our condensed consolidated financial statements due to the consolidation of the substantial majority of our single-class securitization trusts and the elimination of previously recorded deferred revenue from our guaranty arrangements. We continue to manage Fannie Mae based on the same three business segments; however, effective in 2010 we changed the presentation of segment financial information that is currently evaluated by management.
 
While some line items in our segment results were not impacted by either the change from the new accounting standards or changes to our segment presentation, others were impacted materially, which reduces the comparability of our segment results with prior years. We have not restated prior year results nor have we presented current year results under the old presentation as we determined that it was impracticable to do so; therefore, our segment results reported in the current period are not comparable with prior years. In the table below, we compare our current segment reporting for our three business segments with our segment reporting in the prior year.


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Segment Reporting in Current Periods Compared with Prior Year
 
                     
Single-Family and Multifamily
Line Item
        Current Segment Reporting         Prior Year Segment Reporting
                     
Guaranty fee income       At adoption of the new accounting standards, we eliminated a substantial majority of our guaranty-related assets and liabilities in our consolidated balance sheet. We re-established an asset and a liability related to the deferred cash fees on Single-Family’s balance sheet and we amortize these fees as guaranty fee income with our contractual guaranty fees.       At the inception of a guaranty to an unconsolidated entity, we established a guaranty asset and guaranty obligation, which included deferred cash fees. These guaranty-related assets and liabilities were then amortized and recognized in guaranty fee income with our contractual guaranty fees over the life of the guaranty.
                     
        We use a static yield method to amortize deferred cash fees to better align with the recognition of contractual guaranty fee income.       We used a prospective level yield method to amortize our guaranty-related assets and liabilities, which created significant fluctuations in our guaranty fee income as the interest rate environment shifted.
                     
        We eliminated substantially all of our guaranty assets that were previously recorded at fair value upon adoption of the new accounting standards. As such, the recognition of fair value adjustments as a component of Single-Family guaranty fee income has been essentially eliminated.       We recorded fair value adjustments on our buy-up assets and certain guaranty assets as a component of Single-Family guaranty fee income.
                     
Net Interest Income (expense)       Because we now recognize loans underlying the substantial majority of our MBS trusts in our condensed consolidated balance sheets, the amount of interest expense Single-Family and Multifamily recognize related to forgone interest on nonperforming loans underlying MBS trusts has significantly increased.       Interest payments expected to be delinquent on off-balance sheet nonperforming loans were considered in the reserve for guaranty losses.
                     
Credit-related expenses       Because we now recognize loans underlying the substantial majority of our MBS trusts in our condensed consolidated balance sheets, we no longer recognize fair value losses upon acquiring credit-impaired loans from these trusts.       We recorded a fair value loss on credit-impaired loans acquired from MBS trusts.
        Upon recognition of mortgage loans held by newly consolidated trusts, we increased our allowance for loan losses and decreased our reserve for guaranty losses. We use a different methodology in estimating incurred losses under our allowance for loan losses versus under our reserve for guaranty losses which will result in lower credit-related expenses.       The majority of our combined loss reserves were recorded in the reserve for guaranty losses, which used a different methodology for estimating incurred losses versus the methodology used for the allowance for loan losses.
                     


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Multifamily only
                     
Line Item
        Current Segment Reporting         Prior Year Segment Reporting
                     
Income (losses) from partnership investments       We report income or losses from partnership investments on an equity basis in the Multifamily balance sheet. As a result, net income or loss attributable to noncontrolling interests is not included in income (losses) from partnership investments.       Income (losses) from partnership investments included net income or loss attributable to noncontrolling interests for the Multifamily segment.
                     
Capital Markets
                     
Line Item
        Current Segment Reporting         Prior Year Segment Reporting
                     
Net interest income       We recognize interest income on interest-earning assets that we own and interest expense on debt that we have issued.       In addition to the assets we own and the debt we issue, we also included interest income on mortgage-related assets underlying MBS trusts that we consolidated under the prior consolidation accounting standards and the interest expense on the corresponding debt of such trusts.
                     
Investment gains (losses), net       We no longer designate the substantial majority of our loans held for securitization as held for sale as the substantial majority of related MBS trusts will be consolidated, thereby reducing lower of cost or fair value adjustments.       We designated loans held for securitization as held for sale resulting in recognition of lower of cost or fair value adjustments on our held-for-sale loans.
        We include the securities that we own, regardless of whether the trust has been consolidated, in reporting gains and losses on securitizations and sales of available-for-sale securities.       We excluded the securities of consolidated trusts that we owned in reporting of gains and losses on securitizations and sales of available-for-sale securities.
                     
Fair value gains (losses), net       We include the trading securities that we own, regardless of whether the trust has been consolidated, in recognizing fair value gains and losses on trading securities.       MBS trusts that were consolidated were reported as loans and thus any securities we owned issued by these trusts did not have fair value adjustments.
                     
 
Under the current segment reporting structure, the sum of the results for our three business segments does not equal our condensed consolidated results of operations as we separate the activity related to our consolidated trusts from the results generated by our three segments. In addition, because we apply accounting methods that differ from our consolidated results for segment reporting purposes, we include an eliminations/adjustments category to reconcile our business segment results and the activity related to our consolidated trusts to our condensed consolidated results of operations.
 
Segment Results
 
Table 18 displays our segment results under our current segment reporting presentation for the third quarter and first nine months of 2010.


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Table 18:  Business Segment Results
 
                                                 
    For the Three Months Ended September 30, 2010  
    Business Segments     Other Activity/Reconciling Items        
    Single
          Capital
    Consolidated
    Eliminations/
    Total
 
    Family     Multifamily     Markets     Trusts(1)     Adjustments(2)     Results  
    (Dollars in millions)  
 
Net interest income (expense)
  $ (1,108 )   $     $ 4,065     $ 1,246     $ 573 (3)   $ 4,776  
Benefit (provision) for loan losses
    (4,702 )     6                         (4,696 )
                                                 
Net interest income (expense) after provision for loan losses
    (5,810 )     6       4,065       1,246       573       80  
Guaranty fee income (expense)
    1,804       205       (402 )     (1,095 )(4)     (461 )(4)     51  
Investment gains (losses), net
    3       4       1,270       (165 )     (1,030 )(5)     82  
Net other-than-temporary impairments
                (323 )     (3 )           (326 )
Fair value gains (losses), net
                436       (89 )     178 (6)     525  
Debt extinguishment losses, net
                (185 )     (29 )           (214 )
Income from partnership investments
          39                   8       47  
Fee and other income (expense)
    93       35       130       (4 )     (1 )     253  
Administrative expenses
    (471 )     (94 )     (165 )                 (730 )
Benefit (provision) for guaranty losses
    (79 )     1                         (78 )
Foreclosed property expense
    (778 )     (9 )                       (787 )
Other expenses
    (217 )     (7 )     (3 )           (16 )(7)     (243 )
                                                 
Income (loss) before federal income taxes
    (5,455 )     180       4,823       (139 )     (749 )     (1,340 )
Benefit for federal income taxes
    (1 )     (1 )     (7 )                 (9 )
                                                 
Net income (loss)
    (5,454 )     181       4,830       (139 )     (749 )     (1,331 )
Less: Net income attributable to noncontrolling interests
                            (8 )(8)     (8 )
                                                 
Net income (loss) attributable to Fannie Mae
  $ (5,454 )   $ 181     $ 4,830     $ (139 )   $ (757 )   $ (1,339 )
                                                 
 


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    For the Nine Months Ended September 30, 2010  
    Business Segments     Other Activity/Reconciling Items        
    Single
          Capital
    Consolidated
    Eliminations/
    Total
 
    Family     Multifamily     Markets     Trusts(1)     Adjustments(2)     Results  
    (Dollars in millions)  
 
Net interest income (expense)
  $ (4,438 )   $ 9     $ 10,671     $ 3,767     $ 1,763 (3)   $ 11,772  
Benefit (provision) for loan losses
    (20,966 )     36                         (20,930 )
                                                 
Net interest income (expense) after provision for loan losses
    (25,404 )     45       10,671       3,767       1,763       (9,158 )
Guaranty fee income (expense)
    5,367       594       (1,041 )     (3,422 )(4)     (1,341 )(4)     157  
Investment gains (losses), net
    7       3       2,841       (348 )     (2,232 )(5)     271  
Net other-than-temporary impairments
                (696 )     (3 )           (699 )
Fair value losses, net
                (119 )     (113 )     (645 )(6)     (877 )
Debt extinguishment losses, net
                (368 )     (129 )           (497 )
Losses from partnership investments
          (41 )                 4       (37 )
Fee and other income (expense)
    225       98       370       (18 )     (1 )     674  
Administrative expenses
    (1,297 )     (286 )     (422 )                 (2,005 )
Benefit (provision) for guaranty losses
    (163 )     52                         (111 )
Foreclosed property expense
    (1,227 )     (28 )                       (1,255 )
Other income (expenses)
    (648 )     (24 )     115             (56 )(7)     (613 )
                                                 
Income (loss) before federal income taxes
    (23,140 )     413       11,351       (266 )     (2,508 )     (14,150 )
Provision (benefit) for federal income taxes
    (53 )     14       (28 )                 (67 )
                                                 
Net income (loss)
    (23,087 )     399       11,379       (266 )     (2,508 )     (14,083 )
Less: Net income attributable to noncontrolling interests
                            (4 )(8)     (4 )
                                                 
Net income (loss) attributable to Fannie Mae
  $ (23,087 )   $ 399     $ 11,379     $ (266 )   $ (2,512 )   $ (14,087 )
                                                 
 
 
(1) Represents activity related to the assets and liabilities of consolidated trusts in our balance sheet under the new accounting standards.
 
(2) Represents the elimination of intercompany transactions occurring between the three business segments and our consolidated trusts, as well as other adjustments to reconcile to our condensed consolidated results.
 
(3) Represents the amortization expense of cost basis adjustments on securities that we own in our portfolio that on a GAAP basis are eliminated.
 
(4) Represents the guaranty fees paid from consolidated trusts to the Single-Family and Multifamily segments. The adjustment to guaranty fee income in the Eliminations/Adjustments column represents the elimination of the amortization of deferred cash fees related to consolidated trusts that were re-established for segment reporting.
 
(5) Primarily represents the removal of realized gains and losses on sales of Fannie Mae MBS classified as available-for-sale securities that are issued by consolidated trusts and retained in the Capital Markets portfolio. The adjustment also includes the removal of securitization gains (losses) recognized in the Capital Markets segment relating to portfolio securitization transactions that do not qualify for sale accounting under GAAP.
 
(6) Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are retained in the Capital Markets portfolio.
 
(7) Represents the removal of amortization of deferred revenue on certain credit enhancements from the Single-Family and Multifamily segment balance sheets that are eliminated upon reconciliation to our condensed consolidated balance sheets.
 
(8) Represents the adjustment from equity method accounting to consolidation accounting for partnership investments that are consolidated in our condensed consolidated balance sheets.

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Single-Family Business Results
 
Table 19 summarizes the financial results of the Single-Family business for the third quarter and first nine months of 2010 under the current segment reporting presentation and for the third quarter and first nine months of 2009 under the prior segment reporting presentation. The primary sources of revenue for our Single-Family business are guaranty fee income and fee and other income. Expenses primarily include credit-related expenses and administrative expenses.
 
Table 19:  Single-Family Business Results
 
                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    (Dollars in millions)  
 
Statement of operations data:(1)
                               
Net interest income (expense)
  $ (1,108 )   $ 176     $ (4,438 )   $ 377  
Guaranty fee income(2)
    1,804       2,112       5,367       5,943  
Credit-related expenses(3)
    (5,559 )     (21,656 )     (22,356 )     (60,377 )
Other expenses(4)
    (592 )     (455 )     (1,713 )     (1,247 )
                                 
Loss before federal income taxes
    (5,455 )     (19,823 )     (23,140 )     (55,304 )
Benefit for federal income taxes
    1       276       53       1,059  
                                 
Net loss attributable to Fannie Mae
  $ (5,454 )   $ (19,547 )   $ (23,087 )   $ (54,245 )
                                 
Other key performance data:
                               
Single-family effective guaranty fee rate (in basis points)(1)(5)
    25.2       29.3       24.9       27.8  
Single-family average charged guaranty fee on new acquisitions (in basis points)(6)
    25.3       24.7       26.4       23.2  
Average single-family guaranty book of business(7)
  $ 2,857,917     $ 2,886,496     $ 2,875,952     $ 2,852,977  
Single-family Fannie Mae MBS issues(8)
  $ 155,940     $ 196,514     $ 391,754     $ 659,628  
 
 
(1) Segment statement of operations data reported under the current segment reporting basis is not comparable to the segment statement of operations data reported in prior periods.
 
(2) In 2010, guaranty fee income related to consolidated MBS trusts consists of contractual guaranty fees and the amortization of deferred cash fees using a static yield method. In 2009, guaranty fee income consisted of amortization of our guaranty-related assets and liabilities using a prospective level yield method and fair value adjustments of buys-ups and certain guaranty assets.
 
(3) Consists of the provision for loan losses, provision for guaranty losses and foreclosed property expense.
 
(4) Consists of investment gains and losses, fee and other income, other expenses, and administrative expenses.
 
(5) Presented in basis points based on annualized Single-Family segment guaranty fee income divided by the average single-family guaranty book of business.
 
(6) Presented in basis points. Represents the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life.
 
(7) Consists of single-family mortgage loans held in our mortgage portfolio, single-family mortgage loans held by consolidated trusts, single-family Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on single-family mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.
 
(8) Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Single-Family segment during the period. In 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac in which we agreed to provide assistance to state and local housing finance agencies (“HFAs”) through three separate assistance programs: a temporary credit and liquidity facilities (“TCLF”) program, a new issue bond (“NIB”) program and a multifamily credit enhancement program. Includes HFA new issue bond program issuances of $3.1 billion for the nine months ended September 30, 2010.


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Net Interest Income (Expense)
 
Net interest income (expense) for the Single-Family business segment includes forgone interest on nonperforming loans, loss recoveries on performing loans, and an allocated cost of capital charge among our three business segments. The shift from net interest income in the third quarter and first nine months of 2009 to net interest expense in the third quarter and first nine months of 2010 was primarily driven by an increase in forgone interest on nonperforming loans, which increased to $1.8 billion in the third quarter of 2010 from $328 million in the third quarter of 2009 and to $6.7 billion in the first nine months of 2010 from $785 million in the first nine months of 2009. The increase in forgone interest on nonperforming loans was due to the increase in nonperforming loans in our condensed consolidated balance sheets as a result of our adoption of the new accounting standards.
 
Guaranty Fee Income
 
Guaranty fee income decreased in the third quarter and first nine months of 2010, compared with the third quarter and first nine months of 2009, primarily because: (1) we now amortize our single-family deferred cash fees under the static yield method, which resulted in lower amortization income compared with 2009 when we amortized these fees under the prospective level yield method; (2) guaranty fee income in 2009 included the amortization of certain non-cash deferred items, the balance of which was eliminated upon adoption of the new accounting standards and was not re-established on Single-Family’s balance sheet at the transition date; and (3) guaranty fee income in the third quarter and first nine months of 2009 reflected an increase in the fair value of buy-ups and certain guaranty assets which are no longer marked to fair value under the new segment reporting.
 
The average single-family guaranty book of business decreased by 1.0% in the third quarter of 2010 compared with the third quarter of 2009 and increased 0.8% for the first nine months of 2010 compared with the first nine months of 2009. Although our market share remains high, our book of business was relatively flat period over period because of the decline in residential mortgage debt outstanding as there were fewer new mortgage originations due to weakness in the housing market and an increase in liquidations due to the high level of foreclosures.
 
The single-family average charged guaranty fee on new acquisitions increased in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 primarily due to an increase in acquisitions of loans with characteristics that receive risk-based pricing adjustments.
 
Credit-Related Expenses
 
Single-family credit-related expenses decreased in both the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 primarily due to the moderate change in our total single-family loss reserves during the third quarter and first nine months of 2010 compared with the substantial increase in our total single-family loss reserves during the third quarter and first nine months of 2009. The substantial increase in our single-family total loss reserves during the third quarter and first nine months of 2009 reflected the significant growth in the number of loans that were seriously delinquent during that period, which was partly the result of the economic deterioration during 2009. Another impact of the economic deterioration during 2009 was sharply falling home prices, which resulted in higher losses on defaulted loans, further increasing the loss reserves. Our single-family provision for credit losses was substantially lower in both the third quarter and first nine months of 2010, because there has not been an increase in seriously delinquent loans, nor a sharp decline in house prices, and therefore we did not need to substantially increase our reserves in the third quarter or first nine months of 2010. Additionally, because we now recognize loans underlying the substantial majority of our MBS trusts in our condensed consolidated balance sheets, we no longer recognize fair value losses upon acquiring credit-impaired loans from these trusts. Although our credit-related expenses declined in the third quarter and first nine months of 2010, our credit losses were higher in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 due to an increase in the number of defaults.


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Credit-related expenses in the Single-Family business represent the substantial majority of our total consolidated losses. We provide additional information on our credit-related expenses in “Consolidated Results of Operations—Credit-Related Expenses.”
 
Federal Income Taxes
 
We recognized an income tax benefit in the first nine months of 2010 due to the reversal of a portion of the valuation allowance for deferred tax assets primarily due to a settlement agreement reached with the IRS in 2010 for our unrecognized tax benefits for the tax years 1999 through 2004. The tax benefit recognized for the first nine months of 2009 was primarily due to the benefit of carrying back to prior years a portion of our 2009 tax loss, net of the reversal of the use of certain tax credits.
 
Multifamily Business Results
 
Table 20 summarizes the financial results for our Multifamily business for the third quarter and first nine months of 2010 under the current segment reporting presentation and for the third quarter and first nine months of 2009 under the prior segment reporting presentation. The primary sources of revenue for our Multifamily business are guaranty fee income and fee and other income. Expenses primarily include credit-related expenses, net operating losses associated with our partnership investments, and administrative expenses.
 
Table 20:  Multifamily Business Results
 
                                 
    For the Three Months
    For the Nine Months
 
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    (Dollars in millions)  
 
Statement of operations data:(1)
                               
Guaranty fee income(2)
  $ 205     $ 172     $ 594     $ 494  
Fee and other income
    35       23       98       70  
Income (losses) from partnership investments(3)
    39       (520 )     (41 )     (1,448 )
Credit-related income (expenses)(4)
    (2 )     (304 )     60       (1,239 )
Other expenses(5)
    (97 )     (154 )     (298 )     (456 )
                                 
Income (loss) before federal income taxes
    180       (783 )     413       (2,579 )
Benefit (provision) for federal income taxes
    1       (99 )     (14 )     (310 )
                                 
Net income (loss)
    181       (882 )     399       (2,889 )
Less: Net loss attributable to the noncontrolling interests(3)
          12             55  
                                 
Net income (loss) attributable to Fannie Mae
  $ 181     $ (870 )   $ 399     $ (2,834 )
                                 
Other key performance data:
                               
Multifamily effective guaranty fee rate (in basis points)(1)(6)
    43.9       37.9       42.5       37.0  
Credit loss performance ratio (in basis points)(7)
    40.1       14.6       28.2       9.4  
Average multifamily guaranty book of business(8)
  $ 186,766     $ 181,301     $ 186,234     $ 177,815  
Multifamily Fannie Mae MBS issues(9)
  $ 4,437     $ 4,628     $ 11,238     $ 11,745  
 
                 
    As of
    September 30,
  December 31,
    2010   2009
    (Dollars in millions)
 
Multifamily serious delinquency rate
    0.65 %     0.63 %
Multifamily Fannie Mae MBS outstanding(10)
  $ 64,919     $ 59,852  
 
 
  (1) Segment statement of operations data reported under the current segment reporting basis is not comparable to the segment statement of operations data reported in prior periods.


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  (2) In 2010, guaranty fee income related to consolidated MBS trusts consists of contractual guaranty fees. In 2009, guaranty fee income consisted of amortization of our guaranty-related assets and liabilities using a prospective level yield method.
 
  (3) In 2010, income or losses from partnership investments is reported using the equity method of accounting. As a result, net income or losses attributable to noncontrolling interests from partnership investments is not included in income or losses for the Multifamily segment. In 2009, income or losses from partnership investments is reported using either the equity method or consolidation, in accordance with GAAP, with net income or losses attributable to noncontrolling interests included in partnership investments income or losses.
 
  (4) Consists of the benefit (provision) for loan losses, benefit (provision) for guaranty losses and foreclosed property expense.
 
  (5) Consists of net interest income, investment gains, other expenses, and administrative expenses.
 
  (6) Presented in basis points based on annualized Multifamily segment guaranty fee income divided by the average multifamily guaranty book of business.
 
  (7) Basis points based on the annualized amount of credit losses divided by the average multifamily guaranty book of business.
 
  (8) Consists of multifamily mortgage loans held in our mortgage portfolio, multifamily mortgage loans held by consolidated trusts, multifamily Fannie Mae MBS issued from unconsolidated trusts held by either third parties or within our retained portfolio, and other credit enhancements that we provide on multifamily mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we do not provide a guaranty.
 
  (9) Reflects unpaid principal balance of Fannie Mae MBS issued and guaranteed by the Multifamily segment during the period. Includes HFA new issue bond program issuances of $1.0 billion for the nine months ended September 30, 2010. Also includes $9 million and $265 million of new MBS issuances as a result of converting adjustable rate loans to fixed rate loans for the three and nine months ended September 30, 2010, respectively.
 
(10) Includes $9.9 billion of Fannie Mae multifamily MBS held in the mortgage portfolio and $1.4 billion of bonds issued by HFAs as of September 30, 2010.
 
Guaranty Fee Income
 
Multifamily guaranty fee income increased in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 primarily attributable to higher fees charged on new acquisitions in recent years, which have become an increasingly larger part of our book of business.
 
Income (Losses) from Partnership Investments
 
In the fourth quarter of 2009, we reduced the carrying value of our LIHTC investments to zero. As a result, we no longer recognize net operating losses or other-than-temporary impairment on our LIHTC investments, which resulted in a shift to income from partnership investments in the third quarter of 2010 from losses on these investments in the third quarter of 2009 and a decrease in losses from partnership investments in the first nine months of 2010 compared with the first nine months of 2009.
 
Credit-Related Income (Expenses)
 
Multifamily credit-related expenses decreased in the third quarter of 2010 compared with the third quarter of 2009 and shifted from credit-related expenses in the first nine months of 2009 to credit-related income in the first nine months of 2010. The benefit for credit losses for the third quarter of 2010 was $7 million compared with a provision of $278 million for the third quarter of 2009 and a benefit of $88 million for the first nine months of 2010 compared to a provision of $1.2 billion for the first nine months of 2009. The shift from a provision in the third quarter and first nine months of 2009 to a benefit in the third quarter and first nine months of 2010 was primarily due to a modest decrease in the allowance for loan losses in 2010, as multifamily credit trends continued to improve, compared to the increase in the allowance for 2009.
 
Although credit trends improved and our allowance and provision for multifamily credit losses decreased, our multifamily charge-offs and foreclosed property expense remained elevated. Our multifamily net charge-offs and foreclosed property expense increased from $66 million in the third quarter of 2009 to $187 million in the


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third quarter of 2010 and from $126 million in the first nine months of 2009 to $394 million in the first nine months of 2010. The increase in net charge-offs and foreclosed property expense was driven by increased volumes of multifamily REO acquisitions in the 2010 periods. We expect our multifamily charge-offs will remain at elevated levels through 2011. The increase in the multifamily credit loss ratio between the second quarter of 2010 and the third quarter 2010 was primarily driven by losses associated with a charge-off of a larger balance loan. While we expect multifamily credit losses to remain elevated as we continue through the current economic cycle, we do not believe that the experience with this loan is representative of the overall risk level of our Multifamily business.
 
Federal Income Taxes
 
We recognized a provision for income taxes in the first nine months of 2010 resulting from a settlement agreement reached with the IRS with respect to our unrecognized tax benefits for tax years 1999 through 2004. The tax provision recognized in the first nine months of 2009 was attributable to the reversal of previously utilized tax credits because of our ability to carry back to prior years’ net operating losses.
 
Capital Markets Group Results
 
Table 21 summarizes the financial results for our Capital Markets group for the third quarter and first nine months of 2010 under the current segment reporting presentation and for the third quarter and first nine months of 2009 under the prior segment reporting presentation. Following the table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s mortgage portfolio. For a discussion on the debt issued by the Capital Markets group to fund its investment activities, see “Liquidity and Capital Management.” For a discussion on the derivative instruments that Capital Markets uses to manage interest rate risk, see “Consolidated Balance Sheet Analysis—Derivative Instruments,” “Risk Management—Market Risk Management, Including Interest Rate Risk Management—Derivatives Activity,” and “Note 10, Derivative Instruments.” The primary sources of revenue for our Capital Markets group are net interest income and fee and other income. Expenses and other items that impact income or loss primarily include fair value gains and losses, investment gains and losses, other-than-temporary impairment, and administrative expenses.
 
Table 21:  Capital Markets Group Results
 
                                 
    For the
    For the
 
    Three Months
    Nine Months
 
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
    (Dollars in millions)  
 
Statement of operations data:(1)
                               
Net interest income(2)
  $ 4,065     $ 3,701     $ 10,671     $ 10,596  
Investment gains, net(3)
    1,270       778       2,841       898  
Net other-than-temporary impairments
    (323 )     (939 )     (696 )     (7,345 )
Fair value gains (losses), net(4)
    436       (1,536 )     (119 )     (2,173 )
Fee and other income
    130       91       370       231  
Other expenses(5)
    (755 )     (516 )     (1,716 )     (1,916 )
                                 
Income before federal income taxes
    4,823       1,579       11,351       291  
Benefit (provision) for federal income taxes
    7       (34 )     28       (6 )
                                 
Net income attributable to Fannie Mae
  $ 4,830     $ 1,545     $ 11,379     $ 285  
                                 
 
 
(1) Segment statement of operations data reported under the current segment reporting basis is not comparable to the segment statement of operations data reported in prior periods.
 
(2) In 2010, Capital Markets net interest income is reported based on the mortgage-related assets held in the segment’s portfolio and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest expense on the corresponding debt of such trusts. In 2009, the Capital Markets group’s


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net interest income included interest income on mortgage-related assets underlying MBS trusts that we consolidated under the prior consolidation accounting standards and the interest expense on the corresponding debt of such trusts.
 
(3) In 2010, we include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities. In 2009, we excluded the securities of consolidated trusts that we own in reporting of gains and losses on securitizations and sales of available-for-sale securities.
 
(4) In 2010, fair value gains or losses on trading securities include the trading securities that we own, regardless of whether the trust has been consolidated. In 2009, MBS trusts that were consolidated were reported as loans and thus any securities we owned issued by these trusts did not have fair value adjustments.
 
(5) Includes allocated guaranty fee expense, debt extinguishment losses, net, administrative expenses, and other expenses. In 2010, gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group because purchases of securities are recognized as such. In 2009, gains or losses related to the extinguishment of debt issued by consolidated trusts were included in the Capital Markets group’s results as debt extinguishment gain or loss.
 
Net Interest Income
 
The Capital Markets group’s interest income consists of interest on the segment’s interest-earning assets, which differs from interest-earning assets in our condensed consolidated balance sheets. We exclude loans and securities that underlie the consolidated trusts from our Capital Markets group balance sheets. The net interest income reported by the Capital Markets group excludes the interest income earned on assets held by consolidated trusts. As a result, the Capital Markets group reports interest income and amortization of cost basis adjustments only on securities and loans that are held in our portfolio. For mortgage loans held in our portfolio, after we stop recognizing interest income in accordance with our nonaccrual accounting policy, the Capital Markets group recognizes interest income for reimbursement from Single-Family and Multifamily for the contractual interest due under the terms of our intracompany guaranty arrangement.
 
Capital Markets group’s interest expense consists of contractual interest on the Capital Markets group’s interest-bearing liabilities, including the accretion and amortization of any cost basis adjustments. It excludes interest expense on debt issued by consolidated trusts. Therefore, the interest expense recognized on the Capital Markets group statement of operations is limited to our funding debt, which is reported as “Debt of Fannie Mae” in our condensed consolidated balance sheets. Net interest expense also includes an allocated cost of capital charge among the three business segments.
 
The Capital Markets group’s net interest income increased in the third quarter and first nine months of 2010 compared with the third quarter and first nine months of 2009 primarily due to a decline in funding costs as we replaced higher cost debt with lower cost debt. Also, Capital Markets’ net interest income and net interest yield benefited from funds we received from Treasury under the senior preferred stock purchase agreement as the cash received was used to reduce our debt and the cost of these funds is included in dividends rather than interest expense.
 
We supplement our issuance of debt with interest rate-related derivatives to manage the prepayment and duration risk inherent in our mortgage investments. The effect of these derivatives, in particular the periodic net interest expense accruals on interest rate swaps, is not reflected in Capital Markets’ net interest income but is included in our results as a component of “Fair value gains (losses), net” and is shown in “Table 9: Fair Value Gains (Losses), Net.” If we had included the economic impact of adding the net contractual interest accruals on our interest rate swaps in our Capital Markets’ interest expense, Capital Markets’ net interest income would have decreased by $673 million in the third quarter of 2010 compared with a $968 million decrease in the third quarter of 2009 and a $2.3 billion decrease in the first nine months of 2010 compared with a $2.7 billion decrease in the first nine months of 2009.
 
Investment Gains, Net
 
The increase in investment gains in the third quarter of 2010 compared with the third quarter of 2009 was primarily driven by an increase in gains on securitizations as well as from a significant decline in lower of


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cost or fair value adjustments on held-for-sale loans as we reclassified almost all of these loans to held-for-investment upon adoption of the new accounting standards. The increase was partially offset by lower gains on sales of available-for-sale securities.
 
The increase in investment gains in the first nine months of 2010 compared with the first nine months of 2009 was primarily driven by an increase in gains on securitizations partially offset by a significant decline in lower of cost or fair value adjustments on held-for-sale loans.
 
Net Other-Than-Temporary Impairment
 
The net other-than-temporary impairment recognized by the Capital Markets group is consistent with the net other-than-temporary impairment reported in our condensed consolidated results of operations. We discuss details on net other-than-temporary impairment in “Consolidated Results of Operations—Net Other-Than-Temporary Impairment.”
 
Fair Value Gains (Losses), Net
 
The derivative gains and losses and foreign exchange gains and losses that are reported for the Capital Markets group are consistent with these same losses reported in our condensed consolidated results of operations. We discuss details of these components of fair value gains and losses in “Consolidated Results of Operations—Fair Value Gains (Losses), Net.”
 
The gains on our trading securities for the segment during the third quarter and first nine months of 2010 were driven by a decrease in interest rates and narrowing of credit spreads on CMBS.
 
The gains on our trading securities during the third quarter of 2009 were primarily attributable to the narrowing of credit spreads on CMBS, as well as from a decline in interest rates. The gains on our trading securities during the first nine months of 2009 were primarily attributable to the narrowing of credit spreads on CMBS, asset-backed securities, corporate debt securities and agency MBS, partially offset by an increase in interest rates in the first nine months of 2009.
 
Federal Income Taxes
 
We recognized an income tax benefit in the first nine months of 2010 primarily due to the reversal of a portion of the valuation allowance for deferred tax assets resulting from a settlement agreement reached with the IRS in the first quarter of 2010 for our unrecognized tax benefits for the tax years 1999 through 2004. We recorded a valuation allowance for the majority of the tax benefits associated with the pre-tax losses recognized in the third quarter and first nine months of 2009.
 
The Capital Markets Group’s Mortgage Portfolio
 
The Capital Markets group’s mortgage portfolio consists of mortgage-related securities and mortgage loans that we own. Mortgage-related securities held by Capital Markets include Fannie Mae MBS and non-Fannie Mae mortgage-related securities. The Fannie Mae MBS that we own are maintained as securities on the Capital Markets group’s balance sheets. Mortgage-related assets held by consolidated MBS trusts are not included in the Capital Markets group’s mortgage portfolio.
 
We are restricted by our senior preferred stock purchase agreement with Treasury in the amount of mortgage assets that we may own. Beginning on December 31, 2010 and each year thereafter, we are required to reduce our Capital Markets group’s mortgage portfolio to no more than 90% of the maximum allowable amount we were permitted to own as of December 31 of the immediately preceding calendar year, until the amount of mortgage assets we own declines to no more than $250 billion. The maximum allowable amount we may own prior to December 31, 2010 is $900 billion. This cap will decrease to $810 billion on December 31, 2010.


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Table 22 summarizes our Capital Markets group’s mortgage portfolio activity based on unpaid principal balance for the third quarter and first nine months of 2010.
 
Table 22: Capital Markets Group’s Mortgage Portfolio Activity
 
                 
    For the Three Months
    For the Nine Months
 
    Ended September 30, 2010     Ended September 30, 2010  
    (Dollars in millions)  
 
Mortgage loans:
               
Beginning balance
  $ 426,185     $ 281,162  
Purchases
    54,136       254,725  
Securitizations(1)
    (24,052 )     (52,218 )
Liquidations(2)
    (26,436 )     (53,836 )
                 
Mortgage loans, ending balance
    429,833       429,833  
                 
Mortgage securities:
               
Beginning balance
  $ 391,615     $ 491,566  
Purchases(3)
    3,677       37,541  
Securitizations(1)
    24,052       52,218  
Sales
    (25,598 )     (140,986 )
Liquidations(2)
    (20,728 )     (67,321 )
                 
Mortgage securities, ending balance
    373,018       373,018  
                 
Total Capital Markets mortgage portfolio, ending balance
  $ 802,851     $ 802,851  
                 
 
 
(1) Includes portfolio securitization transactions that do not qualify for sale treatment under the new accounting standards on the transfers of financial assets.
 
(2) Includes scheduled repayments, prepayments, foreclosures and lender repurchases.
 
(3) Includes purchases of Fannie Mae MBS issued by consolidated trusts.
 
The Capital Markets group’s mortgage portfolio activity for the first nine months of 2010 has been impacted by an increase in purchases of delinquent loans from single-family MBS trusts. Under our MBS trust documents, we have the option to purchase from MBS trusts loans that are delinquent as to four or more consecutive monthly payments. We purchased approximately 996,000 delinquent loans with an unpaid principal balance of approximately $195 billion from our single-family MBS trusts in the first nine months of 2010. The substantial majority of these delinquent loan purchases were completed in the first half of 2010.
 
We expect to continue to purchase loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, servicer capacity, and other constraints including the limit on the mortgage assets that we may own pursuant to the senior preferred stock purchase agreement. As of September 30, 2010, the total unpaid principal balance of all loans in single-family MBS trusts that were delinquent as to four or more consecutive monthly payments was approximately $8 billion. In October 2010, we purchased approximately 41,000 delinquent loans with an unpaid principal balance of $7.3 billion from our single-family MBS trusts.
 
Table 23 shows the composition of the Capital Markets group’s mortgage portfolio based on unpaid principal balance as of September 30, 2010 and as of January 1, 2010, immediately after we adopted the new accounting standards.


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Table 23:  Capital Markets Group’s Mortgage Portfolio Composition
 
                 
    As of  
    September 30,
    January 1,
 
    2010     2010  
    (Dollars in millions)  
 
Capital Markets Group’s mortgage loans:
               
Single-family loans
               
Government insured or guaranteed
  $ 51,727     $ 51,395  
Conventional:
               
Long-term, fixed-rate
    226,324       94,236  
Intermediate-term, fixed-rate
    11,438       8,418  
Adjustable-rate
    34,881       18,493  
                 
Total single-family conventional
    272,643       121,147  
                 
Total single-family loans
    324,370       172,542  
                 
Multifamily loans
               
Government insured or guaranteed
    457       521  
Conventional:
               
Long-term, fixed-rate
    4,843       4,941  
Intermediate-term, fixed-rate
    79,073       81,610  
Adjustable-rate
    21,090       21,548  
                 
Total multifamily conventional
    105,006       108,099  
                 
Total multifamily loans
    105,463       108,620  
                 
Total Capital Markets Group’s mortgage loans(1)
    429,833       281,162  
                 
Capital Markets Group’s mortgage-related securities:
               
Fannie Mae
    268,208       358,495  
Freddie Mac
    19,012       41,390  
Ginnie Mae
    1,169       1,255  
Alt-A private-label securities
    22,960       25,133  
Subprime private-label securities
    18,438       20,001  
CMBS
    25,363       25,703  
Mortgage revenue bonds
    13,136       14,448  
Other mortgage-related securities
    4,732       5,141  
                 
Total Capital Markets Group’s mortgage-related securities(2)
    373,018       491,566  
                 
Total Capital Markets Group’s mortgage portfolio
  $ 802,851     $ 772,728  
                 
 
 
(1) The total unpaid principal balance of nonperforming loans in the Capital Markets Group’s mortgage loans was $219.9 billion as of September 30, 2010.
 
(2) The fair value of these mortgage-related securities was $378.6 billion as of September 30, 2010.


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CONSOLIDATED BALANCE SHEET ANALYSIS
 
As discussed in “Executive Summary,” effective January 1, 2010, we prospectively adopted new accounting standards which had a significant impact on the presentation of our condensed consolidated financial statements due to the consolidation of the substantial majority of our single-class securitization trusts. In the table below, we summarize the primary impacts of the new accounting standards to our condensed consolidated balance sheet for 2010.
 
       
Item     Consolidation Impact
Restricted cash
    We recognize unscheduled cash payments that have been either received by the servicer or that are held by consolidated trusts and have not yet been remitted to MBS certificateholders.
Investments in securities     Fannie Mae MBS that we own were consolidated resulting in a decrease in our investments in securities.
Mortgage loans

Accrued interest
receivable
    We now record the underlying assets of the majority of our MBS trusts in our condensed consolidated balance sheets which significantly increases mortgage loans and related accrued interest receivable.
Allowance for loan losses

Reserve for guaranty losses
    The substantial majority of our combined loss reserves are now recognized in our allowance for loan losses to reflect the loss allowance against the consolidated mortgage loans. We use a different methodology to estimate incurred losses for our allowance for loan losses as compared with our reserve for guaranty losses.
Guaranty assets

Guaranty obligations
    We eliminated our guaranty accounting for the newly consolidated trusts, which resulted in derecognizing previously recorded guaranty-related assets and liabilities associated with the newly consolidated trusts from our condensed consolidated balance sheets. We continue to have guaranty assets and obligations on unconsolidated trusts and other credit enhancements arrangements, such as our long-term standby commitments.
Debt

Accrued interest payable
    We recognize the MBS certificates issued by the consolidated trusts and that are held by third-party certificateholders as debt, which significantly increases our debt outstanding and related accrued interest payable.
       
 
We recognized a decrease of $3.3 billion in our stockholders’ deficit to reflect the cumulative effect of adopting the new accounting standards. See “Note 2, Adoption of the New Accounting Standards on the Transfers of Financial Assets and Consolidation of Variable Interest Entities” for a further discussion of the impacts of the new accounting standards on our condensed consolidated financial statements.
 
Table 24 presents a summary of our condensed consolidated balance sheets as of September 30, 2010 and December 31, 2009, as well as the impact of the transition to the new accounting standards on January 1, 2010. Following the table is a discussion of material changes in the major components of our assets, liabilities and deficit from January 1, 2010 to September 30, 2010.


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Table 24:  Summary of Condensed Consolidated Balance Sheets
 
                                         
    As of     Variance  
    September 30,
    January 1,
    December 31,
    January 1 to
    December 31, 2009 to
 
    2010     2010     2009     September 30, 2010     January 1, 2010  
                (Dollars in millions)        
 
Assets
                                       
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
  $ 31,388     $ 60,161     $ 60,496     $ (28,773 )   $ (335 )
Restricted cash
    59,764       48,653       3,070       11,111       45,583  
Investments in securities(1)
    171,644       161,088       349,667       10,556       (188,579 )
Mortgage loans
    2,970,571       2,985,445       404,486       (14,874 )     2,580,959  
Allowance for loan losses
    (59,740 )     (53,501 )     (9,925 )     (6,239 )     (43,576 )
                                         
Mortgage loans, net of allowance for
loan losses
    2,910,831       2,931,944       394,561       (21,113 )     2,537,383  
Other assets(2)
    55,995       44,389       61,347       11,606       (16,958 )
                                         
Total assets
  $ 3,229,622     $ 3,246,235     $ 869,141     $ (16,613 )   $ 2,377,094  
                                         
Liabilities and equity (deficit)
                                       
Debt(3)
  $ 3,203,647     $ 3,223,054     $ 774,554     $ (19,407 )   $ 2,448,500  
Other liabilities(4)
    28,422       35,164       109,868       (6,742 )     (74,704 )
                                         
Total liabilities
    3,232,069       3,258,218       884,422       (26,149 )     2,373,796  
                                         
Senior preferred stock
    86,100       60,900       60,900       25,200        
Other equity (deficit)(5)
    (88,547 )     (72,883 )     (76,181 )     (15,664 )     3,298  
                                         
Total stockholders’ equity (deficit)
    (2,447 )     (11,983 )     (15,281 )     9,536       3,298  
                                         
Total liabilities and stockholders’ deficit
  $ 3,229,622     $ 3,246,235     $ 869,141     $ (16,613 )   $ 2,377,094  
                                         
 
 
(1) Includes $45.4 billion as of September 30, 2010 and $8.9 billion as of January 1, 2010 and December 31, 2009 of non-mortgage-related securities that are included in our other investments portfolio in “Table 25: Cash and Other Investments Portfolio.”
 
(2) Consists of: advances to lenders; accrued interest receivable, net; acquired property, net; derivative assets, at fair value; guaranty assets; deferred tax assets, net; partnership investments; servicer and MBS trust receivable and other assets.
 
(3) Consists of: federal funds purchased and securities sold under agreements to repurchase; short-term debt; and long-term debt.
 
(4) Consists of: accrued interest payable; derivative liabilities; reserve for guaranty losses; guaranty obligations; partnership liabilities; servicer and MBS trust payable; and other liabilities.
 
(5) Consists of: preferred stock; common stock; additional paid-in capital; retained earnings (accumulated deficit); accumulated other comprehensive loss; treasury stock; and noncontrolling interest.


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Table of Contents

 
Cash and Other Investments Portfolio
 
Table 25 provides information on the composition of our cash and other investments portfolio for the periods indicated.
 
Table 25:  Cash and Other Investments Portfolio
 
                 
    As of  
    September 30,
    January 1,
 
    2010     2010  
    (Dollars in millions)  
 
Cash and cash equivalents(1)
  $ 11,382     $ 6,793  
Federal funds sold and securities purc