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

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from     to         
Commission File No.: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation
52-0883107
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3900 Wisconsin Avenue, NW
Washington, DC
20016
(Zip Code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (800) 2FANNIE (800-232-6643)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company  o
Emerging growth company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ
As of June 30, 2017, there were 1,158,087,567 shares of common stock of the registrant outstanding.
 





TABLE OF CONTENTS
 
 
Page
PART I—Financial Information
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 14—Fair Value
 
 
Item 2.
 
 
 
Legislation and Regulation
 
 
 
Retained Mortgage Portfolio
 
Mortgage Credit Book of Business
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II—Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

Fannie Mae Second Quarter 2017 Form 10-Q
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MD&A TABLE REFERENCE
Table
Description
Page
1
Summary of Condensed Consolidated Results of Operations
13
2
Analysis of Net Interest Income and Yield
14
3
Rate/Volume Analysis of Changes in Net Interest Income
16
4
Fair Value Losses, Net
17
5
Changes in Combined Loss Reserves
18
6
Troubled Debt Restructurings and Nonaccrual Loans
19
7
Credit Loss Performance Metrics
20
8
Credit Loss Concentration Analysis
21
9
Summary of Condensed Consolidated Balance Sheets
22
10
Summary of Mortgage-Related Securities at Fair Value
23
11
Retained Mortgage Portfolio
24
12
Retained Mortgage Portfolio Profile
25
13
Composition of Mortgage Credit Book of Business
26
14
Single-Family Business Key Performance Data
28
15
Single-Family Business Financial Results
29
16
Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2017
31
17
Single-Family Credit Risk Transfer Transactions
32
18
Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
34
19
Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business
35
20
Delinquency Status and Activity of Single-Family Conventional Loans
38
21
Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
39
22
Statistics on Single-Family Loan Workouts
40
23
Single-Family Foreclosed Properties
41
24
Multifamily Business Key Performance Data
43
25
Multifamily Business Financial Results
44
26
Multifamily Guaranty Book of Business Key Risk Characteristics
45
27
Activity in Debt of Fannie Mae
47
28
Outstanding Short-Term Borrowings and Long-Term Debt
49
29
Cash and Other Investments Portfolio
50
30
Mortgage Insurance Coverage
54
31
Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
59
32
Derivative Impact on Interest Rate Risk (50 Basis Points)
59

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MD&A | Introduction


PART I—FINANCIAL INFORMATION
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets. The conservator has since 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, 2016 (“2016 Form 10-K”) in “Business—Conservatorship and Treasury Agreements.”
 
 
 
 
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with our unaudited condensed consolidated financial statements and related notes in this report and the more detailed information in our 2016 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 2016 Form 10-K.
You can find a “Glossary of Terms Used in This Report” in the MD&A of our 2016 Form 10-K.
Introduction
Fannie Mae is a government-sponsored enterprise (“GSE”) chartered by Congress. 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. 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 operate in the secondary mortgage market. We support the liquidity and stability of the U.S. mortgage market primarily by securitizing mortgage loans originated by lenders into Fannie Mae mortgage-backed securities that we guarantee, which we refer to as Fannie Mae MBS. 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 do not originate loans or lend money directly to consumers in the primary mortgage market.
We remain in conservatorship and our conservatorship has no specified termination date. We do not know when or how the conservatorship will terminate, what further changes to our business will be made during or following conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, or whether we will continue to exist following conservatorship. In addition, as a result of our agreements with Treasury and directives from our conservator, we are not permitted to retain our net worth (other than a limited amount that will decrease to zero in 2018), rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. Our senior preferred stock purchase agreement with Treasury also includes covenants that significantly restrict our business activities. Congress continues to consider options for reform of the housing finance system, including the GSEs. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation or actions the Administration or FHFA may take with respect to housing finance reform. We provide additional information on the uncertainty of our future, the conservatorship, the provisions of our agreements with Treasury, their impact on our business, and recent actions and statements relating to housing finance reform by the Administration, Congress and FHFA in “Business—Conservatorship and Treasury Agreements,” “Business—

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MD&A | Introduction


Legislation and Regulation—Housing Finance Reform” and “Risk Factors” in our 2016 Form 10-K and in “Legislation and Regulation” and “Risk Factors” in our quarterly report on Form 10-Q for the quarter ended March 31, 2017 (“First Quarter 2017 Form 10-Q”) and in this report.
Although Treasury owns our senior preferred stock and a warrant to purchase 79.9% of our common stock, and has made a commitment under a senior preferred stock purchase agreement to provide us with funds to maintain a positive net worth under specified conditions, the U.S. government does not guarantee our securities or other obligations.
Our common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “FNMA.” Our debt securities are actively traded in the over-the-counter market.
Executive Summary
Summary of Our Financial Performance
Quarterly Results
We recognized comprehensive income of $3.1 billion in the second quarter of 2017, consisting of net income of $3.2 billion, partially offset by other comprehensive loss of $83 million. In comparison, we recognized comprehensive income of $2.9 billion in the second quarter of 2016, consisting of net income of $2.9 billion, partially offset by other comprehensive loss of $77 million. The increase in our net income in the second quarter of 2017 compared with the second quarter of 2016 was primarily driven by lower fair value losses, partially offset by lower credit-related income and lower net interest income.
Year-to-Date Results
We recognized comprehensive income of $5.9 billion in the first half of 2017, consisting of net income of $6.0 billion, partially offset by other comprehensive loss of $77 million. In comparison, we recognized comprehensive income of $3.8 billion in the first half of 2016, consisting of net income of $4.1 billion, partially offset by other comprehensive loss of $277 million. The increase in our net income in the first half of 2017 compared with the first half of 2016 was primarily driven by lower fair value losses, partially offset by lower credit-related income.
The table below highlights our financial results and key performance data. The performance measures shown below are discussed in later sections of the MD&A. See “MD&AConsolidated Results of Operations” for more information on our financial results.

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MD&A | Executive Summary


Financial Results and Key Performance Data
 
Second Quarter
First Half
 
2017
2016
2017
2016
Comprehensive income 
$3.1 billion
$2.9 billion
$5.9 billion
$3.8 billion
Net income
3.2 billion
2.9 billion
6.0 billion
4.1 billion
Net interest income
Net interest income in the second quarter and first half of 2017 was primarily derived from guaranty fees from our guaranty book of business and remained relatively flat compared with the second quarter and first half of 2016. We receive guaranty fee income as compensation for managing the credit risk on loans underlying Fannie Mae MBS held by third parties.
5.0 billion
5.3 billion
10.3 billion
10.1 billion
Net fair value losses
Fair value losses in the second quarter and first half of 2017 were primarily driven by decreases in the fair value of our risk management derivatives due to declines in longer-term swap rates during the second quarter and by decreases in the fair value of our mortgage commitments due to an increase in prices as interest rates decreased during the commitment periods. We recognized additional fair value losses in the second quarter and first half of 2017 on Connecticut Avenue SecuritiesTM (“CAS”) debt reported at fair value resulting from tightening spreads between CAS debt yields and LIBOR during the periods.
Fair value losses in the second quarter and first half of 2016 were primarily due to losses on our risk management derivatives resulting from declines in longer-term swap rates.
0.7 billion
1.7 billion
0.7 billion
4.5 billion
Credit-related income
Credit-related income in the second quarter and first half of 2017 was primarily driven by an increase in actual and forecasted home prices and the redesignation of loans from held for investment (“HFI”) to held for sale (“HFS”).
Credit-related income in the second quarter and first half of 2016 was primarily attributable to an increase in home prices and a decline in actual and projected mortgage interest rates in the period.
1.2 billion
1.5 billion
1.4 billion
2.4 billion
Retained mortgage portfolio as of period end
255.8 billion
316.3 billion
255.8 billion
316.3 billion
Single-family guaranty book of business as of period end
2.9 trillion
2.8 trillion
2.9 trillion
2.8 trillion
Net worth as of period end
3.7 billion
4.1 billion
3.7 billion
4.1 billion
Capital reserve amount applicable to quarterly dividend payment to Treasury
600 million
1.2 billion
600 million
1.2 billion
Dividends paid to Treasury in the period
   
2.8 billion
919 million
8.3 billion
3.8 billion
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 whose estimated fair value may fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads, and implied volatility, as well as activity related to these financial instruments. We use derivatives to manage the interest rate risk exposure of our net portfolio, which consists of our retained mortgage portfolio, cash and other investments portfolio, and outstanding debt of Fannie Mae. Some of these

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MD&A | Executive Summary


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 ManagementMarket Risk Management, Including Interest Rate Risk Management” for more information. In addition, our credit-related income or expense can vary substantially from period to period based on a number of factors such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volume of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from HFI to HFS.
Our Strategy and Business Objectives
Our vision is to be America’s most valued housing partner and to provide liquidity, access to credit and affordability in all U.S. housing markets at all times, while effectively managing and reducing risk to our business, taxpayers and the housing finance system. In support of this vision, we are focused on:
advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers;
providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners; and
serving customer needs by building a company that is efficient, innovative and continuously improving.
Advancing a sustainable and reliable business model that reduces risk to the housing finance system and taxpayers
We have significantly changed our business model since we entered conservatorship in 2008 and our business continues to evolve. We have strengthened our underwriting and eligibility standards and transitioned from a portfolio-focused business to a guaranty-focused business. In addition, we are transferring an increasing portion of the credit risk on our guaranty book of business. These changes have transformed our business model and reduced certain risks of our business as compared with our business prior to entering conservatorship.
Our business also continues to evolve as a result of our many other efforts to build a safer and sustainable housing finance system and to pursue the strategic goals identified by our conservator. See “Business—Legislation and Regulation—Housing Finance Reform—Conservator Developments and Strategic Goals” in our 2016 Form 10-K for a discussion of some of these efforts and FHFA’s strategic goals for our conservatorship.
Stronger underwriting and eligibility standards
We strengthened our underwriting and eligibility standards for loans we acquired beginning in late 2008 and 2009. These changes improved the credit quality of our single-family guaranty book of business and contributed to improvement in our credit performance. As of June 30, 2017, 89% of our single-family conventional guaranty book of business consisted of loans acquired since 2009. Our single-family serious delinquency rate has decreased each quarter since the first quarter of 2010 and was 1.01% as of June 30, 2017.


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MD&A | Executive Summary


fanniemaeq2_chart-04080.jpg

__________
*
We have acquired HARP loans and other Refi Plus loans under our Refi PlusTM initiative since 2009. Our Refi Plus initiative 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. HARP loans, which have loan-to-value (“LTV”) ratios at origination greater than 80%, refers to loans we have acquired pursuant to the Home Affordable Refinance Program® (“HARP®”). Other Refi Plus loans, which have LTV ratios at origination of 80% or less, refers to loans we have acquired under our Refi Plus initiative other than HARP loans. Loans we acquire under Refi Plus and HARP are refinancings of loans that were originated prior to June 2009.
See “Business Segments—Single-Family Business” for information on our recent single-family acquisitions and the credit performance of our single-family mortgage loans.
Transition to a guaranty-focused business
We 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).
As shown in the chart below, in recent periods, an increasing portion of our net interest income has been derived from guaranty fees, rather than from our retained mortgage portfolio assets. This shift has been driven by both the guaranty fee increases we implemented in 2012 and the reduction of our retained mortgage portfolio in accordance with the requirements of our senior preferred stock purchase agreement with Treasury and direction from FHFA. More than 75% of our net interest income for the first half of 2017 was derived from the loans underlying our Fannie Mae MBS in consolidated trusts, which primarily generate income through guaranty fees. We expect that guaranty fees will continue to account for an increasing portion of our net interest income.

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MD&A | Executive Summary


fanniemaeq2_chart-05454.jpg
__________
*
Guaranty fee income reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, the incremental revenue from which is remitted to Treasury and not retained by us.
Transferring a portion of the mortgage credit risk on our single-family book of business
In late 2013, we began entering into credit risk transfer transactions with the goal of transferring, to the extent economically sensible, a portion of the mortgage credit risk on some of the recently acquired loans in our single-family book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and Credit Insurance Risk TransferTM (“CIRTTM”) transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. As of June 30, 2017, $798 billion in outstanding unpaid principal balance of our single-family loans, or 28% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. Over time, we expect that a larger portion of our single-family conventional guaranty book of business will be covered by credit risk transfer transactions.
The chart below shows as of the dates specified the total outstanding unpaid principal balance of our single-family loans, as well as the percentage of our total single-family conventional guaranty book of business measured by unpaid principal balance, that were included in a reference pool for a credit risk transfer transaction.

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MD&A | Executive Summary


fanniemaeq2_chart-07264.jpg
The risk in force of these transactions, which refers to the maximum amount of losses that could be absorbed by credit risk transfer investors, was approximately $25 billion as of June 30, 2017. For further discussion of our credit risk transfer transactions, including more detailed information on the portion of the credit risk of these loans we have transferred, see “Business Segments—Single-Family Business—Single-Family Mortgage Credit Risk Management—Transfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions.”
Providing reliable, large-scale access to affordable mortgage credit for qualified borrowers and helping struggling homeowners
We continued to provide reliable, large-scale access to affordable mortgage credit to the U.S. housing market and to help struggling homeowners in the second quarter of 2017:
We provided approximately $135 billion in liquidity to the mortgage market in the second quarter of 2017 through our purchases of loans and guarantees of loans and securities. This liquidity enabled borrowers to complete approximately 222,000 mortgage refinancings and approximately 316,000 home purchases, and provided financing for approximately 162,000 units of multifamily housing.
We provided approximately 27,000 loan workouts in the second quarter of 2017 to help homeowners stay in their homes or otherwise avoid foreclosure.
We helped borrowers refinance loans, including through our Refi PlusTM initiative, which offers 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 24,000 Refi Plus loans in the second quarter of 2017. Refinancings delivered to us through Refi Plus in the second quarter of 2017 reduced borrowers’ monthly mortgage payments by an average of $176.
We support affordability in the multifamily rental market. This has become more challenging in recent years as rent growth has outpaced wage growth, making units at many income levels less affordable than in prior years. Approximately 90% of the multifamily units we financed in the second quarter of 2017 were affordable to families earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.
Serving customer needs by building a company that is efficient, innovative and continuously improving
We are committed to providing our lender customers with the products, services and tools they need to serve the housing market more effectively and efficiently, as well as continuing to improve our business processes. For information on enhancements we have recently made or are currently working on, see “Business—Executive Summary—Our Strategy and Business Objectives” in our 2016 Form 10-K.

Fannie Mae Second Quarter 2017 Form 10-Q
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MD&A | Executive Summary


Treasury Draws and Dividend Payments
Treasury has made a commitment under a senior preferred stock purchase agreement to provide funding to us under certain circumstances if we have a net worth deficit. Acting as successor to the rights, titles, powers and privileges of the Board, the conservator has declared and directed us to pay dividends to Treasury on the senior preferred stock on a quarterly basis since we entered into conservatorship in 2008.
The chart below shows the funds we have drawn from Treasury pursuant to the senior preferred stock purchase agreement, as well as the dividend payments we have made to Treasury on the senior preferred stock, since entering into conservatorship.
fanniemaeq2_chart-04309.jpg
__________
(1) 
Under the terms of the senior preferred stock purchase agreement, dividend payments we make to Treasury do not offset our prior draws of funds from Treasury, and we are not permitted to pay down draws we have made under the agreement except in limited circumstances. 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. Amounts may not sum due to rounding.
(2) 
Treasury draws are shown in the period for which requested, not when the funds were received by us. We have not requested a draw for any period since 2012.
The dividend provisions of the senior preferred stock provide for quarterly dividends consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. This capital reserve amount is $600 million for each quarter of 2017 and will decrease to zero in 2018. These are referred to as “net worth sweep” dividend provisions. As a result of these provisions, we will pay Treasury a dividend of $3.1 billion for the third quarter of 2017 by September 30, 2017, calculated based on our net worth of $3.7 billion as of June 30, 2017, less the current capital reserve amount of $600 million, if our conservator declares a dividend in this amount before September 30, 2017. To the extent that these quarterly dividends are not paid, they will accumulate and be added to the liquidation preference of the senior preferred stock. This would not affect the amount of available funding from Treasury under the senior preferred stock purchase agreement.
If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership. As of the date of this filing, the maximum amount of remaining funding under the agreement is $117.6 billion. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding

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MD&A | Executive Summary


under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement. For a description of the terms of the senior preferred stock purchase agreement and the senior preferred stock, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2016 Form 10-K. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risks associated with our limited and declining capital reserves, and “Outlook” in this report for our current expectations about our future financial results.
On May 11, 2017, the Director of FHFA testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs that a draw by Fannie Mae or Freddie Mac could erode investor confidence, which could affect liquidity and increase the cost of mortgage credit for borrowers. To avoid a draw, the Director indicated that FHFA has the authority to withhold dividend payments without the consent of Treasury, but that his first option would be to work with the Secretary of the Treasury. He further stated that any action FHFA may take to avoid additional draws would not be intended to influence the outcome of housing finance reform or as a step toward “recap and release,” which refers to proposals by some investors to recapitalize Fannie Mae and Freddie Mac with private capital and release them from conservatorship. On May 18, 2017, the Secretary of the Treasury testified before the same committee and stated that it was Treasury’s expectation that dividends should be paid per the terms of the senior preferred stock purchase agreement.  
As described in “Legal Proceedings” and “Note 15, Commitments and Contingencies,” several lawsuits have been filed by preferred and common stockholders of Fannie Mae and Freddie Mac against one or more of the United States, Treasury and FHFA challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac, including challenges to the net worth sweep dividend provisions of the senior preferred stock. We are also a party to some of those lawsuits. We cannot predict the course or the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) may take in response to any ruling or finding in any of these lawsuits.
2017 Market Share
We were the largest issuer of single-family mortgage-related securities in the secondary market in the second quarter of 2017. Our estimated market share of new single-family mortgage-related securities issuances was 39% in both the first and second quarter of 2017, compared with 38% in the second quarter of 2016. The chart below shows our market share of single-family mortgage-related securities issuances in the second quarter of 2017 compared with that of our primary competitors.
fanniemaeq2_chart-03850.jpg
We remained a continuous source of liquidity in the multifamily market in the second quarter of 2017. We owned or guaranteed approximately 20% of the outstanding debt on multifamily properties as of March 31, 2017 (the latest date for which information is available).

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MD&A | Executive Summary


Outlook
In this section, we present a number of estimates and expectations regarding our future performance, as well as future home prices. These estimates and expectations are forward-looking statements based on our current assumptions regarding numerous factors. See “Forward-Looking Statements” and “Risk Factors” in this report and in our 2016 Form 10-K for discussions of factors that could cause actual results to differ materially from our current estimates and expectations. 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.
Financial Results. We continued to be profitable in the second quarter of 2017, with net income of $3.2 billion. We expect to remain profitable on an annual basis for the foreseeable future; however, certain factors, such as changes in interest rates or home prices, could result in significant volatility in our financial results from quarter to quarter or year to year. Our future financial results also will be affected by a number of other factors, including: our guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition and quality of our retained mortgage portfolio and guaranty book of business; and economic and housing market conditions. Although we expect to remain profitable on an annual basis for the foreseeable future, due to our limited and declining capital reserves (which decrease to zero in 2018) and the potential for significant volatility in our financial results, we could experience a net worth deficit in a future quarter. If we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement to avoid being placed into receivership.
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, corporate income tax reform legislation and changes in accounting standards. For example, the current Administration proposes reducing the U.S. corporate income tax rate. Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require that we record a substantial reduction in the value of our deferred tax assets in the quarter in which the legislation is enacted. Thus, if legislation significantly lowering the U.S. corporate income tax rate is enacted, we expect to incur a significant net loss and net worth deficit for the quarter in which the legislation is enacted and we could potentially incur a net loss for that year. As noted above, if we experience a net worth deficit in a future quarter, we will be required to draw additional funds from Treasury under the senior preferred stock purchase agreement in order to avoid being placed into receivership.
See “Risk Factors” in our 2016 Form 10-K and in this report for discussions of the risks associated with our limited and declining capital reserves and the potential impact of legislative and regulatory actions.
Revenues. We 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 guaranty fee revenues consist of two primary components: (1) the base guaranty fees that we receive over the life of the loan; and (2) upfront fees we receive at loan acquisition which are amortized over the contractual life of the loan. When mortgage loans prepay faster due to a lower interest rate environment, we typically have higher amortization income. Conversely, when mortgage loans prepay more slowly due to a higher interest rate environment, we typically have lower amortization income. Our guaranty fee revenues increased in recent years primarily driven by: (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business; and (2) an increase in amortization income as a lower interest rate environment during portions of these years increased prepayments on mortgage loans. We expect loans with lower guaranty fees to continue to liquidate from our book of business and be replaced with new loans that typically have higher guaranty fees, which will contribute to increasing guaranty fee revenues; however, the impact of this trend on our guaranty fee revenues could be offset by lower amortization income if interest rates remain at higher levels and result in lower prepayments on mortgage loans. Accordingly, our guaranty fee revenues may remain relatively flat in the near term.
We expect the size of our retained mortgage portfolio to continue to decrease each year to meet the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s additional portfolio cap, which we describe in “Business—Conservatorship and Treasury Agreements—Treasury Agreements” in our 2016 Form 10-K. These decreases in our retained mortgage portfolio will continue to negatively impact our net interest income and net revenues.

Fannie Mae Second Quarter 2017 Form 10-Q
10


 
 
MD&A | Executive Summary


Factors that may affect our future revenues include: changes to guaranty fee pricing we may make in the future and their impact on our competitive environment and guaranty fee revenues; economic and housing market conditions, including changes in interest rates and home prices; 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; our market share; and legislative and regulatory changes.
Home Prices. Based on our home price index, we estimate that home prices on a national basis increased by 2.6% in the second quarter of 2017 and by 3.7% in the first half of 2017. We expect the rate of home price appreciation on a national basis in 2017 will be similar to the estimated 5.8% home price appreciation rate in 2016. We also expect significant regional variation in the timing and rate of home price growth.
Credit Losses. Our credit losses, which include our charge-offs, net of recoveries, reflect our realization of losses on our loans. Our credit losses were $1.8 billion for the first half of 2017, down from $2.4 billion for the first half of 2016. We expect our credit losses for 2017 to be lower than for 2016; however, we expect a significantly smaller decline in credit losses for 2017 than the $7.0 billion decline for 2016. See “Consolidated Results of OperationsCredit-Related Income (Expense)Credit Loss Performance Metrics” for a discussion of our credit losses for the second quarter and first half of 2017 and 2016.
Loss Reserves. Our allowance for loan losses was $20.4 billion as of June 30, 2017, down from $23.5 billion as of December 31, 2016. Our loss reserves declined in recent years and are expected to decline further in 2017. For a discussion of the factors that contributed to the decline in our loss reserves in the second quarter and first half of 2017, see “Consolidated Results of Operations—Credit-Related Income (Expense)” and “Consolidated Balance Sheet Analysis—Mortgage Loans and Allowance for Loan Losses.”
Legislation and Regulation
The information in this section updates and supplements information regarding legislation and regulation affecting our business set forth in “Business—Legislation and Regulation” in our 2016 Form 10-K and in “MD&A—Legislation and Regulation” in our First Quarter 2017 Form 10-Q. Also see “Risk Factors” in this report and in our 2016 Form 10-K for discussions of risks relating to legislative and regulatory matters.
Housing Finance Reform
Congress continues to consider housing finance reform that could result in significant changes in our structure and role in the future. As a result, there continues to be significant uncertainty regarding the future of our company. See “Risk Factors” for a discussion of the risks to our business relating to the uncertain future of our company.
Treasury Report on Financial System
In June 2017, in response to an executive order, the Secretary of the Treasury released a report titled “A Financial System That Creates Economic Opportunities: Banks and Credit Unions” recommending changes to financial services regulations. The report does not cover housing finance reform; however, the report makes a number of recommendations relating to regulations affecting the mortgage industry, including regulations relating to mortgage loan origination, mortgage loan servicing and private sector secondary mortgage market activities. The report also makes recommendations relating to bank capital and liquidity standards that, if implemented, could affect demand for our debt and MBS securities. Many of the report’s recommendations could be completed through regulatory actions, and do not require legislation.
Conservatorship Capital Framework
We have worked with FHFA and Freddie Mac on an aligned risk measurement framework for evaluating Fannie Mae and Freddie Mac business decisions and performance during conservatorship. FHFA has directed Fannie Mae and Freddie Mac to implement these conservatorship capital framework standards. The framework includes specific requirements relating to risk and modeled returns on our new acquisitions. We will be required to submit quarterly reports to FHFA relating to the framework’s requirements starting later this year. We continuously review our business decisions as they relate to existing and prospective capital framework standards and at this time expect the conservatorship capital framework to result in limited change to our business decision making.

Fannie Mae Second Quarter 2017 Form 10-Q
11


 
MD&A | Legislation and Regulation


Duty to Serve Plan
In May 2017, FHFA published our proposed duty to serve underserved markets plan and requested public input on the plan by July 10, 2017. The proposed plan describes specific activities and objectives we propose to undertake from 2018 to 2020 to fulfill our duty to serve obligations in each underserved market—manufactured housing, affordable housing preservation and rural markets. The final plan must receive a non-objection letter from FHFA. Under the current timetable set forth by FHFA, we anticipate our first duty to serve underserved markets plan will become effective in 2018.
Proposed Housing Goals for 2018-2020
In June 2017, FHFA published a proposed rule that would establish new single-family and multifamily housing goals for Fannie Mae and Freddie Mac for 2018 through 2020. Comments on the proposed rule are due in September 2017. FHFA will issue a final rule after considering the comments received on the proposed rule.
Proposed Single-Family Housing Goals
Under FHFA’s proposed rule, FHFA would continue to evaluate our performance against the single-family housing goals using a two-part approach that compares the goals-qualifying share of our single-family mortgage acquisitions against both a benchmark level and a market level. To meet a single-family housing goal or subgoal, the percentage of our mortgage acquisitions that meet each goal or subgoal must meet or exceed either the benchmark level set in advance by FHFA or the market level for that year. The market level is determined retrospectively each year based on actual goals-qualifying originations in the primary mortgage market as measured by FHFA based on Home Mortgage Disclosure Act data for that year. Typically, this data is made available in September.
FHFA has proposed the following single-family home purchase and refinance housing goal benchmarks for 2018 through 2020. A home purchase mortgage may be counted toward more than one home purchase benchmark.
Low-Income Families Home Purchase Benchmark: At least 24% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to low-income families (defined as income not in excess of 80% of area median income). This is the same benchmark currently applicable for 2017.
Very Low-Income Families Home Purchase Benchmark: At least 6% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to very low-income families (defined as income not greater than 50% of area median income). This is the same benchmark currently applicable for 2017.
Low-Income Areas Home Purchase Goal Benchmark: The benchmark level for our acquisitions of single-family owner-occupied purchase money mortgage loans for families in low-income areas is set annually by notice from FHFA, based on the benchmark level for the low-income areas home purchase subgoal (below), plus an adjustment factor reflecting the additional incremental share of mortgages for moderate-income families (defined as income not in excess of 100% of area median income) in designated disaster areas.
Low-Income Areas Home Purchase Subgoal Benchmark: At least 15% of our acquisitions of single-family owner-occupied purchase money mortgage loans must be affordable to families in low-income census tracts or to moderate-income families in high-minority census tracts. This is an increase from the benchmark of 14% currently applicable for 2017.
Low-Income Families Refinancing Benchmark: At least 21% of our acquisitions of single-family owner-occupied refinance mortgage loans must be affordable to low-income families. This is the same benchmark currently applicable for 2017.
Proposed Multifamily Housing Goals
FHFA has proposed the following multifamily goals and subgoals for 2018 through 2020.
Low-Income Families Goal: At least 315,000 multifamily units per year financed by us must be affordable to low-income families. This is an increase from the goal of 300,000 units currently applicable for 2017.
Very Low-Income Families Subgoal: At least 60,000 multifamily units per year financed by us must be affordable to very low-income families. This is the same subgoal currently applicable for 2017.

Fannie Mae Second Quarter 2017 Form 10-Q
12


 
MD&A | Legislation and Regulation


Small Affordable Multifamily Properties Subgoal: At least 10,000 multifamily units per year financed by us must be affordable to low-income families in small multifamily rental properties (5 to 50 units). This is the same subgoal currently applicable for 2017.
There is no market-based alternative measurement for the multifamily goal or subgoals.
Consolidated Results of Operations
This section provides a discussion of our condensed consolidated results of operations and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Table 1: Summary of Condensed Consolidated Results of Operations
 
For the Three Months
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
 
(Dollars in millions)
Net interest income
$
5,002

 
$
5,286

 
$
(284
)
 
$
10,348

 
$
10,055

 
$
293

Fee and other income
353

 
174

 
179

 
602

 
377

 
225

Net revenues
5,355

 
5,460

 
(105
)
 
10,950

 
10,432

 
518

Investment gains, net
385

 
398

 
(13
)
 
376

 
467

 
(91
)
Fair value losses, net
(691
)
 
(1,667
)
 
976

 
(731
)
 
(4,480
)
 
3,749

Administrative expenses
(686
)
 
(678
)
 
(8
)
 
(1,370
)
 
(1,366
)
 
(4
)
Credit-related income:
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
1,267

 
1,601

 
(334
)
 
1,663

 
2,785

 
(1,122
)
Foreclosed property expense
(34
)
 
(63
)
 
29

 
(251
)
 
(397
)
 
146

Total credit-related income
1,233

 
1,538

 
(305
)
 
1,412

 
2,388

 
(976
)
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees
(518
)
 
(453
)
 
(65
)
 
(1,021
)
 
(893
)
 
(128
)
Other expenses, net
(291
)
 
(254
)
 
(37
)
 
(673
)
 
(518
)
 
(155
)
Income before federal income taxes
4,787

 
4,344

 
443

 
8,943

 
6,030

 
2,913

Provision for federal income taxes
(1,587
)
 
(1,398
)
 
(189
)
 
(2,970
)
 
(1,948
)
 
(1,022
)
Net income
$
3,200

 
$
2,946

 
$
254

 
$
5,973

 
$
4,082

 
$
1,891

Total comprehensive income
$
3,117

 
$
2,869

 
$
248

 
$
5,896

 
$
3,805

 
$
2,091

Net Interest Income
We have two primary sources of net interest income: (1) the guaranty fees we receive for managing the credit risk on loans underlying Fannie Mae MBS held by third parties; and (2) the difference between interest income earned on the assets in our retained mortgage portfolio and the interest expense associated with the debt that funds those assets.
Guaranty fees consist of two primary components: (1) base guaranty fees that we receive over the life of the loan; and (2) upfront fees that we receive at the time of loan acquisition, primarily related to single-family loan level pricing adjustments and other fees we receive from lenders, which are amortized over the contractual life of the loan. Guaranty fees include revenues generated by the 10 basis point increase in guaranty fees we implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us. We recognize almost all of our guaranty fee revenue in net interest income due to the consolidation of the substantial majority of loans underlying our Fannie Mae MBS in consolidated trusts on our balance sheet. Those guaranty fees are the primary component of the difference between the interest income on loans in consolidated trusts and the interest expense on the debt of consolidated trusts.

Fannie Mae Second Quarter 2017 Form 10-Q
13


 
MD&A | Consolidated Results of Operations


Table 2 displays an analysis of our net interest income, average balances, and related yields earned on assets and incurred on liabilities. For most components of the average balances, we use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Table 3 displays the change in our net interest income between periods and the extent to which that variance is attributable to: (1) changes in the volume of our interest-earning assets and interest-bearing liabilities or (2) changes in the interest rates of these assets and liabilities.
Table 2: Analysis of Net Interest Income and Yield
 
For the Three Months Ended June 30,
 
2017
 
2016
 
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
$
190,255

 
$
1,978

 
4.16
%
 
$
232,722

 
$
2,390

 
4.11
%
Mortgage loans of consolidated trusts
2,951,028

 
25,033

 
3.39

 
2,822,502

 
23,866

 
3.38

Total mortgage loans(1)
3,141,283

 
27,011

 
3.44

 
3,055,224

 
26,256

 
3.44

Mortgage-related securities, net
13,860

 
127

 
3.64

 
23,060

 
241

 
4.18

Non-mortgage-related securities(2)
54,542

 
140

 
1.02

 
53,217

 
57

 
0.42

Other(3)
41,344

 
115

 
1.10

 
26,781

 
46

 
0.68

Total interest-earning assets
$
3,251,029

 
$
27,393

 
3.37
%
 
$
3,158,282

 
$
26,600

 
3.37
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
30,320

 
$
56

 
0.73
%
 
$
56,132

 
$
56

 
0.40
%
Long-term funding debt
281,987

 
1,629

 
2.31

 
303,397

 
1,736

 
2.29

Total funding debt
312,307

 
1,685

 
2.16

 
359,529

 
1,792

 
1.99

Debt securities of consolidated trusts held by third parties
2,949,510

 
20,706

 
2.81

 
2,819,018

 
19,522

 
2.77

Total interest-bearing liabilities
$
3,261,817

 
$
22,391

 
2.75
%
 
$
3,178,547

 
$
21,314

 
2.68
%
Net interest income/net interest yield
 
 
$
5,002

 
0.62
%
 
 
 
$
5,286

 
0.67
%


Fannie Mae Second Quarter 2017 Form 10-Q
14


 
MD&A | Consolidated Results of Operations


 
For the Six Months Ended June 30,
 
2017
 
2016
 
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
$
195,302

 
$
4,071

 
4.17
%
 
$
235,338

 
$
4,725

 
4.02
%
Mortgage loans of consolidated trusts
2,937,007

 
49,987

 
3.40

 
2,820,153

 
48,492

 
3.44

Total mortgage loans(1)
3,132,309

 
54,058

 
3.45

 
3,055,491

 
53,217

 
3.48

Total mortgage-related securities, net
14,627

 
269

 
3.66

 
24,821

 
510

 
4.11

Non-mortgage-related securities(2)
55,264

 
241

 
0.87

 
51,737

 
111

 
0.43

Other(3)
43,207

 
209

 
0.96

 
27,260

 
94

 
0.68

Total interest-earning assets
$
3,245,407

 
$
54,777

 
3.38
%
 
$
3,159,309

 
$
53,932

 
3.41
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt
$
31,381

 
$
99

 
0.63
%
 
$
58,109

 
$
106

 
0.36
%
Long-term funding debt
285,894

 
3,315

 
2.32

 
311,170

 
3,590

 
2.31

Total funding debt
317,275

 
3,414

 
2.15

 
369,279

 
3,696

 
2.00

Total debt securities of consolidated trusts held by third parties
2,937,399

 
41,015

 
2.79

 
2,809,727

 
40,181

 
2.86

Total interest-bearing liabilities
$
3,254,674

 
$
44,429

 
2.73
%
 
$
3,179,006

 
$
43,877

 
2.76
%
Net interest income/net interest yield
 
 
$
10,348

 
0.64
%
 
 
 
$
10,055

 
0.64
%

 
As of June 30,
 
2017
 
2016
Selected benchmark interest rates
 
 
 
3-month LIBOR
1.30
%
 
0.65
%
2-year swap rate
1.62

 
0.73

5-year swap rate
1.96

 
0.98

10-year swap rate
2.28

 
1.36

30-year Fannie Mae MBS par coupon rate
3.03

 
2.31

__________
(1) 
Average balance includes mortgage loans on nonaccrual status. Typically, interest income on nonaccrual mortgage loans is recognized when cash is received. Interest income not recognized for loans on nonaccrual status was $186 million and $402 million, respectively, for the second quarter and first half of 2017, compared with $321 million and $659 million, respectively, for the second quarter and first half of 2016.
(2) 
Includes cash equivalents.
(3) 
Consists of federal funds sold and securities purchased under agreements to resell or similar arrangements and advances to lenders.

Fannie Mae Second Quarter 2017 Form 10-Q
15


 
MD&A | Consolidated Results of Operations


Table 3: Rate/Volume Analysis of Changes in Net Interest Income
 
 
 
 
 
 
  
For the Three Months Ended
 
For the Six Months Ended
  
June 30, 2017 vs. 2016
 
June 30, 2017 vs. 2016
  
Total
 
Variance Due to:(1)
 
Total
 
Variance Due to:(1)
  
Variance
 
Volume
 
Rate
 
Variance
 
Volume
 
Rate
 
(Dollars in millions)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans of Fannie Mae
$
(412
)
 
$
(441
)
 
$
29

 
$
(654
)
 
$
(829
)
 
$
175

Mortgage loans of consolidated trusts
1,167

 
1,090

 
77

 
1,495

 
1,993

 
(498
)
Total mortgage loans
755

 
649

 
106

 
841

 
1,164

 
(323
)
Mortgage-related securities, net
(114
)
 
(87
)
 
(27
)
 
(241
)
 
(193
)
 
(48
)
Non-mortgage-related securities(2)
83

 
1

 
82

 
130

 
8

 
122

Other(3)
69

 
22

 
47

 
115

 
53

 
62

Total interest income
$
793

 
$
585

 
$
208

 
$
845

 
$
1,032

 
$
(187
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
Short-term funding debt

 
(33
)
 
33

 
(7
)
 
(63
)
 
56

Long-term funding debt
(107
)
 
(124
)
 
17

 
(275
)
 
(293
)
 
18

Total funding debt
(107
)
 
(157
)
 
50

 
(282
)
 
(356
)
 
74

Debt securities of consolidated trusts held by third parties
1,184

 
923

 
261

 
834

 
1,862

 
(1,028
)
Total interest expense
$
1,077

 
$
766

 
$
311

 
$
552

 
$
1,506

 
$
(954
)
Net interest income
$
(284
)
 
$
(181
)
 
$
(103
)
 
$
293

 
$
(474
)
 
$
767

__________
(1) 
Combined rate/volume variances are allocated to rate and volume based on the relative size of each variance.
(2) 
Includes cash equivalents.
(3) 
Consists of federal funds sold and securities purchased under agreements to resell or similar arrangements and advances to lenders.
Net interest income and net interest yield decreased in the second quarter of 2017 compared with the second quarter of 2016 due to a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio pursuant to the requirements of our senior preferred stock purchase agreement with Treasury and FHFA’s additional portfolio cap. The decrease in net interest income was partially offset by a slight increase in guaranty fee income driven by (1) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the second quarter of 2017 compared with the second quarter of 2016; almost entirely offset by (2) a decrease in the amortization of upfront fees driven by lower prepayments on mortgage loans and liquidations of MBS debt of consolidated trusts, which reduced the amortization of cost basis adjustments on the loans and related debt.
Net interest income increased in the first half of 2017 compared with the first half of 2016 due to an increase in guaranty fee income driven by: (1) an increase in amortization income in the first half of 2017 due to activity related to increased prepayments on mortgage loans and liquidations of MBS debt of consolidated trusts, which accelerated the amortization of cost basis adjustments on the loans and related debt; and (2) loans with higher base guaranty fees comprising a larger part of our guaranty book of business in the first half of 2017 compared with the first half of 2016. The increase in net interest income due to higher guaranty fee income was partially offset by a decline in the average balance of our retained mortgage portfolio as we continued to reduce this portfolio. See “Retained Mortgage Portfolio” for information about our retained mortgage portfolio.


Fannie Mae Second Quarter 2017 Form 10-Q
16


 
MD&A | Consolidated Results of Operations


Fair Value Losses, Net

The estimated fair value of our derivatives and trading securities may fluctuate substantially from period to period because of changes in interest rates, credit spreads and interest rate volatility, as well as activity related to these financial instruments. While the estimated fair value of our derivatives that serve to mitigate certain risk exposures may fluctuate, some of the financial instruments that generate these exposures are not recorded at fair value in our condensed consolidated financial statements.
Table 4 displays the components of our fair value gains and losses.
Table 4: Fair Value Losses, Net
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Risk management derivatives fair value gains (losses) attributable to:
 
 
 
 
 
 
 
Net contractual interest expense accruals on interest rate swaps
$
(224
)
 
$
(291
)
 
$
(479
)
 
$
(560
)
Net change in fair value during the period
(78
)
 
(899
)
 
289

 
(3,001
)
Total risk management derivatives fair value losses, net
(302
)
 
(1,190
)
 
(190
)
 
(3,561
)
Mortgage commitment derivatives fair value losses, net
(192
)
 
(367
)
 
(272
)
 
(729
)
Total derivatives fair value losses, net
(494
)
 
(1,557
)
 
(462
)
 
(4,290
)
Trading securities gains, net
18

 
22

 
86

 
50

CAS debt fair value losses, net(1)
(169
)
 
(168
)
 
(331
)
 
(228
)
Other, net(2)
(46
)
 
36

 
(24
)
 
(12
)
Fair value losses, net
$
(691
)
 
$
(1,667
)
 
$
(731
)
 
$
(4,480
)
__________
(1) 
Consists of fair value losses on CAS debt reported at fair value.
(2) 
Consists of fair value gains and losses on non-CAS debt and mortgage loans.
Fair value losses in the second quarter and first half of 2017 were primarily driven by:
decreases in the fair value of our pay-fixed risk management derivatives due to declines in longer-term swap rates during the second quarter;
decreases in the fair value of our mortgage commitments due to losses on commitments to sell mortgage-related securities due to an increase in prices as interest rates decreased during the commitment periods; and
fair value losses on CAS debt reported at fair value resulting from tightening spreads between CAS debt yields and LIBOR during the periods.
Fair value losses in the second quarter and first half of 2016 were primarily due to losses on risk management derivatives resulting from decreases in the fair value of our pay-fixed derivatives due to declines in longer-term swap rates during the second quarter and first half of 2016.
Credit-Related Income (Expense)
We refer to our benefit (provision) for loan losses and benefit (provision) for guaranty losses collectively as our “benefit (provision) for credit losses.” Credit-related income (expense) consists of our benefit (provision) for credit losses and foreclosed property income (expense).
Provision (Benefit) for Credit Losses
Our combined loss reserves provide for an estimate of credit losses incurred in our guaranty book of business, including concessions we granted borrowers upon modification of their loans. We establish our combined loss reserves through our provision for credit losses for losses that we believe have been incurred and will eventually be realized over time in our financial statements. When we reduce our combined loss reserves, we recognize a benefit for credit losses. When we determine that a loan is uncollectible, typically upon foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale), we recognize a charge-off against our

Fannie Mae Second Quarter 2017 Form 10-Q
17


 
MD&A | Consolidated Results of Operations


combined loss reserves. For a subset of delinquent single-family loans, we charge off the portion of the loans that is deemed uncollectible prior to foreclosure when the loans have been delinquent for a specified length of time and meet specified mark-to-market LTV ratios. We also recognize a charge-off upon the redesignation of loans from HFI to HFS. If the amounts charged off upon redesignation exceed the allowance related to the loans, we record a provision for credit losses. If the amounts charged off are less than the allowance related to the loans, we recognize a benefit for credit losses. We record recoveries of previously charged-off amounts as a reduction to charge-offs.
Table 5 displays the changes in the combined loss reserves, which consists of the allowance for loan losses and the reserve for guaranty losses.
Table 5: Changes in Combined Loss Reserves
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Changes in combined loss reserves:
 
 
 
 
 
 
 
Beginning balance
$
22,526

 
$
26,332

 
$
23,835

 
$
28,590

Benefit for credit losses
(1,267
)
 
(1,601
)
 
(1,663
)
 
(2,785
)
Charge-offs
(704
)
 
(828
)
 
(1,766
)
 
(2,131
)
Recoveries
179

 
164

 
298

 
329

Other
8

 
22

 
38

 
86

Ending balance
$
20,742

 
$
24,089

 
$
20,742

 
$
24,089

 
As of
 
June 30,
 
 
December 31,
 
 
2017
 
 
2016
 
 
(Dollars in millions)
Allocation of combined loss reserves:
 
 
 
 
 
Balance at end of each period attributable to:
 
 
 
 
 
Single-family
$
20,553

 
 
$
23,639

 
Multifamily
189

 
 
196

 
       Total
$
20,742

 
 
$
23,835

 
Single-family and multifamily combined loss reserves as a percentage of applicable guaranty book of business:
 
 
 
 
 
Single-family
0.72

%
 
0.83

%
Multifamily
0.07

 
 
0.08

 
Combined loss reserves as a percentage of:
 
 
 
 
 
Total guaranty book of business
0.66

%
 
0.77

%
Recorded investment in nonaccrual loans
55.06

 
 
53.62

 
The amount of our provision or benefit for credit losses may vary from period to period based on a number of factors, such as changes in actual and expected home prices, fluctuations in interest rates, borrower payment behavior, the types and volumes of our loss mitigation activities, the volume of foreclosures completed, and redesignations of loans from HFI to HFS. In addition, our provision or benefit for credit losses and our combined loss reserves can be impacted by updates to the models, assumptions and data used in determining our allowance for loan losses.
The following factors contributed to our benefit for credit losses in the second quarter and first half of 2017:
Actual and forecasted home prices increased in the period. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default, which impacts our estimate of losses and ultimately reduces our combined loss reserves and provision for credit losses.

Fannie Mae Second Quarter 2017 Form 10-Q
18


 
MD&A | Consolidated Results of Operations


We redesignated certain reperforming and nonperforming single-family loans from HFI to HFS during the period as we no longer intend to hold them to maturity. Upon redesignation of these loans, we recorded the loans at the lower of cost or fair value via a charge-off to the allowance for loan losses. Amounts recorded in the allowance related to the loans exceeded the amount charged off, contributing to the benefit for credit losses.
The following factors contributed to our benefit for credit losses in the second quarter and first half of 2016:
Home prices, including distressed property valuations, increased during the second quarter and first half of 2016.
Actual and projected mortgage interest rates declined during the second quarter and first half of 2016. As mortgage interest rates decline, we expect an increase in future prepayments on single-family individually impaired loans, including modified loans. Higher expected prepayments shorten the expected lives of modified loans, which decreases the impairment relating to concessions provided on these loans and results in a decrease in the provision for credit losses.
We discuss our expectations regarding our future loss reserves in “Executive SummaryOutlook—Loss Reserves.”
Troubled Debt Restructurings and Nonaccrual Loans
Table 6 displays the composition of loans restructured in a troubled debt restructuring (“TDR”) that are on accrual status and loans on nonaccrual status. The table includes our recorded investment in HFI and HFS mortgage loans. For information on the impact of TDRs and other individually impaired loans on our allowance for loan losses, see “Note 3, Mortgage Loans.”
Table 6: Troubled Debt Restructurings and Nonaccrual Loans
 
As of
 
June 30,
2017
 
December 31, 2016
 
(Dollars in millions)
TDRs on accrual status:
 
 
 
 
 
 
 
Single-family
 
$
123,183

 
 
 
$
127,353

 
Multifamily
 
95

 
 
 
141

 
Total TDRs on accrual status
 
$
123,278

 
 
 
$
127,494

 
Nonaccrual loans:
 
 
 
 
 
 
 
Single-family
 
$
37,331

 
 
 
$
44,047

 
Multifamily
 
341

 
 
 
403

 
Total nonaccrual loans
 
$
37,672

 
 
 
$
44,450

 
Accruing on-balance sheet loans past due 90 days or more(1)
 
$
304

 
 
 
$
402

 
 
For the Six Months
 
 
Ended June 30,
 
 
 
2017
 
 
 
2016
 
 
 
(Dollars in millions)
 
Interest related to on-balance sheet TDRs and nonaccrual loans:
 
 
 
 
 
 
 
Interest income forgone(2)
 
$
1,781

 
 
 
$
2,345

 
Interest income recognized for the period(3)
 
2,886

 
 
 
3,103

 
__________
(1) 
Includes loans that, as of the end of each period, are 90 days or more past due and continuing to accrue interest. The majority of these amounts consists of loans insured or guaranteed by the U.S. government and loans for which we have recourse against the seller in the event of a default.
(2) 
Represents the amount of interest income we did not recognize, but would have recognized during the period for nonaccrual loans and TDRs on accrual status as of the end of each period had the loans performed according to their original contractual terms.
(3) 
Represents interest income recognized during the period, including the amortization of any deferred cost basis adjustments, for loans classified as either nonaccrual loans or TDRs on accrual status as of the end of each period. Includes primarily amounts accrued while the loans were performing and cash payments received on nonaccrual loans.

Fannie Mae Second Quarter 2017 Form 10-Q
19


 
MD&A | Consolidated Results of Operations


Credit Loss Performance Metrics
Our credit-related income (expense) should be considered in conjunction with our credit loss performance metrics. Our credit loss performance metrics, however, are not defined terms within generally accepted accounting principles (“GAAP”) and may not be calculated in the same manner as similarly titled measures reported by other companies. Because management does not view changes in the fair value of our mortgage loans as credit losses, we adjust our credit loss performance metrics for the impact associated with our acquisition of credit-impaired loans from unconsolidated MBS trusts. We also exclude interest forgone on nonaccrual loans and TDRs, other-than-temporary impairment losses resulting from deterioration in the credit quality of our mortgage-related securities and accretion of interest income on acquired credit-impaired loans from credit losses. We believe that credit loss performance metrics may be useful to investors as the losses are presented as a percentage of our book of business and have historically been used by analysts, investors and other companies within the financial services industry. Moreover, by presenting credit losses with and without the effect of fair value losses associated with the acquisition of credit-impaired loans, investors are able to evaluate our credit performance on a more consistent basis among periods. Table 7 displays the components of our credit loss performance metrics as well as our single-family and multifamily initial charge-off severity rates.
Table 7: Credit Loss Performance Metrics
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
 
(Dollars in millions) 
Charge-offs, net of recoveries
$
525

 
6.7
bps
 
$
664

 
8.8
bps
 
$
1,468

 
9.4
bps
 
$
1,802

 
11.8
bps
Foreclosed property expense
34

 
0.4
 
 
63

 
0.8
 
 
251

 
1.6
 
 
397

 
2.6
 
Credit losses including the effect of fair value losses on acquired credit-impaired loans
559

 
7.1
 
 
727

 
9.6
 
 
1,719

 
11.0
 
 
2,199

 
14.4
 
Plus: Impact of acquired credit-impaired loans on charge-offs and foreclosed property expense(2)
61

 
0.8
 
 
90

 
1.1
 
 
122

 
0.8
 
 
190

 
1.3
 
Credit losses and credit loss ratio
$
620

 
7.9
bps
 
$
817

 
10.7
bps
 
$
1,841

 
11.8
bps
 
$
2,389

 
15.7
bps
Credit losses attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
$
618

 
 
 
 
$
812

 
 
 
 
$
1,839

 
 
 
 
$
2,381

 
 
 
Multifamily
2

 
 
 
 
5

 
 
 
 
2

 
 
 
 
8

 
 
 
     Total
$
620

 
 
 
 
$
817

 
 
 
 
$
1,841

 
 
 
 
$
2,389

 
 
 
Single-family initial charge-off severity rate(3)
 
 
13.6
%
 
 
 
17.3
%
 
 
 
15.9
%
 
 
 
21.4
%
Multifamily initial charge-off severity rate(3)(4)
 
 
%
 
 
 
1.0
%
 
 
 
%
 
 
 
12.3
%
__________
(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 fair value losses from acquired credit-impaired loans.
(3) 
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 real estate owned (“REO”) after initial acquisition through final disposition. The single-family rate includes charge-offs pursuant to the provisions of FHFA’s Advisory Bulletin 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention” and charge-offs of property tax and insurance receivables, while it excludes charge-offs from short sales and third-party sales. Multifamily rate is net of risk sharing agreements.
(4) 
Reflects two loans in the second quarter of 2017 and three loans in the first half of 2017 that were foreclosed without any credit losses.

Fannie Mae Second Quarter 2017 Form 10-Q
20


 
MD&A | Consolidated Results of Operations


Credit losses and our credit loss ratio decreased in the second quarter and first half of 2017 compared with the second quarter and first half of 2016 primarily due to lower charge-offs as a result of lower delinquencies.
We discuss our expectations regarding our future credit losses in “Executive SummaryOutlook—Credit Losses.”
Table 8 displays concentrations of our single-family credit losses based on geography, credit characteristics and loan vintages.
Table 8: Credit Loss Concentration Analysis
 
Percentage of Single-Family Conventional Guaranty Book of Business Outstanding(1)
 
Percentage of Single-Family Credit Losses(2)
 
As of
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
June 30,
 
December 31,
 
June 30,
 
 
2017
 
2016
 
2016
 
2017
 
2016
 
2017
 
2016
Geographical Distribution:
 
 
 
 
 
 
 
 
 
 
 
 
 
California
19
%
 
19
%
 
20
%
 
12
%
 
1
%
 
9
%
 
2
%
Florida
6

 
6

 
6

 
14

 
4

 
13

 
8

Illinois
4

 
4

 
4

 
10

 
8

 
9

 
8

New Jersey
4

 
4

 
4

 
14

 
19

 
13

 
18

New York
5

 
5

 
5

 
9

 
19

 
11

 
22

All other states
62

 
62

 
61

 
41

 
49

 
45

 
42

Select higher-risk product features(3)
21

 
21

 
22

 
73

 
57

 
62

 
58

Vintages:(4)

 
 
 

 

 

 

 

2004 and prior
4

 
5

 
5

 
3

 
16

 
10

 
17

2005 - 2008
7

 
8

 
9

 
69

 
59

 
67

 
65

2009 - 2017
89

 
87

 
86

 
28

 
25

 
23

 
18

__________
(1) 
Calculated based on the unpaid principal balance of loans, where we have detailed loan level information, for each category divided by the unpaid principal balance of our single-family conventional guaranty book of business as of the end of each period.
(2) 
Excludes the impact of recoveries resulting from resolution agreements related to representation and warranty matters and compensatory fee income related to servicing matters that have not been allocated to specific loans.
(3) 
Includes Alt-A loans, subprime loans, interest-only loans, loans with original LTV ratios greater than 90% and loans with FICO® scores less than 620.
(4) 
Credit losses on mortgage loans typically do not peak until the third through sixth years following origination; however, this range can vary based on many factors, including changes in macroeconomic conditions and foreclosure timelines.
As shown in Table 8, the majority of our credit losses for the second quarter and first half of 2017 continued to be driven by loans originated in 2005 through 2008. The percentage of our credit losses in California and Florida were higher in the second quarter and the first half of 2017 compared with the second quarter and first half of 2016 because a large portion of the reperforming loans that were redesignated as HFS and charged-off in the second quarter and first half of 2017 related to properties in those states. We provide more detailed single-family credit performance information, including serious delinquency rate share and foreclosure activity, in “Business SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk Management.”
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) Fees
Pursuant to the TCCA, in 2012, FHFA directed us to increase our single-family guaranty fees by 10 basis points and remit this increase to Treasury. This TCCA-related revenue is included in “Net interest income” and the expense is recognized as “TCCA fees.” TCCA fees increased in the second quarter and first half of 2017 compared with the second quarter and first half of 2016 as our book of business subject to the TCCA continued to grow. We expect the guaranty fees collected and expenses incurred under the TCCA to continue to increase in the future.

Fannie Mae Second Quarter 2017 Form 10-Q
21


 
MD&A | Consolidated Balance Sheet Analysis


Consolidated Balance Sheet Analysis
This section provides a discussion of our condensed consolidated balance sheets and should be read together with our condensed consolidated financial statements, including the accompanying notes.
Table 9: Summary of Condensed Consolidated Balance Sheets
 
As of
 
 
 
June 30,
 
December 31,
 
 
 
2017
 
2016
 
Variance
 
(Dollars in millions)
Assets 
 
 
 
 
 
Cash and cash equivalents and federal funds sold and securities purchased under agreements to resell or similar arrangements
$
46,124

 
$
55,639

 
$
(9,515
)
Restricted cash
30,999

 
36,953

 
(5,954
)
Investments in securities(1)
45,682

 
48,925

 
(3,243
)
Mortgage loans:
 
 
 
 
 
Of Fannie Mae
185,635

 
207,190

 
(21,555
)
Of consolidated trusts
2,960,179

 
2,896,028

 
64,151

Allowance for loan losses
(20,399
)
 
(23,465
)
 
3,066

Mortgage loans, net of allowance for loan losses
3,125,415

 
3,079,753

 
45,662

Deferred tax assets, net
31,402

 
33,530

 
(2,128
)
Other assets
29,608

 
33,168

 
(3,560
)
Total assets
$
3,309,230

 
$
3,287,968

 
$
21,262

Liabilities and equity
 
 
 
 
 
Debt:
 
 
 
 
 
Of Fannie Mae
$
303,120

 
$
327,097

 
$
(23,977
)
Of consolidated trusts
2,984,547

 
2,935,219

 
49,328

Other liabilities
17,846

 
19,581

 
(1,735
)
Total liabilities
3,305,513

 
3,281,897

 
23,616

Equity
3,717

 
6,071

 
(2,354
)
Total liabilities and equity
$
3,309,230

 
$
3,287,968

 
$
21,262

__________
(1) 
Includes $32.4 billion as of June 30, 2017 and $32.3 billion as of December 31, 2016 of U.S. Treasury securities that are included in our 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 ManagementLiquidity ManagementCash 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 decreased as of June 30, 2017 compared with the balance as of December 31, 2016 primarily as a result of a decrease in prepayments received on mortgage loans in June 2017 compared with prepayments received in December 2016.

Fannie Mae Second Quarter 2017 Form 10-Q
22


 
MD&A | Consolidated Balance Sheet Analysis


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 10 displays the fair value of our investments in trading and available-for-sale mortgage-related securities. We classify private-label securities as Alt-A, subprime or commercial mortgage-backed securities (“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.
Table 10: Summary of Mortgage-Related Securities at Fair Value
 
As of
 
June 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Mortgage-related securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
6,549

 
 
 
$
7,323

 
Other agency
 
2,401

 
 
 
2,605

 
Alt-A and subprime private-label securities
 
2,755

 
 
 
3,345

 
CMBS
 
275

 
 
 
1,580

 
Mortgage revenue bonds
 
874

 
 
 
1,293

 
Other mortgage-related securities
 
410

 
 
 
462

 
Total
 
$
13,264

 
 
 
$
16,608

 
The decrease in mortgage-related securities at fair value from December 31, 2016 to June 30, 2017 was primarily driven by liquidations and sales of securities.
See “Note 5, Investments in Securities” for additional information on our investments in mortgage-related securities, including the composition of our trading and available-for-sale securities at amortized cost and fair value and the gross unrealized gains and losses related to our available-for-sale securities as of June 30, 2017 and December 31, 2016.
Mortgage Loans and Allowance for Loan Losses
The increase in mortgage loans, net of allowance, from December 31, 2016 to June 30, 2017 was driven by an increase in mortgage loans of consolidated trusts as we continued to add to our guaranty book of business through securitization activity. Partially offsetting this was a decline in mortgage loans of Fannie Mae resulting from liquidations, portfolio securitizations and sales. For additional information on our mortgage loans, see “Note 3, Mortgage Loans.”
The decrease in our allowance for loan losses from December 31, 2016 to June 30, 2017 was driven primarily by the redesignations of loans from HFI to HFS, liquidations and an increase in actual and forecasted home prices. See “Consolidated Results of OperationsCredit-Related Income (Expense)Provision (Benefit) for Credit Losses” for more information.
Other Assets
The decrease in other assets from December 31, 2016 to June 30, 2017 was primarily driven by a decrease in advances to lenders as a result of lower lender funding needs. For additional information on our accounting policy for advances to lenders, refer to “Note 1, Summary of Significant Accounting Policies” in our 2016 Form 10-K.
Debt
Debt of Fannie Mae is the primary means of funding our mortgage acquisitions. Debt of consolidated trusts represents the amount of Fannie Mae MBS issued from consolidated trusts and held by third-party certificateholders. 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 ManagementLiquidity ManagementDebt Funding.” Also see “Note 7, Short-Term Borrowings and Long-Term Debt” for additional information on our outstanding debt.
The decrease in debt of Fannie Mae from December 31, 2016 to June 30, 2017 was primarily driven by lower funding needs, as our retained mortgage portfolio decreased. The increase in debt of consolidated trusts from

Fannie Mae Second Quarter 2017 Form 10-Q
23


 
MD&A | Consolidated Balance Sheet Analysis


December 31, 2016 to June 30, 2017 was primarily driven by sales of Fannie Mae MBS, which are accounted for as issuances of debt of consolidated trusts in our condensed consolidated balance sheets, since the MBS certificate ownership is transferred from us to a third party.
Stockholders’ Equity
Our net equity decreased as of June 30, 2017 compared with December 31, 2016 due to our payments of senior preferred stock dividends to Treasury during the first half of 2017, partially offset by our comprehensive income recognized during the first half of 2017.
Retained Mortgage Portfolio
Our retained mortgage portfolio consists of mortgage loans and mortgage-related securities that we own and includes Fannie Mae MBS and non-Fannie Mae mortgage-related securities. Assets held by consolidated MBS trusts that back mortgage-related securities owned by third parties are not included in our retained mortgage portfolio.
The amount of mortgage assets that we may own is restricted by our senior preferred stock purchase agreement with Treasury and FHFA’s additional cap, as described in “BusinessConservatorship and Treasury AgreementsTreasury Agreements” in our 2016 Form 10-K. We plan to reduce our retained mortgage portfolio to no more than the FHFA cap of $259.6 billion as of December 31, 2017, which also would be in compliance with the senior preferred stock purchase agreement cap of $288.4 billion. Table 11 displays the unpaid principal balance of our retained mortgage portfolio.
Table 11: Retained Mortgage Portfolio
 
As of
 
June 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
Mortgage loans(1)
 
$
163,411

 
 
 
$
181,219

 
Reverse mortgages
 
28,047

 
 
 
29,443

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
34,874

 
 
 
25,667

 
Fannie Mae-wrapped reverse mortgage securities
 
7,064

 
 
 
7,420

 
Other Fannie Mae-wrapped securities
 
3,613

 
 
 
3,773

 
Private-label and other securities
 
4,009

 
 
 
4,980

 
Total single-family mortgage-related securities(3)
 
49,560

 
 
 
41,840

 
Total single-family mortgage loans and mortgage-related securities
 
241,018

 
 
 
252,502

 
Multifamily:
 
 
 
 
 
 
 
Mortgage loans(4)
 
5,736

 
 
 
9,407

 
Mortgage-related securities:
 
 
 
 
 
 
 
Agency securities(2)
 
7,985

 
 
 
7,693

 
CMBS
 
276

 
 
 
1,567

 
Mortgage revenue bonds
 
783

 
 
 
1,185

 
Total multifamily mortgage-related securities(5)
 
9,044

 
 
 
10,445

 
Total multifamily mortgage loans and mortgage-related securities
 
14,780

 
 
 
19,852

 
Total retained mortgage portfolio
 
$
255,798

 
 
 
$
272,354

 
__________
(1) 
Includes single-family loans restructured in a TDR that were on accrual status of $103.5 billion and $119.4 billion as of June 30, 2017 and December 31, 2016, respectively, and single-family loans on nonaccrual status of $33.3 billion and $38.7 billion as of June 30, 2017 and December 31, 2016, respectively.
(2) 
Includes Fannie Mae, Freddie Mac and Ginnie Mae mortgage-related securities, excluding Fannie Mae-wrapped reverse mortgage securities and other Fannie Mae-wrapped securities.

Fannie Mae Second Quarter 2017 Form 10-Q
24


 
MD&A | Retained Mortgage Portfolio


(3) 
The fair value of these single-family mortgage-related securities was $51.6 billion and $42.9 billion as of June 30, 2017 and December 31, 2016, respectively.
(4) 
Includes multifamily loans restructured in a TDR that were on accrual status of $89 million and $131 million as of June 30, 2017 and December 31, 2016, respectively, and multifamily loans on nonaccrual status of $171 million and $246 million as of June 30, 2017 and December 31, 2016, respectively.
(5) 
The fair value of these multifamily mortgage-related securities was $9.7 billion and $11.2 billion as of June 30, 2017 and December 31, 2016, respectively.
In support of our loss mitigation strategy, we purchased $6.2 billion of loans from our single-family MBS trusts in the first half of 2017, the substantial majority of which were delinquent. See “Business—Mortgage Securitizations—Purchases of Loans from Our MBS Trusts” in our 2016 Form 10-K for more information relating to our purchases of loans from MBS trusts.
We primarily use our retained mortgage portfolio to: (1) provide liquidity to the mortgage market and (2) support our loss mitigation activities. Previously, we also used our retained mortgage portfolio for investment purposes.
Table 12 below separates the instruments within our retained mortgage portfolio by unpaid principal balance into three categories based on each instrument’s use. “Lender liquidity,” which includes balances related to our whole loan conduit activity, supports our efforts to provide liquidity to the Single-Family and Multifamily mortgage markets. “Loss mitigation” supports our loss mitigation efforts through the purchase of delinquent loans from MBS trusts. “Other” represents assets that were previously purchased for investment purposes. More than half of the balance of “Other” consisted of reverse mortgage loans and Fannie Mae-wrapped reverse mortgage securities as of June 30, 2017 and December 31, 2016.
Table 12: Retained Mortgage Portfolio Profile
 
As of
 
June 30, 2017
 
December 31, 2016
 
Single-Family
 
Multifamily
 
Total
 
% of Mortgage Credit Book of Business
 
Single-Family
 
Multifamily
 
Total
 
% of Mortgage Credit Book of Business
 
(Dollars in millions)
Lender liquidity
$
49,956

 
$
7,985

 
$
57,941

 
2
%
 
$
36,272

 
$
7,694

 
$
43,966

 
2
%
Loss mitigation
141,973

 
260

 
142,233

 
4

 
164,028

 
376

 
164,404

 
5

Other
49,089

 
6,535

 
55,624

 
2

 
52,202

 
11,782

 
63,984

 
2

Total
$
241,018

 
$
14,780

 
$
255,798

 
8
%
 
$
252,502

 
$
19,852

 
$
272,354

 
9
%
Mortgage Credit Book of Business
Table 13 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 92% of our mortgage credit book of business as of June 30, 2017 and December 31, 2016. 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.

Fannie Mae Second Quarter 2017 Form 10-Q
25


 
MD&A | Mortgage Credit Book of Business


Table 13: Composition of Mortgage Credit Book of Business
 
As of
 
June 30, 2017
 
December 31, 2016
 
Single-Family 
 
Multifamily 
 
Total 
 
Single-Family 
 
Multifamily 
 
Total 
 
(Dollars in millions)
Mortgage loans and Fannie Mae MBS(1)
$
2,865,372

 
$
244,701

 
$
3,110,073

 
$
2,838,086

 
$
229,896

 
$
3,067,982

Unconsolidated Fannie Mae MBS, held by third parties(2)
7,014

 
1,096

 
8,110

 
7,795

 
1,159

 
8,954

Other credit guarantees(3)
2,004

 
12,628

 
14,632

 
2,193

 
13,142

 
15,335

Guaranty book of business
$
2,874,390

 
$
258,425

 
$
3,132,815

 
$
2,848,074

 
$
244,197

 
$
3,092,271

Other agency mortgage-related securities(4)
2,286

 

 
2,286

 
2,500

 

 
2,500

Other mortgage-related securities(5)
4,009

 
1,059

 
5,068

 
4,980

 
2,752

 
7,732

Mortgage credit book of business  
$
2,880,685

 
$
259,484

 
$
3,140,169

 
$
2,855,554

 
$
246,949

 
$
3,102,503

Guaranty Book of Business Detail:
 
 
 
 
 
 
 
 
 
 
 
Conventional Guaranty Book of Business(6)
$
2,831,398

 
$
257,129

 
$
3,088,527

 
$
2,802,572

 
$
242,834

 
$
3,045,406

Government Guaranty Book of Business(7)
$
42,992

 
$
1,296

 
$
44,288

 
$
45,502

 
$
1,363

 
$
46,865

__________
(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 private-label securities, and CMBS.
(6) 
Consists of 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) 
Consists of mortgage loans and mortgage-related securities guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies.
The 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”), requires us to set aside each year an amount equal to 4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases and to pay this amount to specified U.S. Department of Housing and Urban Development (“HUD”) and Treasury funds. New business purchases consist of single-family and multifamily whole mortgage loans purchased during the period and single-family and multifamily mortgage loans underlying Fannie Mae MBS issued during the period pursuant to lender swaps. In February 2017, we paid $268 million to the funds based on our new business purchases in 2016. Our new business purchases were $270.9 billion in the first half of 2017. Accordingly, we recognized an expense of $114 million related to this obligation for the first half of 2017. We expect to pay this amount, plus additional amounts to be accrued based on our new business purchases in the second half of 2017, to the funds on or before March 1, 2018. See “Business—Legislation and Regulation—GSE Act and Other Regulation of Our Business—Affordable Housing Allocations” in our 2016 Form 10-K for more information regarding this obligation.

Fannie Mae Second Quarter 2017 Form 10-Q
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MD&A | Business Segments


Business Segments
Overview
We have two reportable business segments: Single-Family and Multifamily. Previously, we had a third reportable business segment, Capital Markets, which was incorporated into the Single-Family and Multifamily segments in the fourth quarter of 2016. Results of our two business segments are intended to reflect each segment as if it were a stand-alone business. We have revised the presentation of our segment results for the prior periods to be consistent with the current period presentation.
This section describes the following for each of our business segments:
market conditions relating to the business segment;
the segment’s business and financial results; and
credit risk management relating to the business segment.
This section should be read together with our comparative discussion of our condensed consolidated results of operations in “Consolidated Results of Operations.”
Single-Family Business
Single-Family Housing and Mortgage Market and Economic Conditions
According to the U.S. Bureau of Economic Analysis advance estimate, the inflation-adjusted U.S. gross domestic product, or GDP, rose by 2.6% on an annualized basis in the second quarter of 2017, compared with an increase of 1.2% in the first quarter of 2017. The overall economy gained an estimated 2.2 million non-farm jobs in the second quarter of 2017. According to the U.S. Bureau of Labor Statistics, over the 12 months ending in June 2017, the economy created an estimated 581,000 non-farm jobs. The unemployment rate was 4.4% in June 2017, compared with 4.5% in March 2017.
According to the Federal Reserve, total U.S. residential mortgage debt outstanding, which includes $10.3 trillion of single-family debt outstanding, was estimated to be approximately $11.5 trillion as of March 31, 2017 (the latest date for which information is available) and December 31, 2016.
We forecast that total originations in the U.S. single-family mortgage market in 2017 will decrease from 2016 levels by approximately 20% from an estimated $2.05 trillion in 2016 to $1.65 trillion in 2017, and that the amount of originations in the U.S. single-family mortgage market that are refinancings will decrease from an estimated $991 billion in 2016 to $566 billion in 2017.
Housing sales remained relatively flat in the second quarter of 2017 compared with the first quarter of 2017. Total existing home sales averaged 5.6 million units annualized in the first and second quarter of 2017, according to data from the National Association of REALTORS®. Sales of foreclosed homes and preforeclosure, or “short,” sales (together, “distressed sales”) accounted for 4.0% of existing home sales in June 2017, compared with 6.0% in March 2017 and June 2016. According to the U.S. Census Bureau, new single-family home sales decreased during the second quarter of 2017, averaging an annualized rate of 597,000 units, a 3.2% decrease from the first quarter of 2017.
The number of months’ supply, or the inventory/sales ratio, of available existing homes and of new homes were each below their historical average at the end of the second quarter of 2017. According to the U.S. Census Bureau, the months’ supply of new single-family unsold homes was 5.4 months as of June 30, 2017, compared with 5.0 months as of March 31, 2017. According to the National Association of REALTORS®, the months’ supply of existing unsold homes was 4.3 months as of June 30, 2017, compared with 3.8 months as of March 31, 2017.
The overall mortgage market serious delinquency rate fell to 2.8% as of March 31, 2017 (the latest date for which information is available), according to the Mortgage Bankers Association’s National Delinquency Survey, compared with 3.3% as of March 31, 2016. We provide information about Fannie Mae’s serious delinquency rate in “Single-Family Mortgage Credit Risk Management” below.
Based on our home price index, we estimate that home prices on a national basis increased by 2.6% in the second quarter of 2017 and by 3.7% in the first half of 2017, following increases of 5.8% in 2016, 4.6% in 2015 and 4.2% in 2014. We estimate that, in the second quarter of 2017, home prices on a national basis surpassed

Fannie Mae Second Quarter 2017 Form 10-Q
27


 
MD&A | Business Segments


the peak previously reached in the third quarter of 2006 for the first time, exceeding the previous 2006 peak by an estimated 2.4%. Our home price estimates are based on preliminary data and are subject to change as additional data become available.
Thirty-year fixed-rate mortgage rates ended the quarter at 3.88% for the week of June 30, 2017, down from 4.14% for the week of March 31, 2017, according to Freddie Mac’s Primary Mortgage Market Survey®.
Single-Family Business Metrics
Table 14: Single-Family Business Key Performance Data
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Securitization Activity/New Business
 
 
 
 
 
 
 
 
 
 
 
Single-family Fannie Mae MBS issuances
$
120,724

 
 
$
132,086

 
 
$
248,515

 
 
$
233,883

 
Single-family Fannie Mae MBS outstanding, at end of period
$
2,713,903

 
 
$
2,628,583

 
 
$
2,713,903

 
 
$
2,628,583

 
Portfolio Data
 
 
 
 
 
 
 
 
 
 
 
Single-family retained mortgage portfolio, at end of period
$
241,018

 
 
$
291,709

 
 
$
241,018

 
 
$
291,709

 
Credit Guaranty Activity
 
 
 
 
 
 
 
 
 
 
 
Average single-family guaranty book of business(1)
$
2,870,396

 
 
$
2,821,243

 
 
$
2,862,955

 
 
$
2,824,069

 
Average charged guaranty fee on single-family guaranty book of business:(2)
 
 
 
 
 
 
 
 
 
 
 
Fee, net of TCCA fees (in basis points)(3)
42.1

 
 
40.7

 
 
41.9

 
 
40.5

 
Total fee (in basis points)
49.4

 
 
47.2

 
 
49.2

 
 
46.9

 
Average charged guaranty fee on new single-family acquisitions:(4)
 
 
 
 
 
 
 
 
 
 
 
Fee, net of TCCA fees (in basis points)(3)
48.0

 
 
47.2

 
 
48.3

 
 
48.1

 
Total fee (in basis points)
58.0

 
 
57.2

 
 
58.3

 
 
58.1

 
Single-family credit loss ratio (in basis points)(5)
8.6

 
 
11.5

 
 
12.8

 
 
16.9

 
Single-family serious delinquency rate, at end of period(6)
1.01

%
 
1.32

%
 
1.01

%
 
1.32

%
__________
(1) 
Our single-family guaranty book of business consists of (a) single-family mortgage loans of Fannie Mae, (b) single-family mortgage loans underlying Fannie Mae MBS, and (c) other credit enhancements that we provide on single-family mortgage assets, such as long-term standby commitments. It excludes non-Fannie Mae single-family mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(2) 
Calculated based on the average guaranty fee rate for our single-family guaranty arrangements outstanding during the period plus the recognition of any upfront cash payments over an estimated average life.
(3) 
Excludes the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury and not retained by us.
(4) 
Calculated based on the average guaranty fee rate for our single-family guaranty arrangements entered into during the period plus the recognition of any upfront cash payments over an estimated average life.
(5) 
Calculated based on single-family segment credit losses divided by the average single-family guaranty book of business.
(6) 
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.
Our single-family Fannie Mae MBS issuances decreased in the second quarter of 2017 compared with the second quarter of 2016, driven primarily by a decrease in refinance activity partially offset by an increase in our acquisition of home purchase mortgage loans in the second quarter of 2017.
Our single-family Fannie Mae MBS issuances increased in the first half of 2017 compared with the first half of 2016, driven primarily by an increase in our acquisition of home purchase mortgage loans partially offset by a decrease in refinance activity in the first half of 2017.

Fannie Mae Second Quarter 2017 Form 10-Q
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MD&A | Business Segments


Single-Family Business Financial Results
Table 15: Single-Family Business Financial Results
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
 
(Dollars in millions)
Net interest income(1)
$
4,366

 
$
4,730

 
$
(364
)
 
$
9,122

 
$
8,975

 
$
147

Fee and other income
111

 
78

 
33

 
187

 
145

 
42

Net revenues
4,477

 
4,808

 
(331
)
 
9,309

 
9,120

 
189

Investment gains, net
321

 
280

 
41

 
271

 
336

 
(65
)
Fair value losses, net
(685
)
 
(1,679
)
 
994

 
(697
)
 
(4,529
)
 
3,832

Administrative expenses
(600
)
 
(597
)
 
(3
)
 
(1,201
)
 
(1,206
)
 
5

Credit-related income(2)
1,223

 
1,535

 
(312
)
 
1,407

 
2,363

 
(956
)
TCCA fees(1)
(518
)
 
(453
)
 
(65
)
 
(1,021
)
 
(893
)
 
(128
)
Other expenses, net
(155
)
 
(252
)
 
97

 
(411
)
 
(498
)
 
87

Income before federal income taxes
4,063

 
3,642

 
421

 
7,657

 
4,693

 
2,964

Provision for federal income taxes
(1,401
)
 
(1,254
)
 
(147
)
 
(2,653
)
 
(1,643
)
 
(1,010
)
Net income
$
2,662

 
$
2,388

 
$
274

 
$
5,004

 
$
3,050

 
$
1,954

__________
(1) 
Reflects the impact of a 10 basis point guaranty fee increase implemented in 2012 pursuant to the TCCA, the incremental revenue from which is remitted to Treasury. The resulting revenue is included in net interest income and the expense is recognized as “TCCA fees.”
(2) 
Consists of the benefit for credit losses and foreclosed property expense.
Single-family net income increased in the second quarter and first half of 2017 compared with the second quarter and first half of 2016. The increase in net income in the second quarter of 2017 compared with the second quarter of 2016 was primarily due to lower fair value losses, partially offset by lower net interest income and lower credit-related income. The increase in net income in the first half of 2017 compared with the first half of 2016 was primarily due to lower fair value losses, partially offset by lower credit-related income.
Single-family net interest income decreased in the second quarter of 2017 compared with the second quarter of 2016, primarily due to a decline in the average balance of our retained mortgage portfolio partially offset by a slight increase in single-family guaranty fee income. Single-family net interest income increased in the first half of 2017 compared with the first half of 2016 due to an increase in single-family guaranty fee income, which was partially offset by a decline in the average balance of our retained mortgage portfolio. The drivers of net interest income for the single-family segment are consistent with the drivers of net interest income reported in our condensed consolidated statements of operations and comprehensive income. See “Consolidated Results of OperationsNet Interest Income” for more information on the drivers of our net interest income.
Fair value losses decreased in the second quarter and first half of 2017 compared with the second quarter and first half of 2016. The fair value losses that are reported for the single-family segment are consistent with the fair value losses reported in our condensed consolidated statements of operations and comprehensive income. We discuss our fair value gains and losses in “Consolidated Results of OperationsFair Value Losses, Net.”
We recognized lower single-family credit-related income in the second quarter and first half of 2017 compared with the second quarter and first half of 2016. Credit-related income in the second quarter and first half of 2017 was driven by an increase in actual and forecasted home prices and the redesignation of loans from HFI to HFS. Credit-related income in the second quarter and first half of 2016 was primarily attributable to an increase in home prices and a decline in actual and projected mortgage interest rates. See “Consolidated Results of OperationsCredit-Related Income (Expense)” for more information on the drivers of our credit-related income.
Single-Family Mortgage Credit Risk Management
Our strategy in managing single-family mortgage credit risk consists of five primary components:
our acquisition and servicing policies along with our underwriting and servicing standards;

Fannie Mae Second Quarter 2017 Form 10-Q
29


 
MD&A | Business Segments


the transfer of credit risk through credit risk transfer transactions and the use of credit enhancements; 
portfolio diversification and monitoring;
management of problem loans; and
real estate owned (“REO”) management.
This section updates our discussion of single-family mortgage credit risk management in our 2016 Form 10-K in “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk Management.” For additional information on how we manage risk, see “MD&A—Risk Management” and “Risk Factors” in our 2016 Form 10-K.
The single-family credit statistics we focus on and report 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. We exclude from these credit statistics approximately 1% of our single-family conventional guaranty book of business for which our loan level information is incomplete as of June 30, 2017 and December 31, 2016. 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. We rely on a combination of data verification tools we make available to lenders and lender representations regarding the accuracy of the characteristics of loans in our guaranty book of business. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risk that we could experience mortgage fraud as a result of this reliance on lender representations. We provide information on non-Fannie Mae mortgage-related securities held in our portfolio in “Note 5, Investments in Securities.”
Single-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards
For an overview and additional information on our quality control process, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Acquisition and Servicing Policies and Underwriting and Servicing Standards” in our 2016 Form 10-K.
Recent Changes
Desktop Underwriter® (DU®), our proprietary automated underwriting system, is used by mortgage lenders for a comprehensive assessment of a borrower’s loan application. In July 2017, we implemented a number of changes to DU, including the following.
Debt-to-income ratio assessment update. DU’s risk assessment is a model-based assessment of a borrower’s willingness and ability to repay the loan. DU also includes eligibility overlays that can deem the loan ineligible for delivery to us, regardless of the result from the model-based assessment. Under the prior version of DU, loans with a debt-to-income ratio between 45% and 50% that received an “Approve” recommendation from DU’s risk assessment were ineligible for delivery to us unless the loan also had certain compensating factors. Under the current version of DU, this eligibility overlay has been removed; loans with a debt-to-income ratio between 45% and 50% that receive an “Approve” recommendation in DU are now eligible for delivery to us without the additional compensating factors noted above. This change was made possible by a re-estimation of the DU risk assessment that delivers a more accurate evaluation of loans in this debt-to-income ratio range.
We expect a small increase in the average risk of our monthly loan acquisitions as a result of this change. However, the risk associated with these acquisitions is still within the same risk tolerance threshold used in the prior version of DU that determined whether a loan received an “Approve” recommendation. Also, loans with debt-to-income ratios above 50% remain ineligible for delivery to us under the current version of DU.
Adjustable-rate mortgage LTV ratios. The maximum allowable LTV ratios for adjustable-rate mortgages were increased to align with fixed-rate mortgage maximum LTV ratios for all transaction, occupancy and property types, up to a maximum of 95%.
Self-employment income documentation. The criteria used by DU to determine the level of documentation required to verify a self-employed borrower’s income has been updated. This will increase the number of self-employed borrowers eligible to provide one year (instead of two years) of personal and business tax return documentation.

Fannie Mae Second Quarter 2017 Form 10-Q
30


 
MD&A | Business Segments


Repurchase Requests
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 as described below. We collectively refer to our demands that mortgage sellers and servicers meet these obligations as repurchase requests. The unpaid principal balance of single-family loans that are subject to a repurchase request has declined significantly since we strengthened our underwriting standards in late 2008 and 2009, implemented changes to our quality control process in 2013 and implemented our revised representation and warranty framework described below. As of June 30, 2017, we had issued repurchase requests on approximately 0.10% of the $532.9 billion of unpaid principal balance of single-family loans delivered to us during the twelve months ended October 2016. Our total outstanding repurchase requests were $246 million as of June 30, 2017, compared with $303 million as of December 31, 2016.
Representation and Warranty Relief
We implemented a revised representation and warranty framework in 2013 to provide lenders with a higher degree of certainty and clarity regarding their exposure to repurchase requests on future deliveries, as well as greater consistency around repurchase timelines and remedies. This framework was further revised in 2014. Under the framework, lenders are relieved of certain repurchase liabilities for loans that meet specific requirements. In addition, through our Day 1 CertaintyTM initiative we have developed new tools that enable lenders to obtain relief from certain representations and warranties at an earlier date than provided for under the framework. For information on our representation and warranty framework and our Day 1 Certainty initiative, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Acquisition and Servicing Policies and Underwriting and Servicing StandardsRepresentation and Warranty Relief” in our 2016 Form 10-K.
As of June 30, 2017, approximately 52% of the outstanding loans in our single-family conventional guaranty book of business were acquired after January 1, 2013 and are subject to the revised representation and warranty framework, compared with 48% as of December 31, 2016. Table 16 below displays information regarding the relief status of single-family conventional loans, based only on payment history or the satisfactory conclusion of a full-file quality control review, delivered to us beginning in 2013 under the revised representation and warranty framework.
Table 16: Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2017
 
As of June 30, 2017
 
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
$
167,505

 
1,218,471

 
$
395,852

 
2,146,402

 
$
563,357

 
3,364,873

Remain eligible for relief
22,349

 
147,011

 
1,129,173

 
5,246,803

 
1,151,522

 
5,393,814

Are not eligible for relief
4,446

 
29,764

 
15,841

 
85,246

 
20,287

 
115,010

Total outstanding loans acquired since January 1, 2013
$
194,300

 
1,395,246

 
$
1,540,866

 
7,478,451

 
$
1,735,166

 
8,873,697

As of June 30, 2017, approximately 38% of loans acquired under the revised representation and warranty framework had obtained relief, compared with 37% as of December 31, 2016. Providing lenders with relief from repurchasing loans for breaches of certain representations and warranties on loans 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 and timing of our quality control reviews to shortly after loan delivery. We also retain the right to review all loans, including reviews for any violations of “life of loan” representations and warranties.

Fannie Mae Second Quarter 2017 Form 10-Q
31


 
MD&A | Business Segments


Transfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions
Our Single-Family business has developed risk-sharing capabilities to transfer portions of our single-family mortgage credit risk to the private market. The goal of these transactions is, to the extent economically sensible, to transfer a portion of the existing mortgage credit risk on a portion of recently acquired loans in our single-family guaranty book of business in order to reduce the economic risk to us and to taxpayers of future borrower defaults. Our primary method of achieving this objective has been through our CAS and CIRT transactions. In these transactions, we transfer to investors a portion of the mortgage credit risk associated with losses on a reference pool of mortgage loans and in exchange we pay investors a premium that effectively reduces the guaranty fee income we retain on the loans. We enter into other types of credit risk transfer transactions in addition to our CAS and CIRT transactions, including lender risk-sharing transactions. For information on our credit risk transfer transactions, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementTransfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2016 Form 10-K.
As of June 30, 2017, $798 billion in outstanding unpaid principal balance of our single-family loans, or 28% of the loans in our single-family conventional guaranty book of business measured by unpaid principal balance, were included in a reference pool for a credit risk transfer transaction. During the first half of 2017, pursuant to our credit risk transfer transactions, we transferred a portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of $180 billion at the time of the transactions. Our CAS and CIRT transactions are our primary credit risk transfer transactions. In the first half of 2017, we paid $364 million on our outstanding CAS debt for the spread over LIBOR at the time of issuance of the debt and $84 million in CIRT premiums, compared with $231 million on CAS debt and $46 million in CIRT premiums in the first half of 2016. These amounts increased from the first half of 2016 to the first half of 2017 as we continue to transfer credit risk on a larger portion of our single-family book of business.
We generally include approximately half of our recent single-family acquisitions in credit risk transfer transactions, as we target only certain types of loan categories for these transactions. Loan categories we have targeted for credit risk transfer transactions generally consist of fixed-rate 30-year single-family conventional loans that meet certain credit performance characteristics, are non-Refi Plus and have LTV ratios between 60% and 97%. The portion of our single-family loan acquisitions we include in credit risk transfer transactions can vary from period to period based on market conditions and other factors.
Table 17 displays the mortgage credit risk transferred to third parties and retained by Fannie Mae at the time of issuance and the outstanding reference pool balances as of June 30, 2017 pursuant to our single-family credit risk transfer transactions.
Table 17: Single-Family Credit Risk Transfer Transactions
Issuances from Inception to June 30, 2017
(Dollars in billions)

crtgraphica02.jpg
Senior
 
Fannie Mae(1)
 
 
$1,000
 
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Fannie Mae(1)
 
CIRT(2)(3)
 
CAS(2)
 
Lender Risk-Sharing(2)
 
Initial Reference Pool(4)
$1
 
$4
 
$24
 
*
 
$1,036
 
 
 
 
 
 
 
 
 
 
 
First Loss
 
Fannie Mae(1)
 
CAS(2)(5)
 
Lender Risk-Sharing(2)
 
 
$5
 
$1
 
$1
 
 

Fannie Mae Second Quarter 2017 Form 10-Q
32


 
MD&A | Business Segments


Outstanding as of June 30, 2017
(Dollars in billions)

crtgraphica03.jpg
Senior
 
Fannie Mae(1)
 
 
$767
 
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Fannie Mae(1)
 
CIRT(2)(3)
 
CAS(2)
 
Lender Risk-Sharing(2)
 
Outstanding Reference Pool(4)(6)
$1
 
$4
 
$19
 
*
 
$798
 
 
 
 
 
 
 
 
 
 
 
First Loss
 
Fannie Mae(1)
 
CAS(2)(5)
 
Lender Risk-Sharing(2)
 
 
$5
 
$1
 
$1
 
 
__________
*
Represents less than $500 million.
(1) 
Credit risk retained by Fannie Mae in CAS, CIRT and lender risk-sharing transactions. Tranche sizes vary across programs.
(2) 
Credit risk transferred to third parties. Tranche sizes vary across programs.
(3) 
Includes mortgage pool insurance transactions covering loans with an unpaid principal balance of approximately $7 billion at issuance and approximately $4 billion outstanding as of June 30, 2017.
(4) 
For CIRT and some lender risk-sharing transactions, “reference pool” reflects a pool of covered loans.
(5) 
For CAS transactions, “First Loss” represents all B tranche balances.
(6) 
For CAS and some lender risk-sharing transactions, represents outstanding reference pools, not the outstanding unpaid principal balance of the underlying loans, as of June 30, 2017.
As shown in the outstanding balances in Table 17 above, we have designed our credit risk transfer transactions so that prepayment activity typically has a more substantial impact on the senior tranches retained by Fannie Mae than on the risk transferred to third parties. Principal payments on the underlying reference pool are first allocated between the senior tranches and then applied sequentially to the subordinate tranches. Losses are applied in reverse sequential order starting with the first loss tranche. For CAS transactions, all principal payments and losses are allocated pro rata between the sold notes and the portion we retain. The decreases in outstanding balances from issuance to June 30, 2017 in the senior and mezzanine tranches are the result of paydowns. Outstanding balances from issuance to June 30, 2017 in the first loss tranches decreased only slightly as the losses allocated to those tranches were insignificant.
While these deals are expected to mitigate some of our potential future credit losses, they are not designed to shield us from all losses. We retain a portion of the risk of future credit losses on loans covered by CAS and CIRT transactions, including all or at least half of the first loss positions and all of the senior loss positions. In addition, on our CAS transactions, we retain a pro rata share of risk equal to approximately 5% of all notes sold. When structuring these transactions, we seek to optimize benefit to cost considerations by taking into account a number of factors, including the level of investor demand, liquidity and pricing levels, and the amount of risk reduction provided assuming various economic scenarios. Due to differences in accounting, there also could be a significant lag between the time when we recognize a provision for credit losses and when we recognize the related recovery from our CAS transactions. See “Risk Factors” in our 2016 Form 10-K for a discussion of factors that may limit our ability to use credit risk transfer transactions to mitigate some of our potential future credit losses, including factors that may result in these transactions providing less protection than we expect.
We continue to explore ways to innovate and improve our credit risk transfer programs. As part of this continued innovation, we announced a proposed new structure that would enhance our CAS program by structuring our CAS offerings as notes issued by trusts that qualify as real estate mortgage investment conduits. This proposed enhancement to our CAS program is designed to promote the continued growth of the market by expanding the potential investor base for these securities, making the program more attractive to real estate investment trust investors, as well as certain other investors, and limiting investor exposure to Fannie Mae counterparty risk.

Fannie Mae Second Quarter 2017 Form 10-Q
33


 
MD&A | Business Segments


Single-Family Portfolio Diversification and Monitoring
Overview
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. In some cases, we may decide to significantly reduce our participation in riskier loan product categories. We also review the payment performance of loans in order to help identify potential problem loans early in the delinquency cycle and to guide the development of our loss mitigation strategies. For information on key loan attributes, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and Monitoring” in our 2016 Form 10-K.
Credit Risk Profile of Our Single-Family Acquisitions and Book of Business
We initiated underwriting and eligibility changes that became effective for deliveries in late 2008 and 2009 and that focused on strengthening our underwriting and eligibility standards to promote sustainable homeownership. The result of many of these changes is reflected in the substantially improved credit risk profile of our single-family loan acquisitions since 2009.
Table 18 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business by acquisition period.
Table 18: Selected Credit Characteristics of Single-Family Conventional Guaranty Book of Business, by Acquisition Period
 
As of June 30, 2017
 
% 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
2009-2017 acquisitions, excluding HARP and other Refi Plus loans
75
%
 
57
%
 
*
%
 
0.22
%
HARP loans(4)
8
 
 
72
 
 
7
 
 
1.06
 
Other Refi Plus loans(5)
6
 
 
43
 
 
*
 
 
0.41
 
2005-2008 acquisitions
7
 
 
69
 
 
10
 
 
5.57
 
2004 and prior acquisitions
4
 
 
41
 
 
1
 
 
2.65
 
Total single-family conventional guaranty book of business
100
%
 
58
%
 
1
%
 
1.01
%
__________
*
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 June 30, 2017.
(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 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 period divided by the aggregate unpaid principal balance of loans for each category in our single-family conventional guaranty book of business as of June 30, 2017.
(4) 
HARP loans, which we began to acquire in 2009, have LTV ratios at origination in excess of 80%. Some borrowers for HARP loans may have lower FICO credit scores and may provide less documentation than we would otherwise require. As of June 30, 2017, HARP loans had a weighted average FICO credit score at origination of 726 compared with 745 for loans in our single-family book of business overall.
(5) 
Other Refi Plus loans, which we began to acquire in 2009, includes all other Refi Plus loans that are not HARP loans.

Fannie Mae Second Quarter 2017 Form 10-Q
34


 
MD&A | Business Segments


Table 19 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.
Table 19: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business(1)
 
Percent of Single-Family Conventional Business
Volume at Acquisition(2)
Percent of Single-Family Conventional Guaranty Book of
Business(3)(4)
As of
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
June 30, 2017
 
December 31, 2016
Original LTV ratio:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
17

%
19

%
19

%
19

%
 
21

%
 
 
21

%
60.01% to 70%
12

 
14

 
13

 
14

 
 
14

 
 
 
14

 
70.01% to 80%
39

 
39

 
39

 
39

 
 
38

 
 
 
38

 
80.01% to 90%
13

 
12

 
12

 
12

 
 
11

 
 
 
11

 
90.01% to 100%
19

 
16

 
17

 
16

 
 
13

 
 
 
12

 
Greater than 100%
*

 
*

 
*

 
*

 
 
3

 
 
 
4

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Weighted average
76

%
75

%
75

%
75

%
 
75

%
 
 
75

%
Average loan amount
$
225,194

 
$
230,416

 
$
223,305

 
$
225,443

 
 
$
164,659

 
 
 
$
163,200

 
Estimated mark-to-market LTV ratio:(6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
 
 
 
 
 
 
 
 
 
53

%
 
 
49

%
60.01% to 70%
 
 
 
 
 
 
 
 
 
19

 
 
 
19

 
70.01% to 80%
 
 
 
 
 
 
 
 
 
16

 
 
 
17

 
80.01% to 90%
 
 
 
 
 
 
 
 
 
8

 
 
 
9

 
90.01% to 100%
 
 
 
 
 
 
 
 
 
3

 
 
 
4

 
Greater than 100%
 
 
 
 
 
 
 
 
 
1

 
 
 
2

 
Total
 
 
 
 
 
 
 
 
 
100

%
 
 
100

%
Weighted-average
 
 
 
 
 
 
 
 
 
58

%
 
 
60

%
Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate:(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term
84

%
82

%
82

%
81

%
 
79

%
 
 
77

%
Intermediate-term
13

 
17

 
15

 
17

 
 
16

 
 
 
17

 
Interest-only

 
 

 

 
 
*

 
 
 
*

 
Total fixed-rate
97

 
99

 
97

 
98

 
 
95

 
 
 
94

 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-only
 

 

 

 
 
1

 
 
 
1

 
Other ARMs
3

 
1

 
3

 
2

 
 
4

 
 
 
5

 
Total adjustable-rate
3

 
1

 
3

 
2

 
 
5

 
 
 
6

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Number of property units:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 unit
97

%
98

%
97

%
98

%
 
97

%
 
 
97

%
2-4 units
3

 
2

 
3

 
2

 
 
3

 
 
 
3

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%

Fannie Mae Second Quarter 2017 Form 10-Q
35


 
MD&A | Business Segments


 
Percent of Single-Family Conventional Business
Volume at Acquisition(2)
Percent of Single-Family Conventional Guaranty Book of
Business(3)(4)
As of
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
June 30, 2017
 
December 31, 2016
Property type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family homes
90

%
90

%
90

%
90

%
 
91

%
 
 
91

%
Condo/Co-op
10

 
10

 
10

 
10

 
 
9

 
 
 
9

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Occupancy type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary residence
88

%
90

%
89

%
90

%
 
88

%
 
 
88

%
Second/vacation home
5

 
4

 
4

 
4

 
 
4

 
 
 
4

 
Investor
7

 
6

 
7

 
6

 
 
8

 
 
 
8

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
FICO credit score at origination:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620(8)
*

%
*

%
*

%
*

%
 
2

%
 
 
2

%
620 to < 660
5

 
4

 
5

 
5

 
 
5

 
 
 
5

 
660 to < 700
13

 
12

 
13

 
13

 
 
12

 
 
 
12

 
700 to < 740
23

 
21

 
23

 
21

 
 
20

 
 
 
20

 
>= 740
59

 
63

 
59

 
61

 
 
61

 
 
 
61

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Weighted average
745

 
749

 
745

 
747

 
 
745

 
 
 
745

 
Loan purpose: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
61

%
47

%
53

%
47

%
 
37

%
 
 
35

%
Cash-out refinance
20

 
18

 
22

 
19

 
 
20

 
 
 
20

 
Other refinance
19

 
35

 
25

 
34

 
 
43

 
 
 
45

 
Total
100

%
100

%
100

%
100

%
 
100

%
 
 
100

%
Geographic concentration:(9)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Midwest
14

%
14

%
14

%
14

%
 
15

%
 
 
15

%
Northeast
13

 
13

 
14

 
13

 
 
18

 
 
 
18

 
Southeast
24

 
21

 
23

 
21

 
 
22

 
 
 
22

 
Southwest
21

 
20

 
20

 
20

 
 
17

 
 
 
17

 
West
28

 
32

 
29

 
32

 
 
28

 
 
 
28

 
Total
100

%
100

%
100

%
100

%
 
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 6% of our single-family conventional guaranty book of business as of June 30, 2017 and December 31, 2016. See “Business—Legislation and Regulation—Charter Act” and “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and MonitoringJumbo-Conforming and High-Balance Loans” in our 2016 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.

Fannie Mae Second Quarter 2017 Form 10-Q
36


 
MD&A | Business Segments


(6) 
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.
(7) 
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.
(8) 
Loans acquired after 2009 with FICO credit scores at origination below 620 consist primarily of the refinance of existing loans under our Refi Plus initiative.
(9) 
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.
Our acquisitions in the first half of 2017 continued to have a strong credit profile with a weighted average original LTV ratio of 75% and a weighted average FICO credit score at origination of 745. As shown in the table above, the first half of 2017 had a higher proportion of acquisitions consisting of home purchase loans than refinance loans compared with the first half of 2016. The shift toward home purchase loans drove up the proportion of our acquisitions consisting of loans with a weighted average original LTV ratio over 90%, as home purchase loans tend to have less equity than refinance loans. Additionally, lower refinancing activity led to a lower weighted average FICO credit score at origination during the first half of 2017.
The credit profile of our future acquisitions will depend on many factors. For example, if a higher proportion of our future acquisitions consists of home purchase loans and we acquire lower volumes of refinance loans in future periods, the loans we acquire in those periods may have a higher weighted average original LTV ratio and a lower weighted average FICO credit score at origination than our acquisitions in recent periods. Other factors that may affect the credit profile of our future acquisitions include: our future guaranty fee pricing and our competitors’ 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 and the U.S. Department of Veteran Affairs; changes in interest rates; our future objectives and activities in support of those objectives, including actions we may take to reach additional underserved creditworthy borrowers; government policy; market and competitive conditions; and the volume and characteristics of HARP and high LTV refinance loans we acquire in the future. 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.
In August 2016, FHFA directed us and Freddie Mac to implement a new high LTV refinance offering aimed at borrowers who are making their mortgage payments on time and whose current LTV ratio exceeds a specified amount. FHFA has informed us that they currently expect the new high LTV refinance offering will be available for borrowers whose loans were originated on or after a future date to be determined by FHFA and who meet other eligibility requirements. We continue to work with FHFA and Freddie Mac on the details regarding this offering and the timing of implementation.
See “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and Monitoring” in our 2016 Form 10-K for more information on the credit characteristics of loans in our guaranty book of business, including HARP and Refi Plus loans, Alt-A loans, jumbo-conforming and high-balance loans, reverse mortgages and mortgage products with rate resets.
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 loan servicer 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. See “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementProblem Loan Management” in our 2016 Form 10-K for a discussion of our work with mortgage servicers to implement our foreclosure prevention initiatives.

Fannie Mae Second Quarter 2017 Form 10-Q
37


 
MD&A | Business Segments


In the following section, we present statistics on our problem loans, describe 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.
Problem Loan Statistics
Table 20 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 20: Delinquency Status and Activity of Single-Family Conventional Loans
 
As of
 
June 30,
2017
 
December 31, 2016
 
June 30,
2016
Delinquency status:
 
 
 
 
 
30 to 59 days delinquent
1.32
%
 
1.51
%
 
1.42
%
60 to 89 days delinquent
0.34

 
0.41

 
0.36

Seriously delinquent (“SDQ”)
1.01

 
1.20

 
1.32

Percentage of SDQ loans that have been delinquent for more than 180 days
61
%
 
59
%
 
68
%
Percentage of SDQ loans that have been delinquent for more than two years
20

 
21

 
27

 
For the Six Months Ended June 30,
 
2017
 
2016
Single-family SDQ loans (number of loans):
 
 
 
Beginning balance
206,549

 
267,174

Additions
116,271

 
119,519

Removals:
 
 
 
Modifications and other loan workouts
(38,515
)
 
(40,645
)
Liquidations and sales
(45,295
)
 
(58,889
)
Cured or less than 90 days delinquent
(64,860
)
 
(61,569
)
Total removals
(148,670
)
 
(161,103
)
Ending balance
174,150

 
225,590

Our single-family serious delinquency rate was 1.01% as of June 30, 2017, compared with 1.20% as of December 31, 2016. The decrease in our serious delinquency rate in the first half of 2017 was primarily the result of home retention solutions, foreclosure alternatives and completed foreclosures, improved loan payment performance and nonperforming loan sales.
We expect our single-family serious delinquency rate to continue to decline; however, as our single-family serious delinquency rate has already declined significantly over the past several years, we expect more modest declines in this rate in the future. Our single-family serious delinquency rate and the period of time that loans remain seriously delinquent continue to be negatively affected by the length of time required to complete a foreclosure in some states. Other factors that affect our single-family serious delinquency rate include the pace of loan modifications, the timing and volume of nonperforming loan sales we make, servicer performance, and changes in home prices, unemployment levels and other macroeconomic conditions.
Certain higher-risk loan categories, such as Alt-A loans, 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

Fannie Mae Second Quarter 2017 Form 10-Q
38


 
MD&A | Business Segments


higher share of our credit losses. Single-family loans originated in 2005 through 2008 constituted 7% of our single-family book of business as of June 30, 2017, but constituted 50% of our seriously delinquent single-family loans as of June 30, 2017 and drove 67% of our single-family credit losses in the first half of 2017. In addition, loans in certain states such as Florida, New Jersey and New York have exhibited higher than average delinquency rates and/or account for a higher share of our credit losses.
Table 21 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 21: Single-Family Conventional Seriously Delinquent Loan Concentration Analysis
 
As of
 
June 30, 2017
December 31, 2016
June 30, 2016
 
 
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
 
19
%
 
6
%
 
0.43
%
 
19
%
 
6
%
 
0.50
%
 
20
%
 
5
%
 
0.52
%
Florida
 
6

 
10

 
1.51

 
6

 
10

 
1.89

 
6

 
11

 
2.27

New Jersey
 
4

 
8

 
2.49

 
4

 
8

 
3.07

 
4

 
9

 
3.88

New York
 
5

 
10

 
2.21

 
5

 
10

 
2.65

 
5

 
11

 
3.03

All other states
 
66

 
66

 
0.94

 
66

 
66

 
1.11

 
65

 
64

 
1.16

Product type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alt-A(2)
 
3

 
14

 
4.52

 
3

 
15

 
5.00

 
3

 
16

 
5.68

Vintages:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004 and prior
 
4

 
25

 
2.62

 
5

 
26

 
2.82

 
5

 
26

 
2.82

2005-2008
 
7

 
50

 
5.73

 
8

 
51

 
6.39

 
9

 
54

 
6.73

2009-2017
 
89

 
25

 
0.32

 
87

 
23

 
0.36

 
86

 
20

 
0.34

Estimated mark-to-market LTV ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
<= 60%
 
53

 
39

 
0.64

 
49

 
33

 
0.70

 
49

 
31

 
0.71

60.01% to 70%
 
19

 
16

 
1.02

 
19

 
15

 
1.13

 
19

 
15

 
1.16

70.01% to 80%
 
16

 
15

 
1.16

 
17

 
16

 
1.31

 
16

 
15

 
1.45

80.01% to 90%
 
8

 
12

 
1.79

 
9

 
13

 
2.11

 
9

 
13

 
2.35

90.01% to 100%
 
3

 
7

 
2.98

 
4

 
9

 
2.99

 
4

 
9

 
3.92

Greater than 100%
 
1

 
11

 
10.05

 
2

 
14

 
10.44

 
3

 
17

 
10.54

Credit enhanced:(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary MI & other(4)
 
19

 
27

 
1.68

 
18

 
28

 
2.18

 
19

 
27

 
2.17

Credit risk transfer(5)
 
28

 
3

 
0.15

 
22

 
2

 
0.17

 
22

 
1

 
0.10

Non-credit enhanced
 
63

 
72

 
1.03

 
67

 
70

 
1.16

 
68

 
72

 
1.28

__________
(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) 
For a description of our Alt-A loan classification criteria, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementSingle-Family Portfolio Diversification and Monitoring” in our 2016 Form 10-K.
(3) 
The credit-enhanced categories are not mutually exclusive. A loan with primary mortgage insurance that is also covered by a credit risk transfer transaction will be included in both the “Primary MI & other” category and the “Credit risk transfer” category. As a result, the “Credit enhanced” and “Non-credit enhanced” categories do not sum to 100%. The total percentage of our single-family conventional guaranty book of business with some form of credit enhancement as of June 30, 2017 was 37%.
(4) 
Refers to loans included in an agreement used to reduce credit risk by requiring primary mortgage insurance, collateral,

Fannie Mae Second Quarter 2017 Form 10-Q
39


 
MD&A | Business Segments


letters of credit, 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. Excludes loans covered by credit risk transfer transactions unless such loans are also covered by primary mortgage insurance.
(5) 
Refers to loans included in reference pools for credit risk transfer transactions, including loans in these transactions that are also covered by primary mortgage insurance. For Connecticut Avenue Securities and some lender risk-sharing transactions, this represents outstanding unpaid principal balance of the underlying loans on the single-family mortgage credit book, not the outstanding reference pool, as of the specified date. Loans included in our credit risk transfer transactions have all been acquired since 2012 and newer vintages typically have significantly lower delinquency rates than more seasoned loans.
Loan Workout Metrics
Our loan workouts reflect our home retention solutions, including loan modifications, repayment plans and forbearances, and foreclosure alternatives, including short sales and deeds-in-lieu of foreclosure.
Our primary loan modification initiatives have included the Home Affordable Modification Program (“HAMP”), which had a December 31, 2016 application deadline, and our proprietary Standard and Streamlined Modification initiatives. In December 2016, we announced a new modification program, the Fannie Mae Flex Modification, which replaces both HAMP and our Standard and Streamlined Modification programs with a single modification program that leverages the lessons learned from the housing crisis. The Flex Modification program became available for our servicers to implement on March 1, 2017 and must be implemented by October 1, 2017. The program offers additional payment relief allowing forbearance of principal to an 80% mark-to-market LTV ratio for eligible borrowers and targeting a 20% payment reduction.
Table 22 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 June 30, 2017, there were approximately 28,200 loans in a trial modification period. For a description of our loan workout types, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementProblem Loan ManagementLoan Workout Metrics” in our 2016 Form 10-K.
Table 22: Statistics on Single-Family Loan Workouts
 
For the Six Months Ended June 30,
 
2017
 
2016
 
Unpaid Principal Balance
 
 
Number of Loans
 
 
Unpaid Principal Balance
 
 
Number of Loans
 
 
(Dollars in millions)
 
Home retention solutions:
 
 
 
 
 
 
 
 
 
 
 
Modifications
$
6,878

 
 
41,467

 
 
$
7,003

 
 
42,177

 
Repayment plans and forbearances completed(1)
524

 
 
3,703

 
 
395

 
 
2,825

 
Total home retention solutions
7,402

 
 
45,170

 
 
7,398

 
 
45,002

 
Foreclosure alternatives:
 
 
 
 
 
 
 
 
 
 
 
Short sales
881

 
 
4,280

 
 
1,214

 
 
5,887

 
Deeds-in-lieu of foreclosure
346

 
 
2,285

 
 
502

 
 
3,317

 
Total foreclosure alternatives
1,227

 
 
6,565

 
 
1,716

 
 
9,204

 
Total loan workouts
$
8,629

 
 
51,735

 
 
$
9,114

 
 
54,206

 
Loan workouts as a percentage of single-family guaranty book of business
0.60

%
 
0.60

%
 
0.65

%
 
0.63

%
__________
(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 modifications completed in the first half of 2017 decreased compared with the first half of 2016, primarily due to a decline in the number of delinquent loans in the first half of 2017 compared with the first half of 2016.

Fannie Mae Second Quarter 2017 Form 10-Q
40


 
MD&A | Business Segments


Nonperforming Loan Sales
FHFA’s 2017 conservatorship scorecard includes an objective relating to reducing the number of our severely-aged delinquent loans, including through nonperforming loan sales. During the first half of 2017, we sold approximately 7,300 nonperforming loans with an aggregate unpaid principal balance of $1.3 billion. As of June 30, 2017, we had sold a total of approximately 47,300 nonperforming loans with an aggregate unpaid principal balance of $8.9 billion. We plan to complete additional nonperforming loan sales in the future.
REO Management
Foreclosure and REO activity affect the amount of credit losses we realize in a given period. Table 23 displays our foreclosure activity by region. Regional REO acquisition and charge-off trends generally follow a pattern that is similar to, but lags, that of regional delinquency trends.
Table 23: Single-Family Foreclosed Properties
  
For the Six Months
  
Ended June 30,
 
2017
 
2016
Single-family foreclosed properties (number of properties):
 
 
 
 
 
Beginning of period inventory of single-family foreclosed properties (REO)(1)
38,093

 
 
57,253

 
Acquisitions by geographic area:(2)
 
 
 
 
 
Midwest
4,712

 
 
6,978

 
Northeast
5,269

 
 
7,056

 
Southeast
6,530

 
 
9,907

 
Southwest
2,976

 
 
3,796

 
West
1,587

 
 
2,634

 
Total properties acquired through foreclosure(1)
21,074

 
 
30,371

 
Dispositions of REO
(27,796
)
 
 
(41,643
)
 
End of period inventory of single-family foreclosed properties (REO)(1)
31,371

 
 
45,981

 
Carrying value of single-family foreclosed properties (dollars in millions)
$
3,545

 
 
$
5,301

 
Single-family foreclosure rate(3)
0.25

%
 
0.35

%
REO net sales prices to unpaid principal balance(4)
75

%
 
74

%
Short sales net sales prices to unpaid principal balance(5)
75

%
 
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 9 to “Table 19: 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.
(4) 
Calculated as the amount of sale proceeds received on disposition of REO properties during the respective periods, 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.
(5) 
Calculated as the amount of sale proceeds received on properties sold in short sale transactions during the respective periods divided by the aggregate unpaid principal balance of the related loans. Net sales price represents the contract sales price less the selling costs for the property and other charges paid by the seller at the closing, including borrower relocation incentive payments and subordinate lien(s) negotiated payoffs.
The continued decrease in the number of our seriously delinquent single-family loans resulted in a reduction in the number of REO acquisitions in the first half of 2017 compared with the first half of 2016.
We continue to manage our REO inventory to appropriately control 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

Fannie Mae Second Quarter 2017 Form 10-Q
41


 
MD&A | Business Segments


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. As of June 30, 2017, approximately 39% of our REO properties were unable to be marketed, 23% of our REO properties were available for sale, 18% of our REO properties were pending sale settlement and 20% of our REO properties were pending appraisals and being prepared to be listed for sale.
Multifamily Business
Our Multifamily business provides mortgage market liquidity primarily for properties with five or more residential units, which may be communities, cooperative properties, seniors housing, dedicated student housing or manufactured housing communities.
Multifamily Mortgage Market Conditions and Outlook
National multifamily market fundamentals, which include factors such as vacancy rates and rents, exhibited improved results during the second quarter of 2017.
Vacancy rates. According to preliminary third-party data, the national multifamily vacancy rate for institutional investment-type apartment properties was an estimated 5.3% as of June 30, 2017, down from 5.5% as of March 31, 2017. The national estimated multifamily vacancy rate remains below its average rate over the last 10 years.
Rents. Estimated multifamily rents increased during the second quarter of 2017 by an estimated 1.0%. Despite the recent moderating trend, because estimated multifamily rent growth has outpaced wage growth over the past few years, multifamily rental housing affordability has declined in recent years.
Despite the increase in new multifamily supply, estimated rent growth was positive during the second quarter of 2017, likely due to job growth and new household formations.
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 28,000 units during the second quarter of 2017, according to preliminary data from Reis, Inc., compared with approximately 24,000 units during the first quarter of 2017.
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. According to Dodge Data & Analytics, it is estimated that there will be approximately 422,000 new multifamily units completed in 2017. 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 slowdown in national net absorption rates, occupancy levels and effective rents in the second half of 2017.

Fannie Mae Second Quarter 2017 Form 10-Q
42


 
MD&A | Business Segments


Multifamily Business Metrics
Table 24: Multifamily Business Key Performance Data
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017

2016
 
2017
 
2016
 
(Dollars in millions)
Securitization Activity/New Business
 
 
 
 
 
 
 
 
 
 
 
Multifamily new business volume(1)
$
12,297

 
 
$
10,251

 
 
$
29,676

 
 
$
22,802

 
Multifamily units financed from new business volume
162,000

 
 
141,000

 
 
364,000

 
 
302,000

 
Other rental business volume(2)
$
945

 
 
$

 
 
$
945

 
 
$

 
Multifamily Fannie Mae MBS issuances(3)
$
12,297

 
 
$
10,183

 
 
$
29,543

 
 
$
22,734

 
Multifamily Fannie Mae structured securities issuances
$
2,605

 
 
$
2,851

 
 
$
5,680

 
 
$
5,584

 
Multifamily Fannie Mae MBS outstanding, at end of period(3)
$
241,357

 
 
$
201,680

 
 
$
241,357

 
 
$
201,680

 
Portfolio Data
 
 
 


 
 
 
 
 
 
 
Multifamily retained mortgage portfolio, at end of period
$
14,780

 
 
$
24,568

 
 
$
14,780

 
 
$
24,568

 
Credit Guaranty Activity
 
 
 


 
 
 
 
 
 
 
Average multifamily guaranty book of business(4)
$
256,575

 
 
$
222,969

 
 
$
252,449

 
 
$
219,786

 
Average charged guaranty fee rate on multifamily guaranty book of business (in basis points), at end of period
77.9

 
 
71.6

 
 
77.9

 
 
71.6

 
Multifamily credit loss ratio (in basis points)(5)
0.3

 
 
0.9

 
 
0.2

 
 
0.7

 
Multifamily serious delinquency rate, at end of period
0.04

%
 
0.07

%
 
0.04

%
 
0.07

%
Percentage of multifamily guaranty book of business with lender risk-sharing, at end of period
95

%
 
93

%
 
95

%
 
93

%
__________
(1) 
Reflects unpaid principal balance of multifamily Fannie Mae MBS issued (excluding portfolio securitizations), multifamily loans purchased, and credit enhancements provided during the period.
(2) 
Consists of a transaction backed by a pool of single-family rental properties.
(3) 
Excludes a transaction backed by a pool of single-family rental properties.
(4) 
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 and relating to a transaction backed by a pool of single-family rental properties. It excludes non-Fannie Mae multifamily mortgage-related securities held in our retained mortgage portfolio for which we do not provide a guaranty.
(5) 
Calculated based on Multifamily segment credit losses divided by the average multifamily guaranty book of business.
FHFA’s 2017 conservatorship scorecard includes an objective to maintain the dollar volume of new multifamily business at or below $36.5 billion excluding certain targeted affordable and underserved market business segments. Approximately 52% of Fannie Mae’s multifamily new business and other rental volume of $30.6 billion for the first half of 2017 counted towards FHFA’s 2017 multifamily volume cap.

Fannie Mae Second Quarter 2017 Form 10-Q
43


 
MD&A | Business Segments


Multifamily Business Financial Results
Table 25: Multifamily Business Financial Results
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
 
(Dollars in millions)
Net interest income
$
636

 
$
556

 
$
80

 
$
1,226

 
$
1,080

 
$
146

Fee and other income
242

 
96

 
146

 
415

 
232

 
183

Net revenues
878

 
652

 
226

 
1,641

 
1,312

 
329

Fair value gains (losses), net
(6
)
 
12

 
(18
)
 
(34
)
 
49

 
(83
)
Administrative expenses
(86
)
 
(81
)
 
(5
)
 
(169
)
 
(160
)
 
(9
)
Credit-related income(1)
10

 
3

 
7

 
5

 
25

 
(20
)
Other income (expenses), net(2)
(72
)
 
116

 
(188
)
 
(157
)
 
111

 
(268
)
Income before federal income taxes
724

 
702

 
22

 
1,286

 
1,337

 
(51
)
Provision for federal income taxes
(186
)
 
(144
)
 
(42
)
 
(317
)
 
(305
)
 
(12
)
Net income
$
538

 
$
558

 
$
(20
)
 
$
969

 
$
1,032

 
$
(63
)
__________
(1) 
Consists of the benefit for credit losses and foreclosed property expense.
(2) 
Consists of investment gains, gains on partnership investments and other income (expenses).
Multifamily net income remained relatively flat in the second quarter and first half of 2017 compared with the second quarter and first half of 2016, respectively. Multifamily net income in the second quarter and first half of 2017 and in the second quarter and first half of 2016 was primarily driven by net interest income, fee and other income, and other income (expenses).
Net interest income in all periods presented was primarily driven by guaranty fee income, which continued to increase as our multifamily guaranty book of business grew and loans with higher guaranty fees became a larger part of our book of business, while loans with lower guaranty fees continued to liquidate.
Fee and other income in all periods presented was primarily driven by yield maintenance fees resulting from prepayment activity.
Other income in the second quarter and first half of 2016 was driven by investment gains resulting from the sale of available-for-sale securities.
Multifamily Mortgage Credit Risk Management
This section updates our discussion of multifamily mortgage credit risk management in our 2016 Form 10-K in “MD&ABusiness SegmentsMultifamily BusinessMultifamily Mortgage Credit Risk Management.”
We exclude from the multifamily credit statistics reported below the approximately 1% of our multifamily guaranty book of business for which our loan level information is incomplete as of June 30, 2017 and December 31, 2016.
Multifamily Acquisition Policy and Underwriting Standards
Our multifamily business is responsible for pricing and managing the credit risk on multifamily mortgage loans we have purchased, on Fannie Mae MBS backed by multifamily loans (whether held in our retained mortgage portfolio or held by third parties), and on other credit enhancements provided on multifamily mortgage assets, 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 underwritten by Fannie Mae-approved lenders and may be subject to our underwriting review prior to closing, depending on the product type, loan size, market and other factors. Loans delivered to us by DUS lenders and their affiliates represented 98% of our multifamily guaranty book of business as of June 30, 2017, and 97% of our multifamily guaranty book of business as of December 31, 2016.
We use credit enhancement arrangements, primarily lender risk-sharing, for our multifamily loans. As of June 30, 2017, 95% of the unpaid principal balance of loans in our multifamily guaranty book of business had lender risk-

Fannie Mae Second Quarter 2017 Form 10-Q
44


 
MD&A | Business Segments


sharing, compared with 94% as of December 31, 2016. Our maximum potential loss recovery from lenders under current risk-sharing agreements represented over 20% of the unpaid principal balance of our multifamily guaranty book of business as of June 30, 2017 and December 31, 2016.
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. At underwriting, the DSCR is evaluated based on both actual and underwritten debt service payments. The original DSCR is calculated using the underwritten debt service payments for the loan, rather than the actual debt service payments which, depending on the interest rate of the loan and loan structure, may result in a more conservative estimate of the debt service payments.
Table 26 displays original LTV ratio and DSCR metrics for our multifamily guaranty book of business.
Table 26: Multifamily Guaranty Book of Business Key Risk Characteristics
 
As of
 
June 30,
2017
 
December 31, 2016
 
June 30,
2016
Weighted average original LTV ratio
 
67
%
 
 
 
67
%
 
 
 
66
%
 
Original LTV ratio greater than 80%
 
2

 
 
 
2

 
 
 
2

 
Original DSCR less than or equal to 1.10
 
13

 
 
 
14

 
 
 
13

 
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 and loan size, as well as 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 loan term at the asset and portfolio level. 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 1% as of June 30, 2017, compared with approximately 2% as of December 31, 2016.
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 was 0.04% as of June 30, 2017 and 0.05% as of December 31, 2016. We classify multifamily loans as seriously delinquent when payment is 60 days or more past due.
REO Management
The number of multifamily foreclosed properties held for sale remained low at 14 properties with a carrying value of $90 million as of June 30, 2017, compared with 13 properties with a carrying value of $85 million as of December 31, 2016.
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.

Fannie Mae Second Quarter 2017 Form 10-Q
45


 
MD&A | Liquidity and Capital Management


Our primary source of funds is proceeds from the issuance of short-term and long-term debt securities. Accordingly, our liquidity depends largely on our ability to issue unsecured debt in the capital markets. Our status as a GSE and federal government support of our business continue to be essential to maintaining our access to the unsecured debt markets. Our treasury group 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 and our status under conservatorship and Treasury arrangements, we believe that our liquidity contingency plans may be difficult or impossible to execute for a company of our size in our circumstances.
Our liquidity position could be adversely affected by many factors, both internal and external to our business, including: actions taken by FHFA, the Federal Reserve, 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 in our 2016 Form 10-K. See “MD&ALiquidity and Capital ManagementLiquidity Management” and “Risk Factors” in our 2016 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 a variety 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 payments to Treasury. See “Retained Mortgage Portfolio” for information about our retained mortgage portfolio and our requirement to reduce the size of our retained mortgage portfolio.

Fannie Mae Second Quarter 2017 Form 10-Q
46


 
MD&A | Liquidity and Capital Management


Fannie Mae Debt Funding Activity
Table 27 displays the activity in debt of Fannie Mae. This activity excludes the debt of consolidated trusts and intraday loans. 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. The reported amounts of debt issued and paid off during the period represent the face amount of the debt at issuance and redemption.
The increase in our issuances and payoffs of short-term debt during the first half of 2017 compared with the first half of 2016 was driven by increased utilization of notes with overnight maturities. The decrease in our issuances and payoffs of long-term debt during the second quarter and first half of 2017 compared with the second quarter and first half of 2016 was primarily due to decreased funding needs, as well as declines in call activity due to a higher interest rate environment.
Table 27: Activity in Debt of Fannie Mae
 
 
 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Issued during the period:
 
 
 
 
 
 
 
Short-term:
 
 
 
 
 
 
 
Amount
$
162,311

 
$
170,072

 
$
313,695

 
$
276,885

Weighted-average interest rate
0.78
%
 
0.26
%
 
0.65
%
 
0.27
%
Long-term:(1)
 
 
 
 
 
 
 
Amount
$
5,914

 
$
27,384

 
$
19,022

 
$
51,652

Weighted-average interest rate
2.81
%
 
1.61
%
 
2.44
%
 
1.74
%
Total issued:
 
 
 
 
 
 
 
Amount
$
168,225

 
$
197,456

 
$
332,717

 
$
328,537

Weighted-average interest rate
0.85
%
 
0.45
%
 
0.75
%
 
0.50
%
Paid off during the period:(2)
 
 
 
 
 
 
 
Short-term:
 
 
 
 
 
 
 
Amount
$
169,440

 
$
169,891

 
$
318,186

 
$
287,320

Weighted-average interest rate
0.68
%
 
0.28
%
 
0.58
%
 
0.26
%
Long-term:(1)
 
 
 
 
 
 
 
Amount
$
23,424

 
$
36,195

 
$
39,296

 
$
65,447

Weighted-average interest rate
4.52
%
 
1.98
%
 
3.59
%
 
2.09
%
Total paid off:
 
 
 
 
 
 
 
Amount
$
192,864

 
$
206,086

 
$
357,482

 
$
352,767

Weighted-average interest rate
1.14
%
 
0.58
%
 
0.91
%
 
0.60
%
__________
(1) 
Includes credit risk-sharing securities issued under our CAS series. For additional information on our credit risk transfer transactions, see “Business SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementTransfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer 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.
Intraday Line of Credit
We 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

Fannie Mae Second Quarter 2017 Form 10-Q
47


 
MD&A | Liquidity and Capital Management


this facility was $15.0 billion as of June 30, 2017 and 2016. We had no borrowings outstanding under this line of credit as of June 30, 2017.
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.
Our outstanding short-term debt, based on its original contractual maturity, as a percentage of our total outstanding debt, was 10% as of June 30, 2017 and 11% as of December 31, 2016. The weighted-average interest rate on our long-term debt, based on its original contractual maturity, decreased to 2.20% as of June 30, 2017 from 2.31% as of December 31, 2016.
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 31% as of June 30, 2017 and 32% as of December 31, 2016. The weighted-average maturity of our outstanding debt that is maturing within one year was 129 days as of June 30, 2017, compared with 146 days as of December 31, 2016. The weighted-average maturity of our outstanding debt maturing in more than one year was approximately 57 months as of June 30, 2017, compared with approximately 56 months as of December 31, 2016.
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.
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 $407.2 billion in 2017. As of June 30, 2017, our aggregate indebtedness totaled $304.1 billion, which was $103.1 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.

Fannie Mae Second Quarter 2017 Form 10-Q
48


 
MD&A | Liquidity and Capital Management


Table 28 displays information on our outstanding short-term and long-term debt based on its original contractual terms.
Table 28: Outstanding Short-Term Borrowings and Long-Term Debt(1)
 
As of
 
June 30, 2017
 
December 31, 2016
 
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)
 
$
7

 
0.25
%
 
 
$

 
%
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
Debt of Fannie Mae
 
$
30,501

 
0.84
%
 
 
$
34,995

 
0.49
%
Debt of consolidated trusts
 
511

 
0.91

 
 
584

 
0.48

Total short-term debt
 
 
$
31,012

 
0.84
%
 
 
 
$
35,579

 
0.49
%
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Senior fixed:
 
 
 
 
 
 
 
 
 
 
 
Benchmark notes and bonds
2017 - 2030
 
$
137,509

 
1.96
%
 
2017 - 2030
 
$
153,983

 
2.16
%
Medium-term notes(3)
2017 - 2026
 
82,215

 
1.42

 
2017 - 2026
 
82,230

 
1.40

Other(4)
2017 - 2038
 
7,926

 
4.82

 
2017 - 2038
 
12,800

 
6.74

Total senior fixed
 
 
227,650

 
1.87

 
 
 
249,013

 
2.14

Senior floating:
 
 
 
 
 
 
 
 
 
 
 
Medium-term notes(3)
2017 - 2020
 
19,051

 
1.11

 
2017 - 2019
 
21,476

 
0.71

Connecticut Avenue Securities(5)
2023 - 2029
 
20,589

 
5.03

 
2023 - 2029
 
16,511

 
4.77

Other(6)
2020 - 2037
 
365

 
7.20

 
2020 - 2037
 
346

 
6.75

Total senior floating
 
 
40,005

 
3.14

 
 
 
38,333

 
2.48

Subordinated debentures
2019
 
4,870

 
9.93

 
2019
 
4,645

 
9.93

Secured borrowings(7)
2021 - 2022
 
94

 
1.60

 
2021 - 2022
 
111

 
1.44

Total long-term debt of Fannie Mae
 
 
272,619

 
2.20

 
 
 
292,102

 
2.31

Debt of consolidated trusts
2017 - 2056
 
2,984,036

 
2.78

 
2017 - 2056
 
2,934,635

 
2.57

Total long-term debt
 
 
$
3,256,655

 
2.73
%
 
 
 
$
3,226,737

 
2.54
%
Outstanding callable debt of Fannie Mae(8)
 
 
$
79,044

 
2.08
%
 
 
 
$
77,257

 
1.89
%
__________
(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 $1.0 billion and $1.8 billion as of June 30, 2017 and December 31, 2016, 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) 
Includes other long-term debt with an original contractual maturity of greater than 10 years and foreign exchange bonds.
(5) 
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, a portion of which is reported at fair value. For additional information on our credit risk transfer transactions, see “Business SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementTransfer of Mortgage Credit Risk: Single-Family Credit Risk Transfer Transactions.”
(6) 
Consists of structured debt instruments that are reported at fair value.

Fannie Mae Second Quarter 2017 Form 10-Q
49


 
MD&A | Liquidity and Capital Management


(7) 
Represents remaining liability resulting from the transfer of financial assets from our condensed consolidated balance sheets that did not qualify as a sale.
(8) 
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.
Cash and Other Investments Portfolio
Table 29 displays information on the composition of our cash and other investments portfolio. The balance of our cash and other investments portfolio fluctuates based on changes in our cash flows, liquidity in the fixed income markets and our liquidity risk management framework and practices. See “Risk ManagementCredit Risk ManagementInstitutional Counterparty Credit Risk ManagementCounterparty Credit Exposure of Investments Held in our Cash and Other Investments Portfolio” in our 2016 Form 10-K for additional information on the risks associated with the assets in our cash and other investments portfolio.
Table 29: Cash and Other Investments Portfolio
 
As of
 
June 30, 2017
 
December 31, 2016
 
(Dollars in millions) 
Cash and cash equivalents
 
$
16,904

 
 
 
$
25,224

 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
 
29,220

 
 
 
30,415

 
U.S. Treasury securities
 
32,418

 
 
 
32,317

 
Total cash and other investments
 
$
78,542

 
 
 
$
87,956

 
Cash Flows
Six Months Ended June 30, 2017. Cash and cash equivalents decreased by $8.3 billion from $25.2 billion as of December 31, 2016 to $16.9 billion as of June 30, 2017. The decrease was primarily driven by cash outflows from (1) the purchase of Fannie Mae MBS from third parties, (2) the redemption of funding debt, which outpaced issuances, due to lower funding needs, and (3) the payment of dividends to Treasury under our senior preferred stock purchase agreement.
Partially offsetting these cash outflows were cash inflows from (1) the sale of Fannie MBS to third parties and (2) proceeds from repayments and sales of loans of Fannie Mae.
Six Months Ended June 30, 2016. Cash and cash equivalents increased by $8.9 billion from $14.7 billion as of December 31, 2015 to $23.6 billion as of June 30, 2016. The increase was primarily driven by cash inflows from (1) the sale of Fannie MBS to third parties, (2) proceeds from the repayments and sales of loans of Fannie Mae and (3) proceeds from the sale and liquidation of mortgage-related securities.
Partially offsetting these cash inflows were cash outflows from (1) the redemption of funding debt, which outpaced issuances, due to lower funding needs, (2) the acquisition of delinquent loans out of MBS trusts and (3) the payment of dividends to Treasury under our senior preferred stock purchase agreement.
Credit Ratings
As of June 30, 2017, our credit ratings have not changed since we filed our 2016 Form 10-K. For additional information on our credit ratings, see “MD&ALiquidity and Capital ManagementLiquidity ManagementCredit Ratings” in our 2016 Form 10-K.
Capital Management
Regulatory Capital
FHFA stated that, during conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and FHFA will not issue quarterly capital classifications. The deficit of our core capital over statutory minimum capital was $137.9 billion as of June 30, 2017 and $136.2 billion as of December 31, 2016. For more information on our minimum capital requirements, see “Note 14, Regulatory Capital Requirements” in our 2016 Form 10-K.

Fannie Mae Second Quarter 2017 Form 10-Q
50


 
MD&A | Liquidity and Capital Management


Capital Activity
Each quarter during the conservatorship, the Director of FHFA has directed us to make dividend payments to Treasury. Our second quarter 2017 dividend of $2.8 billion was declared by FHFA and subsequently paid by us on June 30, 2017.
The terms of our senior preferred stock provide for quarterly dividends to accumulate at a rate equal to our net worth less an applicable capital reserve amount. The capital reserve amount is $600 million for dividend periods in 2017, and will be reduced to zero on January 1, 2018. We will pay Treasury a dividend for the third quarter of 2017 of $3.1 billion by September 30, 2017 if our conservator declares a dividend in this amount before September 30, 2017. To the extent that these quarterly dividends are not paid, they will accumulate and be added to the liquidation preference of the senior preferred stock. This would not affect the amount of available funding from Treasury under the senior preferred stock purchase agreement.
We are effectively unable to raise equity capital from private sources at this time and, therefore, are reliant on the funding available under our senior preferred stock purchase agreement with Treasury to address any net worth deficit. 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 June 30, 2017. The current aggregate liquidation preference of the senior preferred stock, including the initial aggregate liquidation preference of $1.0 billion, remains at $117.1 billion. Dividend payments we make to Treasury do not reduce the outstanding liquidation preference of the senior preferred stock, although we are permitted to pay down the liquidation preference of the senior preferred stock to the extent of any accumulated and unpaid dividends previously added to the liquidation preference and not previously paid down.
While we had a positive net worth as of June 30, 2017 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. If we were to draw additional funds from Treasury under the agreement in a future period, the amount of remaining funding under the agreement would be reduced by the amount of our draw. Dividend payments we make to Treasury do not restore or increase the amount of funding available to us under the agreement.
See “BusinessConservatorship and Treasury AgreementsTreasury Agreements” in our 2016 Form 10-K for more information on the terms of our senior preferred stock and our senior preferred stock purchase agreement with Treasury. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risks relating to our limited and declining capital reserves and the dividend provisions of the senior preferred stock.
Off-Balance Sheet Arrangements
We enter into certain business arrangements to facilitate our statutory purpose of providing liquidity to the secondary mortgage market and to reduce our exposure to interest rate fluctuations. Some of these arrangements are not recorded in our condensed consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements result primarily from: our guaranty of mortgage loan securitization and resecuritization transactions, and other guaranty commitments over which we do not have control; liquidity support transactions; and partnership interests. For a description of our off-balance sheet arrangements, see “MD&AOff-Balance Sheet Arrangements” in our 2016 Form 10-K.
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 $22.7 billion as of June 30, 2017 and $24.3 billion as of December 31, 2016. Our total outstanding liquidity commitments to advance funds for securities backed by multifamily housing revenue bonds totaled $9.9 billion as of June 30, 2017 and $10.4 billion as of December 31, 2016.

Fannie Mae Second Quarter 2017 Form 10-Q
51


 
MD&A | Risk Management


Risk Management
Our business activities expose us to the following three major categories of risk: credit risk, market risk (including interest rate and liquidity risk) and operational risk. We seek to actively manage and monitor these risks by using an established risk management program. We are also exposed to compliance risk, reputational risk and strategic risk, which encompasses the 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” and in “BusinessLegislation and RegulationHousing Finance Reform” in our 2016 Form 10-K.
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&ARisk Management” and “Risk Factors” in our 2016 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 Management
Mortgage credit risk is the risk of loss resulting from the failure of a borrower to make required mortgage payments. 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. For a discussion of our single-family mortgage credit risk management, see “MD&ABusiness SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk Management” in our 2016 Form 10-K and in this report. For a discussion of our multifamily credit risk management, see “MD&ABusiness SegmentsMultifamily BusinessMultifamily Mortgage Credit Risk Management” in our 2016 Form 10-K and in this report.
Institutional Counterparty Credit Risk Management
Institutional counterparty credit risk is the risk of loss resulting from the failure of an institutional counterparty to fulfill its contractual obligations to us. Defaults by a counterparty with significant obligations to us could result in significant financial losses to us.
See “MD&ARisk ManagementCredit Risk ManagementInstitutional Counterparty Credit Risk Management” and “Risk Factors” in our 2016 Form 10-K for additional information about our 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 40% of our single-family guaranty book of business as of June 30, 2017, compared with approximately 39% as December 31, 2016. Our largest mortgage servicer is Wells Fargo Bank, N.A., which, together with its affiliates, serviced approximately 17% of our single-family guaranty book of business as of June 30, 2017 and December 31, 2016.
Our five largest multifamily mortgage servicers, including their affiliates, serviced approximately 47% of our multifamily guaranty book of business as of June 30, 2017 and December 31, 2016. Wells Fargo Bank, N.A. and Walker & Dunlop, LLC each serviced over 10% of our multifamily guaranty book of business as of June 30, 2017 and December 31, 2016.
A large portion of our single-family guaranty book is serviced by non-depository servicers. As of June 30, 2017, 16% of our total single-family guaranty book of business, including 52% of our delinquent single-family loans, was serviced by our five largest non-depository servicers, compared with 16% of our total single-family guaranty book of business, including 51% of our delinquent single-family loans, as of December 31, 2016. Compared with depository financial institutions, non-depository servicers pose additional risks to us because non-depository

Fannie Mae Second Quarter 2017 Form 10-Q
52


 
MD&A | Risk Management


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 addition, regulatory bodies have been reviewing the activities of some of our largest non-depository servicers. See “Risk Factors” in our 2016 Form 10-K for a discussion of the risks of our reliance on servicers.
Our five largest single-family mortgage sellers, including their affiliates, accounted for approximately 34% of our single-family business acquisition volume in the first half of 2017, compared with approximately 28% in the first half of 2016. Our largest mortgage seller is Wells Fargo Bank, N.A., which, together with its affiliates, accounted for approximately 16% of our single-family business acquisition volume in the first half of 2017, compared with approximately 13% in the first half of 2016.
We acquire a 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.
Credit Guarantors
We use various types of credit guarantors to manage our mortgage credit risk, including mortgage insurers, credit insurance risk transfer counterparties, financial guarantors, and multifamily 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 30 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, excluding insurance coverage provided by federal government entities and credit insurance obtained through CIRT deals. The table includes our top nine 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 June 30, 2017 and December 31, 2016. In addition, for our mortgage insurer counterparties not approved to write new business, we have provided the percentage of their claims payments the counterparties are currently deferring based on the direction of their state regulators, referred to as their deferred payment obligation. As of June 30, 2017 and December 31, 2016, less than 1% of our total risk in force mortgage insurance coverage was pool insurance. In addition, approximately 1% of our total insurance in force mortgage insurance coverage was pool insurance as of June 30, 2017 and December 31, 2016.
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 expect to receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. The amount by which our estimated benefit from mortgage insurance reduced our total combined loss reserves was $1.1 billion as of June 30, 2017 and $1.4 billion as of December 31, 2016.

Fannie Mae Second Quarter 2017 Form 10-Q
53


 
MD&A | Risk Management


Table 30: Mortgage Insurance Coverage
 
Risk in Force(1)
 
Insurance in Force(2)
 
 
 
As of
 
As of
 
Deferred
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
Payment
 
2017
 
2016
 
2017
 
2016
 
Obligation %(3)
 
(Dollars in millions)
 
 
 
Counterparty:(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Approved:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Arch Capital Group Ltd.:(6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Guaranty Residential Insurance Co.
$
26,473

 
 
$
27,161

 
 
$
101,490

 
 
$
104,418

 
 
 
 
Arch Mortgage Insurance Co.
7,738

 
 
6,059

 
 
30,596

 
 
23,998

 
 
 
 
Total Arch Capital Group Ltd.
34,211

 
 
33,220

 
 
132,086

 
 
128,416

 
 
 
 
Radian Guaranty, Inc.
27,054

 
 
25,866

 
 
105,103

 
 
100,626

 
 
 
 
Mortgage Guaranty Insurance Corp.
25,304

 
 
24,662

 
 
98,131

 
 
95,431

 
 
 
 
Genworth Mortgage Insurance Corp.
19,334

 
 
18,573

 
 
76,100

 
 
73,075

 
 
 
 
Essent Guaranty, Inc.
12,843

 
 
11,213

 
 
51,557

 
 
45,053

 
 
 
 
National Mortgage Insurance Corp.
5,312

 
 
4,388

 
 
24,678

 
 
21,209

 
 
 
 
Others
298

 
 
282

 
 
1,822

 
 
1,724

 
 
 
 
Total approved
124,356

 
 
118,204

 
 
489,477

 
 
465,534

 
 
 
 
Not approved:(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PMI Mortgage Insurance Co.(7)
3,375

 
 
3,790

 
 
13,465

 
 
15,112

 
 
 
28.5
%
Republic Mortgage Insurance Co.(7)
2,756

 
 
3,104

 
 
10,689

 
 
12,043

 
 
 

Triad Guaranty Insurance Corp.(7)
994

 
 
1,106

 
 
3,569

 
 
3,975

 
 
 
25.0
%
Others
10

 
 
11

 
 
32

 
 
34

 
 
 
 
Total not approved
7,135

 
 
8,011

 
 
27,755

 
 
31,164

 
 
 
 
Total
$
131,491

 
 
$
126,215

 
 
$
517,232

 
 
$
496,698

 
 
 
 
Total as a percentage of single-family guaranty book of business
5

%
 
4

%
 
18

%
 
17

%
 
 
 
__________
(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 its state of domicile. As of June 30, 2017, we had an aggregate unpaid issued deferred payment obligation of $934 million from PMI Mortgage Insurance Co. and Triad Guaranty Insurance Corporation. We reserve for any unpaid amounts for which collectability is uncertain.
(4) 
Insurance coverage amounts provided for each counterparty may include coverage provided by 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) 
In December 2016, Arch Capital Group Ltd., the ultimate parent company of Arch Mortgage Insurance Co., acquired United Guaranty Corporation. United Guaranty Corporation is the ultimate parent company of United Guaranty Residential Insurance Co.
(7) 
These mortgage insurers are under various forms of supervised control by their state regulators and are in run-off.
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 $926 million recorded in “Other assets” in our condensed consolidated balance sheets as of June 30, 2017 and $1.0 billion as of December 31, 2016 related to amounts

Fannie Mae Second Quarter 2017 Form 10-Q
54


 
MD&A | Risk Management


claimed on insured, defaulted loans excluding government insured loans. Of this amount, $106 million as of June 30, 2017 and $141 million as of December 31, 2016 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 $612 million as of June 30, 2017 and $638 million as of December 31, 2016. The valuation allowance reduces our claim receivable to the amount considered probable of collection as of June 30, 2017 and December 31, 2016.
Credit Insurance Risk Transfer Counterparties
In a CIRT transaction, we shift a portion of the credit risk on a reference pool of mortgage loans to credit insurers or reinsurers. As of June 30, 2017, our single-family CIRT counterparties had a maximum liability to us of $4.3 billion. A portion of these counterparties’ obligation is collateralized with highly-rated liquid assets held in a trust account. As of June 30, 2017, $1.2 billion in assets securing these counterparties’ obligations were held in a trust account. Our credit risk exposure to our CIRT counterparties is concentrated. Our top five single-family CIRT counterparties had a maximum liability to us of $2.7 billion (representing 62% of our total CIRT coverage) as of June 30, 2017, compared to $2.1 billion (70% of our total CIRT coverage) as of December 31, 2016. Our single-family CIRT transactions are described in “Business SegmentsSingle-Family BusinessSingle-Family Mortgage Credit Risk ManagementTransfer of Mortgage Credit Risk—Credit Risk Transfer Transactions” in our 2016 Form 10-K.
Multifamily 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 risk sharing agreements on DUS and non-DUS multifamily loans was $58.4 billion as of June 30, 2017, compared with $54.8 billion as of December 31, 2016. As of June 30, 2017 and December 31, 2016, 43% of our maximum potential loss recovery on multifamily loans was from four DUS lenders.
As noted above in “Business SegmentsMultifamily BusinessMultifamily Mortgage Credit Risk ManagementMultifamily Acquisition Policy and Underwriting Standards,” our primary multifamily delivery channel is our DUS program, which is comprised of lenders that range from large depositories to independent non-bank financial institutions. As of June 30, 2017 and December 31, 2016, 35% 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, DUS 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
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 exposed to risk 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 institutions could result in significant financial losses to us.
A total of $32.3 billion in deposits for single-family payments were received and held by 256 institutions during the month of June 2017 and a total of $42.3 billion in deposits for single-family payments were received and held by 258 institutions during the month of December 2016. Of these total deposits, 90% as of June 30, 2017, compared with 91% as of December 31, 2016 were held by institutions rated as investment grade by S&P Global Ratings (“S&P”), Moody’s Investors Services (“Moody’s”) and Fitch Ratings Limited (“Fitch”).
During the month of June 2017, a total of $3.4 billion in deposits for multifamily payments were received and held by 28 institutions and $3.1 billion in deposits for multifamily payments were received and held by 27 institutions during the month of December 2016. Of these total deposits, 98% as of June 30, 2017 and December 31, 2016 were held by institutions rated as investment grade by S&P, Moody’s and Fitch.

Fannie Mae Second Quarter 2017 Form 10-Q
55


 
MD&A | Risk Management


Our transactions with custodial depository institutions are concentrated. Our six largest single-family custodial depository institutions held 79% of these deposits as of June 30, 2017, compared with 80% as of December 31, 2016. Our six largest multifamily custodial depository institutions held 88% of these deposits as of June 30, 2017, compared with 91% as of December 31, 2016.
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 Wall Street Reform and Consumer Protection Act, we are required to submit certain categories of new interest rate swaps to a derivatives clearing organization. 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 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 may include cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. Regulations that took effect March 1, 2017 require posting of variation margin without the application of any thresholds for OTC derivative transactions executed after that date.
Our cleared derivative transactions are submitted to derivatives clearing organizations on our behalf through clearing members of the organizations. 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 organizations and the members who are 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.
We will continue to have credit risk exposure to derivatives clearing organizations and certain of their members 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 represents our 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. Our total exposure was $24 million as of June 30, 2017 and $54 million as of December 31, 2016. The majority of our total exposure as of each date consisted of credit risk transfer transactions and mortgage insurance contracts that we account for as derivatives.
As of June 30, 2017, we had thirteen counterparties with which we may transact OTC derivative transactions, all of which were subject to enforceable master netting arrangements, compared with sixteen counterparties as of December 31, 2016. 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 June 30, 2017 and December 31, 2016.
See “Note 8, Derivative Instruments” and “Note 13, Netting Arrangements” for additional information on our derivative contracts as of June 30, 2017 and December 31, 2016.
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 from adverse changes in the value of our assets or liabilities or our future earnings due to changes in interest rates. Spread risk or basis risk is the resulting

Fannie Mae Second Quarter 2017 Form 10-Q
56


 
MD&A | Risk Management


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, business risks posed by changes in interest rates, and our strategy for managing interest rate risk and spread risk in “MD&A—Risk Management—Market Risk Management, Including Interest Rate Risk Management” and in “Risk Factors” in our 2016 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 investments portfolio assets; our outstanding debt of Fannie Mae that is used to fund our retained mortgage portfolio assets and cash and other investments portfolio assets; 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.
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 these interest rate shocks 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 website 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 depend on, among other factors, the mix of funding and other risk management derivative instruments we use at any given point in time.

Fannie Mae Second Quarter 2017 Form 10-Q
57


 
MD&A | Risk Management


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 31 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. Table 31 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 June 30, 2017 and 2016.
The sensitivity measures displayed in Table 31, 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 positive or negative 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 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.

Fannie Mae Second Quarter 2017 Form 10-Q
58


 
MD&A | Risk Management


Table 31: Interest Rate Sensitivity of Net Portfolio to Changes in Interest Rate Level and Slope of Yield Curve
 
As of
 
June 30, 2017(1)(2)
 
December 31, 2016(1)(2)
 
(Dollars in billions)
Rate level shock:
 
 
 
 
 
 
 
-100 basis points
 
$
(0.1
)
 
 
 
$
(0.2
)
 
-50 basis points
 
0.0

 
 
 
0.0

 
+50 basis points
 
0.0

 
 
 
0.0

 
+100 basis points
 
(0.1
)
 
 
 
0.0

 
Rate slope shock:
 
 
 
 
 
 
 
-25 basis points (flattening)
 
0.0

 
 
 
0.0

 
+25 basis points (steepening)
 
0.0

 
 
 
0.0

 
 
For the Three Months Ended June 30,(1)(3)
 
2017
 
2016
 
Duration Gap
 
Rate Slope Shock 25 bps
 
Rate Level Shock 50 bps
 
Duration Gap
 
Rate Slope Shock 25 bps
 
Rate Level Shock 50 bps
 
 
 
Exposure
 
 
 
Exposure
 
(In months)
 
(Dollars in billions)
 
(In months)
 
(Dollars in billions)
Average
(0.1)
 
 
$
0.0

 
 
 
$
0.0

 
 
0.2
 
 
$
0.1

 
 
 
$
0.0

 
Minimum
(0.5)
 
 
0.0

 
 
 
0.0

 
 
(0.3)
 
 
0.0

 
 
 
0.0

 
Maximum
0.7
 
 
0.1

 
 
 
0.1

 
 
1.0
 
 
0.1

 
 
 
0.1

 
Standard deviation
0.3
 
 
0.0

 
 
 
0.0

 
 
0.3
 
 
0.0

 
 
 
0.0

 
__________
(1) 
Computed based on changes in 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. Because the effective duration gap of our net portfolio was close to zero months in the periods presented, the convexity exposure was the primary driver of the market value sensitivity of our net portfolio as of June 30, 2017. In addition, the convexity exposure may result in similar market value sensitivities for positive and negative interest rate shocks of the same magnitude.
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 32 displays an example of how derivatives impacted the net market value exposure for a 50 basis point parallel interest rate shock.
Table 32: Derivative Impact on Interest Rate Risk (50 Basis Points)
 
As of(1)
 
June 30, 2017
 
December 31, 2016
 
(Dollars in billions)
Before derivatives
 
$
(0.8
)
 
 
 
$
(1.0
)
 
After derivatives
 
0.0

 
 
 
0.0

 
Effect of derivatives
 
0.8

 
 
 
1.0

 
__________
(1)
Measured on the last day of each period presented.

Fannie Mae Second Quarter 2017 Form 10-Q
59


 
MD&A | Risk Management


Liquidity Risk Management
See “MD&A—Liquidity and Capital Management—Liquidity Management” in our 2016 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 2016 Form 10-K for information on operational risks that we face and our framework for managing operational risk.
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 2016 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 2016 Form 10-K for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified two of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition: fair value measurement and combined loss reserves.
See “MD&A—Critical Accounting Policies and Estimates” in our 2016 Form 10-K for a discussion of these critical accounting policies and estimates.
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. Examples of forward-looking statements in this report include, but are not limited to, statements relating to our expectations regarding the following matters:
our profitability and financial results, and the factors that will affect our profitability and financial results;
our revenues and the factors that will affect our revenues;
the composition, quality and size of our retained mortgage portfolio;
our business plans and strategies and the impact of such plans and strategies;
our capital reserves and our dividend payments to Treasury;
our payments to HUD and Treasury funds under the GSE Act;

Fannie Mae Second Quarter 2017 Form 10-Q
60


 
MD&A | Forward-Looking Statements


the impact of legislation, regulation and accounting guidance on our business or financial results, including the impact of corporate income tax legislation and impairment accounting guidance;
housing and mortgage market conditions (including home price appreciation rates, mortgage origination volumes, changes in interest rates and changes in mortgage spreads) and the impact of such conditions on our financial results;
the risks to our business;
our credit losses and loss reserves;
our serious delinquency rate and foreclosures;
our engagement in credit risk transfer transactions and the effects of those transactions;
factors that will affect or mitigate our credit risk exposure;
the characteristics and performance of the loans in our book of business and factors that will affect their characteristics and performance;
our single-family loan acquisitions and the credit risk profile of such acquisitions;
factors that will affect our liquidity and ability to meet our debt obligations and factors relating to our liquidity contingency plans; and
our response to legal and regulatory proceedings and their impact on our business or financial condition.
Forward-looking statements reflect our management’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; future legislative and regulatory requirements or changes affecting us, such as the enactment of housing finance reform legislation or corporate income tax reform legislation; actions by FHFA, Treasury, HUD or other regulators that affect our business; the timing and level of, as well as regional variation in, home price changes; changes in interest rates, including negative interest rates; changes in unemployment rates and other macroeconomic and housing market variables; our future guaranty fee pricing and the impact of that pricing on our competitive environment and guaranty fee revenues; the size, composition and quality of our guaranty book of business and retained mortgage portfolio; our market share; the life of the loans in our guaranty book of business; challenges we face in retaining and hiring qualified executives and other 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, in its role as our conservator or as our regulator, such as changes in the type of business we do or implementation of the Single Security Initiative for Fannie Mae and Freddie Mac; limitations on our business imposed by FHFA, in its role as our conservator or as our regulator; 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 nonperforming and reperforming loan 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, including implementation of the Federal Reserve’s balance sheet normalization program; changes in the structure and

Fannie Mae Second Quarter 2017 Form 10-Q
61


 
MD&A | Forward-Looking Statements


regulation of the financial services industry; credit availability; global political risks; natural disasters, environmental disasters, terrorist attacks, pandemics or other major disruptive events; information security breaches or threats; and those factors described in “Risk Factors” in this report and in our 2016 Form 10-K.
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 this report and in our 2016 Form 10-K. 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.

Fannie Mae Second Quarter 2017 Form 10-Q
62


 
 Financial Statements | Condensed Consolidated Balance Sheets


Item 1.  Financial Statements
FANNIE MAE
(In conservatorship)
Condensed Consolidated Balance Sheets — (Unaudited)
(Dollars in millions, except share amounts)
 
As of
 
June 30,
 
December 31,
 
2017
 
2016
ASSETS
Cash and cash equivalents
 
$
16,904

 
 
 
$
25,224

 
Restricted cash (includes $26,279 and $31,536, related to consolidated trusts)
 
30,999

 
 
 
36,953

 
Federal funds sold and securities purchased under agreements to resell or similar arrangements
 
29,220

 
 
 
30,415

 
Investments in securities:
 
 
 
 
 
 
 
Trading, at fair value (includes $1,007 and $1,277, respectively, pledged as collateral )
 
39,274

 
 
 
40,562

 
Available-for-sale, at fair value (includes $98 and $107, respectively, related to consolidated trusts)
 
6,408

 
 
 
8,363

 
Total investments in securities
 
45,682

 
 
 
48,925

 
Mortgage loans:
 
 
 
 
 
 
 
Loans held for sale, at lower of cost or fair value
 
5,322

 
 
 
2,899

 
Loans held for investment, at amortized cost:
 
 
 
 
 
 
 
Of Fannie Mae
 
180,318

 
 
 
204,318

 
Of consolidated trusts
 
2,960,174

 
 
 
2,896,001

 
Total loans held for investment (includes $11,406 and $12,057, respectively, at fair value)
 
3,140,492

 
 
 
3,100,319

 
Allowance for loan losses
 
(20,399
)
 
 
 
(23,465
)
 
Total loans held for investment, net of allowance
 
3,120,093

 
 
 
3,076,854

 
Total mortgage loans
 
3,125,415

 
 
 
3,079,753

 
Deferred tax assets, net
 
31,402

 
 
 
33,530

 
Accrued interest receivable (includes $7,223 and $7,064, respectively, related to consolidated trusts)
 
7,840

 
 
 
7,737

 
Acquired property, net
 
3,696

 
 
 
4,489

 
Other assets
 
18,072

 
 
 
20,942

 
Total assets
 
$
3,309,230

 
 
 
$
3,287,968

 
LIABILITIES AND EQUITY
Liabilities:
 
 
 
 
 
 
 
Accrued interest payable (includes $8,389 and $8,285, respectively, related to consolidated trusts)
 
$
9,473

 
 
 
$
9,431

 
Debt:
 
 
 
 
 
 
 
Of Fannie Mae (includes $9,008 and $9,582, respectively, at fair value)
 
303,120

 
 
 
327,097

 
Of consolidated trusts (includes $34,866 and $36,524, respectively, at fair value)
 
2,984,547

 
 
 
2,935,219

 
Other liabilities (includes $340 and $390, respectively, related to consolidated trusts)
 
8,373

 
 
 
10,150

 
Total liabilities
 
3,305,513

 
 
 
3,281,897

 
Commitments and contingencies (Note 15)
 

 
 
 

 
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, 1,158,087,567 and 1,158,082,750 shares outstanding, respectively
 
687

 
 
 
687

 
Accumulated deficit
 
(126,531
)
 
 
 
(124,253
)
 
Accumulated other comprehensive income
 
682

 
 
 
759

 
Treasury stock, at cost, 150,675,136 and 150,679,953 shares, respectively
 
(7,400
)
 
 
 
(7,401
)
 
Total stockholders’ equity (See Note 1: Senior Preferred Stock for information on our dividend to Treasury)
 
3,717

 
 
 
6,071

 
Total liabilities and equity
 
$
3,309,230

 
 
 
$
3,287,968

 





See Notes to Condensed Consolidated Financial Statements

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
63


 
 Financial Statements | Condensed Consolidated Statements of Operations and Comprehensive Income


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
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
$
176

 
 
 
$
128

 
 
 
$
318

 
 
 
$
248

 
Available-for-sale securities
 
91

 
 
 
170

 
 
 
192

 
 
 
373

 
Mortgage loans (includes $25,033 and $23,866, respectively, for the three months ended and $49,987 and $48,492, respectively, for the six months ended related to consolidated trusts)
 
27,011

 
 
 
26,256

 
 
 
54,058

 
 
 
53,217

 
Other
 
115

 
 
 
46

 
 
 
209

 
 
 
94

 
Total interest income
 
27,393

 
 
 
26,600

 
 
 
54,777

 
 
 
53,932

 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
57

 
 
 
57

 
 
 
101

 
 
 
108

 
Long-term debt (includes $20,705 and $19,521, respectively, for the three months ended and $41,013 and $40,179, respectively, for the six months ended related to consolidated trusts)
 
22,334

 
 
 
21,257

 
 
 
44,328

 
 
 
43,769

 
Total interest expense
 
22,391

 
 
 
21,314

 
 
 
44,429

 
 
 
43,877

 
Net interest income
 
5,002

 
 
 
5,286

 
 
 
10,348

 
 
 
10,055

 
Benefit for credit losses
 
1,267

 
 
 
1,601

 
 
 
1,663

 
 
 
2,785

 
Net interest income after benefit for credit losses
 
6,269

 
 
 
6,887

 
 
 
12,011

 
 
 
12,840

 
Investment gains, net
 
385

 
 
 
398

 
 
 
376

 
 
 
467

 
Fair value losses, net
 
(691
)
 
 
 
(1,667
)
 
 
 
(731
)
 
 
 
(4,480
)
 
Fee and other income
 
353

 
 
 
174

 
 
 
602

 
 
 
377

 
Non-interest income (loss)
 
47

 
 
 
(1,095
)
 
 
 
247

 
 
 
(3,636
)
 
Administrative expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
332

 
 
 
331

 
 
 
676

 
 
 
695

 
Professional services
 
234

 
 
 
232

 
 
 
463

 
 
 
447

 
Occupancy expenses
 
47

 
 
 
46

 
 
 
93

 
 
 
91

 
Other administrative expenses
 
73

 
 
 
69

 
 
 
138

 
 
 
133

 
Total administrative expenses
 
686

 
 
 
678

 
 
 
1,370

 
 
 
1,366

 
Foreclosed property expense
 
34

 
 
 
63

 
 
 
251

 
 
 
397

 
Temporary Payroll Tax Cut Continuation Act of 2011 (“TCCA”) fees
 
518

 
 
 
453

 
 
 
1,021

 
 
 
893

 
Other expenses, net
 
291

 
 
 
254

 
 
 
673

 
 
 
518

 
Total expenses
 
1,529

 
 
 
1,448

 
 
 
3,315

 
 
 
3,174

 
Income before federal income taxes
 
4,787

 
 
 
4,344

 
 
 
8,943

 
 
 
6,030

 
Provision for federal income taxes
 
(1,587
)
 
 
 
(1,398
)
 
 
 
(2,970
)
 
 
 
(1,948
)
 
Net income
 
3,200

 
 
 
2,946

 
 
 
5,973

 
 
 
4,082

 
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains on available-for-sale securities, net of reclassification adjustments and taxes
 
(81
)
 
 
 
(75
)
 
 
 
(73
)
 
 
 
(273
)
 
Other
 
(2
)
 
 
 
(2
)
 
 
 
(4
)
 
 
 
(4
)
 
Total other comprehensive loss
 
(83
)
 
 
 
(77
)
 
 
 
(77
)
 
 
 
(277
)
 
Total comprehensive income
 
$
3,117

 
 
 
$
2,869

 
 
 
$
5,896

 
 
 
$
3,805

 
Net income
 
$
3,200

 
 
 
$
2,946

 
 
 
$
5,973

 
 
 
$
4,082

 
Dividends distributed or available for distribution to senior preferred stockholder (Note 9)
 
(3,117
)
 
 
 
(2,869
)
 
 
 
(5,896
)
 
 
 
(3,788
)
 
Net income attributable to common stockholders (Note 9)
 
$
83

 
 
 
$
77

 
 
 
$
77

 
 
 
$
294

 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.01

 
 
 
$
0.01

 
 
 
$
0.01

 
 
 
$
0.05

 
Diluted
 
0.01

 
 
 
0.01

 
 
 
0.01

 
 
 
0.05

 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
5,762

 
 
 
5,762

 
 
 
5,762

 
 
 
5,762

 
Diluted
 
5,893

 
 
 
5,893

 
 
 
5,893

 
 
 
5,893

 




See Notes to Condensed Consolidated Financial Statements

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
64


 
 Financial Statements | Condensed Consolidated Statements of Cash Flows


FANNIE MAE
(In conservatorship)
Condensed Consolidated Statements of Cash Flows — (Unaudited)
(Dollars in millions)
 
For the Six Months Ended June 30,
 
2017
 
2016
Net cash provided by (used in) operating activities
 
$
262

 
 
 
$
(3,982
)
 
Cash flows provided by investing activities:
 
 
 
 
 
 
 
Proceeds from maturities and paydowns of trading securities held for investment
 
937

 
 
 
1,109

 
Proceeds from sales of trading securities held for investment
 
124

 
 
 
1,313

 
Proceeds from maturities and paydowns of available-for-sale securities
 
1,214

 
 
 
1,778

 
Proceeds from sales of available-for-sale securities
 
922

 
 
 
7,584

 
Purchases of loans held for investment
 
(90,180
)
 
 
 
(97,024
)
 
Proceeds from repayments of loans acquired as held for investment of Fannie Mae
 
12,835

 
 
 
11,804

 
Proceeds from sales of loans acquired as held for investment of Fannie Mae
 
2,361

 
 
 
1,964

 
Proceeds from repayments and sales of loans acquired as held for investment of consolidated trusts
 
208,576

 
 
 
238,188

 
Net change in restricted cash
 
5,954

 
 
 
(6,818
)
 
Advances to lenders
 
(57,533
)
 
 
 
(57,956
)
 
Proceeds from disposition of acquired property and preforeclosure sales
 
6,874

 
 
 
8,557

 
Net change in federal funds sold and securities purchased under agreements to resell or similar arrangements
 
1,195

 
 
 
5,025

 
Other, net
 
(208
)
 
 
 
(661
)
 
Net cash provided by investing activities
 
93,071

 
 
 
114,863

 
Cash flows used in financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of debt of Fannie Mae
 
489,301

 
 
 
432,025

 
Payments to redeem debt of Fannie Mae
 
(514,228
)
 
 
 
(456,586
)
 
Proceeds from issuance of debt of consolidated trusts
 
181,764

 
 
 
171,004

 
Payments to redeem debt of consolidated trusts
 
(250,251
)
 
 
 
(244,631
)
 
Payments of cash dividends on senior preferred stock to Treasury
 
(8,250
)
 
 
 
(3,778
)
 
Other, net
 
11

 
 
 
30

 
Net cash used in financing activities
 
(101,653
)
 
 
 
(101,936
)
 
Net increase (decrease) in cash and cash equivalents
 
(8,320
)
 
 
 
8,945

 
Cash and cash equivalents at beginning of period
 
25,224

 
 
 
14,674

 
Cash and cash equivalents at end of period
 
$
16,904

 
 
 
$
23,619

 
Cash paid during the period for:
 
 
 
 
 
 
 
Interest
 
$
56,207

 
 
 
$
52,354

 
Income taxes
 
1,070

 
 
 
610

 
















See Notes to Condensed Consolidated Financial Statements

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
65


 
Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies


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, how long we will be in conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, and whether we will continue to exist following conservatorship. 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 into receivership at his discretion at any time for other reasons set forth in the GSE Act, including if we are critically undercapitalized or 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 fundamentally 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 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 ability to issue long-term debt has been strong primarily due to actions taken by the federal government to support us.
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 without appropriate capitalization of the company could materially and adversely affect our liquidity, financial condition and results of operations. Changes or perceived changes in our status as a GSE could also materially and adversely affect our liquidity, financial condition and results of operations. In addition,

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
66


 
Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies


due to our reliance on the U.S. government’s support, our access to debt funding or the cost of debt funding also could be materially adversely affected by a change or perceived change in the creditworthiness of the U.S. government.
A downgrade in our credit ratings could reduce demand for our debt securities and increase our borrowing costs. Future changes or disruptions in the financial markets could significantly change the amount, mix and cost of funds we obtain, which also could increase our liquidity and “roll over” risk and have a material adverse impact on 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. As consideration for Treasury’s funding commitment, we issued one million shares of senior preferred stock and a warrant to purchase shares of our common stock to Treasury. As of June 30, 2017, the amount of remaining funding available to us under the senior preferred stock purchase agreement was $117.6 billion.
Senior Preferred Stock
Treasury, as the holder of the senior preferred stock, is entitled to receive quarterly cash dividends, when, as and if declared by our conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors. The dividends we have paid to Treasury on the senior preferred stock during conservatorship have been declared by, and paid at the direction of, our conservator.
For each quarterly period through and including December 31, 2017, dividends on the senior preferred stock accumulate based on the amount by which our net worth at the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. If our net worth does not exceed the applicable capital reserve amount, then dividends will neither accumulate nor be payable to the shareholder for such period.
Pursuant to the terms of our senior preferred stock, our net worth is the amount by which our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our total liabilities (excluding any obligation in respect of capital stock), in each case as reflected on our balance sheet prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The applicable capital reserve amount was $1.2 billion for 2016, decreased to $600 million for quarterly dividend periods in 2017, and will decrease to zero in 2018.
We recognize a liability on our balance sheet for senior preferred stock dividends only upon their declaration by our conservator, at which point they become payable to the shareholder.
Shares of the senior preferred stock have no par value and have a stated value and initial liquidation preference equal to $1,000 per share.
The liquidation preference of the senior preferred stock is subject to adjustment. To the extent that quarterly dividends are not paid, they will accumulate and be added to the liquidation preference of the senior preferred stock. In addition, the liquidation preference of the senior preferred stock will be increased by (1) any amounts Treasury pays to us pursuant to its funding commitment provided in the senior preferred stock purchase agreement and (2) any quarterly commitment fee payments that are payable but not paid in cash or waived by Treasury under the senior preferred stock purchase agreement. As long as the dividend provisions described above remain in effect, however, the periodic commitment fee will neither accrue nor become payable. As of June 30, 2017, we have received a total of $116.1 billion under Treasury’s funding commitment and the aggregate liquidation preference of the senior preferred stock was $117.1 billion. Because the senior preferred stock ranks prior to our common stock and all other series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and distributions upon liquidation, if we are liquidated, the senior preferred stock is entitled to its then-current liquidation preference (which includes any accumulated but unpaid dividends) before any distribution is made to the holders of our common stock or other preferred stock.
On June 30, 2017, we paid Treasury a dividend of $2.8 billion based on our net worth of $3.4 billion as of March 31, 2017, less the applicable capital reserve amount of $600 million. We will pay Treasury a dividend of $3.1 billion by September 30, 2017, calculated based on our net worth of $3.7 billion as of June 30, 2017, less the applicable capital reserve amount of $600 million, if our conservator declares a dividend in this amount before September 30, 2017.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
67


 
Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies


Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with 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 six months ended June 30, 2017 may not necessarily be indicative of the results for the year ending December 31, 2017. The unaudited interim condensed consolidated financial statements as of and for the six months ended June 30, 2017 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, 2016 (“2016 Form 10-K”), filed with the SEC on February 17, 2017.
Regulatory Capital
FHFA stated that, during conservatorship, our existing statutory and FHFA-directed regulatory capital requirements will not be binding and 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 $137.9 billion as of June 30, 2017 and $136.2 billion as of December 31, 2016.
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 has directed 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 June 30, 2017, Treasury held an investment in our senior preferred stock with an aggregate liquidation preference of $117.1 billion. FHFA’s control of both us and Freddie Mac has caused us, FHFA and Freddie Mac to be deemed related parties. In 2013, Fannie Mae and Freddie Mac established Common Securitization Solutions, LLC (“CSS”), a jointly owned limited liability company to operate a common securitization platform; therefore, CSS is deemed a related party.
Transactions with Treasury
Our administrative expenses were reduced by $11 million and $23 million for the three and six months ended June 30, 2017, respectively, and $15 million and $31 million for the three and six months ended June 30, 2016, 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.
We made tax payments to the Internal Revenue Service (“IRS”), a bureau of Treasury, of $1.1 billion during the three and six months ended June 30, 2017. We made tax payments of $250 million and $610 million during the three and six months ended June 30, 2016, respectively.
In 2009, we entered into a memorandum of understanding with Treasury, FHFA and Freddie Mac pursuant to which we agreed to provide assistance to state and local housing finance agencies (“HFAs”) through certain programs, including a new issue bond (“NIB”) program. As of June 30, 2017, under the NIB program, Fannie Mae and Freddie Mac had $5.2 billion outstanding of pass-through securities backed by single-family and multifamily housing bonds issued by HFAs, which is less than 35% of the total original principal under the program, the amount of losses that Treasury would bear. Accordingly, we do not have a potential risk of loss under 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 $518 million and $453 million in TCCA fees

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
68


 
Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies


during the three months ended June 30, 2017 and 2016, respectively, and $1.0 billion and $893 million for the six months ended June 30, 2017 and 2016, respectively, of which $518 million had not been remitted to Treasury as of June 30, 2017.
We incurred expenses in connection with certain funding obligations under the GSE Act, a portion of which is attributable to Treasury’s Capital Magnet and HOPE Reserve Funds. These expenses, recognized in “Other expenses, net” in our condensed consolidated statements of operations and comprehensive income, were measured as the product of 4.2 basis points and the unpaid principal balance of our total new business purchases for the respective period. We recognized $29 million and $31 million in “Other expenses, net” in connection with Treasury’s Capital Magnet and HOPE Reserve Funds for the three months ended June 30, 2017 and 2016, respectively, and $58 million and $56 million for the six months ended June 30, 2017 and 2016, respectively, of which $58 million had not been remitted as of June 30, 2017.
In addition to the transactions with Treasury mentioned above, we also purchase and sell Treasury securities in the normal course of business. As of June 30, 2017 and December 31, 2016, we held Treasury securities with a fair value of $32.4 billion and $32.3 billion, respectively, and accrued interest receivable of $63 million and $39 million, respectively. We recognized interest income on these securities held by us of $86 million and $33 million for the three months ended June 30, 2017 and 2016, respectively, and $149 million and $65 million for the six months ended June 30, 2017 and 2016, respectively.
Transactions with Freddie Mac
As of June 30, 2017 and December 31, 2016, we held Freddie Mac mortgage-related securities with a fair value of $748 million and $1.4 billion, respectively, and accrued interest receivable of $3 million and $5 million, respectively. We recognized interest income on these securities held by us of $10 million and $36 million for the three months ended June 30, 2017 and 2016, respectively, and $23 million and $81 million for the six months ended June 30, 2017 and 2016, respectively. In addition, Freddie Mac may be an investor in variable interest entities (“VIEs”) that we have consolidated, and we may be an investor in VIEs that Freddie Mac has consolidated. Freddie Mac may also be an investor in our debt securities.
Transactions with FHFA
The GSE Act 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 $26 million and $28 million for the three months ended June 30, 2017 and 2016, respectively, and $56 million for the six months ended June 30, 2017 and 2016.
Transactions with CSS
In connection with our jointly owned company with Freddie Mac, we contributed capital to CSS of $18 million and $35 million for the three months ended June 30, 2017 and 2016, respectively, and $53 million and $65 million for the six months ended June 30, 2017 and 2016, respectively. In November 2016, Fannie Mae, Freddie Mac and CSS entered into a Customer Services Agreement that sets forth the terms under which CSS will provide securitization services to us and Freddie Mac. No other transactions outside of normal business activities have occurred between us and CSS during the six months ended June 30, 2017 and 2016.
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, other assets and liabilities, and allowance for loan losses. Actual results could be different from these estimates.
New Accounting Guidance
In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that changes the impairment model for most financial assets and certain other instruments. For loans, held-to-maturity debt securities and other financial assets recorded at amortized cost, entities will be required to use a new forward-looking “expected

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
69


 
Notes to Condensed Consolidated Financial Statements | Summary of Significant Accounting Policies


loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowance for loan losses. The guidance is effective on January 1, 2020 with early adoption permitted on January 1, 2019. We will recognize the impact of the new guidance through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. We are continuing to evaluate the impact of this guidance on our condensed consolidated financial statements, including the timing of the adoption. We expect the greater impact of the guidance to relate to our accounting for credit losses for loans that are not individually impaired. The adoption of this guidance will decrease, perhaps substantially, our retained earnings and increase our allowance for loan losses.
2. Consolidations and Transfers of Financial Assets
We have interests in various entities that are considered to be VIEs. The primary types of entities are securitization trusts and limited partnerships. 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 securitization trusts.
 
As of
 
June 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Assets:
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
4,197

 
 
 
$
4,642

 
Non-Fannie Mae
 
2,577

 
 
 
3,473

 
Total trading securities
 
6,774

 
 
 
8,115

 
Available-for-sale securities:
 
 
 
 
 


 
Fannie Mae
 
2,174

 
 
 
2,447

 
Non-Fannie Mae
 
3,319

 
 
 
4,879

 
Total available-for-sale securities
 
5,493

 
 
 
7,326

 
Other assets
 
74

 
 
 
77

 
Other liabilities
 
(501
)
 
 
 
(528
)
 
Net carrying amount
 
$
11,840

 
 
 
$
14,990

 
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 maximum exposure to loss related to unconsolidated securitization trusts was approximately $17 billion and $21 billion as of June 30, 2017 and December 31, 2016, respectively. The total assets of our unconsolidated securitization trusts were approximately $100 billion and $150 billion as of June 30, 2017 and December 31, 2016, respectively.
The maximum exposure to loss for our unconsolidated limited partnerships and similar legal entities, which consist of low-income housing tax credit investments, community investments and other entities, was $108 million and the related carrying value was $83 million as of June 30, 2017. As of December 31, 2016, the maximum exposure to loss was $118 million and the related carrying value was $92 million. The total assets of these limited partnership investments were $3.6 billion and $3.9 billion as of June 30, 2017 and December 31, 2016, respectively.
The unpaid principal balance of our multifamily loan portfolio was $244.7 billion as of June 30, 2017. As our lending relationship does not provide us with a controlling financial interest in the borrower entity, we do not

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
70


 
Notes to Condensed Consolidated Financial Statements | Consolidations and Transfers of Financial Assets


consolidate these borrowers regardless of their status as either a VIE or a voting interest entity. We have excluded these entities from our VIE disclosures. However, the disclosures we have provided in “Note 3, Mortgage Loans,” “Note 4, Allowance for Loan Losses” and “Note 6, Financial Guarantees” with respect to this population are consistent with the FASB’s stated objectives for the disclosures related to unconsolidated VIEs.
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 June 30, 2017 and 2016, the unpaid principal balance of portfolio securitizations was $69.2 billion and $64.3 billion, respectively. For the six months ended June 30, 2017 and 2016, the unpaid principal balance of portfolio securitizations was $126.5 billion and $112.6 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 June 30, 2017, the unpaid principal balance of retained interests was $4.1 billion and its related fair value was $5.2 billion. The unpaid principal balance of retained interests was $4.4 billion and its related fair value was $5.8 billion as of December 31, 2016. For the three months ended June 30, 2017 and 2016, the principal and interest received on retained interests was $303 million and $315 million, respectively. For the six months ended June 30, 2017 and 2016, the principal and interest received on retained interests was $560 million and $623 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 $1.3 billion and $1.4 billion as of June 30, 2017 and December 31, 2016, respectively. For information on our on-balance sheet mortgage loans, see “Note 3, Mortgage Loans.”
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 held for investment (“HFI”) or held for sale (“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 “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income. We define the recorded investment of HFI loans as 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 that are guaranteed or insured, in whole or in part, by the U.S. government or one of its agencies, and 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
 
June 30, 2017
 
December 31, 2016
 
(Dollars in millions)
Single-family
$
2,861,253

 
$
2,833,750

Multifamily
244,701

 
229,896

Total unpaid principal balance of mortgage loans
3,105,954

 
3,063,646

Cost basis and fair value adjustments, net
39,860

 
39,572

Allowance for loan losses for loans held for investment
(20,399
)
 
(23,465
)
Total mortgage loans
$
3,125,415

 
$
3,079,753


Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
71


 
Notes to Condensed Consolidated Financial Statements | Mortgage Loans


During the three and six months ended June 30, 2017, we redesignated loans with a carrying value of $2.9 billion and $5.4 billion, respectively, from HFI to HFS. During the three and six months ended June 30, 2016, we redesignated loans with a carrying value of $1.0 billion and $1.6 billion, respectively, from HFI to HFS. During the three and six months ended June 30, 2017, we redesignated loans with a carrying value of $17 million and $52 million, respectively, from HFS to HFI. We sold loans with an unpaid principal balance of $2.9 billion and $3.0 billion during the three and six months ended June 30, 2017, respectively. We sold loans with an unpaid balance of $1.5 billion and $2.6 billion during the three and six months ended June 30, 2016, respectively.
The recorded investment of single-family mortgage loans for which formal foreclosure proceedings are in process was $15.6 billion and $18.3 billion as of June 30, 2017 and December 31, 2016, respectively. 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 Loans
We discontinue accruing interest on loans when we believe collectibility 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. Interest previously accrued but not collected is reversed through interest income at the date a loan is placed on nonaccrual status. We return a nonmodified single-family loan to accrual status at the point that the borrower brings the loan current. We return a modified single-family loan to accrual status at the point that the borrower successfully makes all required payments during the trial period (generally three to four months) and the modification is made permanent. We place a multifamily loan on nonaccrual status when the loan becomes three months or more past due according to its contractual terms or is deemed to be individually impaired, unless the loan is well secured such that collectibility of principal and accrued interest is reasonably assured. We return a multifamily loan to accrual status when the borrower cures the delinquency of the loan or we otherwise determine that the loan is well secured such that collectibility 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, excluding loans for which we have elected the fair value option.
  
As of June 30, 2017
 
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
$
27,294

 
$
6,677

 
$
17,842

 
$
51,813

 
$
2,703,162

 
$
2,754,975

 
$
19

 
$
28,056

Government(2)
50

 
21

 
229

 
300

 
35,080

 
35,380

 
228

 
1

Alt-A
3,103

 
1,000

 
3,451

 
7,554

 
66,845

 
74,399

 
2

 
5,026

Other
1,141

 
367

 
1,259

 
2,767

 
22,580

 
25,347

 
4

 
1,827

Total single-family
31,588

 
8,065

 
22,781

 
62,434

 
2,827,667

 
2,890,101

 
253

 
34,910

Multifamily(3)
27

 
N/A

 
95

 
122

 
246,506

 
246,628

 

 
341

Total
$
31,615

 
$
8,065

 
$
22,876

 
$
62,556

 
$
3,074,173

 
$
3,136,729

 
$
253

 
$
35,251


Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
72


 
Notes to Condensed Consolidated Financial Statements | Mortgage Loans


  
As of December 31, 2016
 
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
$
31,631

 
$
7,910

 
$
21,761

 
$
61,302

 
$
2,654,195

 
$
2,715,497

 
$
22

 
$
33,448

Government(2)
56

 
22

 
256

 
334

 
36,814

 
37,148

 
256

 

Alt-A
3,629

 
1,194

 
4,221

 
9,044

 
72,903

 
81,947

 
2

 
6,019

Other
1,349

 
438

 
1,582

 
3,369

 
25,974

 
29,343

 
5

 
2,238

Total single-family
36,665

 
9,564

 
27,820

 
74,049

 
2,789,886

 
2,863,935

 
285

 
41,705

Multifamily(3)
44

 
N/A

 
129

 
173

 
231,708

 
231,881

 

 
403

Total
$
36,709

 
$
9,564

 
$
27,949

 
$
74,222

 
$
3,021,594

 
$
3,095,816

 
$
285

 
$
42,108

__________
(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, excluding loans for which we have elected the fair value option.
  
As of
  
June 30, 2017(1)
 
December 31, 2016(1)
  
Primary
 
Alt-A
 
Other
 
Primary
 
Alt-A
 
Other
  
(Dollars in millions)
Estimated mark-to-market loan-to-value (“LTV”) ratio:(2)
  
 
 
 
  
 
  
 
 
 
  
Less than or equal to 80%
$
2,410,185

 
$
54,917

 
$
18,219

 
$
2,321,201

 
$
56,250

 
$
19,382

Greater than 80% and less than or equal to 90%
231,412

 
8,010

 
2,826

 
244,231

 
9,787

 
3,657

Greater than 90% and less than or equal to 100%
88,637

 
5,088

 
1,908

 
114,412

 
6,731

 
2,627

Greater than 100%
24,741

 
6,384

 
2,394

 
35,653

 
9,179

 
3,677

Total
$
2,754,975

 
$
74,399

 
$
25,347

 
$
2,715,497

 
$
81,947

 
$
29,343

__________
(1) 
Excludes $35.4 billion and $37.1 billion as of June 30, 2017 and December 31, 2016, 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 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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
73


 
Notes to Condensed Consolidated Financial Statements | Mortgage Loans


The following table displays the total recorded investment in our multifamily HFI loans by credit quality indicator, excluding loans for which we have elected the fair value option.
  
As of
  
June 30,
 
December 31,
 
2017
 
2016
  
(Dollars in millions)
Credit risk profile by internally assigned grade:
 
 
 
Non-classified
$
243,555

 
$
228,749

Classified:(1)
 
 
 
Substandard
3,069

 
3,129

Doubtful
4

 
3

Total classified
3,073

 
3,132

Total
$
246,628

 
$
231,881

_________
(1) 
A loan classified as “Substandard” has a well-defined weakness that jeopardizes the timely full repayment. “Doubtful” refers to a loan with a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions and values.
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; excluding loans classified as HFS. The following tables display the total unpaid principal balance, recorded investment, related allowance, average recorded investment and interest income recognized for individually impaired loans.
 
As of
 
June 30, 2017
 
December 31, 2016
 
Unpaid Principal Balance
 
Total Recorded Investment
 
Related Allowance for Loan Losses
 
Unpaid Principal Balance
 
Total Recorded Investment
 
Related Allowance for Loan Losses
 
(Dollars in millions)
Individually impaired loans:
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
With related allowance recorded:
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Single-family:
 
 
 
 
 
  

 
 
 
 
 
 
 
 
 
 
  

 
 
 
 
 
Primary
 
$
97,394

 
 
 
$
92,591

 
 
 
$
12,778

 
 
$
105,113

 
 
 
$
99,825

 
 
 
$
14,462

 
Government
 
288

 
 
 
291

 
 
 
58

 
 
302

 
 
 
305

 
 
 
59

 
Alt-A
 
25,862

 
 
 
23,556

 
 
 
4,642

 
 
28,599

 
 
 
26,059

 
 
 
5,365

 
Other
 
9,651

 
 
 
9,106

 
 
 
1,719

 
 
11,087

 
 
 
10,465

 
 
 
2,034

 
Total single-family
 
133,195

 
 
 
125,544

 
 
 
19,197

 
 
145,101

 
 
 
136,654

 
 
 
21,920

 
Multifamily
 
217

 
 
 
218

 
 
 
41

 
 
320

 
 
 
323

 
 
 
33

 
Total individually impaired loans with related allowance recorded
 
133,412

 
 
 
125,762

 
 
 
19,238

 
 
145,421

 
 
 
136,977

 
 
 
21,953

 
With no related allowance recorded:(1)
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Single-family:
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Primary
 
16,109

 
 
 
15,225

 
 
 

 
 
15,733

 
 
 
14,758

 
 
 

 
Government
 
67

 
 
 
62

 
 
 

 
 
63

 
 
 
59

 
 
 

 
Alt-A
 
3,418

 
 
 
3,010

 
 
 

 
 
3,511

 
 
 
3,062

 
 
 

 
Other
 
1,078

 
 
 
992

 
 
 

 
 
1,159

 
 
 
1,065

 
 
 

 
Total single-family
 
20,672

 
 
 
19,289

 
 
 

 
 
20,466

 
 
 
18,944

 
 
 

 
Multifamily
 
268

 
 
 
269

 
 
 

 
 
266

 
 
 
266

 
 
 

 
Total individually impaired loans with no related allowance recorded
 
20,940

 
 
 
19,558

 
 
 

 
 
20,732

 
 
 
19,210

 
 
 

 
Total individually impaired loans(2)
 
$
154,352

 
 
 
$
145,320

 
 
 
$
19,238

 
 
$
166,153

 
 
 
$
156,187

 
 
 
$
21,953

 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
74


 
Notes to Condensed Consolidated Financial Statements | Mortgage Loans


 
For the Three Months Ended June 30,
 
2017
 
2016
 
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
 
$
94,599

 
 
 
$
955

 
 
 
$
77

 
 
 
$
106,674

 
 
 
$
1,015

 
 
 
$
71

 
Government
 
295

 
 
 
2

 
 
 

 
 
 
317

 
 
 
3

 
 
 

 
Alt-A
 
24,249

 
 
 
240

 
 
 
14

 
 
 
27,901

 
 
 
256

 
 
 
11

 
Other
 
9,419

 
 
 
82

 
 
 
5

 
 
 
11,639

 
 
 
93

 
 
 
3

 
Total single-family
 
128,562

 
 
 
1,279

 
 
 
96

 
 
 
146,531

 
 
 
1,367

 
 
 
85

 
Multifamily
 
259

 
 
 
4

 
 
 

 
 
 
556

 
 
 
13

 
 
 

 
Total individually impaired loans with related allowance recorded
 
128,821

 
 
 
1,283

 
 
 
96

 
 
 
147,087

 
 
 
1,380

 
 
 
85

 
With no related allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Primary
 
15,091

 
 
 
273

 
 
 
24

 
 
 
15,377

 
 
 
327

 
 
 
30

 
Government
 
61

 
 
 
1

 
 
 

 
 
 
59

 
 
 
1

 
 
 

 
Alt-A
 
3,026

 
 
 
67

 
 
 
2

 
 
 
3,361

 
 
 
81

 
 
 
5

 
Other
 
1,016

 
 
 
21

 
 
 
1

 
 
 
1,126

 
 
 
30

 
 
 
2

 
Total single-family
 
19,194

 
 
 
362

 
 
 
27

 
 
 
19,923

 
 
 
439

 
 
 
37

 
Multifamily
 
284

 
 
 
7

 
 
 

 
 
 
326

 
 
 
3

 
 
 

 
Total individually impaired loans with no related allowance recorded
 
19,478

 
 
 
369

 
 
 
27

 
 
 
20,249

 
 
 
442

 
 
 
37

 
Total individually impaired loans
 
$
148,299

 
 
 
$
1,652

 
 
 
$
123

 
 
 
$
167,336

 
 
 
$
1,822

 
 
 
$
122

 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
75


 
Notes to Condensed Consolidated Financial Statements | Mortgage Loans


 
For the Six Months Ended June 30,
 
2017
 
2016
 
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
 
$
96,395

 
 
 
$
1,941

 
 
 
$
165

 
 
 
$
107,984

 
 
 
$
2,036

 
 
 
$
175

 
Government
 
298

 
 
 
5

 
 
 

 
 
 
320

 
 
 
6

 
 
 

 
Alt-A
 
24,896

 
 
 
489

 
 
 
29

 
 
 
28,287

 
 
 
509

 
 
 
30

 
Other
 
9,805

 
 
 
169

 
 
 
10

 
 
 
11,827

 
 
 
185

 
 
 
11

 
Total single-family
 
131,394

 
 
 
2,604

 
 
 
204

 
 
 
148,418

 
 
 
2,736

 
 
 
216

 
Multifamily
 
280

 
 
 
6

 
 
 

 
 
 
589

 
 
 
18

 
 
 

 
Total individually impaired loans with related allowance recorded
 
131,674

 
 
 
2,610

 
 
 
204

 
 
 
149,007

 
 
 
2,754

 
 
 
216

 
With no related allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
Primary
 
15,050

 
 
 
562

 
 
 
47

 
 
 
15,323

 
 
 
595

 
 
 
50

 
Government
 
61

 
 
 
2

 
 
 

 
 
 
58

 
 
 
2

 
 
 

 
Alt-A
 
3,056

 
 
 
140

 
 
 
5

 
 
 
3,362

 
 
 
143

 
 
 
8

 
Other
 
1,041

 
 
 
44

 
 
 
2

 
 
 
1,131

 
 
 
52

 
 
 
3

 
Total single-family
 
19,208

 
 
 
748

 
 
 
54

 
 
 
19,874

 
 
 
792

 
 
 
61

 
Multifamily
 
278

 
 
 
10

 
 
 

 
 
 
335

 
 
 
6

 
 
 

 
Total individually impaired loans with no related allowance recorded
 
19,486

 
 
 
758

 
 
 
54

 
 
 
20,209

 
 
 
798

 
 
 
61

 
Total individually impaired loans
 
$
151,160

 
 
 
$
3,368

 
 
 
$
258

 
 
 
$
169,216

 
 
 
$
3,552

 
 
 
$
277

 
__________
(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 $144.3 billion and $155.0 billion as of June 30, 2017 and December 31, 2016, respectively. Includes multifamily loans restructured in a TDR with a recorded investment of $198 million and $248 million as of June 30, 2017 and December 31, 2016, respectively.
(3) 
Total single-family interest income recognized of $1.7 billion for the three months ended June 30, 2017 consists of $1.5 billion of contractual interest and $229 million of effective yield adjustments. Total single-family interest income recognized of $1.8 billion for the three months ended June 30, 2016 consists of $1.5 billion of contractual interest and $331 million of effective yield adjustments. Total single-family interest income recognized of $3.4 billion for the six months ended June 30, 2017 consists of $2.9 billion of contractual interest and $497 million of effective yield adjustments. Total single-family interest income recognized of $3.5 billion for the six months ended June 30, 2016 consists of $2.9 billion of contractual interest and $641 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.
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 June 30, 2017 and 2016, the average term extension of a single-family modified loan was 155 months and 159 months, respectively, and the average interest rate reduction was 0.67 and 0.72 percentage points, respectively. During the six months ended June 30, 2017 and 2016, the average term extension of a single-family modified loan was 154 months and 159 months, respectively, and the average interest rate reduction was 0.80 and 0.73 percentage points, respectively.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
76


 
Notes to Condensed Consolidated Financial Statements | Mortgage Loans


The following tables display the number of loans and recorded investment in loans restructured in a TDR.
 
For the Three Months Ended June 30,
 
2017
 
2016
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
14,148

 
 
 
$
1,945

 
 
 
14,814

 
 
 
$
2,028

 
Government
 
45

 
 
 
4

 
 
 
28

 
 
 
3

 
Alt-A
 
1,328

 
 
 
194

 
 
 
1,623

 
 
 
238

 
Other
 
271

 
 
 
46

 
 
 
362

 
 
 
61

 
Total single-family
 
15,792

 
 
 
2,189

 
 
 
16,827

 
 
 
2,330

 
Multifamily
 
3

 
 
 
17

 
 
 
4

 
 
 
45

 
Total TDRs
 
15,795

 
 
 
$
2,206

 
 
 
16,831

 
 
 
$
2,375

 
 
For the Six Months Ended June 30,
 
2017
 
2016
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
31,383

 
 
 
$
4,308

 
 
 
32,004

 
 
 
$
4,360

 
Government
 
106

 
 
 
10

 
 
 
82

 
 
 
9

 
Alt-A
 
2,893

 
 
 
418

 
 
 
3,534

 
 
 
508

 
Other
 
580

 
 
 
99

 
 
 
761

 
 
 
133

 
Total single-family
 
34,962

 
 
 
4,835

 
 
 
36,381

 
 
 
5,010

 
Multifamily
 
3

 
 
 
17

 
 
 
4

 
 
 
45

 
Total TDRs
 
34,965

 
 
 
$
4,852

 
 
 
36,385

 
 
 
$
5,055

 
The following tables display the number of loans and our recorded investment in these loans at the time of payment default 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 June 30,
 
2017
 
2016
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
4,238

 
 
 
$
589

 
 
 
4,648

 
 
 
$
638

 
Government
 
25

 
 
 
3

 
 
 
27

 
 
 
3

 
Alt-A
 
616

 
 
 
97

 
 
 
756

 
 
 
116

 
Other
 
150

 
 
 
30

 
 
 
289

 
 
 
40

 
Total TDRs that subsequently defaulted
 
5,029

 
 
 
$
719

 
 
 
5,720

 
 
 
$
797

 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
77


 
Notes to Condensed Consolidated Financial Statements | Mortgage Loans


 
For the Six Months Ended June 30,
 
2017
 
2016
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
(Dollars in millions)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary
 
8,717

 
 
 
$
1,210

 
 
 
10,109

 
 
 
$
1,440

 
Government
 
44

 
 
 
5

 
 
 
42

 
 
 
5

 
Alt-A
 
1,230

 
 
 
193

 
 
 
1,608

 
 
 
260

 
Other
 
351

 
 
 
68

 
 
 
532

 
 
 
89

 
Total single-family
 
10,342

 
 
 
1,476

 
 
 
12,291

 
 
 
1,794

 
Multifamily
 
1

 
 
 
4

 
 
 

 
 
 

 
Total TDRs that subsequently defaulted
 
10,343

 
 
 
$
1,480

 
 
 
12,291

 
 
 
$
1,794

 
4. Allowance for Loan Losses
We maintain an allowance for loan losses for HFI loans held by Fannie Mae and loans backing Fannie Mae MBS issued from consolidated trusts. When calculating our allowance for loan losses, we consider our net carrying value of HFI loans at the balance sheet date, which includes unpaid principal balance, net of amortized premiums and discounts, and other cost basis adjustments. We record charge-offs as a reduction to our allowance for loan losses at the point of foreclosure, completion of a short sale, upon the redesignation of loans from HFI to HFS or when a loan is determined to be uncollectible.
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 that provide loan level loss coverage and are either contractually attached to a loan or that were entered into contemporaneously with and in contemplation of a guaranty or loan purchase transaction. We use recent regional historical sales and appraisal information including the sales of our own foreclosed properties, to develop our loss severity estimates for all loan categories. Our allowance calculation also incorporates a loss confirmation period (the anticipated time lag between a credit loss event and the confirmation of the credit loss resulting from that event) to ensure our allowance estimate captures credit losses that have been incurred as of the balance sheet date but have not been confirmed. 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. We consider a loan to be impaired when, based on current information, it is probable that we will not receive all amounts due, including interest, in accordance with the contractual terms of the loan agreement. When a loan has been restructured, we measure impairment using a cash flow analysis discounted at the loan’s original effective interest rate. 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 or similar sources.
We establish a collective allowance 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. 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, as we have concluded that such loans are collateral dependent. We evaluate collectively for impairment smaller-balance homogeneous multifamily loans.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
78


 
Notes to Condensed Consolidated Financial Statements | Allowance for Loan Losses


The following table displays changes in single-family, multifamily and total allowance for loan losses.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
 
(Dollars in millions)
Single-family allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
21,938

 
 
$
25,597

 
$
23,283

 
 
$
27,709

Benefit for loan losses(1)
(1,185
)
 
 
(1,332
)
 
(1,605
)
 
 
(2,348
)
Charge-offs
(689
)
 
 
(818
)
 
(1,729
)
 
 
(2,097
)
Recoveries
146

 
 
115

 
231

 
 
234

Other(2)
8

 
 
22

 
38

 
 
86

Ending balance
$
20,218

 
 
$
23,584

 
$
20,218

 
 
$
23,584

Multifamily allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
191

 
 
$
222

 
$
182

 
 
$
242

Benefit for loan losses(1)
(11
)
 
 
(4
)
 
(2
)
 
 
(20
)
Charge-offs

 
 
(3
)
 

 
 
(8
)
Recoveries
1

 
 

 
1

 
 
1

Ending balance
$
181

 
 
$
215

 
$
181

 
 
$
215

Total allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
22,129

 
 
$
25,819

 
$
23,465

 
 
$
27,951

Benefit for loan losses(1)
(1,196
)
 
 
(1,336
)
 
(1,607
)
 
 
(2,368
)
Charge-offs
(689
)
 
 
(821
)
 
(1,729
)
 
 
(2,105
)
Recoveries
147

 
 
115

 
232

 
 
235

Other(2)
8

 
 
22

 
38

 
 
86

Ending balance
$
20,399

 
 
$
23,799

 
$
20,399

 
 
$
23,799

__________
(1) 
Benefit for loan losses is included in “Benefit for credit losses” in our condensed consolidated statements of operations and comprehensive income.
(2) 
Amounts represent changes in other loss reserves which are reflected in benefit for loan losses, charge-offs, and recoveries.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
79


 
Notes to Condensed Consolidated Financial Statements | Allowance for Loan Losses


The following table displays the allowance for loan losses and recorded investment in our HFI loans, excluding loans for which we have elected the fair value option, by impairment or allowance methodology and portfolio segment.
 
As of
  
June 30, 2017
 
December 31, 2016
 
Single-Family
 
Multifamily
 
 
Total
 
Single-Family
 
Multifamily
 
Total
 
(Dollars in millions)
Allowance for loan losses by segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually impaired loans(1)
$
19,197

 
 
$
41

 
 
$
19,238

 
$
21,920

 
 
$
33
 
 
$
21,953

Collectively reserved loans
1,021

 
 
140

 
 
1,161

 
1,363

 
 
149
 
 
1,512

Total allowance for loan losses
$
20,218

 
 
$
181

 
 
$
20,399

 
$
23,283

 
 
$
182
 
 
$
23,465

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans by segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually impaired loans(1)
$
144,833

 
 
$
487

 
 
$
145,320

 
$
155,598

 
 
$
589
 
 
$
156,187

Collectively reserved loans
2,745,268

 
 
246,141

 
 
2,991,409

 
2,708,337

 
 
231,292
 
 
2,939,629

Total recorded investment in loans
$
2,890,101

 
 
$
246,628

 
 
$
3,136,729

 
$
2,863,935

 
 
$
231,881
 
 
$
3,095,816

__________
(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
 
June 30, 2017
 
December 31, 2016
 
(Dollars in millions)
 
Mortgage-related securities:
 
 
 
 
 
 
 
Fannie Mae
 
$
4,277

 
 
 
$
4,769

 
Other agency
 
1,969

 
 
 
2,058

 
Alt-A and subprime private-label securities
 
593

 
 
 
636

 
Commercial mortgage-backed securities (“CMBS”)
 
16

 
 
 
761

 
Mortgage revenue bonds
 
1

 
 
 
21

 
Total mortgage-related securities
 
6,856

 
 
 
8,245

 
U.S. Treasury securities
 
32,418

 
 
 
32,317

 
Total trading securities
 
$
39,274

 
 
 
$
40,562

 
Available-for-Sale Securities
We record available-for-sale (“AFS”) securities at fair value with unrealized gains and losses, recorded net of tax, as a component of “Other comprehensive income (loss)” 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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
80


 
Notes to Condensed Consolidated Financial Statements | Investments in Securities


The following table displays the gross realized gains, losses and proceeds on sales of AFS securities.
 
For the Three
 
For the Six
 
Months Ended
 
Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)

Gross realized gains
$
227

 
$
234

 
$
230

 
$
445

Gross realized losses

 
8

 

 
12

Total proceeds (excludes initial sale of securities from new portfolio securitizations)
799

 
3,645

 
894

 
7,267

The following tables display the amortized cost, gross unrealized gains and losses, and fair value by major security type for AFS securities.
 
As of June 30, 2017
 
Total Amortized Cost(1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses(2)
 
 
Total Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
2,173

 
 
 
$
124

 
 
 
$
(25
)
 
 
 
$
2,272

Other agency
 
399

 
 
 
33

 
 
 

 
 
 
432

Alt-A and subprime private-label securities
 
1,335

 
 
 
828

 
 
 
(1
)
 
 
 
2,162

CMBS
 
259

 
 
 

 
 
 

 
 
 
259

Mortgage revenue bonds
 
858

 
 
 
21

 
 
 
(6
)
 
 
 
873

Other mortgage-related securities
 
395

 
 
 
15

 
 
 

 
 
 
410

Total
 
$
5,419

 
 
 
$
1,021

 
 
 
$
(32
)
 
 
 
$
6,408

 
As of December 31, 2016
 
Total Amortized Cost(1)
 
Gross Unrealized Gains
 
Gross Unrealized Losses(2)
 
 
Total Fair Value
 
(Dollars in millions)
Fannie Mae
 
$
2,445

 
 
 
$
137

 
 
 
$
(28
)
 
 
 
$
2,554

Other agency
 
508

 
 
 
39

 
 
 

 
 
 
547

Alt-A and subprime private-label securities
 
1,817

 
 
 
895

 
 
 
(3
)
 
 
 
2,709

CMBS
 
815

 
 
 
4

 
 
 

 
 
 
819

Mortgage revenue bonds
 
1,245

 
 
 
36

 
 
 
(9
)
 
 
 
1,272

Other mortgage-related securities
 
431

 
 
 
31

 
 
 

 
 
 
462

Total
 
$
7,261

 
 
 
$
1,142

 
 
 
$
(40
)
 
 
 
$
8,363

__________
(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 gross unrealized losses on securities for which we have not recognized OTTI, as well as the noncredit component of OTTI and cumulative changes in fair value of securities for which we previously recognized the credit component of OTTI in “Accumulated other comprehensive income ” in our condensed consolidated balance sheets.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
81


 
Notes to Condensed Consolidated Financial Statements | Investments in Securities


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 June 30, 2017
 
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
)
 
 
$
194

 
 
$
(23
)
 
 
$
443

Alt-A and subprime private-label securities
 

 
 

 
 
(1
)
 
 
64

Mortgage revenue bonds
 

 
 

 
 
(6
)
 
 
17

Total
 
$
(2
)
 
 
$
194

 
 
$
(30
)
 
 
$
524

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
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
)
 
 
$
139

 
 
$
(26
)
 
 
$
477

Alt-A and subprime private-label securities
 

 
 

 
 
(3
)
 
 
73

Mortgage revenue bonds
 
(7
)
 
 
78

 
 
(2
)
 
 
6

Total
 
$
(9
)
 
 
$
217

 
 
$
(31
)
 
 
$
556

Other-Than-Temporary Impairments
The balance of the unrealized credit loss component of AFS debt securities held by us and recognized in our condensed consolidated statements of operations and comprehensive income was $1.8 billion, $1.8 billion and $1.9 billion as of June 30, 2017, March 31, 2017 and December 31, 2016, respectively. The decrease in the six months ended June 30, 2017 was primarily driven by securities no longer held in portfolio at period end.
The balance of the unrealized credit loss component of AFS debt securities held by us and recognized in our condensed consolidated statements of operations and comprehensive income was $2.2 billion, $2.3 billion and $2.4 billion as of June 30, 2016, March 31, 2016 and December 31, 2015, respectively. The decrease in the three months ended June 30, 2016 was primarily driven by changes in cash flows expected to be collected over the remaining life of the securities. The decrease in the six months ended June 30, 2016 was primarily driven by securities no longer held in portfolio at period end.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
82


 
Notes to Condensed Consolidated Financial Statements | Investments in Securities


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. 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 June 30, 2017
 
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
 
$
2,173

 
 
$
2,272

 
 
$
2

 
 
$
2

 
 
$
13

 
 
$
14

 
 
$
64

 
 
$
68

 
 
$
2,094

 
 
$
2,188

Other agency
 
399

 
 
432

 
 
1

 
 
1

 
 
26

 
 
26

 
 
62

 
 
66

 
 
310

 
 
339

Alt-A and subprime private-label securities
 
1,335

 
 
2,162

 
 

 
 

 
 

 
 

 
 

 
 

 
 
1,335

 
 
2,162

CMBS
 
259

 
 
259

 
 
259

 
 
259

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage revenue bonds
 
858

 
 
873

 
 
10

 
 
10

 
 
75

 
 
75

 
 
112

 
 
114

 
 
661

 
 
674

Other mortgage-related securities
 
395

 
 
410

 
 

 
 

 
 

 
 

 
 
3

 
 
3

 
 
392

 
 
407

Total
 
$
5,419

 
 
$
6,408

 
 
$
272

 
 
$
272

 
 
$
114

 
 
$
115

 
 
$
241

 
 
$
251

 
 
$
4,792

 
 
$
5,770

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 1 day to 35 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.
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
 
June 30, 2017
 
December 31, 2016
 
Maximum Exposure(1)
 
Guaranty Obligation
 
Maximum Recovery(2)
 
Maximum Exposure(1)
 
Guaranty Obligation
 
Maximum Recovery(2)
 
(Dollars in millions)
Unconsolidated Fannie Mae MBS
$
11,619

 
$
134

 
$
7,636

 
$
12,607

 
$
143

 
$
8,048

Other guaranty arrangements(3)
14,632

 
130

 
2,499

 
15,335

 
137

 
2,663

    Total
$
26,251

 
$
264

 
$
10,135

 
$
27,942

 
$
280

 
$
10,711

__________
(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 and financial guarantors, see “Note 15, Concentrations of Credit Risk” in our 2016 Form 10-K.
(3) 
Primarily consists of credit enhancements and long-term standby commitments.
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 $304 million and $446 million as of June 30, 2017 and December 31, 2016, respectively. These Fannie Mae MBS consist primarily of private-label wraps where our guaranty arrangement is with an unconsolidated MBS trust.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
83


 
Notes to Condensed Consolidated Financial Statements | Short-Term Borrowings and Long-Term Debt


7.  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
  
June 30, 2017
 
December 31, 2016
 
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)
$
7

 
0.25
%
 
$

 
%
 
 
 
 
 
 
 
 
Short-term debt of Fannie Mae
$
30,501

 
0.84
%
 
$
34,995

 
0.49
%
Debt of consolidated trusts
511

 
0.91

 
584

 
0.48

Total short-term debt
$
31,012

 
0.84
%
 
$
35,579

 
0.49
%
__________
(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 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 June 30, 2017 and December 31, 2016. We had no borrowings outstanding under this line of credit as of June 30, 2017.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
84


 
Notes to Condensed Consolidated Financial Statements | Short-Term Borrowings and Long-Term Debt


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
 
June 30, 2017
 
December 31, 2016
 
Maturities
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
Maturities
 
Outstanding
 
Weighted- Average Interest Rate(1)
 
(Dollars in millions)
Senior fixed:
 
 
 
 
 
 
 
 
 
 
 
Benchmark notes and bonds
2017 - 2030
 
$
137,509

 
1.96
%
 
2017 - 2030
 
$
153,983

 
2.16
%
Medium-term notes(2)
2017 - 2026
 
82,215

 
1.42

 
2017 - 2026
 
82,230

 
1.40

Other(3)
2017 - 2038
 
7,926

 
4.82

 
2017 - 2038
 
12,800

 
6.74

Total senior fixed
 
 
227,650

 
1.87

 
 
 
249,013

 
2.14

Senior floating:
 
 
 
 
 
 
 
 
 
 
 
Medium-term notes(2)
2017 - 2020
 
19,051

 
1.11

 
2017 - 2019
 
21,476

 
0.71

Connecticut Avenue Securities(4)
2023 - 2029
 
20,589

 
5.03

 
2023 - 2029
 
16,511

 
4.77

Other(5)
2020 - 2037
 
365

 
7.20

 
2020 - 2037
 
346

 
6.75

Total senior floating
 
 
40,005

 
3.14

 
 
 
38,333

 
2.48

Subordinated debentures
2019
 
4,870

 
9.93

 
2019
 
4,645

 
9.93

Secured borrowings(6)
2021 - 2022
 
94

 
1.60

 
2021 - 2022
 
111

 
1.44

Total long-term debt of Fannie Mae(7)
 
 
272,619

 
2.20

 
 
 
292,102

 
2.31

Debt of consolidated trusts
2017 - 2056
 
2,984,036

 
2.78

 
2017 - 2056
 
2,934,635

 
2.57

Total long-term debt
 
 
$
3,256,655

 
2.73
%
 
 
 
$
3,226,737

 
2.54
%
__________
(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) 
Includes other long-term debt with an original contractual maturity of greater than 10 years and foreign exchange bonds.
(4) 
Credit risk-sharing securities that transfer a portion of the credit risk on specified pools of single-family mortgage loans to the investors in these securities, a portion of which is reported at fair value.
(5) 
Consists of structured debt instruments that are reported at fair value.
(6) 
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.
(7) 
Includes unamortized discounts and premiums, other cost basis adjustments and fair value adjustments of $1.0 billion and $1.8 billion as of June 30, 2017 and December 31, 2016, respectively.
8.  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.
We enter into various forms of credit risk sharing agreements, including credit risk transfer transactions, swap credit enhancements and mortgage insurance contracts, that we account for as derivatives. The majority of our credit-related derivatives are credit risk transfer transactions, whereby a portion of the credit risk associated with losses on a reference pool of mortgage loans is transferred to a third party.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
85


 
Notes to Condensed Consolidated Financial Statements | Derivative Instruments


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 14, 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 June 30, 2017
 
As of December 31, 2016
 
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
$
32,746

 
$
441

 
$
79,878

 
$
(2,983
)
 
$
29,540

 
$
660

 
$
94,584

 
$
(4,396
)
Receive-fixed
33,890

 
2,604

 
134,172

 
(1,051
)
 
30,207

 
2,696

 
135,470

 
(1,552
)
Basis
12,873

 
127

 
1,350

 
(1
)
 
1,624

 
115

 
15,600

 
(11
)
Foreign currency
226

 
49

 
228

 
(72
)
 
214

 
40

 
216

 
(85
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
10,250

 
179

 
2,350

 
(3
)
 
9,600

 
241

 
4,850

 
(82
)
Receive-fixed

 

 
8,350

 
(271
)
 

 

 
10,100

 
(257
)
Other(1)
24,203

 
23

 

 
(1
)
 
15,087

 
33

 
655

 
(2
)
Total gross risk management derivatives
114,188

 
3,423

 
226,328

 
(4,382
)
 
86,272

 
3,785

 
261,475

 
(6,385
)
Accrued interest receivable (payable)

 
707

 

 
(754
)
 

 
785

 

 
(937
)
Netting adjustment(2)

 
(4,024
)
 

 
5,034

 

 
(4,514
)
 

 
6,844

Total net risk management derivatives
$
114,188

 
$
106

 
$
226,328

 
$
(102
)
 
$
86,272

 
$
56

 
$
261,475

 
$
(478
)
Mortgage commitment derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage commitments to purchase whole loans
$
1,898

 
$
5

 
$
6,698

 
$
(27
)
 
$
4,753

 
$
28

 
$
3,039

 
$
(49
)
Forward contracts to purchase mortgage-related securities
11,791

 
37

 
69,343

 
(243
)
 
31,635

 
198

 
27,297

 
(388
)
Forward contracts to sell mortgage-related securities
100,370

 
271

 
16,793

 
(48
)
 
34,103

 
405

 
47,645

 
(300
)
Total mortgage commitment derivatives
$
114,059

 
$
313

 
$
92,834

 
$
(318
)
 
$
70,491

 
$
631

 
$
77,981

 
$
(737
)
Derivatives at fair value
$
228,247

 
$
419

 
$
319,162

 
$
(420
)
 
$
156,763

 
$
687

 
$
339,456

 
$
(1,215
)
__________
(1) 
Includes credit risk transfer transactions, futures, swap credit enhancements and mortgage insurance contracts that we account for as derivatives.
(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 $1.6 billion and $2.9 billion as of June 30, 2017 and December 31, 2016, respectively. Cash collateral received was $599 million and $535 million as of June 30, 2017 and December 31, 2016, respectively.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
86


 
Notes to Condensed Consolidated Financial Statements | Derivative Instruments


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
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Risk management derivatives:
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
Pay-fixed
$
(691
)
 
$
(2,257
)
 
$

 
$
(7,430
)
Receive-fixed
639

 
1,371

 
322

 
4,358

Basis
16

 
14

 
23

 
49

Foreign currency
11

 
(34
)
 
23

 
(31
)
Swaptions:
 
 
 
 
 
 
 
Pay-fixed
(48
)
 
4

 
(48
)
 
29

Receive-fixed
(8
)
 
(19
)
 
(26
)
 
(136
)
Other
3

 
22

 
(5
)
 
160

Net accrual of periodic settlements
(224
)
 
(291
)
 
(479
)
 
(560
)
Total risk management derivatives fair value losses, net
$
(302
)
 
$
(1,190
)
 
$
(190
)
 
$
(3,561
)
Mortgage commitment derivatives fair value losses, net
(192
)
 
(367
)
 
(272
)
 
(729
)
Total derivatives fair value losses, net
$
(494
)
 
$
(1,557
)
 
$
(462
)
 
$
(4,290
)
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 OTC 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 13, Netting Arrangements” for information on our rights to offset assets and liabilities.
9. Earnings 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).

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
87


 
Notes to Condensed Consolidated Financial Statements | Earnings Per Share


The following table displays the computation of basic and diluted earnings per share of common stock.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars and shares in millions, except per share amounts)
Net income
$
3,200

 
$
2,946

 
$
5,973

 
$
4,082

Dividends distributed or available for distribution to senior preferred stockholder(1)
(3,117
)
 
(2,869
)
 
(5,896
)
 
(3,788
)
Net income attributable to common stockholders
$
83

 
$
77

 
$
77

 
$
294

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

 
5,762

 
5,762

 
5,762

Convertible preferred stock
131

 
131

 
131

 
131

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

 
5,893

 
5,893

 
5,893

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
0.01

 
$
0.01

 
$
0.05

Diluted
0.01

 
0.01

 
0.01

 
0.05

__________
(1) 
Dividends distributed or available for distribution were calculated based on our net worth as of the end of the fiscal quarters, less the applicable capital reserve amount. See “Note 1, Summary of Significant Accounting Policies” in this report and in our 2016 Form 10-K for additional information on our senior preferred stock agreement and our payment of dividends to Treasury.
(2) 
Includes 4.6 billion 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 June 30, 2017 and 2016.
10. Segment Reporting
We have two reportable business segments: Single-Family and Multifamily. Previously, we had a third reportable business segment, Capital Markets, which was incorporated into the Single-Family and Multifamily segments in the fourth quarter of 2016. Results of our two business segments are intended to reflect each segment as if it were a stand-alone business. We have revised the presentation of our segment results for the prior periods to be consistent with the current period presentation.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
88


 
Notes to Condensed Consolidated Financial Statements | Segment Reporting


 
 
For the Three Months Ended June 30,
 
 
2017
 
 
2016
 
 
Single-Family
 
Multifamily
 
Total
 
 
Single-Family
 
Multifamily
 
Total
 
(Dollars in millions)
Net interest income(1)
 
$
4,366

 
$
636

 
$
5,002

 
 
$
4,730

 
$
556

 
$
5,286

Fee and other income(2)
 
111

 
242

 
353

 
 
78

 
96

 
174

Net revenues
 
4,477

 
878

 
5,355

 
 
4,808

 
652

 
5,460

Investment gains, net(3)
 
321

 
64

 
385

 
 
280

 
118

 
398

Fair value gains (losses), net(4)
 
(685
)
 
(6
)
 
(691
)
 
 
(1,679
)
 
12

 
(1,667
)
Administrative expenses
 
(600
)
 
(86
)
 
(686
)
 
 
(597
)
 
(81
)
 
(678
)
Credit-related income(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
 
1,255

 
12

 
1,267

 
 
1,596

 
5

 
1,601

Foreclosed property expense
 
(32
)
 
(2
)
 
(34
)
 
 
(61
)
 
(2
)
 
(63
)
Total credit-related income
 
1,223

 
10

 
1,233

 
 
1,535

 
3

 
1,538

TCCA fees(6)
 
(518
)
 

 
(518
)
 
 
(453
)
 

 
(453
)
Other expenses, net
 
(155
)
 
(136
)
 
(291
)
 
 
(252
)
 
(2
)
 
(254
)
Income before federal income taxes
 
4,063

 
724

 
4,787

 
 
3,642

 
702

 
4,344

Provision for federal income taxes
 
(1,401
)
 
(186
)
 
(1,587
)
 
 
(1,254
)
 
(144
)
 
(1,398
)
Net income
 
$
2,662

 
$
538

 
$
3,200

 
 
$
2,388

 
$
558

 
$
2,946

 
 
For the Six Months Ended June 30,
 
 
2017
 
 
2016
 
 
Single-Family
 
Multifamily
 
Total
 
 
Single-Family
 
Multifamily
 
Total
 
(Dollars in millions)
Net interest income(1)
 
$
9,122

 
$
1,226

 
$
10,348

 
 
$
8,975

 
$
1,080

 
$
10,055

Fee and other income(2)
 
187

 
415

 
602

 
 
145

 
232

 
377

Net revenues
 
9,309

 
1,641

 
10,950

 
 
9,120

 
1,312

 
10,432

Investment gains, net(3)
 
271

 
105

 
376

 
 
336

 
131

 
467

Fair value gains (losses), net(4)
 
(697
)
 
(34
)
 
(731
)
 
 
(4,529
)
 
49

 
(4,480
)
Administrative expenses
 
(1,201
)
 
(169
)
 
(1,370
)
 
 
(1,206
)
 
(160
)
 
(1,366
)
Credit-related income(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefit for credit losses
 
1,655

 
8

 
1,663

 
 
2,759

 
26

 
2,785

Foreclosed property expense
 
(248
)
 
(3
)
 
(251
)
 
 
(396
)
 
(1
)
 
(397
)
Total credit-related income
 
1,407

 
5

 
1,412

 
 
2,363

 
25

 
2,388

TCCA fees(6)
 
(1,021
)
 

 
(1,021
)
 
 
(893
)
 

 
(893
)
Other expenses, net
 
(411
)
 
(262
)
 
(673
)
 
 
(498
)
 
(20
)
 
(518
)
Income before federal income taxes
 
7,657

 
1,286

 
8,943

 
 
4,693

 
1,337

 
6,030

Provision for federal income taxes
 
(2,653
)
 
(317
)
 
(2,970
)
 
 
(1,643
)
 
(305
)
 
(1,948
)
Net income
 
$
5,004

 
$
969

 
$
5,973

 
 
$
3,050

 
$
1,032

 
$
4,082


Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
89


 
Notes to Condensed Consolidated Financial Statements | Segment Reporting


__________
(1) 
Net interest income primarily consists of guaranty fees received as compensation for assuming and managing the credit risk on loans underlying Fannie Mae MBS held by third parties for the respective business segment, and the difference between the interest income earned on the respective business segment’s mortgage assets in our retained mortgage portfolio and the interest expense associated with the debt funding those assets. Revenues from single-family guaranty fees include revenues generated by the 10 basis point increase in guaranty fees we implemented in 2012 pursuant to TCCA.
(2) 
Single-Family fee and other income primarily consists of compensation for engaging in structured transactions and providing other lender services, and income resulting from settlement agreements resolving certain claims relating to private-label securities sold to us or that we have guaranteed. Multifamily fee and other income consists of fees associated with multifamily business activities, including yield maintenance income.
(3) 
Investment gains and losses primarily consists of gains and losses on the sale of mortgage assets for the respective business segment.
(4) 
Single-Family fair value gains and losses primarily consist of fair value gains and losses on risk management and mortgage commitment derivatives, trading securities and other financial instruments associated with our single-family mortgage credit book of business. Multifamily fair value gains and losses primarily consist of fair value gains and losses on MBS commitment derivatives, trading securities and other financial instruments associated with our multifamily mortgage credit book of business.
(5) 
Credit-related income or expense is based on the guaranty book of business of the respective business segment and consists of the applicable segment’s benefit or provision for credit losses and foreclosed property expense on loans underlying the segment’s guaranty book of business.
(6) 
Consists of the portion of our single-family guaranty fees that is remitted to Treasury pursuant to the TCCA.
11. Equity
The following table displays the activity in other comprehensive loss, net of tax, by major categories.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in millions)
Net income
$
3,200

 
$
2,946

 
$
5,973

 
$
4,082

Other comprehensive loss, net of tax effect:
 
 
 
 
 
 
 
Changes in net unrealized gains (losses) on AFS securities (net of tax of $6 and $27, respectively, for the three months ended and net of tax of $11 and $21, respectively, for the six months ended)
11

 
50

 
20

 
(39
)
Reclassification adjustment for OTTI recognized in net income (net of tax of $0 and $1, respectively, for the three months ended and net of tax of $0 and $11, respectively, for the six months ended)

 
1

 
1

 
20

Reclassification adjustment for gains on AFS securities included in net income (net of tax of $50 and $68, respectively, for the three months ended and net of tax of $51 and $137, respectively, for the six months ended)
(92
)
 
(126
)
 
(94
)
 
(254
)
Other
(2
)
 
(2
)
 
(4
)
 
(4
)
Total other comprehensive loss
(83
)
 
(77
)
 
(77
)
 
(277
)
Total comprehensive income
$
3,117

 
$
2,869

 
$
5,896

 
$
3,805


Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
90


 
Notes to Condensed Consolidated Financial Statements | Equity


The following table displays our accumulated other comprehensive income by major categories.
 
As of
 
June 30,
 
December 31,
 
2017
 
2016
 
(Dollars in millions)
Net unrealized gains on AFS securities for which we have not recorded OTTI, net of tax
 
$
108

 
 
 
$
135

 
Net unrealized gains on AFS securities for which we have recorded OTTI, net of tax
 
535

 
 
 
581

 
Other, net of tax
 
39

 
 
 
43

 
Accumulated other comprehensive income
 
$
682

 
 
 
$
759

 
The table below displays changes in accumulated other comprehensive income, net of tax.
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
AFS(1)
 
Other
 
Total
 
AFS(1)
 
Other
 
Total
 
AFS(1)
 
Other
 
Total
 
AFS(1)
 
Other
 
Total
 
(Dollars in millions)
Beginning balance
$
724

 
$
41

 
$
765

 
$
1,160

 
$
47

 
$
1,207

 
$
716

 
$
43

 
$
759

 
$
1,358

 
$
49

 
$
1,407

Other comprehensive income (loss) before reclassifications
11

 

 
11

 
50

 

 
50

 
20

 

 
20

 
(39
)
 

 
(39
)
Amounts reclassified from other comprehensive income (loss)
(92
)
 
(2
)
 
(94
)
 
(125
)
 
(2
)
 
(127
)
 
(93
)
 
(4
)
 
(97
)
 
(234
)
 
(4
)
 
(238
)
Net other comprehensive income (loss)
(81
)
 
(2
)
 
(83
)
 
(75
)
 
(2
)
 
(77
)
 
(73
)
 
(4
)
 
(77
)
 
(273
)
 
(4
)
 
(277
)
Ending balance
$
643

 
$
39

 
$
682

 
$
1,085

 
$
45

 
$
1,130

 
$
643

 
$
39

 
$
682

 
$
1,085

 
$
45

 
$
1,130

__________
(1) 
The amounts reclassified from accumulated other comprehensive income 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 “Investment gains, net” in our condensed consolidated statements of operations and comprehensive income.
12. Concentrations of Credit Risk
Risk Characteristics of our Guaranty Book of Business
One of the measures by which we gauge our performance risk under our guaranty is 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 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 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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
91


 
Notes to Condensed Consolidated Financial Statements | Concentrations of Credit Risk


The following tables display the delinquency status and serious delinquency rates for specified loan categories of our single-family conventional and total multifamily guaranty book of business.
 
As of
 
June 30, 2017(1)
 
December 31, 2016(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)
1.14
%
 
0.30
%
 
0.98
%
 
1.30
%
 
0.36
%
 
1.18
%
Percentage of single-family conventional loans(4)
1.32

 
0.34

 
1.01

 
1.51

 
0.41

 
1.20

 
As of
 
June 30, 2017(1)
 
December 31, 2016(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%
1
%
 
10.05
%
 
2
%
 
10.44
%
Geographical distribution:
 
 
 
 
 
 
 
California
19

 
0.43

 
19

 
0.50

Florida
6

 
1.51

 
6

 
1.89

New Jersey
4

 
2.49

 
4

 
3.07

New York
5

 
2.21

 
5

 
2.65

All other states
66

 
0.94

 
66

 
1.11

Product distribution:
 
 
 
 
 
 
 
Alt-A
3

 
4.52

 
3

 
5.00

Vintages:
 
 
 
 
 
 
 
2004 and prior
4

 
2.62

 
5

 
2.82

2005-2008
7

 
5.73

 
8

 
6.39

2009-2017
89

 
0.32

 
87

 
0.36

__________
(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 June 30, 2017 and December 31, 2016.
(2) 
Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of June 30, 2017 and December 31, 2016.
(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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
92


 
Notes to Condensed Consolidated Financial Statements | Concentrations of Credit Risk


 
As of
 
June 30, 2017(1)(2)
 
December 31, 2016(1)(2)
 
30 Days Delinquent
 
Seriously Delinquent(3)
 
30 Days Delinquent
 
Seriously Delinquent(3)
Percentage of multifamily guaranty book of business
0.01
%
 
0.04
%
 
0.02
%
 
0.05
%
 
As of
 
June 30, 2017(1)
 
December 31, 2016(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%
2
%
 
0.17
%
 
2
%
 
0.22
%
Less than or equal to 80%
98

 
0.04

 
98

 
0.05

Current DSCR less than 1.0(5)
1

 
2.12

 
2

 
1.96

__________
(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 June 30, 2017 and December 31, 2016, 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 may also be obligated to repurchase loans or foreclosed properties, reimburse us for losses or provide other remedies under certain circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements, if certain 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 40% of our single-family guaranty book of business as of June 30, 2017, compared with approximately 39% as of December 31, 2016. Our five largest multifamily mortgage servicers, including their affiliates, serviced approximately 47% of our multifamily guaranty book of business as of June 30, 2017 and December 31, 2016.
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 increase our credit losses and credit-related expense, and adversely affect our results of operations and financial condition.
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 $131.5 billion and $126.2 billion on the single-family mortgage loans in our guaranty book of business as of June 30, 2017 and December 31, 2016, respectively, which represented 5% and 4% of our single-family guaranty book of business as of June 30, 2017 and December 31, 2016, respectively. Our primary mortgage insurance coverage risk in force was $130.9 billion and $125.6 billion as of June 30, 2017 and December 31, 2016, respectively. Our pool mortgage insurance coverage risk in force was $565 million and $617 million as of June 30, 2017 and December 31, 2016, respectively. Our top three mortgage insurance companies provided 66% of our mortgage insurance coverage risk in force as of June 30, 2017 and December 31, 2016.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
93


 
Notes to Condensed Consolidated Financial Statements | Concentrations of Credit Risk


Of our largest primary mortgage insurers, PMI Mortgage Insurance Co., Triad Guaranty Insurance Corporation and Republic Mortgage Insurance Company 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 $7.1 billion, or 5%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of June 30, 2017.
We have counterparty credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family loans we purchase or guarantee. There is 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 increase 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 increase our combined loss reserves. As of June 30, 2017 and December 31, 2016, the amount by which our estimated benefit from mortgage insurance reduced our combined loss reserves was $1.1 billion and $1.4 billion, respectively.
We had outstanding receivables of $926 million recorded in “Other assets” in our condensed consolidated balance sheets as of June 30, 2017 and $1.0 billion as of December 31, 2016 related to amounts claimed on insured, defaulted loans excluding government-insured loans. Of this amount, $106 million as of June 30, 2017 and $141 million as of December 31, 2016 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 $612 million as of June 30, 2017 and $638 million as of December 31, 2016. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of June 30, 2017 and December 31, 2016.
For information on credit risk associated with our derivative transactions and repurchase agreements refer to “Note 8, Derivative Instruments” and “Note 13, Netting Arrangements.”
13. 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 tables below display 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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
94


 
Notes to Condensed Consolidated Financial Statements | Netting Arrangements


 
As of June 30, 2017
 
 
 
 
 
Net Amount Presented in our Condensed Consolidated Balance Sheets
 
Amounts Not Offset in our 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
$
2,800

 
$
(2,753
)
 
 
$
47

 
 
 
$

 
 
$

 
$
47

Cleared risk management derivatives
1,307

 
(1,271
)
 
 
36

 
 
 

 
 

 
36

Mortgage commitment derivatives
313

 

 
 
313

 
 
 
(234
)
 
 

 
79

Total derivative assets
4,420

 
(4,024
)
 
 
396

(4) 
 
 
(234
)
 
 

 
162

Securities purchased under agreements to resell or similar arrangements(5)
41,120

 

 
 
41,120

 
 
 

 
 
(41,120
)
 

Total assets
$
45,540

 
$
(4,024
)
 
 
$
41,516

 
 
 
$
(234
)
 
 
$
(41,120
)
 
$
162

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
$
(3,564
)
 
$
3,465

 
 
$
(99
)
 
 
 
$

 
 
$

 
$
(99
)
Cleared risk management derivatives
(1,571
)
 
1,569

 
 
(2
)
 
 
 

 
 
2

 

Mortgage commitment derivatives
(318
)
 

 
 
(318
)
 
 
 
234

 
 

 
(84
)
Total derivative liabilities
(5,453
)
 
5,034

 
 
(419
)
(4) 
 
 
234

 
 
2

 
(183
)
Securities sold under agreements to repurchase or similar arrangements
(7
)
 

 
 
(7
)
 
 
 

 
 
7

 

Total liabilities
$
(5,460
)
 
$
5,034

 
 
$
(426
)
 
 
 
$
234

 
 
$
9

 
$
(183
)
 
As of December 31, 2016
 
 
 
 
 
Net Amount Presented in our Condensed Consolidated Balance Sheets
 
Amounts Not Offset in our 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
$
3,688

 
$
(3,667
)
 
 
$
21

 
 
 
$

 
 
$

 
$
21

Cleared risk management derivatives
849

 
(847
)
 
 
2

 
 
 

 
 

 
2

Mortgage commitment derivatives
631

 

 
 
631

 
 
 
(357
)
 
 
(22
)
 
252

Total derivative assets
5,168

 
(4,514
)
 
 
654

(4) 
 
 
(357
)
 
 
(22
)
 
275

Securities purchased under agreements to resell or similar arrangements(5)
51,115

 

 
 
51,115

 
 
 

 
 
(51,115
)
 

Total assets
$
56,283

 
$
(4,514
)
 
 
$
51,769

 
 
 
$
(357
)
 
 
$
(51,137
)
 
$
275

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTC risk management derivatives
$
(4,905
)
 
$
4,520

 
 
$
(385
)
 
 
 
$

 
 
$

 
$
(385
)
Cleared risk management derivatives
(2,415
)
 
2,324

 
 
(91
)
 
 
 

 
 
91

 

Mortgage commitment derivatives
(737
)
 

 
 
(737
)
 
 
 
357

 
 
16

 
(364
)
Total derivative liabilities
(8,057
)
 
6,844

 
 
(1,213
)
(4) 
 
 
357

 
 
107

 
(749
)
Total liabilities
$
(8,057
)
 
$
6,844

 
 
$
(1,213
)
 
 
 
$
357

 
 
$
107

 
$
(749
)
__________
(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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
95


 
Notes to Condensed Consolidated Financial Statements | Netting Arrangements


(3) 
Represents non-cash collateral received that has not been recognized and not offset in our condensed consolidated balance sheets as well as non-cash collateral posted which has been recognized but not offset in our condensed consolidated balance sheets. Does not include collateral held or posted in excess of our exposure. The fair value of non-cash collateral we pledged was $1.0 billion and $1.3 billion as of June 30, 2017 and December 31, 2016, respectively, which the counterparty was permitted to sell or repledge. The fair value of non-cash collateral received was $41.2 billion and $51.2 billion, of which $38.9 billion and $45.5 billion could be sold or repledged as of June 30, 2017 and December 31, 2016, respectively. None of the underlying collateral was sold or repledged as of June 30, 2017 and December 31, 2016.
(4) 
Excludes derivative assets of $23 million and $33 million as of June 30, 2017 and December 31, 2016, and derivative liabilities of $1 million and $2 million recognized in our condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016, respectively, that are not subject to enforceable master netting arrangements.
(5) 
Includes $11.9 billion and $20.7 billion of securities purchased under agreements to resell classified as “Cash and cash equivalents” in our condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016, 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.
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. 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.
14.  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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
96


 
Notes to Condensed Consolidated Financial Statements | Fair Value


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.
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.
 
Fair Value Measurements as of June 30, 2017
 
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
 
$

 
 
 
$
2,406

 
 
 
$
1,871

 
 
 
$

 
 
 
$
4,277

 
Other agency
 

 
 
 
1,969

 
 
 

 
 
 

 
 
 
1,969

 
Alt-A and subprime private-label securities
 

 
 
 
329

 
 
 
264

 
 
 

 
 
 
593

 
CMBS
 

 
 
 
16

 
 
 

 
 
 

 
 
 
16

 
Mortgage revenue bonds
 

 
 
 

 
 
 
1

 
 
 

 
 
 
1

 
Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
32,418

 
 
 

 
 
 

 
 
 

 
 
 
32,418

 
Total trading securities
 
32,418

 
 
 
4,720

 
 
 
2,136

 
 
 

 
 
 
39,274

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

 
 
 
2,066

 
 
 
206

 
 
 

 
 
 
2,272

 
Other agency
 

 
 
 
432

 
 
 

 
 
 

 
 
 
432

 
Alt-A and subprime private-label securities
 

 
 
 
1,984

 
 
 
178

 
 
 

 
 
 
2,162

 
CMBS
 

 
 
 
259

 
 
 

 
 
 

 
 
 
259

 
Mortgage revenue bonds
 

 
 
 

 
 
 
873

 
 
 

 
 
 
873

 
Other
 

 
 
 
30

 
 
 
380

 
 
 

 
 
 
410

 
Total available-for-sale securities
 

 
 
 
4,771

 
 
 
1,637

 
 
 

 
 
 
6,408

 
Mortgage loans
 

 
 
 
10,287

 
 
 
1,119

 
 
 

 
 
 
11,406

 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 
 
 
3,784

 
 
 
144

 
 
 

 
 
 
3,928

 
Swaptions
 

 
 
 
179

 
 
 

 
 
 

 
 
 
179

 
Other
 

 
 
 

 
 
 
23

 
 
 

 
 
 
23

 
Netting adjustment
 

 
 
 

 
 
 

 
 
 
(4,024
)
 
 
 
(4,024
)
 
Mortgage commitment derivatives
 

 
 
 
313

 
 
 

 
 
 

 
 
 
313

 
Total other assets
 

 
 
 
4,276

 
 
 
167

 
 
 
(4,024
)
 
 
 
419

 
Total assets at fair value
 
$
32,418

 
 
 
$
24,054

 
 
 
$
5,059

 
 
 
$
(4,024
)
 
 
 
$
57,507

 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
97


 
Notes to Condensed Consolidated Financial Statements | Fair Value



 
Fair Value Measurements as of June 30, 2017
 
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
 
$

 
 
 
$
8,643

 
 
 
$
365

 
 
 
$

 
 
 
$
9,008

 
Total of Fannie Mae
 

 
 
 
8,643

 
 
 
365

 
 
 

 
 
 
9,008

 
Of consolidated trusts
 

 
 
 
34,106

 
 
 
760

 
 
 

 
 
 
34,866

 
Total long-term debt
 

 
 
 
42,749

 
 
 
1,125

 
 
 

 
 
 
43,874

 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 
 
 
4,837

 
 
 
24

 
 
 

 
 
 
4,861

 
Swaptions
 

 
 
 
274

 
 
 

 
 
 

 
 
 
274

 
Other
 

 
 
 

 
 
 
1

 
 
 

 
 
 
1

 
Netting adjustment
 

 
 
 

 
 
 

 
 
 
(5,034
)
 
 
 
(5,034
)
 
Mortgage commitment derivatives
 

 
 
 
300

 
 
 
18

 
 
 

 
 
 
318

 
Total other liabilities
 

 
 
 
5,411

 
 
 
43

 
 
 
(5,034
)
 
 
 
420

 
Total liabilities at fair value
 
$

 
 
 
$
48,160

 
 
 
$
1,168

 
 
 
$
(5,034
)
 
 
 
$
44,294

 


Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
98


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2016
 
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
 
$

 
 
 
$
3,934

 
 
 
$
835

 
 
 
$

 
 
 
$
4,769

 
Other agency
 

 
 
 
2,058

 
 
 

 
 
 

 
 
 
2,058

 
Alt-A and subprime private-label securities
 

 
 
 
365

 
 
 
271

 
 
 

 
 
 
636

 
CMBS
 

 
 
 
761

 
 
 

 
 
 

 
 
 
761

 
Mortgage revenue bonds
 

 
 
 

 
 
 
21

 
 
 

 
 
 
21

 
Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
32,317

 
 
 

 
 
 

 
 
 

 
 
 
32,317

 
Total trading securities
 
32,317

 
 
 
7,118

 
 
 
1,127

 
 
 

 
 
 
40,562

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

 
 
 
2,324

 
 
 
230

 
 
 

 
 
 
2,554

 
Other agency
 

 
 
 
542

 
 
 
5

 
 
 

 
 
 
547

 
Alt-A and subprime private-label securities
 

 
 
 
2,492

 
 
 
217

 
 
 

 
 
 
2,709

 
CMBS
 

 
 
 
819

 
 
 

 
 
 

 
 
 
819

 
Mortgage revenue bonds
 

 
 
 

 
 
 
1,272

 
 
 

 
 
 
1,272

 
Other
 

 
 
 
33

 
 
 
429

 
 
 

 
 
 
462

 
Total available-for-sale securities
 

 
 
 
6,210

 
 
 
2,153

 
 
 

 
 
 
8,363

 
Mortgage loans
 

 
 
 
10,860

 
 
 
1,197

 
 
 

 
 
 
12,057

 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 
 
 
4,159

 
 
 
137

 
 
 

 
 
 
4,296

 
Swaptions
 

 
 
 
241

 
 
 

 
 
 

 
 
 
241

 
Other
 

 
 
 

 
 
 
33

 
 
 

 
 
 
33

 
Netting adjustment
 

 
 
 

 
 
 

 
 
 
(4,514
)
 
 
 
(4,514
)
 
Mortgage commitment derivatives
 

 
 
 
619

 
 
 
12

 
 
 

 
 
 
631

 
Total other assets
 

 
 
 
5,019

 
 
 
182

 
 
 
(4,514
)
 
 
 
687

 
Total assets at fair value
 
$
32,317

 
 
 
$
29,207

 
 
 
$
4,659

 
 
 
$
(4,514
)
 
 
 
$
61,669

 


Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
99


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
Fair Value Measurements as of December 31, 2016
 
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
 
$

 
 
 
$
9,235

 
 
 
$
347

 
 
 
$

 
 
 
$
9,582

 
Total of Fannie Mae
 

 
 
 
9,235

 
 
 
347

 
 
 

 
 
 
9,582

 
Of consolidated trusts
 

 
 
 
36,283

 
 
 
241

 
 
 

 
 
 
36,524

 
Total long-term debt
 

 
 
 
45,518

 
 
 
588

 
 
 

 
 
 
46,106

 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk management derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 
 
 
6,933

 
 
 
48

 
 
 

 
 
 
6,981

 
Swaptions
 

 
 
 
339

 
 
 

 
 
 

 
 
 
339

 
Other
 

 
 
 

 
 
 
2

 
 
 

 
 
 
2

 
Netting adjustment
 

 
 
 

 
 
 

 
 
 
(6,844
)
 
 
 
(6,844
)
 
Mortgage commitment derivatives
 

 
 
 
649

 
 
 
88

 
 
 

 
 
 
737

 
Total other liabilities
 

 
 
 
7,921

 
 
 
138

 
 
 
(6,844
)
 
 
 
1,215

 
Total liabilities at fair value
 
$

 
 
 
$
53,439

 
 
 
$
726

 
 
 
$
(6,844
)
 
 
 
$
47,321

 
__________
(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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
100


 
Notes to Condensed Consolidated Financial Statements | Fair Value


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). The tables also display gains and losses due to changes in fair value, including realized and unrealized gains and losses, recognized in our condensed consolidated statements of operations and comprehensive income for Level 3 assets and liabilities. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
For the Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of June 30,
2017(5)(6)
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2017
 
Included in Net Income
 
Included in Total Other Comprehensive
Income (Loss)(1)
 
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3
 
Transfers into
Level 3(4)
 
Balance, June 30, 2017
 
 
(Dollars in millions)
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
856

 
$
1

 
 
$

 
 
$
63

 
$

 
$

 
$
(2
)
 
$
(21
)
 
$
974

 
$
1,871

 
 
$

 
Alt-A and subprime private-label securities
272

 
3

 
 

 
 

 

 

 
(11
)
 

 

 
264

 
 
2

 
Mortgage revenue bonds
20

 
3

 
 

 
 

 
(21
)
 

 
(1
)
 

 

 
1

 
 

 
Total trading securities
$
1,148

 
$
7

(6)(7) 
 
$

 
 
$
63

 
$
(21
)
 
$

 
$
(14
)
 
$
(21
)
 
$
974

 
$
2,136

 
 
$
2

 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
232

 
$

 
 
$
(3
)
 
 
$

 
$

 
$

 
$
(2
)
 
$
(21
)
 
$

 
$
206

 
 
$

 
Alt-A and subprime private-label securities
205

 

 
 
(21
)
 
 

 

 

 
(6
)
 

 

 
178

 
 

 
Mortgage revenue bonds
1,185

 
34

 
 
(11
)
 
 

 
(312
)
 

 
(23
)
 

 

 
873

 
 

 
Other
417

 

 
 
(19
)
 
 

 

 

 
(18
)
 

 

 
380

 
 

 
Total available-for-sale securities
$
2,039

 
$
34

(7)(8) 
 
$
(54
)
 
 
$

 
$
(312
)
 
$

 
$
(49
)
 
$
(21
)
 
$

 
$
1,637

 
 
$

 
Mortgage loans
$
1,149

 
$
24

(6)(7) 
 
$

 
 
$

 
$

 
$

 
$
(55
)
 
$
(21
)
 
$
22

 
$
1,119

 
 
$
19

 
Net derivatives
113

 
27

(6) 
 

 
 

 

 

 
(16
)
 

 

 
124

 
 
9

 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(350
)
 
$
(15
)
 
 
$

 
 
$

 
$

 
$

 
$

 
$

 
$

 
$
(365
)
 
 
$
(14
)
 
Of consolidated trusts
(214
)
 
(5
)
 
 

 
 

 

 

 
12

 
22

 
(575
)
 
(760
)
 
 
(5
)
 
Total long-term debt
$
(564
)
 
$
(20
)
(6) 
 
$

 
 
$

 
$

 
$

 
$
12

 
$
22

 
$
(575
)
 
$
(1,125
)
 
 
$
(19
)
 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
101


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
For the Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of June 30,
2017(5)(6)
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
Included in Net Income
 
Included in Total Other Comprehensive
Income (Loss)(1)
 
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3
 
Transfers into
Level 3(4)
 
Balance, June 30, 2017
 
 
(Dollars in millions)
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
835

 
$
4

 
 
$

 
 
$
63

 
$

 
$

 
$
(5
)
 
$
(22
)
 
$
996

 
$
1,871

 
 
$
2

 
Alt-A and subprime private-label securities
271

 
11

 
 

 
 

 

 

 
(18
)
 

 

 
264

 
 
11

 
Mortgage revenue bonds
21

 
3

 
 

 
 

 
(21
)
 

 
(2
)
 

 

 
1

 
 

 
Total trading securities
$
1,127

 
$
18

(6)(7) 
 
$

 
 
$
63

 
$
(21
)
 
$

 
$
(25
)
 
$
(22
)
 
$
996

 
$
2,136

 
 
$
13

 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
230

 
$
1

 
 
$
(2
)
 
 
$

 
$

 
$

 
$
(6
)
 
$
(47
)
 
$
30

 
$
206

 
 
$

 
Other agency
5

 

 
 

 
 

 
(1
)
 

 

 
(4
)
 

 

 
 

 
Alt-A and subprime private-label securities
217

 

 
 
(15
)
 
 

 

 

 
(24
)
 

 

 
178

 
 

 
Mortgage revenue bonds
1,272

 
35

 
 
(12
)
 
 

 
(324
)
 

 
(98
)
 

 

 
873

 
 

 
Other
429

 

 
 
(14
)
 
 

 

 

 
(35
)
 

 

 
380

 
 

 
Total available-for-sale securities
$
2,153

 
$
36

(7)(8) 
 
$
(43
)
 
 
$

 
$
(325
)
 
$

 
$
(163
)
 
$
(51
)
 
$
30

 
$
1,637

 
 
$

 
Mortgage loans
$
1,197

 
$
32

(6)(7) 
 
$

 
 
$

 
$

 
$

 
$
(117
)
 
$
(67
)
 
$
74

 
$
1,119

 
 
$
16

 
Net derivatives
44

 
100

(6) 
 

 
 

 

 

 
(24
)
 
5

 
(1
)
 
124

 
 

 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(347
)
 
$
(18
)
 
 
$

 
 
$

 
$

 
$

 
$

 
$

 
$

 
$
(365
)
 
 
$
(18
)
 
Of consolidated trusts
(241
)
 
(4
)
 
 

 
 

 

 
(2
)
 
19

 
88

 
(620
)
 
(760
)
 
 
(4
)
 
Total long-term debt
$
(588
)
 
$
(22
)
(6) 
 
$

 
 
$

 
$

 
$
(2
)
 
$
19

 
$
88

 
$
(620
)
 
$
(1,125
)
 
 
$
(22
)
 



Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
102


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
For the Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of June 30,
2016(5)(6)
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2016
 
Included in Net Income
 
Included in Total Other Comprehensive
Income (Loss)(1)
 
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3
 
Transfers into
Level 3
 
Balance, June 30, 2016
 
 
(Dollars in millions)
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
25

 
$

 
 
$

 
 
$

 
$

 
$

 
$
(1
)
 
$
(24
)
 
$

 
$

 
 
$

 
Other agency
1

 

 
 

 
 

 

 

 

 
(1
)
 

 

 
 

 
Alt-A and subprime private-label securities
288

 
27

 
 

 
 

 

 

 
(12
)
 

 

 
303

 
 
27

 
Mortgage revenue bonds
363

 
17

 
 

 
 

 
(184
)
 

 
(3
)
 

 

 
193

 
 
6

 
Total trading securities
$
677

 
$
44

(6)(7) 
 
$

 
 
$

 
$
(184
)
 
$

 
$
(16
)
 
$
(25
)
 
$

 
$
496

 
 
$
33

 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$
1

 
$

 
 
$

 
 
$

 
$

 
$

 
$

 
$
(1
)
 
$

 
$

 
 
$

 
Other agency
2

 

 
 

 
 

 

 

 

 
(1
)
 

 
1

 
 

 
Alt-A and subprime private-label securities
399

 
1

 
 
9

 
 

 

 

 
(61
)
 

 

 
348

 
 

 
Mortgage revenue bonds
2,564

 
76

 
 
18

 
 

 
(568
)
 

 
(61
)
 

 

 
2,029

 
 

 
Other
655

 
3

 
 
(1
)
 
 

 
(201
)
 

 
(6
)
 

 

 
450

 
 

 
Total available-for-sale securities
$
3,621

 
$
80

(7)(8) 
 
$
26

 
 
$

 
$
(769
)
 
$

 
$
(128
)
 
$
(2
)
 
$

 
$
2,828

 
 
$

 
Mortgage loans
$
1,311

 
$
15

(6)(7) 
 
$

 
 
$
25

 
$

 
$

 
$
(67
)
 
$
(19
)
 
$
15

 
$
1,280

 
 
$
10

 
Net derivatives
231

 
52

(6) 
 

 
 

 

 
(3
)
 
(33
)
 

 
1

 
248

 
 
41

 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(395
)
 
$
(15
)
 
 
$

 
 
$

 
$

 
$

 
$

 
$

 
$

 
$
(410
)
 
 
$
(15
)
 
Of consolidated trusts
(246
)
 
(7
)
 
 

 
 

 

 
(47
)
 
9

 
8

 
(43
)
 
(326
)
 
 
(7
)
 
Total long-term debt
$
(641
)
 
$
(22
)
(6) 
 
$

 
 
$

 
$

 
$
(47
)
 
$
9

 
$
8

 
$
(43
)
 
$
(736
)
 
 
$
(22
)
 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
103


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
For the Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of June 30,
2016(5)(6)
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
 
Included in Net Income
 
Included in Total Other Comprehensive
Income (Loss)(1)
 
Purchases(2)
 
Sales(2)
 
Issues(3)
 
Settlements(3)
 
Transfers out of Level 3(4)
 
Transfers into
Level 3
 
Balance, June 30, 2016
 
 
(Dollars in millions)
Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$

 
$

 
 
$

 
 
$

 
$

 
$

 
$
(1
)
 
$
(24
)
 
$
25

 
$

 
 
$

 
Other agency

 

 
 

 
 

 

 

 

 
(1
)
 
1

 

 
 

 
Alt-A and subprime private-label securities
949

 
(64
)
 
 

 
 

 
(187
)
 

 
(32
)
 
(363
)
 

 
303

 
 
(40
)
 
Mortgage revenue bonds
449

 
29

 
 

 
 

 
(279
)
 

 
(6
)
 

 

 
193

 
 
10

 
Total trading securities
$
1,398

 
$
(35
)
(6)(7) 
 
$

 
 
$

 
$
(466
)
 
$

 
$
(39
)
 
$
(388
)
 
$
26

 
$
496

 
 
$
(30
)
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fannie Mae
$

 
$

 
 
$

 
 
$

 
$

 
$

 
$

 
$
(1
)
 
$
1

 
$

 
 
$

 
Other agency
4

 

 
 

 
 

 

 

 

 
(3
)
 

 
1

 
 

 
Alt-A and subprime private-label securities
4,322

 
104

 
 
(159
)
 
 

 
(875
)
 

 
(205
)
 
(2,839
)
 

 
348

 
 

 
Mortgage revenue bonds
2,701

 
80

 
 
48

 
 

 
(611
)
 

 
(189
)
 

 

 
2,029

 
 

 
Other
1,404

 

 
 
(26
)
 
 

 
(605
)
 

 
(39
)
 
(284
)
 

 
450

 
 

 
Total available-for-sale securities
$
8,431

 
$
184

(7)(8) 
 
$
(137
)
 
 
$

 
$
(2,091
)
 
$

 
$
(433
)
 
$
(3,127
)
 
$
1

 
$
2,828

 
 
$

 
Mortgage loans
$
1,477

 
$
116

(6)(7) 
 
$

 
 
$
25

 
$
(320
)
 
$

 
$
(139
)
 
$
(84
)
 
$
205

 
$
1,280

 
 
$
20

 
Net derivatives
157

 
232

(6) 
 

 
 

 

 
(7
)
 
(133
)
 
(2
)
 
1

 
248

 
 
76

 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
$
(369
)
 
$
(41
)
 
 
$

 
 
$

 
$

 
$

 
$

 
$

 
$

 
$
(410
)
 
 
$
(41
)
 
Of consolidated trusts
(496
)
 
(75
)
 
 

 
 

 

 
(54
)
 
318

 
45

 
(64
)
 
(326
)
 
 
(8
)
 
Total long-term debt
$
(865
)
 
$
(116
)
(6) 
 
$

 
 
$

 
$

 
$
(54
)
 
$
318

 
$
45

 
$
(64
)
 
$
(736
)
 
 
$
(49
)
 
__________
(1) 
Gains (losses) included in other comprehensive income (loss) are included in “Changes in unrealized gains on AFS securities, net of reclassification adjustments and taxes” in our 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 into Level 3 during the second quarter and first half of 2017 consisted primarily of a Fannie Mae security backed by private-label mortgage-related securities. Prices for this security were based on inputs that were not readily available. Transfers out of Level 3 during the first half of 2016 consisted primarily of private-label mortgage-related securities backed by Alt-A loans and subprime loans. Prices for these securities were available from multiple third-party vendors and demonstrated an increased and sustained level of observability over time.
(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 “Fair value losses, net” in our condensed consolidated statements of operations and comprehensive income.
(7) 
Gains (losses) are included in “Net interest income” 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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
104


 
Notes to Condensed Consolidated Financial Statements | Fair Value


The following tables display 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.
 
 
Fair Value Measurements as of June 30, 2017
 
 
 
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)
 
$
1,815

 
Single Vendor
 
Prepayment Speed (%)
 
0.0
-
177.0
 
170.4
 
 
 
 
 
 
 
Spreads (bps)
 
32.7
-
210.0
 
186.0
 
 
 
56

 
Various
 
 
 
 
 
 
 
 
 
Total agency
 
1,871

 
 
 
 
 
 
 
 
 
 
 
Alt-A and subprime private-label securities
 
264

 
Consensus
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
1

 
Various
 
 
 
 
 
 
 
 
 
Total trading securities
 
$
2,136

 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
 
$
206

 
Various
 
 
 
 
 
 
 
 
 
Alt-A and subprime private-label securities
 
178

 
Various
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
656

 
Single Vendor
 
Spreads (bps)
 
4.5
-
366.8
 
58.1
 
 
 
145

 
Discounted Cash Flow
 
Spreads (bps)
 
4.5
-
413.3
 
193.6
 
 
 
72

 
Various
 
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
 
873

 
 
 
 
 
 
 
 
 
 
 
Other
 
309

 
Discounted Cash Flow
 
Default Rate (%)
 
1.2
 
1.2
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.5
 
0.5
 
 
 
 
 
 
 
Severity (%)
 
95.0
 
95.0
 
 
 
 
 
 
 
Spreads (bps)
 
102.0
-
610.0
 
604.4
 
 
 
71

 
Various
 
 
 
 
 
 
 
 
 
Total other
 
380

 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
 
$
1,637

 
 
 
 
 
 
 
 
 
 
 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
105


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
 
Fair Value Measurements as of June 30, 2017
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
$
509

 
Build-Up
 
 
 
 
 
 
 
 
 
 
 
398

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
51

 
Various
 
 
 
 
 
 
 
 
 
Total single-family
 
958

 
 
 
 
 
 
 
 
 
 
 
Multifamily
 
161

 
Build-Up
 
Spreads (bps)
 
47.0

-
293.2
 
129.1
 
Total mortgage loans
 
$
1,119

 
 
 
 
 
 
 
 
 
 
 
Net derivatives
 
$
121

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
3

 
Various
 
 
 
 
 
 
 
 
 
Total net derivatives
 
$
124

 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$
(365
)
 
Discounted Cash Flow
 
 
 
 
 
 
 
 
 
Of consolidated trusts(3)
 
(543
)
 
Discounted Cash Flow
 
Default Rate (%)
 
4.0
-
5.0
 
4.5
 
 
 
 
 
 
 
Prepayment Speed (%)
 
5.0
-
100.0
 
99.5
 
 
 
 
 
 
 
Severity (%)
 
64.0
-
69.0
 
66.5
 
 
 
 
 
 
 
Spreads (bps)
 
43.0

-
656.0
 
91.6
 
 
 
(217
)
 
Various
 
 
 
 
 
 
 
 
 
Total of consolidated trusts
 
(760
)
 
 
 
 
 
 
 
 
 
 
 
Total long-term debt
 
$
(1,125
)
 
 
 
 
 
 
 
 
 
 
 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
106


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
 
Fair Value Measurements as of December 31, 2016
 
 
 
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)
 
$
809

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
26

 
Various
 
 
 
 
 
 
 
 
 
Total agency
 
835

 
 
 
 
 
 
 
 
 
 
 
Alt-A and subprime private-label securities
 
232

 
Consensus
 
Default Rate (%)
 
0.4

-
10.9
 
8.2
 
 
 
 
 
 
 
Prepayment Speed (%)
 
4.3

-
7.4
 
6.6
 
 
 
 
 
 
 
Severity (%)
 
71.0

-
95.0
 
88.9
 
 
 
 
 
 
 
Spreads (bps)
 
244.6

-
253.9
 
251.5
 
 
 
39

 
Consensus
 
 
 
 
 
 
 
 
 
Total Alt-A and subprime private-label securities
 
271

 
 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
19

 
Discounted Cash Flow
 
Spreads (bps)
 
13.0

-
268.2
 
252.2
 
 
 
2

 
Various
 
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
 
21

 
 
 
 
 
 
 
 
 
 
 
Total trading securities
 
$
1,127

 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency(2)
 
$
129

 
Single Vendor
 
Prepayment Speed (%)
 
124.8
-
165.5
 
142.4
 
 
 
 
 
 
 
Spreads (bps)
 
175.0

-
210.0
 
182.5
 
 
 
72

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
34

 
Various
 
 
 
 
 
 
 
 
 
Total agency
 
235

 
 
 
 
 
 
 
 
 
 
 
Alt-A and subprime private-label securities
 
93

 
Single Vendor
 
Default Rate (%)
 
2.5
-
8.0
 
3.8
 
 
 
 
 
 
 
Prepayment Speed (%)
 
3.0
-
11.0
 
4.9
 
 
 
 
 
 
 
Severity (%)
 
38.0
-
80.0
 
48.1
 
 
 
 
 
 
 
Spreads (bps)
 
266.1

-
306.8
 
297.1
 
 
 
45

 
Discounted Cash Flow
 
Spreads (bps)
 
361.0

-
450.0

406.0
 
 
 
79

 
Various
 
 
 
 
 
 
 
 
 
Total Alt-A and subprime private-label securities
 
217

 
 
 
 
 
 
 
 
 
 
 
Mortgage revenue bonds
 
684

 
Single Vendor
 
Spreads (bps)
 
(16.8
)
-
336.9
 
44.3
 
 
 
126

 
Single Vendor
 
 
 
 
 
 
 
 
 
 
 
435

 
Discounted Cash Flow
 
Spreads (bps)
 
(16.8
)
-
391.1
 
260.0
 
 
 
27

 
Various

 
 
 
 
 
 
 
 
 
Total mortgage revenue bonds
 
1,272

 
 
 
 
 
 
 
 
 
 
 
Other
 
47

 
Consensus
 
Default Rate (%)
 
0.5
-
3.5
 
3.5
 
 
 
 
 
 
 
Prepayment Speed (%)
 
2.5
-
6.0
 
2.5
 
 
 
 
 
 
 
Severity (%)
 
20.0
-
88.0
 
87.5
 
 
 
 
 
 
 
Spreads (bps)
 
221.6

-
300.2
 
237.7
 
 
 
348

 
Discounted Cash Flow
 
Default Rate (%)
 
2.3
 
2.3
 
 
 
 
 
 
 
Prepayment Speed (%)
 
0.5
 
0.5
 
 
 
 
 
 
 
Severity (%)
 
95.0
 
95.0
 
 
 
 
 
 
 
Spreads (bps)
 
190.0

-
450.0
 
449.1
 
 
 
34

 
Various
 
 
 
 
 
 
 
 
 
Total other
 
429

 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale securities
 
$
2,153

 
 
 
 
 
 
 
 
 
 
 

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
107


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
 
Fair Value Measurements as of December 31, 2016
 
 
 
Fair Value
 
Significant Valuation Techniques
 
Significant Unobservable Inputs(1)
 
Range(1)
 
Weighted - Average(1)
 
 
 
(Dollars in millions)
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
$
516

 
Build-Up
 
 
 
 
 
 
 
 
 
 
 
300

 
Consensus
 
 
 
 
 
 
 
 
 
 
 
218

 
Various
 
 
 
 
 
 
 
 
 
Total single-family
 
1,034

 
 
 
 
 
 
 
 
 
 
 
Multifamily
 
163

 
Build-Up
 
Spreads (bps)
 
55.0
-
305.2
 
140.2
 
Total mortgage loans
 
$
1,197

 
 
 
 
 
 
 
 
 
 
 
Net derivatives
 
$
10

 
Internal Model
 
 
 
 
 
 
 
 
 
 
 
89

 
Dealer Mark
 
 
 
 
 
 
 
 
 
 
 
21

 
Discounted Cash Flow
 
 
 
 
 
 
 
 
 
 
 
(76
)
 
Various
 
 
 
 
 
 
 
 
 
Total net derivatives
 
$
44

 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae:
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior floating
 
$
(347
)
 
Discounted Cash Flow
 
 
 
 
 
 
 
 
 
Of consolidated trusts
 
(241
)
 
Various
 
 
 
 
 
 
 
 
 
Total long-term debt
 
$
(588
)
 
 
 
 
 
 
 
 
 
 
 
_________
(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. The prepayment speed used for trading agency securities and available-for-sale agency securities is the Public Securities Association prepayment speed, which can be greater than 100%. For all other securities, the Conditional Prepayment Rate is used as the prepayment speed, which can be between 0% and 100%.
(2) 
Includes Fannie Mae and Freddie Mac securities.
(3) 
Includes instruments for which the prepayment speed represents the estimated annualized rate of prepayment after all prepayment penalty provisions have expired and also instruments for which prepayment speed 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 held as of June 30, 2017 or December 31, 2016 that were measured at fair value on a nonrecurring basis. We held $814 million and $250 million in 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 June 30, 2017 and December 31, 2016, respectively.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
108


 
Notes to Condensed Consolidated Financial Statements | Fair Value


The following table displays valuation techniques for our Level 3 assets measured at fair value on a nonrecurring basis. The significant unobservable inputs related to these techniques primarily relate to 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
as of
 
Valuation Techniques
 
 
June 30, 2017
 
 
December 31, 2016
 
 
 
 
(Dollars in millions)
 
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale, at lower of cost or fair value
Consensus
 
 
$
2,316

 
 
 
$
1,025

 
 
Single Vendor
 
 
74

 
 
 
54

 
 
Various
 
 
2

 
 
 
9

 
Total mortgage loans held for sale, at lower of cost or fair value
 
 
 
2,392

 
 
 
1,088

 
Single-family mortgage loans held for investment, at amortized cost
Internal Model
 
 
1,806

 
 
 
2,816

 
Multifamily mortgage loans held for investment, at amortized cost
Broker Price Opinions
 
 
19

 
 
 
25

 
 
Asset Manager Estimate
 
 
96

 
 
 
170

 
 
Various
 
 

 
 
 
3

 
Total multifamily mortgage loans held for investment, at amortized cost
 
 
 
115

 
 
 
198

 
Acquired property, net:(1)
 
 
 
 
 
 
 
 
 
Single-family
Accepted Offers
 
 
255

 
 
 
340

 
 
Appraisals
 
 
509

 
 
 
571

 
 
Walk Forwards
 
 
200

 
 
 
306

 
 
Internal Model
 
 
294

 
 
 
476

 
 
Various
 
 
44

 
 
 
99

 
Total single-family
 
 
 
1,302

 
 
 
1,792

 
Multifamily
Broker Price Opinions
 
 
27

 
 
 

 
Other assets
Various
 
 
2

 
 
 
12

 
Total nonrecurring assets at fair value
 
 
 
$
5,644

 
 
 
$
5,906

 
__________
(1) 
The most commonly used techniques in our valuation of acquired property are proprietary home price model and third-party valuations (both current and walk forward). Based on the number of properties measured as of June 30, 2017, these methodologies comprised approximately 74% of our valuations, while accepted offers comprised approximately 20% of our valuations. Based on the number of properties measured as of December 31, 2016, these methodologies comprised approximately 75% of our valuations, while accepted offers comprised approximately 19% of our valuations.
We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. See “Note 17, Fair Value” in our 2016 Form 10-K for information on the valuation control processes and 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. There were no significant changes made to the valuation control processes and the valuation techniques for the six months ended June 30, 2017.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
109


 
Notes to Condensed Consolidated Financial Statements | Fair Value


Fair Value of Financial Instruments
The following table displays the carrying value and estimated fair value of our financial instruments. 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 all non-financial instruments; therefore, the fair value of our financial assets and liabilities does not represent the underlying fair value of our total consolidated assets and liabilities.
 
As of June 30, 2017
 
Carrying
Value
 
Quoted Prices 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
$
47,903

 
$
36,003

 
$
11,900

 
$

 
$

 
$
47,903

Federal funds sold and securities purchased under agreements to resell or similar arrangements
29,220

 

 
29,220

 

 

 
29,220

Trading securities
39,274

 
32,418

 
4,720

 
2,136

 

 
39,274

Available-for-sale securities
6,408

 

 
4,771

 
1,637

 

 
6,408

Mortgage loans held for sale
5,322

 

 
3,193

 
2,897

 

 
6,090

Mortgage loans held for investment, net of allowance for loan losses
3,120,093

 

 
2,828,761

 
322,070

 

 
3,150,831

Advances to lenders
4,965

 

 
4,659

 
322

 

 
4,981

Derivative assets at fair value
419

 

 
4,276

 
167

 
(4,024
)
 
419

Guaranty assets and buy-ups
148

 

 

 
433

 

 
433

Total financial assets
$
3,253,752

 
$
68,421

 
$
2,891,500

 
$
329,662

 
$
(4,024
)
 
$
3,285,559

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
$
7

 
$

 
$
7

 
$

 
$

 
$
7

Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
30,501

 

 
30,501

 

 

 
30,501

Of consolidated trusts
511

 

 

 
511

 

 
511

Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
272,619

 

 
280,471

 
812

 

 
281,283

Of consolidated trusts
2,984,036

 

 
2,954,716

 
40,513

 

 
2,995,229

Derivative liabilities at fair value
420

 

 
5,411

 
43

 
(5,034
)
 
420

Guaranty obligations
264

 

 

 
523

 

 
523

Total financial liabilities
$
3,288,358

 
$

 
$
3,271,106

 
$
42,402

 
$
(5,034
)
 
$
3,308,474


Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
110


 
Notes to Condensed Consolidated Financial Statements | Fair Value


 
As of December 31, 2016
 
Carrying
Value
 
Quoted Prices 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
$
62,177

 
$
41,477

 
$
20,700

 
$

 
$

 
$
62,177

Federal funds sold and securities purchased under agreements to resell or similar arrangements
30,415

 

 
30,415

 

 

 
30,415

Trading securities
40,562

 
32,317

 
7,118

 
1,127

 

 
40,562

Available-for-sale securities
8,363

 

 
6,210

 
2,153

 

 
8,363

Mortgage loans held for sale
2,899

 

 
509

 
2,751

 

 
3,260

Mortgage loans held for investment, net of allowance for loan losses
3,076,854

 

 
2,767,813

 
316,742

 

 
3,084,555

Advances to lenders
7,494

 

 
7,156

 
352

 

 
7,508

Derivative assets at fair value
687

 

 
5,019

 
182

 
(4,514
)
 
687

Guaranty assets and buy-ups
158

 

 

 
432

 

 
432

Total financial assets
$
3,229,609

 
$
73,794

 
$
2,844,940

 
$
323,739

 
$
(4,514
)
 
$
3,237,959

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
$
34,995

 
$

 
$
34,998

 
$

 
$

 
$
34,998

Of consolidated trusts
584

 

 

 
584

 

 
584

Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
Of Fannie Mae
292,102

 

 
298,980

 
770

 

 
299,750

Of consolidated trusts
2,934,635

 

 
2,901,316

 
36,668

 

 
2,937,984

Derivative liabilities at fair value
1,215

 

 
7,921

 
138

 
(6,844
)
 
1,215

Guaranty obligations
280

 

 

 
710

 

 
710

Total financial liabilities
$
3,263,811

 
$

 
$
3,243,215

 
$
38,870

 
$
(6,844
)
 
$
3,275,241

For a detailed description and classification of our financial instruments, see “Note 17, Fair Value” in our 2016 Form 10-K.
Fair Value Option
We elected the fair value option for our credit risk sharing debt securities issued under our CAS series issued prior to January 1, 2016 and certain loans 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.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
111


 
Notes to Condensed Consolidated Financial Statements | Fair Value


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
 
 
 
June 30, 2017
 
 
 
December 31, 2016
 
 
Loans(1)
 
Long-Term Debt of Fannie Mae
 
Long-Term Debt of Consolidated Trusts
 
Loans(1)
 
Long-Term Debt of Fannie Mae
 
Long-Term Debt of Consolidated Trusts
 
 
(Dollars in millions)
 
Fair value
 
$
11,406

 
 
 
$
9,008

 
 
 
$
34,866

 
 
 
$
12,057

 
 
 
$
9,582

 
 
 
$
36,524

 
Unpaid principal balance
 
10,980

 
 
 
8,167

 
 
 
31,510

 
 
 
11,688

 
 
 
9,090

 
 
 
33,055

 
__________
(1) 
Includes nonaccrual loans with a fair value of $187 million and $200 million as of June 30, 2017 and December 31, 2016, respectively. The difference between unpaid principal balance and the fair value of these nonaccrual loans as of June 30, 2017 and December 31, 2016 was $33 million and $34 million, respectively. Includes loans that are 90 days or more past due with a fair value of $145 million and $152 million as of June 30, 2017 and December 31, 2016, respectively. The difference between unpaid principal balance and the fair value of these 90 or more days past due loans as of June 30, 2017 and December 31, 2016 was $25 million.
Changes in Fair Value under the Fair Value Option Election
The following tables display 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 June 30,
 
2017
 
2016
 
Loans
 
Long-Term Debt
 
Total Gains (Losses)
 
Loans
 
Long-Term Debt
 
Total Gains (Losses)
 
(Dollars in millions)
Changes in instrument-specific credit risk
$
26

 
$
(173
)
 
$
(147
)
 
$
19

 
$
(169
)
 
$
(150
)
Other changes in fair value
68

 
(115
)
 
(47
)
 
126

 
(144
)
 
(18
)
Fair value gains (losses), net
$
94

 
$
(288
)
 
$
(194
)
 
$
145

 
$
(313
)
 
$
(168
)
 
For the Six Months Ended June 30,
 
2017
 
2016
 
Loans
 
Long-Term Debt
 
Total Gains (Losses)
 
Loans
 
Long-Term Debt
 
Total Gains (Losses)
 
(Dollars in millions)
Changes in instrument-specific credit risk
$
53

 
$
(339
)
 
$
(286
)
 
$
32

 
$
(221
)
 
$
(189
)
Other changes in fair value
83

 
(118
)
 
(35
)
 
344

 
(446
)
 
(102
)
Fair value gains (losses), net
$
136

 
$
(457
)
 
$
(321
)
 
$
376

 
$
(667
)
 
$
(291
)

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
112


 
Notes to Condensed Consolidated Financial Statements | Fair Value


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 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 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 credit risk.
15.  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, accruals 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.
We establish an accrual 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 an accrual. 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 an accrual, 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.
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

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
113


 
Notes to Condensed Consolidated Financial Statements | Commitments and Contingencies


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 dividend 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 February 21, 2017, the U.S. Court of Appeals for the D.C. Circuit affirmed the district court’s dismissal of the claims alleging violation of the Administrative Procedure Act, but reversed the district court’s dismissal of the claims alleging breach of the implied covenant of good faith and fair dealing and one of the breach of contract claims. The court also ruled that the class-action plaintiffs could seek leave in the district court to amend their claim for breach of fiduciary duty from a derivative to a direct claim. On July 17, 2017, the Court of Appeals issued a revised opinion allowing certain plaintiffs to continue to maintain their breach of the implied covenant of good faith and fair dealing and breach of contract claims that the original opinion had found not properly preserved, and modifying its discussion of the standard that applies to the breach of implied covenant claim.
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.
16.  Subsequent Events
On July 12, 2017, FHFA, the conservator, on behalf of Fannie Mae and Freddie Mac, entered into a settlement agreement with The Royal Bank of Scotland Group plc and certain related entities and individuals (collectively “RBS”) resolving legal claims relating to private-label mortgage-backed securities RBS sold to Fannie Mae and Freddie Mac. As a result of this settlement, we will recognize approximately $975 million in “Fee and other income” in our condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2017.

Fannie Mae (In conservatorship) Second Quarter 2017 Form 10-Q
114


 
Quantitative and Qualitative Disclosures about Market Risk


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 June 30, 2017, 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 June 30, 2017 or as of the date of filing this report.
Our disclosure controls and procedures were not effective as of June 30, 2017 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 June 30, 2017 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 2201 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 June 30, 2017 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 GSE 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 GSE 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

Fannie Mae Second Quarter 2017 Form 10-Q
115


 
 
Controls and Procedures


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 or operate effective disclosure controls and procedures. As both our regulator and our conservator under the GSE 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 June 30, 2017 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 Related 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 June 30, 2017 (“Second Quarter 2017 Form 10-Q”), and engaged in discussions regarding issues associated with the information contained in those filings. Prior to filing our Second Quarter 2017 Form 10-Q, FHFA provided Fannie Mae management with a written acknowledgment that it had reviewed the Second Quarter 2017 Form 10-Q, and it was not aware of any material misstatements or omissions in the Second Quarter 2017 Form 10-Q and had no objection to our filing the Second Quarter 2017 Form 10-Q.
The Director of FHFA and our Chief Executive Officer have been in frequent communication and meet on a regular 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 March 31, 2017 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Fannie Mae Second Quarter 2017 Form 10-Q
116


 
 
Other Information


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 2016 Form 10-K and our First Quarter 2017 Form 10-Q. We also provide information regarding material legal proceedings in “Note 15, 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 accruals 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 accrued 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 2016 Form 10-K or our First Quarter 2017 Form 10-Q. If certain of these matters are determined against us, FHFA or Treasury, 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
In September 2011, FHFA, in its role as conservator of Fannie Mae and Freddie Mac, filed a lawsuit against The Royal Bank of Scotland Group plc and certain related entities and individuals (collectively, “RBS”) in the U.S. District Court for the District of Connecticut alleging violations of federal and state securities laws in connection with private-label mortgage-backed securities RBS sold to Fannie Mae and Freddie Mac. On July 12, 2017, FHFA, on behalf of Fannie Mae and Freddie Mac as our conservator, entered into a $5.5 billion settlement agreement with RBS resolving all claims in this lawsuit. RBS paid us approximately $975 million of the settlement amount in August 2017.
Senior Preferred Stock Purchase Agreements Litigation
Between June 2013 and June 2017, several lawsuits were filed by preferred and common stockholders of Fannie Mae and Freddie Mac in multiple federal courts against one or more of the United States, Treasury and FHFA, challenging actions taken by the defendants relating to the senior preferred stock purchase agreements and the conservatorships of Fannie Mae and Freddie Mac. 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, the payment of dividends to Treasury under the net worth sweep dividend provisions, and FHFA’s decision to require Fannie Mae and Freddie Mac to draw funds from Treasury in order to pay dividends to Treasury prior to the August 2012 amendments. The plaintiffs seek various forms of equitable and injunctive relief, including rescission of the August 2012 amendments, as well as damages. The courts where the lawsuits were filed and the current status of the cases are listed below.
District of Columbia. On September 30, 2014, the U.S. District Court for the District of Columbia dismissed all but one of the cases then pending before that court. The plaintiffs in each of the dismissed cases 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 21, 2017, the Court of Appeals for the District of Columbia Circuit affirmed in part and reversed in part the district court’s dismissal of the cases filed in the U.S. District Court for the District of Columbia. On July 17, 2017, the Court of Appeals issued a revised opinion allowing certain plaintiffs to continue to maintain certain claims the original opinion had found not properly preserved, and modifying its discussion of the standard that applies to one of those claims. Fannie Mae is a defendant in this action, which is described in “Note 15, Commitments and Contingencies.”
Southern District of Iowa. On February 3, 2015, the U.S. District Court for the Southern District of Iowa dismissed the case pending before it. The plaintiff in that case did not file a notice of appeal.

Fannie Mae Second Quarter 2017 Form 10-Q
117


 
 
Other Information


Eastern District of Kentucky. On September 9, 2016, the U.S. District Court for the Eastern District of Kentucky dismissed the case pending before it. The plaintiff in that case filed a notice of appeal and the appeal was docketed on November 17, 2016.
Western District of Texas. On March 9, 2017, the U.S. District Court for the Western District of Texas dismissed the case pending before it. The plaintiff in that case filed a notice of appeal and the appeal was docketed on March 14, 2017. On June 19, 2017, the Court of Appeals for the Fifth Circuit affirmed the district court’s order dismissing the case.
Northern District of Illinois. On March 20, 2017, the U.S. District Court for the Northern District of Illinois dismissed the case pending before it. The plaintiff in that case filed a notice of appeal and the appeal was docketed on April 27, 2017.
Northern District of Iowa. On March 27, 2017, the U.S. District Court for the Northern District of Iowa dismissed the case pending before it. The plaintiff in that case filed a notice of appeal and the appeal was docketed on April 4, 2017.
Southern District of Texas. On May 22, 2017, the U.S. District Court for the Southern District of Texas dismissed the case pending before it. The plaintiff in that case filed a notice of appeal and the appeal was docketed on May 30, 2017.
Western District of Michigan and District of Minnesota. On June 1, 2017 and June 22, 2017, preferred and common stockholders of Fannie Mae and Freddie Mac filed complaints for declaratory and injunctive relief against FHFA and Treasury in the U.S. District Court for the Western District of Michigan and the U.S. District Court for the District of Minnesota. The complaints, which also ask the courts to set aside the net worth sweep dividend provisions of the senior preferred stock purchase agreements, allege that FHFA’s structure violates constitutional requirements, including: presidential removal authority; separation of powers; the appointments clause; the nondelegation doctrine; and the private nondelegation doctrine.
U.S. Court of Federal Claims. 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 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 for 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. The plaintiffs in Fisher, Rafter and the other cases pending before the court have 45 days after completion of discovery in Fairholme Funds to file amended complaints. The United States must file an omnibus motion to dismiss all cases within 120 days after the deadline for filing amended complaints.
District of Delaware. Fannie Mae is also a nominal defendant in a case filed against FHFA and Treasury in the U.S. District Court for the District of Delaware: Jacobs v. FHFA, filed on August 17, 2015. The 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 agreements violate Delaware law. The plaintiffs are pursuing this claim derivatively on behalf of Fannie Mae and directly against the government. The plaintiffs amended their complaint on March 16, 2017 to add unjust enrichment claims against FHFA and Treasury. The defendants filed motions to dismiss on April 17, 2017.
Delaware State Court Action. On March 14, 2016, Timothy Pagliara filed a lawsuit against Fannie Mae in the Delaware Court of Chancery: Pagliara v. Federal National Mortgage Association. The plaintiff owns Fannie Mae preferred stock and sought access to Fannie Mae’s books and records under a provision of Delaware state law. The plaintiff alleged that he is entitled to inspect Fannie Mae’s books and records in order to investigate potential breaches of duties to stockholders related to 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, as well as Fannie Mae’s involvement in the common securitization platform, Common Securitization

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Other Information


Solutions, LLC, and the Single Security Initiative. On March 31, 2017, Fannie Mae filed a motion to dismiss, or in the alternative, for FHFA to substitute itself as plaintiff. On May 31, 2017, the court granted Fannie Mae’s motion to dismiss the case. The plaintiff did not file a notice of appeal.
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 2016 Form 10-K. This section supplements and updates that discussion. Please also refer to “MD&A—Risk Management” in this report and in our 2016 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 2016 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, how long we will be in conservatorship, what form we will have and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated, and whether we will continue to exist following conservatorship. The conservatorship is indefinite in duration and the timing, conditions and likelihood of our emerging from conservatorship are uncertain. Our conservatorship could terminate through a receivership. Termination of the conservatorship, other than in connection with a receivership, requires Treasury’s consent under the senior preferred stock purchase agreement.
The previous Administration endorsed the wind down of Fannie Mae and Freddie Mac through a responsible transition and the enactment of comprehensive housing finance reform legislation. The current Administration has not articulated a formal position on housing finance reform or the future of the GSEs; however, the Secretary of the Treasury has publicly stated that he is focused on housing finance reform and a solution to the current status of Fannie Mae and Freddie Mac.
We expect that Congress will continue to consider legislation that could result in significant changes in our structure and role in the future, including proposals that would result in Fannie Mae’s liquidation or dissolution. Congress, FHFA or other agencies may also consider legislation or regulation aimed at or having the effect of increasing the competition we face, reducing our market share, expanding our obligations to provide funds to Treasury, constraining our business operations, or subjecting us to new obligations, such as the Freedom of Information Act, that could impose substantial burdens or adversely affect our results of operations or financial condition. We cannot predict the prospects for the enactment, timing or final content of housing finance reform legislation or other legislation related to our activities. See “Business—Legislation and Regulation—Housing Finance Reform” in our 2016 Form 10-K and “MD&A—Legislation and Regulation—Housing Finance Reform” in our First Quarter 2017 Form 10-Q for more information about recent actions and statements relating to housing finance reform from Congress, as well as actions our conservator has been taking to further housing finance reform.
A decline in activity in the U.S. housing market, increasing interest rates, or changes in tax laws could lower our business volumes or otherwise adversely affect our results of operations, net worth and financial condition.
Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and the size of the U.S. residential mortgage market. A decline in mortgage debt outstanding reduces the unpaid principal balance of mortgage loans available for us to acquire, which in turn could reduce our net interest income. Even if we were able to increase our share of the secondary mortgage market, it may not be sufficient to make up for a decline in the rate of growth in mortgage originations.
Mortgage interest rates also affect our business volume. Rising interest rates generally result in fewer mortgage originations, particularly for refinances. An increase in interest rates, particularly if the increase is sudden and steep, could significantly reduce our business volume. Significant reductions in our business volume could adversely affect our results of operations and financial condition. The Federal Reserve raised the target range for

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Other Information


the federal funds rate in December 2015, December 2016, March 2017 and June 2017. In July 2017, the Federal Reserve stated that it expects economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; however, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The Federal Reserve may increase rates at a faster rate than it is currently expecting. Moreover, the Federal Reserve’s federal funds rate path is not the only factor that affects long-term interest rates. Accordingly, our business remains subject to the risk of sudden and steep interest rate increases.
Changes in tax laws may also adversely affect housing demand, home prices or other housing or mortgage market conditions, which could adversely affect our results of operations, net worth and financial condition.
The Federal Reserve’s balance sheet normalization program could adversely affect our business, results of operations, financial condition, liquidity and net worth.
In recent years, the Federal Reserve has purchased a significant amount of mortgage-backed securities issued by us, Freddie Mac and Ginnie Mae. The Federal Reserve began to taper these purchases in January 2014 and concluded its asset purchase program in October 2014. Since concluding its asset purchase program, the Federal Reserve has maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities; therefore, it has continued to purchase a significant amount of agency mortgage-backed securities. In the statement following the Federal Open Market Committee meeting in July 2017, the Federal Reserve indicated that, for the time being, it is maintaining its existing reinvestment policy and expects to begin implementing a balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated. This program would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities. We expect the Federal Reserve’s balance sheet normalization program likely will result in increases in mortgage interest rates and a widening of mortgage spreads, which could adversely affect our business volume and reduce demand for Fannie Mae MBS. If this occurs, it could adversely affect our business, results of operations, financial condition, liquidity and net worth.
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 June 30, 2017, 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 website 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 website, the document will be posted on our website within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The website 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.

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We are providing our website address solely for your information. Information appearing on our website is not incorporated into this report.
Our Purchases of Equity Securities
We did not repurchase any of our equity securities during the second quarter of 2017.
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 has directed 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 require that we pay Treasury each quarter any dividends declared consisting of the amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount, which will decrease to zero in 2018. 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 2016 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 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 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 Charter Act and the GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we would be undercapitalized. The Director of FHFA, however, 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


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: August 3, 2017

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

Date: August 3, 2017

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Index to Exhibits


INDEX TO EXHIBITS
Item
 
Description
3.1
 
3.2
 
31.1
 
31.2
 
32.1
 
32.2
 
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.


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