FannieMae Q1.03.31.2015 10Q
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from     to         
Commission File No.: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation
52-0883107
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3900 Wisconsin Avenue, NW
Washington, DC
20016
(Zip Code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code:
(202) 752-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ
As of March 31, 2015, there were 1,158,082,750 shares of common stock of the registrant outstanding.
 



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

i


MD&A TABLE REFERENCE
Table
Description
Page
1
Credit Statistics, Single-Family Guaranty Book of Business
5
2
Single-Family Acquisitions Statistics
7
3
Summary of Condensed Consolidated Results of Operations
17
4
Analysis of Net Interest Income and Yield
18
5
Rate/Volume Analysis of Changes in Net Interest Income
19
6
Fair Value Losses, Net
20
7
Total Loss Reserves
21
8
Changes in Combined Loss Reserves
21
9
Troubled Debt Restructurings and Nonaccrual Loans
23
10
Credit Loss Performance Metrics
24
11
Single-Family Business Results
25
12
Multifamily Business Results
27
13
Capital Markets Group Results
29
14
Capital Markets Group’s Mortgage Portfolio Activity
30
15
Capital Markets Group’s Mortgage Portfolio Composition
31
16
Capital Markets Group’s Mortgage Portfolio
32
17
Summary of Condensed Consolidated Balance Sheets
33
18
Summary of Mortgage-Related Securities at Fair Value
34
19
Activity in Debt of Fannie Mae
36
20
Outstanding Short-Term Borrowings and Long-Term Debt
37
21
Cash and Other Investments Portfolio
38
22
Composition of Mortgage Credit Book of Business
41
23
Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
42
24
Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2015
44
25
Credit Risk Transferred Pursuant to CAS Issuances
45
26
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business
46
27
Delinquency Status and Activity of Single-Family Conventional Loans
51
28
Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
52
29
Statistics on Single-Family Loan Workouts
53
30
Single-Family Foreclosed Properties
54
31
Single-Family Foreclosed Property Status
55
32
Multifamily Lender Risk-Sharing
56
33
Multifamily Guaranty Book of Business Key Risk Characteristics
56
34
Multifamily Foreclosed Properties
57
35
Mortgage Insurance Coverage
59
36
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
64
37
Derivative Impact on Interest Rate Risk (50 Basis Points)
65

ii


PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since delegated specified authorities to our Board of Directors and has delegated to management the authority to conduct our day-to-day operations. Our directors do not have any fiduciary duties to any person or entity except to the conservator and, accordingly, are not obligated to consider the interests of the company, the holders of our equity or debt securities or the holders of Fannie Mae MBS unless specifically directed to do so by the conservator. We describe the rights and powers of the conservator, key provisions of our agreements with the U.S. Department of the Treasury (“Treasury”), and their impact on shareholders in our Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes and the more detailed information in our 2014 Form 10-K.
This report contains forward-looking statements that are based on management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this report. Our actual results may differ materially from those reflected in our forward-looking statements due to a variety of factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this report and in our 2014 Form 10-K.
You can find a “Glossary of Terms Used in This Report” in the “MD&A” of our 2014 Form 10-K.
INTRODUCTION
Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. We serve an essential role in the functioning of the U.S. housing market and are investing in improvements to the U.S. housing finance system. Our public mission is to support liquidity and stability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold, and to increase the supply of affordable housing. Our charter does not permit us to originate loans or lend money directly to consumers in the primary mortgage market.
Fannie Mae provides reliable, large-scale access to affordable mortgage credit and indirectly enables families to buy, refinance or rent homes. We securitize mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. One of our key functions is to evaluate, price and manage the credit risk on the loans and securities that we guarantee. We also purchase mortgage loans and mortgage-related securities, primarily for securitization and sale at a later date. We use the term “acquire” in this report to refer to both our securitizations and our purchases of mortgage-related assets. We obtain funds to support our business activities by issuing a variety of debt securities in the domestic and international capital markets, which attracts global capital to the United States housing market.
Our conservatorship has no specified termination date, and we do not know when or how the conservatorship will terminate, whether we will continue to exist following conservatorship, what changes to our business structure will be made during or following the conservatorship, or what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated. In addition, our agreements with Treasury that provide for financial support include covenants that significantly restrict our business activities and provide for dividends to accrue at a rate equal to our net worth less a capital reserve amount, which continues to decrease annually until it reaches zero, allowing us to retain only a limited and decreasing amount of our net worth. We provide additional information on the conservatorship, the provisions of our agreements with Treasury, and their impact on our business in our 2014 Form 10-K in “Business—Conservatorship and Treasury Agreements” and “Risk Factors.” We discuss the uncertainty of our future in “Executive Summary—Outlook” and “Risk Factors” in this report. We discuss proposals for housing finance reform that could materially affect our business in “Business—Housing Finance Reform” in our 2014 Form 10-K.
Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and has made a commitment under a senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions, the U.S. government does not guarantee our securities or other obligations.

1



Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.
EXECUTIVE SUMMARY
Our Strategy
We are focused on:
achieving strong financial and credit performance;
supporting the housing recovery by providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners;
serving customer needs and improving our business efficiency; and
helping to build a sustainable housing finance system.
Achieving strong financial and credit performance
We continued to achieve strong financial and credit performance in the first quarter of 2015:
Financial Performance. We reported net income of $1.9 billion for the first quarter of 2015, compared with net income of $5.3 billion for the first quarter of 2014. See “Summary of Our Financial Performance” below for an overview of our financial performance for the first quarter of 2015, compared with the first quarter of 2014. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. For more information regarding our expectations for our future financial performance, see “Outlook—Financial Results” and “Outlook—Revenues” below.
Dividend Payments to Treasury. With our expected June 2015 dividend payment to Treasury, we will have paid a total of $138.2 billion in dividends to Treasury on our senior preferred stock. The aggregate amount of draws we have received from Treasury to date under the senior preferred stock purchase agreement is $116.1 billion. Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws. See “Treasury Draws and Dividend Payments” and “Outlook—Dividend Obligations to Treasury” below for more information regarding our dividend payments to Treasury.
Book of Business and Credit Performance. Beginning in 2008, we made changes to strengthen our underwriting and eligibility standards that have improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010, and was 1.78% as of March 31, 2015, compared with 1.89% as of December 31, 2014. Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. See “Single-Family Guaranty Book of Business” below for information on the credit performance of the mortgage loans in our single-family guaranty book of business and on our single-family acquisitions.
Our business model has changed significantly since we entered into conservatorship in 2008 and continues to evolve. To meet the requirements of our senior preferred stock purchase agreement with Treasury, our retained mortgage portfolio has declined substantially since entering conservatorship and will continue to decline until 2018, which has resulted in, and is expected to continue to result in, declines in our net revenues from our retained mortgage portfolio. In addition, the amount of guaranty fee income we receive for managing the credit risk of loans in our book of business has increased significantly since entering into conservatorship and we expect will continue to increase over the next several years. See “Outlook—Revenues” for more information on the shift in, and future expectations regarding, the sources of our revenue. Our business also continues to evolve as a result of our efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator. For example, we have begun to transfer a portion of the existing credit risk on our single-family guaranty book of business in order to reduce the risk to taxpayers of future borrower defaults, and we expect to continue engaging in economically sensible ways to expand our offerings of credit risk transfer transactions in the future. See “Helping to Build a Sustainable Housing Finance System” below and in our 2014 Form 10-K in “Business—Executive Summary” for a discussion of our credit risk transfer transactions and other efforts to build a safer and sustainable housing finance system.

2



We remain under conservatorship and subject to the restrictions of the senior preferred stock purchase agreement with Treasury. As a result of the senior preferred stock purchase agreement and directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zero by 2018), rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. See “Business—Conservatorship and Treasury Agreements” in our 2014 Form 10-K for more information regarding our conservatorship and our senior preferred stock purchase agreement with Treasury. In addition, the future of our company remains uncertain. Congress continues to consider options for reform of the housing finance system, including the GSEs, and we cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. See “Business—Housing Finance Reform” in our 2014 Form 10-K for information on recent proposals for housing finance reform.
Supporting the housing recovery by providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners
We continued our efforts to support the housing recovery in the first quarter of 2015. We remained the largest single issuer of mortgage-related securities in the single-family secondary market during the first quarter of 2015 and a continuous source of liquidity in the multifamily market. We also continued to help struggling homeowners. In the first quarter of 2015, we provided approximately 34,000 loan workouts to help homeowners stay in their homes or otherwise avoid foreclosure. We discuss our activities to support the housing and mortgage markets in “Contributions to the Housing and Mortgage Markets” below.
Serving customer needs and improving our business efficiency
We continued to work on initiatives to better serve our customers’ needs and improve our business efficiency in the first quarter of 2015. These initiatives include revising and clarifying our representation and warranty framework to reduce lenders’ repurchase risk, simplifying our business processes, and updating our infrastructure. We discuss these initiatives in “Serving Customer Needs and Improving Our Business Efficiency” below and in our 2014 Form 10-K in “Business—Executive Summary.”
Helping to build a sustainable housing finance system
We continued to help lay the foundation for a safer and sustainable housing finance system in the first quarter of 2015. Our efforts included pursuing the strategic goals and objectives identified by our conservator, as well as investing in enhancements to our business and infrastructure. We discuss these efforts, as well as FHFA’s 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac and FHFA’s related 2015 conservatorship scorecard, in “Helping to Build a Sustainable Housing Finance System” below and in our 2014 Form 10-K in “Business—Executive Summary.”
Summary of Our Financial Performance
Comprehensive Income
We recognized comprehensive income of $1.8 billion in the first quarter of 2015, consisting of net income of $1.9 billion and other comprehensive loss of $92 million. In comparison, we recognized comprehensive income of $5.7 billion in the first quarter of 2014, consisting of net income of $5.3 billion and other comprehensive income of $372 million. The decrease in comprehensive income was primarily driven by revenue of $4.1 billion recognized in the first quarter of 2014 resulting from settlement agreements resolving certain lawsuits relating to private-label mortgage-related securities (“PLS”) sold to us. The decrease in comprehensive income was also attributable to a decline in credit-related income and an increase in fair value losses.
Credit-related income decreased to $60 million in the first quarter of 2015 from $1.0 billion in the first quarter of 2014. This decrease was primarily due to less income in the first quarter of 2015 from resolution agreements relating to representation and warranty matters compared with the first quarter of 2014.
Fair value losses increased to $1.9 billion in the first quarter of 2015 from $1.2 billion in the first quarter of 2014. This increase was primarily driven by risk management derivative fair value losses as a result of larger declines in longer-term swap rates during the first quarter of 2015, which caused larger decreases in the fair value of our pay-fixed derivatives.
We expect volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings. These instruments include derivatives and certain securities. The estimated fair value of our derivatives and securities may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage spreads and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, cash and other investments

3



portfolio, and outstanding debt of Fannie Mae. Some of these financial instruments in our net portfolio are not recorded at fair value in our condensed consolidated financial statements, and as a result we may experience accounting gains or losses due to changes in interest rates or other market conditions that may not be indicative of the economic interest rate risk exposure of our net portfolio. See “Risk Management—Market Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period primarily due to changes in home prices, borrower payment behavior and economic conditions.
See “Consolidated Results of Operations” for more information on our results.
Net Worth
Our net worth decreased to $3.6 billion as of March 31, 2015 from $3.7 billion as of December 31, 2014 primarily due to our payment to Treasury of $1.9 billion in senior preferred stock dividends, offset by our comprehensive income of $1.8 billion during the first quarter of 2015. Our expected dividend payment of $1.8 billion for the second quarter of 2015 is calculated based on our net worth of $3.6 billion as of March 31, 2015 less the applicable capital reserve amount of $1.8 billion.
Single-Family Guaranty Book of Business
Credit Performance
We continued to achieve strong credit performance in the first quarter of 2015. In addition to acquiring loans with strong credit profiles, as we discuss below in “Recently Acquired Single-Family Loans,” we continued to execute on our strategies for reducing credit losses, such as helping eligible Fannie Mae borrowers with high loan-to-value (“LTV”) ratio loans refinance into more sustainable loans through the Administration’s Home Affordable Refinance Program® (“HARP®”), offering borrowers loan modifications that can significantly reduce their monthly payments, pursuing foreclosure alternatives and managing our real estate owned (“REO”) inventory to appropriately manage costs and maximize sales proceeds. As we work to reduce credit losses, we also seek to assist struggling homeowners, help stabilize communities and support the housing market.
Table 1 presents information for each of the last five quarters about the credit performance of mortgage loans in our single-family guaranty book of business and our workouts. The term “workouts” refers to both home retention solutions (loan modifications and other solutions that enable a borrower to stay in his or her home) and foreclosure alternatives (short sales and deeds-in-lieu of foreclosure). The workout information in Table 1 does not reflect repayment plans and forbearances that have been initiated but not completed, nor does it reflect trial modifications that have not become permanent.

4



Table 1: Credit Statistics, Single-Family Guaranty Book of Business(1)
  
2015
 
2014
 
  
Q1
 
Full
Year
 
Q4
 
Q3
 
Q2
 
Q1
 
  
(Dollars in millions)
 
As of the end of each period: 
 
 
 
 
 
 
 
 
 
 
 
 
Serious delinquency rate(2)
1.78

%
1.89

%
1.89

%
1.96

%
2.05

%
2.19

%
Seriously delinquent loan count
308,546

 
329,590

 
329,590

 
340,897

 
357,267

 
383,810

 
Foreclosed property inventory:
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties(3)
79,319

 
87,063

 
87,063

 
92,386

 
96,796

 
102,398

 
Carrying value
$
8,915

 
$
9,745

 
$
9,745

 
$
10,209

 
$
10,347

 
$
10,492

 
Total loss reserves(4)
32,532

 
37,762

 
37,762

 
39,330

 
41,657

 
44,760

 
During the period: 
 
 
 
 
 
 
 
 
 
 
 
 
Credit-related (expense) income(5)
$
(7
)
 
$
3,625

 
$
94

 
$
748

 
$
1,781

 
$
1,002

 
Credit losses(6)
5,373

 
5,978

 
1,616

 
1,738

 
1,497

 
1,127

 
REO net sales prices to unpaid principal balance(7)
70

%
69

%
69

%
69

%
69

%
68

%
Short sales net sales price to unpaid principal balance(8)
73

%
72

%
72

%
72

%
72

%
71

%
Loan workout activity (number of loans): 
 
 
 
 
 
 
 
 
 
 
 
 
Home retention loan workouts(9)
28,568

 
130,132

 
27,610

 
30,584

 
33,639

 
38,299

 
Short sales and deeds-in-lieu of foreclosure
5,657

 
34,480

 
6,845

 
7,992

 
9,516

 
10,127

 
Total loan workouts
34,225

 
164,612

 
34,455

 
38,576

 
43,155

 
48,426

 
Loan workouts as a percentage of delinquent loans in our guaranty book of business(10)
21.71

%
23.20

%
20.45

%
22.46

%
24.69

%
25.70

%
__________
(1) 
Our single-family guaranty book of business consists of (a) single-family mortgage loans of Fannie Mae, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(2) 
Calculated based on the number of single-family conventional loans that are 90 days or more past due or in the foreclosure process, divided by the number of loans in our single-family conventional guaranty book of business.
(3) 
Includes acquisitions through deeds-in-lieu of foreclosure. Also includes held for use properties, which are reported in our condensed consolidated balance sheets as a component of “Other assets.”
(4) 
Consists of (a) the combined loss reserves, (b) allowance for accrued interest receivable, and (c) allowance for preforeclosure property taxes and insurance receivable. Effective January 1, 2015, we charged off accrued interest receivable associated with loans on nonaccrual status and eliminated the related allowance in connection with our change in accounting policy related to the treatment of interest previously accrued, but not collected, at the date that loans are placed on nonaccrual status. See “Note 1, Summary of Significant Accounting Policies” for more information on this policy change.
(5) 
Consists of (a) the benefit for credit losses and (b) foreclosed property (expense) income.
(6) 
Consists of (a) charge-offs, net of recoveries and (b) foreclosed property expense (income), adjusted to exclude the impact of fair value losses resulting from credit-impaired loans acquired from MBS trusts. As discussed in “Outlook” and in “Consolidated Results of Operations—Credit Loss Performance Metrics,” our credit losses in the first quarter of 2015 included charge-offs of (1) $1.8 billion in loans held for investment and $724 million in preforeclosure property taxes and insurance receivable that we recognized on January 1, 2015 upon our adoption of FHFA’s Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”) and (2) $1.1 billion in accrued interest receivable that we recognized on January 1, 2015 upon our adoption of a change in accounting policy related to loans placed on nonaccrual.
(7) 
Calculated as the amount of sale proceeds received on disposition of REO properties during the respective period, excluding those subject to repurchase requests made to our sellers or servicers, divided by the aggregate unpaid principal balance of the related loans at the time of foreclosure. Net sales price represents the contract sales price less selling costs for the property and other charges paid by the seller at closing.
(8) 
Calculated as the amount of sale proceeds received on properties sold in short sale transactions during the respective periods divided by the aggregate unpaid principal balance of the related loans. Net sales price represents the contract sales price less the selling costs for

5



the property and other charges paid by the seller at the closing, including borrower relocation incentive payments and subordinate lien(s) negotiated payoffs.
(9) 
Consists of (a) modifications, which do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as troubled debt restructurings (“TDRs”), or repayment plans or forbearances that have been initiated but not completed and (b) repayment plans and forbearances completed. See “Table 29: Statistics on Single-Family Loan Workouts” in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Problem Loan Management—Loan Workout Metrics” for additional information on our various types of loan workouts.
(10) 
Calculated based on annualized problem loan workouts during the period as a percentage of the average balance of delinquent loans in our single-family guaranty book of business.
Beginning in 2008, we took actions to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. These actions have improved the credit quality of our book of business and contributed to improvement in our credit performance. For information on the credit risk profile of our single-family guaranty book of business, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “Table 26: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business.” For a discussion of revisions we made to our eligibility criteria in 2014 to address a targeted segment of creditworthy borrowers while imposing eligibility requirements that we expect will limit the effect of their loans on our overall credit risk, see “Providing Targeted Access to Credit Opportunities for Creditworthy Borrowers.”
We continue to experience disproportionately higher credit losses and serious delinquency rates from single-family loans originated in 2005 through 2008 than from loans originated in other years. Single-family loans originated in 2005 through 2008 constituted 12% of our single-family book of business as of March 31, 2015 but constituted 59% of our seriously delinquent loans as of March 31, 2015 and drove 67% of our credit losses in the first quarter of 2015. For information on the credit performance of our single-family book of business based on loan vintage, see “Table 15: Credit Loss Concentration Analysis” in our 2014 Form 10-K in “MD&A—Consolidated Results of Operations—Credit-Related Income—Credit Loss Performance Metrics” and “Table 28: Single-Family Conventional Seriously Delinquent Loan Concentration Analysis” in this report in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.” For information on certain credit characteristics of our single-family book of business based on the period in which we acquired the loans, see “Table 23: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period” in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
We provide additional information on our credit-related income in “Consolidated Results of Operations—Credit-Related Income” and on the credit performance of mortgage loans in our single-family book of business in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.”
We provide more information on our efforts to reduce our credit losses in “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” and “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” in both this report and our 2014 Form 10-K. See also “Risk Factors” in our 2014 Form 10-K, where we describe factors that may adversely affect the success of our efforts, including our reliance on third parties to service our loans, conditions in the foreclosure environment, and risks relating to our mortgage insurer counterparties.
Recently Acquired Single-Family Loans
Table 2 below displays information regarding our average charged guaranty fee on and select risk characteristics of the single-family loans we acquired in each of the last five quarters. Table 2 also displays the volume of our single-family Fannie Mae MBS issuances for these periods, which is indicative of the volume of single-family loans we acquired in these periods.

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Table 2: Single-Family Acquisitions Statistics
 
2015
 
2014
 
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
 
(Dollars in millions)
 
Single-family average charged guaranty fee on new acquisitions (in basis points)(1)(2)
61.2

 
62.5

 
63.5

 
62.6

 
63.0

 
Single-family Fannie Mae MBS issuances
$
110,994

 
$
109,045

 
$
105,563

 
$
84,096

 
$
76,972

 
Select risk characteristics of single-family conventional acquisitions:(3)
 
 
 
 
 
 
 
 
 
 
Weighted average FICO® credit score at origination
748

 
745

 
744

 
744

 
741

 
FICO credit score at origination less than 660
5

%
6

%
7

%
7

%
8

%
Weighted average original LTV ratio(4)
74

%
76

%
77

%
77

%
77

%
Original LTV ratio over 80%(4)(5)
26

%
30

%
32

%
32

%
31

%
Original LTV ratio over 95%(4)(6)
2

%
2

%
3

%
4

%
7

%
Loan purpose:

 

 

 


 

 
Purchase
37

%
50

%
57

%
54

%
45

%
Refinance
63

%
50

%
43

%
46

%
55

%
__________
(1) 
Includes the impact of a 10 basis point guaranty fee increase implemented pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 (the “TCCA”), the incremental revenue from which must be remitted to Treasury. The resulting revenue is included in guaranty fee income and the expense is recognized as “TCCA fees.”
(2) 
Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points.
(3) 
Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition.
(4) 
The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available.
(5) 
We purchase loans with original LTV ratios above 80% as part of our mission to serve the primary mortgage market and provide liquidity to the housing finance system. Except as permitted under HARP, our charter generally requires primary mortgage insurance or other credit enhancement for loans that we acquire that have an LTV ratio over 80%.
(6) 
Approximately 58% of the greater than 95% LTV ratio loans we acquired in the first quarter of 2015 were acquired pursuant to HARP. See “Risk ManagementCredit Risk ManagementSingle-Family Mortgage Credit Risk Management” for information on HARP loans.
The decrease in our average charged guaranty fee on newly-acquired single-family loans in the first quarter of 2015 as compared with the first quarter of 2014 was driven primarily by a decrease in loan level price adjustments charged on our acquisitions in the first quarter of 2015, as these acquisitions included a lower proportion of loans with higher LTV ratios and a lower proportion of loans with lower FICO credit scores than our acquisitions in the first quarter of 2014. Loan level price adjustments refer to one-time cash fees that we charge at the time we acquire a loan based on the credit characteristics of the loan. See “Legislative and Regulatory Developments—Changes to Our Single-Family Guaranty Fee Pricing” for information on changes to our guaranty fee pricing.
The decrease in our acquisitions of loans with higher LTV ratios in the first quarter of 2015 as compared with the first quarter of 2014 was primarily due to an increase in the percentage of our acquisitions consisting of refinance loans, given the decrease in mortgage rates, and a corresponding decrease in the percentage of our acquisitions consisting of home purchase loans. Home purchase loans typically have higher LTV ratios than non-HARP refinance loans. In addition, an increase in refinance volume as a result of decreased mortgage rates resulted in an increase in borrowers with higher FICO credit scores in the first quarter of 2015 compared with the first quarter of 2014. The single-family loans we acquired in the first quarter of 2015 continued to have a strong credit profile, with a weighted average original LTV ratio of 74% and a weighted average FICO credit score of 748. For more information on the credit risk profile of our single-family conventional loan acquisitions in the first quarter of 2015, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management,” including “Table 26: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” in that section.

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Whether the loans we acquire in the future will exhibit an overall credit profile and performance similar to our more recent acquisitions will depend on a number of factors, including our future guaranty fee pricing and any impact of that pricing on the volume and mix of loans we acquire; our future eligibility standards and those of mortgage insurers, the Federal Housing Administration (“FHA”) and the Department of Veterans Affairs (“VA”), the percentage of loan originations representing refinancings, changes in interest rates, our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers, government policy, market and competitive conditions, and the volume and characteristics of HARP loans we acquire in the future. In addition, if our lender customers retain more of the higher-quality loans they originate, it could negatively affect the credit risk profile of our new single-family acquisitions.
Providing Targeted Access to Credit Opportunities for Creditworthy Borrowers
Pursuant to FHFA’s 2014 and 2015 conservatorship scorecards and our statutory mission, we are continuing to work to increase access to mortgage credit for creditworthy borrowers, consistent with the full extent of our applicable credit requirements and risk management practices. As part of this effort, we are encouraging lenders to originate loans across the full range of credit eligibility for those borrowers meeting our credit requirements. Some actions we are taking in this regard include: providing additional clarity regarding seller and servicer representations and warranties and remedies for poor servicing performance; making new quality control tools available to lenders; conducting increased outreach to lenders and other industry stakeholders to increase awareness of our available products and programs and to identify potential opportunities to enhance our products and programs to serve this important creditworthy segment; and conducting consumer research to provide industry partners with information to support their efforts to reach underserved market segments.
As part of meeting this scorecard objective, in 2014 we worked with FHFA to revise our eligibility criteria to address a targeted segment of creditworthy borrowers—those who can afford a mortgage but who lack resources for a substantial down payment—in a responsible manner by taking into account factors that would compensate for the high LTV ratios of their loans. Specifically, we changed our eligibility requirements to increase our maximum LTV ratio from 95% to 97% for loans meeting certain criteria. Although higher LTV ratio loans typically present a higher credit risk than lower LTV ratio loans, we expect our acquisition of these loans under our revised eligibility criteria will not materially affect our overall credit risk because we expect that (1) these loans will constitute a small portion of our acquisitions overall and (2) our eligibility requirements for these loans will limit their effect on our overall credit risk. In addition, we have experience managing the credit risk associated with loans with LTV ratios in this range. In the first quarter of 2015, under our newly revised eligibility criteria, we acquired approximately 2,100 single-family loans with 95.01% to 97% LTV ratios from 370 lenders. These loans represented less than 1% of the single-family loans we acquired in the first quarter of 2015. While we expect the volume of loans we acquire under these criteria to increase, we expect they will continue to constitute only a small portion of our acquisitions overall. Our eligibility requirements for these loans include compensating factors and risk mitigants, which reduce the incidence of loans with multiple higher-risk characteristics, or “risk layering.” For purchase transactions, at least one borrower on the loan must be a first-time home buyer and occupy the property as his or her principal residence. In some cases, we also require the borrower to receive housing counseling before obtaining the loan. Eligibility for refinance transactions is limited to existing Fannie Mae loans to provide support for borrowers who may not otherwise be eligible for our Refi PlusTM initiative. For both purchase and refinance loans, the loans must have fixed-rate terms and must be underwritten through Desktop Underwriter®, our proprietary automated underwriting system. Desktop Underwriter provides a comprehensive credit risk assessment on loan applications submitted through the system, assessing risk layers and compensating factors, and denying loan applications that do not meet our eligibility requirements. We require mortgage insurance or other appropriate credit enhancement for all non-HARP loans with LTV ratios greater than 80%.
To the extent we are able to encourage lenders to increase access to mortgage credit, we may acquire a greater number of single-family loans with higher risk characteristics than we acquired in recent periods; however, we expect our single-family acquisitions will continue to have a strong overall credit risk profile given our current underwriting and eligibility standards and product design. We actively monitor on an ongoing basis the credit risk profile and credit performance of our single-family loan acquisitions, in conjunction with housing market and economic conditions, to determine if our pricing, eligibility and underwriting criteria accurately reflect the risk associated with loans we acquire or guarantee.
Contributions to the Housing and Mortgage Markets
Liquidity and Support Activities
As the largest provider of residential mortgage credit in the United States, we indirectly enable families to buy, refinance or rent homes. During the first quarter of 2015, we continued to provide critical liquidity and support to the U.S. mortgage market in a number of important ways:

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We serve as a stable source of liquidity for purchases of homes and financing of multifamily rental housing, as well as for refinancing existing mortgages. We provided approximately $124 billion in liquidity to the mortgage market in the first quarter of 2015 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 320,000 mortgage refinancings and approximately 190,000 home purchases, and provided financing for approximately 134,000 units of multifamily housing.
Our role in the market enables qualified borrowers to have reliable access to affordable mortgage credit, including a variety of conforming mortgage products such as the prepayable 30-year fixed-rate mortgage that protects homeowners from fluctuations in interest rates.
We provided approximately 34,000 loan workouts in the first quarter of 2015 to help homeowners stay in their homes or otherwise avoid foreclosure. Our loan workout efforts have helped to stabilize neighborhoods, home prices and the housing market.
We helped borrowers refinance loans, including through our Refi Plus initiative, which offers additional refinancing flexibility to eligible borrowers who are current on their loans, whose loans are owned or guaranteed by us and who meet certain additional criteria. We acquired approximately 54,000 Refi Plus loans in the first quarter of 2015. Refinancings delivered to us through Refi Plus in the first quarter of 2015 reduced borrowers’ monthly mortgage payments by an average of $177.
We support affordability in the multifamily rental market. Over 80% of the multifamily units we financed in the first quarter of 2015 were affordable to families earning at or below the median income in their area.
In addition to purchasing and guaranteeing loans, we provide funds to the mortgage market through short-term financing and other activities. These activities are described in our 2014 Form 10-K in “Business—Business Segments—Capital Markets.”
2015 Market Share
We remained the largest single issuer of mortgage-related securities in the secondary market during the first quarter of 2015, with an estimated market share of new single-family mortgage-related securities issuances of 40%, unchanged from the fourth quarter of 2014 and down slightly from 41% in the first quarter of 2014.
We remained a continuous source of liquidity in the multifamily market in the first quarter of 2015. We owned or guaranteed approximately 19% of the outstanding debt on multifamily properties as of December 31, 2014 (the latest date for which information is available).
Serving Customer Needs and Improving Our Business Efficiency
We are undertaking various initiatives to better serve our customers’ needs and improve our business efficiency. We are committed to providing our lender partners with the products, services and tools they need to serve the market efficiently and profitably. To further this commitment, we are focused on revising and clarifying our representation and warranty framework to reduce lenders’ repurchase risk, and making our customers’ interactions with us simpler and more efficient.
As part of these initiatives, in January 2015, we made Collateral UnderwriterTM freely available to lenders, giving them access to the same appraisal review tool we use so that they can address potential appraisal issues prior to delivering a loan to us. In April 2015, we announced that Collateral Underwriter had been integrated with Desktop Underwriter, which we believe will enhance our lenders’ risk management and underwriting capabilities. See “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” for more information on Desktop Underwriter.
See “Business—Executive Summary—Serving Customer Needs and Improving Our Business Efficiency” in our 2014 Form 10-K for a discussion of other actions we have taken and are taking to better serve our customer needs and improve our business efficiency.
Helping to Build a Sustainable Housing Finance System
We continue to invest significant resources towards helping to build a safer and sustainable housing finance system, primarily through pursuing the strategic goals identified by our conservator. FHFA’s current strategic goals are to:
Maintain, in a safe and sound manner, credit availability and foreclosure prevention activities for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets.
Reduce taxpayer risk through increasing the role of private capital in the mortgage market.

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Build a new single-family securitization infrastructure for use by Fannie Mae and Freddie Mac and adaptable for use by other participants in the secondary market in the future.
In January 2015, FHFA released annual corporate performance objectives for Fannie Mae and Freddie Mac, referred to as the 2015 conservatorship scorecard, which details specific priorities for implementing FHFA’s strategic goals, including objectives designed to further the goal of reforming the housing finance system. We describe below some of the actions we have taken in 2015 pursuant to the mandates of the scorecard in order to build the policies and infrastructure for a sustainable housing finance system.
Credit Risk Transfer Transactions: Connecticut Avenue SecuritiesTM. FHFA’s 2015 conservatorship scorecard includes an objective relating to credit risk transfer transactions. The goal of these transactions is, to the extent economically sensible, to transfer a limited portion of the existing credit risk on a portion of our single-family guaranty book of business in order to reduce the risk to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through the issuance of our Connecticut Avenue SecuritiesTM (“CAS”), which transfer some of the credit risk associated with losses on the underlying mortgage loans to investors in these securities. During the first quarter of 2015, we issued $1.5 billion in CAS, transferring some of the credit risk on single-family mortgages with an unpaid principal balance of $50.2 billion. See “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Risk Sharing Transactions” for more information on CAS.
Nonperforming Loan Sales. Another objective included in FHFA’s 2015 conservatorship scorecard relates to implementing key loss mitigation activities, including those that enable borrowers to stay in their homes and avoid foreclosure where possible. These activities include developing and executing strategies to reduce the number of severely aged delinquent loans we hold, considering tools such as nonperforming loan (“NPL”) sales. The strategies should help improve outcomes in hardest hit markets. On March 2, 2015, FHFA announced enhanced requirements for NPL sales by Fannie Mae and Freddie Mac. In the announcement, the Director of FHFA indicated FHFA’s expectation that, with these enhanced requirements, NPL sales will result in favorable outcomes for borrowers and local communities. We plan to build NPL sales into a programmatic offering. In April 2015, we began marketing our first bulk NPL sale.
Mortgage Insurance. FHFA’s 2015 conservatorship scorecard also includes an objective relating to implementing final mortgage insurer eligibility requirements. These reforms are intended to strengthen our mortgage insurer counterparties and reduce the risk to taxpayers of future defaults by mortgage insurers on their obligations to the GSEs. On April 17, 2015, we announced and published updated eligibility standards for approved private mortgage insurers. The new standards include enhanced financial requirements and are designed to ensure that mortgage insurers have sufficient liquid assets to pay all claims under a hypothetical future stress scenario. The new standards also set forth enhanced operational performance expectations and define remedial actions that may be imposed should an approved mortgage insurer fail to comply with the revised requirements. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” for additional information on these new standards.
Single Security. FHFA’s 2014 and 2015 conservatorship scorecards include objectives relating to the development of a single mortgage-backed security for Fannie Mae and Freddie Mac. FHFA believes a single security would increase liquidity in the housing finance market. The development of the single security is expected to be a multi-year initiative. In the first quarter of 2015, we worked on a variety of issues relating to the implementation of the single security, including accounting matters, communication planning, risk assessments, legal and contractual issues, trust matters, disclosures, and system development and testing work with the common securitization platform. See “Housing Finance Reform—Conservator Developments” in our 2014 Form 10-K for information on FHFA’s single security proposal and the common securitization platform and “Risk Factors” in our 2014 Form 10-K for a discussion of the risks to our business associated with a single security for Fannie Mae and Freddie Mac.
For more information on FHFA’s 2015 conservatorship scorecard objectives, see our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on January 20, 2015. For more information on our initiatives in pursuit of these objectives, see “Business—Executive Summary—Helping to Build a Sustainable Housing Finance System” in our 2014 Form 10-K.
Treasury Draws and Dividend Payments
From 2009 through the first quarter of 2012, we received a total of $116.1 billion from Treasury under the senior preferred stock purchase agreement. This funding provided us with the capital and liquidity needed to fulfill our mission of providing liquidity and support to the nation’s housing finance markets and to avoid a trigger of mandatory receivership under the Federal Housing Finance Regulatory Reform Act of 2008 (the “2008 Reform Act”). In addition, a portion of the $116.1 billion we received from Treasury was drawn to pay dividends to Treasury because, prior to 2013, our dividend payments on the senior preferred stock accrued at an annual rate of 10%, and we were directed by our conservator to pay these dividends

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to Treasury each quarter even when we did not have sufficient income to pay the dividend. We have not received funds from Treasury under the agreement since the first quarter of 2012. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. From 2008 through the first quarter of 2015, we paid a total of $136.4 billion in dividends to Treasury on the senior preferred stock. Under the terms of the senior preferred stock purchase agreement, dividend payments do not offset prior Treasury draws, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. Accordingly, the current aggregate liquidation preference of the senior preferred stock is $117.1 billion, due to the initial $1.0 billion liquidation preference of the senior preferred stock (for which we did not receive cash proceeds) and the $116.1 billion we have drawn from Treasury.
The Director of FHFA directs us to make dividend payments on the senior preferred stock on a quarterly basis. We expect to pay Treasury an additional senior preferred stock dividend of $1.8 billion by June 30, 2015 for the second quarter of 2015.
Housing and Mortgage Market and Economic Conditions
Economic growth slowed in the first quarter of 2015 compared with the fourth quarter of 2014. According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 0.2% on an annualized basis in the first quarter of 2015, compared with an increase of 2.2% in the fourth quarter of 2014. The overall economy gained an estimated 591,000 non-farm jobs in the first quarter of 2015. According to the U.S. Bureau of Labor Statistics, over the 12 months ending in March 2015, the economy created an estimated 3.1 million non-farm jobs. The unemployment rate was 5.5% in March 2015, compared with 5.6% in December 2014.
According to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $9.9 trillion of single-family debt outstanding, was estimated to be approximately $10.9 trillion as of December 31, 2014 (the latest date for which information is available), compared with $10.8 trillion as of September 30, 2014.
Housing sales were mixed, with existing home sales declining and new home sales rising, during the first quarter of 2015 as compared with the fourth quarter of 2014. Total existing home sales averaged 5.0 million units annualized in the first quarter of 2015, a 1.8% decrease from the fourth quarter of 2014, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 10% of existing home sales in March 2015, compared with 11% in December 2014 and 14% in March 2014. According to the U.S. Census Bureau, new single-family home sales increased during the first quarter of 2015, averaging an annualized rate of 513,000 units, a 8.8% increase from the fourth quarter of 2014.
The number of months’ supply, or the inventory/sales ratio, of available existing homes and of new homes increased in the first quarter of 2015. According to the U.S. Census Bureau, the months’ supply of new single-family unsold homes was 5.3 months as of March 31, 2015, compared with 5.1 months as of December 31, 2014. According to the National Association of REALTORS®, the months’ supply of existing single-family unsold homes was 4.6 months as of March 31, 2015, compared with a 4.4 months’ supply as of December 31, 2014.
The overall mortgage market serious delinquency rate, which has trended down since peaking in the fourth quarter of 2009, remained above long-term averages at 4.2% as of March 31, 2015, according to the Mortgage Bankers Association National Delinquency Survey, compared with 4.5% as of December 31, 2014. We provide information about Fannie Mae’s serious delinquency rate, which also decreased in the first quarter of 2015, in “Single-Family Guaranty Book of Business—Credit Performance.”
Based on our home price index, we estimate that home prices on a national basis increased by 0.4% in the first quarter of 2015, following increases of 4.6% in 2014 and 8.0% in 2013. Despite the recent increases in home prices, we estimate that, through March 31, 2015, home prices on a national basis remained 9.9% below their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and are subject to change as additional data become available.
Many homeowners continue to have “negative equity” in their homes as a result of declines in home prices since 2006, which means their mortgage principal balance exceeds the current market value of their home. This increases the likelihood that borrowers will abandon their mortgage obligations and that the loans will become delinquent and proceed to foreclosure. According to CoreLogic, Inc. the number of residential properties with mortgages in a negative equity position in the fourth quarter of 2014 rose slightly, reflecting the typical weakness in home values during the final quarter of the year, increasing to approximately 5.4 million from 5.2 million in the third quarter of 2014, but still below the 6.6 million residential properties with mortgages in a negative equity position in the fourth quarter of 2013. The percentage of properties with mortgages in a negative equity position in the fourth quarter of 2014 was 10.8%, up from 10.4% in the third quarter of 2014 but down from 13.4% in the fourth quarter of 2013.
Thirty-year fixed-rate mortgage rates ended the quarter at 3.69% for the week of April 2, 2015, down from 3.87% for the week of December 31, 2014, according to the Freddie Mac Primary Mortgage Market Survey®.

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During the first quarter of 2015, the multifamily sector continued to exhibit stable fundamentals, according to preliminary third-party data, with flat vacancy levels and positive rent growth. The national multifamily vacancy rate for institutional investment-type apartment properties was an estimated 5.0% as of March 31, 2015, the same rate as of both December 31, 2014 and March 31, 2014.
National asking rents increased by an estimated 0.5% during both the first quarter of 2015 and the fourth quarter of 2014. Continued demand for multifamily rental units was reflected in the estimated positive net absorption (that is, the net change in the number of occupied rental units during the time period) of approximately 37,000 units during the first quarter of 2015, according to preliminary data from Reis, Inc., compared with approximately 41,000 units during the fourth quarter of 2014.
As a result of the continued demand for multifamily rental units over the past few years, there has been an increase in the amount of new multifamily construction development nationally. Approximately 340,000 new multifamily units are expected to be completed this year. The bulk of this new supply is concentrated in a limited number of metropolitan areas. We believe this increase in supply will result in a temporary slowdown in net absorption rates, occupancy levels and effective rents in those areas throughout 2015. In addition, because estimated multifamily rent growth has outpaced wage growth over the past few years, ongoing multifamily rental housing affordability remains a concern. Nevertheless, we expect overall national rental market supply and demand to remain in balance over the longer term, based on expected construction completions, expected obsolescence, positive rental household formation trends and expected increases in the population of 20- to 34-year olds, which is the primary age group that tends to rent multifamily housing.
Outlook
Uncertainty Regarding our Future Status. We expect continued significant uncertainty regarding the future of our company and the housing finance system, including how long the company will continue to be in its current form, the extent of our role in the market, what form we will have, what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to exist following conservatorship.
We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation. See “Business—Housing Finance Reform” in our 2014 Form 10-K, for a discussion of proposals for reform of the housing finance system, including the GSEs, that could materially affect our business, including proposals to wind down Fannie Mae and Freddie Mac. See “Risk Factors” in both this report and in our 2014 Form 10-K for a discussion of the risks to our business relating to the uncertain future of our company.
Financial Results. Our financial results continued to be strong in the first quarter of 2015, with net income of $1.9 billion. We expect to remain profitable on an annual basis for the foreseeable future; however, we expect our earnings in 2015 and future years will be substantially lower than our earnings for 2014, primarily due to our expectation of substantially lower income from resolution agreements, continued declines in net interest income from our retained mortgage portfolio assets and lower credit-related income. In addition, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Our expectations for our future financial results do not take into account the impact on our business of potential future legislative or regulatory changes, which could have a material impact on our financial results, particularly the enactment of housing finance reform legislation as noted in “Uncertainty Regarding our Future Status” above.
Under the terms of the senior preferred stock, our capital reserve will decline by $600 million each year until it reaches zero in 2018. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our declining capital reserve, our expectation of substantially lower earnings in future years than our earnings for 2014, and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter, particularly as our capital reserve approaches zero. If that were to occur, we would be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. See “Risk Factors” in our 2014 Form 10-K for a discussion of the risks associated with our declining capital reserves.
Revenues. We currently have two primary sources of revenues: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets. Our “retained mortgage portfolio” refers to the mortgage-related assets we own (which excludes the portion of assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties). In recent years, an increasing portion of our net interest income has been derived from guaranty fees rather than from our retained mortgage portfolio assets, due to the impact of guaranty fee increases and the shrinking of our retained mortgage portfolio. We estimate that a majority of our

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net interest income in the first quarter of 2015 was derived from guaranty fees on loans underlying our Fannie Mae MBS. We expect that guaranty fees will continue to account for an increasing portion of our net interest income.
We expect continued decreases in the size of our retained mortgage portfolio, which will continue to negatively impact our net interest income and net revenues; however, we also expect increases in our guaranty fee revenues will partially offset the negative impact of the decline in our retained mortgage portfolio. We expect our guaranty fee revenues to increase over the next several years, as loans with lower guaranty fees liquidate from our book of business and are replaced with new loans with higher guaranty fees. The extent to which the positive impact of increased guaranty fee revenues will offset the negative impact of the decline in the size of our retained mortgage portfolio will depend on many factors, including: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; the size, composition and quality of our guaranty book of business; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio, including the pace at which we are required by our conservator to reduce the size of our portfolio and the types of assets we are required to sell; economic and housing market conditions, including changes in interest rates; our market share; and legislative and regulatory changes.
Dividend Obligations to Treasury. We expect to retain only a limited amount of any future net worth because we are required by the dividend provisions of the senior preferred stock and quarterly directives from our conservator to pay Treasury each quarter the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $1.8 billion for each quarter of 2015 and continues to decrease by $600 million annually until it reaches zero in 2018.
As described in “Legal Proceedings” and “Note 16, Commitments and Contingencies,” several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against the United States, Treasury and/or FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac, including challenges to the net worth sweep dividend provisions of the senior preferred stock. We cannot predict the course or the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits.
Overall Market Conditions. We expect that single-family mortgage loan serious delinquency and severity rates will continue their downward trend, but at a slower pace than in recent years. We expect that single-family serious delinquency and severity rates will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans with high mark-to-market LTV ratios originated prior to 2009 to work their way through the foreclosure process. Despite steady demand and stable fundamentals at the national level, the multifamily sector may continue to exhibit below average fundamentals in certain local markets and with certain properties.
We forecast that total originations in the U.S. single-family mortgage market in 2015 will increase from 2014 levels by approximately 14%, from an estimated $1.2 trillion in 2014 to $1.4 trillion in 2015, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will increase from an estimated $507 billion in 2014 to $609 billion in 2015.
Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 0.4% in the first quarter of 2015. We expect the rate of home price appreciation in 2015 to be similar to the rate in 2014. Future home price changes may be very different from our expectations as a result of significant inherent uncertainty in the current market environment, including uncertainty about the effect of recent and future changes in mortgage rates; actions the federal government has taken and may take with respect to fiscal policies, mortgage finance programs and policies, and housing finance reform; the Federal Reserve’s purchases and sales of mortgage-backed securities; the impact of those actions on and changes generally in unemployment and the general economic and interest rate environment; and the impact on the U.S. economy of global economic and political conditions. We also expect significant regional variation in the timing and rate of home price growth.
Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. For the vast majority of our single-family loans, we charge off a loan at the time of foreclosure or other liquidation event (such as when we accept a short sale or deed-in-lieu of foreclosure). However, under our approach to adopting on January 1, 2015 the charge-off provisions of FHFA’s Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”), we began to charge off a portion of a relatively small subset of delinquent loans (as well as preforeclosure property taxes and insurance receivable that pertain to the loans) that are deemed uncollectible prior to foreclosure. The charge-off portion is classified as a “loss” pursuant to the Advisory Bulletin. Our credit losses in the first quarter of 2015 were impacted by implementation of these provisions, as well as by our implementation, effective January 1, 2015, of a change in our accounting policy for the treatment of interest previously accrued, but not collected, at the date that loans are placed on

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nonaccrual status. Upon adopting this accounting policy change, we charged off the accrued interest receivable balance on our nonaccrual loans. Our credit losses were $5.4 billion in the first quarter of 2015, compared with $1.6 billion in the fourth quarter of 2014 and $1.1 billion in the first quarter of 2014. Our credit losses in the first quarter of 2015 included (1) $1.8 billion in charge-offs of loans held for investment and $724 million in charge-offs of preforeclosure property taxes and insurance receivable that we recognized on January 1, 2015 under our approach to adopting the charge-off provisions of the Advisory Bulletin and (2) $1.1 billion in charge-offs we recognized on January 1, 2015 upon our implementation of the change in our accounting policy for nonaccrual loans. Because the increase in our charge-off amounts in the first quarter of 2015 compared with the first quarter of 2014 was driven primarily by our initial adoption of the Advisory Bulletin’s charge-off provisions and our initial implementation of our accounting policy change, we expect our credit losses to resume their downward trend in future quarters. See “Business—Our Charter and Regulation of Our Activities—FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans” in our 2014 Form 10-K for further information about this Advisory Bulletin. See “Note 1, Summary of Significant Accounting Policies” for information about our change in accounting principle for nonaccrual loans.
Loss Reserves. Our total loss reserves consist of (1) our allowance for loan losses, (2) our allowance for preforeclosure property taxes and insurance receivable and (3) our reserve for guaranty losses. Prior to our implementation on January 1, 2015 of the change in our accounting policy for nonaccrual loans, our total loss reserves also included an allowance for accrued interest receivable. Our total loss reserves were $32.9 billion as of March 31, 2015, down from $38.2 billion as of December 31, 2014. The decrease in our total loss reserves during the first quarter of 2015 was significantly impacted by our approach to adopting the charge-off provisions of the Advisory Bulletin and our implementation of the change in our accounting policy for nonaccrual loans. The charge-offs of held-for-investment loans, preforeclosure property taxes and insurance receivable and accrued interest receivable described above in “Credit Losses” reduced our allowance for loan losses, our allowance for preforeclosure property taxes and insurance receivable and our allowance for accrued interest receivable. We expect our approach to adopting the Advisory Bulletin’s charge-off provisions and our charge-offs resulting from implementing our change in accounting policy for nonaccrual loans will decrease the amount of future charge-offs on these same loans from what they otherwise would have been.
Although our loss reserves have declined substantially from their peak and are expected to decline further, we expect our loss reserves will remain elevated relative to the levels experienced prior to the 2008 housing crisis for an extended period because (1) we expect future defaults on loans that we acquired prior to 2009 and the resulting charge-offs will occur over a period of years and (2) a significant portion of our reserves represents concessions granted to borrowers upon modification of their loans and our reserves will continue to reflect these concessions until the loans are fully repaid or default.
Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations. We present a number of estimates and expectations in this executive summary regarding our future performance, including estimates and expectations regarding our future financial results and profitability, the level and sources of our future revenues and net interest income, our future dividend payments to Treasury, the level and credit characteristics of, and the credit risk posed by, our future acquisitions, our future credit losses and our future loss reserves. We also present a number of estimates and expectations in this executive summary regarding future housing market conditions, including expectations regarding future single-family loan delinquency and severity rates, future mortgage originations, future refinancings, future home prices and future conditions in the multifamily market. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. Our future estimates of our performance and housing market conditions, as well as the actual results, may differ materially from our current estimates and expectations as a result of: the timing and level of, as well as regional variation in, home price changes; changes in interest rates, unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our guaranty fee revenues and competitive environment; our future serious delinquency rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; future legislative or regulatory requirements or changes that have a significant impact on our business, such as a requirement that we implement a principal forgiveness program or the enactment of housing finance reform legislation; actions we may be required to take by FHFA, as our conservator or as our regulator, such as changes in the type of business we do or implementation of a single GSE security; future updates to our models relating to our loss reserves, including the assumptions used by these models; future changes to our accounting policies; significant changes in modification and foreclosure activity; the volume and pace of future NPL sales and their impact on our results and serious delinquency rates; changes in borrower behavior, such as an increasing number of underwater borrowers who strategically default on their mortgage loans; the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies; whether our counterparties meet their obligations in full; resolution or settlement agreements we may enter into with our counterparties; changes in the fiscal and monetary policies of the Federal Reserve, including any change in the Federal Reserve’s policy towards the reinvestment of principal payments of mortgage-backed securities or any future

14



sales of such securities; changes in the fair value of our assets and liabilities; changes in generally accepted accounting principles (“GAAP”); credit availability; global political risks; natural disasters, terrorist attacks, pandemics or other major disruptive events; information security breaches; and other factors, including those discussed in “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report and in our 2014 Form 10-K. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The information in this section updates and supplements information regarding legislative and regulatory developments set forth in “Business—Housing Finance Reform” and “Business—Our Charter and Regulation of Our Activities” in our 2014 Form 10-K. Also see “Risk Factors” in this report and in our 2014 Form 10-K for a discussion of risks relating to legislative and regulatory matters.
Changes to Our Single-Family Guaranty Fee Pricing
On April 17, 2015, FHFA announced the results of its review of single-family guaranty fees that Fannie Mae and Freddie Mac charge lenders. FHFA determined that current fees, on average, are at an appropriate level and that it would also be appropriate to make some modest changes to our single-family loan level price adjustments, or LLPAs, which are one-time cash fees that we charge at the time we acquire a loan based on the credit characteristics of the loan. Specifically, FHFA directed us to eliminate the 25 basis point adverse market delivery charge that has been assessed on all single-family mortgages purchased by us since 2008, and to attempt to replace the revenue that resulted from the adverse market delivery charge with targeted increases in LLPAs to address various risk-based and access-to-credit considerations. These targeted increases include small increases in LLPAs for loans with both lower LTV ratios and higher FICO credit scores, as well as for loans with certain risk attributes (that is, cash-out refinances, investment properties, loans with secondary financing, and jumbo conforming loans). The fee changes will become effective for whole loans we purchase on or after September 1, 2015 and for loans we acquire in lender swap transactions for Fannie Mae MBS with issue dates on or after September 1, 2015.
In its announcement, FHFA stated that, since all of the guaranty fee changes are small, FHFA does not expect the adjustments to cause any material changes to our loan volume in any of the loan categories and expects the small changes to be revenue neutral. It is possible that, by reducing the differentiation in our pricing for loans with differing risk characteristics, these changes in our LLPAs could increase or decrease our credit risk in the event of a shift in the mix of single-family loans we acquire. For example, pricing increases could result in some of our lender customers retaining lower credit risk loans for their portfolio or delivering them to our competitors instead of delivering the loans to us. For more information on the potential impact of changes to our single-family guaranty fee pricing on our credit risk profile, revenues and business, as well as a discussion of risks associated with FHFA’s ability to direct us to change our guaranty fee pricing and our dependence on FHFA to approve changes to our national LLPAs, see our discussion of the effect of conservatorship on our business activities in “Risk Factors” in our 2014 Form 10-K.
FHFA Communication on Compensation
The Board of Directors of Fannie Mae received a communication on executive compensation from FHFA Director Melvin L. Watt as follows:
“Fannie Mae is authorized to submit a proposal for FHFA review and consideration on executive compensation for the position of Fannie Mae Chief Executive Officer (CEO) to address the Board’s obligation and FHFA’s conservatorship and supervisory objectives of providing for CEO retention; effective succession planning for the CEO position; and continuity, efficiency and stability of operations during this extended period of conservatorship in which the future of the Enterprise is uncertain and the Enterprise is engaged in market transformative work. Any proposal submitted under this authorization must be consistent with meeting the above objectives; may not propose adjustment of CEO compensation before the third anniversary date of the current CEO (June 5, 2015); and may not propose compensation for the CEO that is higher than the 25th percentile of the market, using the agreed-upon comparator group for FHFA evaluation of compensation of Fannie Mae’s executive officers.
A proposal must comply with applicable law, including 12 USC 4518(a) and 4518a, and must be consistent with Fannie Mae’s charter act, 12 USC 1723a(d)(2). In particular, compensation must be reasonable and comparable with similar positions at similar companies and must take into consideration Fannie Mae’s status in conservatorship and FHFA’s statutory power as conservator to preserve and conserve assets, 12 USC 4617(b). Recommendations must include pay for performance aspects and may not include a ‘bonus.’”

15



Affordable Housing Allocations
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the 2008 Reform Act, (together, the “GSE Act”) requires us and Freddie Mac to set aside each year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases to fund HUD’s Housing Trust Fund and Treasury’s Capital Magnet Fund. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps. These allocations were temporarily suspended by FHFA in November 2008, but in December 2014 FHFA ended the temporary suspension effective for 2015. As a result, we are required to set aside amounts during each year and to allocate or otherwise transfer these amounts within 60 days after the end of the year, unless we have made a draw from Treasury under the terms of the senior preferred stock purchase agreement based on a net worth deficit for any quarter of the year, or unless such allocation or transfer would cause us to have to make a draw from Treasury, in which case we will make no allocation or transfer for that year and the amounts accrued for that year will be reversed. In December 2014 FHFA issued an interim final rule prohibiting Fannie Mae and Freddie Mac from passing through the cost of these allocations to the originators of mortgage loans that we purchase or securitize, and in March 2015 FHFA issued a final rule continuing this rule. In the first quarter of 2015, our new business purchases totaled $124.0 billion, which resulted in our recording $52 million as an expense in our condensed consolidated statements of operations and comprehensive income. We expect to allocate these funds, plus additional amounts to be accrued based on our new business purchases in subsequent quarters of 2015, in February 2016. See “Business—Our Charter and Regulation of Our Activities—The GSE Act—Affordable Housing Allocations” in our 2014 Form 10-K for more information regarding these allocations.
2014 Housing Goals Performance
We are subject to housing goals, which establish specified requirements for our mortgage acquisitions relating to affordability or location. Our single-family performance is measured against the lower of benchmarks established by FHFA or goals-qualifying originations in the primary mortgage market. Multifamily goals are established as a number of units to be financed.
For 2014, we believe we met all of our single-family benchmarks with the exception of the very low-income families home purchase goal. We believe we also met both of our 2014 multifamily goals. Final performance results will be calculated and published by FHFA after the release in the fall of 2015 of data reported by primary market originators under the Home Mortgage Disclosure Act (“HMDA”). To determine whether we met our very low-income families home purchase goal, FHFA will compare our performance with that of the market. We will be in compliance with the single-family very low-income families home purchase goal if we meet the market share measure. See “Business—Our Charter and Regulation of Our Activities—The GSE Act—Housing Goals and Duty to Serve Undeserved Markets—Housing Goals for 2012 to 2014” in our 2014 Form 10-K for a more detailed discussion of our housing goals.
Dodd-Frank Act—FHFA Rule Regarding Stress Testing
Pursuant to an FHFA rule issued in 2013 implementing a provision of the Dodd-Frank Act, we are required to conduct an annual stress test, based on our data as of September 30, using three different scenarios of financial conditions provided by FHFA: baseline, adverse and severely adverse. As required by the rule, we published our most recent stress test results for the severely adverse scenario on our Web site on April 30, 2015.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the condensed consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 1, Summary of Significant Accounting Policies” in this report and in our 2014 Form 10-K.
We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors. See “Risk Factors” in our 2014 Form 10-K for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified three of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of

16



reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting policies and estimates are as follows:
•    Fair Value Measurement;
•    Total Loss Reserves; and
•    Deferred Tax Assets.
See “MD&A—Critical Accounting Policies and Estimates” in our 2014 Form 10-K for a discussion of these critical accounting policies and estimates.
CONSOLIDATED RESULTS OF OPERATIONS
This section provides a discussion of our condensed consolidated results of operations for the periods indicated and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Table 3 displays a summary of our condensed consolidated results of operations for the periods indicated.
Table 3: Summary of Condensed Consolidated Results of Operations
 
For the Three Months
 
Ended March 31,
 
2015
 
2014
 
Variance
 
(Dollars in millions)
Net interest income
$
5,067

 
$
4,738

 
$
329

Fee and other income
308

 
4,355

 
(4,047
)
Net revenues
5,375

 
9,093

 
(3,718
)
Investment gains, net
342

 
95

 
247

Fair value losses, net
(1,919
)
 
(1,190
)
 
(729
)
Administrative expenses
(723
)
 
(672
)
 
(51
)
Credit-related income
 
 
 
 
 
Benefit for credit losses
533

 
774

 
(241
)
Foreclosed property (expense) income
(473
)
 
262

 
(735
)
Total credit-related income
60

 
1,036

 
(976
)
Other non-interest expenses(1)
(377
)
 
(453
)
 
76

Income before federal income taxes
2,758

 
7,909

 
(5,151
)
Provision for federal income taxes
(870
)
 
(2,584
)
 
1,714

Net income attributable to Fannie Mae
$
1,888

 
$
5,325

 
$
(3,437
)
Total comprehensive income attributable to Fannie Mae
$
1,796

 
$
5,697

 
$
(3,901
)
__________
(1) 
Consists of TCCA fees, debt extinguishment gains, net, and other expenses, net.
Net Interest Income
We currently have two primary sources of net interest income: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties, which we refer to as mortgage loans of consolidated trusts; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Table 4 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities for the periods indicated. For most components of the average balances, we use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Table 5 displays the change in our net interest income between periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.

17



Table 4: Analysis of Net Interest Income and Yield
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/Paid
 
(Dollars in millions)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
271,127

 
$
2,422

 
3.57
%
 
$
296,018

 
$
2,634

 
3.56
%
Mortgage loans of consolidated trusts
2,783,994

 
24,622

 
3.54
 
 
2,771,950

 
25,954

 
3.75
 
Total mortgage loans(1)
3,055,121

 
27,044

 
3.54
 
 
3,067,968

 
28,588

 
3.73
 
Mortgage-related securities
121,734

 
1,426

 
4.69
 
 
157,595

 
1,819

 
4.62
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(83,587
)
 
(947
)
 
4.53
 
 
(107,798
)
 
(1,258
)
 
4.67
 
Total mortgage-related securities, net
38,147

 
479

 
5.02
 
 
49,797

 
561

 
4.51
 
Non-mortgage securities(2)
43,941

 
12

 
0.11
 
 
33,626

 
6

 
0.07
 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
33,409

 
12

 
0.14
 
 
33,395

 
5

 
0.06
 
Advances to lenders
4,001

 
21

 
2.10
 
 
3,213

 
19

 
2.37
 
Total interest-earning assets
$
3,174,619

 
$
27,568

 
3.47
%
 
$
3,187,999

 
$
29,179

 
3.66
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$
98,043

 
$
29

 
0.12
%
 
$
62,931

 
$
20

 
0.13
%
Long-term debt
358,182

 
1,957

 
2.19
 
 
442,368

 
2,345

 
2.12
 
Total short-term and long-term funding debt
456,225

 
1,986

 
1.74
 
 
505,299

 
2,365

 
1.87
 
Debt securities of consolidated trusts
2,849,447

 
21,462

 
3.01
 
 
2,822,418

 
23,334

 
3.31
 
Elimination of Fannie Mae MBS held in retained mortgage portfolio
(83,587
)
 
(947
)
 
4.53
 
 
(107,798
)
 
(1,258
)
 
4.67
 
Total debt securities of consolidated trusts held by third parties
2,765,860

 
20,515

 
2.97
 
 
2,714,620

 
22,076

 
3.25
 
Total interest-bearing liabilities
$
3,222,085

 
$
22,501

 
2.79
%
 
$
3,219,919

 
$
24,441

 
3.04
%
Net interest income/net interest yield
 
 
$
5,067

 
0.64
%
 
 
 
$
4,738

 
0.59
%

 
As of March 31,
 
2015
 
2014
Selected benchmark interest rates
 
 
 
 
 
3-month LIBOR
0.27
%
 
0.23
%
2-year swap rate
0.81
 
 
0.55
 
5-year swap rate
1.53
 
 
1.80
 
10-year swap rate
2.02
 
 
2.84
 
30-year Fannie Mae MBS par coupon rate
2.65
 
 
3.44
 
__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Interest income not recognized for loans on nonaccrual status was $412 million for the first quarter of 2015 compared with $527 million for the first quarter of 2014. Effective January 1, 2015, we changed our policy for the treatment of interest previously accrued, but not collected, at the date loans are placed on nonaccrual status. See “Note 1, Summary of Significant Accounting Policies” for information on this policy change.
(2) 
Includes cash equivalents.

18



Table 5: Rate/Volume Analysis of Changes in Net Interest Income
  
For the Three Months Ended
  
March 31, 2015 vs. 2014
  
Total
 
Variance Due to:(1)
  
Variance
 
Volume
 
Rate
 
(Dollars in millions) 
Interest income:
 
 
 
 
 
Mortgage loans of Fannie Mae
$
(212
)
 
$
(222
)
 
$
10

Mortgage loans of consolidated trusts
(1,332
)
 
112

 
(1,444
)
Total mortgage loans
(1,544
)
 
(110
)
 
(1,434
)
Total mortgage-related securities, net
(82
)
 
(145
)
 
63

Non-mortgage securities(2)
6

 
2

 
4

Federal funds sold and securities purchased under agreements to resell or similar arrangements
7

 

 
7

Advances to lenders
2

 
4

 
(2
)
Total interest income
$
(1,611
)
 
$
(249
)
 
$
(1,362
)
Interest expense:
 
 
 
 
 
Short-term debt
9

 
10

 
(1
)
Long-term debt
(388
)
 
(458
)
 
70

Total short-term and long-term funding debt
(379
)
 
(448
)
 
69

Total debt securities of consolidated trusts held by third parties
(1,561
)
 
497

 
(2,058
)
Total interest expense
$
(1,940
)
 
$
49

 
$
(1,989
)
Net interest income
$
329

 
$
(298
)
 
$
627

__________
(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 and net interest yield increased in the first quarter of 2015 compared with the first quarter of 2014, primarily due to an increase in net amortization income as a result of an increase in prepayments on mortgage loans held by consolidated trusts. Higher guaranty fee income also contributed to an increase in net interest income as loans with higher guaranty fees have become a larger part of our guaranty book of business. We recognize almost all of our guaranty fee revenue in net interest income due to the consolidation of the substantial majority of loans underlying our MBS trusts on our balance sheet. The increase in net interest income was partially offset by a decline in the average balance of our retained mortgage portfolio, as we continued to reduce this portfolio pursuant to the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s additional portfolio cap. The average balance of our retained mortgage portfolio was 13% lower in the first quarter of 2015 than in the first quarter of 2014. See “Business Segment Results—The Capital Markets Group’s Mortgage Portfolio” for more information about our retained mortgage portfolio.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. Fee and other income decreased in the first quarter of 2015 compared with the first quarter of 2014 due to revenue of $4.1 billion recognized in the first quarter of 2014 as a result of settlement agreements resolving certain lawsuits relating to PLS sold to us.
Investment Gains, Net
Investment gains, net include gains and losses recognized from the sale of available-for-sale (“AFS”) securities, gains and losses recognized on the securitization of loans and securities from our retained mortgage portfolio and net other-than-temporary impairments recognized on our investments. Investment gains increased in the first quarter of 2015 compared with the first quarter of 2014 primarily due to an increase in the amount of non-agency mortgage-related securities sold in the first quarter of 2015 compared with the amount of such securities that were sold in the first quarter of 2014.

19



Fair Value Losses, Net
Table 6 displays the components of our fair value gains and losses.
Table 6: Fair Value Losses, Net
 
For the Three Months Ended March 31,
 
2015
 
2014
 
(Dollars in millions)
Risk management derivatives fair value losses attributable to:
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(229
)
 
$
(199
)
Net change in fair value during the period
(1,285
)
 
(741
)
Total risk management derivatives fair value losses, net
(1,514
)
 
(940
)
Mortgage commitment derivatives fair value losses, net
(239
)
 
(345
)
Total derivatives fair value losses, net
(1,753
)
 
(1,285
)
Trading securities gains, net
36

 
145

Other, net(1)
(202
)
 
(50
)
Fair value losses, net
$
(1,919
)
 
$
(1,190
)
__________
(1) 
Consists of debt fair value gains (losses), net, which includes gains (losses) on CAS; debt foreign exchange gains (losses), net; and mortgage loans fair value gains (losses), net.
Risk Management Derivatives Fair Value Losses, Net
Risk management derivative instruments are an integral part of our interest rate risk management strategy. We supplement our issuance of debt securities with derivative instruments to further reduce interest rate risk. Risk management derivative fair value losses increased in the first quarter of 2015 compared with the first quarter of 2014 primarily as a result of larger declines in longer-term swap rates, which caused larger decreases in the fair value of our pay-fixed derivatives.
We present, by derivative instrument type, the fair value gains and losses, net on our derivatives for the three months ended March 31, 2015 and 2014 in “Note 9, Derivative Instruments.”
Mortgage Commitment Derivatives Fair Value Losses, Net
We recognized fair value losses on our mortgage commitments in the first quarter of 2015 and 2014 primarily due to losses on commitments to sell mortgage-related securities driven by an increase in prices as interest rates decreased during the commitment periods.
Credit-Related Income
We refer to our benefit (expense) for loan losses and guaranty losses collectively as our “benefit for credit losses.” Credit-related income consists of our benefit for credit losses and foreclosed property expense (income).
Benefit for Credit Losses
Table 7 displays the components of our total loss reserves and our total fair value losses previously recognized on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets. Because these fair value losses lowered our recorded loan balances, we have fewer inherent losses in our guaranty book of business and consequently require lower total loss reserves. For these reasons, we consider these fair value losses as an “effective reserve,” apart from our total loss reserves, to the extent that we expect to realize these amounts as credit losses on the acquired loans in the future. The fair value losses shown in Table 7 represent credit losses we expect to realize in the future or that will eventually be recovered, either through net interest income for loans that cure or through foreclosed property income for loans where the sale of the collateral exceeds our recorded investment in the loan. We exclude these fair value losses from our credit loss calculation as described in “Credit Loss Performance Metrics.”

20



Table 7: Total Loss Reserves
 
As of
 
March 31,
2015
 
December 31, 2014
 
 
(Dollars in millions)
 
Allowance for loan losses
 
$
31,820

 
 
 
$
35,541

 
Reserve for guaranty losses
 
678

 
 
 
1,246

 
Combined loss reserves
 
32,498

 
 
 
36,787

 
Other(1)
 
375

 
 
 
1,386

 
Total loss reserves
 
32,873

 
 
 
38,173

 
Fair value losses previously recognized on acquired credit-impaired loans(2)
 
9,440

 
 
 
9,864

 
Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans
 
$
42,313

 
 
 
$
48,037

 
__________
(1) 
Includes allowances for accrued interest receivable and preforeclosure property taxes and insurance receivable. Effective January 1, 2015, we charged off accrued interest receivable associated with loans on nonaccrual status and eliminated the related allowance in connection with the our change in accounting policy related to the treatment of interest previously accrued, but not collected, at the date that loans are placed on nonaccrual status. See “Note 1, Summary of Significant Accounting Policies” for more information on this policy change.
(2) 
Represents the fair value losses on loans purchased out of unconsolidated MBS trusts reflected in our condensed consolidated balance sheets.
Table 8 displays changes in our combined loss reserves.
Table 8: Changes in Combined Loss Reserves
 
For the Three Months Ended March 31,
 
2015
 
2014
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
Beginning balance
$
36,787

 
$
45,295

Benefit for credit losses
(533
)
 
(774
)
Charge-offs(1)
(5,389
)
 
(1,627
)
Recoveries
622

 
392

Other(2)
1,011

 
145

Ending balance
$
32,498

 
$
43,431



21



 
 
As of
 
 
March 31,
2015
 
December 31, 2014
 
 
(Dollars in millions)
Allocation of combined loss reserves:
 
 
 
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
 
 
 
Single-family
 
 
$
32,157

 
 
 
$
36,383

 
Multifamily
 
 
341

 
 
 
404

 
       Total
 
 
$
32,498

 
 
 
$
36,787

 
Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:
 
 
 
 
 
 
 
 
Single-family
 
 
1.13
%
 
 
 
1.28
%
 
Multifamily
 
 
0.16

 
 
 
0.20

 
Combined loss reserves as a percentage of:
 
 
 
 
 
 
 
 
Total guaranty book of business
 
 
1.07
%
 
 
 
1.20
%
 
Recorded investment in nonaccrual loans
 
 
57.21

 
 
 
56.63

 
_________
(1) 
Includes charge-offs of (1) $1.8 billion in loans held for investment and $724 million in preforeclosure property taxes and insurance receivable in connection with our adoption of the Advisory Bulletin and (2) $1.1 billion in accrued interest receivable in connection with our adoption of a change in accounting principle related to the treatment of interest previously accrued, but not collected, at the date that loans are placed on nonaccrual status. See “Note 1, Summary of Significant Accounting Policies” for more information on this policy change.
(2) 
Amounts represent changes in other loss reserves which are offset by amounts reflected in benefit for credit losses, charge-offs and recoveries.
The amount of our benefit or provision for credit losses varies from period to period based on changes in actual and expected
home prices, borrower payment behavior, the types and volumes of loss mitigation activities and foreclosures completed, and
actual and estimated recoveries from our mortgage insurer counterparties. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” for information on mortgage insurers. In addition, our benefit or provision for credit losses and our loss reserves can be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses.
We recognized a benefit for credit losses in the first quarter of 2015 primarily due to an increase in actual and forecasted home prices, a decline in actual and projected interest rates and the liquidation of mortgage loans. Our approach to the adoption of the charge-off provisions of the Advisory Bulletin on January 1, 2015 had no impact on the amount of benefit for credit losses that we recognized in the first quarter of 2015.
We recognized a benefit for credit losses in the first quarter of 2014 primarily due to a decline in mortgage interest rates as well as an increase in home prices.
We discuss our expectations regarding our future loss reserves in “Executive Summary—Outlook—Loss Reserves.”

22



Troubled Debt Restructurings and Nonaccrual Loans
Table 9 displays the composition of loans restructured in a troubled debt restructuring (“TDR”) that are on accrual status and loans on nonaccrual status. The table includes our recorded investment in held-for-investment and held-for-sale mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
Table 9: Troubled Debt Restructurings and Nonaccrual Loans
 
 
As of
 
 
March 31,
2015
 
December 31, 2014
 
(Dollars in millions)
TDRs on accrual status:
 
 
 
 
 
 
 
Single-family
 
$
145,784

 
 
 
$
144,649

 
Multifamily
 
638

 
 
 
645

 
Total TDRs on accrual status
 
$
146,422

 
 
 
$
145,294

 
Nonaccrual loans:
 
 
 
 
 
 
 
Single-family
 
$
55,997

 
 
 
$
64,136

 
Multifamily
 
807

 
 
 
823

 
Total nonaccrual loans
 
$
56,804

 
 
 
$
64,959

 
Accruing on-balance sheet loans past due 90 days or more(1)
 
$
569

 
 
 
$
585

 
 
For the Three Months
 
 
Ended March 31,
 
 
 
2015
 
 
 
2014
 
 
 
(Dollars in millions)
 
Interest related to on-balance sheet TDRs and nonaccrual loans:
 
 
 
 
 
 
 
Interest income forgone(2)
 
$
1,666

 
 
 
$
1,760

 
Interest income recognized for the period(3)
 
1,323

 
 
 
1,369

 
__________
(1) 
Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consists of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default.
(2) 
Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms.
(3) 
Represents interest income recognized during the period for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans.
Foreclosed Property (Expense) Income
We recognized foreclosed property expense in the first quarter of 2015 compared with foreclosed property income in the first quarter of 2014. This change was due to income recognized as a result of resolutions of representation and warranty matters in the first quarter of 2014. In addition, we incurred more expenses related to our foreclosed properties and recognized lower income from outstanding deferred payment obligations from mortgage insurers in the first quarter of 2015 compared with the first quarter of 2014.
Credit Loss Performance Metrics
Our credit-related income should be considered in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within GAAP and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonaccrual loans and TDRs, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses. We believe that credit loss performance

23



metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our credit performance on a more consistent basis among periods. Table 10 displays the components of our credit loss performance metrics as well as our single-family and multifamily initial charge-off severity rates.
Table 10: Credit Loss Performance Metrics
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
(Dollars in millions) 
Charge-offs, net of recoveries
$
1,212

 
15.9
bps
 
$
1,235

 
16.0

bps
Adoption of Advisory Bulletin and change in accounting principle(2)
3,555

 
46.6
 
 

 

 
Foreclosed property expense (income)
473

 
6.2
 
 
(262
)
 
(3.4
)
 
Credit losses including the effect of fair value losses on acquired credit-impaired loans
5,240

 
68.7
 
 
973

 
12.6

 
Plus: Impact of acquired credit-impaired loans on charge offs and foreclosed property expense (income)(3)
136

 
1.8
 
 
160

 
2.1

 
Credit losses and credit loss ratio
$
5,376

 
70.5
bps
 
$
1,133

 
14.7

bps
Credit losses attributable to:
 
 
 
 
 
 
 
 
 
Single-family
$
5,373

 
 
 
 
$
1,127

 
 
 
Multifamily
3

 
 
 
 
6

 
 
 
     Total
$
5,376

 
 
 
 
$
1,133

 
 
 
Single-family initial charge-off severity rate(4)
 
 
17.99
%
 
 
 
20.31

%
Multifamily initial charge-off severity rate(4)
 
 
23.60
%
 
 
 
29.91

%
__________
(1) 
Basis points are based on the annualized amount for each line item presented divided by the average guaranty book of business during the period.
(2) 
Includes charge-offs of (1) $1.8 billion in loans held for investment and $724 million in preforeclosure property taxes and insurance receivable in connection with our adoption of the Advisory Bulletin and (2) $1.1 billion in accrued interest receivable in connection with our adoption of a change in accounting principle related to the treatment of interest previously accrued, but not collected, at the date that loans are placed on nonaccrual status. See “Note 1, Summary of Significant Accounting Policies” for more information on this policy change.
(3) 
Includes fair value losses from acquired credit-impaired loans.
(4) 
Single-family and multifamily rates exclude fair value losses on credit-impaired loans acquired from MBS trusts and any costs, gains or losses associated with REO after initial acquisition through final disposition. Single-family rate excludes charge-offs prior to foreclosure and other liquidations, short sales and third-party sales. Multifamily rate is net of risk-sharing agreements.
Credit losses and our credit loss ratio increased in the first quarter of 2015 compared with the first quarter of 2014 primarily due to our adoption of the Advisory Bulletin beginning on January 1, 2015 as well as a change in our accounting policy for nonaccrual loans.
We discuss our expectations regarding our future credit losses in “Executive Summary—Outlook—Credit Losses.”
Other Non-Interest Expenses
Other non-interest expenses decreased in the first quarter of 2015 compared with the first quarter of 2014 primarily due to higher gains from the sale of partnership investments. These gains were partially offset by an increase in expenses related to TCCA fees in the first quarter of 2015 compared with the first quarter of 2014 due to an increase in the percentage of loans in our single-family guaranty book of business subject to TCCA fees. We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase in the future.

24



BUSINESS SEGMENT RESULTS
Results of our three business segments are intended to reflect each segment as if it were a stand-alone business. Under our segment reporting structure, the sum of the results for our three business segments does not equal our condensed consolidated results of operations as we separate the activity related to our consolidated trusts from the results generated by our three segments. In addition, because we apply accounting methods that differ from our condensed consolidated results for segment reporting purposes, we include an eliminations/adjustments category to reconcile our business segment results and the activity related to our consolidated trusts to our condensed consolidated results of operations. We describe the management reporting and allocation process used to generate our segment results in “Note 13, Segment Reporting” in our 2014 Form 10-K.
In this section, we summarize our segment results for the first quarter of 2015 and 2014 in the tables below and provide a comparative discussion of these results. This section should be read together with our comparative discussion of our condensed consolidated results of operations in “Consolidated Results of Operations.” See “Note 11, Segment Reporting” for a reconciliation of our segment results to our condensed consolidated results.
Single-Family Business Results
Table 11 displays the financial results of our Single-Family business for the periods indicated. For a discussion of Single-Family credit risk management, including information on serious delinquency rates and loan workouts, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management.” The primary source of revenue for our Single-Family business is guaranty fee income. Other items that impact income or loss primarily include credit-related (expense) income, TCCA fees and administrative expenses.
Table 11: Single-Family Business Results
 
For the Three Months Ended March 31,
 
2015
 
 
2014
 
 
Variance
 
(Dollars in millions)
Guaranty fee income(1)
$
3,040

 
 
$
2,870

 
 
$
170

Credit-related (expense) income(2)
(7
)
 
 
1,002

 
 
(1,009
)
TCCA fees(1)
(382
)
 
 
(322
)
 
 
(60
)
Other expenses(3)
(539
)
 
 
(514
)
 
 
(25
)
Income before federal income taxes
2,112

 
 
3,036

 
 
(924
)
Provision for federal income taxes
(581
)
 
 
(927
)
 
 
346

Net income attributable to Fannie Mae
$
1,531

 
 
$
2,109

 
 
$
(578
)
Other key performance data:
 
 
 
 
 
 
 
Securitization Activity/New Business
 
 
 
 
 
 
 
Single-family Fannie Mae MBS issuances
$
110,994

 
 
$
76,972

 
 
 
Credit Guaranty Activity
 
 
 
 
 
 
 
Average single-family guaranty book of business(4)
$
2,845,125

 
 
$
2,884,653

 
 
 
Single-family effective guaranty fee rate (in basis points)(1)(5)
42.7

 
 
39.8

 
 
 
Single-family average charged guaranty fee on new acquisitions (in basis points)(1)(6)
61.2

 
 
63.0

 
 
 
Single-family serious delinquency rate, at end of period(7)
1.78

%
 
2.19

%
 
 
Market
 
 
 
 
 
 
 
Single-family mortgage debt outstanding, at end of period (total U.S. market)(8)
$
9,862,066

 
 
$
9,851,200

 
 
 
30-year mortgage rate, at end of period(9)
3.69

%
 
4.40

%
 
 
__________
(1) 
Includes the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA, the incremental revenue from which must be remitted to Treasury. The resulting revenue is included in guaranty fee income and the expense is recognized as “TCCA fees.”
(2) 
Consists of the benefit for credit losses and foreclosed property (expense) income.

25



(3) 
Consists of net interest income (loss), investment gains (losses), net, fair value (losses) gains, net, (losses) gains from partnership investments, fee and other income (expense), administrative expenses and other (expenses) income.
(4) 
Our single-family guaranty book of business consists of (a) single-family mortgage loans of Fannie Mae, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(5) 
Calculated based on annualized Single-Family segment guaranty fee income divided by the average single-family guaranty book of business, expressed in basis points.
(6) 
Calculated based on the average contractual fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments ratably over an estimated average life, expressed in basis points.
(7) 
Calculated based on the number of single-family conventional loans that are 90 days or more past due or in the foreclosure process, divided by the number of loans in our single-family conventional guaranty book of business.
(8) 
Information labeled as of March 31, 2015 is as of December 31, 2014 and is based on the Federal Reserve’s March 2015 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for single-family residences. Prior period amounts may have been changed to reflect revised historical data from the Federal Reserve.
(9) 
Based on Freddie Mac’s Primary Mortgage Market Survey® rate for the last week in the period, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender.
Pre-tax income decreased in the first quarter of 2015 compared with the first quarter of 2014 primarily due to credit-related expense in the first quarter of 2015 compared with credit-related income in the first quarter of 2014.
We recognized single-family credit-related expense in the first quarter of 2015 compared with credit-related income in the first quarter of 2014 due to income recognized as a result of resolutions of representation and warranty matters in the first quarter of 2014. In addition, we incurred more expenses related to our foreclosed properties and recognized lower income from outstanding deferred payment obligations from mortgage insurers in the first quarter of 2015 compared with the first quarter of 2014. See “Consolidated Results of Operations—Credit-Related Income” for more information on the drivers of our credit-related income.
Guaranty fee income and our effective guaranty fee rate increased in the first quarter of 2015 compared with the first quarter of 2014 as loans with higher guaranty fees have become a larger part of our single-family guaranty book of business primarily due to the cumulative impact of guaranty fee price increases implemented in 2012.
TCCA fees increased in the first quarter of 2015 compared with the first quarter of 2014, as single-family loans acquired since the implementation of the TCCA-related guaranty fee increase constituted a larger portion of our single-family guaranty book of business in the first quarter of 2015.
Multifamily Business Results
Multifamily business results primarily reflect our multifamily guaranty business. Our multifamily business results also include activity relating to our low-income housing tax credit (“LIHTC”) investments and equity investments. Although we are not currently making new LIHTC or equity investments, we continue to make contractually required contributions for our legacy investments. Activity from multifamily products is also reflected in the Capital Markets group results, which include net interest income related to multifamily loans and securities held in our retained mortgage portfolio, gains and losses from the sale of multifamily Fannie Mae MBS, mortgage loans and re-securitizations, and other miscellaneous income.
Table 12 displays the financial results of our Multifamily business for the periods indicated. The primary sources of revenue for our Multifamily business are guaranty fee income and fee and other income, which includes yield maintenance income. Other items that affect income or loss primarily include credit-related income and administrative expenses.

26



Table 12: Multifamily Business Results
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Variance
 
(Dollars in millions)
Guaranty fee income
$
340

 
$
311

 
$
29

 
Fee and other income
51

 
24

 
27

 
Gains from partnership investments(1)
212

 
45

 
167

 
Credit-related income(2)
67

 
34

 
33

 
Other expenses(3)
(117
)
 
(93
)
 
(24
)
 
Income before federal income taxes
553

 
321

 
232

 
(Provision) benefit for federal income taxes
(70
)
 
9

 
(79
)
 
Net income attributable to Fannie Mae
$
483

 
$
330

 
$
153

 
Other key performance data:
 
 
 
 
 
 
Securitization Activity/New Business
 
 
 
 
 
 
Multifamily new business volume(4)
$
10,364

 
$
3,520

 
 
 
Multifamily units financed from new business volume
134,000

 
72,000

 
 
 
Multifamily Fannie Mae MBS issuances(5)
$
11,418

 
$
4,879

 
 
 
Multifamily Fannie Mae structured securities issuances (issued by Capital Markets group)
$
3,434

 
$
3,262

 
 
 
Multifamily Fannie Mae MBS outstanding, at end of period(6)
$
173,507

 
$
150,693

 
 
 
Credit Guaranty Activity
 
 
 
 
 
 
Average multifamily guaranty book of business(7)
$
205,003

 
$
199,829

 
 
 
Multifamily effective guaranty fee rate (in basis points)(8)
66.3

 
62.3

 
 
 
Multifamily credit loss ratio (in basis points)(9)
0.6

 
1.2

 
 
 
Multifamily serious delinquency rate, at end of period
0.09

%
0.10

%
 
 
Percentage of multifamily guaranty book of business with credit enhancement, at end of period
93

%
91

%
 
 
Fannie Mae percentage of total multifamily mortgage debt outstanding, at end of period(10)
19

%
20

%
 
 
Portfolio Data
 
 
 
 
 
 
Average Fannie Mae multifamily mortgage loans and Fannie Mae MBS in Capital Markets group’s portfolio(11)
$
39,801

 
$
56,655

 
 
 
Additional net interest income and yield maintenance income earned on Fannie Mae multifamily mortgage loans and MBS (included in Capital Markets group’s results)(12)
$
170

 
$
167

 
 
 
__________
(1) 
Gains from partnership investments are included in other expenses in our condensed consolidated statements of operations and comprehensive income. Gains from partnership investments are reported using the equity method of accounting. As a result, net income attributable to noncontrolling interest from partnership investments is not included in income for the Multifamily segment.
(2) 
Consists of the benefit for credit losses and foreclosed property (expense) income.
(3) 
Consists of net interest income (loss), investment gains (losses), net, administrative expenses and other (expenses) income.
(4) 
Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations) and multifamily loans purchased during the period.
(5) 
Reflects unpaid principal balance of multifamily Fannie Mae MBS issued during the period. Includes (a) issuances of new MBS and (b) Fannie Mae portfolio securitization transactions of $1.1 billion and $1.4 billion for the three months ended March 31, 2015 and 2014, respectively.
(6) 
Includes $16.4 billion and $20.5 billion of Fannie Mae multifamily MBS held in the retained mortgage portfolio, the vast majority of which have been consolidated to loans in our condensed consolidated balance sheets, as of March 31, 2015 and 2014, respectively.

27



(7) 
Our Multifamily guaranty book of business consists of (a) multifamily mortgage loans of Fannie Mae, (b) multifamily mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on multifamily mortgage assets. It excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(8) 
Calculated based on annualized Multifamily segment guaranty fee income divided by the average multifamily guaranty book of business, expressed in basis points.
(9) 
Calculated based on annualized Multifamily segment credit losses divided by the average multifamily guaranty book of business, expressed in basis points.
(10) 
Includes mortgage loans and Fannie Mae MBS guaranteed by the Multifamily segment. Information labeled as of March 31, 2015 is as of December 31, 2014 and is based on the Federal Reserve’s March 2015 mortgage debt outstanding release, the latest date for which the Federal Reserve has estimated mortgage debt outstanding for multifamily residences. Prior period amounts may have been changed to reflect revised historical data from the Federal Reserve.
(11) 
Based on unpaid principal balance.
(12) 
Interest expense estimate is based on allocated duration-matched funding costs. Net interest income was reduced by guaranty fees allocated to Multifamily from the Capital Markets group on multifamily loans in our retained mortgage portfolio. Yield maintenance income represents the investor portion of fees earned as a result of prepayments of multifamily loans and MBS in our retained mortgage portfolio. A portion of yield maintenance income is reported in multifamily business results to the extent attributable to our multifamily guaranty business.
Pre-tax income increased in the first quarter of 2015 compared with the first quarter of 2014 primarily due to an increase in gains on partnership investments, credit-related income and guaranty fee income.
Guaranty fee income increased in the first quarter of 2015 compared with the first quarter of 2014 as loans with higher guaranty fees have become a larger part of our multifamily guaranty book of business, while loans with lower guaranty fees continue to liquidate.
Credit-related income increased in the first quarter of 2015 compared with the first quarter of 2014 primarily driven by improvements in property valuations and loss severity trends.
Gains from partnership investments increased in the first quarter of 2015 compared with the first quarter of 2014 as a result of sales of investments in markets with strong multifamily fundamentals.
Capital Markets Group Results
Table 13 displays the financial results of our Capital Markets group for the periods indicated. Following the table we discuss the Capital Markets group’s financial results and describe the Capital Markets group’s retained mortgage portfolio. For a discussion of the debt issued by the Capital Markets group to fund its investment activities, see “Liquidity and Capital Management.” For a discussion of the derivative instruments that the Capital Markets group uses to manage interest rate risk, see “Risk Management—Market Risk Management, Including Interest Rate Risk Management—Measurement of Interest Rate Risk” in our 2014 Form 10-K and “Note 9, Derivative Instruments” in this report and our 2014 Form 10-K. The primary sources of revenue for our Capital Markets group are net interest income and fee and other income. Other items that impact income or loss primarily include fair value gains and losses, investment gains and losses, as well as allocated guaranty fee expense and administrative expenses.

28



Table 13: Capital Markets Group Results
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Variance
 
(Dollars in millions)
Net interest income(1)
$
1,602

 
 
 
$
1,830

 
 
 
$
(228
)
 
Investment gains, net(2)
1,509

 
 
 
1,285

 
 
 
224

 
Fair value losses, net(3)
(1,970
)
 
 
 
(1,337
)
 
 
 
(633
)
 
Fee and other income
55

 
 
 
4,133

 
 
 
(4,078
)
 
Other expenses(4)
(378
)
 
 
 
(410
)
 
 
 
32

 
Income before federal income taxes
818

 
 
 
5,501

 
 
 
(4,683
)
 
Provision for federal income taxes
(219
)
 
 
 
(1,666
)
 
 
 
1,447

 
Net income attributable to Fannie Mae
$
599

 
 
 
$
3,835

 
 
 
$
(3,236
)
 
__________
(1) 
Includes contractual interest income, excluding recoveries, on nonaccrual loans received from the Single-Family segment of $559 million and $743 million for the three months ended March 31, 2015 and 2014, respectively. The Capital Markets group’s net interest income is reported based on the mortgage-related assets held in the segment’s retained mortgage portfolio and excludes interest income on mortgage-related assets held by consolidated MBS trusts that are owned by third parties and the interest expense on the corresponding debt of such trusts.
(2) 
We include the securities that we own regardless of whether the trust has been consolidated in reporting of gains and losses on securitizations and sales of available-for-sale securities.
(3) 
Includes fair value gains or losses on derivatives and trading securities that we own, regardless of whether the trust has been consolidated.
(4) 
Includes allocated guaranty fee expense, debt extinguishment gains, net, administrative expenses, and other expenses. Gains or losses related to the extinguishment of debt issued by consolidated trusts are excluded from the Capital Markets group’s results because purchases of securities are recognized as such.
Pre-tax income decreased in the first quarter of 2015 compared with the first quarter of 2014 primarily due to lower fee and other income and net interest income, as well as higher fair value losses in the first quarter of 2015.
Fee and other income decreased in the first quarter of 2015 compared with the first quarter of 2014 due to revenue of $4.1 billion recognized in the first quarter of 2014 as a result of settlement agreements resolving certain lawsuits relating to PLS sold to us.
Investment gains increased in the first quarter of 2015 compared with the first quarter of 2014 primarily due to an increase in the amount of non-agency mortgage-related securities sold in the first quarter of 2015 compared with the amount of such securities that were sold in the first quarter of 2014.
Fair value losses in the first quarter of 2015 were primarily due to fair value losses on our risk management derivatives. The derivatives fair value losses that are reported for the Capital Markets group are consistent with the losses reported in our condensed consolidated statements of operations and comprehensive income. We discuss our derivatives fair value losses in “Consolidated Results of Operations—Fair Value Losses, Net.”
The decrease in net interest income in the first quarter of 2015 compared with the first quarter of 2014 was primarily due to a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio pursuant to the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s additional portfolio cap.
We supplement our issuance of debt securities with derivative instruments to further reduce interest rate risk. The effect of these derivatives, in particular the periodic net interest expense accruals on interest rate swaps, is not reflected in the Capital Markets group’s net interest income but is included in our results as a component of “Fair value losses, net” and is displayed in “Table 6: Fair Value Losses, Net.”
The Capital Markets Group’s Mortgage Portfolio
The Capital Markets group’s mortgage portfolio, which we also refer to as our retained mortgage portfolio, consists of mortgage loans and mortgage-related securities that we own. Mortgage-related securities held by the Capital Markets group 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. The portion of assets held by consolidated MBS trusts

29



that back mortgage-related securities owned by third parties are not included in the Capital Markets group’s mortgage portfolio.
The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury. By December 31 of each year, we are required to reduce our mortgage assets to 85% of the maximum allowable amount that we were permitted to own as of December 31 of the immediately preceding calendar year, until the amount of our mortgage assets reaches $250 billion in 2018. Under the agreement, the maximum allowable amount of mortgage assets we are permitted to own as of December 31, 2015 is $399.2 billion.
In 2014, FHFA requested that we submit a revised portfolio plan outlining how we will reduce the portfolio each year to 90% of the annual limit under our senior preferred stock purchase agreement with Treasury. FHFA’s request noted that we may seek FHFA permission to increase this cap to 95% of the annual limit under our senior preferred stock purchase agreement with Treasury upon written request and with a documented basis for exception, such as changed market conditions. Accordingly, under our revised portfolio plan, we plan to reduce our mortgage portfolio to no more than $359.3 billion as of December 31, 2015, in compliance with both our senior preferred stock purchase agreement with Treasury and FHFA’s request.
As we continue to reduce the size of our retained mortgage portfolio, our revenues generated by our retained mortgage portfolio will continue to decrease. As of March 31, 2015, we owned $411.7 billion in mortgage assets, compared with $413.3 billion as of December 31, 2014. For additional information on the terms of the senior preferred stock purchase agreement with Treasury, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2014 Form 10-K.
Table 14 displays our Capital Markets group’s mortgage portfolio activity based on unpaid principal balance.
Table 14: Capital Markets Group’s Mortgage Portfolio Activity
  
For the Three Months
  
Ended March 31,
 
2015
 
2014
 
(Dollars in millions)
Mortgage loans:
 
 
 
Beginning balance
$
285,610

 
$
314,664

Purchases
48,788

 
30,900

Securitizations(1)
(42,757
)
 
(26,543
)
Liquidations and sales(2)
(10,239
)
 
(13,032
)
Mortgage loans, ending balance
281,402

 
305,989

 
 
 
 
Mortgage securities:
 
 
 
Beginning balance
127,703

 
176,037

Purchases(3)
8,690

 
3,530

Securitizations(1)
42,757

 
26,543

Sales
(43,668
)
 
(37,242
)
Liquidations(2)
(5,200
)
 
(7,145
)
Mortgage securities, ending balance
130,282

 
161,723

Total Capital Markets group’s mortgage portfolio
$
411,684

 
$
467,712

__________
(1) 
Includes portfolio securitization transactions that do not qualify for sale treatment under GAAP.
(2) 
Includes scheduled repayments, prepayments, foreclosures, and lender repurchases.
(3) 
Includes purchases of Fannie Mae MBS issued by consolidated trusts.

30



Table 15 displays the composition of the unpaid principal balance of the Capital Markets group’s mortgage portfolio and our assessment of the liquidity of these assets. Our assessment is based on the liquidity within the markets in which the assets are traded, the issuers of the assets and the nature of the collateral underlying the assets. Our unsecuritized mortgage loans, PLS and other non-agency securities are considered less liquid. Fannie Mae securities that are collateralized by non-agency mortgage-related securities are also considered to be less liquid.
Table 15: Capital Markets Group’s Mortgage Portfolio Composition
 
As of
 
March 31, 2015
 
December 31, 2014
 
 
More Liquid
 
Less Liquid
 
Total
 
More Liquid
 
Less Liquid
 
Total
 
(Dollars in millions)
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family loans:
 
 
 
 
 
 
 
 
 
 
 
 
Government insured or guaranteed
 
$

 
$
35,855

 
$
35,855

 
$

 
$
36,442

 
$
36,442

Conventional
 

 
224,697

 
224,697

 

 
225,800

 
225,800

Total single-family loans
 

 
260,552

 
260,552

 

 
262,242

 
262,242

Multifamily loans:
 
 
 
 
 
 
 
 
 
 
 
 
Government insured or guaranteed
 

 
240

 
240

 

 
243

 
243

Conventional
 

 
20,610

 
20,610

 

 
23,125

 
23,125

Total multifamily loans
 

 
20,850

 
20,850

 

 
23,368

 
23,368

Total mortgage loans
 

 
281,402

 
281,402

 

 
285,610

 
285,610

Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
 
86,804

 
12,195

 
98,999

 
80,377

 
12,442

 
92,819

Freddie Mac
 
6,445

 

 
6,445

 
6,368

 

 
6,368

Ginnie Mae
 
596

 

 
596

 
572

 

 
572

Alt-A private-label securities
 

 
6,105

 
6,105

 

 
7,745

 
7,745

Subprime private-label securities
 

 
7,494

 
7,494

 

 
8,913

 
8,913

CMBS
 

 
3,646

 
3,646

 

 
3,686

 
3,686

Mortgage revenue bonds
 

 
4,025

 
4,025

 

 
4,556

 
4,556

Other mortgage-related securities
 

 
2,972

 
2,972

 

 
3,044

 
3,044

Total mortgage-related securities(1)
 
$
93,845

 
$
36,437

 
$
130,282

 
$
87,317

 
$
40,386

 
$
127,703

Total Capital Markets group’s mortgage portfolio
 
$
93,845

 
$
317,839

 
$
411,684

 
$
87,317

 
$
325,996

 
$
413,313

__________
(1) 
The fair value of these mortgage-related securities was $137.4 billion as of March 31, 2015 and $133.5 billion as of December 31, 2014.
The Capital Markets group’s mortgage portfolio decreased as of March 31, 2015 compared with December 31, 2014, as we reduce the size of our retained mortgage portfolio to comply with the requirement of our senior preferred stock purchase agreement with Treasury and FHFA’s request to further cap our portfolio.

31



The loans we purchased in the first quarter of 2015 included $3.9 billion in delinquent loans we purchased from our single-family MBS trusts. We expect to continue purchasing loans from MBS trusts as they become four or more consecutive monthly payments delinquent subject to market conditions, economic benefit, servicer capacity and other factors, including the limit on the amount of mortgage assets that we may own pursuant to the senior preferred stock purchase agreement and FHFA’s portfolio plan requirements. As a result of purchasing these loans, an increasing portion of the Capital Markets group’s mortgage portfolio is comprised of loans restructured in a TDR and nonaccrual loans. Table 16 displays the composition of loans restructured in a TDR that were on accrual status, loans on nonaccrual status and all other mortgage-related assets in our Capital Markets group’s mortgage portfolio.
Table 16: Capital Markets Group’s Mortgage Portfolio
 
As of
 
March 31, 2015
 
December 31, 2014
 
Unpaid Principal Balance
 
Percent of total
 
Unpaid Principal Balance
 
Percent of total
 
(Dollars in millions)
TDRs on accrual status
$
142,075

 
35
%
 
$
140,828

 
34
%
Nonaccrual loans
54,901

 
13

 
58,597

 
14

All other mortgage-related assets
214,708

 
52

 
213,888

 
52

Total Capital Markets group’s mortgage portfolio
$
411,684

 
100
%
 
$
413,313

 
100
%
CONSOLIDATED BALANCE SHEET ANALYSIS
This section provides a discussion of our condensed consolidated balance sheets as of the dates indicated and should be read together with our condensed consolidated financial statements, including the accompanying notes.

32


Table 17 displays a summary of our condensed consolidated balance sheets as of the dates indicated.
Table 17: Summary of Condensed Consolidated Balance Sheets
 
As of
 
 
 
March 31, 2015
 
December 31, 2014
 
Variance
 
(Dollars in millions)
Assets 
 
 
 
 
 
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
$
44,090

 
$
52,973

 
$
(8,883
)
Restricted cash
41,439

 
32,542

 
8,897

Investments in securities(1)
59,018

 
62,158

 
(3,140
)
Mortgage loans:
 
 
 
 
 
Of Fannie Mae
266,289

 
272,666

 
(6,377
)
Of consolidated trusts
2,778,647

 
2,782,369

 
(3,722
)
Allowance for loan losses
(31,820
)
 
(35,541
)
 
3,721

Mortgage loans, net of allowance for loan losses
3,013,116

 
3,019,494

 
(6,378
)
Deferred tax assets, net
41,983

 
42,206

 
(223
)
Other assets
38,467

 
38,803

 
(336
)
Total assets
$
3,238,113

 
$
3,248,176

 
$
(10,063
)
Liabilities and equity
 
 
 
 
 
Debt:
 
 
 
 
 
Of Fannie Mae
$
448,740

 
$
460,443

 
$
(11,703
)
Of consolidated trusts
2,763,891

 
2,761,712

 
2,179

Other liabilities
21,886

 
22,301

 
(415
)
Total liabilities
3,234,517

 
3,244,456

 
(9,939
)
Total equity
3,596

 
3,720

 
(124
)
Total liabilities and equity
$
3,238,113

 
$
3,248,176

 
$
(10,063
)
__________
(1) 
Includes $19.4 billion as of March 31, 2015 and $19.5 billion as of December 31, 2014 of U.S. Treasury securities that are included in our other investments portfolio, which we present in “Table 21: Cash and Other Investments Portfolio.”
Cash and Other Investments Portfolio
Our cash and other investments portfolio consists of cash and cash equivalents, securities purchased under agreements to resell or similar arrangements, and investments in U.S. Treasury securities. See “Liquidity and Capital Management—Liquidity Management—Cash and Other Investments Portfolio” for additional information on our cash and other investments portfolio.
Restricted Cash
Restricted cash primarily includes unscheduled borrower payments received by servicers of loans backing consolidated trusts due to be remitted to the MBS certificateholders in the subsequent month. Our restricted cash increased as of March 31, 2015 compared with the balance as of December 31, 2014 primarily as a result of an increase in prepayments received on mortgage loans in March 2015 compared with prepayments received in December 2014.

33



Investments in Mortgage-Related Securities
Our investments in mortgage-related securities are classified in our condensed consolidated balance sheets as either trading or available-for-sale and are measured at fair value. Table 18 displays the fair value of our investments in mortgage-related securities, including trading and available-for-sale securities, as of the dates indicated. We classify PLS as Alt-A, subprime or CMBS if the securities were labeled as such when issued. We have also invested in subprime private-label mortgage-related securities that we have resecuritized to include our guaranty (which we refer to as “wraps”).
Table 18: Summary of Mortgage-Related Securities at Fair Value
 
As of
 
March 31, 2015
 
December 31, 2014
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
10,366

 
 
 
$
10,579

 
Freddie Mac
 
6,980

 
 
 
6,897

 
Ginnie Mae
 
672

 
 
 
642

 
Alt-A private-label securities
 
5,297

 
 
 
6,598

 
Subprime private-label securities
 
5,484

 
 
 
6,547

 
CMBS
 
3,848

 
 
 
3,912

 
Mortgage revenue bonds
 
4,302

 
 
 
4,745

 
Other mortgage-related securities
 
2,702

 
 
 
2,772

 
Total
 
$
39,651

 
 
 
$
42,692

 

The decrease in mortgage-related securities at fair value from December 31, 2014 to March 31, 2015 was primarily driven by sales of PLS in the first three months of 2015.
Mortgage Loans
The decrease in mortgage loans from December 31, 2014 to March 31, 2015 was primarily due to liquidations outpacing acquisition volumes. For additional information on our mortgage loans, see “Note 3, Mortgage Loans.” For additional information on the mortgage loan purchase and sale activities reported by our Capital Markets group, see “Business Segment Results—Capital Markets Group Results.”
The decrease in our allowance for loan losses from December 31, 2014 to March 31, 2015 was primarily due to our approach to adopting the charge-off provisions of the Advisory Bulletin on January 1, 2015. See “Consolidated Results of Operations—Credit-Related Income” for more information concerning the adoption of the Advisory Bulletin.
Debt
Debt of Fannie Mae is the primary means of funding our mortgage investments. The decrease in debt of Fannie Mae from December 31, 2014 to March 31, 2015 was primarily driven by lower funding needs, as our retained mortgage portfolio decreased. We provide a summary of the activity of the debt of Fannie Mae and a comparison of the mix between our outstanding short-term and long-term debt in “Liquidity and Capital Management—Liquidity Management—Debt Funding.” Also see “Note 8, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.
Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. The increase in debt of consolidated trusts from December 31, 2014 to March 31, 2015 was primarily driven by sales of Fannie Mae MBS, which are accounted for as reissuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party.
Total Equity
Total equity decreased as of March 31, 2015 compared with December 31, 2014 due to our payment of senior preferred stock dividends to Treasury during the first quarter of 2015, partially offset by comprehensive income recognized during the first quarter of 2015.

34



LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity Management
Our business activities require that we maintain adequate liquidity to fund our operations. Our liquidity risk management framework is designed to address our liquidity risk. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. Liquidity risk management involves forecasting funding requirements, maintaining sufficient capacity to meet our needs based on our ongoing assessment of financial market liquidity and adhering to our regulatory requirements.
Our treasury function is responsible for implementing our liquidity and contingency planning strategies. We hold a portfolio of highly liquid investments and maintain access to alternative sources of liquidity which are designed to provide near term availability of cash in the event that our access to the debt markets becomes limited. While our liquidity contingency planning attempts to address stressed market conditions, we believe that our liquidity contingency plan may be difficult or impossible to execute for a company of our size and in our circumstances.
Our liquidity position could be adversely affected by many factors, both internal and external to our business, including: actions taken by our conservator, the Federal Reserve, U.S. Treasury or other government agencies; legislation relating to us or our business; a U.S. government payment default on its debt obligations; a downgrade in the credit ratings of our senior unsecured debt or the U.S. government’s debt from the major ratings organizations; a systemic event leading to the withdrawal of liquidity from the market; an extreme market-wide widening of credit spreads; public statements by key policy makers; a significant decline in our net worth; potential investor concerns about the adequacy of funding available to us under the senior preferred stock purchase agreement; loss of demand for our debt, or certain types of our debt, from a major group of investors; a significant credit event involving one of our major institutional counterparties; a sudden catastrophic operational failure in the financial sector; or elimination of our GSE status.
This section supplements and updates information regarding liquidity risk management contained in our 2014 Form 10-K. See “MD&A—Liquidity and Capital Management—Liquidity Management” and “Risk Factors” in our 2014 Form 10-K for additional information, including discussions of our primary sources and uses of funds, our liquidity risk management practices and liquidity contingency planning, factors that influence our debt funding activity, factors that may impact our access to or the cost of our debt funding, and factors that could adversely affect our liquidity.
Debt Funding
We fund our business primarily through the issuance of short-term and long-term debt securities in the domestic and international capital markets. Because debt issuance is our primary funding source, we are subject to “roll over,” or refinancing, risk on our outstanding debt.
Our debt funding needs and debt funding activity may vary from quarter to quarter depending on market conditions and are influenced by anticipated liquidity needs, the size of our retained mortgage portfolio and our dividend payment obligations to Treasury. See “Business Segment Results—Capital Markets Group Results—The Capital Markets Group’s Mortgage Portfolio” for information about our retained mortgage portfolio, our requirement to reduce the size of our retained mortgage portfolio and our portfolio reduction plan.
Fannie Mae Debt Funding Activity
Table 19 displays the activity in debt of Fannie Mae. This activity excludes the debt of consolidated trusts and intraday loans. The reported amounts of debt issued and paid off during the period represent the face amount of the debt at issuance and redemption, respectively. Activity for short-term debt of Fannie Mae relates to borrowings with an original contractual maturity of one year or less while activity for long-term debt of Fannie Mae relates to borrowings with an original contractual maturity of greater than one year.

35



Table 19: Activity in Debt of Fannie Mae
 
For the Three Months
Ended March 31,
 
2015
 
2014
 
(Dollars in millions)
Issued during the period:
 
 
 
Short-term:
 
 
 
Amount
$
52,111

 
$
32,438

Weighted-average interest rate
0.12
%
 
0.05
%
Long-term:(1)
 
 
 
Amount:
$
16,723

 
$
8,060

Weighted-average interest rate
1.63
%
 
1.63
%
Total issued:
 
 
 
Amount
$
68,834

 
$
40,498

Weighted-average interest rate
0.49
%
 
0.37
%
Paid off during the period:(2)
 
 
 
Short-term:
 
 
 
Amount
$
57,726

 
$
39,272

Weighted-average interest rate
0.07
%
 
0.08
%
Long-term:
 
 
 
Amount
$
23,163

 
$
49,117

Weighted-average interest rate
0.81
%
 
1.85
%
Total paid off:
 
 
 
Amount
$
80,889

 
$
88,389

Weighted-average interest rate
0.28
%
 
1.06
%
__________
(1) 
Includes credit risk-sharing securities issued under our CAS series. For additional information on our credit risk sharing transactions, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards—Risk-Sharing Transactions.”
(2) 
Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls and payments for any other repurchases. Repurchases of debt and early retirements of zero-coupon debt are reported at original face value, which does not equal the amount of actual cash payment.
Outstanding Debt
Total outstanding debt of Fannie Mae includes short-term and long-term debt, excluding debt of consolidated trusts. Short-term debt of Fannie Mae consists of borrowings with an original contractual maturity of one year or less and, therefore, does not include the current portion of long-term debt. Long-term debt of Fannie Mae consists of borrowings with an original contractual maturity of greater than one year.
Pursuant to the terms of the senior preferred stock purchase agreement, we are prohibited from issuing debt without the prior consent of Treasury if it would result in our aggregate indebtedness exceeding our outstanding debt limit, which is 120% of the amount of mortgage assets we were allowed to own under the senior preferred stock purchase agreement on December 31 of the immediately preceding calendar year. Our debt limit under the senior preferred stock purchase agreement was reduced to $563.6 billion in 2015. As of March 31, 2015, our aggregate indebtedness totaled $452.3 billion, which was $111.3 billion below our debt limit. The calculation of our indebtedness for purposes of complying with our debt limit reflects the unpaid principal balance and excludes debt basis adjustments and debt of consolidated trusts. Because of our debt limit, we may be restricted in the amount of debt we issue to fund our operations.

36



Table 20 displays information as of the dates indicated on our outstanding short-term and long-term debt based on its original contractual terms.
Table 20: Outstanding Short-Term Borrowings and Long-Term Debt(1) 
 
As of
 
March 31, 2015
 
December 31, 2014
 
Maturities
 
Outstanding
 
Weighted-
Average
Interest
Rate
 
Maturities
 
Outstanding
 
Weighted-
Average
Interest
Rate
 
(Dollars in millions)
Federal funds purchased and securities sold under agreements to repurchase(2)
 
$
87

 
%
 
 
$
50

 
%
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt of Fannie Mae
 
$
99,349

 
0.14
%
 
 
$
105,012

 
0.11
%
Debt of consolidated trusts
 
1,463

 
0.12

 
 
1,560

 
0.09

Total short-term debt
 
 
$
100,812

 
0.14
%
 
 
 
$
106,572

 
0.11
%
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Senior fixed:
 
 
 
 
 
 
 
 
 
 
 
Benchmark notes and bonds
2015 - 2030
 
$
170,531

 
2.44
%
 
2015 - 2030
 
$
173,010

 
2.41
%
Medium-term notes(3)
2015 - 2025
 
116,246

 
1.44

 
2015 - 2024
 
114,556

 
1.42

Foreign exchange notes and bonds
2021 - 2028
 
590

 
5.37

 
2021 - 2028
 
619

 
5.44

Other
2015 - 2038
 
31,555

 
4.57

 
2015 - 2038
 
32,322

 
4.63

Total senior fixed
 
 
318,922

 
2.29

 
 
 
320,507

 
2.29

Senior floating:
 
 
 
 
 
 
 
 
 
 
 
Medium-term notes(3)
2015 - 2019
 
18,419

 
0.18

 
2015 - 2019
 
24,469

 
0.15

Connecticut Avenue Securities(4)
2023 - 2025
 
7,530

 
3.10

 
2023 - 2024
 
6,041

 
2.97

Other(5)
2020 - 2037
 
391

 
7.89

 
2020 - 2037
 
363

 
8.71

Total senior floating
 
 
26,340

 
1.10

 
 
 
30,873

 
0.81

Subordinated debentures
2019
 
3,940

 
9.84

 
2019
 
3,849

 
9.93

Secured borrowings(6)
2021 - 2022
 
189

 
1.91

 
2021 - 2022
 
202

 
1.90

Total long-term debt of Fannie Mae
 
 
349,391

 
2.29

 
 
 
355,431

 
2.24

Debt of consolidated trusts(5)
2015 - 2054
 
2,762,428

 
2.91

 
2015 - 2054
 
2,760,152

 
3.02

Total long-term debt
 
 
$
3,111,819

 
2.84
%
 
 
 
$
3,115,583

 
2.93
%
Outstanding callable debt of Fannie Mae(7)
 
 
$
114,993

 
1.81
%
 
 
 
$
114,990

 
1.79
%
__________
(1) 
Outstanding debt amounts and weighted-average interest rates reported in this table include the effects of discounts, premiums and other cost basis adjustments. Reported outstanding amounts include fair value gains and losses associated with debt that we elected to carry at fair value. Reported amounts for total debt of Fannie Mae include unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $3.7 billion and $4.1 billion as of March 31, 2015 and December 31, 2014, respectively. The unpaid principal balance of outstanding debt of Fannie Mae, which excludes unamortized discounts, premiums and other cost basis adjustments, and debt of consolidated trusts, totaled $452.5 billion and $464.6 billion as of March 31, 2015 and December 31, 2014, respectively.
(2) 
Represents agreements to repurchase securities for a specified price, with repayment generally occurring on the following day.
(3) 
Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zero-coupon debt.
(4) 
Credit risk-sharing securities that transfer a portion of the credit risk on specified pools of mortgage loans in our single-family guaranty book of business to the investors in these securities. Connecticut Avenue Securities are reported at fair value. For additional information on our credit risk sharing transactions, see “Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards—Risk-Sharing Transactions.”
(5) 
Includes a portion of structured debt instruments that is reported at fair value.
(6) 
Represents remaining liability resulting from the transfer of financial assets from our condensed consolidated balance sheets that did not qualify as a sale.

37



(7) 
Consists of the unpaid principal balance of long-term callable debt of Fannie Mae that can be paid off in whole or in part at our option at any time on or after a specified date.
Maturity Profile of Outstanding Debt of Fannie Mae
Our outstanding short-term debt, as a percentage of our total outstanding debt, was 22% as of March 31, 2015 compared with 23% as of December 31, 2014. The weighted-average interest rate on our long-term debt increased to 2.29% as of March 31, 2015 from 2.24% as of December 31, 2014.
Our outstanding debt maturing within one year, including the current portion of our long-term debt and amounts we have announced for early redemption, as a percentage of our total outstanding debt, excluding debt of consolidated trusts, was 36% as of March 31, 2015 and 37% as of December 31, 2014. The weighted-average maturity of our outstanding debt that is maturing within one year was 133 days as of March 31, 2015, compared with 131 days as of December 31, 2014. The weighted-average maturity of our outstanding debt maturing in more than one year was approximately 60 months as of March 31, 2015, compared with approximately 61 months as of December 31, 2014. We intend to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities. We also may use proceeds from our mortgage assets to pay our debt obligations.
Cash and Other Investments Portfolio
The balance of our cash and other investments portfolio fluctuates based on changes in our cash flows, overall liquidity in the fixed income markets and our liquidity risk management policies and practices. See “Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Counterparty Credit Exposure of Investments Held in our Cash and Other Investments Portfolio” for additional information on the risks associated with the assets in our cash and other investments portfolio.
Table 21 displays information on the composition of our cash and other investments portfolio.
Table 21: Cash and Other Investments Portfolio
 
As of
 
March 31, 2015
 
December 31, 2014
 
(Dollars in millions) 
Cash and cash equivalents
 
$
23,860

 
 
 
$
22,023

 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
 
20,230

 
 
 
30,950

 
U.S. Treasury securities
 
19,367

 
 
 
19,466

 
Total cash and other investments
 
$
63,457

 
 
 
$
72,439

 
Credit Ratings
As of March 31, 2015, our credit ratings have not changed since we filed our 2014 Form 10-K. For additional information on our credit ratings, see “Management’s Discussion and Analysis—Liquidity and Capital Management—Fannie Mae Credit Ratings” in our 2014 Form 10-K.
Cash Flows
Three Months Ended March 31, 2015. Cash and cash equivalents increased by $1.8 billion from $22.0 billion as of December 31, 2014 to $23.9 billion as of March 31, 2015. The increase in the balance was primarily driven by cash inflows from (1) issuances of long-term debt of consolidated trusts resulting from the sale of Fannie Mae MBS to third parties, (2) proceeds from repayment of loans of Fannie Mae, (3) the sale of our REO inventory and (4) proceeds from sale and liquidations of mortgage-related securities.
Partially offsetting these cash inflows were cash outflows from (1) acquiring mortgage loans and providing advances to lenders, and (2) the acquisition of delinquent loans out of MBS trusts.
Three Months Ended March 31, 2014. Cash and cash equivalents decreased by $5.2 billion from $19.2 billion as of December 31, 2013 to $14.1 billion as of March 31, 2014. The decrease in the balance was primarily driven by cash outflow from (1) acquiring mortgage loans and providing advances to lenders; (2) payments to redeem funding debt, which outpaced issuances, due to lower funding needs, (3) acquisition of delinquent loans out of MBS trusts, and (4) the payment of dividends to Treasury under our senior preferred stock purchase agreement.

38



Partially offsetting these cash outflows were cash inflows from issuances of long-term debt of consolidated trusts resulting from the sale of Fannie Mae MBS to third parties.
Capital Management
Regulatory Capital
FHFA has announced that, during the conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and that FHFA will not issue quarterly capital classifications. We submit capital reports to FHFA and FHFA monitors our capital levels. The deficit of our core capital over statutory minimum capital was $142.2 billion as of March 31, 2015 and December 31, 2014.
Under the terms of the senior preferred stock, starting January 1, 2013, we are required to pay Treasury each quarter a dividend, when, as and if declared, equal to the excess of our net worth as of the end of the preceding quarter over an applicable capital reserve amount. Therefore, we do not expect to eliminate our deficit of core capital over statutory minimum capital. We expect to pay Treasury a dividend of $1.8 billion by June 30, 2015.
Senior Preferred Stock Purchase Agreement
As a result of the covenants under the senior preferred stock purchase agreement, Treasury’s ownership of the warrant to purchase up to 79.9% of the total shares of our common stock outstanding and the significant uncertainty regarding our future, we effectively no longer have access to equity funding except through draws under the senior preferred stock purchase agreement.
Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficiencies in our net worth. We have received a total of $116.1 billion from Treasury pursuant to the senior preferred stock purchase agreement as of March 31, 2015. The aggregate liquidation preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion, remains at $117.1 billion.
While we had a positive net worth as of March 31, 2015 and have not received funds from Treasury under the agreement since the first quarter of 2012, we will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement if we have a net worth deficit in future periods. As of the date of this filing, the amount of remaining available funding under the senior preferred stock purchase agreement is $117.6 billion. For additional information, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common Stock Warrant—Senior Preferred Stock Purchase Agreement” in our 2014 Form 10-K.
Our first quarter 2015 dividend of $1.9 billion was declared by FHFA and subsequently paid by us on March 31, 2015. For each dividend period from January 1, 2013 through and including December 31, 2017, when, as and if declared, the dividend amount will be the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. The capital reserve amount is $1.8 billion for dividend periods in 2015 and will be reduced by $600 million each year until it reaches zero on January 1, 2018. For each dividend period beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the immediately preceding fiscal quarter. Based on the terms of the senior preferred stock, we expect to pay Treasury a dividend for the second quarter of 2015 of $1.8 billion by June 30, 2015. The Director of FHFA directs us to make dividend payments on the senior preferred stock on a quarterly basis.
See “Risk Factors” in our 2014 Form 10-K for a discussion of the risks relating to our dividend obligations to Treasury on the senior preferred stock. See “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2014 Form 10-K for more information on the terms of the senior preferred stock and our senior preferred stock purchase agreement with Treasury.
OFF-BALANCE SHEET ARRANGEMENTS
Our maximum potential exposure to credit losses relating to our outstanding and unconsolidated Fannie Mae MBS and other financial guarantees is primarily represented by the unpaid principal balance of the mortgage loans underlying outstanding and unconsolidated Fannie Mae MBS and other financial guarantees of $30.9 billion as of March 31, 2015 and $31.7 billion as of December 31, 2014.
For a description of our off-balance sheet arrangements, see “MD&A—Off-Balance Sheet Arrangements” in our 2014 Form 10-K.

39



RISK MANAGEMENT
Our business activities expose us to the following three major categories of financial risk: credit risk, market risk (including interest rate and liquidity risk) and operational risk. We actively monitor and manage these risks by using an established risk management framework. In addition to our exposure to credit, market and operational risks, there is significant uncertainty regarding the future of our company, including how long we will continue to be in existence, which we discuss in more detail in “Risk Factors” in this report and in “Business—Housing Finance Reform” in our 2014 Form 10-K. This uncertainty, along with limitations on our employee compensation arising from our conservatorship, could affect our ability to retain and hire qualified employees.
We are also subject to a number of other risks that could adversely impact our business, financial condition, earnings and cash flow, including human capital, model, legal, regulatory and compliance, reputational, strategic and execution risks. These risks may arise due to a failure to comply with laws, regulations or ethical standards and codes of conduct applicable to our business activities and functions.
In this section we provide an update on our management of our major risk categories. For a more complete discussion of the primary risks we face and how we manage credit risk, market risk and operational risk, see “MD&A—Risk Management” in our 2014 Form 10-K and “Risk Factors” in this report and our 2014 Form 10-K.
Credit Risk Management
We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit risk. Mortgage credit risk is the risk that a borrower will fail to make required mortgage payments. Institutional counterparty credit risk is the risk that our institutional counterparties may fail to fulfill their contractual obligations to us.
Mortgage Credit Risk Management
We are exposed to credit risk on our mortgage credit book of business because we either hold mortgage assets, have issued a guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets or provided other credit enhancements on mortgage assets. While our mortgage credit book of business includes all of our mortgage-related assets, both on- and off-balance sheet, our guaranty book of business excludes non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty. We provide information on the performance of non-Fannie Mae mortgage-related securities held in our retained mortgage portfolio, including the impairment that we have recognized on these securities, in “Note 5, Investments in Securities.”
Mortgage Credit Book of Business
Table 22 displays the composition of our mortgage credit book of business based on unpaid principal balance. Our single-family mortgage credit book of business accounted for 93% of our mortgage credit book of business as of March 31, 2015 and December 31, 2014.

40



Table 22: Composition of Mortgage Credit Book of Business
 
As of
 
March 31, 2015
 
December 31, 2014
 
Single-Family 
 
Multifamily 
 
Total 
 
Single-Family 
 
Multifamily 
 
Total 
 
(Dollars in millions) 
Mortgage loans and Fannie Mae MBS(1)
$
2,822,162

 
 
$
191,016

 
 
$
3,013,178

 
$
2,837,211

 
 
$
187,300

 
 
$
3,024,511

Unconsolidated Fannie Mae MBS, held by third parties(2)
11,344

 
 
1,260

 
 
12,604

 
11,660

 
 
1,267

 
 
12,927

Other credit guarantees(3)
3,840

 
 
14,414

 
 
18,254

 
4,033

 
 
14,748

 
 
18,781

Guaranty book of business
$
2,837,346

 
 
$
206,690

 
 
$
3,044,036

 
$
2,852,904

 
 
$
203,315

 
 
$
3,056,219

Agency mortgage-related securities(4)
7,036

 
 
8

 
 
7,044

 
6,932

 
 
8

 
 
6,940

Other mortgage-related securities(5)
16,819

 
 
7,423

 
 
24,242

 
19,973

 
 
7,970

 
 
27,943

Mortgage credit book of business  
$
2,861,201

 
 
$
214,121

 
 
$
3,075,322

 
$
2,879,809

 
 
$
211,293

 
 
$
3,091,102

Guaranty Book of Business Detail:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conventional Guaranty Book of Business(6)
$
2,781,224

 
 
$
205,163

 
 
$
2,986,387

 
$
2,795,666

 
 
$
201,763

 
 
$
2,997,429

Government Guaranty Book of Business(7)
$
56,122

 
 
$
1,527

 
 
$
57,649

 
$
57,238

 
 
$
1,552

 
 
$
58,790

__________
(1) 
Consists of mortgage loans and Fannie Mae MBS recognized in our condensed consolidated balance sheets. The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(2) 
The principal balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(3) 
Consists of single-family and multifamily credit enhancements that we have provided and that are not otherwise reflected in the table.
(4) 
Consists of mortgage-related securities issued by Freddie Mac and Ginnie Mae.
(5) 
Primarily includes mortgage revenue bonds, Alt-A and subprime PLS and CMBS.
(6) 
Refers to mortgage loans and mortgage-related securities that are not guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
(7) 
Refers to mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
In the following sections, we discuss the mortgage credit risk of the single-family and multifamily loans in our guaranty book of business. The credit statistics reported below, unless otherwise noted, pertain generally to the portion of our guaranty book of business for which we have access to detailed loan-level information, which constituted approximately 99% of each of our single-family conventional guaranty book of business and our multifamily guaranty book of business, excluding defeased loans, as of March 31, 2015 and December 31, 2014. We typically obtain this data from the sellers or servicers of the mortgage loans in our guaranty book of business and receive representations and warranties from them as to the accuracy of the information. While we perform various quality assurance checks by sampling loans to assess compliance with our underwriting and eligibility criteria, we do not independently verify all reported information and we rely on lender representations regarding the accuracy of the characteristics of loans in our guaranty book of business. See “Risk Factors” in our 2014 Form 10-K for a discussion of the risk that we could experience mortgage fraud as a result of this reliance on lender representations.
Single-Family Mortgage Credit Risk Management
Our strategy in managing single-family mortgage credit risk consists of four primary components: (1) our acquisition and servicing policies along with our underwriting and servicing standards, including the use of credit enhancements; (2) portfolio diversification and monitoring; (3) management of problem loans; and (4) REO management. These approaches may increase our expenses and may not be effective in reducing our credit-related expense or credit losses. We provide information on our credit-related income and credit losses in “Consolidated Results of Operations—Credit-Related Income.” For information on how we evaluate and factors that affect our single-family mortgage credit risk, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management” in our 2014 Form 10-K.
The single-family credit statistics we focus on and report in the sections below generally relate to our single-family conventional guaranty book of business, which represents the substantial majority of our total single-family guaranty book of business.

41



Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
Our Single-Family business, with the oversight of our Enterprise Risk Management division, is responsible for pricing and managing credit risk relating to the portion of our single-family mortgage credit book of business consisting of single-family mortgage loans and Fannie Mae MBS backed by single-family mortgage loans (whether held in our portfolio or held by third parties). Desktop Underwriter®, our proprietary automated underwriting system which measures credit risk by assessing the primary risk factors of a mortgage, is used to evaluate the majority of the loans we purchase or securitize. For information on our single-family acquisition and servicing policies and on our underwriting and servicing standards, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2014 Form 10-K.
Table 23 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business by acquisition period.
Table 23: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
 
As of March 31, 2015
 
% of Single-Family Conventional Guaranty Book of Business(1)
 
Current Estimated Mark-to-Market LTV Ratio(2)
 
Current Estimated Mark-to-Market LTV Ratio>100%(3)
 
Serious Delinquency Rate(4)
2009-2015 acquisitions, excluding HARP and other Refi Plus loans
63
%
 
60
%
 
*
%
 
0.23
%
HARP loans(5)
11
 
 
87
 
 
20
 
 
1.07
 
Other Refi Plus loans(6)
8
 
 
51
 
 
*
 
 
0.39
 
2005-2008 acquisitions
12
 
 
81
 
 
22
 
 
7.82
 
2004 and prior acquisitions
6
 
 
48
 
 
2
 
 
3.19
 
Total Single-Family Book of Business
100
%
 
64
%
 
5
%
 
1.78
%
__________
* Represents less than 0.5%
(1)
Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of March 31, 2015.
(2) 
The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loans as of the end of the applicable period divided by the estimated current value of the properties, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available.
(3) 
The current estimated mark-to-market LTV ratio greater than 100% is based on the unpaid principal balance of the loans with mark-to-market LTV ratios greater than 100% for each category as of the end of the applicable period divided by the aggregate unpaid principal balance of loans for each category in our single-family conventional guaranty book of business as of March 31, 2015.
(4) 
The serious delinquency rates for loans acquired in more recent years will be higher after the loans have aged, but we do not expect them to approach the levels of the March 31, 2015 serious delinquency rates of loans acquired in 2005 through 2008.
(5) 
HARP loans, which we began to acquire in 2009, have LTV ratios at origination in excess of 80%. In the fourth quarter of 2012, we revised our presentation of the data to reflect all loans under our Refi Plus program with LTV ratios at origination in excess of 80% as HARP loans. Previously we did not reflect loans that were backed by second homes or investor properties as HARP loans.
(6) 
Other Refi Plus loans, which we began to acquire in 2009, includes all other Refi Plus loans that are not HARP loans.
Beginning with loans delivered in 2013, and in conjunction with our new representation and warranty framework, we have made changes in our quality control process that move the primary focus of our quality control review from the time a loan defaults to shortly after the loan is delivered to us. We have implemented new tools to help identify loans delivered to us that may not have met our underwriting or eligibility guidelines and use these tools to help select discretionary samples of performing loans for quality control review shortly after delivery. We also select random samples of performing loans for quality control review shortly after delivery. For a discussion of our new representation and warranty framework, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2014 Form 10-K.
We derive an eligibility defect rate from our random reviews, which represents the proportion of loans in the sample population with underwriting defects that would make them potentially ineligible for delivery to us. The eligibility defect rate

42



does not necessarily indicate how well the loans will ultimately perform. Instead, we use the eligibility defect rate to estimate the percentage of loans we acquired that potentially had a significant error in the underwriting process. As of March 31, 2015, the eligibility defect rate for our single-family non-Refi Plus loan acquisitions made during the twelve months ended March 31, 2014 was 1.47%. Because of enhancements to the sampling methodology of our random reviews that we implemented in 2013, the eligibility defect rate for our 2013 and 2014 loan acquisitions is not directly comparable to the “significant findings rate” we reported on our acquisitions in prior periods. We continue to work with lenders to reduce the number of defects identified.
If we determine that a mortgage loan did not meet our underwriting or eligibility requirements, loan representations or warranties were violated or a mortgage insurer rescinded coverage, then our mortgage sellers and/or servicers are obligated to either repurchase the loan or foreclosed property, reimburse us for our losses or provide other remedies, unless the loan is eligible for representation and warranty relief under our new representation and warranty framework described below. We refer to our demands that mortgage sellers and servicers meet these obligations collectively as repurchase requests. See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Mortgage Sellers and Servicers” in our 2014 Form 10-K for a discussion of our mortgage sellers and servicers’ repurchase obligations. As of March 31, 2015, we have issued repurchase requests on approximately 0.41% of the $76.4 billion of unpaid principal balance of single-family loans delivered to us in the first quarter of 2014, for which reviews have been substantially completed.
The dollar amounts of our outstanding repurchase requests are based on the unpaid principal balance of the loans underlying the repurchase request, not the actual amount we have requested from the lenders. In some cases, we allow lenders to remit payment equal to our loss, including imputed interest, on the loan after we have disposed of the related REO, which is substantially less than the unpaid principal balance of the loan. As a result, we expect our actual cash receipts relating to these outstanding repurchase requests to be significantly lower than the unpaid principal balance of the loans. Amounts relating to repurchase requests originating from missing documentation or loan files, where a full file review could not be completed are excluded from the total requests outstanding until we receive the missing documentation or loan files and a full underwriting review is completed. Total outstanding repurchase requests as of March 31, 2015 were $1.3 billion, compared with $1.0 billion as of December 31, 2014.
Representation and Warranty Framework
Our representation and warranty framework for single-family mortgage loans delivered on or after January 1, 2013 seeks to provide lenders a higher degree of certainty and clarity regarding their repurchase exposure and liability on future deliveries, as well as consistency around repurchase timelines and remedies. Under the framework, lenders are relieved of repurchase liability for loans that meet specific payment history requirements and other eligibility requirements. For example, a lender would not be required to repurchase a mortgage loan in breach of certain underwriting and eligibility representations and warranties if the borrower has made timely payments for 36 months following the delivery date (or, for Refi Plus loans, including HARP loans, for 12 months following the delivery date), and the loan meets other specified eligibility requirements. For single-family loans delivered on or after July 1, 2014 the 36-month timely payment history requirement is relaxed to permit two instances of 30-day delinquency and adds an alternative path to relief if there is a satisfactory conclusion of a quality control review. For more information on our quality control process and our representation and warranty framework, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2014 Form 10-K.
We continue to work with FHFA to identify opportunities to enhance our representation and warranty framework, providing the mortgage finance industry with more certainty and transparency regarding selling representation and warranty obligations.
As of March 31, 2015, approximately 31% of the outstanding loans in our single-family conventional guaranty book of business were acquired under the new representation and warranty framework. Table 24 below displays information regarding the relief status of single-family conventional loans, based on payment history, delivered to us beginning in 2013 under the new representation and warranty framework.

43



Table 24: Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2015
 
As of March 31, 2015
 
Refi Plus
 
Non-Refi Plus
 
Total
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
(Dollars in millions)
Single-family conventional loans that:
 
 
 
 
 
 
 
 
 
 
 
Obtained relief
$
151,388

 
1,006,648

 
$

 

 
$
151,388

 
1,006,648

Remain eligible for relief
41,338

 
278,947

 
845,408

 
4,060,497

 
886,746

 
4,339,444

Are not eligible for relief
3,000

 
19,004

 
9,344

 
47,277

 
12,344

 
66,281

Total outstanding loans acquired under the new representation and warranty framework
$
195,726

 
1,304,599

 
$
854,752

 
4,107,774

 
$
1,050,478

 
5,412,373

As of March 31, 2015, approximately 19% of loans acquired under the new representation and warranty framework had obtained relief. Providing lenders with relief from repurchasing loans for breaches of certain representations and warranties on loans acquired beginning in 2013 that meet specified eligibility requirements shifts some of the risk of non-compliance with our requirements back to us. However, we believe that we have taken appropriate steps to mitigate this risk, including moving the primary focus of our quality control reviews to shortly after the time the loans are delivered to us. We also retain the right to review any defaulted loans that were not previously reviewed and have not obtained relief, in addition to retaining the right to review all loans for any violations of life of loan representations and warranties.
Risk-Sharing Transactions
FHFA’s 2015 conservatorship scorecard includes an objective to transact credit risk transfers on single-family mortgages with at least $150 billion of unpaid principal balance, adjusted for the amount of credit risk transferred. In meeting this objective, we must utilize at least two types of risk transfer structures. Our primary method of achieving this objective has been through the issuance of CAS, which transfers some of the credit risk associated with losses on the underlying mortgage loans to investors in these securities. During the first quarter of 2015, we issued $1.5 billion in CAS, transferring some of the credit risk on single-family mortgages with an unpaid principal balance of $50.2 billion.
In a CAS transaction, we create a reference pool consisting of recently acquired single-family mortgage loans included in our single-family guaranty book of business in our condensed consolidated balance sheet. We then create a hypothetical securitization structure with notional credit risk positions, or tranches (that is, first loss, mezzanine and senior). We receive cash and issue CAS (which relate to the mezzanine loss position) to investors, which we recognize as “Debt of Fannie Mae” in our condensed consolidated balance sheets.
We are obligated to make payments of principal and interest on the CAS, and we recognize the interest paid as “Long-term debt interest expense” in our condensed consolidated statements of operations and comprehensive income. The principal balance of the CAS is reduced as a result of principal liquidations of loans in the reference pool or when certain specified credit events (such as a loan becoming 180 days delinquent) occur on the loans in the reference pool. In turn, these credit events may reduce the total amount of payments we ultimately make on the CAS. However, principal reductions will first occur on the first loss position, which is retained by us, until it is fully reduced before the CAS begin participating in reductions to the principal balances. As the reference pools underlying CAS issued to date consist of recently acquired single-family mortgage loans (loans in the reference pools underlying the transactions in the first quarter of 2015 were acquired between September and November 2013), we have recognized minimal credit losses on loans in these reference pools to date.

44



Table 25 displays the credit risk transferred to third parties and retained by Fannie Mae pursuant to our CAS transactions since 2013.
Table 25: Credit Risk Transferred Pursuant to CAS Issuances
 
At Issuance
 
As of March 31, 2015
 
 
Retained by Fannie Mae
 
Transferred to Third Parties
 
 
 
 
First Loss Position
 
Mezzanine Loss Position
 
Senior Loss Position
 
Mezzanine Loss Position
 
Total Reference Pool
 
Total Outstanding Reference Pool(1)
 
 
(Dollars in millions)
2015 CAS issuances:
 
 
 
 
 
 
 
 
 
 
 
 
CAS 2015 C01
$
257

 
$
78

 
$
48,389

 
$
1,469

 
$
50,193

 
$
49,252

 
Prior CAS issuances:
 
 
 
 
 
 
 
 
 
 
 
 
2014 issuances
$
845

 
$
355

 
$
215,175

 
$
5,849

 
$
222,224

 
$
209,495

 
2013 issuances
80

 
47

 
25,954

 
675

 
26,756

 
23,876

 
Total prior CAS issuances
$
925

 
$
402

 
$
241,129

 
$
6,524

 
$
248,980

 
$
233,371

 
Total CAS issuances
$
1,182

 
$
480

 
$
289,518

 
$
7,993

 
$
299,173

 
$
282,623

 
Total outstanding reference pool as a percentage of single-family conventional guaranty book of business
 
10.16

%
__________
(1) 
Includes $7.5 billion outstanding for the mezzanine loss tranche transferred to third parties as of March 31, 2015.
Single-Family Portfolio Diversification and Monitoring
Diversification within our single-family mortgage credit book of business by product type, loan characteristics and geography is an important factor that influences credit quality and performance and may reduce our credit risk. We monitor various loan attributes, in conjunction with housing market and economic conditions, to determine if our pricing, eligibility and underwriting criteria accurately reflect the risk associated with loans we acquire or guarantee. For additional information on key loan attributes, see “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” in our 2014 Form 10-K.
Table 26 displays our single-family conventional business volumes and our single-family conventional guaranty book of business, based on certain key risk characteristics that we use to evaluate the risk profile and credit quality of our single-family loans.

45



Table 26: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1) 
 
Percent of Single-Family Conventional Business Volume(2)
 
 
 
 
 
 
 
 
For the
Three Months
Ended March 31,
 
Percent of Single-Family
Conventional Guaranty
Book of Business(3)(4)
As of
 
2015
 
2014
 
March 31, 2015
 
December 31, 2014
Original LTV ratio:(5)
 
 
 
 
 
 
 
 
 
 
 
<= 60%
19

%
17

%
 
21

%
 
 
21

%
60.01% to 70%
15

 
13

 
 
14

 
 
 
14

 
70.01% to 80%
40

 
39

 
 
38

 
 
 
38

 
80.01% to 90%(6)
12

 
12

 
 
11

 
 
 
11

 
90.01% to 100%(6)
13

 
15

 
 
11

 
 
 
11

 
100.01% to 125%(6)
1

 
3

 
 
3

 
 
 
3

 
Greater than 125%(6)
*
 
1

 
 
2

 
 
 
2

 
Total
100

%
100

%
 
100

%
 
 
100

%
Weighted-average
74

%
77

%
 
75

%
 
 
75

%
Average loan amount
$
221,682

 
$
193,053

 
 
$
159,832

 
 
 
$
159,997

 
Estimated mark-to-market LTV ratio:(7)
 
 
 
 
 
 
 
 
 
 
 
<= 60%
 
 
 
 
 
42

%
 
 
42

%
60.01% to 70%
 
 
 
 
 
19

 
 
 
19

 
70.01% to 80%
 
 
 
 
 
18

 
 
 
18

 
80.01% to 90%
 
 
 
 
 
10

 
 
 
10

 
90.01% to 100%
 
 
 
 
 
6

 
 
 
6

 
100.01% to 125%
 
 
 
 
 
4

 
 
 
4

 
Greater than 125%
 
 
 
 
 
1

 
 
 
1

 
Total
 
 
 
 
 
100

%
 
 
100

%
Weighted-average
 
 
 
 
 
64

%
 
 
64

%
Product type:
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate:(8)
 
 
 
 
 
 
 
 
 
 
 
Long-term
80

%
75

%
 
74

%
 
 
74

%
Intermediate-term
17

 
20

 
 
17

 
 
 
17

 
Interest-only

 
 
 
1

 
 
 
1

 
Total fixed-rate
97

 
95

 
 
92

 
 
 
92

 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Interest-only
 
*
 
 
2

 
 
 
2

 
Other ARMs
3

 
5

 
 
6

 
 
 
6

 
Total adjustable-rate
3

 
5

 
 
8

 
 
 
8

 
Total
100

%
100

%
 
100

%
 
 
100

%
Number of property units:
 
 
 
 
 
 
 
 
 
 
 
1 unit
97

%
96

%
 
97

%
 
 
97

%
2-4 units
3

 
4

 
 
3

 
 
 
3

 
Total
100

%
100

%
 
100

%
 
 
100

%
Property type:
 
 
 
 
 
 
 
 
 
 
 
Single-family homes
90

%
89

%
 
91

%
 
 
91

%
Condo/Co-op
10

 
11

 
 
9

 
 
 
9

 
Total
100

%
100

%
 
100

%
 
 
100

%


46



 
Percent of Single-Family
Conventional Business Volume(2)
 
 
 
 
 
 
 
 
For the
Three Months
Ended March 31,
 
Percent of Single-Family
Conventional Guaranty
Book of Business(3)(4)
As of
 
2015
 
2014
 
March 31, 2015
 
December 31, 2014
Occupancy type:
 
 
 
 
 
 
 
 
 
 
 
Primary residence
88

%
85

%
 
88

%
 
 
88

%
Second/vacation home
4

 
4

 
 
4

 
 
 
4

 
Investor
8

 
11

 
 
8

 
 
 
8

 
Total
100

%
100

%
 
100

%
 
 
100

%
FICO credit score at origination:
 
 
 
 
 
 
 
 
 
 
 
< 620(9)
1

%
2

%
 
2

%
 
 
3

%
620 to < 660
4

 
6

 
 
6

 
 
 
5

 
660 to < 700
12

 
14

 
 
12

 
 
 
12

 
700 to < 740
20

 
21

 
 
19

 
 
 
19

 
>= 740
63

 
57

 
 
61

 
 
 
61

 
Total
100

%
100

%
 
100

%
 
 
100

%
Weighted-average
748

 
741

 
 
744

 
 
 
744

 
Loan purpose: 
 
 
 
 
 
 
 
 
 
 
 
Purchase
37

%
45

%
 
31

%
 
 
31

%
Cash-out refinance
19

 
16

 
 
20

 
 
 
20

 
Other refinance
44

 
39

 
 
49

 
 
 
49

 
Total
100

%
100

%
 
100

%
 
 
100

%
Geographic concentration:(10)
 
 
 
 
 
 
 
 
 
 
 
Midwest
14

%
14

%
 
15

%
 
 
15

%
Northeast
14

 
16

 
 
19

 
 
 
19

 
Southeast
20

 
21

 
 
22

 
 
 
22

 
Southwest
18

 
19

 
 
16

 
 
 
16

 
West
34

 
30

 
 
28

 
 
 
28

 
Total
100

%
100

%
 
100

%
 
 
100

%
Origination year:
 
 
 
 
 
 
 
 
 
 
 
<= 2006
 
 
 
 
 
13

%
 
 
13

%
2007
 
 
 
 
 
4

 
 
 
4

 
2008
 
 
 
 
 
2

 
 
 
2

 
2009
 
 
 
 
 
6

 
 
 
6

 
2010
 
 
 
 
 
8

 
 
 
9

 
2011
 
 
 
 
 
9

 
 
 
10

 
2012
 
 
 
 
 
23

 
 
 
24

 
2013
 
 
 
 
 
20

 
 
 
21

 
2014
 
 
 
 
 
12

 
 
 
11

 
2015
 
 
 
 
 
3

 
 
 

 
Total
 
 
 
 
 
100

%
 
 
100

%
__________
*
Represents less than 0.5% of single-family conventional business volume or book of business.
(1) 
Second lien mortgage loans held by third parties are not reflected in the original LTV or mark-to-market LTV ratios in this table.
(2) 
Calculated based on unpaid principal balance of single-family loans for each category at time of acquisition.
(3) 
Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of the end of each period.
(4) 
Our single-family conventional guaranty book of business includes jumbo-conforming and high-balance loans that represented approximately 5% of our single-family conventional guaranty book of business as of March 31, 2015 and December 31, 2014. See “Business—Our Charter and Regulation of Our Activities—Charter Act—Loan Standards” and “MD&A—Risk Management—Credit

47



Risk Management—Single-Family Mortgage Credit Risk Management—Credit Profile Summary—Jumbo Conforming and High-Balance Loans” in our 2014 Form 10-K for information on our loan limits.
(5) 
The original LTV ratio generally is based on the original unpaid principal balance of the loan divided by the appraised property value reported to us at the time of acquisition of the loan. Excludes loans for which this information is not readily available.
(6) 
We purchase loans with original LTV ratios above 80% as part of our mission to serve the primary mortgage market and provide liquidity to the housing finance system. Except as permitted under HARP, our charter generally requires primary mortgage insurance or other credit enhancement for loans that we acquire that have an LTV ratio over 80%.
(7) 
The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available.
(8) 
Long-term fixed-rate consists of mortgage loans with maturities greater than 15 years, while intermediate-term fixed-rate loans have maturities equal to or less than 15 years. Loans with interest-only terms are included in the interest-only category regardless of their maturities.
(9) 
Loans acquired after 2009 with FICO credit scores below 620 consist primarily of the refinance of existing loans under our Refi Plus initiative.
(10) 
Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD and WI. Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT and VI. Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA and WV. Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX and UT. West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.
Credit Profile Summary
Overview
Our acquisitions in the first quarter of 2015 continued to have a strong credit profile with a weighted average original LTV of 74% compared with 77% in the first quarter of 2014. Our acquisition of loans with original LTV ratios over 80% decreased to 26% in the first quarter of 2015, compared with 31% in the first quarter of 2014. This decrease was primarily due to an increase in our acquisitions of refinancing loans, which increased to 63% in the first quarter of 2015, compared with 55% in the first quarter of 2014, and a corresponding decline in our acquisitions of home purchase mortgage loans. The weighted average FICO credit score of our acquisitions increased to 748 in the first quarter of 2015, compared with 741 in the first quarter of 2014. Our acquisitions of loans with FICO credit scores at origination of 740 or above increased to 63% in the first quarter of 2015, compared with 57% in the first quarter of 2014. Our acquisition of loans with FICO credit scores at origination of less than 700 decreased to 17% in the first quarter of 2015, compared with 22% in the first quarter of 2014.
The credit profile of our future acquisitions will depend on many factors, including our future guaranty fee pricing and any impact of that pricing on the volume and mix of loans we acquire; our future eligibility standards and those of mortgage insurers, FHA and VA, the percentage of loan originations representing refinancings, changes in interest rates, our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers, government policy, market and competitive conditions, and the volume and characteristics of HARP loans we acquire in the future. We expect the ultimate performance of all our loans will be affected by borrower behavior, public policy and macroeconomic trends, including unemployment, the economy and home prices. In addition, if lender customers retain more of the higher-quality loans they originate, it could negatively affect the credit profile of our new single-family acquisitions. We discuss our efforts to increase access to mortgage credit for creditworthy borrowers in “Executive Summary—Single-Family Guaranty Book of Business—Recently Acquired Single-Family Loans.”
HARP and Refi Plus Loans
Since 2009, we have offered HARP under our Refi Plus initiative, which was designed to expand refinancing opportunities for borrowers who may otherwise be unable to refinance their mortgage loans due to a decline in home values. HARP offers refinancing flexibility to eligible borrowers who are current on their loans and whose loans are owned or guaranteed by us and meet certain additional criteria. Under HARP, we allow our borrowers who have mortgage loans that have note dates prior to June 2009 with current LTV ratios greater than 80% to refinance their mortgages without obtaining new mortgage insurance in excess of what is already in place. Accordingly, HARP loans have LTV ratios at origination in excess of 80%. HARP loans cannot (1) be an adjustable-rate mortgage loan, if the initial fixed period is less than five years; (2) have an interest only feature, which permits the payment of interest without a payment of principal; (3) be a balloon mortgage loan; or (4) have the potential for negative amortization. In April 2013, FHFA announced the extension of the ending date for HARP to December 31, 2015.
The loans we acquire under HARP have higher LTV ratios than we would otherwise permit, greater than 100% in some cases. Since 2012, we have acquired HARP loans with LTV ratios greater than 125% for fixed-rate loans of eligible borrowers. In

48



addition to the high LTV ratios that characterize HARP loans, some borrowers for HARP and Refi Plus loans may also have lower FICO credit scores and may provide less documentation than we would otherwise require. As of March 31, 2015, HARP loans, which constituted 11% of our single-family book of business, had a weighted average FICO credit score at origination of 731 compared with 744 for loans in our single-family book of business overall.
Loans we acquire under Refi Plus and HARP represent refinancings of loans that are already in our guaranty book of business. The credit risk associated with the newly acquired loans essentially replaces the credit risk on the loans that we already held prior to the refinancing. These loans have higher risk profiles and higher serious delinquency rates than the other loans we have acquired since the beginning of 2009. However, we expect these loans will perform better than the loans they replace because HARP and Refi Plus loans should either reduce the borrowers’ monthly payments or provide more stable terms than the borrowers’ old loans (for example, by refinancing into a mortgage with a fixed interest rate instead of an adjustable rate).
The percentage of our acquisitions that are refinanced loans, including loans acquired under our Refi Plus initiative, which includes HARP, increased during the first quarter of 2015 as a result of the decline in mortgage interest rates during the quarter. HARP loans constituted approximately 3% of our total single-family acquisitions in the first quarter of 2015, compared with approximately 10% of total single-family acquisitions in the first quarter of 2014.
We expect the volume of refinancings under HARP to continue to decline, due to a decrease in the population of borrowers with loans that have high LTV ratios who are willing to refinance and would benefit from refinancing.
For information on the serious delinquency rates and current mark-to-market LTV ratios as of March 31, 2015 of single-family loans we acquired under HARP and Refi Plus, compared with other single-family loans we have acquired, see “Table 23: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period.”
Alt-A Loans
We classify certain loans as Alt-A so that we can discuss our exposure to Alt-A loans in this Form 10-Q and elsewhere. However, there is no universally accepted definition of Alt-A loans. Our single-family conventional guaranty book of business includes loans with some features that are similar to Alt-A loans that we have not classified as Alt-A because they do not meet our classification criteria.
We do not rely solely on our classifications of loans as Alt-A to evaluate the credit risk exposure relating to these loans in our single-family conventional guaranty book of business. For more information about the credit risk characteristics of loans in our single-family guaranty book of business, see “Table 26: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business,” “Note 3, Mortgage Loans,” and “Note 13, Concentrations of Credit Risk.”
Our exposure to Alt-A loans included in our single-family conventional guaranty book of business, based on the classification criteria described in this section, does not include (1) our investments in private-label mortgage-related securities backed by Alt-A loans or (2) resecuritizations, or wraps, of private-label mortgage-related securities backed by Alt-A mortgage loans that we have guaranteed. See “Note 5, Investments in Securities” for more information on our exposure to private label mortgage-related securities backed by Alt-A loans.
We have classified a mortgage loan as Alt-A if and only if the lender that delivered the loan to us classified the loan as Alt-A, based on documentation or other features. The unpaid principal balance of Alt-A loans included in our single-family conventional guaranty book of business of $113.5 billion as of March 31, 2015, represented approximately 4% of our single-family conventional guaranty book of business.
See “MD&A—Risk ManagementCredit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Portfolio Diversification and Monitoring” in our 2014 Form 10-K for a discussion of other types of loans, including jumbo conforming loans, high balance loans, adjustable-rate mortgages and fixed-rate interest only mortgages.
Problem Loan Management
Our problem loan management strategies are primarily focused on reducing defaults to avoid losses that would otherwise occur and pursuing foreclosure alternatives to attempt to minimize the severity of the losses we incur. If a borrower does not make required payments, or is in jeopardy of not making payments, we work with the servicers of our loans to offer workout solutions to minimize the likelihood of foreclosure as well as the severity of loss. Our loan workouts reflect our various types of home retention solutions, including loan modifications, repayment plans and forbearances, and foreclosure alternatives, including short sales and deeds-in-lieu of foreclosure. When appropriate, we seek to move to foreclosure expeditiously.
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, directing servicers to contact borrowers at an earlier stage of delinquency

49



and improve their telephone communications with borrowers, and holding our servicers accountable for following our requirements. In 2011, we issued new standards for mortgage servicers regarding the management of delinquent loans, default prevention and foreclosure time frames under FHFA’s directive to align GSE policies for servicing delinquent mortgages. The new standards, reinforced by new incentives and compensatory fees, require servicers to take a more consistent approach for homeowner communications, loan modifications and other workouts, and, when necessary, foreclosures.
In addition to the new standards, we are taking other steps to improve the servicing of our delinquent loans, which included transferring servicing on loan populations that include loans with higher-risk characteristics to special servicers with which we have worked to develop high-touch protocols for servicing these loans. We believe retaining special servicers to service these loans using high-touch protocols will reduce our future credit losses on the transferred loan portfolio. We continue to work with some of our servicers to test and implement high-touch servicing protocols designed for managing higher-risk loans, which include lower ratios of loans per servicer employee, beginning borrower outreach strategies earlier in the delinquency cycle and establishing a single point of contact for distressed borrowers.
The efforts of our mortgage servicers are critical in keeping people in their homes and preventing foreclosures. We continue to work with our servicers to implement our foreclosure prevention initiatives effectively and to find ways to enhance our workout protocols and their workflow processes.
In the following section, we present statistics on our problem loans, describe specific efforts undertaken to manage these loans and prevent foreclosures, and provide metrics regarding the performance of our loan workout activities. Unless otherwise noted, single-family delinquency data is calculated based on number of loans. We include single-family conventional loans that we own and those that back Fannie Mae MBS in the calculation of the single-family delinquency rate. Seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Percentage of book outstanding calculations are based on the unpaid principal balance of loans for each category divided by the unpaid principal balance of our total single-family guaranty book of business for which we have detailed loan-level information.

50



Problem Loan Statistics
Table 27 displays the delinquency status of loans in our single-family conventional guaranty book of business (based on number of loans) and changes in the balance of seriously delinquent loans in our single-family conventional guaranty book of business.
Table 27: Delinquency Status and Activity of Single-Family Conventional Loans
 
As of
 
March 31,
2015
 
December 31, 2014
 
March 31,
2014
Delinquency status:
 
 
 
 
 
30 to 59 days delinquent
1.26
%
 
1.47
%
 
1.40
%
60 to 89 days delinquent
0.36

 
0.43

 
0.40

Seriously delinquent (“SDQ”)
1.78

 
1.89

 
2.19

Percentage of SDQ loans that have been delinquent for more than 180 days
72
%
 
70
%
 
74
%
Percentage of SDQ loans that have been delinquent for more than two years
34

 
34

 
37

 
For the Three Months Ended March 31,
 
2015
 
 
2014
Single-family SDQ loans (number of loans):
 
 
 
 
Beginning balance
329,590

 
 
418,837

Additions
67,358

 
 
79,318

Removals:
 
 
 
 
Modifications and other loan workouts
(25,883
)
 
 
(35,078
)
Liquidations
(30,075
)
 
 
(42,073
)
Cured or less than 90 days delinquent
(32,444
)
 
 
(37,194
)
Total removals
(88,402
)
 
 
(114,345
)
Ending balance
308,546

 
 
383,810

Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010. The decrease in our serious delinquency rate is primarily the result of home retention solutions, foreclosure alternatives and completed foreclosures, improved loan payment performance, as well as our acquisition of loans with stronger credit profiles since the beginning of 2009. Loans we acquired since 2009 comprised 82% of our single-family guaranty book of business and had a serious delinquency rate of 0.36% as of March 31, 2015.
Although our single-family serious delinquency rate has decreased, the pace of declines in our single-family serious delinquency rate has slowed in recent months and we expect this trend to continue. Our single-family serious delinquency rate and the period of time that loans remain seriously delinquent continue to be negatively impacted by the length of time required to complete a foreclosure in some states. High levels of foreclosures, changes in state foreclosure laws, new federal and state servicing requirements imposed by regulatory actions and legal settlements, and the need for servicers to adapt to these changes have lengthened the time it takes to foreclose on a mortgage loan in a number of states, particularly in New York, Florida and New Jersey. Longer foreclosure timelines result in these loans remaining in our book of business for a longer time, which has caused our serious delinquency rate to decrease more slowly in the last few years than it would have if the pace of foreclosures had been faster. We believe the slow pace of foreclosures in certain areas of the country will continue to negatively affect our single-family serious delinquency rates, foreclosure timelines and credit-related income (expense). Other factors such as the pace of loan modifications, the timing and volume of any NPL sales we make, changes in home prices, unemployment levels and other macroeconomic conditions also influence serious delinquency rates. We expect the number of our single-family loans in our book of business that are seriously delinquent to remain above pre-2008 levels for years.
Certain higher-risk loan categories, such as Alt-A loans and loans with higher mark-to-market LTV ratios, and our 2005 through 2008 loan vintages continue to exhibit higher than average delinquency rates and/or account for a higher share of our credit losses. Our 2005 to 2008 loan vintages represented approximately 48% of the loans added to our seriously delinquent

51



loan population as of March 31, 2015. In addition, loans in certain states such as Florida, Illinois, New Jersey and New York have exhibited higher than average delinquency rates and/or account for a higher share of our credit losses.
Table 28 displays the serious delinquency rates for, and the percentage of our total seriously delinquent single-family conventional loans represented by, the specified loan categories. We also include information for our loans in California, as this state accounts for a large share of our single-family conventional guaranty book of business. The reported categories are not mutually exclusive.
Table 28: Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
 
As of
 
March 31, 2015
December 31, 2014
March 31, 2014
 
 
Percentage of Book Outstanding
 
Percentage of Seriously Delinquent Loans(1)
 
Serious Delinquency Rate
 
Percentage of Book Outstanding
 
Percentage of Seriously Delinquent Loans(1)
 
Serious Delinquency Rate
 
Percentage of Book Outstanding
 
Percentage of Seriously Delinquent Loans(1)
 
Serious Delinquency Rate
States:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
California
 
20
%
 
5
%
 
0.66
%
 
20
%
 
5
%
 
0.70
%
 
20
%
 
6
%
 
0.86
%
Florida
 
6

 
14

 
3.91

 
6

 
15

 
4.42

 
6

 
18

 
6.12

Illinois
 
4

 
6

 
2.20

 
4

 
6

 
2.36

 
4

 
6

 
2.79

New Jersey
 
4

 
10

 
5.62

 
4

 
10

 
5.78

 
4

 
9

 
6.08

New York
 
5

 
11

 
4.04

 
5

 
10

 
4.17

 
5

 
9

 
4.31

All other states
 
61

 
54

 
1.43

 
61

 
54

 
1.52

 
61

 
52

 
1.70

Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alt-A
 
4

 
18

 
7.41

 
4

 
18

 
7.77

 
5

 
19

 
8.72

Vintages:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
 
7

 
27

 
3.17

 
7

 
28

 
3.26

 
9

 
28

 
3.36

2005
 
3

 
12

 
5.94

 
3

 
12

 
6.18

 
3

 
13

 
6.81

2006
 
3

 
16

 
9.14

 
3

 
16

 
9.61

 
3

 
18

 
10.58

2007
 
4

 
23

 
10.34

 
4

 
23

 
10.79

 
5

 
24

 
11.53

2008
 
2

 
8

 
6.05

 
2

 
8

 
6.27

 
3

 
8

 
6.40

2009
 
6

 
3

 
1.00

 
6

 
3

 
1.00

 
7

 
3

 
0.95

2010
 
8

 
3

 
0.59

 
9

 
3

 
0.59

 
10

 
2

 
0.55

2011
 
9

 
2

 
0.42

 
10

 
2

 
0.42

 
11

 
1

 
0.35

2012
 
23

 
3

 
0.28

 
24

 
3

 
0.27

 
25

 
2

 
0.19

2013
 
20

 
3

 
0.25

 
21

 
2

 
0.22

 
23

 
1

 
0.07

2014
 
12

 
*

 
0.07

 
11

 
*

 
0.04

 
1

 

 

2015
 
3

 

 

 

 

 

 

 

 

Estimated mark-to-market LTV ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
 
42

 
23

 
0.85

 
42

 
23

 
0.88

 
38

 
19

 
0.92

60.01% to 70%
 
19

 
12

 
1.29

 
19

 
12

 
1.36

 
19

 
11

 
1.39

70.01% to 80%
 
18

 
14

 
1.62

 
18

 
14

 
1.75

 
19

 
13

 
1.75

80.01% to 90%
 
10

 
14

 
2.76

 
10

 
14

 
3.04

 
11

 
13

 
3.15

90.01% to 100%
 
6

 
12

 
4.08

 
6

 
12

 
4.59

 
6

 
13

 
4.86

Greater than 100%
 
5

 
25

 
10.43

 
5

 
25

 
10.98

 
7

 
31

 
11.27

Credit enhancement(2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit enhanced
 
16

 
26

 
3.21

 
16

 
27

 
3.47

 
15

 
27

 
4.27

Non-credit enhanced
 
84

 
74

 
1.53

 
84

 
73

 
1.62

 
85

 
73

 
1.85

__________
*
Represents less than 0.5% of single-family conventional business volume or book of business.

52



(1) 
Calculated based on the number of single-family loans that were seriously delinquent for each category divided by the total number of single-family conventional loans that were seriously delinquent.
(2) 
Refers to loans included in an agreement used to reduce credit risk by requiring collateral, letters of credit, mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance that it will be compensated to some degree in the event of a financial loss.
Loan Workout Metrics
Table 29 displays statistics on our single-family loan workouts that were completed, by type. These statistics include loan modifications but do not include trial modifications, loans to certain borrowers who have received bankruptcy relief that are classified as TDRs, or repayment or forbearance plans that have been initiated but not completed. As of March 31, 2015, there were approximately 40,400 loans in a trial modification period.
Table 29: Statistics on Single-Family Loan Workouts
 
 
For the Three Months Ended March 31,
 
 
 
 
2015
 
 
 
2014
 
 
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
 
 
(Dollars in millions)
 
 
Home retention strategies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Modifications
 
$
4,415

 
 
 
26,700

 
 
 
$
6,191

 
 
 
36,044

 
 
Repayment plans and forbearances completed(1)
 
257

 
 
 
1,868

 
 
 
296

 
 
 
2,255

 
 
Total home retention strategies
 
4,672

 
 
 
28,568

 
 
 
6,487

 
 
 
38,299

 
 
Foreclosure alternatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short sales
 
758

 
 
 
3,689

 
 
 
1,374

 
 
 
6,804

 
 
Deeds-in-lieu of foreclosure
 
304

 
 
 
1,968

 
 
 
528

 
 
 
3,323

 
 
Total foreclosure alternatives
 
1,062

 
 
 
5,657

 
 
 
1,902

 
 
 
10,127

 
 
Total loan workouts
 
$
5,734

 
 
 
34,225

 
 
 
$
8,389

 
 
 
48,426

 
 
Loan workouts as a percentage of single-family guaranty book of business
 
0.81

%
 
0.79

%
 
1.17

%
 
1.10

%
__________
(1) 
Repayment plans reflect only those plans associated with loans that were 60 days or more delinquent. Forbearances reflect loans that were 90 days or more delinquent.
The volume of home retention solutions completed in the first quarter of 2015 decreased compared with the first quarter of 2014, primarily due to a decline in the number of delinquent loans in the first quarter of 2015, compared with the first quarter of 2014.
We continue to work with our servicers to implement our home retention and foreclosure prevention initiatives. Our approach to workouts continues to focus on the large number of borrowers facing financial hardships. Accordingly, the vast majority of loan modifications we have completed since 2009 have been concentrated on deferring or lowering the borrowers’ monthly mortgage payments to allow borrowers to work through their hardships.
Our loan modifications can include a reduction in the borrower’s interest rate that is fixed for an initial period and may be followed by one or more annual interest rate increases. The majority of these rate reset modifications are performing loans that were modified under HAMP and have fixed interest rates for an initial five-year period followed by annual interest rate increases, of up to one percent per year, until the mortgage rate reaches the prevailing market rate at the time of modification. The outstanding unpaid principal balance of rate reset modifications in our guaranty book of business was $86.5 billion as of March 31, 2015. During the first quarter of 2015, approximately 12% of these modified loans experienced an interest rate reset to a weighted average interest rate of 3.21%. In anticipation of potential financial hardship related to interest rate increases, we have directed servicers to evaluate rate reset modifications for a re-modification if the loan is at imminent risk of default and the borrower requests a loan modification or if the loan becomes 60 days delinquent within the first 12 months after an interest rate adjustment. Additionally, for borrowers with HAMP modifications we extended “pay for performance” incentives, in the form of principal curtailment, to encourage borrowers to stay current on their mortgages after the initial interest rate reset and to reduce their monthly payments in cases where the borrower chooses to re-amortize their unpaid

53



principal balance following receipt of the incentive. See “MD&A—Risk Management—Credit Portfolio Summary—Mortgage Rate Resets” in our 2014 Form 10-K for information on the timing of these initial interest rate resets.
There is significant uncertainty regarding the ultimate long term success of our modification efforts. We believe the performance of our workouts will be highly dependent on economic factors, such as unemployment rates, household wealth and income, and home prices. Modifications, even those with reduced monthly payments, may also not be sufficient to help borrowers with second liens and other significant non-mortgage debt obligations. FHFA, other agencies of the U.S. government or Congress may ask us to undertake new initiatives to support the housing and mortgage markets should our current modification efforts ultimately not perform in a manner that results in the stabilization of these markets. See “Risk Factors” in our 2014 Form 10-K for a discussion of efforts we may be required or asked to undertake and their potential effect on us.
REO Management
Foreclosure and REO activity affect the amount of credit losses we realize in a given period. Table 30 displays our foreclosure activity, by region, for the periods indicated. Regional REO acquisition and charge-off trends generally follow a pattern that is similar to, but lags, that of regional delinquency trends.
Table 30: Single-Family Foreclosed Properties
  
For the Three Months
  
Ended March 31,
 
2015
 
2014
Single-family foreclosed properties (number of properties):
 
 
 
 
 
Beginning of period inventory of single-family foreclosed properties (REO)(1)
87,063

 
 
103,229

 
Acquisitions by geographic area:(2)
 
 
 
 
 
Midwest
5,428

 
 
7,542

 
Northeast
4,128

 
 
3,417

 
Southeast
10,006

 
 
13,524

 
Southwest
2,387

 
 
4,097

 
West
2,367

 
 
3,316

 
Total properties acquired through foreclosure(1)
24,316

 
 
31,896

 
Dispositions of REO
(32,060
)
 
 
(32,727
)
 
End of period inventory of single-family foreclosed properties (REO)(1)
79,319

 
 
102,398

 
Carrying value of single-family foreclosed properties (dollars in millions)
$
8,915

 
 
$
10,492

 
Single-family foreclosure rate(3)
0.56

%
 
0.73

%
__________
(1) 
Includes acquisitions through deeds-in-lieu of foreclosure. Also includes held for use properties, which are reported in our condensed consolidated balance sheets as a component of “Other assets.”
(2) 
See footnote 10 to “Table 26: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” for states included in each geographic region.
(3) 
Estimated based on the annualized total number of properties acquired through foreclosure or deeds-in-lieu of foreclosure as a percentage of the total number of loans in our single-family guaranty book of business as of the end of each respective period.
The continued decrease in the number of our seriously delinquent single-family loans, as well as lengthy foreclosure timelines in a number of states, have resulted in a reduction in the number of REO acquisitions in the first quarter of 2015 as compared with the first quarter of 2014.
We continue to manage our REO inventory to appropriately manage costs and maximize sales proceeds. However, we are unable to market and sell a large portion of our inventory, primarily due to occupancy and state or local redemption or confirmation periods, which extends the amount of time it takes to bring our properties to a marketable state and eventually dispose of them. This results in higher foreclosed property expenses, which include costs related to maintaining the property and ensuring that the property is vacant. Additionally, before we market our foreclosed properties, we may choose to repair them in order to maximize the sales price and increase the likelihood that an owner occupant will purchase. The percent of

54



properties we repair prior to marketing has increased as a result of market demand and our continued focus on stabilizing neighborhoods and increasing opportunities for owner occupants to purchase.
Table 31 displays the current status of our single-family foreclosed property inventory, including the percentage of our inventory that we are unable to market, as of the dates indicated.
Table 31: Single-Family Foreclosed Property Status
 
Percent of Single-Family
 
 
Foreclosed Properties
 
 
As of
 
 
March 31, 2015
 
December 31, 2014
 
Available-for-sale
 
24
%
 
28
%
Offer accepted(1)
 
22
 
 
17
 
Appraisal stage(2)
 
14
 
 
13
 
Unable to market:
 
 
 
 
 
 
Occupied status(3)
 
13
 
 
12
 
Redemption status(4)
 
7
 
 
7
 
Properties being repaired
 
10
 
 
13
 
Rental property(5)
 
2
 
 
2
 
Other
 
8
 
 
8
 
Total unable to market
 
40
 
 
42
 
Total
 
100
%
 
100
%
__________
(1) 
Properties for which an offer has been accepted, but the property has not yet been sold.
(2) 
Properties that are pending appraisals and being prepared to be listed for sale.
(3) 
Properties that are still occupied, and for which the eviction process is not yet complete.
(4) 
Properties that are within the period during which state laws allow the former mortgagor and second lien holders to redeem the property.
(5) 
Properties with a tenant living in the home under our tenant in place or deed for lease programs.
Multifamily Mortgage Credit Risk Management
The credit risk profile of our multifamily mortgage credit book of business is influenced by the structure of the financing, the type and location of the property, the condition and value of the property, the financial strength of the borrower, market and sub-market trends and growth, the current and anticipated cash flows from the property, as well as the financial strength of the lender. These and other factors affect both the amount of expected credit loss on a given loan and the sensitivity of that loss to changes in the economic environment. We provide information on our credit-related income and credit losses in “Business Segment Results—Multifamily Business Results.”
Multifamily Acquisition Policy and Underwriting Standards
Our Multifamily business is responsible for pricing and managing the credit risk on multifamily mortgage loans we purchase and on Fannie Mae MBS backed by multifamily loans (whether held in our retained mortgage portfolio or held by third parties), with oversight from our Enterprise Risk Management division. Our primary multifamily delivery channel is the Delegated Underwriting and Servicing, or DUS®, program, which consists of large financial institutions and independent mortgage lenders. Multifamily loans that we purchase or that back Fannie Mae MBS are either underwritten by a Fannie Mae-approved lender or subject to our underwriting review prior to closing, depending on the product type, loan size, market and/or other factors. Loans delivered to us by DUS lenders and their affiliates represented 94% of our multifamily guaranty book of business as of March 31, 2015 and December 31, 2014.
We use various types of credit enhancement arrangements for our multifamily loans including lender risk-sharing, lender repurchase agreements, pool insurance, subordinated participations in mortgage loans or structured pools, cash and letter of credit collateral agreements, and cross-collateralization/cross-default provisions. The most prevalent form of credit enhancement on multifamily loans is lender risk-sharing. Lenders in the DUS program typically share in loan-level credit losses in one of two ways: (1) they bear losses up to the first 5% of the unpaid principal balance of the loan and share in

55



remaining losses up to a prescribed limit; or (2) they share up to one-third of the credit losses on an equal basis with us. Non-DUS lenders typically share or absorb credit losses based on a negotiated percentage of the loan or the pool balance.
Table 32 displays the percentage of the unpaid principal balance of loans in our multifamily guaranty book of business with lender risk-sharing and with no recourse to the lender.
Table 32: Multifamily Lender Risk-Sharing
 
As of 
 
March 31,
2015
 
December 31, 2014
Lender risk-sharing:
 
 
 
 
 
 
 
DUS
 
86
%
 
 
 
85
%
 
Non-DUS negotiated
 
3

 
 
 
3

 
No recourse to the lender
 
11

 
 
 
12

 
Our maximum potential loss recovery from lenders under current risk-sharing agreements represents over 20% of the unpaid principal balance of our multifamily guaranty book of business as of March 31, 2015. These risk-sharing agreements not only transfer credit risk, but also better align our interest with that of the lender.
At the time of our purchase or guarantee of multifamily mortgage loans, we and our lenders rely on sound underwriting standards, which generally include third-party appraisals and cash flow analysis. Our standards for multifamily loans specify maximum original LTV ratio and minimum original debt service coverage ratio (“DSCR”) values that vary based on loan characteristics. Our experience has been that original LTV ratio and DSCR values have been reliable indicators of future credit performance.
Table 33 displays original LTV ratio and DSCR metrics for our multifamily guaranty book of business.
Table 33: Multifamily Guaranty Book of Business Key Risk Characteristics
 
As of
 
March 31,
2015
 
December 31, 2014
 
March 31,
2014
Weighted average original LTV ratio
 
66
%
 
 
 
66
%
 
 
 
66
%
 
Original LTV ratio greater than 80%
 
3

 
 
 
3

 
 
 
3

 
Original DSCR less than or equal to 1.10
 
9

 
 
 
8

 
 
 
7

 
Multifamily Portfolio Diversification and Monitoring
Diversification within our multifamily mortgage credit book of business by geographic concentration, term to maturity, interest rate structure, borrower concentration, loan size, and credit enhancement coverage are important factors that influence credit performance and help reduce our credit risk.
We and our lenders monitor the performance and risk characteristics of our multifamily loans and the underlying properties on an ongoing basis throughout the life of the loan at the loan, property, and portfolio levels. We closely monitor loans with an estimated current DSCR below 1.0, as that is an indicator of heightened default risk. The percentage of loans in our multifamily guaranty book of business, calculated based on unpaid principal balance, with a current DSCR less than 1.0 was approximately 3% as of March 31, 2015 and December 31, 2014. Our estimates of current DSCRs are based on the latest available income information for these properties. Although we use the most recently available results from our multifamily borrowers, there is a lag in reporting, which typically can range from 3 to 6 months but in some cases may be longer.
Multifamily Problem Loan Management and Foreclosure Prevention
We periodically refine our underwriting standards in response to market conditions and implement proactive portfolio management and monitoring which are each designed to keep credit losses and delinquencies to a low level relative to our multifamily guaranty book of business. The multifamily serious delinquency rate increased slightly from 0.05% as of December 31, 2014 to 0.09% as of March 31, 2015. We classify multifamily loans as seriously delinquent when payment is 60 days or more past due.

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REO Management
Table 34 displays our held-for-sale multifamily REO activity.
Table 34: Multifamily Foreclosed Properties
 
For the Three
 
Months Ended
 
March 31,
 
2015
 
2014
Multifamily foreclosed properties held for sale (number of properties):
 
 
 
 
 
 
 
Beginning of period inventory of multifamily foreclosed properties (REO)
 
62

 
 
 
118

 
Total properties acquired through foreclosure
 
6

 
 
 
17

 
Transfers from held for sale(1)
 
(4
)
 
 
 
(1
)
 
Dispositions of REO
 
(6
)
 
 
 
(17
)
 
End of period inventory of multifamily foreclosed properties (REO)
 
58

 
 
 
117

 
Carrying value of multifamily foreclosed properties (dollars in millions)
 
$
343

 
 
 
$
575

 
________
(1)  
Represents the transfer of properties between held for use and held for sale. Held for use properties are reported in our condensed consolidated balance sheets as a component of “Other assets.
Institutional Counterparty Credit Risk Management
Institutional counterparty credit risk is the risk that our institutional counterparties may fail to fulfill their contractual obligations to us. Defaults by a counterparty with significant obligations to us could result in significant financial losses to us.
See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management” and “Risk Factors” in our 2014 Form 10-K for additional information about institutional counterparty risk, including counterparty risk we face from mortgage originators, investors and dealers, from debt security dealers, from document custodians and from mortgage fraud.
Mortgage Sellers and Servicers
One of our primary exposures to institutional counterparty risk is with mortgage servicers that service the loans we hold in our retained mortgage portfolio or that back our Fannie Mae MBS, as well as mortgage sellers and servicers that are obligated to repurchase loans from us or reimburse us for losses in certain circumstances. We rely on mortgage servicers to meet our servicing standards and fulfill their servicing obligations. We also rely on mortgage sellers and servicers to fulfill their repurchase obligations.
Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 45% of our single-family guaranty book of business as of March 31, 2015, compared with approximately 46% as of December 31, 2014. Our largest mortgage servicer is Wells Fargo Bank, N.A., which, together with its affiliates, serviced approximately 18% of our single-family guaranty book of business as of March 31, 2015 and December 31, 2014. As of March 31, 2015 and December 31, 2014, one additional mortgage servicer, JPMorgan Chase Bank, N.A., with its affiliates, serviced over 10% of our single-family guaranty book of business.
Our ten largest multifamily mortgage servicers, including their affiliates, serviced approximately 68% of our multifamily guaranty book of business as of March 31, 2015, compared with approximately 67% as of December 31, 2014. Wells Fargo Bank, N.A. serviced over 10% of our multifamily guaranty book of business as of March 31, 2015 and December 31, 2014. As of December 31, 2014, one additional mortgage servicer, Walker & Dunlop, LLC serviced over 10% of our multifamily guaranty book of business.
We have seen an increasing shift in our single-family servicing book from depository financial institution servicers to non-depository servicers. As of March 31, 2015, 19% of our total single-family guaranty book of business, including 55% of our delinquent single-family loans, were serviced by our five largest non-depository servicers, compared with 18% of our total single-family guaranty book of business, including 48% of our delinquent single-family loans as of March 31, 2014. Certain of these servicers’ growth in recent years is due to acquisitions from both depository and other non-depository servicers. The shift from depository to non-depository servicers poses additional risks to us because non-depository servicers may have a greater reliance on third-party sources of liquidity and may, in the event of significant increases in delinquent loan volumes, have less financial capacity to advance funds on our behalf or satisfy repurchase requests or compensatory fee obligations. In

57



addition, the rapid expansion of these servicers’ servicing portfolios results in increased operational risk, which could negatively impact their ability to effectively manage their servicing portfolios. In addition, regulatory bodies have been reviewing the activities of some of our largest non-depository servicers. See “Risk Factors” in our 2014 Form 10-K for a discussion of the risk of our reliance on servicers.
Some of our loans are serviced by subsidiaries and/or affiliates of Ocwen Financial Corporation (“Ocwen”). Ocwen has been the subject of regulatory scrutiny and actions, as well as rating agency downgrades. We are working with Ocwen on the orderly transfer of a substantial portion of the servicing of our loans. As of March 31, 2015, approximately 3% of our total single-family guaranty book of business was serviced by Ocwen.
Our five largest single-family mortgage sellers, including their affiliates, accounted for approximately 32% of our single-family business acquisition volume in the first quarter of 2015, compared with approximately 37% in the first quarter of 2014. Our largest mortgage seller is Wells Fargo Bank, N.A., which, together with its affiliates, accounted for approximately 13% of our single-family business acquisition volume in the first quarter of 2015 and 2014. A number of our largest single-family mortgage seller counterparties have reduced or eliminated their purchases of mortgage loans from mortgage brokers and correspondent lenders in recent years, resulting in a decline in our single-family mortgage seller concentration. As a result, we are acquiring a greater portion of our business volume directly from non-depository and smaller depository financial institutions that may not have the same financial strength or operational capacity as our largest mortgage seller counterparties. We could be required to absorb losses on defaulted loans that a failed mortgage seller is obligated to repurchase from us if we determine there was an underwriting eligibility breach. See “Risk Factors” in our 2014 Form 10-K for a discussion of the risks to our business due to changes in the mortgage industry.
If we determine that a mortgage loan did not meet our underwriting or eligibility requirements, loan representations or warranties were violated or a mortgage insurer rescinded coverage, then our mortgage sellers and/or servicers are obligated to either repurchase the loan or foreclosed property, reimburse us for our losses or provide other remedies unless the loan has become eligible for relief under our new representation and warranty framework. We refer to our demands that mortgage sellers and servicers meet these obligations collectively as repurchase requests. See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Mortgage Sellers and Servicers” in our 2014 Form 10-K for a discussion of our mortgage sellers and servicers’ repurchase obligations.
Mortgage sellers and servicers may not meet the terms of their repurchase obligations, and we may be unable to recover on all outstanding loan repurchase obligations resulting from their breaches of contractual obligations. Failure by a significant mortgage seller or servicer, or a number of mortgage sellers or servicers, to fulfill repurchase obligations to us could result in an increase in our credit losses and credit-related expense, and have an adverse effect on our results of operations and financial condition. In addition, actions we take to pursue our contractual remedies could increase our costs, reduce our revenues, or otherwise have an adverse effect on our results of operations or financial condition. As of March 31, 2015 and December 31, 2014, in estimating our allowance for loan losses, we assumed no benefit from repurchase demands due to us from mortgage sellers or servicers that, in our view, lacked the financial capacity to honor their contractual obligations. The unpaid principal balance of our outstanding repurchase requests was $1.3 billion as of March 31, 2015, compared with $1.0 billion as of December 31, 2014. See “MD&A—Risk Management—Credit Risk Management—Single-Family Mortgage Credit Risk Management—Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2014 Form 10-K for a discussion of our repurchase requests.
Credit Guarantors
We use various types of credit guarantors to manage our single-family mortgage credit risk, including mortgage insurers, financial guarantors, reinsurers and lenders with risk sharing.
Mortgage Insurers
We are generally required, pursuant to our charter, to obtain credit enhancements on single-family conventional mortgage loans that we purchase or securitize with LTV ratios over 80% at the time of purchase. We use several types of credit enhancements to manage our single-family mortgage credit risk, including primary and pool mortgage insurance coverage. Table 35 displays our risk in force for mortgage insurance coverage on single-family loans in our guaranty book of business and our insurance in force for our mortgage insurer counterparties. The table includes our top ten mortgage insurer counterparties, which provided over 99% of our total mortgage insurance coverage on single-family loans in our guaranty book of business as of March 31, 2015 and December 31, 2014. In addition, for our mortgage insurer counterparties not approved to write new business, we have provided the percentage of their claims payments that the counterparties are currently deferring based on the direction of their state regulators, referred to as their deferred payment obligation. Both our risk in force and our insurance in force increased in 2014 primarily due to the increase in our acquisition of loans with LTV

58



ratios greater than 80%, which generally are required to carry mortgage insurance. As of March 31, 2015 and December 31, 2014, approximately 1% of our total risk in force mortgage insurance coverage was pool insurance and approximately 2% of our total insurance in force mortgage insurance coverage was pool insurance.
Table 35: Mortgage Insurance Coverage
 
 
 
Risk in Force(1)
 
 
Insurance in Force(2)
 
 
 
 
 
 
As of
 
 
As of
 
Deferred
 
 
 
 
March 31,
 
 
December 31,
 
 
March 31,
 
December 31,
 
Payment
 
 
 
 
2015
 
 
2014
 
 
2015
 
2014
 
Obligation %(3)
 
 
 
 
(Dollars in millions)
 
 
 
Counterparty:(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Approved:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Guaranty Residential Insurance Co.
 
 
$
25,327

 
 
 
$
25,018

 
 
 
$
98,083

 
 
$
96,906

 
 
 
 
Radian Guaranty, Inc.
 
 
24,348

 
 
 
24,284

 
 
 
95,929

 
 
95,845

 
 
 
 
Mortgage Guaranty Insurance Corp.
 
 
22,449

 
 
 
22,184

 
 
 
86,982

 
 
86,069

 
 
 
 
Genworth Mortgage Insurance Corp.
 
 
15,639

 
 
 
15,477

 
 
 
62,021

 
 
61,408

 
 
 
 
Essent Guaranty, Inc.
 
 
7,009

 
 
 
6,637

 
 
 
29,072

 
 
27,679

 
 
 
 
Arch Mortgage Insurance Co.
 
 
3,177

 
 
 
3,049

 
 
 
12,843

 
 
12,267

 
 
 
 
National Mortgage Insurance Corp.
 
 
663

 
 
 
468

 
 
 
7,007

 
 
6,286

 
 
 
 
Others
 
 
197

 
 
 
185

 
 
 
1,172

 
 
1,092

 
 
 
 
Total approved
 
 
98,809

 
 
 
97,302

 
 
 
393,109

 
 
387,552

 
 
 
 
Not approved:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PMI Mortgage Insurance Co.(6)
 
 
5,629

 
 
 
5,895

 
 
 
22,559

 
 
23,655

 
 
30
%
(7) 
Republic Mortgage Insurance Co.(6)(8)
 
 
4,585

 
 
 
4,796

 
 
 
18,445

 
 
19,393

 
 

(8) 
Triad Guaranty Insurance Corp.(6)
 
 
1,526

 
 
 
1,585

 
 
 
5,558

 
 
5,858

 
 
25
%
 
Others
 
 
11

 
 
 
12

 
 
 
54

 
 
57

 
 
 
 
Total not approved
 
 
11,751

 
 
 
12,288

 
 
 
46,616

 
 
48,963

 
 
 
 
Total
 
 
$
110,560

 
 
 
$
109,590

 
 
 
$
439,725

 
 
$
436,515

 
 
 
 
Total as a percentage of single-family guaranty book of business
 
 
4

%
 
 
4

%
 
 
15

%
 
15

%
 
 
 
__________
(1) 
Risk in force is generally the maximum potential loss recovery under the applicable mortgage insurance policies in force and is based on the loan level insurance coverage percentage and, if applicable, any aggregate pool loss limit, as specified in the policy. 
(2) 
Insurance in force represents the unpaid principal balance of single-family loans in our guaranty book of business covered under the applicable mortgage insurance policies.
(3) 
Deferred payment obligation represents the percentage of cash payments on policyholder claims being deferred as directed by the insurer’s respective regulator in the state of domicile as of May 7, 2015.
(4) 
Insurance coverage amounts provided for each counterparty may include coverage provided by consolidated affiliates and subsidiaries of the counterparty.
(5) 
“Approved” mortgage insurers are counterparties approved to write new insurance with us. “Not approved” mortgage insurers are counterparties that are no longer approved to write new insurance with us.
(6) 
These mortgage insurers are under various forms of supervised control by their state regulators and are in run-off.
(7) 
Effective April 10, 2015, PMI increased its cash payments on policyholder claims from 67% to 70%, and subsequently paid sufficient amounts of its outstanding deferred payment obligations to bring payment on those claims to 70%. It is uncertain whether PMI will be permitted in the future to pay any remaining deferred policyholder claims or increase or decrease the amount of cash they pay on claims.
(8) 
Effective July 1, 2014, the terms of RMIC’s order regarding its deferred payment arrangements changed to no longer defer payments on policyholder claims and to increase its cash payments to 100%. In addition, RMIC paid us amounts equivalent to its outstanding deferred payment obligations to bring payment on our claims to 100%.
On April 17, 2015, Fannie Mae published updated eligibility standards for approved private mortgage insurers, pursuant to a directive issued by FHFA to both Fannie Mae and Freddie Mac. The new standards, effective immediately for new applicants and on December 31, 2015 for existing approved insurers, include enhanced financial requirements, including risk-based and minimum asset standards and are designed to ensure that mortgage insurers have sufficient liquid assets to pay all claims

59



under a hypothetical future stress scenario. The new standards also set forth enhanced operational performance expectations and define remedial actions that may be imposed should an approved mortgage insurer fail to comply with the revised requirements. In addition, Fannie Mae and Freddie Mac established a framework and timelines for existing approved mortgage insurers to come into compliance with the new standards while they continue to insure new business eligible for delivery to us.
Although the financial condition of our primary mortgage insurer counterparties currently approved to write new business has improved in recent years, there is still risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies. In addition, as shown in “Table 35: Mortgage Insurance Coverage,” three of our top mortgage insurer counterparties—PMI, RMIC and Triad—are currently under various forms of supervised control by their state regulators and are in run-off, which increases the risk that these counterparties will pay claims only in part or fail to pay claims at all under existing insurance policies.
When we estimate the credit losses that are inherent in our mortgage loans and under the terms of our guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of our mortgage insurer counterparties’ ability to fulfill their respective obligations to us worsens, it could result in an increase in our loss reserves. The amount by which our estimated benefit from mortgage insurance reduced our total loss reserves was $2.9 billion as of March 31, 2015 and $4.1 billion as of December 31, 2014.
When an insured loan held in our retained mortgage portfolio subsequently goes into foreclosure, we charge off the loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds, cancels or denies insurance coverage, the initial receivable becomes due from the mortgage seller or servicer. We had outstanding receivables of $1.5 billion recorded in “Other assets” in our condensed consolidated balance sheets as of March 31, 2015 and $1.4 billion as of December 31, 2014 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $360 million as of March 31, 2015 and $269 million as of December 31, 2014 was due from our mortgage sellers or servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $870 million as of March 31, 2015 and $799 million as of December 31, 2014. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of March 31, 2015 and December 31, 2014.
Financial Guarantors
We are the beneficiary of non-governmental financial guarantees on non-agency securities held in our retained mortgage portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The total unpaid principal balance of guaranteed non-agency securities in our retained mortgage portfolio was $4.1 billion as of March 31, 2015 and $4.6 billion as of December 31, 2014. See “Note 16, Concentrations of Credit Risk—Financial Guarantors” in our 2014 Form 10-K for a further discussion of our exposure to financial guarantors.
We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that totaled $19.0 billion as of March 31, 2015 and $19.2 billion as of December 31, 2014.
Reinsurers
See “MD&A—Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Credit Guarantors—Reinsurers” in our 2014 Form 10-K for information about reinsurers.
Lenders with Risk Sharing
We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under these risk sharing agreements on single-family loans was $8.5 billion as of March 31, 2015, compared with $8.9 billion as of December 31, 2014. As of March 31, 2015 and December 31, 2014, 47% of our maximum potential loss recovery on single-family loans was from three lenders. Our maximum potential loss recovery from lenders under risk sharing agreements on DUS and non-DUS multifamily loans was $42.9 billion as of March 31, 2015, compared with $41.7 billion as of December 31, 2014. As of March 31, 2015 and December 31, 2014, 32% of our maximum potential loss recovery on multifamily loans was from three DUS lenders.
The percentage of single-family recourse obligations from lenders with investment grade credit ratings (based on the lower of S&P, Moody’s and Fitch ratings) was 48% as of March 31, 2015, compared with 49% as of December 31, 2014. The

60



percentage of recourse obligations from lender counterparties rated below investment grade was 23% as of March 31, 2015 and December 31, 2014. The percentage of remaining recourse obligations from lender counterparties that were not rated by rating agencies was 29% of as of March 31, 2015, compared with 28% as of December 31, 2014. Given the stressed financial condition of some of our single-family lenders, we expect in some cases we will recover less than the amount the lender is obligated to provide us under our risk sharing arrangement with them. Depending on the financial strength of the counterparty, we may require a lender to pledge collateral to secure its recourse obligations.
As noted above in “Multifamily Mortgage Credit Risk Management—Multifamily Acquisition Policy and Underwriting Standards,” our primary multifamily delivery channel is our DUS program, which consists of lenders that range from large depositories to independent non-bank financial institutions. As of March 31, 2015 and December 31, 2014 approximately 36% of the unpaid principal balance of loans in our multifamily guaranty book of business serviced by our DUS lenders was from institutions with an external investment grade credit rating or a guaranty from an affiliate with an external investment grade credit rating. Given the recourse nature of the DUS program, the lenders are bound by eligibility standards that dictate, among other items, minimum capital and liquidity levels, and the posting of collateral at a highly rated custodian to secure a portion of the lenders’ future obligations. We actively monitor the financial condition of these lenders to help ensure the level of risk remains within our standards and to ensure required capital levels are maintained and are in alignment with actual and modeled loss projections.
Custodial Depository Institutions
A total of $39.3 billion in deposits for single-family payments were received and held by 270 institutions during the month of March 2015 and a total of $33.2 billion in deposits for single-family payments were received and held by 269 institutions during the month of December 2014. Of these total deposits, 93% as of March 31, 2015 and December 31, 2014, were held by institutions rated as investment grade by S&P, Moody’s and Fitch. Our transactions with custodial depository institutions are concentrated. Our six largest custodial depository institutions held 82% of these deposits as of March 31, 2015, compared with 83% as of December 31, 2014.
We evaluate our custodial depository institutions to determine whether they are eligible to hold deposits on our behalf based on requirements specified in our Servicing Guide. If a custodial depository institution were to fail while holding remittances of borrower payments of principal and interest due to us in our custodial account, we would be an unsecured creditor of the depository for balances in excess of the deposit insurance protection and might not be able to recover all of the principal and interest payments being held by the depository on our behalf, or there might be a substantial delay in receiving these amounts. If this were to occur, we would be required to replace these amounts with our own funds to make payments that are due to Fannie Mae MBS certificateholders. Accordingly, the insolvency of one of our principal custodial depository counterparties could result in significant financial losses to us. During the month of March 2015, approximately $3.8 billion, or 10%, of our total deposits for single-family payments received and held by these institutions was in excess of the deposit insurance protection limit compared with approximately $2.4 billion, or 7%, during the month of December 2014. These amounts can vary as they are calculated based on individual payments of mortgage borrowers and we must estimate which borrowers are paying their regular principal and interest payments and other types of payments, such as prepayments from refinancing or sales.
Counterparty Credit Exposure of Investments Held in our Cash and Other Investments Portfolio
Our cash and other investments portfolio consists of cash and cash equivalents, securities purchased under agreements to resell or similar arrangements and U.S. Treasury securities. Our cash and other investment counterparties are primarily financial institutions and the Federal Reserve Bank. As of March 31, 2015 and December 31, 2014, we held $2.0 billion short-term unsecured deposits with two financial institutions that had short-term credit rating of A-1 from S&P (or its equivalent), based on the lowest credit rating issued by S&P, Moody’s and Fitch, and no other unsecured positions other than U.S. Treasury securities. See “Liquidity and Capital Management—Liquidity Management—Cash and Other Investments Portfolio” for more detailed information on our cash and other investments portfolio.
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. Historically, our risk management derivative transactions have been made pursuant to bilateral contracts with a specific counterparty governed by the terms of an International Swaps and Derivatives Association Inc. master agreement. Pursuant to regulations implementing the Dodd-Frank Act that became effective in June 2013, we are required to submit certain categories of new interest rate swaps to a derivatives clearing organization. We refer to our derivative transactions

61



made pursuant to bilateral contracts as our over-the-counter (“OTC”) derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our cleared derivative transactions.
We manage our derivative counterparty credit exposure relating to our OTC derivative transactions through enforceable master netting arrangements. These arrangements allow us to net derivative assets and liabilities with the same counterparty. We also manage our derivative counterparty exposure relating to our OTC derivative transactions by requiring counterparties to post collateral, which includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.
Our cleared derivative transactions are submitted to a derivatives clearing organization on our behalf through a clearing member of the organization. A contract accepted by a derivatives clearing organization is governed by the terms of the clearing organization’s rules and arrangements between us and the clearing member of the clearing organization. As a result, we are exposed to the institutional credit risk of both the derivatives clearing organization and the member who is acting on our behalf. We manage our credit exposure relating to our cleared derivative transactions through enforceable master netting arrangements. These arrangements allow us to net our exposure to cleared derivatives by clearing organization and by clearing member.
Our institutional credit risk exposure to derivatives clearing organizations and certain of their members will increase substantially in the future as cleared derivative contracts comprise a larger percentage of our derivative instruments. We estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present value basis, to settle at current market prices all outstanding derivative contracts in a net gain position at the counterparty level where the right of legal offset exists.
The fair value of derivatives in a gain position is included in our condensed consolidated balance sheets in “Other assets.” Total exposure net of collateral represents the exposure to credit loss on derivative instruments less the cash and non-cash collateral posted by our counterparties to us. This does not include collateral held in excess of exposure. As of March 31, 2015 and December 31, 2014, our total exposure net of collateral was $27 million. Most of our total exposure net of collateral consists of mortgage insurance contracts accounted for as derivatives as of March 31, 2015 and December 31, 2014.
As of March 31, 2015 and December 31, 2014, we had sixteen counterparties with which we may transact OTC derivative transactions, all of which were subject to enforceable master netting arrangements. We had outstanding notional amounts with all of these counterparties, and the highest concentration by our total outstanding notional amount was approximately 9% as of March 31, 2015 and 11% as of December 31, 2014.
See “Note 9, Derivative Instruments” and “Note 14, Netting Arrangements” for additional information on our derivative contracts as of March 31, 2015 and December 31, 2014.
Market Risk Management, Including Interest Rate Risk Management
We are subject to market risk, which includes interest rate risk, spread risk and liquidity risk. These risks arise from our mortgage asset investments. Interest rate risk is the risk of loss in value or expected future earnings that may result from changes to interest rates. Spread risk or basis risk is the resulting impact of changes in the spread between our mortgage assets and our debt and derivatives we use to hedge our position. Liquidity risk is the risk that we will not be able to meet our funding obligations in a timely manner. We describe our sources of interest rate risk exposure and our strategy for managing interest rate risk and spread risk in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” in our 2014 Form 10-K.
Measurement of Interest Rate Risk
Below we present two quantitative metrics that provide estimates of our interest rate risk exposure: (1) fair value sensitivity of our net portfolio to changes in interest rate levels and slope of yield curve; and (2) duration gap. Our net portfolio consists of our retained mortgage portfolio assets; cash and other investment portfolio; our outstanding debt of Fannie Mae that is used to fund the retained mortgage portfolio assets and cash and other investment portfolio; mortgage commitments and risk management derivatives. Risk management derivatives along with our debt instruments are used to manage interest rate risk.
The metrics presented are calculated using internal models that require standard assumptions regarding interest rates and future prepayments of principal over the remaining life of our securities. These assumptions are derived based on the characteristics of the underlying structure of the securities and historical prepayment rates experienced at specified interest rate levels, taking into account current market conditions, the current mortgage rates of our existing outstanding loans, loan age and other factors. On a continuous basis, management makes judgments about the appropriateness of the risk assessments and will make adjustments as necessary to properly assess our interest rate exposure and manage our interest rate risk. The methodologies used to calculate risk estimates are periodically changed on a prospective basis to reflect improvements in the underlying estimation process.

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Interest Rate Sensitivity to Changes in Interest Rate Level and Slope of Yield Curve
Pursuant to a disclosure commitment with FHFA, we disclose on a monthly basis the estimated adverse impact on the fair value of our net portfolio that would result from the following hypothetical situations:
A 50 basis point shift in interest rates.
A 25 basis point change in the slope of the yield curve.
In measuring the estimated impact of changes in the level of interest rates, we assume a parallel shift in all maturities of the U.S. LIBOR interest rate swap curve.
In measuring the estimated impact of changes in the slope of the yield curve, we assume a constant 7-year rate and a shift of 16.7 basis points for the 1-year rate and 8.3 basis points for the 30-year rate. We believe the aforementioned interest rate shocks for our monthly disclosures represent moderate movements in interest rates over a one-month period.
Duration Gap
Duration gap measures the price sensitivity of our assets and liabilities in our net portfolio to changes in interest rates by quantifying the difference between the estimated durations of our assets and liabilities. Our duration gap analysis reflects the extent to which the estimated maturity and repricing cash flows for our assets are matched, on average, over time and across interest rate scenarios to those of our liabilities. A positive duration gap indicates that the duration of our assets exceeds the duration of our liabilities. We disclose duration gap on a monthly basis under the caption “Interest Rate Risk Disclosures” in our Monthly Summary, which is available on our Web site and announced in a press release.
While our goal is to reduce the price sensitivity of our net portfolio to movements in interest rates, various factors can contribute to a duration gap that is either positive or negative. For example, changes in the market environment can increase or decrease the price sensitivity of our mortgage assets relative to the price sensitivity of our liabilities because of prepayment uncertainty associated with our assets. In a declining interest rate environment, prepayment rates tend to accelerate, thereby shortening the duration and average life of the fixed rate mortgage assets we hold in our net portfolio. Conversely, when interest rates increase, prepayment rates generally slow, which extends the duration and average life of our mortgage assets. Our debt and derivative instrument positions are used to manage the interest rate sensitivity of our retained mortgage portfolio and our investments in non-mortgage securities. As a result, the degree to which the interest rate sensitivity of our retained mortgage portfolio and our investments in non-mortgage securities is offset will be dependent upon, among other factors, the mix of funding and other risk management derivative instruments we use at any given point in time.
The market value sensitivities of our net portfolio are a function of both the duration and the convexity of our net portfolio. Duration provides a measure of the price sensitivity of a financial instrument to changes in interest rates while convexity reflects the degree to which the duration of the assets and liabilities in our net portfolio changes in response to a given change in interest rates. We use convexity measures to provide us with information about how quickly and by how much our net portfolio’s duration may change in different interest rate environments. The market value sensitivity of our net portfolio will depend on a number of factors, including the interest rate environment, modeling assumptions and the composition of assets and liabilities in our net portfolio, which vary over time.
Results of Interest Rate Sensitivity Measures
The interest rate risk measures discussed below exclude the impact of changes in the fair value of our guaranty assets and liabilities resulting from changes in interest rates. We exclude our guaranty business from these sensitivity measures based on our current assumption that the guaranty fee income generated from future business activity will largely replace guaranty fee income lost due to mortgage prepayments.
Table 36 displays the pre-tax market value sensitivity of our net portfolio to changes in the level of interest rates and the slope of the yield curve as measured on the last day of each period presented. In addition, Table 36 also provides the daily average, minimum, maximum and standard deviation values for duration gap and for the most adverse market value impact on the net portfolio to changes in the level of interest rates and the slope of the yield curve for the three months ended March 31, 2015 and 2014.
The sensitivity measures displayed in Table 36, which we disclose on a quarterly basis pursuant to a disclosure commitment with FHFA, are an extension of our monthly sensitivity measures. There are three primary differences between our monthly sensitivity disclosure and the quarterly sensitivity disclosure presented below: (1) the quarterly disclosure is expanded to include the sensitivity results for larger rate level shocks of plus or minus 100 basis points; (2) the monthly disclosure reflects the estimated pre-tax impact on the market value of our net portfolio calculated based on a daily average, while the quarterly disclosure reflects the estimated pre-tax impact calculated based on the estimated financial position of our net portfolio and

63



the market environment as of the last business day of the quarter; and (3) the monthly disclosure shows the most adverse pre-tax impact on the market value of our net portfolio from the hypothetical interest rate shocks, while the quarterly disclosure includes the estimated pre-tax impact of both up and down interest rate shocks.
Table 36: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve(1) 
 
As of
 
March 31, 2015(2)
 
December 31, 2014(2)
 
(Dollars in billions)
Rate level shock:
 
 
 
 
 
 
 
-100 basis points
 
$
0.4

 
 
 
$
0.4

 
-50 basis points
 
0.1

 
 
 
0.1

 
+50 basis points
 
(0.0
)
 
 
 
(0.1
)
 
+100 basis points
 
(0.1
)
 
 
 
(0.1
)
 
Rate slope shock:
 
 
 
 
 
 
 
-25 basis points (flattening)
 
(0.0
)
 
 
 
0.0

 
+25 basis points (steepening)
 
0.0

 
 
 
(0.0
)
 
 
For the Three Months Ended March 31, 2015(3)
 
Duration Gap
 
Rate Slope Shock 25 Bps
 
Rate Level Shock 50 Bps
 
 
 
Exposure
 
(In months)
 
(Dollars in billions)
Average
0.2
 
 
$
0.0

 
 
 
$
0.0

 
Minimum
(0.5)
 
 
0.0

 
 
 

 
Maximum
1.1
 
 
0.1

 
 
 
0.1

 
Standard deviation
0.4
 
 
0.0

 
 
 
0.0

 
 
  
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2014(3)
 
Duration Gap
 
Rate Slope Shock
25 Bps
 
Rate Level Shock 50 Bps
 
 
 
Exposure
 
(In months)
 
(Dollars in billions)
Average
(0.1)
 
 
$
0.0

 
 
 
$
0.1

 
Minimum
(0.5)
 
 
0.0

 
 
 
0.0

 
Maximum
0.3
 
 
0.1

 
 
 
0.1

 
Standard deviation
0.1
 
 
0.0

 
 
 
0.0

 
__________
(1) 
Computed based on changes in U.S. LIBOR interest rates swap curve.
(2) 
Measured on the last day of each period presented.
(3) 
Computed based on daily values during the period presented.
The market value sensitivity of our net portfolio varies across a range of interest rate shocks depending upon the duration and convexity profile of our net portfolio. The average duration gap was 0.2 months for the three months ended March 31, 2015, which is consistent with the average duration gap for the three months ended March 31, 2014. Because the effective duration gap of our net portfolio was close to zero months in the periods presented, convexity risk was the primary driver of the market value sensitivity of our net portfolio in those periods.
A majority of the interest rate risk associated with our mortgage-related securities and loans is hedged with our debt issuances, which include callable debt. We use derivatives to help manage the residual interest rate risk exposure between our assets and liabilities. Derivatives have enabled us to keep our interest rate risk exposure at consistently low levels in a wide range of interest-rate environments. Table 37 displays an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.

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Table 37: Derivative Impact on Interest Rate Risk (50 Basis Points)(1) 
 
As of
 
March 31, 2015
 
December 31, 2014
 
(Dollars in billions)
Before Derivatives
 
$
(1.7
)
 
 
 
$
(1.9
)
 
After Derivatives
 
(0.0
)
 
 
 
(0.1
)
 
Effect of Derivatives
 
1.7

 
 
 
1.8

 
__________
(1)
Measured on the last day of each period presented.
Liquidity Risk Management
See “MD&A—Liquidity and Capital Management—Liquidity Management” in our 2014 Form 10-K and in this report for a discussion of how we manage liquidity risk.
Operational Risk Management
See “MD&A—Risk Management—Operational Risk Management” in our 2014 Form 10-K for information on operational risks that we face and our framework for managing operational risk.
IMPACT OF FUTURE ADOPTION OF NEW ACCOUNTING GUIDANCE
We identify and discuss the expected impact on our condensed consolidated financial statements of recently issued accounting guidance in “Note 1, Summary of Significant Accounting Policies.”
FORWARD-LOOKING STATEMENTS
This report includes statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, our senior management may from time to time make forward-looking statements orally to analysts, investors, the news media and others. Forward-looking statements often include words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “forecast,” “project,” “would,” “should,” “could,” “likely,” “may,” “will” or similar words.
Among the forward-looking statements in this report are statements relating to:
Our expectation that we will remain profitable on an annual basis for the foreseeable future;
Our expectation that our earnings in 2015 and future years will be substantially lower than our earnings for 2014, primarily due to our expectation of substantially lower income from resolution agreements, continued declines in net interest income from our retained mortgage portfolio assets and lower credit-related income;
Our expectation that certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year;
Our expectation that our future financial results also will be affected by a number of other factors, including: our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions;
Our expectation of volatility from period to period in our financial results from a number of factors, particularly changes in market conditions that result in periodic fluctuations in the estimated fair value of the financial instruments that we mark to market through our earnings;
Our expectation that we will continue engaging in economically sensible ways to expand our offerings of credit risk transfer transactions in the future;
Our expectation that we will pay Treasury a senior preferred stock dividend of $1.8 billion by June 30, 2015 for the second quarter of 2015;

65


Our expectation that we will retain only a limited amount of any future net worth because we are required by the dividend provisions of the senior preferred stock and quarterly directives from our conservator to pay Treasury each quarter the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount;
Our expectation that our acquisition of single-family loans with 95.01% to 97% LTV ratios will not materially affect our overall credit risk because of our expectations that (1) these loans will constitute a small portion of our acquisitions overall, although their volume will increase, and (2) our eligibility requirements for these loans will limit their effect on our overall credit risk;
Our expectation that our single-family acquisitions will continue to have a strong overall credit risk profile given our current underwriting and eligibility standards and product design;
Our belief that Collateral Underwriter’s integration with Desktop Underwriter will enhance our lenders’ risk management and underwriting capabilities;
The expectation that, with the enhanced requirements FHFA announced in March 2015, NPL sales will result in favorable outcomes for borrowers and local communities;
Our plan to build NPL sales into a programmatic offering, and the outcome of the marketing efforts for our first bulk sale of NPL, which we began in April 2015;
The estimate that there will be approximately 340,000 new multifamily units completed in 2015;
Our belief that the increase in the supply of multifamily units concentrated in a limited number of metropolitan areas in 2015 will result in a temporary slowdown in net absorption rates, occupancy levels and effective rents in those areas throughout 2015;
Our expectation that overall national rental market supply and demand will remain in balance over the longer term, based on expected construction completions, expected obsolescence, positive household formation trends and expected increases in the population of 20- to 34-year olds, which is the primary age group that tends to rent multifamily housing;
Our expectation that significant uncertainty regarding the future of our company and the housing finance system will continue;
Our expectation that the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties will continue to account for an increasing portion of our net interest income;
Our expectation that continued decreases in the size of our retained mortgage portfolio will continue to negatively impact our net interest income and net revenues;
Our expectation that increases in our guaranty fee revenues will partially offset the negative impact of the decline in our retained mortgage portfolio,
Our expectation that our guaranty fee revenues will increase over the next several years, as loans with lower guaranty fees liquidate from our book of business and are replaced with new loans with higher guaranty fees;
Our expectation that the extent to which the positive impact of increased guaranty fee revenues will offset the negative impact of the decline in the size of our retained mortgage portfolio will depend on many factors, including: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; the size, composition and quality of our guaranty book of business; the nature and volume of transactions we enter into to transfer credit risk; the life of the loans in our guaranty book of business; the size, composition and quality of our retained mortgage portfolio, including the pace at which we are required by our conservator to reduce the size of our portfolio and the types of assets we are required to sell; economic and housing market conditions, including changes in interest rates; our market share; and legislative and regulatory changes;
Our expectation that single-family mortgage loan serious delinquency and severity rates will continue their downward trend, but at a slower pace than in recent years;
Our expectation that single-family serious delinquency and severity rates will remain high compared with pre-housing crisis levels because it will take some time for the remaining delinquent loans with high mark-to-market LTV ratios originated prior to 2009 to work their way through the foreclosure process;
Our expectation that, despite steady demand and stable fundamentals at the national level, the multifamily sector may continue to exhibit below average fundamentals in certain local markets and with certain properties;

66


Our forecast that total originations in the U.S. single-family mortgage market in 2015 will increase from 2014 levels by approximately 14%, from an estimated $1.2 trillion in 2013 to $1.4 trillion in 2014;
Our forecast that the amount of originations in the U.S. single-family mortgage market that are refinancings will increase from an estimated $507 billion in 2014 to $609 billion in 2015;
Our expectation that the rate of home price appreciation in 2015 will be similar to the rate in 2014;
Our expectation of significant regional variation in the timing and rate of home price growth;
Our expectation that our credit losses will resume their downward trend in future quarters;
Our expectation that our approach to adopting the Advisory Bulletin’s charge-off provisions and our charge-offs resulting from implementing our change in accounting policy for nonaccrual loans will decrease the amount of future charge-offs on these same loans from what they otherwise would have been;
Our expectation that, although our loss reserves have declined substantially from their peak and are expected to decline further, our loss reserves will remain elevated relative to the levels experienced prior to the 2008 housing crisis for an extended period because (1) we expect future defaults on loans that we acquired prior to 2009 and the resulting charge-offs will occur over a period of years and (2) a significant portion of our reserves represents concessions granted to borrowers upon modification of their loans and our reserves will continue to reflect these concessions until the loans are fully repaid or default;
The expectations that, since all of the guaranty fee changes FHFA directed us to implement in April 2015 are small, the adjustments will not cause any material changes to our loan volume in any of the relevant loan categories and that the small changes will be revenue neutral;
Our expectation that we will allocate $52 million that we accrued in the first quarter of 2015, plus additional amounts to be accrued based on our new business purchases in subsequent quarters of 2015, in February 2016 to HUD’s Housing Trust Fund and Treasury’s Capital Magnet Fund;
Our expectation that guaranty fees collected and expenses incurred under the TCCA will continue to increase in the future;
Our expectation that, as we continue to reduce the size of our retained mortgage portfolio, our revenues generated by our retained mortgage portfolio will decrease;
Our belief that our liquidity contingency plan may be difficult or impossible to execute for a company of our size and in our circumstances;
Our intention to repay our short-term and long-term debt obligations as they become due primarily through proceeds from the issuance of additional debt securities;
Our expectation that we may also use proceeds from our mortgage assets to pay our debt obligations;
Our expectation that we will not eliminate our deficit of core capital over statutory minimum capital;
Our expectation that the serious delinquency rates for single-family loans acquired in more recent years will be higher after the loans have aged, but will not approach the March 31, 2015 serious delinquency rates of loans acquired in 2005 through 2008;
Our expectation that the ultimate performance of all our loans will be affected by borrower behavior, public policy and macroeconomic trends, including unemployment, the economy and home prices;
Our expectation that loans we acquire under Refi Plus and HARP will perform better than the loans they replace because they should either reduce the borrowers’ monthly payments or provide more stable terms than the borrowers’ old loans (for example, by refinancing into a mortgage with a fixed interest rate instead of an adjustable rate);
Our expectation that the volume of refinancings under HARP will continue to decline, due to a decrease in the population of borrowers with loans that have high LTV ratios who are willing to refinance and would benefit from refinancing;
Our belief that the slow pace of single-family foreclosures in certain areas of the country will continue to negatively affect our single-family serious delinquency rates, foreclosure timelines and credit-related income (expense);
Our expectation that the number of our single-family loans in our book of business that are seriously delinquent will remain above pre-2008 levels for years;

67


Our expectation that, as a result of allowing lenders to remit payments equal to our losses on loans after we have disposed of the related REO, our actual cash receipts relating to our outstanding repurchase requests will be significantly lower than the unpaid principal balance of the loans;
Our belief that retaining special servicers to service loans using high-touch protocols will reduce our future credit losses on the transferred loan portfolio;
Our expectation, given the stressed financial condition of some of our single-family lenders, that in some cases we will recover less than the amount the lender is obligated to provide us under our risk sharing arrangement with them, and our expectation that, depending on the financial strength of the counterparty, we may require a lender to pledge collateral to secure its recourse obligations;
Our expectation that we will not remediate the material weakness relating to our disclosure controls and procedures while we are in conservatorship;
Our expectation that Congress will continue to hold hearings and consider legislation on the future status of Fannie Mae and Freddie Mac, including proposals that would result in Fannie Mae’s liquidation or dissolution; and
Our belief that changes or perceived changes in federal government support of our business or our status as a GSE could materially and adversely affect our liquidity, financial condition and results of operations.
Forward-looking statements reflect our management’s or in some cases FHFA’s expectations, forecasts or predictions of future conditions, events or results based on various assumptions and management’s estimates of trends and economic factors in the markets in which we are active, as well as our business plans. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. Our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. There are a number of factors that could cause actual conditions, events or results to differ materially from those described in the forward-looking statements contained in this report, including, but not limited to, the following: the uncertainty of our future; legislative and regulatory changes affecting us; the timing and level of, as well as regional variation in, home price changes; changes in interest rates, unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our competitive environment and guaranty fee revenues; challenges we face in retaining and hiring qualified employees; our future serious delinquency rates; the deteriorated credit performance of many loans in our guaranty book of business; the conservatorship and its effect on our business; the investment by Treasury and its effect on our business; adverse effects from activities we undertake to support the mortgage market and help borrowers; actions we may be required to take by FHFA, as our conservator or as our regulator, such as changes in the type of business we do or implementation of a single GSE security; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; a decrease in our credit ratings; limitations on our ability to access the debt capital markets; disruptions in the housing and credit markets; significant changes in modification and foreclosure activity; the volume and pace of future NPL sales and their impact on our results and serious delinquency rates; changes in borrower behavior; the effectiveness of our loss mitigation strategies, management of our REO inventory and pursuit of contractual remedies; defaults by one or more institutional counterparties; resolution or settlement agreements we may enter into with our counterparties; our need to rely on third parties to fully achieve some of our corporate objectives; our reliance on mortgage servicers; changes in GAAP; guidance by the Financial Accounting Standards Board (“FASB”); future changes to our accounting policies; changes in the fair value of our assets and liabilities; operational control weaknesses; our reliance on models; future updates to our models, including the assumptions used by these models; the level and volatility of interest rates and credit spreads; changes in the fiscal and monetary policies of the Federal Reserve; changes in the structure and regulation of the financial services industry; credit availability; global political risks; natural disasters, terrorist attacks, pandemics or other major disruptive events; information security breaches; and those factors described in “Risk Factors” in this report and in our 2014 Form 10-K, as well as the factors described in “Executive Summary—Outlook—Factors that Could Cause Actual Results to be Materially Different from our Estimates and Expectations” in this report.
Readers are cautioned to place forward-looking statements in this report or that we make from time to time into proper context by carefully considering the factors discussed in “Risk Factors” in our 2014 Form 10-K and in this report. These forward-looking statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the federal securities laws.

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Item 1.  Financial Statements
FANNIE MAE
(In conservatorship)
Condensed Consolidated Balance Sheets — (Unaudited)
(Dollars in millions, except share amounts)
 
As of
 
March 31,
 
December 31,
 
2015
 
2014
ASSETS
Cash and cash equivalents
 
$
23,860

 
 
 
$
22,023

 
Restricted cash (includes $36,921 and $27,515, respectively, related to consolidated trusts)
 
41,439

 
 
 
32,542

 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
 
20,230

 
 
 
30,950

 
Investments in securities:
 
 
 
 
 
 
 
Trading, at fair value
 
31,286

 
 
 
31,504

 
Available-for-sale, at fair value (includes $468 and $596, respectively, related to consolidated trusts)
 
27,732

 
 
 
30,654

 
Total investments in securities
 
59,018

 
 
 
62,158

 
Mortgage loans:
 
 
 
 
 
 
 
Loans held for sale, at lower of cost or fair value
 
613

 
 
 
331

 
Loans held for investment, at amortized cost:
 
 
 
 
 
 
 
Of Fannie Mae
 
265,700

 
 
 
272,360

 
Of consolidated trusts (includes $15,570 and $15,629, respectively, at fair value)
 
2,778,623

 
 
 
2,782,344

 
Total loans held for investment
 
3,044,323

 
 
 
3,054,704

 
Allowance for loan losses
 
(31,820
)
 
 
 
(35,541
)
 
Total loans held for investment, net of allowance
 
3,012,503

 
 
 
3,019,163

 
Total mortgage loans
 
3,013,116

 
 
 
3,019,494

 
Accrued interest receivable, net (includes $7,259 and $7,169, respectively, related to consolidated trusts)
 
7,990

 
 
 
8,193

 
Acquired property, net
 
9,518

 
 
 
10,618

 
Deferred tax assets, net
 
41,983

 
 
 
42,206

 
Other assets
 
20,959

 
 
 
19,992

 
Total assets
 
$
3,238,113

 
 
 
$
3,248,176

 
LIABILITIES AND EQUITY
Liabilities:
 
 
 
 
 
 
 
Accrued interest payable (includes $8,223 and $8,282, respectively, related to consolidated trusts)
 
$
10,324

 
 
 
$
10,232

 
Federal funds purchased and securities sold under agreements to repurchase
 
87

 
 
 
50

 
Debt:
 
 
 
 
 
 
 
Of Fannie Mae (includes $7,920 and $6,403, respectively, at fair value)
 
448,740

 
 
 
460,443

 
Of consolidated trusts (includes $21,373 and $19,483, respectively, at fair value)
 
2,763,891

 
 
 
2,761,712

 
Other liabilities (includes $437 and $503, respectively, related to consolidated trusts)
 
11,475

 
 
 
12,019

 
Total liabilities
 
3,234,517

 
 
 
3,244,456

 
Commitments and contingencies (Note 16)
 

 
 
 

 
Fannie Mae stockholders’ equity:
 
 
 
 
 
 
 
Senior preferred stock, 1,000,000 shares issued and outstanding
 
117,149

 
 
 
117,149

 
Preferred stock, 700,000,000 shares are authorized—555,374,922 shares issued and outstanding
 
19,130

 
 
 
19,130

 
Common stock, no par value, no maximum authorization—1,308,762,703 shares issued and 1,158,082,750 shares outstanding
 
687

 
 
 
687

 
Accumulated deficit
 
(127,651
)
 
 
 
(127,618
)
 
Accumulated other comprehensive income
 
1,641

 
 
 
1,733

 
Treasury stock, at cost, 150,679,953 shares
 
(7,401
)
 
 
 
(7,401
)
 
Total Fannie Mae stockholders’ equity
 
3,555

 
 
 
3,680

 
Noncontrolling interest
 
41

 
 
 
40

 
Total equity (See Note 1: Impact of U.S. Government Support for information on our dividend obligation to Treasury)
 
3,596

 
 
 
3,720

 
Total liabilities and equity
 
$
3,238,113

 
 
 
$
3,248,176

 


See Notes to Condensed Consolidated Financial Statements

69


FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Operations and Comprehensive Income — (Unaudited)
(Dollars and shares in millions, except per share amounts)
 
For the Three Months
 
Ended March 31,
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Trading securities
 
$
115

 
 
 
$
127

 
Available-for-sale securities
 
376

 
 
 
440

 
Mortgage loans (includes $24,622 and $25,954, respectively, related to consolidated trusts)
 
27,044

 
 
 
28,588

 
Other
 
33

 
 
 
24

 
Total interest income
 
27,568

 
 
 
29,179

 
Interest expense:
 
 
 
 
 
 
 
Short-term debt
 
29

 
 
 
20

 
Long-term debt (includes $20,515 and $22,076, respectively, related to consolidated trusts)
 
22,472

 
 
 
24,421

 
Total interest expense
 
22,501

 
 
 
24,441

 
Net interest income
 
5,067

 
 
 
4,738

 
Benefit for credit losses
 
533

 
 
 
774

 
Net interest income after benefit for credit losses
 
5,600

 
 
 
5,512

 
Investment gains, net
 
342

 
 
 
95

 
Fair value losses, net
 
(1,919
)
 
 
 
(1,190
)
 
Debt extinguishment gains, net
 
8

 
 
 

 
Fee and other income
 
308

 
 
 
4,355

 
Non-interest (loss) income
 
(1,261
)
 
 
 
3,260

 
Administrative expenses:
 
 
 
 
 
 
 
Salaries and employee benefits
 
351

 
 
 
325

 
Professional services
 
271

 
 
 
242

 
Occupancy expenses
 
43

 
 
 
50

 
Other administrative expenses
 
58

 
 
 
55

 
Total administrative expenses
 
723

 
 
 
672

 
Foreclosed property expense (income)
 
473

 
 
 
(262
)
 
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees
 
382

 
 
 
322

 
Other expenses, net
 
3

 
 
 
131

 
Total expenses
 
1,581

 
 
 
863

 
Income before federal income taxes
 
2,758

 
 
 
7,909

 
Provision for federal income taxes
 
(870
)
 
 
 
(2,584
)
 
Net income
 
1,888

 
 
 
5,325

 
Other comprehensive income:
 
 
 
 
 
 
 
Changes in unrealized gains on available-for-sale securities, net of reclassification adjustments and taxes
 
(91
)
 
 
 
372

 
Other
 
(1
)
 
 
 

 
Total other comprehensive (loss) income
 
(92
)
 
 
 
372

 
Total comprehensive income attributable to Fannie Mae
 
$
1,796

 
 
 
$
5,697

 
Net income attributable to Fannie Mae
 
1,888

 
 
 
5,325

 
Dividends available for distribution to senior preferred stockholder (Note 10)
 
(1,796
)
 
 
 
(5,692
)
 
Net income (loss) attributable to common stockholders (Note 10)
 
$
92

 
 
 
$
(367
)
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
 
$
0.02

 
 
 
$
(0.06
)
 
Diluted
 
0.02

 
 
 
(0.06
)
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
 
5,762

 
 
 
5,762

 
Diluted
 
5,893

 
 
 
5,762

 









See Notes to Condensed Consolidated Financial Statements

70


FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Cash Flows — (Unaudited)
(Dollars in millions)

 
For the Three Months Ended March 31,
 
2015
 
2014
Net cash used in operating activities
 
$
(1,249
)
 
 
 
$
(1,321
)
 
Cash flows provided by investing activities:
 
 
 
 
 
 
 
Proceeds from maturities and paydowns of trading securities held for investment
 
296

 
 
 
333

 
Proceeds from sales of trading securities held for investment
 
483

 
 
 
486

 
Proceeds from maturities and paydowns of available-for-sale securities
 
1,232

 
 
 
1,446

 
Proceeds from sales of available-for-sale securities
 
2,171

 
 
 
35

 
Purchases of loans held for investment
 
(44,460
)
 
 
 
(24,486
)
 
Proceeds from repayments and sales of loans acquired as held for investment of Fannie Mae
 
5,348

 
 
 
6,217

 
Proceeds from repayments and sales of loans acquired as held for investment of consolidated trusts
 
124,849

 
 
 
80,610

 
Net change in restricted cash
 
(8,897
)
 
 
 
4,412

 
Advances to lenders
 
(30,804
)
 
 
 
(20,501
)
 
Proceeds from disposition of acquired property and preforeclosure sales
 
5,490

 
 
 
6,329

 
Net change in federal funds sold and securities purchased under agreements to resell or similar arrangements
 
10,720

 
 
 
26,225

 
Other, net
 
154

 
 
 
(385
)
 
Net cash provided by investing activities
 
66,582

 
 
 
80,721

 
Cash flows used in financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of debt of Fannie Mae
 
114,467

 
 
 
69,086

 
Payments to redeem debt of Fannie Mae
 
(126,608
)
 
 
 
(117,058
)
 
Proceeds from issuance of debt of consolidated trusts
 
68,943

 
 
 
58,216

 
Payments to redeem debt of consolidated trusts
 
(118,409
)
 
 
 
(87,643
)
 
Payments of cash dividends on senior preferred stock to Treasury
 
(1,920
)
 
 
 
(7,191
)
 
Other, net
 
31

 
 
 
18

 
Net cash used in financing activities
 
(63,496
)
 
 
 
(84,572
)
 
Net increase (decrease) in cash and cash equivalents
 
1,837

 
 
 
(5,172
)
 
Cash and cash equivalents at beginning of period
 
22,023

 
 
 
19,228

 
Cash and cash equivalents at end of period
 
$
23,860

 
 
 
$
14,056

 
Cash paid during the period for:
 
 
 
 
 
 
 
Interest
 
$
26,235

 
 
 
$
26,567

 
Income taxes
 

 
 
 
425

 














See Notes to Condensed Consolidated Financial Statements

71






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



1. Summary of Significant Accounting Policies
Organization
We are a stockholder-owned corporation organized and existing under the Federal National Mortgage Association Charter Act (the “Charter Act” or our “charter”). We are a government-sponsored enterprise (“GSE”) and we are subject to government oversight and regulation. Our regulators include the Federal Housing Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”), the U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“Treasury”). The U.S. government does not guarantee our securities or other obligations.
Conservatorship
On September 7, 2008, the Secretary of the Treasury and the Director of FHFA announced several actions taken by Treasury and FHFA regarding Fannie Mae, which included: (1) placing us in conservatorship, and (2) the execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and Treasury, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock.
Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Federal Housing Finance Regulatory Reform Act of 2008 (together, the “GSE Act”), the conservator immediately succeeded to (1) all rights, titles, powers and privileges of Fannie Mae, and of any stockholder, officer or director of Fannie Mae with respect to Fannie Mae and its assets, and (2) title to the books, records and assets of any other legal custodian of Fannie Mae. 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. The conservator retains the authority to withdraw its delegations at any time.
The conservatorship has no specified termination date and there continues to be significant uncertainty regarding our future, including how long we will continue to exist in our current form, the extent of our role in the market, what form we will have, what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to exist following conservatorship. Under the GSE Act, FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations or if we have not been paying our debts, in either case, for a period of 60 days. In addition, the Director of FHFA may place us in receivership at his discretion at any time for other reasons set forth in the GSE Act, including if we are undercapitalized and have no reasonable prospect of becoming adequately capitalized. Should we be placed into receivership, different assumptions would be required to determine the carrying value of our assets, which could lead to substantially different financial results. We are not aware of any plans of FHFA to significantly change our business model or capital structure in the near term.
Impact of U.S. Government Support
We continue to rely on support from Treasury to eliminate any net worth deficits we may experience in the future, which would otherwise trigger our being placed into receivership. Based on consideration of all the relevant conditions and events affecting our operations, including our reliance on the U.S. government, we continue to operate as a going concern and in accordance with our delegation of authority from FHFA.
We believe that continued federal government support of our business, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in federal government support of our business or our status as a GSE could materially and adversely affect our liquidity, financial condition and results of operations.
Pursuant to the senior preferred stock purchase agreement, Treasury has committed to provide us with funding to help us maintain a positive net worth thereby avoiding the mandatory receivership trigger described above. We have received a total of $116.1 billion from Treasury pursuant to the senior preferred stock purchase agreement as of March 31, 2015. The aggregate liquidation preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion, was $117.1 billion as of March 31, 2015. As of March 31, 2015, the amount of remaining funding available to us under the senior preferred stock purchase agreement was $117.6 billion.
Based on the terms of the senior preferred stock, we paid Treasury a dividend of $1.9 billion on March 31, 2015 based on our net worth of $3.7 billion as of December 31, 2014 less the applicable capital reserve of $1.8 billion. We expect to pay

72






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Treasury an additional dividend of $1.8 billion by June 30, 2015 based on our net worth of $3.6 billion as of March 31, 2015 less the applicable capital reserve amount of $1.8 billion. The capital reserve amount was $2.4 billion for dividend periods in 2014. The capital reserve amount will continue to be reduced by $600 million each year until it reaches zero on January 1, 2018.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany accounts and transactions have been eliminated. To conform to our current period presentation, we have reclassified certain amounts reported in our prior periods’ condensed consolidated financial statements. Results for the three months ended March 31, 2015 may not necessarily be indicative of the results for the year ending December 31, 2015. The unaudited interim condensed consolidated financial statements as of and for the three months ended March 31, 2015 should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”), filed with the SEC on February 20, 2015.
Changes in Accounting Principle—Nonaccrual Loans
Effective January 1, 2015, we changed our policy for the treatment of interest previously accrued but not collected at the date both single-family and multifamily loans are placed on nonaccrual status. Specifically, interest previously accrued but not collected will be reversed through interest income at the date a loan is placed on nonaccrual status. Previously, when a loan was placed on nonaccrual status, interest previously accrued but not collected became part of each loan’s recorded investment and was reviewed either individually or collectively for impairment.
We also changed our policy for when a non-modified single-family loan is returned to accrual status. Effective January 1, 2015, a non-modified single-family loan will be returned to accrual status at the point that the borrower brings the loan current. Previously, a non-modified single-family loan was returned to accrual status at the point that the borrower had made sufficient payments to reduce the delinquency status below our nonaccrual threshold of 60 days past due.
We have concluded that these changes in accounting principle are preferable as we align our nonaccrual policy with industry practice. This alignment increases comparability of our financial statements to these entities, resulting in improved financial reporting.
As these changes to our nonaccrual policy were not material to our financial statements, we wrote off the accrued interest receivable balance on our nonaccrual loans, as well as the corresponding allowance that related to that interest, as an adjustment to current period provision for loan losses and did not retrospectively adjust the condensed consolidated financial statements for this change.
Change in Accounting Principle—Loans Held for Sale
Effective January 1, 2015, we changed our policy for calculating the lower of cost or fair value adjustment on loans that have been designated as held for sale (“HFS”). Specifically, our lower of cost or fair value calculation will be performed at an individual loan level on the date of re-designation (if previously held for investment (“HFI”)) and for all subsequent periods in which a loan is classified as HFS. Previously, the initial lower of cost or fair value adjustment on the date of re-designation was calculated at a loan level whereas the subsequent lower of cost or fair value adjustments were calculated at a pool level.
We have concluded that this change in accounting policy is preferable as it will align the unit of account that is used for both the initial and subsequent lower of cost or market measurements on our HFS portfolio. Additionally, by performing the lower of cost or fair value calculation at the loan level, the adjustment will be calculated on a more disaggregated basis.

73






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


As this change in accounting policy is not material to our financial statements, we recorded the impact of this change in accounting principle as an adjustment to current period fair value losses and did not retrospectively adjust the consolidated financial statements for this change.
Regulatory Capital
FHFA has announced that, during the conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and that FHFA will not issue quarterly capital classifications. We submit capital reports to FHFA, and FHFA monitors our capital levels. The deficit of core capital over statutory minimum capital was $142.2 billion as of March 31, 2015 and December 31, 2014.
Under the terms of the senior preferred stock, we are required to pay Treasury a dividend each quarter, when, as and if declared, equal to the excess of our net worth as of the end of the preceding quarter over an applicable capital reserve amount. The Director of FHFA directs us to make dividend payments on the senior preferred stock on a quarterly basis. Therefore, we do not expect to eliminate our deficit of core capital over statutory minimum capital.
Related Parties
As a result of our issuance to Treasury of the warrant to purchase shares of Fannie Mae common stock equal to 79.9% of the total number of shares of Fannie Mae common stock, we and Treasury are deemed related parties. As of March 31, 2015, Treasury held an investment in our senior preferred stock with an aggregate liquidation preference of $117.1 billion. FHFA’s control of Fannie Mae and Freddie Mac has caused us, FHFA and Freddie Mac to be deemed related parties.
Our administrative expenses were reduced by $16 million and $17 million for the three months ended March 31, 2015 and 2014, respectively, due to reimbursements from Treasury and Freddie Mac for expenses incurred as program administrator for Treasury’s Home Affordable Modification Program (“HAMP”) and other initiatives under Treasury’s Making Home Affordable Program.
During the three months ended March 31, 2015, we did not make any tax payments to the Internal Revenue Service (“IRS”), a bureau of Treasury. We made tax payments of $425 million during the three months ended March 31, 2014. We received a refund of $135 million from the IRS during the three months ended March 31, 2015 for income tax adjustments related to tax years 2004 through 2006.
Under the temporary credit and liquidity facilities (“TCLF”) program, we had $342 million and $390 million outstanding, which includes principal and interest, of standby credit and liquidity support as of March 31, 2015 and December 31, 2014, respectively. Under the new issue bond (“NIB”) program, we had $4.2 billion outstanding of pass-through securities backed by single-family and multifamily housing bonds issued by housing finance agencies (“HFAs”) as of March 31, 2015 and December 31, 2014. Treasury will bear the initial losses of principal under the TCLF program and the NIB program up to 35% of the total original principal on a combined program-wide basis, and thereafter we will bear the losses of principal that are attributable to the TCLF and the securities we have issued. Treasury will also bear any losses of unpaid interest under the two programs. As of March 31, 2015, there had been no losses of principal or interest under the TCLF program or the NIB program.
The fee revenue and expense related to the Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) are recorded in “Mortgage loans interest income” and “TCCA fees,” respectively, in our condensed consolidated statements of operations and comprehensive income. We recognized $382 million and $322 million in TCCA fees during the three months ended March 31, 2015 and 2014, respectively, of which $382 million had not been remitted to Treasury as of March 31, 2015.
In connection with the GSE Act, and for the three months ended March 31, 2015, we accrued, but have not yet paid, $18 million in expenses in connection with our funding obligation to Treasury’s Capital Magnet Fund. These expense accruals, which are classified in “Other expenses, net”, were measured as a portion of the product of 4.2 basis points and the unpaid principal balance of total new business purchases for the three months ended March 31, 2015.
As of March 31, 2015 and December 31, 2014, we held Freddie Mac mortgage-related securities with a fair value of $7.0 billion and $6.9 billion, respectively. We recognized interest income on these securities held by us of $61 million and $78 million for the three months ended March 31, 2015 and 2014, respectively. In addition, Freddie Mac may be an investor in

74






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


variable interest entities that we have consolidated, and we may be an investor in variable interest entities that Freddie Mac has consolidated.
The Housing and Economic Recovery Act of 2008 authorizes FHFA to establish an annual assessment for regulated entities, including Fannie Mae, which is payable on a semi-annual basis (April and October), for FHFA’s costs and expenses, as well as to maintain FHFA’s working capital. We recognized FHFA assessment fees, which are recorded in “Administrative expenses” in our condensed consolidated statements of operations and comprehensive income, of $28 million for the three months ended March 31, 2015 and 2014.
Fannie Mae and Freddie Mac established Common Securitization Solutions, LLC (“CSS”), a jointly owned limited liability company, to operate a common securitization platform. During the three months ended March 31, 2015, we contributed $13 million of capital into CSS, and we made no contributions for the three months ended March 31, 2014. No other transactions outside of normal business activities have occurred between us and Freddie Mac during the three months ended March 31, 2015 or 2014.
Use of Estimates
Preparing condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the dates of our condensed consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting periods. Management has made significant estimates in a variety of areas including, but not limited to, valuation of certain financial instruments and other assets and liabilities, recoverability of our deferred tax assets and allowance for loan losses. Actual results could be different from these estimates.
In April 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”), which prescribes, among other things, classification of loans by risk category and provides guidance on when a loan should be charged off. The provisions of the Advisory Bulletin led us to re-evaluate our estimate of when a loan is deemed uncollectible. For the vast majority of our delinquent single-family loans, we will continue to charge-off the loan at the date of foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale). For a relatively small subset of delinquent loans deemed to be uncollectible prior to foreclosure based upon our historical data, we charge off the portion of the loan (including preforeclosure property taxes and insurance receivable that pertain to such loans) deemed to be uncollectible prior to the date of foreclosure or other liquidation event, which given our current credit analytics and historical data, is when the loans are excessively delinquent and the outstanding loan balance exceeds the fair value of the underlying property. This change in estimate resulted in the recognition on January 1, 2015 of (1) $1.8 billion in charge-offs of HFI loans, (2) $724 million in charge-offs of preforeclosure property taxes and insurance receivable and (3) a reduction to our allowance for loan losses and our allowance for preforeclosure property taxes and insurance receivable in amounts equal to charge-offs recognized in connection with HFI loans and preforeclosure property taxes and insurance receivable. We continue to enhance our data collection and analysis efforts to further refine our loss estimates as we obtain incremental information on the performance of our loans.
Fee and Other Income
Fee and other income includes transaction fees, technology fees, multifamily fees and other miscellaneous income. During the three months ended March 31, 2014, we recognized $4.1 billion in “Fee and other income” in our condensed consolidated statements of operations and comprehensive income resulting from settlement agreements resolving certain lawsuits relating to private-label mortgage-related securities (“PLS”) sold to us. There were no settlement agreements resolving PLS lawsuits during the three months ended March 31, 2015.
New Accounting Guidance
Effective January 1, 2015, we prospectively adopted guidance issued by the FASB clarifying when a creditor is considered to have received physical possession of residential real estate property collateralized by a consumer mortgage loan. The adoption of this guidance resulted in a clarification to our policy to align our definition of when we have taken physical possession of real estate with the new guidance; however it did not impact the timing of derecognition of loan receivable and

75






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


recognition of real estate property in our financial statements. The new guidance also requires us to disclose the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. See “Note 3, Mortgage Loans” for additional information regarding the disclosure required upon adoption of this guidance.
Effective January 1, 2015, we prospectively adopted guidance issued by the FASB related to the classification of government guaranteed mortgage loans upon foreclosure. The impact of the adoption was not material to the condensed consolidated balance sheets.
In February 2015, the FASB issued guidance regarding consolidation of legal entities such as limited partnerships, limited liability corporations and securitization structures. The guidance removes the specialized consolidation model surrounding limited partnerships and similar entities and amends the requirements that such entities must meet to qualify as voting interest entities. In addition, the guidance eliminates certain of the conditions for evaluating whether fees paid to a decision maker or service provider represent a variable interest. The new guidance is effective for us on January 1, 2016 with early adoption permitted. We are currently evaluating the potential impact of the new guidance on our consolidated financial statements.
2. Consolidations and Transfers of Financial Assets
We have interests in various entities that are considered to be variable interest entities (“VIEs”). The primary types of entities are securitization trusts guaranteed by us via lender swap and portfolio securitization transactions and mortgage-backed trusts that were not created by us, as well as housing partnerships that are established to finance the acquisition, construction, development or rehabilitation of affordable multifamily and single-family housing. These interests include investments in securities issued by VIEs, such as Fannie Mae MBS created pursuant to our securitization transactions and our guaranty to the entity. We consolidate the substantial majority of our single-class securitization trusts because our role as guarantor and master servicer provides us with the power to direct matters (primarily the servicing of mortgage loans) that impact the credit risk to which we are exposed. In contrast, we do not consolidate single-class securitization trusts when other organizations have the power to direct these activities.
Unconsolidated VIEs
We do not consolidate VIEs when we are not deemed to be the primary beneficiary. Our unconsolidated VIEs include securitization trusts and limited partnerships. The following table displays the carrying amount and classification of our assets and liabilities that relate to our involvement with unconsolidated mortgage-backed trusts, as well as our maximum exposure to loss and the total assets of these unconsolidated mortgage-backed trusts.

76






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
As of
 
March 31, 2015
 
December 31, 2014
 
(Dollars in millions)
Assets and liabilities recorded in our condensed consolidated balance sheets related to mortgage-backed trusts:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
Fannie Mae securities
 
$
4,818

 
 
 
$
4,790

 
Non-Fannie Mae securities
 
6,938

 
 
 
7,073

 
Total trading securities
 
11,756

 
 
 
11,863

 
Available-for-sale securities:
 
 
 
 
 


 
Fannie Mae securities
 
4,939

 
 
 
5,043

 
Non-Fannie Mae securities
 
20,458

 
 
 
22,776

 
Total available-for-sale securities
 
25,397

 
 
 
27,819

 
Other assets
 
107

 
 
 
111

 
Other liabilities
 
(871
)
 
 
 
(1,440
)
 
Net carrying amount
 
$
36,389

 
 
 
$
38,353

 
Maximum exposure to loss
 
$
42,479

 
 
 
$
45,311

 
Total assets of unconsolidated mortgage-backed trusts
 
$
253,415

 
 
 
$
253,554

 
Our maximum exposure to loss generally represents the greater of our recorded investment in the entity or the unpaid principal balance of the assets covered by our guaranty. However, our securities issued by Fannie Mae multi-class resecuritization trusts that are not consolidated do not give rise to any additional exposure to loss as we already consolidate the underlying collateral.
The total assets of our unconsolidated limited partnership investments were $5.7 billion and $5.8 billion as of March 31, 2015 and December 31, 2014, respectively.
Transfers of Financial Assets
We issue Fannie Mae MBS through portfolio securitization transactions by transferring pools of mortgage loans or mortgage-related securities to one or more trusts or special purpose entities. We are considered to be the transferor when we transfer assets from our own retained mortgage portfolio in a portfolio securitization transaction. For the three months ended March 31, 2015 and 2014, the unpaid principal balance of portfolio securitizations was $48.9 billion and $32.5 billion, respectively.
We retain interests from the transfer and sale of mortgage-related securities to unconsolidated single-class and multi-class portfolio securitization trusts. As of March 31, 2015, the unpaid principal balance of retained interests was $6.1 billion and its related fair value was $7.5 billion. The unpaid principal balance of retained interests was $6.3 billion and its related fair value was $7.6 billion as of December 31, 2014. For the three months ended March 31, 2015 and 2014, the principal and interest received on retained interests was $350 million and $340 million, respectively.
Managed Loans
Managed loans are on-balance sheet mortgage loans, as well as mortgage loans that we have securitized in unconsolidated portfolio securitization trusts. The unpaid principal balance of securitized loans in unconsolidated portfolio securitization trusts, which are primarily loans that are guaranteed or insured, in whole or in part, by the U.S. government, was $1.7 billion and $1.8 billion as of March 31, 2015 and December 31, 2014, respectively. For information on our on-balance sheet mortgage loans, see “Note 3, Mortgage Loans.”

77






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


3.  Mortgage Loans
We own single-family mortgage loans, which are secured by four or fewer residential dwelling units, and multifamily mortgage loans, which are secured by five or more residential dwelling units. We classify these loans as either HFI or HFS. We report the carrying value of HFI loans at the unpaid principal balance, net of unamortized premiums and discounts, other cost basis adjustments, and an allowance for loan losses. We report the carrying value of HFS loans at the lower of cost or fair value and record valuation changes in our condensed consolidated statements of operations and comprehensive income. We report the recorded investment of HFI loans at the unpaid principal balance, net of unamortized premiums and discounts, other cost basis adjustments, and accrued interest receivable.
For purposes of the single-family mortgage loan disclosures below, we define “primary” class as mortgage loans that are not included in other loan classes; “government” class as mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies, that are not Alt-A; and “other” class as loans with higher-risk characteristics, such as interest-only loans and negative-amortizing loans, that are neither government nor Alt-A.
The following table displays the carrying value of our mortgage loans as of March 31, 2015 and December 31, 2014.
 
As of
 
March 31, 2015
 
December 31, 2014
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
(Dollars in millions)
Single-family
 
$
258,350

 
 
 
$
2,558,761

 
 
 
$
2,817,111

 
 
 
$
262,116

 
 
 
$
2,569,884

 
 
 
$
2,832,000

 
Multifamily
 
20,714

 
 
 
170,302

 
 
 
191,016

 
 
 
23,255

 
 
 
164,045

 
 
 
187,300

 
Total unpaid principal balance of mortgage loans
 
279,064

 
 
 
2,729,063

 
 
 
3,008,127

 
 
 
285,371

 
 
 
2,733,929

 
 
 
3,019,300

 
Cost basis and fair value adjustments, net
 
(12,775
)
 
 
 
49,584

 
 
 
36,809

 
 
 
(12,705
)
 
 
 
48,440

 
 
 
35,735

 
Allowance for loan losses for loans held for investment
 
(29,873
)
 
 
 
(1,947
)
 
 
 
(31,820
)
 
 
 
(33,117
)
 
 
 
(2,424
)
 
 
 
(35,541
)
 
Total mortgage loans
 
$
236,416

 
 
 
$
2,776,700

 
 
 
$
3,013,116

 
 
 
$
239,549

 
 
 
$
2,779,945

 
 
 
$
3,019,494

 
During the three months ended March 31, 2015 and 2014, we redesignated loans with a carrying value of $330 million and $2.2 billion, respectively, from HFI to HFS. There were no sales of loans during the three months ended March 31, 2015. We sold loans with an unpaid principal balance of $1.0 billion during the three months ended March 31, 2014.
The recorded investment of single-family mortgage loans for which formal foreclosure proceedings are in process was $32.3 billion as of March 31, 2015. As a result of our various loss mitigation and foreclosure prevention efforts, we expect that a portion of the loans in the process of formal foreclosure proceedings will not ultimately foreclose.
Nonaccrual Policy
We discontinue accruing interest on loans when we believe collectability of principal or interest is not reasonably assured, which for a single-family loan we have determined, based on our historical experience, to be when the loan becomes two months or more past due according to its contractual terms. We generally place a multifamily loan on nonaccrual status when the loan is deemed to be individually impaired, unless the loan is well secured such that collectability of principal and accrued interest is reasonably assured.
Effective January 1, 2015, we changed our policy for the treatment of interest previously accrued but not collected at the date both single-family and multifamily loans are placed on nonaccrual status. Specifically, interest previously accrued but not collected will be reversed through interest income at the date a loan is placed on nonaccrual status. Previously, when a loan was placed on nonaccrual status, interest previously accrued but not collected became part of the loan’s recorded investment and was reviewed either individually or collectively for impairment. 
We also changed our policy for when a non-modified single-family loan is returned to accrual status. Effective January 1, 2015, a non-modified single-family loan will be returned to accrual status at the point that the borrower brings the loan

78






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


current. Previously, a non-modified single-family loan was returned to accrual status at the point that the borrower had made sufficient payments to reduce their delinquency status below our nonaccrual threshold of 60 days past due. We did not change our policy for returning modified single-family loans to accrual status. We return modified single-family loans to accrual status at the point that the borrower successfully makes all required payments during the trial period (generally three to four months) and modification is made permanent.
See “Note 1, Summary of Significant Accounting Policies” for additional information on such changes in accounting policy.
Changes to our nonaccrual policy were limited to those described above. For most single-family loans, we continue to recognize interest income for loans on nonaccrual status when cash is received. However, if a single-family loan was charged off prior to foreclosure, all payments received are applied on a cost recovery basis to reduce principal on the mortgage loan. We stop applying the cost recovery approach on those single-family loans when they are brought current either through borrower payments or modification and there has been a sufficient performance period to demonstrate that the borrower has the ability and intent to make the remaining payments on their mortgage loans.
For multifamily loans, we apply any payment received on a cost recovery basis to reduce principal on the mortgage loan unless the loan is determined to be well secured. We generally return a multifamily loan to accrual status and stop applying the cost recovery approach when the borrower cures the delinquency of the loan or we otherwise determine that the loan is well secured such that collectability is reasonably assured.
Aging Analysis
The following tables display an aging analysis of the total recorded investment in our HFI mortgage loans by portfolio segment and class as of March 31, 2015 and December 31, 2014, excluding loans for which we have elected the fair value option.
  
As of March 31, 2015
 
30 - 59 Days
Delinquent
 
60 - 89 Days Delinquent
 
Seriously Delinquent(1)
 
Total Delinquent
 
Current
 
Total
 
Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest
 
Recorded Investment in Nonaccrual Loans 
  
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
$
25,087

 
 
 
$
7,045

 
 
 
$
34,166

 
 
 
$
66,298

 
 
$
2,582,073

 
$
2,648,371

 
 
$
56

 
 
$
41,132

Government(2)
 
54

 
 
 
18

 
 
 
298

 
 
 
370

 
 
44,211

 
44,581

 
 
298

 
 

Alt-A
 
3,743

 
 
 
1,321

 
 
 
9,429

 
 
 
14,493

 
 
93,801

 
108,294

 
 
7

 
 
10,743

Other
 
1,347

 
 
 
446

 
 
 
3,103

 
 
 
4,896

 
 
37,397

 
42,293

 
 
7

 
 
3,534

Total single-family
 
30,231

 
 
 
8,830

 
 
 
46,996

 
 
 
86,057

 
 
2,757,482

 
2,843,539

 
 
368

 
 
55,409

Multifamily(3)
 
98

 
 
 
N/A

 
 
 
135

 
 
 
233

 
 
192,795

 
193,028

 
 

 
 
807

Total
 
$
30,329

 
 
 
$
8,830

 
 
 
$
47,131

 
 
 
$
86,290

 
 
$
2,950,277

 
$
3,036,567

 
 
$
368

 
 
$
56,216


79






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


  
As of December 31, 2014
 
30 - 59 Days
Delinquent
 
60 - 89 Days Delinquent
 
Seriously Delinquent(1)
 
Total Delinquent
 
Current
 
Total
 
Recorded Investment in Loans 90 Days or More Delinquent and Accruing Interest
 
Recorded Investment in Nonaccrual Loans 
  
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
$
29,130

 
 
 
$
8,396

 
 
 
$
38,248

 
 
 
$
75,774

 
 
$
2,580,446

 
$
2,656,220

 
 
$
55

 
 
$
46,556

Government(2)
 
63

 
 
 
26

 
 
 
305

 
 
 
394

 
 
44,927

 
45,321

 
 
305

 
 

Alt-A
 
4,094

 
 
 
1,414

 
 
 
11,603

 
 
 
17,111

 
 
95,650

 
112,761

 
 
8

 
 
13,007

Other
 
1,520

 
 
 
516

 
 
 
3,763

 
 
 
5,799

 
 
38,460

 
44,259

 
 
6

 
 
4,259

Total single-family
 
34,807

 
 
 
10,352

 
 
 
53,919

 
 
 
99,078

 
 
2,759,483

 
2,858,561

 
 
374

 
 
63,822

Multifamily(3)
 
60

 
 
 
 N/A

 
 
 
89

 
 
 
149

 
 
189,084

 
189,233

 
 

 
 
823

Total
 
$
34,867

 
 
 
$
10,352

 
 
 
$
54,008

 
 
 
$
99,227

 
 
$
2,948,567

 
$
3,047,794

 
 
$
374

 
 
$
64,645

__________
(1) 
Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process. Multifamily seriously delinquent loans are loans that are 60 days or more past due.
(2) 
Primarily consists of reverse mortgages which, due to their nature, are not aged and are included in the current column.
(3) 
Multifamily loans 60-89 days delinquent are included in the seriously delinquent column.
Credit Quality Indicators
The following table displays the total recorded investment in our single-family HFI loans by class and credit quality indicator as of March 31, 2015 and December 31, 2014, excluding loans for which we have elected the fair value option.
  
As of
  
March 31, 2015(1)
 
December 31, 2014(1)
  
Primary
 
Alt-A
 
Other
 
Primary
 
Alt-A
 
Other
  
(Dollars in millions) 
Estimated mark-to-market loan-to-value ratio:(2)
  
 
 
 
 
  
 
 
  
 
 
 
 
  
 
Less than or equal to 80% 
$
2,126,305

 
$
58,557

 
 
$
21,584

 
 
$
2,156,165

 
$
60,851

 
 
$
22,558

 
Greater than 80%  and less than or equal to 90%
270,619

 
14,661

 
 
5,756

 
 
261,709

 
15,151

 
 
6,046

 
Greater than 90%  and less than or equal to 100%
154,066

 
12,135

 
 
5,023

 
 
140,778

 
12,490

 
 
5,236

 
Greater than 100% and less than or equal to 110%
43,305

 
8,503

 
 
3,692

 
 
43,014

 
8,998

 
 
3,900

 
Greater than 110%  and less than or equal to 120%
23,264

 
5,707

 
 
2,517

 
 
23,439

 
6,033

 
 
2,615

 
Greater than 120%  and less than or equal to 125%
7,445

 
2,000

 
 
848

 
 
7,529

 
2,114

 
 
904

 
Greater than 125% 
23,367

 
6,731

 
 
2,873

 
 
23,586

 
7,124

 
 
3,000

 
Total 
$
2,648,371

 
$
108,294

 
 
$
42,293

 
 
$
2,656,220

 
$
112,761

 
 
$
44,259

 
__________
(1) 
Excludes $44.6 billion and $45.3 billion as of March 31, 2015 and December 31, 2014, respectively, of mortgage loans guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies, that are not Alt-A loans. The segment class is primarily reverse mortgages for which we do not calculate an estimated mark-to-market loan-to-value (“LTV”) ratio.
(2) 
The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loan as of the end of each reported period divided by the estimated current value of the property, which we calculate using an internal valuation model that estimates periodic changes in home value.

80






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


The following table displays the total recorded investment in our multifamily HFI loans by credit quality indicator as of March 31, 2015 and December 31, 2014, excluding loans for which we have elected the fair value option.
  
As of
  
March 31,
 
December 31,
 
2015
 
2014
  
(Dollars in millions) 
Credit risk profile by internally assigned grade:(1)
 
  
 
 
 
 
 
Pass
 
$
186,052

 
 
 
$
182,079

 
Special Mention
 
3,015

 
 
 
3,070

 
Substandard
 
3,953

 
 
 
3,842

 
Doubtful
 
8

 
 
 
242

 
Total
 
$
193,028

 
 
 
$
189,233

 
_________
(1) 
Pass (loan is current and adequately protected by the current financial strength and debt service capacity of the borrower); special mention (loan with signs of potential weakness); substandard (loan with a well defined weakness that jeopardizes the timely full repayment); and doubtful (loan with a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions and values).

81






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Individually Impaired Loans
Individually impaired loans include troubled debt restructurings (“TDRs”), acquired credit-impaired loans and multifamily loans that we have assessed as probable that we will not collect all contractual amounts due, regardless of whether we are currently accruing interest. The following tables display the total unpaid principal balance, recorded investment and related allowance as of March 31, 2015 and December 31, 2014, and average recorded investment and interest income recognized for the three months ended March 31, 2015 and 2014, for individually impaired loans.
 
As of
 
 
March 31, 2015
 
December 31, 2014
 
 
Unpaid Principal Balance
 
Total Recorded Investment
 
Related Allowance for Loan Losses
 
Unpaid Principal Balance
 
Total Recorded Investment
 
Related Allowance for Loan Losses
 
Related Allowance for Accrued Interest Receivable
 
(Dollars in millions)
 
Individually impaired loans:
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
With related allowance recorded:
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
Single-family:
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
Primary
 
$
122,873

 
 
 
$
116,908

 
 
 
$
18,954

 
 
 
$
125,960

 
 
 
$
120,221

 
 
 
$
20,327

 
 
 
$
309

 
Government
 
282

 
 
 
286

 
 
 
58

 
 
 
281

 
 
 
285

 
 
 
46

 
 
 
12

 
Alt-A
 
33,719

 
 
 
30,954

 
 
 
6,935

 
 
 
35,492

 
 
 
32,816

 
 
 
7,778

 
 
 
136

 
Other
 
13,896

 
 
 
13,165

 
 
 
2,715

 
 
 
14,667

 
 
 
13,947

 
 
 
3,049

 
 
 
38

 
Total single-family
 
170,770

 
 
 
161,313

 
 
 
28,662

 
 
 
176,400

 
 
 
167,269

 
 
 
31,200

 
 
 
495

 
Multifamily
 
1,210

 
 
 
1,217

 
 
 
146

 
 
 
1,230

 
 
 
1,241

 
 
 
175

 
 
 
6

 
Total individually impaired loans with related allowance recorded
 
171,980

 
 
 
162,530

 
 
 
28,808

 
 
 
177,630

 
 
 
168,510

 
 
 
31,375

 
 
 
501

 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
With no related allowance recorded:(1)
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
Single-family:
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
Primary
 
18,139

 
 
 
16,349

 
 
 

 
 
 
16,704

 
 
 
14,876

 
 
 

 
 
 

 
Government
 
60

 
 
 
55

 
 
 

 
 
 
61

 
 
 
57

 
 
 

 
 
 

 
Alt-A
 
4,737

 
 
 
3,881

 
 
 

 
 
 
3,993

 
 
 
3,119

 
 
 

 
 
 

 
Other
 
1,540

 
 
 
1,358

 
 
 

 
 
 
1,240

 
 
 
1,056

 
 
 

 
 
 

 
Total single-family
 
24,476

 
 
 
21,643

 
 
 

 
 
 
21,998

 
 
 
19,108

 
 
 

 
 
 

 
Multifamily
 
511

 
 
 
513

 
 
 

 
 
 
565

 
 
 
568

 
 
 

 
 
 

 
Total individually impaired loans with no related allowance recorded
 
24,987

 
 
 
22,156

 
 
 

 
 
 
22,563

 
 
 
19,676

 
 
 

 
 
 

 
Total individually impaired loans(2)
 
$
196,967

 
 
 
$
184,686

 
 
 
$
28,808

 
 
 
$
200,193

 
 
 
$
188,186

 
 
 
$
31,375

 
 
 
$
501

 

82






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
For the Three Months Ended March 31,
 
2015
 
2014
 
Average Recorded Investment
 
Total Interest Income Recognized(3)
 
Interest Income Recognized on a Cash Basis
 
Average Recorded Investment
 
Total Interest Income Recognized(3)
 
Interest Income Recognized on a Cash Basis
 
(Dollars in millions)
Individually impaired loans:
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
With related allowance recorded:
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Single-family:
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Primary
 
$
117,721

 
 
 
$
1,034

 
 
 
$
104

 
 
 
$
123,465

 
 
 
$
1,094

 
 
 
$
140

 
Government
 
282

 
 
 
3

 
 
 

 
 
 
238

 
 
 
3

 
 
 

 
Alt-A
 
31,491

 
 
 
251

 
 
 
17

 
 
 
34,337

 
 
 
270

 
 
 
28

 
Other
 
13,416

 
 
 
94

 
 
 
7

 
 
 
14,910

 
 
 
103

 
 
 
11

 
Total single-family
 
162,910

 
 
 
1,382

 
 
 
128

 
 
 
172,950

 
 
 
1,470

 
 
 
179

 
Multifamily
 
1,229

 
 
 
3

 
 
 

 
 
 
2,086

 
 
 
23

 
 
 

 
Total individually impaired loans with related allowance recorded
 
164,139

 
 
 
1,385

 
 
 
128

 
 
 
175,036

 
 
 
1,493

 
 
 
179

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
With no related allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Primary
 
16,249

 
 
 
247

 
 
 
41

 
 
 
12,646

 
 
 
185

 
 
 
48

 
Government
 
59

 
 
 
1

 
 
 

 
 
 
93

 
 
 
1

 
 
 

 
Alt-A
 
3,736

 
 
 
44

 
 
 
7

 
 
 
2,520

 
 
 
41

 
 
 
10

 
Other
 
1,301

 
 
 
18

 
 
 
2

 
 
 
891

 
 
 
11

 
 
 
2

 
Total single-family
 
21,345

 
 
 
310

 
 
 
50

 
 
 
16,150

 
 
 
238

 
 
 
60

 
Multifamily
 
541

 
 
 
1

 
 
 

 
 
 
1,826

 
 
 
20

 
 
 

 
Total individually impaired loans with no related allowance recorded
 
21,886

 
 
 
311

 
 
 
50

 
 
 
17,976

 
 
 
258

 
 
 
60

 
Total individually impaired loans(2)
 
$
186,025

 
 
 
$
1,696

 
 
 
$
178

 
 
 
$
193,012

 
 
 
$
1,751

 
 
 
$
239

 
__________
(1) 
The discounted cash flows or collateral value equals or exceeds the carrying value of the loan and, as such, no valuation allowance is required.
(2) 
Includes single-family loans restructured in a TDR with a recorded investment of $181.9 billion and $185.2 billion as of March 31, 2015 and December 31, 2014, respectively. Includes multifamily loans restructured in a TDR with a recorded investment of $705 million and $716 million as of March 31, 2015 and December 31, 2014, respectively.
(3) 
Total single-family interest income recognized of $1.7 billion for the three months ended March 31, 2015 consists of $1.4 billion of contractual interest and $276 million of effective yield adjustments. Total single-family interest income recognized of $1.7 billion for the three months ended March 31, 2014 consists of $1.4 billion of contractual interest and $275 million of effective yield adjustments.
Troubled Debt Restructurings
A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a TDR. In addition to formal loan modifications, we also engage in other loss mitigation activities with troubled borrowers, which include repayment plans and forbearance arrangements, both of which represent informal agreements with the borrower that do not result in the legal modification of the loan’s contractual terms. We account for these informal restructurings as a TDR if we defer more than three missed payments. We also classify loans to certain borrowers who have received bankruptcy relief as TDRs.
The substantial majority of the loan modifications we complete result in term extensions, interest rate reductions or a combination of both. During the three months ended March 31, 2015 and 2014, the average term extension of a single-family

83






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


modified loan was 161 months and 159 months, respectively, and the average interest rate reduction was 0.77 and 1.23 percentage points, respectively.
The following table displays the number of loans and recorded investment in loans restructured in a TDR for the three months ended March 31, 2015 and 2014.
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
21,407

 
 
 
$
2,945

 
 
 
28,842

 
 
 
$
4,110

 
Government
 
74

 
 
 
8

 
 
 
62

 
 
 
8

 
 Alt-A
 
2,789

 
 
 
438

 
 
 
4,396

 
 
 
740

 
Other
 
590

 
 
 
108

 
 
 
1,038

 
 
 
219

 
Total single-family
 
24,860

 
 
 
3,499

 
 
 
34,338

 
 
 
5,077

 
Multifamily
 
3

 
 
 
5

 
 
 
6

 
 
 
34

 
Total troubled debt restructurings
 
24,863

 
 
 
$
3,504

 
 
 
34,344

 
 
 
$
5,111

 
The following table displays the number of loans and our recorded investment in these loans at the time of payment default for the three months ended March 31, 2015 and 2014 for loans that were restructured in a TDR in the twelve months prior to the payment default. For purposes of this disclosure, we define loans that had a payment default as: single-family and multifamily loans with completed TDRs that liquidated during the period, either through foreclosure, deed-in-lieu of foreclosure or a short sale; single-family loans with completed modifications that are two or more months delinquent during the period; or multifamily loans with completed modifications that are one or more months delinquent during the period.
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
6,723

 
 
 
$
1,003

 
 
 
8,598

 
 
 
$
1,310

 
Government
 
20

 
 
 
3

 
 
 
18

 
 
 
2

 
Alt-A
 
1,153

 
 
 
203

 
 
 
1,444

 
 
 
260

 
Other
 
304

 
 
 
66

 
 
 
504

 
 
 
115

 
Total single-family
 
8,200

 
 
 
1,275

 
 
 
10,564

 
 
 
1,687

 
Multifamily
 
2

 
 
 
4

 
 
 
4

 
 
 
14

 
Total TDRs that subsequently defaulted
 
8,202

 
 
 
$
1,279

 
 
 
10,568

 
 
 
$
1,701

 
4. Allowance for Loan Losses
Our allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to our recorded investment in both single-family and multifamily HFI loans. This population includes both HFI loans held by Fannie Mae and by consolidated Fannie Mae MBS trusts. When calculating our allowance for loan losses, we consider only our net recorded investment in the loan at the balance sheet date, which includes the loan’s unpaid principal balance and any applicable cost basis adjustments. We record charge-offs as a reduction to the allowance for loan losses when losses are confirmed through the receipt of assets in full satisfaction of a loan, such as the underlying collateral upon foreclosure or cash upon completion of a short sale.

84






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


We aggregate single-family HFI loans that are not individually impaired based on similar risk characteristics, for purposes of estimating incurred credit losses and establishing a collective single-family loss reserve using an econometric model that derives an overall loss reserve estimate. We base our allowance methodology on historical events and trends, such as loss severity (in event of default), default rates, and recoveries from mortgage insurance contracts and other credit enhancements. In addition, management performs a review of the observable data used in its estimate to ensure it is representative of prevailing economic conditions and other events existing as of the balance sheet date.
Individually impaired single-family loans currently include those restructured in a TDR and acquired credit-impaired loans. When a loan has been restructured, we measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate. However, if we expect to recover our recorded investment in an individually impaired loan through probable foreclosure of the underlying collateral, we measure impairment based on the fair value of the collateral, reduced by estimated disposal costs and adjusted for estimated proceeds from mortgage, flood, or hazard insurance and other credit enhancements.
We identify multifamily loans for evaluation for impairment through a credit risk assessment process. If we determine that a multifamily loan is individually impaired, we generally measure impairment on that loan based on the fair value of the underlying collateral less estimated costs to sell the property. We establish a collective loss reserve for all loans in our multifamily guaranty book of business that are not individually impaired using an internal model that applies loss factors to loans in similar risk categories. Our loss factors are developed based on our historical default and loss severity experience.
The following table displays changes in single-family, multifamily and total allowance for loan losses for the three months ended March 31, 2015 and 2014.

85






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
For the Three Months Ended March 31,
 
2015
 
2014
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
Of Fannie Mae
 
Of Consolidated Trusts
 
Total
 
(Dollars in millions)
Single-family allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
32,956

 
 
$
2,221

 
 
$
35,177

 
$
40,202

 
 
$
3,105

 
 
$
43,307

Provision (benefit) for loan losses(1)
205

 
 
(147
)
 
 
58

 
(882
)
 
 
38

 
 
(844
)
Charge-offs(2)(5)
(5,328
)
 
 
(19
)
 
 
(5,347
)
 
(1,447
)
 
 
(101
)
 
 
(1,548
)
Recoveries
614

 
 
8

 
 
622

 
320

 
 
71

 
 
391

Transfers(3)
359

 
 
(359
)
 
 

 
420

 
 
(420
)
 
 

Other(4)
953

 
 
51

 
 
1,004

 
133

 
 
9

 
 
142

Ending balance
$
29,759

 
 
$
1,755

 
 
$
31,514

 
$
38,746

 
 
$
2,702

 
 
$
41,448

Multifamily allowance for loan losses:
 
 
 
 
 
 
 
 

 
 

 
 

Beginning balance
$
161

 
 
$
203

 
 
$
364

 
$
319

 
 
$
220

 
 
$
539

Benefit for loan losses(1)
(37
)
 
 
(13
)
 
 
(50
)
 
(12
)
 
 
(16
)
 
 
(28
)
Charge-offs(2)(5)
(15
)
 
 

 
 
(15
)
 
(51
)
 
 

 
 
(51
)
Other(4)
5

 
 
2

 
 
7

 
2

 
 
1

 
 
3

Ending balance
$
114

 
 
$
192

 
 
$
306

 
$
258

 
 
$
205

 
 
$
463

Total allowance for loan losses:
 
 
 
 
 
 
 
 

 
 

 
 

Beginning balance
$
33,117

 
 
$
2,424

 
 
$
35,541

 
$
40,521

 
 
$
3,325

 
 
$
43,846

Provision (benefit) for loan losses(1)
168

 
 
(160
)
 
 
8

 
(894
)
 
 
22

 
 
(872
)
Charge-offs(2)(5)
(5,343
)
 
 
(19
)
 
 
(5,362
)
 
(1,498
)
 
 
(101
)
 
 
(1,599
)
Recoveries
614

 
 
8

 
 
622

 
320

 
 
71

 
 
391

Transfers(3)
359

 
 
(359
)
 
 

 
420

 
 
(420
)
 
 

Other(4)
958

 
 
53

 
 
1,011

 
135

 
 
10

 
 
145

Ending balance
$
29,873

 
 
$
1,947

 
 
$
31,820

 
$
39,004

 
 
$
2,907

 
 
$
41,911

__________
(1) 
Provision (benefit) for loan losses is included in “Benefit for credit losses” in our condensed consolidated statements of operations and comprehensive income.
(2) 
While we purchase the substantial majority of loans that are four or more months delinquent from our MBS trusts, we do not exercise this option to purchase loans during a forbearance period. Charge-offs of consolidated trusts generally represent loans that remained in our consolidated trusts at the time of default.
(3) 
Includes transfers from trusts for delinquent loan purchases.
(4) 
Amounts represent changes in other loss reserves which are offset by amounts reflected in benefit for credit losses, charge-offs and recoveries.
(5) 
Includes for the three months ended March 31, 2015 charge-offs of (1) $1.8 billion in HFI loans and $724 million in preforeclosure property taxes and insurance receivable in connection with our adoption of the Advisory Bulletin and (2) $1.1 billion in accrued interest receivable that were charged-off in connection with the our adoption of a change in accounting principle related to the treatment of interest previously accrued, but not collected, at the date that loans are placed on nonaccrual status.

86






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


The following table displays the allowance for loan losses and total recorded investment in our HFI loans, excluding loans for which we have elected the fair value option, by impairment or reserve methodology and portfolio segment as of March 31, 2015 and December 31, 2014.
 
As of
  
March 31, 2015
 
December 31, 2014
 
Single-Family
 
Multifamily
 
Total
 
Single-Family
 
Multifamily
 
Total
 
(Dollars in millions)
Allowance for loan losses by segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually impaired loans(1)
$
28,662

 
 
$
146

 
 
$
28,808

 
$
31,200

 
 
$
175

 
 
$
31,375

Collectively reserved loans
2,852

 
 
160

 
 
3,012

 
3,977

 
 
189

 
 
4,166

Total allowance for loan losses
$
31,514

 
 
$
306

 
 
$
31,820

 
$
35,177

 
 
$
364

 
 
$
35,541

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans by segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually impaired loans(1)
$
182,956

 
 
$
1,730

 
 
$
184,686

 
$
186,377

 
 
$
1,809

 
 
$
188,186

Collectively reserved loans
2,660,583

 
 
191,298

 
 
2,851,881

 
2,672,184

 
 
187,424

 
 
2,859,608

Total recorded investment in loans
$
2,843,539

 
 
$
193,028

 
 
$
3,036,567

 
$
2,858,561

 
 
$
189,233

 
 
$
3,047,794

__________
(1) 
Includes acquired credit-impaired loans.
5. Investments in Securities
Trading Securities
Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value losses, net” in our condensed consolidated statements of operations and comprehensive income. The following table displays our investments in trading securities.
 
As of
 
March 31, 2015
 
December 31, 2014
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
4,959

 
 
 
$
4,940

 
Freddie Mac
 
1,723

 
 
 
1,369

 
Ginnie Mae
 
214

 
 
 
166

 
Alt-A private-label securities
 
833

 
 
 
920

 
Subprime private-label securities
 
876

 
 
 
1,307

 
CMBS
 
2,478

 
 
 
2,515

 
Mortgage revenue bonds
 
742

 
 
 
722

 
Other mortgage-related securities
 
94

 
 
 
99

 
Total mortgage-related securities
 
11,919

 
 
 
12,038

 
U.S. Treasury securities
 
19,367

 
 
 
19,466

 
Total trading securities
 
$
31,286

 
 
 
$
31,504

 

87






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


The following table displays information about our net trading gains and losses.
 
For the Three
 
Months Ended
 
March 31,
 
2015
 
2014
 
(Dollars in millions)
Net trading gains
$
36

 
$
145

Net trading gains recognized in the period related to securities still held at period end
29

 
135

Available-for-Sale Securities
We measure available-for-sale (AFS) securities at fair value with unrealized gains and losses, recorded net of tax, as a component of “Other comprehensive income” and we recognize realized gains and losses from the sale of AFS securities in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income.
The following table displays the gross realized gains, losses and proceeds on sales of AFS securities.
 
For the Three
 
Months Ended
 
March 31,
 
2015
 
2014
 
(Dollars in millions)

Gross realized gains
$
400

 
$
3

Gross realized losses
7

 
2

Total proceeds(1)
2,112

 
35

__________
(1) 
Excludes proceeds from the initial sale of securities from new portfolio securitizations.

The following tables display the amortized cost, gross unrealized gains and losses, and fair value by major security type for AFS securities.
 
As of March 31, 2015
 
Total Amortized Cost(1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses - OTTI(2)
 
Gross Unrealized Losses - Other(3)
 
Total Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
5,086

 
 
 
$
336

 
 
 
$

 
 
 
$
(15
)
 
 
$
5,407

Freddie Mac
 
4,842

 
 
 
415

 
 
 

 
 
 

 
 
5,257

Ginnie Mae
 
398

 
 
 
60

 
 
 

 
 
 

 
 
458

Alt-A private-label securities
 
3,649

 
 
 
819

 
 
 
(4
)
 
 
 

 
 
4,464

Subprime private-label securities
 
3,572

 
 
 
1,045

 
 
 

 
 
 
(9
)
 
 
4,608

CMBS
 
1,318

 
 
 
52

 
 
 

 
 
 

 
 
1,370

Mortgage revenue bonds
 
3,344

 
 
 
226

 
 
 
(8
)
 
 
 
(2
)
 
 
3,560

Other mortgage-related securities
 
2,421

 
 
 
187

 
 
 

 
 
 

 
 
2,608

Total
 
$
24,630

 
 
 
$
3,140

 
 
 
$
(12
)
 
 
 
$
(26
)
 
 
$
27,732



88






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
As of December 31, 2014
 
Total Amortized Cost(1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses - OTTI(2)
 
Gross Unrealized Losses - Other(3)
 
Total Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
5,330

 
 
 
$
328

 
 
 
$

 
 
 
$
(19
)
 
 
$
5,639

Freddie Mac
 
5,100

 
 
 
428

 
 
 

 
 
 

 
 
5,528

Ginnie Mae
 
416

 
 
 
60

 
 
 

 
 
 

 
 
476

Alt-A private-label securities
 
4,638

 
 
 
1,055

 
 
 
(15
)
 
 
 

 
 
5,678

Subprime private-label securities
 
4,103

 
 
 
1,161

 
 
 
(9
)
 
 
 
(15
)
 
 
5,240

CMBS
 
1,341

 
 
 
56

 
 
 

 
 
 

 
 
1,397

Mortgage revenue bonds
 
3,859

 
 
 
177

 
 
 
(8
)
 
 
 
(5
)
 
 
4,023

Other mortgage-related securities
 
2,626

 
 
 
183

 
 
 
(23
)
 
 
 
(113
)
 
 
2,673

Total
 
$
27,413

 
 
 
$
3,448

 
 
 
$
(55
)
 
 
 
$
(152
)
 
 
$
30,654

__________
(1) 
Amortized cost consists of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments as well as net other-than-temporary impairments (“OTTI”) recognized in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income.
(2) 
Represents the noncredit component of other-than-temporary impairments losses recorded in “Accumulated other comprehensive income” in our condensed consolidated balance sheets, as well as cumulative changes in fair value of securities for which we previously recognized the credit component of OTTI.
(3) 
Represents the gross unrealized losses on securities for which we have not recognized OTTI.

89






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


The following tables display additional information regarding gross unrealized losses and fair value by major security type for AFS securities in an unrealized loss position.
 
As of March 31, 2015
 
Less Than 12 Consecutive Months
 
12 Consecutive Months or Longer
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
(2
)
 
 
$
188

 
 
$
(13
)
 
 
$
525

Alt-A private-label securities
 
(2
)
 
 
100

 
 
(2
)
 
 
30

Subprime private-label securities
 

 
 

 
 
(9
)
 
 
184

Mortgage revenue bonds
 
(2
)
 
 
55

 
 
(8
)
 
 
86

Total
 
$
(6
)
 
 
$
343

 
 
$
(32
)
 
 
$
825

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
Less Than 12 Consecutive Months
 
12 Consecutive Months or Longer
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
(Dollars in millions)
Fannie Mae
 
$

 
 
$
113

 
 
$
(19
)
 
 
$
627

Alt-A private-label securities
 
(2
)
 
 
171

 
 
(13
)
 
 
112

Subprime private-label securities
 

 
 

 
 
(24
)
 
 
460

Mortgage revenue bonds
 
(2
)
 
 
47

 
 
(11
)
 
 
155

Other mortgage-related securities
 

 
 
8

 
 
(136
)
 
 
1,021

Total
 
$
(4
)
 
 
$
339

 
 
$
(203
)
 
 
$
2,375

Other-Than-Temporary Impairments
We recognized $170 million and $51 million of OTTI for the three months ended March 31, 2015 and 2014, respectively, which are included in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income. During the first three months ended March 31, 2015, other-than-temporary impairments were primarily driven by a change in our intent to sell certain securities. As a result, we recognized the entire difference between the amortized cost basis of these securities and their fair value as OTTI.
The following table displays the modeled attributes, including default rates and severities, which were used to determine as of March 31, 2015 whether our senior interests in certain non-agency mortgage-related securities (including those we intend to sell) will experience a cash shortfall. An estimate of voluntary prepayment rates is also an input to the present value of expected losses.

90






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
As of March 31, 2015
 
 
 
Alt-A
 
Subprime
 
Option ARM
 
Fixed Rate
 
Variable Rate
 
Hybrid Rate
 
(Dollars in millions)
 
Vintage Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 & Prior:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
105

 
 
$
108

 
 
 
$
758

 
 
 
$
115

 
 
 
$
296

 
Weighted average collateral default(1)
25.9
%
 
 
24.9
%
 
 
 
8.1
%
 
 
 
16.5
%
 
 
 
11.0
%
 
Weighted average collateral severities(2)
54.7

 
 
55.0

 
 
 
44.3

 
 
 
38.0

 
 
 
33.7

 
Weighted average voluntary prepayment rates(3)
8.0

 
 
9.6

 
 
 
13.4

 
 
 
9.4

 
 
 
11.0

 
Average credit enhancement(4)
38.8

 
 
3.6

 
 
 
11.3

 
 
 
24.3

 
 
 
10.1

 
2005:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
7

 
 
$
440

 
 
 
$
689

 
 
 
$
131

 
 
 
$
508

 
Weighted average collateral default(1)
44.0
%
 
 
30.0
%
 
 
 
17.9
%
 
 
 
26.2
%
 
 
 
15.5
%
 
Weighted average collateral severities(2)
65.0

 
 
54.2

 
 
 
46.0

 
 
 
54.1

 
 
 
39.2

 
Weighted average voluntary prepayment rates(3)
3.9

 
 
7.7

 
 
 
10.0

 
 
 
8.5

 
 
 
10.0

 
Average credit enhancement(4)
59.5

 
 
6.8

 
 
 
0.7

 
 
 
28.1

 
 
 
6.1

 
2006:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
5,850

 
 
$
318

 
 
 
$
363

 
 
 
$
653

 
 
 
$
786

 
Weighted average collateral default(1)
46.0
%
 
 
36.3
%
 
 
 
21.9
%
 
 
 
23.3
%
 
 
 
10.1
%
 
Weighted average collateral severities(2)
63.3

 
 
35.5

 
 
 
53.2

 
 
 
37.2

 
 
 
38.4

 
Weighted average voluntary prepayment rates(3)
2.4

 
 
6.8

 
 
 
8.3

 
 
 
7.9

 
 
 
13.2

 
Average credit enhancement(4)
15.3

 
 

 
 
 
0.1

 
 
 
1.5

 
 
 

 
2007 & After:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
322

 
 
$

 
 
 
$

 
 
 
$

 
 
 
$

 
Weighted average collateral default(1)
43.2
%
 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
Weighted average collateral severities(2)
20.7

 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
Weighted average voluntary prepayment rates(3)
1.4

 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
Average credit enhancement(4)
19.6

 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
 
 
N/A

 
Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
$
6,284

 
 
$
866

 
 
 
$
1,810

 
 
 
$
899

 
 
 
$
1,590

 
Weighted average collateral default(1)
45.5
%
 
 
31.7
%
 
 
 
14.6
%
 
 
 
22.8
%
 
 
 
12.0
%
 
Weighted average collateral severities(2)
61.1

 
 
46.4

 
 
 
47.8

 
 
 
40.1

 
 
 
37.9

 
Weighted average voluntary prepayment rates(3)
2.5

 
 
7.6

 
 
 
11.0

 
 
 
8.1

 
 
 
11.8

 
Average credit enhancement(4)
15.9

 
 
3.9

 
 
 
5.0

 
 
 
8.3

 
 
 
3.8

 
__________

(1) 
The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the current collateral unpaid principal balance, weighted by security unpaid principal balance.
(2) 
The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.
(3) 
The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.

91






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


(4) 
The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest projections and monoline bond insurance.
The following table displays activity related to the unrealized credit loss component on debt securities held by us and recognized in our condensed consolidated statements of operations and comprehensive income.
 
For the Three Months Ended
  
March 31,
  
2015
 
2014
 
(Dollars in millions)
Balance, beginning of period
$
5,260

 
$
7,904

Additions for the credit component on debt securities for which OTTI was not previously recognized

 
1

Additions for the credit component on debt securities for which OTTI was previously recognized
4

 
39

Reductions for securities no longer in portfolio at period end
(1,093
)
 
(53
)
Reductions for securities which we intend to sell or it is more likely than not that we will be required to sell before recovery of amortized cost basis
(1,369
)
 
(698
)
Reductions for amortization resulting from changes in cash flows expected to be collected over the remaining life of the securities
(58
)
 
(97
)
Balance, end of period
$
2,744

 
$
7,096

Maturity Information
The following table displays the amortized cost and fair value of our AFS securities by major security type and remaining contractual maturity, assuming no principal prepayments, as of March 31, 2015. The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligations at any time.
  
As of March 31, 2015
 
Total Amortized Cost
 
Total
Fair
Value
 
One Year or Less
 
After One Year Through Five Years
 
After Five Years Through Ten Years
 
After Ten Years
 
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
  
(Dollars in millions)
Fannie Mae
 
$
5,086

 
 
$
5,407

 
 
$

 
 
$

 
 
$
253

 
 
$
264

 
 
$
208

 
 
$
226

 
 
$
4,625

 
 
$
4,917

Freddie Mac
 
4,842

 
 
5,257

 
 

 
 

 
 
260

 
 
274

 
 
444

 
 
485

 
 
4,138

 
 
4,498

Ginnie Mae
 
398

 
 
458

 
 

 
 

 
 
1

 
 
1

 
 
59

 
 
67

 
 
338

 
 
390

Alt-A private-label securities
 
3,649

 
 
4,464

 
 

 
 

 
 

 
 

 
 

 
 

 
 
3,649

 
 
4,464

Subprime private-label securities
 
3,572

 
 
4,608

 
 

 
 

 
 

 
 

 
 

 
 

 
 
3,572

 
 
4,608

CMBS
 
1,318

 
 
1,370

 
 

 
 

 
 
1,244

 
 
1,296

 
 

 
 

 
 
74

 
 
74

Mortgage revenue bonds
 
3,344

 
 
3,560

 
 
14

 
 
14

 
 
106

 
 
108

 
 
272

 
 
274

 
 
2,952

 
 
3,164

Other mortgage-related securities
 
2,421

 
 
2,608

 
 

 
 

 
 

 
 

 
 
34

 
 
38

 
 
2,387

 
 
2,570

Total
 
$
24,630

 
 
$
27,732

 
 
$
14

 
 
$
14

 
 
$
1,864

 
 
$
1,943

 
 
$
1,017

 
 
$
1,090

 
 
$
21,735

 
 
$
24,685

6.  Financial Guarantees
We recognize a guaranty obligation for our obligation to stand ready to perform on our guarantees to unconsolidated trusts and other guaranty arrangements. These guarantees expose us to credit losses on the mortgage loans or, in the case of mortgage-related securities, the underlying mortgage loans of the related securities. The remaining contractual terms of our guarantees range from 30 days to 38 years; however, the actual term of each guaranty may be significantly less than the contractual term based on the prepayment characteristics of the related mortgage loans.

92






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


The following table displays our maximum exposure, guaranty obligation recognized in our condensed consolidated balance sheets and the maximum potential recovery from third parties through available credit enhancements and recourse related to our financial guarantees as of March 31, 2015 and December 31, 2014.
 
As of
 
March 31, 2015
 
 
December 31, 2014
 
Maximum Exposure(1)
 
Guaranty Obligation
 
Maximum Recovery(2)
 
Maximum Exposure(1)
 
Guaranty Obligation
 
Maximum Recovery(2)
 
(Dollars in millions)
Unconsolidated Fannie Mae MBS
$
16,703

 
 
$
209

 
 
$
9,576

 
 
$
17,184

 
 
$
214

 
 
$
9,775

Other guaranty arrangements(3)
18,254

 
 
158

 
 
4,431

 
 
18,781

 
 
168

 
 
4,447

    Total
$
34,957

 
 
$
367

 
 
$
14,007

 
 
$
35,965

 
 
$
382

 
 
$
14,222

__________
(1) 
Primarily consists of the unpaid principal balance of the underlying mortgage loans.
(2) 
Recoverability of such credit enhancements and recourse is subject to, among other factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us. For information on our mortgage insurers, see “Note 13, Concentrations of Credit Risk.”
(3) 
Primarily consists of credit enhancements, long-term standby commitments, and our commitment under the TCLF program.
The fair value of our guaranty obligations associated with the Fannie Mae MBS included in “Investments in securities” in our condensed consolidated balance sheets was $769 million and $797 million as of March 31, 2015 and December 31, 2014, respectively. These Fannie Mae MBS consist primarily of private-label wraps where our guaranty arrangement is with an unconsolidated MBS trust.
7.  Acquired Property, Net
Acquired property, net consists of held-for-sale foreclosed property received in satisfaction of a loan, net of a valuation allowance for declines in the fair value of the properties after initial acquisition. We classify properties as held for sale when we intend to sell the property and are actively marketing it for sale. The following table displays the activity in acquired property, and the related valuation allowance, for the three months ended March 31, 2015 and 2014.
 
For the Three Months Ended March 31,
 
2015
 
2014
 
(Dollars in millions)
Beginning balance — Acquired property
$
11,442

 
$
12,307

Additions
2,935

 
3,772

Disposals
(4,029
)
 
(3,335
)
Ending balance — Acquired property
10,348

 
12,744

Beginning balance — Valuation allowance
(824
)
 
(686
)
Increase in valuation allowance
(6
)
 
(98
)
Ending balance — Valuation allowance
(830
)
 
(784
)
Ending balance — Acquired property, net
$
9,518

 
$
11,960


93






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


8.  Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings
The following table displays our outstanding short-term borrowings (borrowings with an original contractual maturity of one year or less) and weighted-average interest rates of these borrowings as of March 31, 2015 and December 31, 2014.
 
As of
  
March 31, 2015
 
December 31, 2014
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
 
(Dollars in millions) 
 
Federal funds purchased and securities sold under agreements to repurchase(2)
 
$
87

 
 
 
%
 
 
 
$
50

 
 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt of Fannie Mae
 
$
99,349

 
 
 
0.14
%
 
 
 
$
105,012

 
 
 
0.11
%
 
Debt of consolidated trusts
 
1,463

 
 
 
0.12

 
 
 
1,560

 
 
 
0.09

 
Total short-term debt
 
$
100,812

 
 
 
0.14
%
 
 
 
$
106,572

 
 
 
0.11
%
 
__________
(1) 
Includes the effects of discounts, premiums and other cost basis adjustments.
(2) 
Represents agreements to repurchase securities for a specified price, with repayment generally occurring on the following day.
Intraday Line of Credit
We periodically use a secured intraday funding line of credit provided by a large financial institution. We post collateral which, in some circumstances, the secured party has the right to repledge to third parties. As this line of credit is an uncommitted intraday loan facility, we may be unable to draw on it if and when needed. The line of credit under this facility was $15.0 billion as of March 31, 2015 and December 31, 2014. We had no borrowings outstanding from this line of credit as of March 31, 2015.

94






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Long-Term Debt
Long-term debt represents borrowings with an original contractual maturity of greater than one year. The following table displays our outstanding long-term debt as of March 31, 2015 and December 31, 2014.
 
As of
 
March 31, 2015
 
December 31, 2014
 
Maturities
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
Maturities
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
(Dollars in millions)
Senior fixed:
 
 
 
 
 
 
 
 
 
 
 
Benchmark notes and bonds
2015 - 2030
 
$
170,531

 
2.44
%
 
2015 - 2030
 
$
173,010

 
2.41
%
Medium-term notes(2)
2015 - 2025
 
116,246

 
1.44

 
2015 - 2024
 
114,556

 
1.42

Foreign exchange notes and bonds
2021 - 2028
 
590

 
5.37

 
2021 - 2028
 
619

 
5.44

Other
2015 - 2038
 
31,555

 
4.57

 
2015 - 2038
 
32,322

 
4.63

Total senior fixed
 
 
318,922

 
2.29

 
 
 
320,507

 
2.29

Senior floating:
 
 
 
 
 
 
 
 
 
 
 
Medium-term notes(2)
2015 - 2019
 
18,419

 
0.18

 
2015 - 2019
 
24,469

 
0.15

Connecticut Avenue Securities(3)
2023 - 2025
 
7,530

 
3.10

 
2023 - 2024
 
6,041

 
2.97

Other(4)
2020 - 2037
 
391

 
7.89

 
2020 - 2037
 
363

 
8.71

Total senior floating
 
 
26,340

 
1.10

 
 
 
30,873

 
0.81

Subordinated debentures
2019
 
3,940

 
9.84

 
2019
 
3,849

 
9.93

Secured borrowings(5)
2021 - 2022
 
189

 
1.91

 
2021 - 2022
 
202

 
1.90

Total long-term debt of Fannie Mae(6)
 
 
349,391

 
2.29

 
 
 
355,431

 
2.24

Debt of consolidated trusts(4)
2015 - 2054
 
2,762,428

 
2.91

 
2015 - 2054
 
2,760,152

 
3.02

Total long-term debt
 
 
$
3,111,819

 
2.84
%
 
 
 
$
3,115,583

 
2.93
%
__________
(1) 
Includes the effects of discounts, premiums and other cost basis adjustments.
(2) 
Includes long-term debt with an original contractual maturity of greater than 1 year and up to 10 years, excluding zero-coupon debt.
(3) 
Credit risk sharing securities that transfer a portion of the credit risk on specified pools of mortgage loans to the investors in these securities. Connecticut Avenue Securities are reported at fair value.
(4) 
Represents structured debt instruments that are reported at fair value.
(5) 
Represents our remaining liability resulting from the transfer of financial assets from our condensed consolidated balance sheets that did not qualify as a sale under the accounting guidance for the transfer of financial instruments.
(6) 
Reported amounts include unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $3.6 billion and $4.1 billion as of March 31, 2015 and December 31, 2014, respectively.
9.  Derivative Instruments
Derivative instruments are an integral part of our strategy in managing interest rate risk. Derivative instruments may be privately-negotiated, bilateral contracts, or they may be listed and traded on an exchange. We refer to our derivative transactions made pursuant to bilateral contracts as our over-the-counter (“OTC”) derivative transactions and our derivative transactions accepted for clearing by a derivatives clearing organization as our cleared derivative transactions. We typically do not settle the notional amount of our risk management derivatives; rather, notional amounts provide the basis for calculating actual payments or settlement amounts. The derivatives we use for interest rate risk management purposes consist primarily of interest rate swaps and interest rate options.

95






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


We enter into forward purchase and sale commitments that lock in the future delivery of mortgage loans and mortgage-related securities at a fixed price or yield. Certain commitments to purchase mortgage loans and purchase or sell mortgage-related securities meet the criteria of a derivative. We typically settle the notional amount of our mortgage commitments that are accounted for as derivatives.
We recognize all derivatives as either assets or liabilities in our condensed consolidated balance sheets at their fair value on a trade date basis. Fair value amounts, which are netted to the extent a legal right of offset exists and is enforceable by law at the counterparty level and are inclusive of the right or obligation associated with the cash collateral posted or received, are recorded in “Other assets” or “Other liabilities” in our condensed consolidated balance sheets. See “Note 15, Fair Value” for additional information on derivatives recorded at fair value. We present cash flows from derivatives as operating activities in our condensed consolidated statements of cash flows.
Notional and Fair Value Position of our Derivatives
The following table displays the notional amount and estimated fair value of our asset and liability derivative instruments as of March 31, 2015 and December 31, 2014.
 
As of March 31, 2015
 
As of December 31, 2014
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
Notional Amount
 
Estimated Fair Value
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
$
17,739

 
$
114

 
$
144,469

 
$
(9,424
)
 
$
41,965

 
$
733

 
$
123,557

 
$
(7,125
)
Receive-fixed
141,195

 
5,508

 
97,104

 
(516
)
 
67,629

 
4,486

 
157,272

 
(1,302
)
Basis
1,769

 
156

 
9,100

 
(3
)
 
5,769

 
123

 
7,100

 
(2
)
Foreign currency
328

 
132

 
260

 
(48
)
 
344

 
144

 
273

 
(30
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
7,625

 
52

 
21,700

 
(79
)
 
11,100

 
57

 
26,525

 
(175
)
Receive-fixed

 

 
23,275

 
(968
)
 
750

 
96

 
29,525

 
(816
)
Other(1)
1,060

 
27

 
12

 
(1
)
 
1,071

 
28

 
12

 
(1
)
Total gross risk management derivatives
169,716

 
5,989

 
295,920

 
(11,039
)
 
128,628

 
5,667

 
344,264

 
(9,451
)
Accrued interest receivable (payable)

 
917

 

 
(1,232
)
 

 
749

 

 
(1,013
)
Netting adjustment(2)

 
(5,626
)
 

 
12,036

 

 
(5,186
)
 

 
10,194

Total net risk management derivatives
$
169,716

 
$
1,280

 
$
295,920

 
$
(235
)
 
$
128,628

 
$
1,230

 
$
344,264

 
$
(270
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
10,387

 
$
51

 
$
1,493

 
$
(4
)
 
$
6,157

 
$
28

 
$
428

 
$

Forward contracts to purchase mortgage-related securities
59,334

 
341

 
6,748

 
(14
)
 
43,533

 
223

 
6,112

 
(8
)
Forward contracts to sell mortgage-related securities
8,548

 
20

 
91,558

 
(549
)
 
4,886

 
4

 
57,910

 
(336
)
Total mortgage commitment derivatives
$
78,269

 
$
412

 
$
99,799

 
$
(567
)
 
$
54,576

 
$
255

 
$
64,450

 
$
(344
)
Derivatives at fair value
$
247,985

 
$
1,692

 
$
395,719

 
$
(802
)
 
$
183,204

 
$
1,485

 
$
408,714

 
$
(614
)

96






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


__________
(1) 
Includes futures, swap credit enhancements and mortgage insurance contracts that we account for as derivatives. The mortgage insurance contracts have payment provisions that are not based on a notional amount.
(2) 
The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received. Cash collateral posted was $6.6 billion and $5.3 billion as of March 31, 2015 and December 31, 2014, respectively. Cash collateral received was $161 million and $245 million as of March 31, 2015 and December 31, 2014, respectively.
A majority of our OTC derivative contracts contain provisions that require our senior unsecured debt to maintain a minimum credit rating from S&P and Moody’s. If our senior unsecured debt credit ratings were downgraded to established thresholds in these derivative contracts, which range from A+ to BBB+, we could be required to provide additional collateral to or terminate transactions with certain counterparties. The aggregate fair value of all OTC derivatives with credit-risk-related contingent features that were in a net liability position was $3.1 billion and $2.6 billion as of March 31, 2015 and December 31, 2014, respectively, for which we posted collateral of $2.9 billion and $2.4 billion in the normal course of business as of March 31, 2015 and December 31, 2014, respectively. Had all of the credit-risk-related contingency features underlying these agreements been triggered, an additional $230 million and $269 million would have been required to be posted as collateral or to immediately settle our positions based on the individual agreements and our fair value position as of March 31, 2015 and December 31, 2014, respectively. A reduction in our credit ratings may also cause derivatives clearing organizations or their members to demand that we post additional collateral for our cleared derivative contracts.
We record all derivative gains and losses, including accrued interest, in “Fair value losses, net” in our condensed consolidated statements of operations and comprehensive income. The following table displays, by type of derivative instrument, the fair value gains and losses, net on our derivatives for the three months ended March 31, 2015 and 2014.
 
For the Three Months
 
Ended March 31,
 
2015
 
2014
 
(Dollars in millions)
Risk management derivatives:
 
 
 
Swaps:
 
 
 
Pay-fixed
$
(3,069
)
 
$
(2,118
)
Receive-fixed
1,847

 
1,465

Basis
32

 
35

Foreign currency
(29
)
 
21

Swaptions:
 
 
 
Pay-fixed
91

 
(99
)
Receive-fixed
(159
)
 
(42
)
Other
2

 
(3
)
Accrual of periodic settlements:
 
 
 
Pay-fixed interest-rate swaps
(931
)
 
(903
)
Receive-fixed interest-rate swaps
692

 
691

Other
10

 
13

Total risk management derivatives fair value losses, net
$
(1,514
)
 
$
(940
)
Mortgage commitment derivatives fair value losses, net
(239
)
 
(345
)
Total derivatives fair value losses, net
$
(1,753
)
 
$
(1,285
)

97






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate derivative contracts. We are exposed to the risk that a counterparty in a derivative transaction will default on payments due to us, which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement. We manage our derivative counterparty credit exposure relating to our risk management derivative transactions mainly through enforceable master netting arrangements, which allow us to net derivative assets and liabilities with the same counterparty or clearing organization and clearing member. For our risk management derivative transactions, we require counterparties to post collateral, which may include cash, U.S. Treasury securities, agency debt and agency mortgage-related securities.
See “Note 14, Netting Arrangements” for information on our rights to offset assets and liabilities.
10. Earnings (Loss) Per Share
The calculation of income available to common stockholders and earnings per share is based on the underlying premise that all income after payment of dividends on preferred shares is available to and will be distributed to common stockholders. However, as a result of our conservatorship status and the terms of the senior preferred stock, no amounts are available to distribute as dividends to common or preferred stockholders (other than to Treasury as holder of the senior preferred stock).
The following table displays the computation of basic and diluted earnings (loss) per share of common stock for the three months ended March 31, 2015 and 2014.
 
For the Three Months Ended March 31,
 
 
2015
 
2014
 
(Dollars and shares in millions, except per share amounts)
Net income attributable to Fannie Mae
 
$
1,888

 
 
 
$
5,325

 
Dividends available for distribution to senior preferred stockholder(1)
 
(1,796
)
 
 
 
(5,692
)
 
Net income (loss) attributable to common stockholders
 
$
92

 
 
 
$
(367
)
 
Weighted-average common shares outstanding—Basic(2)
 
5,762

 
 
 
5,762

 
Convertible preferred stock
 
131

 
 
 

 
Weighted-average common shares outstanding—Diluted(2)
 
5,893

 
 
 
5,762

 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
 
$
0.02

 
 
 
$
(0.06
)
 
Diluted
 
0.02

 
 
 
(0.06
)
 
__________
(1) 
Dividends available for distribution for the three months ended March 31, 2015 and 2014 (relating to the dividend period for the three months ended June 30, 2015 and 2014) were calculated based on our net worth as of March 31, 2015 and 2014 less the applicable capital reserve.
(2) 
Includes 4.6 billion for the three months ended March 31, 2015 and 2014 of weighted average shares of common stock that would be issued upon the full exercise of the warrant issued to Treasury from the date the warrant was issued through March 31, 2015 and 2014.
11. Segment Reporting
Our three reportable segments are: Single-Family, Multifamily and Capital Markets. We use these three segments to generate revenue and manage business risk, and each segment is based on the type of business activities it performs. Under our segment reporting, the sum of the results for our three business segments does not equal our condensed consolidated statements of operations and comprehensive income, as we separate the activity related to our consolidated trusts from the results generated by our three segments. Our business segment financial results include directly attributable revenues and expenses. Additionally, we allocate to each of our segments: (1) capital using FHFA minimum capital requirements adjusted

98






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


for over- or under-capitalization; (2) indirect administrative costs; and (3) a provision or benefit for federal income taxes. In addition, we allocate intracompany guaranty fee income as a charge from the Single-Family and Multifamily segments to Capital Markets for managing the credit risk on mortgage loans held by the Capital Markets group. We also include an eliminations/adjustments category to reconcile our business segment financial results and the activity related to our consolidated trusts to net income in our condensed consolidated statements of operations and comprehensive income.
The following tables display our business segment financial results for the three months ended March 31, 2015 and 2014.
 
For the Three Months Ended March 31, 2015
 
Business Segments
 
Other Activity/Reconciling Items
 
 
 
Single-Family
 
Multifamily
 
Capital Markets
 
Consolidated Trusts(1)
 
Eliminations/ Adjustments(2)
 
Total Results
 
 
(Dollars in millions)
Net interest income (loss)
$
9

 
 
$
(31
)
 
 
$
1,602

 
 
$
3,216

 
 
$
271

(3) 
 
$
5,067

 
Benefit for credit losses
478

 
 
55

 
 

 
 

 
 

 
 
533

 
Net interest income after benefit for credit losses
487

 
 
24

 
 
1,602

 
 
3,216

 
 
271

 
 
5,600

 
Guaranty fee income (expense)(4)
3,040

 
 
340

 
 
(227
)
 
 
(1,562
)
(5) 
 
(1,560
)
(5) 
 
31

(5) 
Investment gains (losses), net

 
 
9

 
 
1,509

 
 
(202
)
 
 
(974
)
(6) 
 
342

 
Fair value (losses) gains, net
(4
)
 
 

 
 
(1,970
)
 
 
(2
)
 
 
57

(7) 
 
(1,919
)
 
Debt extinguishment gains, net

 
 

 
 
2

 
 
6

 
 

 
 
8

 
(Losses) gains from partnership investments(8)
(5
)
 
 
212

 
 

 
 

 
 

 
 
207

 
Fee and other income (expense)
172

 
 
51

 
 
55

 
 
(79
)
 
 
78

 
 
277

 
Administrative expenses
(484
)
 
 
(88
)
 
 
(151
)
 
 

 
 

 
 
(723
)
 
Foreclosed property (expense) income
(485
)
 
 
12

 
 

 
 

 
 

 
 
(473
)
 
TCCA fees(4)
(382
)
 
 

 
 

 
 

 
 

 
 
(382
)
 
Other (expenses) income
(227
)
 
 
(7
)
 
 
(2
)
 
 

 
 
26

 
 
(210
)
 
Income before federal income taxes
2,112

 
 
553

 
 
818

 
 
1,377

 
 
(2,102
)
 
 
2,758

 
Provision for federal income taxes
(581
)
 
 
(70
)
 
 
(219
)
 
 

 
 

 
 
(870
)
 
Net income attributable to Fannie Mae
$
1,531

 
 
$
483

 
 
$
599

 
 
$
1,377

 
 
$
(2,102
)
 
 
$
1,888

 

99






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
For the Three Months Ended March 31, 2014
 
Business Segments
 
Other Activity/Reconciling Items
 
 
 
 
Single-Family
 
Multifamily
 
Capital Markets
 
Consolidated Trusts(1)
 
Eliminations/ Adjustments(2)

 
Total Results
 
 
(Dollars in millions)
Net interest (loss) income
$
(48
)
 
 
$
(22
)
 
 
$
1,830

 
 
$
2,698

 
 
$
280

(3) 
 
$
4,738

 
Benefit for credit losses
745

 
 
29

 
 

 
 

 
 

 
 
774

 
Net interest income after benefit for credit losses
697

 
 
7

 
 
1,830

 
 
2,698

 
 
280

 
 
5,512

 
Guaranty fee income (expense)(4)
2,870

 
 
311

 
 
(246
)
 
 
(1,427
)
(5) 
 
(1,463
)
(5) 
 
45

(5) 
Investment gains (losses), net

 
 
3

 
 
1,285

 
 
(58
)
 
 
(1,135
)
(6) 
 
95

 
Fair value (losses) gains, net
(5
)
 
 

 
 
(1,337
)
 
 
48

 
 
104

(7) 
 
(1,190
)
 
Debt extinguishment (losses) gains, net

 
 

 
 
(7
)
 
 
7

 
 

 
 

 
Gains from partnership investments(8)

 
 
45

 
 

 
 

 
 

 
 
45

 
Fee and other income (expense)
144

 
 
24

 
 
4,133

 
 
(76
)
 
 
85

 
 
4,310

 
Administrative expenses
(450
)
 
 
(73
)
 
 
(149
)
 
 

 
 

 
 
(672
)
 
Foreclosed property income
257

 
 
5

 
 

 
 

 
 

 
 
262

 
TCCA fees(4)
(322
)
 
 

 
 

 
 

 
 

 
 
(322
)
 
Other expenses
(155
)
 
 
(1
)
 
 
(8
)
 
 

 
 
(12
)
 
 
(176
)
 
Income before federal income taxes
3,036

 
 
321

 
 
5,501

 
 
1,192

 
 
(2,141
)
 
 
7,909

 
(Provision) benefit for federal income taxes
(927
)
 
 
9

 
 
(1,666
)
 
 

 
 

 
 
(2,584
)
 
Net income attributable to Fannie Mae
$
2,109

 
 
$
330

 
 
$
3,835

 
 
$
1,192

 
 
$
(2,141
)
 
 
$
5,325

 
__________
(1) 
Represents activity related to the assets and liabilities of consolidated trusts in our condensed consolidated balance sheets.
(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 consolidated results.
(3) 
Represents the amortization expense of cost basis adjustments on securities in the Capital Markets group’s retained mortgage portfolio that on a GAAP basis are eliminated.
(4) 
Includes the impact of a 10 basis point guaranty fee increase implemented pursuant to the TCCA, the incremental revenue from which must be remitted to Treasury. The resulting revenue is included in guaranty fee income and the expense is recognized as “TCCA fees.”
(5) 
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. Total guaranty fee income related to unconsolidated Fannie Mae MBS trusts and other credit enhancement arrangements is included in fee and other income in our condensed consolidated statements of operations and comprehensive income.
(6) 
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 in the Capital Markets group’s retained mortgage 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.
(7) 
Represents the removal of fair value adjustments on consolidated Fannie Mae MBS classified as trading that are in the Capital Markets group’s retained mortgage portfolio.
(8) 
Gains from partnership investments are included in other expenses in our condensed consolidated statements of operations and comprehensive income.

100






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


12. Equity
The following table displays the activity in other comprehensive income (“OCI”), net of tax, by major categories for the three months ended March 31, 2015 and 2014.
 
 
For the Three Months Ended March 31,
 
 
2015
 
2014
 
(Dollars in millions)
Net income
 
$
1,888

 
$
5,325

Other comprehensive income, net of tax effect:
 
 
 
 
Changes in net unrealized gains on AFS securities (net of tax of $13 and $184, respectively)
 
24

 
340

Reclassification adjustment for OTTI recognized in net income (net of tax of $60 and $18, respectively)
 
110

 
33

Reclassification adjustment for gains on AFS securities included in net income (net of tax of $121 and $-, respectively)
 
(225
)
 
(1
)
Other
 
(1
)
 

Total other comprehensive (loss) income
 
(92
)
 
372

Total comprehensive income
 
$
1,796

 
$
5,697

The following table displays our accumulated other comprehensive income (“AOCI”) by major categories as of March 31, 2015 and December 31, 2014.
 
 
As of
 
 
March 31,
 
December 31,
 
2015
 
2014
 
(Dollars in millions)
 
Net unrealized gains on AFS securities for which we have not recorded OTTI, net of tax
 
$
667

 
 
 
$
592

 
Net unrealized gains on AFS securities for which we have recorded OTTI, net of tax
 
1,363

 
 
 
1,529

 
Prior service cost and actuarial losses, net of amortization, net of tax
 
(359
)
 
 
 
(358
)
 
Other losses
 
(30
)
 
 
 
(30
)
 
Accumulated other comprehensive income
 
$
1,641

 
 
 
$
1,733

 



101






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


The table below displays changes in AOCI, net of tax.
 
 
For the Three Months Ended March 31,
 
 
2015
 
2014
 
 
AFS(1)
 
Other(2)
 
Total
 
 AFS(1)
 
Other
 
Total
 
(Dollars in millions)
Beginning balance
 
$
2,121

 
 
$
(388
)
 
$
1,733

 
 
$
1,627

 
 
$
(424
)
 
$
1,203

OCI before reclassifications
 
24

 
 

 
24

 
 
340

 
 

 
340

Amounts reclassified from OCI
 
(115
)
 
 
(1
)
 
(116
)
 
 
32

 
 

 
32

Net OCI
 
(91
)
 
 
(1
)
 
(92
)
 
 
372

 
 

 
372

Ending balance
 
$
2,030

 
 
$
(389
)
 
$
1,641

 
 
$
1,999

 
 
$
(424
)
 
$
1,575

__________
(1) 
The amounts reclassified from AOCI represent the gain or loss recognized in earnings due to a sale of an AFS security or the recognition of a net impairment recognized in earnings, which are recorded in “Investments gains, net” in our condensed consolidated statements of operations and comprehensive income.
(2) 
The amounts reclassified from AOCI represent activity from our defined benefit pension plans, which is recorded in “Salaries and employee benefits” in our condensed consolidated statements of operations and comprehensive income.
13. Concentrations of Credit Risk
Risk Characteristics of our Book of Business
We gauge our performance risk under our guaranty based on the delinquency status of the mortgage loans we hold in our retained mortgage portfolio, or in the case of mortgage-backed securities, the mortgage loans underlying the related securities.
For single-family loans, management monitors the serious delinquency rate, which is the percentage of single-family loans 90 days or more past due or in the foreclosure process, and loans that have higher risk characteristics, such as high mark-to-market loan-to-value (“LTV”) ratios.
For multifamily loans, management monitors the serious delinquency rate, which is the percentage of loans, based on unpaid principal balance, that are 60 days or more past due, and other loans that have higher risk characteristics, to determine our overall credit quality indicator. Higher risk characteristics include, but are not limited to, current debt service coverage ratio (“DSCR”) below 1.0 and high original and current estimated LTV ratios. We stratify multifamily loans into different internal risk categories based on the credit risk inherent in each individual loan.
For single-family and multifamily loans, we use this information, in conjunction with housing market and economic conditions, to structure our pricing and our eligibility and underwriting criteria to reflect the current risk of loans with these higher-risk characteristics, and in some cases we decide to significantly reduce our participation in riskier loan product categories. Management also uses this data together with other credit risk measures to identify key trends that guide the development of our loss mitigation strategies.
The following tables display the current delinquency status and certain higher risk characteristics of our single-family conventional and total multifamily guaranty book of business as of March 31, 2015 and December 31, 2014.
 
As of
 
March 31, 2015(1)
 
December 31, 2014(1)
 
30 Days Delinquent
 
60 Days Delinquent
 
Seriously Delinquent(2)
 
30 Days Delinquent
 
60 Days Delinquent
 
Seriously Delinquent(2)
Percentage of single-family conventional guaranty book of business(3)
1.11
%
 
0.33
%
 
1.87
%
 
1.27
%
 
0.38
%
 
1.99
%
Percentage of single-family conventional loans(4)
1.26

 
0.36

 
1.78

 
1.47

 
0.43

 
1.89



102






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
As of
 
March 31, 2015(1)
 
December 31, 2014(1)
 
Percentage of
Single-Family
Conventional
Guaranty Book of Business(3)
 
Seriously Delinquent Rate(2)
 
Percentage of
Single-Family
Conventional
Guaranty Book of Business(3)
 
Seriously Delinquent Rate(2)
Estimated mark-to-market loan-to-value ratio:
 
 
 
 
 
 
 
Greater than 100%
5
%
 
10.43
%
 
5
%
 
10.98
%
Geographical distribution:
 
 
 
 
 
 
 
California
20

 
0.66

 
20

 
0.70

Florida
6

 
3.91

 
6

 
4.42

Illinois
4

 
2.20

 
4

 
2.36

New Jersey
4

 
5.62

 
4

 
5.78

New York
5

 
4.04

 
5

 
4.17

All other states
61

 
1.43

 
61

 
1.52

Product distribution:
 
 
 
 
 
 
 
Alt-A
4

 
7.41

 
4

 
7.77

Vintages:
 
 
 
 
 
 
 
2005
3

 
5.94

 
3

 
6.18

2006
3

 
9.14

 
3

 
9.61

2007
4

 
10.34

 
4

 
10.79

2008
2

 
6.05

 
2

 
6.27

All other vintages
88

 
0.85

 
88

 
0.88

__________
(1) 
Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total single-family conventional guaranty book of business as of March 31, 2015 and December 31, 2014.
(2) 
Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of March 31, 2015 and December 31, 2014.
(3) 
Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business.  
(4) 
Calculated based on the number of single-family conventional loans that were delinquent divided by the total number of loans in our single-family conventional guaranty book of business.

103






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
As of
 
March 31, 2015(1)(2)
 
December 31, 2014(1)(2)
 
30 Days Delinquent
 
Seriously Delinquent(3)
 
30 Days Delinquent
 
Seriously Delinquent(3)
Percentage of multifamily guaranty book of business
0.03
%
 
0.09
%
 
0.04
%
 
0.05
%

 
As of
 
March 31, 2015(1)
 
December 31, 2014(1)
 
Percentage of Multifamily Guaranty Book of Business(2)
 
Percentage Seriously Delinquent(3)(4)
 
Percentage of Multifamily Guaranty Book of Business(2)
 
Percentage Seriously Delinquent(3)(4)
Original LTV ratio:
 
 
 
 
 
 
 
Greater than 80%
3
%
 
0.55
%
 
3
%
 
0.31
%
Less than or equal to 80%
97

 
0.08

 
97

 
0.04

Current debt service coverage ratio less than 1.0(5)
3

 
1.27

 
3

 
0.83

__________
(1) 
Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total multifamily guaranty book of business as of March 31, 2015 and December 31, 2014 excluding loans that have been defeased.
(2) 
Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the aggregate unpaid principal balance of loans in our multifamily guaranty book of business.
(3) 
Consists of multifamily loans that were 60 days or more past due as of the dates indicated.
(4) 
Calculated based on the unpaid principal balance of multifamily loans that were seriously delinquent divided by the aggregate unpaid principal balance of multifamily loans for each category included in our guaranty book of business.
(5) 
Our estimates of current DSCRs are based on the latest available income information for these properties. Although we use the most recently available results of our multifamily borrowers, there is a lag in reporting, which typically can range from 3 to 6 months but in some cases may be longer.
Other Concentrations
Mortgage Sellers and Servicers.  Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. Our mortgage sellers and servicers are also obligated to repurchase loans or foreclosed properties, reimburse us for losses or provide other remedies if the foreclosed property has been sold, under certain circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements, if loan representations and warranties are violated or if mortgage insurers rescind coverage. However, under our revised representation and warranty framework, we no longer require repurchase for loans that have breaches of certain selling representations and warranties if they have met specified criteria for relief. Our business with mortgage servicers is concentrated. Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 45% of our single-family guaranty book of business as of March 31, 2015, compared with 46% as of December 31, 2014. Our ten largest multifamily mortgage servicers, including their affiliates, serviced approximately 68% of our multifamily guaranty book of business as of March 31, 2015, compared with approximately 67% as of December 31, 2014.
If a significant mortgage seller or servicer counterparty, or a number of mortgage sellers or servicers, fails to meet their obligations to us, it could result in an increase in our credit losses and credit-related expense, and have a material adverse effect on our results of operations, liquidity, financial condition and net worth.
Mortgage Insurers.  Mortgage insurance “risk in force” generally represents our maximum potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of $110.6 billion and $109.6 billion on the single-family mortgage loans in our guaranty book of business as of March 31, 2015 and December 31, 2014, respectively, which represented 4% of our single-family guaranty book of business as of March 31, 2015 and December 31,

104






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


2014. Our primary mortgage insurance coverage risk in force was $109.8 billion and $108.7 billion as of March 31, 2015 and December 31, 2014, respectively. Our pool mortgage insurance coverage risk in force was $806 million and $852 million as of March 31, 2015 and December 31, 2014, respectively. Our top four mortgage insurance companies provided 79% of our mortgage insurance as of March 31, 2015 and December 31, 2014.
Of our largest primary mortgage insurers, PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company (“RMIC”) are under various forms of supervised control by their state regulators and are in run-off. Entering run-off may close off a source of profits and liquidity that may have otherwise assisted a mortgage insurer in paying claims under insurance policies, and could also cause the quality and speed of its claims processing to deteriorate. These three mortgage insurers provided a combined $11.7 billion, or 11%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of March 31, 2015.
Effective April 10, 2015, PMI increased its cash payments on policyholder claims from 67% to 70%, and subsequently paid sufficient amounts of its outstanding deferred payment obligations to bring payment on those claims to 70%. It is uncertain whether PMI will be permitted in the future to pay any remaining deferred policyholder claims or increase or decrease the amount of cash they pay on claims.
Although the financial condition of our mortgage insurer counterparties currently approved to write new business has improved in recent years, there is still risk that these counterparties may fail to fulfill their obligations to pay our claims under insurance policies. If we determine that it is probable that we will not collect all of our claims from one or more of our mortgage insurer counterparties, it could result in an increase in our loss reserves, which could adversely affect our results of operations, liquidity, financial condition and net worth.
When we estimate the credit losses that are inherent in our mortgage loans and under the terms of our guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of our mortgage insurer counterparties’ ability to fulfill their respective obligations to us worsens, it could result in an increase in our loss reserves. As of March 31, 2015 and December 31, 2014, the amount by which our estimated benefit from mortgage insurance reduced our total loss reserves as of these dates was $2.9 billion and $4.1 billion, respectively.
We had outstanding receivables of $1.5 billion recorded in “Other assets” in our condensed consolidated balance sheets as of March 31, 2015 and $1.4 billion as of December 31, 2014 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $360 million as of March 31, 2015 and $269 million as of December 31, 2014 was due from our mortgage sellers or servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $870 million as of March 31, 2015 and $799 million as of December 31, 2014. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of March 31, 2015 and December 31, 2014.
For information on credit risk associated with our derivative transactions and repurchase agreements refer to “Note 9, Derivative Instruments” and “Note 14, Netting Arrangements.”

105






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


14. Netting Arrangements
We use master netting arrangements, which allow us to offset certain financial instruments and collateral with the same counterparty, to minimize counterparty credit exposure. The table below displays information related to derivatives, securities purchased under agreements to resell or similar arrangements, and securities sold under agreements to repurchase or similar arrangements, which are subject to an enforceable master netting arrangement or similar agreement that are either offset or not offset in our condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014.
 
As of March 31, 2015
 
 
 
 
 
 
 
 
 
Net Amount Presented in the Condensed Consolidated Balance Sheets
 
Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
 
 
Gross Amount
 
Gross Amount Offset(1)
 
 
Financial Instruments(2)
 
Collateral(3)
 
Net Amount
 
 
(Dollars in millions)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
 
$
5,705

 
 
 
$
(5,705
)
 
 
 
$

 
 
 
$

 
 
 
$

 
 
 
$

 
Cleared risk management derivatives
 
1,174

 
 
 
79

 
 
 
1,253

 
 
 

 
 
 

 
 
 
1,253

 
Mortgage commitment derivatives
 
412

 
 
 

 
 
 
412

 
 
 
(227
)
 
 
 
(3
)
 
 
 
182

 
Total derivative assets
 
7,291

 
 
 
(5,626
)
 
 
 
1,665

(4 
) 
 
 
(227
)
 
 
 
(3
)
 
 
 
1,435

 
Securities purchased under agreements to resell or similar arrangements(5)
 
39,180

 
 
 

 
 
 
39,180

 
 
 

 
 
 
(39,180
)
 
 
 

 
Total assets
 
$
46,471

 
 
 
$
(5,626
)
 
 
 
$
40,845

 
 
 
$
(227
)
 
 
 
$
(39,183
)
 
 
 
$
1,435

 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
 
$
(8,658
)
 
 
 
$
8,424

 
 
 
$
(234
)
 
 
 
$

 
 
 
$

 
 
 
$
(234
)
 
Cleared risk management derivatives
 
(3,612
)
 
 
 
3,612

 
 
 

 
 
 

 
 
 

 
 
 

 
Mortgage commitment derivatives
 
(567
)
 
 
 

 
 
 
(567
)
 
 
 
227

 
 
 

 
 
 
(340
)
 
Total derivative liabilities
 
(12,837
)
 
 
 
12,036

 
 
 
(801
)
(4 
) 
 
 
227

 
 
 

 
 
 
(574
)
 
Securities sold under agreements to repurchase or similar arrangements
 
(87
)
 
 
 

 
 
 
(87
)
 
 
 

 
 
 
87

 
 
 

 
Total liabilities
 
$
(12,924
)
 
 
 
$
12,036

 
 
 
$
(888
)
 
 
 
$
227

 
 
 
$
87

 
 
 
$
(574
)
 

106






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
Net Amount Presented in the Condensed Consolidated Balance Sheets
 
Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
 
 
Gross Amount
 
Gross Amount Offset(1)
 
 
Financial Instruments(2)
 
Collateral(3)
 
Net Amount
 
 
(Dollars in millions)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
 
$
5,461

 
 
 
$
(5,428
)
 
 
 
$
33

 
 
 
$

 
 
 
$
(33
)
 
 
 
$

 
Cleared risk management derivatives
 
927

 
 
 
242

 
 
 
1,169

 
 
 

 
 
 

 
 
 
1,169

 
Mortgage commitment derivatives
 
255

 
 
 

 
 
 
255

 
 
 
(116
)
 
 
 
(7
)
 
 
 
132

 
Total derivative assets
 
6,643

 
 
 
(5,186
)
 
 
 
1,457

(4 
) 
 
 
(116
)
 
 
 
(40
)
 
 
 
1,301

 
Securities purchased under agreements to resell or similar arrangements(5)
 
47,550

 
 
 

 
 
 
47,550

 
 
 

 
 
 
(47,550
)
 
 
 

 
Total assets
 
$
54,193

 
 
 
$
(5,186
)
 
 
 
$
49,007

 
 
 
$
(116
)
 
 
 
$
(47,590
)
 
 
 
$
1,301

 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
 
$
(7,836
)
 
 
 
$
7,567

 
 
 
$
(269
)
 
 
 
$

 
 
 
$

 
 
 
$
(269
)
 
Cleared risk management derivatives
 
(2,627
)
 
 
 
2,627

 
 
 

 
 
 

 
 
 

 
 
 

 
Mortgage commitment derivatives
 
(344
)
 
 
 

 
 
 
(344
)
 
 
 
116

 
 
 

 
 
 
(228
)
 
Total derivative liabilities
 
(10,807
)
 
 
 
10,194

 
 
 
(613
)
(4 
) 
 
 
116

 
 
 

 
 
 
(497
)
 
Securities sold under agreements to repurchase or similar arrangements
 
(50
)
 
 
 

 
 
 
(50
)
 
 
 

 
 
 
50

 
 
 

 
Total liabilities
 
$
(10,857
)
 
 
 
$
10,194

 
 
 
$
(663
)
 
 
 
$
116

 
 
 
$
50

 
 
 
$
(497
)
 
__________
(1) 
Represents the effect of the right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received and accrued interest.
(2) 
Mortgage commitment derivative amounts reflect where we have recognized both an asset and a liability with the same counterparty under an enforceable master netting arrangement but we have not elected to offset the related amounts in our condensed consolidated balance sheets.
(3) 
Represents collateral posted or received that has neither been recognized nor offset in our condensed consolidated balance sheets. Does not include collateral held in excess of our exposure. The fair value of non-cash collateral accepted for OTC risk management derivatives was $5 million and $51 million as of March 31, 2015 and December 31, 2014, respectively. The fair value of non-cash collateral accepted for securities purchased under agreements to resell or similar arrangements was $39.3 billion and $47.6 billion, of which $31.9 billion and $41.9 billion could be sold or repledged as of March 31, 2015 and December 31, 2014, respectively. None of the underlying collateral was sold or repledged as of March 31, 2015 or December 31, 2014. The fair value of non-cash collateral we pledged for securities sold under agreements to repurchase was $87 million and $50 million as of March 31, 2015 and December 31, 2014, respectively, which the counterparty was permitted to sell or repledge.
(4) 
Excludes derivative assets of $27 million and $28 million as of March 31, 2015 and December 31, 2014, respectively, and derivative liabilities of $1 million as of March 31, 2015 and December 31, 2014, recognized in our condensed consolidated balance sheets that are not subject to enforceable master netting arrangements.
(5) 
Includes $19.0 billion and $16.6 billion of securities purchased under agreements to resell or similar arrangements classified as “Cash and cash equivalents” in our condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014, respectively.
Derivative instruments are recorded at fair value and securities purchased under agreements to resell or similar arrangements are recorded at amortized cost in our condensed consolidated balance sheets.
We determine our rights to offset the assets and liabilities presented above with the same counterparty, including collateral posted or received, based on the contractual arrangements entered into with our individual counterparties and various rules and regulations that would govern the insolvency of a derivative counterparty. The following is a description, under various agreements, of the nature of those rights and their effect or potential effect on our financial position.

107






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


The terms of the majority of our contracts for OTC risk management derivatives are governed under master agreements of the International Swaps and Derivatives Association Inc. (“ISDA”). These agreements provide that all transactions entered into under the agreement with the counterparty constitute a single contractual relationship. An event of default by the counterparty allows the early termination of all outstanding transactions under the same ISDA agreement and we may offset all outstanding amounts related to the terminated transactions including collateral posted or received.
The terms of our contracts for cleared derivatives are governed under the rules of the clearing organization and the agreement between us and the clearing member of that clearing organization. In the event of a clearing organization default, all open positions at the clearing organization are closed and a net position (on a clearing member by clearing member basis) is calculated. Unless otherwise transferred, in the event of a clearing member default, all open positions cleared through that clearing member are closed and a net position is calculated.
The terms of our contracts for mortgage commitment derivatives are primarily governed by the Fannie Mae Single-Family Selling Guide (“Guide”), for Fannie Mae-approved lenders, or Master Securities Forward Transaction Agreements (“MSFTA”), for counterparties that are not Fannie Mae-approved lenders. In the event of default by the counterparty, both the Guide and the MSFTA allow us to terminate all outstanding transactions under the applicable agreement and offset all outstanding amounts related to the terminated transactions including collateral posted or received. In addition, under the Guide, upon a lender event of default, we generally may offset any amounts owed to a lender against any amounts a lender may owe us under any other existing agreement, regardless of whether or not such other agreements are in default or payments are immediately due.
The terms of our contracts for securities purchased under agreements to resell and securities sold under agreements to repurchase are governed by Master Repurchase Agreements, which are based on the guidelines prescribed by the Securities Industry and Financial Markets Association. Master Repurchase Agreements provide that all transactions under the agreement constitute a single contractual relationship. An event of default by the counterparty allows the early termination of all outstanding transactions under the same agreement and we may offset all outstanding amounts related to the terminated transactions including collateral posted or received.
We also have securities purchased under agreements to resell which we transact through the Fixed Income Clearing Corporation (“FICC”). Under the rules of the FICC, all agreements for securities purchased under agreements to resell that are submitted to the FICC for clearing become transactions with the FICC that are subject to FICC clearing rules. In the event of a FICC default, all open positions at the FICC are closed and a net position is calculated.
15.  Fair Value
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis.
Fair Value Measurement
Fair value measurement guidance defines fair value, establishes a framework for measuring fair value and sets forth disclosures around fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. The guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to measurements of assets and liabilities based on limited observable inputs or observable inputs for similar assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs.

108






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Recurring Changes in Fair Value
The following tables display our assets and liabilities measured in our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments for which we have elected the fair value option as of March 31, 2015 and December 31, 2014.
 
 
Fair Value Measurements as of March 31, 2015
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
Estimated Fair Value
 
 
(Dollars in millions)
 
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Fannie Mae
 
$

 
 
 
$
4,957

 
 
 
$
2

 
 
 
$

 
 
 
$
4,959

 
Freddie Mac
 

 
 
 
1,723

 
 
 

 
 
 

 
 
 
1,723

 
Ginnie Mae
 

 
 
 
214

 
 
 

 
 
 

 
 
 
214

 
Alt-A private-label securities
 

 
 
 
261

 
 
 
572

 
 
 

 
 
 
833

 
Subprime private-label securities
 

 
 
 

 
 
 
876

 
 
 

 
 
 
876

 
CMBS
 

 
 
 
2,478

 
 
 

 
 
 

 
 
 
2,478

 
Mortgage revenue bonds
 

 
 
 

 
 
 
742

 
 
 

 
 
 
742

 
Other
 

 
 
 

 
 
 
94

 
 
 

 
 
 
94

 
Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
U.S. Treasury securities
 
19,367

 
 
 

 
 
 

 
 
 

 
 
 
19,367

 
Total trading securities
 
19,367

 
 
 
9,633

 
 
 
2,286

 
 
 

 
 
 
31,286

 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Fannie Mae
 

 
 
 
5,202

 
 
 
205

 
 
 

 
 
 
5,407

 
Freddie Mac
 

 
 
 
5,252

 
 
 
5

 
 
 

 
 
 
5,257

 
Ginnie Mae
 

 
 
 
458

 
 
 

 
 
 

 
 
 
458

 
Alt-A private-label securities
 

 
 
 
1,978

 
 
 
2,486

 
 
 

 
 
 
4,464

 
Subprime private-label securities
 

 
 
 

 
 
 
4,608

 
 
 

 
 
 
4,608

 
CMBS
 

 
 
 
1,370

 
 
 

 
 
 

 
 
 
1,370

 
Mortgage revenue bonds
 

 
 
 

 
 
 
3,560

 
 
 

 
 
 
3,560

 
Other
 

 
 
 
1

 
 
 
2,607

 
 
 

 
 
 
2,608

 
Total available-for-sale securities
 

 
 
 
14,261

 
 
 
13,471

 
 
 

 
 
 
27,732

 
Mortgage loans of consolidated trusts
 

 
 
 
13,760

 
 
 
1,810

 
 
 

 
 
 
15,570

 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Swaps
 

 
 
 
6,666

 
 
 
161

 
 
 

 
 
 
6,827

 
Swaptions
 

 
 
 
52

 
 
 

 
 
 

 
 
 
52

 
Other
 

 
 
 

 
 
 
27

 
 
 

 
 
 
27

 
Netting adjustment
 

 
 
 

 
 
 

 
 
 
(5,626
)
 
 
 
(5,626
)
 
Mortgage commitment derivatives
 

 
 
 
385

 
 
 
27

 
 
 

 
 
 
412

 
Total other assets
 

 
 
 
7,103

 
 
 
215

 
 
 
(5,626
)
 
 
 
1,692

 
Total assets at fair value
 
$
19,367

 
 
 
$
44,757

 
 
 
$
17,782

 
 
 
$
(5,626
)
 
 
 
$
76,280

 


109






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
Fair Value Measurements as of March 31, 2015
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
 
Estimated Fair Value
  
 
(Dollars in millions)
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$

 
 
 
$
7,529

 
 
 
$
391

 
 
 
$

 
 
 
$
7,920

 
Total of Fannie Mae
 

 
 
 
7,529

 
 
 
391

 
 
 

 
 
 
7,920

 
Of consolidated trusts
 

 
 
 
20,826

 
 
 
547

 
 
 

 
 
 
21,373

 
Total long-term debt
 

 
 
 
28,355

 
 
 
938

 
 
 

 
 
 
29,293

 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 
 
 
11,078

 
 
 
145

 
 
 

 
 
 
11,223

 
Swaptions
 

 
 
 
1,047

 
 
 

 
 
 

 
 
 
1,047

 
Other
 

 
 
 

 
 
 
1

 
 
 

 
 
 
1

 
Netting adjustment
 

 
 
 

 
 
 

 
 
 
(12,036
)
 
 
 
(12,036
)
 
Mortgage commitment derivatives
 

 
 
 
564

 
 
 
3

 
 
 

 
 
 
567

 
Total other liabilities
 

 
 
 
12,689

 
 
 
149

 
 
 
(12,036
)
 
 
 
802

 
Total liabilities at fair value
 
$

 
 
 
$
41,044

 
 
 
$
1,087

 
 
 
$
(12,036
)
 
 
 
$
30,095

 


110






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
Fair Value Measurements as of December 31, 2014
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
Estimated Fair Value
 
 
(Dollars in millions)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
 
$

 
 
 
$
4,635

 
 
 
$
305

 
 
 
$

 
 
 
$
4,940

 
Freddie Mac
 

 
 
 
1,369

 
 
 

 
 
 

 
 
 
1,369

 
Ginnie Mae
 

 
 
 
166

 
 
 

 
 
 

 
 
 
166

 
Alt-A private-label securities
 

 
 
 
323

 
 
 
597

 
 
 

 
 
 
920

 
Subprime private-label securities
 

 
 
 

 
 
 
1,307

 
 
 

 
 
 
1,307

 
CMBS
 

 
 
 
2,515

 
 
 

 
 
 

 
 
 
2,515

 
Mortgage revenue bonds
 

 
 
 

 
 
 
722

 
 
 

 
 
 
722

 
Other
 

 
 
 

 
 
 
99

 
 
 

 
 
 
99

 
Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
19,466

 
 
 

 
 
 

 
 
 

 
 
 
19,466

 
Total trading securities
 
19,466

 
 
 
9,008

 
 
 
3,030

 
 
 

 
 
 
31,504

 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
 

 
 
 
5,639

 
 
 

 
 
 

 
 
 
5,639

 
Freddie Mac
 

 
 
 
5,522

 
 
 
6

 
 
 

 
 
 
5,528

 
Ginnie Mae
 

 
 
 
476

 
 
 

 
 
 

 
 
 
476

 
Alt-A private-label securities
 

 
 
 
2,538

 
 
 
3,140

 
 
 

 
 
 
5,678

 
Subprime private-label securities
 

 
 
 

 
 
 
5,240

 
 
 

 
 
 
5,240

 
CMBS
 

 
 
 
1,397

 
 
 

 
 
 

 
 
 
1,397

 
Mortgage revenue bonds
 

 
 
 

 
 
 
4,023

 
 
 

 
 
 
4,023

 
Other
 

 
 
 
2

 
 
 
2,671

 
 
 

 
 
 
2,673

 
Total available-for-sale securities
 

 
 
 
15,574

 
 
 
15,080

 
 
 

 
 
 
30,654

 
Mortgage loans of consolidated trusts
 

 
 
 
13,796

 
 
 
1,833

 
 
 

 
 
 
15,629

 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 
 
 
6,085

 
 
 
150

 
 
 

 
 
 
6,235

 
Swaptions
 

 
 
 
153

 
 
 

 
 
 

 
 
 
153

 
Other
 

 
 
 

 
 
 
28

 
 
 

 
 
 
28

 
Netting adjustment
 

 
 
 

 
 
 

 
 
 
(5,186
)
 
 
 
(5,186
)
 
Mortgage commitment derivatives
 

 
 
 
251

 
 
 
4

 
 
 

 
 
 
255

 
Total other assets
 

 
 
 
6,489

 
 
 
182

 
 
 
(5,186
)
 
 
 
1,485

 
Total assets at fair value
 
$
19,466

 
 
 
$
44,867

 
 
 
$
20,125

 
 
 
$
(5,186
)
 
 
 
$
79,272

 


111






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
Fair Value Measurements as of December 31, 2014
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment(1)
 
Estimated Fair Value
 
 
(Dollars in millions)
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$

 
 
 
$
6,040

 
 
 
$
363

 
 
 
$

 
 
 
$
6,403

 
Total of Fannie Mae
 

 
 
 
6,040

 
 
 
363

 
 
 

 
 
 
6,403

 
Of consolidated trusts
 

 
 
 
18,956

 
 
 
527

 
 
 

 
 
 
19,483

 
Total long-term debt
 

 
 
 
24,996

 
 
 
890

 
 
 

 
 
 
25,886

 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 
 
 
9,339

 
 
 
133

 
 
 

 
 
 
9,472

 
Swaptions
 

 
 
 
991

 
 
 

 
 
 

 
 
 
991

 
Other
 

 
 
 

 
 
 
1

 
 
 

 
 
 
1

 
 Netting adjustment
 

 
 
 

 
 
 

 
 
 
(10,194
)
 
 
 
(10,194
)
 
Mortgage commitment derivatives
 

 
 
 
341

 
 
 
3

 
 
 

 
 
 
344

 
Total other liabilities
 

 
 
 
10,671

 
 
 
137

 
 
 
(10,194
)
 
 
 
614

 
Total liabilities at fair value
 
$

 
 
 
$
35,667

 
 
 
$
1,027

 
 
 
$
(10,194
)
 
 
 
$
26,500

 
__________
(1) 
Derivative contracts are reported on a gross basis by level. The netting adjustment represents the effect of the legal right to offset under legally enforceable master netting arrangements to settle with the same counterparty on a net basis, including cash collateral posted and received.
The following tables display a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014. The tables also display gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our condensed consolidated statements of operations and comprehensive income for Level 3 assets and liabilities for the three months ended March 31, 2015 and 2014. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.

112






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
For the Three Months Ended March 31, 2015
 
 
 
Total (Losses) or Gains (Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized (Losses) Gains Included in Net Income Related to Assets and Liabilities Still Held as of March 31, 2015(5)
 
Balance, December 31, 2014
 
Included in Net Income
 
Included in
Other Comprehensive
Income(1)
 
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3(4)
 
Transfers into
Level 3(4)
 
Balance,
March 31, 2015
 
 
(Dollars in millions)
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
305

 
$
(27
)
 
 
$

 
$

 
$

 
$

 
$

 
$
(278
)
 
$
2

 
$
2

 
 
$
(19
)
 
  Alt-A private-label securities
597

 
8

 
 

 

 

 

 
(17
)
 
(44
)
 
28

 
572

 
 
8

 
Subprime private-label securities
1,307

 
1

 
 

 

 
(398
)
 

 
(34
)
 

 

 
876

 
 
107

 
Mortgage revenue bonds
722

 
35

 
 

 

 
(12
)
 

 
(3
)
 

 

 
742

 
 
33

 
    Other
99

 
(2
)
 
 

 

 

 

 
(3
)
 

 

 
94

 
 
(2
)
 
Total trading securities
$
3,030

 
$
15

(6)(7)
 
$

 
$

 
$
(410
)
 
$

 
$
(57
)
 
$
(322
)
 
$
30

 
$
2,286

 
 
$
127

(6)(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$

 
$

 
 
$

 
$
239

 
$
(34
)
 
$

 
$

 
$

 
$

 
$
205

 
 
$

 
Freddie Mac
6

 

 
 

 

 

 

 

 
(1
)
 

 
5

 
 

 
  Alt-A private-label securities
3,140

 
101

 
 
(78
)
 

 
(556
)
 

 
(124
)
 
(310
)
 
313

 
2,486

 
 

 
  Subprime private-label securities
5,240

 
180

 
 
(101
)
 

 
(565
)
 

 
(146
)
 

 

 
4,608

 
 

 
  Mortgage revenue bonds
4,023

 
23

 
 
52

 

 
(162
)
 

 
(376
)
 

 

 
3,560

 
 

 
    Other
2,671

 
(138
)
 
 
140

 

 

 

 
(66
)
 

 

 
2,607

 
 

 
Total available-for-sale securities
$
15,080

 
$
166

(6)(8)
 
$
13

 
$
239

 
$
(1,317
)
 
$

 
$
(712
)
 
$
(311
)
 
$
313

 
$
13,471

 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of consolidated trusts
$
1,833

 
$
34

(6)(7)
 
$

 
$
3

 
$

 
$

 
$
(77
)
 
$
(57
)
 
$
74

 
$
1,810

 
 
$
19

(6)(7)
Net derivatives
45

 
27

(7)
 

 

 

 

 
(6
)
 

 

 
66

 
 
39

(7)
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(363
)
 
$
(28
)
 
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
(391
)
 
 
$
(28
)
 
Of consolidated trusts
(527
)
 
(13
)
 
 

 

 

 

 
9

 
50

 
(66
)
 
(547
)
 
 
(12
)
 
Total long-term debt
$
(890
)
 
$
(41
)
(7)
 
$

 
$

 
$

 
$

 
$
9

 
$
50

 
$
(66
)
 
$
(938
)
 
 
$
(40
)
(7)

113






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
For the Three Months Ended March 31, 2014
 
 
 
Total (Losses) or Gains or (Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of March 31, 2014(5)
 
Balance, December 31,
2013
 
Included in Net Income
 
Included in
Other Comprehensive
Income(1)
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3(4)
 
Transfers into
Level 3(4)
 
Balance, March 31, 2014
 
 
(Dollars in millions)
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
42

 
$
(1
)
 
$

 
$

 
$

 
$

 
$
(2
)
 
$
(39
)
 
$

 
$

 
 
$

 
Freddie Mac
2

 

 

 

 

 

 

 
(2
)
 

 

 
 

 
  Alt-A private-label securities
618

 
19

 

 

 

 

 
(16
)
 
(76
)
 
110

 
655

 
 
17

 
Subprime private-label securities
1,448

 
76

 

 

 

 

 
(71
)
 

 

 
1,453

 
 
76

 
Mortgage revenue bonds
565

 
40

 

 

 

 

 
(4
)
 

 

 
601

 
 
40

 
    Other
99

 
5

 

 

 

 

 
(2
)
 

 

 
102

 
 
5

 
Total trading securities
$
2,774

 
$
139

(7)
$

 
$

 
$

 
$

 
$
(95
)
 
$
(117
)
 
$
110

 
$
2,811

 
 
$
138

(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
7

 
$

 
$

 
$

 
$

 
$

 
$

 
$
(2
)
 
$

 
$
5

 
 
$

 
Freddie Mac
8

 

 

 

 

 

 

 

 

 
8

 
 

 
  Alt-A private-label securities
3,791

 
13

 
73

 

 

 

 
(88
)
 
(609
)
 
390

 
3,570

 
 

 
  Subprime private-label securities
7,068

 
33

 
219

 

 

 

 
(290
)
 

 

 
7,030

 
 

 
  Mortgage revenue bonds
5,253

 
(20
)
 
193

 

 
(19
)
 

 
(401
)
 

 

 
5,006

 
 

 
    Other
2,885

 
3

 
41

 

 

 

 
(85
)
 

 

 
2,844

 
 

 
Total available-for-sale securities
$
19,012

 
$
29

(6)(8)
$
526

 
$

 
$
(19
)
 
$

 
$
(864
)
 
$
(611
)
 
$
390

 
$
18,463

 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of consolidated trusts
$
2,704

 
$
25

(6)(7)
$

 
$
24

 
$

 
$

 
$
(81
)
 
$
(148
)
 
$
84

 
$
2,608

 
 
$
11

(6)(7)
Net derivatives
(40
)
 
30

(7)

 

 

 

 
(12
)
 
(1
)
 

 
(23
)
 
 
11

(7)
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(955
)
 
$
(90
)
 
$

 
$

 
$

 
$
(750
)
 
$
20

 
$
1,465

 
$

 
$
(310
)
 
 
$
(44
)
 
Of consolidated trusts
(518
)
 
(1
)
 

 

 

 

 
18

 
19

 
(24
)
 
(506
)
 
 
(1
)
 
Total long-term debt
$
(1,473
)
 
$
(91
)
(7)
$

 
$

 
$

 
$
(750
)
 
$
38

 
$
1,484

 
$
(24
)
 
$
(816
)
 
 
$
(45
)
(7)
__________
(1) 
Gains (losses) included in other comprehensive income are included in “Changes in unrealized gains on AFS, net of reclassification adjustments and taxes” in the condensed consolidated statements of operations and comprehensive income.
(2) 
Purchases and sales include activity related to the consolidation and deconsolidation of assets of securitization trusts.
(3) 
Issues and settlements include activity related to the consolidation and deconsolidation of liabilities of securitization trusts.
(4) 
Transfers out of Level 3 consisted primarily of private-label mortgage-related securities backed by Alt-A loans and credit risk sharing securities issued under our CAS series. Prices for these securities were obtained from multiple third-party vendors or dealers. Transfers out of Level 3 also occurred for mortgage loans of consolidated trusts for which unobservable inputs used in valuations became less significant. Transfers into Level 3 consisted primarily of private-label mortgage-related securities backed by Alt-A loans. Prices for these securities are based on inputs from a single source or inputs that were not readily observable.
(5) 
Amount represents temporary changes in fair value. Amortization, accretion and OTTI are not considered unrealized and are not included in this amount.
(6) 
Gains (losses) are included in “Net interest income” in our condensed consolidated statements of operations and comprehensive income.

114






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


(7) 
Gains (losses) are included in “Fair value losses, net” in our condensed consolidated statements of operations and comprehensive income.
(8) 
Gains (losses) are included in “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income.

The following table displays valuation techniques and the range and the weighted average of significant unobservable inputs for our Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014.
 
 
Fair Value Measurements as of March 31, 2015
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
 
$
2

 
Other
 
 
 
 
 
 
 
 
 
Alt-A private-label securities(3)
 
95

 
Single Vendor
 
Default Rate (%)
 
8.8
 
8.8

 
 
 
 
 
 
 
Prepayment Speed (%)
 
2.3
 
2.3

 
 
 
 
 
 
 
Severity (%)
 
82.2
 
82.2
 
 
 
 
 
 
 
Spreads (bps)
 
281.2
 
281.2

 
 
 
78

 
Consensus
 
Default Rate (%)
 
4.7
-
14.2
 
6.3
 
 
 
 
 
 
 
Prepayment Speed (%)
 
2.5
-
13.2
 
4.3

 
 
 
 
 
 
 
Severity (%)
 
36.4
-
46.5
 
38.1

 
 
 
 
 
 
 
Spreads (bps)
 
230.0

-
253.6
 
249.6

 
 
 
372

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
27

 
Other
 
 
 
 
 
 
 
 
 
Total Alt-A private-label securities
 
572

 
 
 
 
 
 
 
 
 
 
 
Subprime private-label securities(3)
 
322

 
Consensus
 
Default Rate (%)
 
4.3
-
9.8
 
5.9

 
 
 
 
 
 
 
Prepayment Speed (%)
 
2.0
-
3.3
 
2.4

 
 
 
 
 
 
 
Severity (%)
 
65.0
-
95.0
 
82.9

 
 
 
 
 
 
 
Spreads (bps)
 
255.0
 
255.0

 
 
 
281

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
121

 
Discounted Cash Flow
 
Default Rate (%)
 
5.4
 
5.4

 
 
 
 
 
 
 
Prepayment Speed (%)
 
2.2
 
2.2

 
 
 
 
 
 
 
Severity (%)
 
60.7
 
60.7

 
 
 
 
 
 
 
Spreads (bps)
 
255.0
 
255.0

 
 
 
152

 
Other
 
 
 
 
 
 
 
 
 
Total subprime private-label securities
 
876

 
 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
723

 
Discounted Cash Flow
 
Spreads (bps)
 
27.5

-
323.4
 
253.1

 
 
 
19

 
Other
 
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
 
742

 
 
 
 
 
 
 
 
 
 
 
Other
 
94

 
Single Vendor
 
Spreads (bps)
 
383.4
 
383.4

 
Total trading securities
 
$
2,286

 
 
 
 
 
 
 
 
 
 
 

115






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
Fair Value Measurements as of March 31, 2015
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
 
$
210

 
Other
 
 
 
 
 
 
 
 
 
Alt-A private-label securities(3)
 
266

 
Single Vendor
 
Default Rate (%)
 
1.7
-
10.4
 
4.7

 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.4
-
9.1
 
4.5

 
 
 
 
 
 
 
Severity (%)
 
34.4
-
94.9
 
60.7

 
 
 
 
 
 
 
Spreads (bps)
 
190.1

-
330.0
 
246.5

 
 
 
784

 
Consensus
 
Default Rate (%)
 
0.0
-
15.2
 
4.3

 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.2
-
34.4
 
12.0

 
 
 
 
 
 
 
Severity (%)
 
15.9
-
95.0
 
65.3

 
 
 
 
 
 
 
Spreads (bps)
 
144.9

-
230.0
 
225.8

 
 
 
795

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
224

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
243

 
Discounted Cash Flow
 
Default Rate (%)
 
1.8
-
5.4
 
3.0

 
 
 
 
 
 
 
Prepayment Speed (%)
 
6.2
-
15.2
 
9.4

 
 
 
 
 
 
 
Severity (%)
 
35.0
-
64.0
 
54.6

 
 
 
 
 
 
 
Spreads (bps)
 
188.0

-
348.5
 
296.8

 
 
 
174

 
Other
 
 
 
 
 
 
 
 
 
Total Alt-A private-label securities
 
2,486

 
 
 
 
 
 
 
 
 
 
 
Subprime private-label securities(3)
 
286

 
Single Vendor
 
 
 
 
 
 
 
 
 
 
 
2,362

 
Consensus
 
Default Rate (%)
 
1.0
-
91.8
 
6.6

 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.1
-
21.5
 
2.4

 
 
 
 
 
 
 
Severity (%)
 
28.0
-
95.0
 
82.8

 
 
 
 
 
 
 
Spreads (bps)
 
145.0

-
255.0
 
208.9

 
 
 
1,233

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
232

 
Dealer Mark
 
Default Rate (%)
 
8.5
-
9.0
 
8.8

 
 
 
 
 
 
 
Prepayment Speed (%)
 
1.8
-
2.0
 
1.9

 
 
 
 
 
 
 
Severity (%)
 
77.8
-
95.0
 
86.9

 
 
 
 
 
 
 
Spreads (bps)
 
205.0
 
205.0

 
 
 
247

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
248

 
Other
 
 
 
 
 
 
 
 
 
Total subprime private-label securities
 
4,608

 
 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
1,365

 
Single Vendor
 
Spreads (bps)
 
10.0

-
466.6
 
71.3

 
 
 
229

 
Single Vendor
 
 
 
 
 
 
 
 
 
 
 
267

 
Dealer Mark
 
Spreads (bps)
 
197.2

-
316.1
 
299.0

 
 
 
1,517

 
Discounted Cash Flow
 
Spreads (bps)
 
10.0

-
396.6
 
244.6

 
 
 
182

 
Other
 
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
 
3,560

 
 
 
 
 
 
 
 
 
 
 
Other
 
713

 
Consensus
 
Default Rate (%)
 
0.0
-
5.0
 
4.2

 
 
 
 
 
 
 
Prepayment Speed (%)
 
3.0
-
14.2
 
4.3

 
 
 
 
 
 
 
Severity (%)
 
0.0
-
95.0
 
61.1

 
 
 
 
 
 
 
Spreads (bps)
 
205.0

-
428.3
 
289.2

 
 
 
206

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
364

 
Dealer Mark
 
Default Rate (%)
 
5.0
 
5.0

 
 
 
 
 
 
 
Prepayment Speed (%)
 
3.0
 
3.0

 
 
 
 
 
 
 
Severity (%)
 
85.0
 
85.0

 
 
 
 
 
 
 
Spreads (bps)
 
245.4

-
410.5
 
299.6

 

116






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
473

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
600

 
Discounted Cash Flow
 
Default Rate (%)
 
0.0
-
1.8
 
0.0

 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.0
-
8.0
 
0.0

 
 
 
 
 
 
 
Severity (%)
 
0.0
-
95.0
 
0.2

 
 
 
 
 
 
 
Spreads (bps)
 
230.0

-
336.0
 
321.8

 
 
 
251

 
Other
 
 
 
 
 
 
 
 
 
Total other
 
2,607

 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
 
$
13,471

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of March 31, 2015
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Mortgage loans of consolidated trusts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
$
900

 
Build-Up
 
Default Rate (%)
 
0.0
-
98.0
 
14.9
 
 
 
 
 
 
 
Prepayment Speed (%)
 
3.8
-
99.7
 
16.9
 
 
 
 
 
 
 
Severity (%)
 
0.0
-
100.0
 
24.1
 
 
 
363

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
360

 
Discounted Cash Flow
 
Default Rate (%)
 
0.0
-
13.3
 
4.6
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.1
-
11.6
 
7.3
 
 
 
 
 
 
 
Severity (%)
 
53.3
-
95.0
 
80.3
 
 
 
 
 
 
 
Spreads (bps)
 
145.0

-
655.0
 
212.6
 
 
 
4

 
Other
 
 
 
 
 
 
 
 
 
Total single-family
 
1,627

 
 
 
 
 
 
 
 
 
 
 
Multifamily
 
183

 
Build-Up
 
Spreads (bps)
 
56.0

-
340.4
 
146.5
 
Total mortgage loans of consolidated trusts
 
$
1,810

 
 
 
 
 
 
 
 
 
 
 
Net derivatives
 
$
(119
)
 
Internal Model
 
 
 
 
 
 
 
 
 
 
 
160

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
25

 
Other
 
 
 
 
 
 
 
 
 
Total net derivatives
 
$
66

 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$
(391
)
 
Discounted Cash Flow
 
 
 
 
 
 
 
 
 
Total of Fannie Mae
 
(391
)
 
 
 
 
 
 
 
 
 
 
 
Of consolidated trusts(4)
 
(290
)
 
Consensus
 
 
 
 
 
 
 
 
 
 
 
(156
)
 
Discounted Cash Flow
 
Default Rate (%)
 
0.0
-
5.0
 
2.3
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.1
-
100.0
 
30.8
 
 
 
 
 
 
 
Severity (%)
 
60.0
-
95.0
 
76.9
 
 
 
 
 
 
 
Spreads (bps)
 
66.0

-
655.0
 
245.8
 
 
 
(101
)
 
Other
 
 
 
 
 
 
 
 
 
Total of consolidated trusts
 
(547
)
 
 
 
 
 
 
 
 
 
 
 
Total long-term debt
 
$
(938
)
 
 
 
 
 
 
 
 
 
 
 

117






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
Fair Value Measurements as of December 31, 2014
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency(2)(4)
 
$
153

 
Single Vendor
 
Prepayment Speed (%)
 
100.0
 
100.0
 
 
 
 
 
 
 
Spreads (bps)
 
256.5
-
350.8
 
293.4
 
 
 
130

 
Consensus
 
Prepayment Speed (%)
 
100.0
 
100.0
 
 
 
 
 
 
 
Spreads (bps)
 
184.6
-
219.5
 
197.5
 
 
 
22

 
Other
 
 
 
 
 
 
 
 
 
Total Agency
 
305

 
 
 
 
 
 
 
 
 
 
 
Alt-A private-label securities(3)
 
290

 
Single Vendor
 
Default Rate (%)
 
8.3
-
9.1
 
8.5
 
 
 
 
 
 
 
Prepayment Speed (%)
 
2.9
-
3.2
 
3.1
 
 
 
 
 
 
 
Severity (%)
 
79.5
-
95.0
 
90.4
 
 
 
 
 
 
 
Spreads (bps)
 
267.2
-
308.2
 
279.4
 
 
 
66

 
Consensus
 
Default Rate (%)
 
5.4
 
5.4
 
 
 
 
 
 
 
Prepayment Speed (%)
 
7.0
 
7.0
 
 
 
 
 
 
 
Severity (%)
 
48.8
 
48.8
 
 
 
 
 
 
 
Spreads (bps)
 
264.8
 
264.8
 
 
 
151

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
90

 
Other
 
 
 
 
 
 
 
 
 
Total Alt-A private-label securities
 
597

 
 
 
 
 
 
 
 
 
 
 
Subprime private-label securities(3)
 
422

 
Consensus
 
Default Rate (%)
 
3.5
-
11.8
 
7.2
 
 
 
 
 
 
 
Prepayment Speed (%)
 
1.4
-
5.2
 
2.8
 
 
 
 
 
 
 
Severity (%)
 
72.1
-
95.0
 
85.9
 
 
 
 
 
 
 
Spreads (bps)
 
265.0
 
265.0
 
 
 
549

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
290

 
Discounted Cash Flow
 
Default Rate (%)
 
4.3
-
6.2
 
5.2
 
 
 
 
 
 
 
Prepayment Speed (%)
 
2.3
-
4.2
 
3.3
 
 
 
 
 
 
 
Severity (%)
 
62.2
-
95.0
 
73.8
 
 
 
 
 
 
 
Spreads (bps)
 
265.0
-
382.1
 
283.7
 
 
 
46

 
Other
 
 
 
 
 
 
 
 
 
Total subprime private-label securities
 
1,307

 
 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
161

 
Dealer Mark
 
Spreads (bps)
 
288.1
 
288.1
 
 
 
540

 
Discounted Cash Flow
 
Spreads (bps)
 
6.0
-
318.0
 
263.0
 
 
 
21

 
Other
 
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
 
722

 
 
 
 
 
 
 
 
 
 
 
Other
 
99

 
Dealer Mark
 
 
 
 
 
 
 
Total trading securities
 
$
3,030

 
 
 
 
 
 
 
 
 
 
 



118






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
Fair Value Measurements as of December 31, 2014
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
 
$
6

 
Other
 
 
 
 
 
 
 
 
 
Alt-A private-label securities(3)
 
322

 
Single Vendor
 
Default Rate (%)
 
0.2
-
13.1
 
4.6
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.2
-
20.5
 
8.2
 
 
 
 
 
 
 
Severity (%)
 
27.8
-
89.7
 
61.0
 
 
 
 
 
 
 
Spreads (bps)
 
190.0

-
315.0
 
264.9
 
 
 
493

 
Single Vendor
 
 
 
 
 
 
 
 
 
 
 
1,187

 
Consensus
 
Default Rate (%)
 
0.4
-
31.2
 
5.1
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.1
-
48.9
 
11.0
 
 
 
 
 
 
 
Severity (%)
 
0.2
-
95.0
 
59.6
 
 
 
 
 
 
 
Spreads (bps)
 
183.8

-
240.0
 
236.7
 
 
 
691

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
403

 
Discounted Cash Flow
 
Default Rate (%)
 
5.0
-
11.5
 
7.0
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.5
-
8.4
 
3.4
 
 
 
 
 
 
 
Severity (%)
 
35.1
-
92.4
 
54.2
 
 
 
 
 
 
 
Spreads (bps)
 
188.0

-
340.0
 
243.4
 
 
 
44

 
Other
 
 
 
 
 
 
 
 
 
Total Alt-A private-label securities
 
3,140

 
 
 
 
 
 
 
 
 
 
 
Subprime private-label securities(3)
 
383

 
Single Vendor
 
Default Rate (%)
 
2.1
-
8.3
 
5.5
 
 
 
 
 
 
 
Prepayment Speed (%)
 
1.5
-
3.3
 
2.1
 
 
 
 
 
 
 
Severity (%)
 
65.4
-
95.0
 
78.5
 
 
 
 
 
 
 
Spreads (bps)
 
215.0

-
262.0
 
230.0
 
 
 
2,722

 
Consensus
 
Default Rate (%)
 
1.5
-
37.4
 
6.3
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.1
-
17.7
 
2.6
 
 
 
 
 
 
 
Severity (%)
 
1.5
-
95.0
 
84.4
 
 
 
 
 
 
 
Spreads (bps)
 
155.0

-
265.0
 
220.0
 
 
 
1,755

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
317

 
Discounted Cash Flow
 
Default Rate (%)
 
3.0
-
12.3
 
7.0
 
 
 
 
 
 
 
Prepayment Speed (%)
 
1.1
-
9.0
 
4.1
 
 
 
 
 
 
 
Severity (%)
 
28.9
-
91.8
 
81.2
 
 
 
 
 
 
 
Spreads (bps)
 
155.0

-
895.0
 
250.5
 
 
 
63

 
Other
 
 
 
 
 
 
 
 
 
Total subprime private-label securities
 
5,240

 
 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
1,504

 
Single Vendor
 
Spreads (bps)
 
(11.5
)
-
361.5
 
52.7
 
 
 
418

 
Single Vendor
 
 
 
 
 
 
 
 
 
 
 
510

 
Dealer Mark
 
Spreads (bps)
 
222.8

-
322.1
 
265.9
 
 
 
1,581

 
Discounted Cash Flow
 
Spreads (bps)
 
(11.5
)
-
620.2
 
251.4
 
 
 
10

 
Other
 
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
 
4,023

 
 
 
 
 
 
 
 
 
 
 
Other
 
337

 
Single Vendor
 
Default Rate (%)
 
1.7
-
5.0
 
4.4
 
 
 
 
 
 
 
Prepayment Speed (%)
 
3.0
-
9.3
 
3.8
 
 
 
 
 
 
 
Severity (%)
 
4.0
-
94.6
 
69.6
 
 
 
 
 
 
 
Spreads (bps)
 
263.1

-
427.2
 
291.5
 
 
 
720

 
Consensus
 
Default Rate (%)
 
0.1
-
6.6
 
3.9
 
 
 
 
 
 
 
Prepayment Speed (%)
 
3.0
-
30.4
 
4.8
 
 
 
 
 
 
 
Severity (%)
 
0.4
-
95.0
 
62.4
 
 
 
 
 
 
 
Spreads (bps)
 
215.0

-
481.4
 
320.6
 
 
 
1,215

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
399

 
Other
 
 
 
 
 
 
 
 
 
Total other
 
2,671

 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
 
$
15,080

 
 
 
 
 
 
 
 
 
 
 

119






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
 
Fair Value Measurements as of December 31, 2014
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Mortgage loans of consolidated trusts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
$
934

 
Build-Up
 
Default Rate (%)
 
0.0

-
99.0
 
14.9

 
 
 
 
 
 
 
Prepayment Speed (%)
 
3.6

-
99.8
 
16.3

 
 
 
 
 
 
 
Severity (%)
 
3.4
-
100.0
 
23.7

 
 
 
279

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
402

 
Discounted Cash Flow
 
Default Rate (%)
 
2.7
-
13.1
 
5.5

 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.1
-
13.5
 
7.5

 
 
 
 
 
 
 
Severity (%)
 
35.5
-
95.0
 
61.3

 
 
 
 
 
 
 
Spreads (bps)
 
155.0

-
665.0
 
227.4

 
 
 
39

 
Other
 
 
 
 
 
 
 
 
 
Total single-family
 
1,654

 
 
 
 
 
 
 
 
 
 
 
Multifamily
 
179

 
Build-Up
 
Spreads (bps)
 
59.0

-
323.4
 
137.3

 
Total mortgage loans of consolidated trusts
 
$
1,833

 
 
 
 
 
 
 
 
 
 
 
Net derivatives
 
$
(107
)
 
Internal Model
 
 
 
 
 
 
 
 
 
 
 
150

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
2

 
Other
 
 
 
 
 
 
 
 
 
Total net derivatives
 
$
45

 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$
(363
)
 
Discounted Cash Flow
 
 
 
 
 
 
 
 
 
Of consolidated trusts(4)
 
(219
)
 
Consensus
 
 
 
 
 
 
 
 
 
 
 
(205
)
 
Discounted Cash Flow
 
Default Rate (%)
 
2.7

-
11.9
 
4.0

 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.1

-
100.0
 
33.4

 
 
 
 
 
 
 
Severity (%)
 
35.5

-
95.0
 
54.6

 
 
 
 
 
 
 
Spreads (bps)
 
88.0

-
665.0
 
249.4

 
 
 
(103
)
 
Other
 
 
 
 
 
 
 
 
 
Total of consolidated trusts
 
(527
)
 
 
 
 
 
 
 
 
 
 
 
Total long-term debt
 
$
(890
)
 
 
 
 
 
 
 
 
 
 
 
_________
(1) 
Valuation techniques for which no unobservable inputs are disclosed generally reflect the use of third-party pricing services or dealers, and the range of unobservable inputs applied by these sources is not readily available or cannot be reasonably estimated. Where we have disclosed unobservable inputs for consensus and single vendor techniques, those inputs are based on our validations performed at the security level using discounted cash flows.
(2) 
Includes Fannie Mae and Freddie Mac securities.
(3) 
Default Rate as disclosed represents the estimated beginning annualized rate of default and is used as a basis to forecast the future default rates that serve as an input for valuation.
(4) 
Includes instruments for which the prepayment speed as disclosed represents the estimated annualized rate of prepayment after all prepayment penalty provisions have expired and also instruments for which prepayment speed as disclosed represents the estimated rate of prepayment over the remaining life of the instrument.
In our condensed consolidated balance sheets certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when we evaluate loans for impairment). We did not have any Level 1 assets or liabilities that were measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014. We held $7 million and $93 million Level 2 assets, comprised of mortgage loans held for sale, and no Level 2 liabilities that were measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014, respectively.
The following table displays valuation techniques for our Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014. The significant unobservable inputs related to these techniques primarily relate to

120






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


collateral dependent valuations. The related ranges and weighted averages are not meaningful when aggregated as they vary significantly from property to property.
 
 
 
Fair Value Measurements (Level 3)
as of
 
Valuation Techniques
 
March 31, 2015
 
December 31, 2014
 
 
 
 
(Dollars in millions)
 
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale, at lower of cost or fair value
Consensus
 
 
$
202

 
 
 
$
110

 
Single-family mortgage loans held for investment, at amortized cost:
 
 
 
 
 
 
 
 
 
Of Fannie Mae
Internal Model
 
 
13,540

 
 
 
16,654

 
 
Consensus
 
 
271

 
 
 

 
Of consolidated trusts
Other
 
 
20

 
 
 
60

 
Total single-family mortgage loans held for investment, at amortized cost
 
 
 
13,831

 
 
 
16,714

 
Multifamily mortgage loans held for investment, at amortized cost
Broker Price Opinions
 
 
83

 
 
 
45

 
 
Asset Manager Estimate
 
 
557

 
 
 
580

 
 
Other
 
 
11

 
 
 

 
Total multifamily mortgage loans held for investment, at amortized cost
 
 
 
651

 
 
 
625

 
Acquired property, net:
 
 
 
 
 
 
 
 
 
Single-family
Accepted Offers
 
 
873

 
 
 
864

 
 
Appraisals
 
 
1,194

 
 
 
1,509

 
 
Walk Forwards
 
 
800

 
 
 
1,173

 
 
Internal Model
 
 
967

 
 
 
1,045

 
 
Other
 
 
172

 
 
 
191

 
Total single-family
 
 
 
4,006

 
 
 
4,782

 
Multifamily
Accepted Offers
 
 
13

 
 
 

 
 
Broker Price Opinions
 
 
35

 
 
 
127

 
 
Other
 
 

 
 
 
13

 
Total multifamily
 
 
 
48

 
 
 
140

 
Other assets
Other
 
 
27

 
 
 
45

 
Total nonrecurring assets at fair value
 
 
 
$
18,765

 
 
 
$
22,416

 
We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a description of the valuation techniques we use for fair value measurement and disclosure as well as our basis for classifying these measurements as Level 1, Level 2 or Level 3 of the valuation hierarchy in more specific situations.
Trading Securities and Available-for-Sale Securities
These securities are recorded in our condensed consolidated balance sheets at fair value on a recurring basis. Fair value is measured using quoted market prices in active markets for identical assets, when available.
We classify securities whose values are based on quoted market prices in active markets for identical assets as Level 1 of the valuation hierarchy. We classify securities in active markets as Level 2 of the valuation hierarchy if quoted market prices in active markets for identical assets are not available. For all valuation techniques used for securities where there is limited activity or less transparency around these inputs to the valuation, these securities are classified as Level 3 of the valuation hierarchy.

121






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


A description of our securities valuation techniques is as follows:
Single Vendor: This valuation technique utilizes one vendor price to estimate fair value. We generally validate these observations of fair value through the use of a discounted cash flow technique whose unobservable inputs (for example, default rates) are disclosed in the table above.
Dealer Mark: This valuation technique utilizes one dealer price to estimate fair value. We generally validate these observations of fair value through the use of a discounted cash flow technique whose unobservable inputs (for example, default rates) are disclosed in the table above.
Consensus: This technique utilizes an average of two or more vendor prices for similar securities. We generally validate these observations of fair value through the use of a discounted cash flow technique whose unobservable inputs (for example, default rates) are disclosed in the table above.
Discounted Cash Flow: In the absence of prices provided by third-party pricing services supported by observable market data, we estimate the fair value of a portion of our securities using a discounted cash flow technique that uses inputs such as default rates, prepayment speeds, loss severity and spreads based on market assumptions where available.
For private-label securities, an increase in unobservable prepayment speeds in isolation would generally result in an increase in fair value, and an increase in unobservable spreads, severity rates or default rates in isolation would generally result in a decrease in fair value. For mortgage revenue bonds classified as Level 3 of the valuation hierarchy, an increase in unobservable spreads would result in a decrease in fair value. Although the sensitivities of the fair value of our recurring Level 3 securities of the valuation hierarchy to various unobservable inputs are discussed above in isolation, interrelationships exist among these inputs such that a change in one unobservable input typically results in a change to one or more of the other inputs.
Mortgage Loans Held for Investment
The majority of HFI loans are reported in our condensed consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments and an allowance for loan losses. We estimate the fair value of HFI loans using the build-up and consensus valuation techniques, as discussed below, for periodic disclosure of financial instruments as required by GAAP. For our remaining loans, which include those containing embedded derivatives that would otherwise require bifurcation and consolidated loans of senior-subordinated trust structures, we elected the fair value option and therefore, we record these loans at fair value in our condensed consolidated balance sheets. We measure these loans on a recurring basis using the build-up, consensus, discounted cash flow and single vendor price techniques. Certain impaired loans are measured at fair value on a nonrecurring basis by using the fair value of their underlying collateral. Specific techniques used include internal models, broker price opinions and appraisals.
A description of our loan valuation techniques is as follows:
Build-up: We derive the fair value of mortgage loans using a build-up valuation technique. In the build-up valuation technique we start with the base value for our Fannie Mae MBS and then add or subtract the fair value of the associated guaranty asset, guaranty obligation (“GO”) and master servicing arrangement. We use observable market values of Fannie Mae MBS with similar characteristics, either on a pool or loan level, determined primarily from third party pricing services, quoted market prices in active markets for similar securities, and other observable market data as a base value. We set the GO equal to the estimated fair value we would receive if we were to issue our guaranty to an unrelated party in a stand-alone arm’s length transaction at the measurement date. We estimate the fair value of the GO using our internal valuation models, which calculate the present value of expected cash flows based on management’s best estimate of certain key assumptions such as current mark-to-market LTV ratios, future house prices, default rates, severity rates and required rate of return. We also estimate the fair value of the GO using our current guaranty pricing and adjust that pricing, as appropriate, for the seasoning of the collateral when such transactions reflect credit characteristics of loans held in our portfolio. As a result, the fair value of our mortgage loans will change when the pricing for our credit guaranty changes in the GSE securitization market.
Our performing loans are generally classified as Level 2 of the valuation hierarchy to the extent that significant inputs are observable. To the extent that unobservable inputs are significant, the loans are classified as Level 3 of the valuation hierarchy.

122






FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Consensus: The fair value of single-family nonperforming loans represents an estimate of the prices we would receive if we were to sell these loans in the whole-loan market. These nonperforming loans are either two or more months delinquent, in an open modification period, or in a closed modification state (both performing and nonperforming in accordance with the loan’s modified terms). We calculate the fair value of nonperforming loans based on certain key factors, including collateral value, cash flow characteristics and mortgage insurance repayment. Collateral value is derived from the current estimated mark-to-market LTV ratio of the individual loan and, where appropriate, a state-level distressed property sales discount. Cash flow characteristics include attributes such as the weighted average coupon rate and loan payment history. The fair value of mortgage insurance is estimated by taking the loan level coverage and adjusting it by the expected claims paying ability of the associated mortgage insurer. The expected claims paying abilities used for estimating the fair value of mortgage insurance are consistent with our credit loss forecast. Fair value is estimated from the extrapolation of indicative sample bids obtained from multiple active market participants plus the estimated value of any applicable mortgage insurance. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
We estimate the fair value for a portion of our senior-subordinated trust structures using the average of two or more vendor prices at the security level as a proxy for estimating loan fair value. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
Discounted Cash Flow: We estimate the fair value of a portion of our senior-subordinated trust structures using discounted cash flow at the security level as a proxy for estimating loan fair value. This valuation technique uses unobservable inputs such as prepayment speeds, default rates, spreads, and loss severities to estimate the fair value of our securities. These inputs are weighted in a model that calculates the expected cash flow of the security which is used as the basis of fair value. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
Single Vendor: We estimate the fair value of a portion of our senior-subordinated trust structures using the single vendor valuation technique at the security level as a proxy for estimating loan fair value. We also estimate the fair value of our reverse mortgages using the single vendor valuation technique. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
Internal Model: For loans whose value it has been determined should be based on collateral value, we use an internal proprietary distressed home price model. The internal model used in this process takes one of two approaches when valuing the collateral.
The first approach relies on comparable foreclosed property sales to estimate the value of the target collateral. The comparable foreclosed property sales approach uses various factors such as geographic distance, transaction time and the value difference. The second approach referred to as the median Metropolitan Statistical Area (“MSA”) is based on the median of all the foreclosure sales of REOs in a specific MSA. Using this sales price, MSA level discount is computed and applied to the estimated non distressed value to derive an estimated fair value. If there are not enough REO sales in a specific MSA, a median state level foreclosure discount is used to estimate the fair value.
The majority of the internal model valuations come from the comparable sales approach. The determination of whether the internal model valuations in a particular geographic area should use the comparable sales approach or median MSA is based on historical accuracy. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
Appraisals: For a portion of our multifamily loans, we use appraisals to estimate the fair value of the loan. There are three approaches used to estimate fair value of a specific property: (1) cost, (2) income capitalization and (3) sales comparison. The cost approach uses the insurable value as a basis. The unobservable inputs used in this model include the estimated cost to construct or replace multifamily properties in the closest localities available. The income capitalization approach estimates the fair value using the present value of the future cash flow expectations by applying an appropriate overall capitalization rate to the forecasted net operating income. The significant unobservable inputs used in this calculation include rental income, fees associated with rental income, expenses associated with the property including taxes, payroll, insurance and other items, and capitalization rates, which are determined through market extraction and the debt service coverage ratio. The sales comparison approach compares the prices paid for similar properties, the prices asked by owners and offers made. The unobservable inputs to this methodology include ratios of sales prices to annual gross income, price paid per unit and

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adjustments made based on financing, conditions of sale and physical characteristics of the property. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
Broker Price Opinion (“BPO”): For a portion of our multifamily loans, we use BPO to estimate the fair value of the loan. This technique uses both current property value and the property value adjusted for stabilization and market conditions. These approaches compute net operating income based on current rents and expenses and use a range of market capitalization rates to estimate property value. The unobservable inputs used in this technique are property net operating income and market capitalization rates to estimate property value. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
Asset Manager Estimate (“AME”): For a portion of our multifamily loans, AME is used to estimate the fair value of the loan. This technique uses the net operating income and tax assessments of the specific property as well as MSA-specific market capitalization rates and average per unit sales values to estimate property fair value. These loans are classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
An increase in prepayment speeds in isolation would generally result in an increase in the fair value of our mortgage loans classified as Level 3 of the valuation hierarchy, and an increase in severity rates, default rates or spreads in isolation would generally result in a decrease in fair value. Although the sensitivities of the fair value of mortgage loans classified as Level 3 of the valuation hierarchy to various unobservable inputs are discussed above in isolation, interrelationships exist among these inputs such that a change in one unobservable input typically results in a change to one or more of the other inputs.
Acquired Property, Net and Other Assets
Acquired property, net represents foreclosed property received in full satisfaction of a loan net of a valuation allowance. Acquired property is initially recorded in our condensed consolidated balance sheets at its fair value less its estimated cost to sell. The initial fair value of foreclosed properties is determined using a hierarchy based on the reliability of available information. The hierarchy for single-family acquired property includes accepted offers, appraisals, broker price opinions and proprietary home price model values. The hierarchy for multifamily acquired property includes accepted offers, appraisals and broker price opinions. We consider an accepted offer on a specific foreclosed property to be the best estimate of its fair value. If we have not accepted an offer on the property we use the next highest priority valuation methodology available, as described in our valuation hierarchy to determine fair value. While accepted offers represent an agreement in principle to transact, a significant portion of these agreements do not get executed for various reasons, and are therefore classified as Level 3 of the valuation hierarchy.
Third-party valuations can be obtained from either an appraisal or a broker price opinion. These valuations are kept current using a monthly walk forward process that updates them for any change in the value of the property. When accepted offers or third-party valuations are not available, we generally utilize the home price values determined using an internal model.
Subsequent to initial measurement, the foreclosed properties that we intend to sell are reported at the lower of the carrying amount or fair value less estimated costs to sell. Foreclosed properties classified as held for use, included in “Other assets” in our condensed consolidated balance sheets, are depreciated and impaired when circumstances indicate that the carrying amount of the property is no longer recoverable. The fair values of our single-family foreclosed properties subsequent to initial measurement are determined using the same information hierarchy used for the initial fair value measurement.
The most commonly used techniques in our valuation of acquired property are proprietary home price model and appraisals (both current and walk forward). Based on the number of properties measured as of March 31, 2015, these methodologies comprised approximately 71% of our valuations, while accepted offers comprised approximately 25% of our valuations. Based on the number of properties measured as of December 31, 2014, these methodologies comprised approximately 77% of our valuations, while accepted offers comprised approximately 19% of our valuations.
Acquired property is classified as Level 3 of the valuation hierarchy because significant inputs are unobservable.
A description of our acquired property significant valuation techniques is as follows:
Single-family acquired property valuation techniques
Appraisal: An appraisal is an estimate of the value of a specific property by a certified or licensed appraiser, in accordance with the Uniform Standards of Professional Appraisal Practice. Data most commonly used is from the local Multiple Listing

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Service and includes properties currently listed for sale, properties under contract, and closed transactions. The appraiser performs an analysis that starts with these data points and then adjusts for differences between the comparable properties and the property being appraised, to arrive at an estimated value for the specific property. Adjustments are made for differences between comparable properties for unobservable inputs such as square footage, location, and condition of the property. The appraiser typically uses recent historical data for the estimate of value.
Broker Price Opinion: This technique provides an estimate of what the property is worth based upon a real estate broker’s knowledge. The broker uses research of pertinent data in the appropriate market, and a sales comparison approach that is similar to the appraisal process. The broker typically has insight into local market trends, such as the number of and terms of offers, lack of offers, increasing supply, shortage of inventory and overall interest in buying a home. This information, all of which is unobservable, is used along with recent and pending sales and current listings of similar properties to arrive at an estimate of value.
We review the appraisals and broker price opinions received to determine if they have been performed in accordance with applicable standards and if the results are consistent with our observed transactions on similar properties. We make necessary adjustments as required.
Appraisal and Broker Price Opinion Walk Forwards (“Walk Forwards”): We use these techniques to adjust appraisal and broker price opinion valuations for changing market conditions by applying a walk forward factor based on local price movements since the time the third-party value was obtained. The majority of third-party values are updated by comparing the difference in our internal home price model from the month of the original appraisal/broker price opinion to the current period and by applying the resulting percentage change to the original value. If a price is not determinable through our internal home price model, we use our zip code level home price index to update the valuations.
Internal Model: We use an internal model to estimate fair value for distressed properties. The valuation methodology and inputs used are described under “Mortgage Loans Held for Investment.”
Multifamily acquired property valuation techniques
Appraisals: We use this method to estimate property values for distressed properties. The valuation methodology and inputs used are described under “Mortgage Loans Held for Investment.”
Broker Price Opinions: We use this method to estimate property values for distressed properties. The valuation methodology and inputs used are described under “Mortgage Loans Held for Investment.”
Derivatives Assets and Liabilities (collectively “Derivatives”)
Derivatives are recorded in our condensed consolidated balance sheets at fair value on a recurring basis. The valuation process for the majority of our risk management derivatives uses observable market data provided by third-party sources, resulting in Level 2 classification of the valuation hierarchy.
A description of our derivatives valuation techniques is as follows:
Internal Model: We use internal models to value interest rate swaps which are valued by referencing yield curves derived from observable interest rates and spreads to project and discount swap cash flows to present value. Option-based derivatives use an internal model that projects the probability of various levels of interest rates by referencing swaption volatilities provided by market makers/dealers. The projected cash flows of the underlying swaps of these option-based derivatives are discounted to present value using yield curves derived from observable interest rates and spreads.
Dealer Mark: Certain highly complex structured swaps primarily use a single dealer mark due to lack of transparency in the market and may be modeled using observable interest rates and volatility levels as well as significant unobservable assumptions, resulting in Level 3 classification of the valuation hierarchy. Mortgage commitment derivatives that use observable market data, quotes and actual transaction price levels adjusted for market movement are typically classified as Level 2 of the valuation hierarchy. To the extent mortgage commitment derivatives include adjustments for market movement that cannot be corroborated by observable market data, we classify them as Level 3 of the valuation hierarchy.

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(UNAUDITED)


Debt
The majority of debt of Fannie Mae is recorded in our condensed consolidated balance sheets at the principal amount outstanding, net of cost basis adjustments. We elected the fair value option for certain structured Fannie Mae debt instruments and debt of consolidated trusts with embedded derivatives, which are recorded in our condensed consolidated balance sheets at fair value on a recurring basis.
We classify debt instruments that have quoted market prices in active markets for similar liabilities when traded as assets as Level 2 of the valuation hierarchy. For all valuation techniques used for debts instruments where there is limited activity or less transparency around these inputs to the valuation, these debt instruments are classified as Level 3 of the valuation hierarchy.
A description of our debt valuation techniques is as follows:
Consensus: We estimate the fair value of debt of Fannie Mae and our debt of consolidated trusts using an average of two or more vendor prices or dealer marks that represents estimated fair value for similar liabilities when traded as assets. 
Single Vendor: We estimate the fair value of debt of Fannie Mae and our debt of consolidated trusts using a single vendor price that represents estimated fair value for these liabilities when traded as assets.
Discounted Cash Flow: In the absence of prices provided by third-party pricing services supported by observable market data, we estimate the fair value of a portion of the debt of Fannie Mae and our debt of consolidated trusts using a discounted cash flow technique that uses spreads based on market assumptions where available.
The valuation methodology and inputs used in estimating the fair value of MBS assets are described under “Trading Securities and Available-for-Sale Securities.” 
Valuation Control Processes
We have control processes that are designed to ensure that our fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that our valuation approaches are consistently applied and the assumptions used are reasonable. Our control processes consist of a framework that provides for a segregation of duties and oversight of our fair value methodologies and valuations, as well as validation procedures.
The Pricing and Verification Group is responsible for the estimation and verification of the fair value for the majority of our financial assets and financial liabilities, including review of material assumptions used when market-based inputs do not exist. The Pricing and Verification Group also provides a quarterly update to the Valuation Oversight Committee (“VOC”) on relevant market information, pricing trends, significant valuation challenges and the resolution of those challenges. The Pricing and Verification Group resides within our Finance Division and is independent of any trading or market related activities. Fair value measurements for acquired property and collateral dependent loans are determined by other valuation groups in the Finance Division.
Our VOC includes senior representation from our Capital Markets segment, our Enterprise Risk Office and our Finance division, and is responsible for providing overall governance for our valuation processes, models and results. The composition of the VOC is determined by the VOC chair, our Chief Financial Officer, with the objective of obtaining appropriate representation from Finance, Enterprise Risk Management and select business units within Fannie Mae. Based on its review of valuation methodologies and fair value results for various financial instruments used for financial reporting, the VOC is responsible for advising the VOC chair, who has the ultimate responsibility over all valuation processes and results. The VOC also reviews trend analysis for various financial assets and liabilities on a quarterly basis.
We use third-party vendor prices and dealer quotes to estimate fair value of some of our financial assets and liabilities. Third-party vendor prices are primarily used to estimate fair value for trading securities, available-for-sale securities, debt of Fannie Mae and consolidated MBS debt. Our Pricing and Verification Group performs various review and validation procedures prior to utilizing these prices in our fair value estimation process. We verify selected prices, using a variety of methods, including corroborating the prices by reference to other independent market data, such as non-binding broker or dealer quotations, relevant benchmark indices and prices of similar instruments. We also review prices for reasonableness based on variations from prices provided in previous periods, comparing prices to internally estimated prices, using primarily a discounted cash flow approach, and conducting relative value comparisons based on specific characteristics of securities.

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(In conservatorship)
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(UNAUDITED)


We have discussions with the pricing vendors as part of our due diligence process in order to maintain a current understanding of the valuation processes and related assumptions and inputs that these vendors use in developing prices. The prices provided to us by third-party pricing services reflect the existence of market reliance upon credit enhancements, if any, and the current lack of liquidity in the marketplace. If we determine that a price provided to us is outside established parameters, we will further examine the price, including having follow-up discussions with the pricing service or dealer. If we conclude that a price is not valid, we will adjust the price for various factors, such as liquidity, bid-ask spreads and credit considerations. All of these procedures are executed before we use the prices in preparing our financial statements.
We have an internal property valuation function that utilizes an internal model to compare the values received on a property and assign a risk rating based on several factors including the deviation between the various values. Property valuations with risk ratings above a specified threshold are reviewed for reasonableness by a team of property valuation experts. The internal model that is used to assign a risk rating and the threshold specified is subject to oversight from the Model Risk Management Group, which is responsible for establishing risk management controls and for reviewing models used in the determination of fair value measurements for financial reporting. In addition, our Quality Control Group reviews the overall work performed and inspects a portion of the properties in major markets, for which the third-party valuations are obtained, in order to assess the quality of the valuations.
We calibrate the performance of our proprietary distressed home price model using actual offers in recently observed transactions. The model’s performance is reviewed on a monthly basis by the REO valuation team and compared quarterly to specific model performance thresholds. The results of the validation are regularly reviewed with the VOC.
Our Property Valuation Review Group reviews appraisals and broker price opinions to determine the most appropriate value by comparing data within these products with current comparable properties and market data. We conduct regular performance reviews of the counterparties that provide products and services for this process. In addition, valuation results and trend analyses are reviewed regularly by management responsible for valuing and disposing of real estate.
Fair Value of Financial Instruments
The following table displays the carrying value and estimated fair value of our financial instruments as of March 31, 2015 and December 31, 2014. The fair value of financial instruments we disclose includes commitments to purchase multifamily and single-family mortgage loans that we do not record in our condensed consolidated balance sheets. The fair values of these commitments are included as “Mortgage loans held for investment, net of allowance for loan losses.” The disclosure excludes certain financial instruments, such as plan obligations for pension and postretirement health care benefits, employee stock option and stock purchase plans, and also excludes all non-financial instruments. As a result, the fair value of our financial assets and liabilities does not represent the underlying fair value of our total consolidated assets and liabilities.

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(In conservatorship)
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(UNAUDITED)


 
As of March 31, 2015
 
Carrying
Value
 
Quoted Price in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment
 
Estimated
Fair Value
 
(Dollars in millions)
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash
$
65,299

 
$
46,349

 
$
18,950

 
$

 
$

 
$
65,299

Federal funds sold and securities purchased under agreements to resell or similar arrangements
20,230

 

 
20,230

 

 

 
20,230

Trading securities
31,286

 
19,367

 
9,633

 
2,286

 

 
31,286

Available-for-sale securities
27,732

 

 
14,261

 
13,471

 

 
27,732

Mortgage loans held for sale
613

 

 
153

 
567

 

 
720

Mortgage loans held for investment, net of allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
235,827

 

 
31,127

 
214,493

 

 
245,620

Of consolidated trusts
2,776,676

 

 
2,644,458

 
204,706

 

 
2,849,164

Mortgage loans held for investment
3,012,503

 

 
2,675,585

 
419,199

 

 
3,094,784

Advances to lenders
6,361

 

 
5,901

 
443

 

 
6,344

Derivative assets at fair value
1,692

 

 
7,103

 
215

 
(5,626
)
 
1,692

Guaranty assets and buy-ups
201

 

 

 
599

 

 
599

Total financial assets
$
3,165,917

 
$
65,716

 
$
2,751,816

 
$
436,780

 
$
(5,626
)
 
$
3,248,686

 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
$
87

 
$

 
$
87

 
$

 
$

 
$
87

Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
    Of Fannie Mae
99,349

 

 
99,361

 

 

 
99,361

    Of consolidated trusts
1,463

 

 

 
1,463

 

 
1,463

Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
    Of Fannie Mae
349,391

 

 
363,358

 
994

 

 
364,352

    Of consolidated trusts
2,762,428

 

 
2,830,632

 
22,826

 

 
2,853,458

Derivative liabilities at fair value
802

 

 
12,689

 
149

 
(12,036
)
 
802

Guaranty obligations
367

 

 

 
1,536

 

 
1,536

Total financial liabilities
$
3,213,887

 
$

 
$
3,306,127

 
$
26,968

 
$
(12,036
)
 
$
3,321,059


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FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


 
As of December 31, 2014
 
Carrying
Value
 
Quoted Price in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Netting Adjustment
 
Estimated
Fair Value
 
(Dollars in millions)
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash
$
54,565

 
$
37,965

 
$
16,600

 
$

 
$

 
$
54,565

Federal funds sold and securities purchased under agreements to resell or similar arrangements
30,950

 

 
30,950

 

 

 
30,950

Trading securities
31,504

 
19,466

 
9,008

 
3,030

 

 
31,504

Available-for-sale securities
30,654

 

 
15,574

 
15,080

 

 
30,654

Mortgage loans held for sale
331

 

 
169

 
169

 

 
338

Mortgage loans held for investment, net of allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
239,243

 

 
29,896

 
217,064

 

 
246,960

Of consolidated trusts
2,779,920

 

 
2,657,863

 
183,263

 

 
2,841,126

Mortgage loans held for investment
3,019,163

 

 
2,687,759

 
400,327

 

 
3,088,086

Advances to lenders
5,559

 

 
5,079

 
470

 

 
5,549

Derivative assets at fair value
1,485

 

 
6,489

 
182

 
(5,186
)
 
1,485

Guaranty assets and buy-ups
210

 

 

 
616

 

 
616

Total financial assets
$
3,174,421

 
$
57,431

 
$
2,771,628

 
$
419,874

 
$
(5,186
)
 
$
3,243,747

 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
$
50


$


$
50

 
$

 
$

 
$
50

Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
    Of Fannie Mae
105,012

 

 
105,022

 

 

 
105,022

    Of consolidated trusts
1,560

 

 

 
1,560

 

 
1,560

Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
    Of Fannie Mae
355,431

 

 
367,703

 
982

 

 
368,685

    Of consolidated trusts
2,760,152

 

 
2,815,843

 
19,334

 

 
2,835,177

Derivative liabilities at fair value
614

 

 
10,671

 
137

 
(10,194
)
 
614

Guaranty obligations
382

 

 

 
1,579

 

 
1,579

Total financial liabilities
$
3,223,201

 
$

 
$
3,299,289

 
$
23,592

 
$
(10,194
)
 
$
3,312,687

Financial Instruments for which fair value approximates carrying value—We hold certain financial instruments that are not carried at fair value but for which the carrying value approximates fair value due to the short-term nature and negligible credit risk inherent in them. These financial instruments include cash and cash equivalents, the majority of advances to lenders, and federal funds and securities sold/purchased under agreements to repurchase/resell.
Federal funds and securities sold/purchased under agreements to repurchase/resell—The carrying value for the majority of these specific instruments approximates the fair value due to the short-term nature and the negligible inherent credit risk, as they involve the exchange of collateral that is easily traded. Were we to calculate the fair value of these instruments we would use observable inputs resulting in Level 2 classification.

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(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Mortgage Loans Held for Sale—Loans are reported at the lower of cost or fair value in our condensed consolidated balance sheets. The valuation methodology and inputs used in estimating the fair value of HFS loans are the same as for our HFI loans and are described under “Fair Value Measurement—Mortgage Loans Held for Investment.” These loans are classified as Level 2 of the valuation hierarchy to the extent that significant inputs are observable. To the extent that significant inputs are unobservable, the loans are classified within Level 3 of the valuation hierarchy.
HARP Loans—We measure the fair value of loans that are delivered under the Home Affordable Refinance Program (“HARP”) using a modified build-up approach while the loan is performing. Under this modified approach, we set the credit component of the consolidated loans (that is, the guaranty obligation) equal to the compensation we would currently receive for a loan delivered to us under the program because the total compensation for these loans is equal to their current exit price in the GSE securitization market. For a description of the build-up valuation methodology, refer to “Fair Value MeasurementMortgage Loans Held for Investment.” We will continue to use this pricing methodology as long as the HARP program is available to market participants. If, subsequent to delivery, the refinanced loan becomes past due or is modified as a part of a troubled debt restructuring, the fair value of the guaranty obligation is then measured consistent with other loans that have similar characteristics.
The total compensation that we receive for the delivery of a HARP loan reflects the pricing that we are willing to offer because HARP is a part of a broader government program intended to provide assistance to homeowners and prevent foreclosures. If these benefits were not reflected in the pricing for these loans (that is, if the loans were valued using our standard build-up approach), the fair value disclosed in the table above would be lower by $3.5 billion as of March 31, 2015 and $3.3 billion as of December 31, 2014. The total fair value of our mortgage loans that have been refinanced under HARP as presented in the table above was $310.2 billion as of March 31, 2015 and $314.0 billion as of December 31, 2014.
Advances to Lenders—The carrying value for the majority of our advances to lenders approximates fair value due to the short-term nature and the negligible inherent credit risk. If we were to calculate the fair value of these instruments we would use discounted cash flow models that use observable inputs such as spreads based on market assumptions, resulting in Level 2 classification.
Advances to lenders also include loans for which the carrying value does not approximate fair value. These loans do not qualify for Fannie Mae MBS securitization and are valued using market-based techniques including credit spreads, severities and prepayment speeds for similar loans, through third-party pricing services or through a model approach incorporating both interest rate and credit risk simulating a loan sale via a synthetic structure. We classify these valuations as Level 3 given that significant inputs are not observable or are determined by extrapolation of observable inputs.
Guaranty Assets and Buy-ups—Guaranty assets related to our portfolio securitizations are recorded in our condensed consolidated balance sheets at fair value on a recurring basis and are classified as Level 3. Guaranty assets in lender swap transactions are recorded in our condensed consolidated balance sheets at the lower of cost or fair value. These assets, which are measured at fair value on a nonrecurring basis, are also classified as Level 3.
We estimate the fair value of guaranty assets based on the present value of expected future cash flows of the underlying mortgage assets using management’s best estimate of certain key assumptions, which include prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. These cash flows are projected using proprietary prepayment, interest rate and credit risk models. Because guaranty assets are like an interest-only income stream, the projected cash flows from our guaranty assets are discounted using one-month LIBOR plus an option-adjusted spread that is calibrated using a representative sample of interest-only swaps that reference Fannie Mae MBS. We believe the remitted fee income is less liquid than interest-only swaps and more like an excess servicing strip. Therefore, we take a further discount of the present value for these liquidity considerations. This discount is based on market quotes from third-party pricing services.
The fair value of the guaranty assets includes the fair value of any associated buy-ups.
Guaranty Obligations—The fair value of all guaranty obligations, measured subsequent to their initial recognition, is our estimate of a hypothetical transaction price we would receive if we were to issue our guaranty to an unrelated party in a standalone arm’s-length transaction at the measurement date. These obligations are classified as Level 3. The valuation methodology and inputs used in estimating the fair value of the guaranty obligations are described under “Fair Value Measurement—Mortgage Loans Held for Investment, Build-up.”

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


Fair Value Option
We elected the fair value option for our credit risk sharing debt securities issued under our CAS series and certain loans of consolidated trusts that contain embedded derivatives that would otherwise require bifurcation. Under the fair value option, we elected to carry these instruments at fair value instead of bifurcating the embedded derivative from such instruments.
We elected the fair value option for all long-term structured debt instruments that are issued in response to specific investor demand and have interest rates that are based on a calculated index or formula and are economically hedged with derivatives at the time of issuance. By electing the fair value option for these instruments, we are able to eliminate the volatility in our results of operations that would otherwise result from the accounting asymmetry created by recording these structured debt instruments at cost while recording the related derivatives at fair value.
We elected the fair value option for the financial assets and liabilities of the consolidated senior-subordinate trust structures. By electing the fair value option for these instruments, we are able to eliminate the volatility in our results of operations that would otherwise result from different accounting treatment between loans at cost and debt at cost.
Interest income for the mortgage loans is recorded in “Interest income—Mortgage loans” and interest expense for the debt instruments is recorded in “Interest expense—Long-term debt” in our condensed consolidated statements of operations and comprehensive income.
The following table displays the fair value and unpaid principal balance of the financial instruments for which we have made fair value elections as of March 31, 2015 and December 31, 2014.
 
 
As of
 
 
 
March 31, 2015
 
 
 
December 31, 2014
 
 
Loans of Consolidated Trusts(1)
 
Long-Term Debt of Fannie Mae
 
Long-Term Debt of Consolidated Trusts
 
Loans of Consolidated Trusts(1)
 
Long-Term Debt of Fannie Mae
 
Long-Term Debt of Consolidated Trusts
 
 
(Dollars in millions)
 
Fair value
 
$
15,570

 
 
 
$
7,920

 
 
 
$
21,373

 
 
 
$
15,629

 
 
 
$
6,403

 
 
 
$
19,483

 
Unpaid principal balance
 
14,817

 
 
 
7,803

 
 
 
19,364

 
 
 
15,001

 
 
 
6,512

 
 
 
17,810

 
__________
(1) 
Includes nonaccrual loans with a fair value of $235 million and $240 million as of March 31, 2015 and December 31, 2014, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of March 31, 2015 and December 31, 2014 was $68 million and $75 million, respectively. Includes loans that are 90 days or more past due with a fair value of $261 million and $271 million as of March 31, 2015 and December 31, 2014, respectively. The difference between unpaid principal balance and the fair value of these 90 or more days past due loans as of March 31, 2015 and December 31, 2014 was $74 million and $78 million, respectively.
Changes in Fair Value under the Fair Value Option Election
The following table displays fair value gains and losses, net, including changes attributable to instrument-specific credit risk, for loans and debt for which the fair value election was made. Amounts are recorded as a component of “Fair value losses, net” in our condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2015 and 2014.
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Loans
 
Long-Term Debt
 
Total Losses
 
Loans
 
Long-Term Debt
 
Total (Losses)Gains
 
(Dollars in millions)
Changes in instrument-specific credit risk
$
(12
)
 
 
$
(193
)
 
 
 
$
(205
)
 
 
$
9

 
 
$
(51
)
 
 
 
$
(42
)
Other changes in fair value
167

 
 
(188
)
 
 
 
(21
)
 
 
123

 
 
(116
)
 
 
 
7

Fair value gains (losses), net
$
155

 
 
$
(381
)
 
 
 
$
(226
)
 
 
$
132

 
 
$
(167
)
 
 
 
$
(35
)

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FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


In determining the changes in the instrument-specific credit risk for loans, the changes in the associated credit-related components of these loans, primarily the guaranty obligation, were taken into consideration with the overall change in the fair value of the loans for which we elected the fair value option for financial instruments. In determining the changes in the instrument-specific credit risk for debt, the changes in Fannie Mae debt spreads to LIBOR that occurred during the period were taken into consideration with the overall change in the fair value of the debt for which we elected the fair value option for financial instruments. Specifically, cash flows are evaluated taking into consideration any derivatives through which Fannie Mae has swapped out of the structured features of the notes and thus created a floating-rate LIBOR-based debt instrument. The change in value of these LIBOR-based cash flows based on the Fannie Mae yield curve at the beginning and end of the period represents the instrument-specific risk.
16.  Commitments and Contingencies
We are party to various types of legal actions and proceedings, including actions brought on behalf of various classes of claimants. We also are subject to regulatory examinations, inquiries and investigations and other information gathering requests. In some of the matters, indeterminate amounts are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. This variability in pleadings, together with our and our counsel’s actual experience in litigating or settling claims, leads us to conclude that the monetary relief that may be sought by plaintiffs bears little relevance to the merits or disposition value of claims.
On a quarterly basis, we review relevant information about all pending legal actions and proceedings for the purpose of evaluating and revising our contingencies, reserves and disclosures.
We have substantial and valid defenses to the claims in the proceedings described below and intend to defend these matters vigorously. However, legal actions and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Accordingly, the outcome of any given matter and the amount or range of potential loss at particular points in time is frequently difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel may view the evidence and applicable law. Further, FHFA adopted a regulation in 2011, which provides, in part, that while we are in conservatorship, FHFA will not pay claims by our current or former shareholders, unless the Director of FHFA determines it is in the interest of the conservatorship. The presence of this regulation and FHFA’s assertion that FHFA will not pay claims asserted in certain cases discussed below while we are in conservatorship creates additional uncertainty in those cases.
We establish a reserve for matters when a loss is probable and we can reasonably estimate the amount of such loss. For legal actions or proceedings where there is only a reasonable possibility that a loss may be incurred, or where we are not currently able to estimate the reasonably possible loss or range of loss, we do not establish a reserve. We are often unable to estimate the possible losses or ranges of losses, particularly for proceedings that are in their early stages of development, where plaintiffs seek indeterminate or unspecified damages, where there may be novel or unsettled legal questions relevant to the proceedings, or where settlement negotiations have not occurred or progressed.
Given the uncertainties involved in any action or proceeding, regardless of whether we have established a reserve, the ultimate resolution of certain of these matters may be material to our operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our net income or loss for that period.
In addition to the matters specifically described below, we are involved in a number of legal and regulatory proceedings that arise in the ordinary course of business that we do not expect will have a material impact on our business or financial condition. We have also advanced fees and expenses of certain current and former officers and directors in connection with various legal proceedings pursuant to our bylaws and indemnification agreements.

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FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


2008 Class Action Lawsuits and Related Proceedings
In re Fannie Mae 2008 Securities Litigation
In a consolidated amended complaint filed in 2009 in the U.S. District Court for the Southern District of New York, lead plaintiffs Massachusetts Pension Reserves Investment Management Board and Boston Retirement Board (for common shareholders) and Tennessee Consolidated Retirement System (for preferred shareholders) alleged that we, certain of our former officers, and certain of our underwriters violated Sections 12(a)(2) and 15 of the Securities Act of 1933. Lead plaintiffs also alleged that we, certain of our former officers, and our outside auditor, violated Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934. Lead plaintiffs sought various forms of relief, including rescission, damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive relief.
On July 15, 2014, the parties reached an agreement in principle to settle the litigation. On March 3, 2015, the court granted final approval of the settlement and entered an order and judgment effecting the settlement. The settlement amount did not materially impact our results of operations or financial condition. The time for filing an appeal has expired, and this matter is concluded with respect to Fannie Mae.
In re 2008 Fannie Mae ERISA Litigation
In a consolidated complaint filed in 2009 in the U.S. District Court for the Southern District of New York, plaintiffs alleged that certain of our current and former officers and directors, including members of Fannie Mae’s Benefit Plans Committee and the Compensation Committee of Fannie Mae’s Board of Directors during the relevant time periods, as fiduciaries of Fannie Mae’s Employee Stock Ownership Plan (“ESOP”), breached their duties to ESOP participants and beneficiaries by investing ESOP funds in Fannie Mae common stock when it was no longer prudent to continue to do so. Plaintiffs purported to represent a class of participants and beneficiaries of the ESOP whose accounts invested in Fannie Mae common stock beginning April 17, 2007. Plaintiffs sought unspecified damages, attorneys’ fees and other fees and costs, and injunctive and other equitable relief.
On October 31, 2014, we reached an agreement in principle with plaintiffs that would resolve this matter on behalf of all parties. The proposed settlement amount did not impact our results of operations or financial condition. On April 17, 2015, plaintiffs filed a motion for preliminary approval of the settlement, which the court granted on May 5, 2015.
Comprehensive Investment Services v. Mudd
This individual securities action was originally filed on May 13, 2009, by plaintiff Comprehensive Investment Services, Inc. against certain of our former officers and directors, and certain of our underwriters in the U.S. District Court for the Southern District of Texas. On July 7, 2009, this case was transferred to the U.S. District Court for the Southern District of New York for coordination with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation. Plaintiff filed an amended complaint on May 11, 2011 against us, certain of our former officers, and certain of our underwriters. The amended complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; violations of Section 20(a) of the Securities Exchange Act of 1934; and violations of the Texas Business and Commerce Code, common law fraud, and negligent misrepresentation in connection with Fannie Mae’s May 2008 $2.0 billion offering of 8.25% non-cumulative preferred Series T stock. Plaintiff sought relief in the form of rescission, actual damages, punitive damages, interest, costs, attorneys’ and experts’ fees, and other equitable and injunctive relief.
On February 26, 2015, Fannie Mae and plaintiff reached an agreement in principle to settle the litigation. The settlement amount did not materially impact our results of operations or financial condition. As a result of the settlement and at the request of the parties, the court dismissed the case with prejudice on April 28, 2015.
Smith v. Fannie Mae
This individual securities action was originally filed on February 25, 2010, by plaintiff Edward Smith against us, certain of our former officers, and certain of our underwriters, in the U.S. District Court for the Central District of California. On April 12, 2010, this case was transferred to the U.S. District Court for the Southern District of New York for coordination with In re Fannie Mae 2008 Securities Litigation and In re 2008 Fannie Mae ERISA Litigation. Plaintiff filed an amended complaint on April 19, 2011, which alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule

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FANNIE MAE
(In conservatorship)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)


10b-5 promulgated thereunder; violations of Section 20(a) of the Securities Exchange Act of 1934; common law fraud and negligence claims; and California state law claims for misrepresentation in connection with Fannie Mae’s December 2007 $7.0 billion offering of 7.75% fixed-to-floating rate non-cumulative preferred Series S stock. Plaintiff sought relief in the form of rescission, actual damages (including interest), and exemplary and punitive damages.
On December 9, 2014, Fannie Mae and plaintiff reached an agreement in principle to settle the litigation. The settlement amount did not materially impact our results of operations or financial condition. As a result of the settlement and at the request of the parties, the court dismissed the case with prejudice on April 27, 2015.
Senior Preferred Stock Purchase Agreements Litigation
A number of putative class action lawsuits were filed in the U.S. District Court for the District of Columbia against us, FHFA as our conservator, Treasury and Freddie Mac from July through September 2013 by shareholders of Fannie Mae and/or Freddie Mac challenging the August 2012 amendment to each company’s senior preferred stock purchase agreement with Treasury. These lawsuits were consolidated and, on December 3, 2013, plaintiffs (preferred and common shareholders of Fannie Mae and/or Freddie Mac) filed a consolidated class action complaint in the U.S. District Court for the District of Columbia against us, FHFA as our conservator, Treasury and Freddie Mac (“In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations”). The preferred shareholder plaintiffs allege that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments to the senior preferred stock purchase agreements nullified certain of the shareholders’ rights, particularly the right to receive dividends. The common shareholder plaintiffs allege that the August 2012 amendments constituted a taking of their property by requiring that all future profits of Fannie Mae and Freddie Mac be paid to Treasury. Plaintiffs allege claims for breach of contract and breach of the implied covenant of good faith and fair dealing against us, FHFA and Freddie Mac, a takings claim against FHFA and Treasury, and a breach of fiduciary duty claim derivatively on our and Freddie Mac’s behalf against FHFA and Treasury. Plaintiffs seek to represent several classes of preferred and/or common shareholders of Fannie Mae and/or Freddie Mac who held stock as of the public announcement of the August 2012 amendments. Plaintiffs seek unspecified damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees.
A non-class action suit, Arrowood Indemnity Company v. Fannie Mae, was filed in the U.S. District Court for the District of Columbia on September 20, 2013 by preferred shareholders against us, FHFA as our conservator, the Director of FHFA (in his official capacity), Treasury, the Secretary of the Treasury (in his official capacity) and Freddie Mac. Plaintiffs bring claims for breach of contract and breach of the implied covenant of good faith and fair dealing against us, FHFA and Freddie Mac, and claims for violation of the Administrative Procedure Act against the FHFA and Treasury defendants, alleging that the net worth sweep provisions nullified certain rights of the preferred shareholders, particularly the right to receive dividends. Plaintiffs seek damages, equitable and injunctive relief, and costs and expenses, including attorneys’ fees.
On September 30, 2014, the court dismissed both lawsuits and plaintiffs in both suits filed timely notices of appeal. On October 27, 2014, the U.S. Court of Appeals for the D.C. Circuit consolidated these appeals with appeals in two other cases involving the same subject matter, but to which we are not a party.
Given the stage of these lawsuits, the substantial and novel legal questions that remain, and our substantial defenses, we are currently unable to estimate the reasonably possible loss or range of loss arising from this litigation.


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Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Information about market risk is set forth in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management.”
Item 4.  Controls and Procedures
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.
Evaluation of Disclosure Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as in effect as of March 31, 2015, the end of the period covered by this report. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of March 31, 2015 or as of the date of filing this report.
Our disclosure controls and procedures were not effective as of March 31, 2015 or as of the date of filing this report because they did not adequately ensure the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of March 31, 2015 or as of the date of this filing, and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below under “Description of Material Weakness.” Based on discussions with FHFA and the structural nature of this material weakness, we do not expect to remediate this material weakness while we are under conservatorship.
Description of Material Weakness
The Public Company Accounting Oversight Board’s Auditing Standard No. 5 defines a material weakness as a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that we continued to have the following material weakness as of March 31, 2015 and as of the date of filing this report:
Disclosure Controls and Procedures. We have been under the conservatorship of FHFA since September 6, 2008. Under the 2008 Reform Act, FHFA is an independent agency that currently functions as both our conservator and our regulator with respect to our safety, soundness and mission. Because of the nature of the conservatorship under the 2008 Reform Act, which places us under the “control” of FHFA (as that term is defined by securities laws), some of the information that we may need to meet our disclosure obligations may be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our continued existence as an ongoing business. Although we and FHFA attempted to design and implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives as a disclosure controls and procedures policy of a typical reporting company, there are inherent structural limitations on our ability to design, implement, test

135



or operate effective disclosure controls and procedures. As both our regulator and our conservator under the 2008 Reform Act, FHFA is limited in its ability to design and implement a complete set of disclosure controls and procedures relating to Fannie Mae, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity, we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible.
Due to these circumstances, we have not been able to update our disclosure controls and procedures in a manner that adequately ensures the accumulation and communication to management of information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including disclosures affecting our condensed consolidated financial statements. As a result, we did not maintain effective controls and procedures designed to ensure complete and accurate disclosure as required by GAAP as of March 31, 2015 or as of the date of filing this report. Based on discussions with FHFA and the structural nature of this weakness, we do not expect to remediate this material weakness while we are under conservatorship.
Mitigating Actions Relating to Material Weakness
As described above under “Description of Material Weakness,” we continue to have a material weakness in our internal control over financial reporting relating to our disclosure controls and procedures. However, we and FHFA have engaged in the following practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws:
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the conservator.
We have provided drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also have provided drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release.
FHFA personnel, including senior officials, have reviewed our SEC filings prior to filing, including this quarterly report on Form 10-Q for the quarter ended March 31, 2015 (“First Quarter 2015 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our First Quarter 2015 Form 10-Q, FHFA provided Fannie Mae management with a written acknowledgment that it had reviewed the First Quarter 2015 Form 10-Q, and it was not aware of any material misstatements or omissions in the First Quarter 2015 Form 10-Q and had no objection to our filing the First Quarter 2015 Form 10-Q.
The Director of FHFA and our Chief Executive Officer have been in frequent communication, typically meeting on at least a bi-weekly basis.
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and market risk management, external communications and legal matters.
Senior officials within FHFA’s Office of the Chief Accountant have met frequently with our senior finance executives regarding our accounting policies, practices and procedures.
Changes in Internal Control over Financial Reporting
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There have been no changes in our internal control over financial reporting since December 31, 2014 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION
Item 1.  Legal Proceedings
The information in this item supplements and updates information regarding certain legal proceedings set forth in “Legal Proceedings” in our 2014 Form 10-K. We also provide information regarding material legal proceedings in “Note 16, Commitments and Contingencies,” which is incorporated herein by reference. In addition to the matters specifically described or incorporated by reference in this item, we are involved in a number of legal and regulatory proceedings that arise in the ordinary course of business that do not have a material impact on our business. Litigation claims and proceedings of all types are subject to many factors that generally cannot be predicted accurately.
We record reserves for legal claims when losses associated with those claims become probable and the amounts can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts reserved for those claims. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, we do not recognize in our condensed consolidated financial statements the potential liability that may result from these matters. Except for matters that have been settled, we presently cannot determine the ultimate resolution of the matters described below or incorporated by reference into this item or in our 2014 Form 10-K. If certain of these matters are determined against us, it could have a material adverse effect on our results of operations, liquidity and financial condition, including our net worth.
FHFA Private-Label Mortgage-Related Securities Litigation
As we disclosed in our 2014 Form 10-K in “Legal Proceedings,” in the third quarter of 2011, FHFA, as conservator, filed sixteen lawsuits on behalf of both Fannie Mae and Freddie Mac against various financial institutions, their officers and affiliated and unaffiliated underwriters that were responsible for marketing and selling private-label mortgage-related securities to us. Fourteen of these lawsuits were resolved during 2013 and 2014, and two remain pending.
One of the remaining lawsuits is against Nomura Holding America Inc. and certain related entities and individuals, and is pending in the U.S. District Court for the Southern District of New York. The other remaining lawsuit is against The Royal Bank of Scotland Group PLC and certain related entities and individuals, and is pending in the U.S. District Court for the District of Connecticut. Both lawsuits were filed on September 2, 2011. These two remaining lawsuits seek to recover losses we and Freddie Mac incurred on the private-label mortgage-related securities the defendants sold to us and Freddie Mac. The lawsuits allege that the defendants violated federal and state securities laws by making material misstatements and omissions regarding the characteristics of the loans underlying the securities in the offering documents for the securities that were sold to Fannie Mae and Freddie Mac. The complaints seek, among other things, rescission and recovery of consideration paid for the securities at issue in the lawsuits and interest.
Senior Preferred Stock Purchase Agreements Litigation
Between June 2013 and August 2014, several lawsuits were filed by preferred and common stockholders of Fannie Mae and Freddie Mac in the U.S. Court of Federal Claims, the U.S. District Court for the District of Columbia and the U.S. District Court for the Southern District of Iowa against the United States, Treasury and/or FHFA, challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac. Some of these lawsuits also contain claims against Fannie Mae and Freddie Mac. The legal claims being advanced by one or more of these lawsuits include challenges to the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendments to the agreements, as well as to FHFA’s decision to require Fannie Mae and Freddie Mac to draw funds from Treasury in order to pay dividends to Treasury during conservatorship. The plaintiffs seek various forms of equitable and injunctive relief, including rescission of the August 2012 amendments, as well as damages. On September 30, 2014, the U.S. District Court for the District of Columbia dismissed all but one of the cases pending before that court. The plaintiffs in each of the dismissed cases have filed a notice of appeal. The plaintiffs in the case that was not dismissed by the court voluntarily dismissed their lawsuit on October 31, 2014. On February 3, 2015, the U.S. District Court for the Southern District of Iowa dismissed the single case pending before it. The matters where Fannie Mae is a named defendant are described below or in “Note 16, Commitments and Contingencies.”
Fannie Mae is a nominal defendant in two actions filed against the United States in the U.S. Court of Federal Claims: Fisher v. United States of America, filed on December 2, 2013, and Rafter v. United States of America, filed on August 14, 2014. Plaintiffs in these cases allege that the net worth sweep dividend provisions of the senior preferred stock that were implemented pursuant to the August 2012 amendment to the senior preferred stock purchase agreement constitute a taking of Fannie Mae’s property without just compensation in violation of the U.S. Constitution. The Fisher plaintiffs are pursuing this claim derivatively on behalf of Fannie Mae, while the Rafter plaintiffs are pursing the claim directly against the United States. Plaintiffs in Rafter also allege a derivative claim that the government breached an implied contract with Fannie Mae’s

137



Board of Directors by implementing the net worth sweep dividend provisions. Plaintiffs in Fisher request just compensation to Fannie Mae in an unspecified amount. Plaintiffs in Rafter seek just compensation to themselves on their constitutional claim and payment of damages to Fannie Mae on their derivative claim for breach of an implied contract. The United States filed a motion to dismiss the Fisher case on January 23, 2014; however, the court has stayed proceedings in this case until discovery in a related case, Fairholme Funds v. United States, is complete and the court sets a date for the Fairholme plaintiffs to respond to the government’s motion to dismiss filed in that case. In the Rafter case, the court has ordered the government to file a response to the complaint within sixty days after discovery is complete in the Fairholme Funds case.
LIBOR Lawsuit
On October 31, 2013, Fannie Mae filed a lawsuit in the U.S. District Court for the Southern District of New York against Barclays Bank PLC, UBS AG, The Royal Bank of Scotland Group PLC, The Royal Bank of Scotland PLC, Deutsche Bank AG, Credit Suisse Group AG, Credit Suisse International, Bank of America Corp., Bank of America, N.A., Citigroup Inc., Citibank, N.A., J.P. Morgan Chase & Co., J.P. Morgan Chase Bank, N.A., Coöperative Centrale Raiffeisen-Boerenleenbank B.A., the British Bankers Association (“BBA”) and BBA LIBOR Ltd. alleging they manipulated LIBOR. On October 6, 2014, Fannie Mae filed an amended complaint alleging, among other things, that the banks submitted false borrowing costs to the BBA in order to suppress LIBOR. The amended complaint seeks compensatory and punitive damages based on claims for breach of contract, breach of the implied duty of good faith and fair dealing, unjust enrichment, fraud and conspiracy to commit fraud. The defendants filed motions to dismiss the lawsuit on November 5, 2014.
Item 1A.  Risk Factors
In addition to the information in this report, you should carefully consider the risks relating to our business that we identify in “Risk Factors” in our 2014 Form 10-K. This section supplements and updates that discussion. For a complete understanding of the subject, you should read both together. Please also refer to “MD&A—Risk Management” in this report and in our 2014 Form 10-K for more detailed descriptions of the primary risks to our business and how we seek to manage those risks.
The risks we face could materially adversely affect our business, results of operations, financial condition, liquidity and net worth, and could cause our actual results to differ materially from our past results or the results contemplated by forward-looking statements contained in this report. However, these are not the only risks we face. In addition to the risks we discuss below and in our 2014 Form 10-K, we face risks and uncertainties not currently known to us or that we currently believe are immaterial.
The future of our company is uncertain.
There continues to be significant uncertainty regarding the future of our company, including how long the company will continue to exist in its current form, the extent of our role in the market, what form we will have, what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to exist following conservatorship. The conservatorship is indefinite in duration and the timing, conditions and likelihood of our emerging from conservatorship are uncertain. Termination of the conservatorship, other than in connection with a receivership, requires Treasury’s consent under the senior preferred stock purchase agreement.
In 2011, the Administration released a report to Congress on ending the conservatorships of the GSEs and reforming America’s housing finance market. The report provides that the Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae and Freddie Mac’s role in the market and ultimately wind down both institutions. The report also addresses three options for a reformed housing finance system. The report does not state whether or how the existing infrastructure or human capital of Fannie Mae may be used in the establishment of such a reformed system. The report emphasizes the importance of proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and Freddie Mac during the transition period. In August 2013, the White House released a paper confirming that a core principle of the Administration’s housing policy priorities is to wind down Fannie Mae and Freddie Mac through a responsible transition. In January 2015, the White House reaffirmed the Administration’s view that housing finance reform should include ending Fannie Mae and Freddie Mac’s business model. Administration officials have also publicly stated on several occasions that the passage of housing finance reform legislation is the only responsible way to end the conservatorships of Fannie Mae and Freddie Mac.
In the last Congress, members of Congress considered several bills to reform the housing finance system, including bills that, among other things, would require Fannie Mae and Freddie Mac to be wound down after a period of time and place certain restrictions on Fannie Mae’s and Freddie Mac’s activities prior to being wound down. We expect that Congress will continue to hold hearings and consider legislation on the future status of Fannie Mae and Freddie Mac, including proposals that would result in Fannie Mae’s liquidation or dissolution. Congress or FHFA may also consider legislation or regulation aimed at increasing the competition we face or reducing our market share. We cannot predict the prospects for the enactment, timing

138



or final content of housing finance reform legislation. See “Business—Housing Finance Reform” in our 2014 Form 10-K for more information about the Administration’s report and paper, and Congressional proposals regarding housing finance reform.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
Under the terms of our senior preferred stock purchase agreement with Treasury, we are prohibited from selling or issuing our equity interests, other than as required by (and pursuant to) the terms of a binding agreement in effect on September 7, 2008, without the prior written consent of Treasury. During the quarter ended March 31, 2015, we did not sell any equity securities.
Information about Certain Securities Issuances by Fannie Mae
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.
Because the securities we issue are exempted securities under the Securities Act of 1933, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report our incurrence of these types of obligations either in offering circulars or prospectuses (or supplements thereto) that we post on our Web site or in a current report on Form 8-K that we file with the SEC, in accordance with a “no-action” letter we received from the SEC staff in 2004. In cases where the information is disclosed in a prospectus or offering circular posted on our Web site, the document will be posted on our Web site within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The Web site address for disclosure about our debt securities is www.fanniemae.com/debtsearch. From this address, investors can access the offering circular and related supplements for debt securities offerings under Fannie Mae’s universal debt facility, including pricing supplements for individual issuances of debt securities.
Disclosure about our obligations pursuant to some of the MBS we issue, some of which may be off-balance sheet obligations, can be found at www.fanniemae.com/mbsdisclosure. From this address, investors can access information and documents about our MBS, including prospectuses and related prospectus supplements.
We are providing our Web site address solely for your information. Information appearing on our Web site is not incorporated into this report.
Our Purchases of Equity Securities
We did not repurchase any of our equity securities during the first quarter of 2015.
Dividend Restrictions
Our payment of dividends is subject to the following restrictions:
Restrictions Relating to Conservatorship. Our conservator announced on September 7, 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock. In addition, FHFA’s regulations relating to conservatorship and receivership operations prohibit us from paying any dividends while in conservatorship unless authorized by the Director of FHFA. The Director of FHFA directs us to make dividend payments on the senior preferred stock on a quarterly basis.
Restrictions Under Senior Preferred Stock Purchase Agreement. The senior preferred stock purchase agreement prohibits us from declaring or paying any dividends on Fannie Mae equity securities (other than the senior preferred stock) without the prior written consent of Treasury. In addition, in 2012 the terms of the senior preferred stock purchase agreement and the senior preferred stock were amended to ultimately require the payment of our entire net worth to Treasury. As a result, our net income is not available to common stockholders. For more information on the terms of the senior preferred stock purchase agreement and senior preferred stock, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Senior Preferred Stock Purchase Agreement and Related Issuance of Senior Preferred Stock and Common Stock Warrant” in our 2014 Form 10-K.
Additional Restrictions Relating to Preferred Stock. Payment of dividends on our common stock is also subject to the prior payment of dividends on our preferred stock and our senior preferred stock. Payment of dividends on all outstanding

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preferred stock, other than the senior preferred stock, is also subject to the prior payment of dividends on the senior preferred stock.
Statutory Restrictions. Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the 2008 Reform Act (together, the “GSE Act”), FHFA has authority to prohibit capital distributions, including payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as significantly undercapitalized, approval of the Director of FHFA is required for any dividend payment. Under the GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we would be undercapitalized, except the Director of FHFA may permit us to repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations in at least an equivalent amount and will reduce our financial obligations or otherwise improve our financial condition.
Item 3.  Defaults Upon Senior Securities
None.
Item 4.  Mine Safety Disclosures
None.
Item 5.  Other Information
None.
Item 6.  Exhibits
An index to exhibits has been filed as part of this report beginning on page E-1 and is incorporated herein by reference.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Federal National Mortgage Association
 
 
 
 
By:
/s/ Timothy J. Mayopoulos
 
 
Timothy J. Mayopoulos
President and Chief Executive Officer

Date: May 7, 2015

 
By:
/s/ David C. Benson
 
 
David C. Benson
Executive Vice President and
Chief Financial Officer

Date: May 7, 2015

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INDEX TO EXHIBITS

Item
 
Description
3.1
 
Fannie Mae Charter Act (12 U.S.C. § 1716 et seq.) as amended through July 30, 2008 (Incorporated by reference to Exhibit 3.1 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 001-34140) for the year ended December 31, 2010, filed February 24, 2011.)

3.2
 
Fannie Mae Bylaws, as amended through January 30, 2009 (Incorporated by reference to Exhibit 3.2 to Fannie Mae’s Annual Report on Form 10-K (Commission file number 001-34140) for the year ended December 31, 2008, filed February 26, 2009.)
18.1
 
Letter from Deloitte & Touche LLP, Independent Registered Public Accounting Firm, Regarding Change in Accounting Principle for Nonaccrual Loans
18.2
 
Letter from Deloitte & Touche LLP, Independent Registered Public Accounting Firm, Regarding Change in Accounting Principle for Loans Held for Sale
31.1
 
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
31.2
 
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101. INS
 
XBRL Instance Document*
101. SCH
 
XBRL Taxonomy Extension Schema*
101. CAL
 
XBRL Taxonomy Extension Calculation*
101. DEF
 
XBRL Taxonomy Extension Definition*
101. LAB
 
XBRL Taxonomy Extension Label*
101. PRE
 
XBRL Taxonomy Extension Presentation*
__________
*
The financial information contained in these XBRL documents is unaudited.


E-1



 


















































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